Court Opinion

ID: 8951659
Source: CourtListenerOpinion
Date Created: 2022-11-27 08:52:41.127054+00
Date Added: 2024-06-11T17:09:58.904762
License: Public Domain

MAHONEY, Circuit Judge,
concurring in part and dissenting in part.
I join the majority in its disposition, as to liability and damages, of MEBCO’s claims against State Street. I respectfully dissent, however, from the majority’s disposition of State Street’s claims against Citibank, and would allow State Street to recover over against Citibank the damages assessed against State Street in behalf of MEBCO. This result would moot for me State Street’s claims against SAMBA, and leave Citibank to pursue any claims which it might wish to assert1 against SAMBA.
There appears to be common ground that this case is governed by New York law, although this is assumed rather than discussed in the majority opinion and the parties’ briefs, and I have no quarrel with that conclusion. It is also clear that Citibank would be liable to State Street, pursuant to Citibank’s undertaking to “assume all liabilities and responsibilities in accordance with the CIB approved guarantee format” resulting from State Street’s return of the $1,000,000 deposit to Citibank, but for the “critical error” (majority opinion, p. 5) of a State Street employee in telexing to Citibank a release of the quoted undertaking, in contravention of the instructions of State Street’s general manager. It is further clear that Citibank did not injuriously rely *909upon the mistaken release, having transmitted the $1,000,000 to SAMBA immediately upon its receipt at Citibank, prior to receipt of the telex release. As the majority opinion states at p. 5, in fact, “[b]y the time Citibank received the release the following morning, Al-Rajhi already had withdrawn the one million dollars from SAMBA.”
The question thus presented is the effect, under New York law, of the release provided by State Street in error to Citibank in these circumstances. I do not deem it necessary to track the majority’s discussion of each of the legal theories advanced by State Street against Citibank, since, in my view, New York law would not give effect to the State Street release on the facts presented here, and this would be dispositive in allowing State Street to recover over against Citibank.
State Street urges that its release is ineffective under New York law on the basis of unilateral mistake. The majority, in response, cites Assurance Co. v. Pulin, 142 N.Y.S.2d 809, 810 (App. Term 1955) (per curiam), for the proposition that the mistake must be “one which is known or ought to have been known to the other party,”2 and adds a “see also” citation to Sheridan Drive-In, Inc. v. State, 16 A.D. 2d 400, 405, 228 N.Y.S.2d 576, 582 (4th Dep’t 1962).
Assurance Co. is easily distinguishable. There the release provision which defendant sought to avoid was “admittedly prepared and inserted in the release by someone in the office of ... [defendant’s] attorney,” it was “obvious that its inclusion must have been the result of discussion and request,” and “the only mistake appears to be that defendant’s regret that they gave up title to the stolen car now that it has been recovered.” Assurance Co., 142 N.Y.S.2d at 810. Under these very different circumstances, Appellate Term made the statement quoted by the majority in the form of a “proviso”. As will be seen, however, this Appellate Term dictum did not accurately state New York law either then or now.
Sheridan Drive-In ruled in favor of a claimant who sought to set aside a release given to New York State under circumstances where the mistake in providing the release was known to the State’s agents, stating that it is “universally recognized” that recovery may be had under such circumstances, but stating also that: “A mistake not mutual but only on one side may be ground for rescinding but not for reforming a contract.” 288 N.Y.S.2d at 582 (quoting Rosenblum v. Manufacturers Trust Co., 270 N.Y. 79, 85, 200 N.E. 587, 588, 105 A.L.R. 947 (1936)). The case is hardly authority for ruling against State Street’s effort to rescind its mistaken release; although dictum, the quoted sentence squarely supports State Street’s right to rescind its release and thereby recover from Citibank.3
Furthermore, the case quoted by Sheridan Drive In, Rosenblum v. Manufacturers Trust Co., holds, contrary to Assurance Co., that unilateral mistake may be the basis for rescinding a contract, stating:
The term “mistake” may be used to cover all kinds of mental error, however induced (3 Williston on the Law of Contracts, § 1540), and equity can interfere in a suit for cancellation or rescission to prevent the enforcement of an unjust agreement induced by a unilateral mistake of fact. A mistake not mutual but only on one side may be ground for rescinding but not for reforming a contract. (Smith v. Mackin, 4 Lans. 41, 44, 45; Moffett, Hodgkins & Clarke Co. v. Rochester, 178 U.S. 373 [20 S.Ct. 957, 44 *910L.Ed. 1108]). If the erroneous transaction was such as to involve the act of the plaintiff only and the effect of the transaction would be the unjust enrichment of the defendant, the plaintiff is entitled to have the transaction rescinded, although he was the only party mistaken. (Clark on Equity, § 372.)
