Regarding the title of the Blog, we are in fly over country. But, then again, we are just 80 miles north of Chicago, by some estimates, the world’s seventh or eighth largest city. Nestled on the shores of Lake Michigan, I like to think we are a part of the Third Coast, the one in the middle.
We also have the occasional opportunity to shape commercial law. More years ago than I care to admit, I argued the case of General Electric Capital Corp. v. Duchow Marine before the Seventh Circuit. The case involved the application and interpretation of Article 4A of the UCC, which had only recently been adopted. During oral argument, Judge Easterbrook asked me point-blank for authority that Wisconsin courts might follow the only reported case up to that time interpreting these new provisions on wire transfers. The case was from New York. In order to understand the impact the question had on me, you must know that the Court was “riding the circuit,” and this argument was taking place in the mock courtroom at my alma mater, which was packed with students and many of my former professors.
Having not foreseen this question, and taking for granted that Wisconsin would be persuaded by my brilliant Chicago School of Economics argument without need to reference those Wall Street types in New York, I had no citations for the Judge. Nonetheless, I assured the Judge in my most confident tone that through the years I could recall reading many decisions where Wisconsin courts had indeed expressed deference to New York decisions involving commercial law. Since opposing counsel, when asked, could cite no authority to the contrary, I left that day feeling I had dodged the bullet.
But the fates had not finished with me. Some weeks or months after the argument, two of the three judges on the panel recused themselves, and the argument was rescheduled for Court’s home in Chicago. Of course, Judge Easterbrook was not one of those who stepped away from the case and, with this in mind, I scrambled for the library to find those Wisconsin decisions I had so confidently assured the Judge were out there. Fortunately, I found them and spouted them at the top of my argument before Judge Easterbrook could ask his question again, or any questions for that matter. And while Judge Easterbrook acknowledged this authority in reaching his decision, in the end, it was his grounding in the Chicago School of Economics that had carried the day:
On reading this conclusion, the president of Central Bank may be tempted to tear out his hair in exasperation. In exchange for the few dollars it collects for a wire transfer, how can the Bank have accepted such a risk?, he may well wonder.Duchow perpetrated a fraud, and Banker’s Bank bungled the payment order. Details of the law of restitution to one side, why ought this lead to liability for the beneficiary’s bank, which did not know the source of the funds or GECC’S security interest in them? Requiring receiving banks to inquire into the source of the funds or to research financing statements in public records would raise the costs of funds transfers and slow down a mechanism that is designed to allow the movement of huge sums within minutes. The answer is that it ought not lead to liability for the beneficiary’s bank — and it would not have left Central Bank holding the bag had it taken precautions after learning of the error. Before reversing the credit in response to Duchow’s request, Central Bank could have sought an indemnity agreement from Banker’s Bank, and perhaps from Duchow as well.
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Even the absence of an indemnity does not necessarily leave Central Bank with the loss. On paying GECC, Central Bank will be subrogated to all of GECC’s rights against Duchow. See UCC § 4A-303 Official Comment 2. It is, after all, Central Bank’s customer Duchow who devised this scam and made off with the money, and it was Banker’s Bank’s error that put Central Bank in this pickle. Central Bank must pay GECC; whether Central Bank may be made whole remains to be seen.
That was then and this is now. When I say I went to the library, that is what I did — got out of my chair and headed for that big room with all the dusty books. The Internet has reached the Third Coast and commerce is bypassing the East and West Coasts at the speed of electrons. The shifting of risks is more important than ever when huge sums of money are transferred, not in minutes, but in seconds, and not in one transaction, but millions of little ones. We love it and will keep you posted.