Id., 270 N.Y. at 84-85, 200 N.E. at 588, 105 A.L.R. at 949 (emphasis added). On this reasoning, the Court of Appeals gave effect to the cancellation of a change of beneficiary in an insurance contract by a decedent where the cancellation was premised upon a mistake of fact by the decedent concededly unknown to the insurance company. To the same effect, see Batto v. Westmoreland Realty Co., 231 App. Div. 103, 106-08, 246 N.Y.S. 498, 502-04 (2d Dep’t 1930); see also Metzger v. Aetna Ins. Co., 227 N.Y. 411, 417, 125 N.E. 814 (1920).
This court has recognized Rosenblum as stating the New York rule concerning unilateral mistake. See Rickets v. Pennsylvania R.R. Co., 153 F.2d 757, 765 & nn. 25 & 26, 164 A.L.R. 387, 395 (2d Cir.1946); see also ITT World Directories, Inc. v. Cia. Editorial de Listas, S.A., 525 F.2d 697, 700 n. 4 (2d Cir.1975); compare Jermor Homes, Inc. v. Hoehlein, 133 N.Y.S.2d 637, 638-39 (Sup. Ct. 1954) (quoting and applying the above passage from Rosenblum as stating the New York rule).
A more recent expression on this subject by the New York Court of Appeals is set forth in DaSilva v. Musso, 53 N.Y.2d 543, 444 N.Y.S.2d 50, 428 N.E.2d 382 (1981), where it was said:
The Trial Judge found that the “mistake was, if anything, unilateral”; the Appellate Division characterized it as a “mistaken belief by both sides.” The confusion resulting from the unilateral/mutual dichotomy has been the subject of much comment ..., and it can be argued that the distinction should be abandoned____ But whether the mistake be of one or both parties, the law is that rescission is proper only when “the mistake is so material that we can see it goes to the foundation of the agreement”____
53 N.Y.2d at 551-52, 444 N.Y.S.2d at 55, 428 N.E.2d at 386-87 (citations omitted).
The more recent trend of the general case law is in the same direction, and is summarized by the following provisions of the Restatement (Second) of Contracts:
§ 153. When Mistake of One party Makes a Contract Voidable
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or
(b) the other party has reason to know of the mistake or his fault caused the mistake.
§ 154. When a Party Bears the Risk of a Mistake
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
Restatement (Second) of Contracts §§ 153 and 154 (1979) (emphasis added).
The comment under Section 153 explains the rule there stated in the following terms:
Courts have traditionally been reluctant to allow a party to avoid a contract on the ground of mistake, even as to a basic assumption, if the mistake was not shared by the other party. Nevertheless, relief has been granted where the other party actually knew (see §§ 160, 161) or had reason to know of the mistake at the time the contract was made or where his fault caused the mistake. There has, in addition, been a growing willingness to allow avoidance where *911the consequences of the mistake are so grave that enforcement of the contract would be unconscionable. This Section states a rule that permits avoidance on this latter basis, as well as the more traditional grounds.
Id. § 153 comment a (emphasis added).
Furthermore, this court, in Albert Elia Bldg. Co. v. Am. Sterilizer Co., 622 F.2d 655 (2d Cir.1980) (per curiam), quoted these Restatement provisions in a case governed by New York Law and posing the question of unilateral mistake as accurately reflecting New York law. Id. at 657.4
In summary, I believe that New York courts clearly would consider whether State Street should be allowed to void the contract of release on the ground that the effect of its mistake with respect thereto is such that enforcement of the release would be unconscionable. See, in addition to the authorities already cited, In Re Clark’s Estate, 233 A.D. 487, 253 N.Y.S. 524 (4th Dep’t 1931); Seidman v. New York Life Ins. Co., 162 Misc. 560, 296 N.Y.S. 55 (Sup. Ct.1937), aff'd, 253 A.D. 804, 2 N.Y.S.2d 634 (1st Dep’t 1938), aff'd, 279 N.Y. 620, 17 N.E.2d 680 (1938).
Once the question of unconscionability is deemed open for consideration, there is little question as to the appropriate outcome. Under the majority’s recital of the facts (which are in any event undisputed), the telex releasing Citibank’s undertaking was sent in contravention of the explicit instruction of State Street’s general manager, and arrived at Citibank after the funds had already been returned to SAMBA and withdrawn by Al-Rajhi, so that there is not even a remote suggestion of injurious reliance by Citibank. There could not be a clearer case of an obvious místate resulting in a gratuitous windfall, lack of reliance and unjust enrichment. Under these circumstances, the releasing telex should be disregarded and the parties returned to the status quo ante, which would result in the reinstatement of the Citibank undertaking and judgment over for State Street against Citibank, unless there is some reason in banking custom and practice to reach a different result.
Both the district court and the majority here place substantial reliance upon banking practice and custom in deciding for Citibank on State Street’s claim. The majority’s invocation of expert testimony and an amicus brief, however, goes primarily to the scope of State Street’s release. Since, in my view, that release is void because of State Street’s mistake in dispatching it, the question of its scope becomes academic.5 In any event, we need only decide the case before us. Whatever the situation might be in other cases and circumstances resulting from permission to withdraw a release sent via electronic payment systems such as the Clearing House Interbank Payments System, I do not see how a rule limited to the facts of this case, where no reliance or change of position by Citibank is even suggested, would have a disruptive impact on banking practices. If such instances of nonreliance would be rare, then the rule would be rarely invoked or applied, but it has the virtue of doing justice here.
As stated earlier, I see no need to consider each of the theories advanced by State Street for recovery against Citibank, since what I have already stated is, in my view, determinative of that outcome. To avoid confusion, however, a brief word is in order concerning consideration and reliance. The majority seeks to avoid the impact of Citibank’s lack of reliance as follows: “[r]eliance is a necessary element of promissory estoppel, which, in certain contexts, may *912serve as a substitute for consideration” (majority opinion, p. 20); but since a written release can be valid under New York law in the absence of consideration, see N.Y. Gen.Oblig.Law § 15-303 (McKinney 1978), Citibank need not “demonstrate reliance as a substitute for consideration, when consideration is not needed to enforce the release in the first instance.” Majority opinion, p. 907.
This rather tortured reasoning, for which no New York authority is cited, would vastly expand the operation and impact of Gen. Obl.Law § 15-303. This statute, which, together with the predecessor Section 243 of the Debtor and Creditor Law, has been on the New York statutory books since 1936,6 provides only that a written release “shall not be invalid because of the absence of consideration or of a seal,” in obvious derogation of common law rules to the contrary. The majority’s application of this statute effects a rule which excepts contracts of release from the normal operation of New York contract law concerning unilateral mistake, reliance and unjust enrichment. In the fifty-one years that this quite straightforward statute has been in effect, no New York court has suggested that it has this startling impact, wholly divorced from its language and obvious purpose. Rather, as stated in New Again Constr. Co. v. City of New York, 76 Misc. 2d 943, 945-46, 351 N.Y.S.2d 895, 899 (Sup.Ct. 1974), “This statute was not enacted to bar legitimate claims but to facilitate release of liability without any consideration....” It is not the function of federal courts to deal in this manner with state statutes that have application in federal litigation.
Finally, the majority states that State Street’s release “constituted the conclusion of a transaction, the consideration for which was Citibank’s offer of indemnification in exchange for return of the funds.” Majority opinion, p. 907. If the implication is that State Street’s tender of a release should be analyzed as part of the performance of a prior, existing contract with Citibank, rather than as a separate contract of release, the rules thus invoked would be more favorable to State Street’s position than those already stated in this dissent. As a leading authority on the law of contracts has stated:
When a valid and enforceable contract exists between the parties and one of the parties pays money to the other in the mistaken belief that the payment is required by the contract he may recover the payment. The same rule holds true if excess payment is made. If something other than money has been transferred to the other, generally the same rule holds. The transferor may recover the value of what has been transferred, and, under proper circumstances, have specific restitution. Relief for mistake in performance is given far more readily than in cases of mistake in formation of a contract. It matters not that the mistake is merely unilateral and that it is negligent. Inasmuch as the contract itself defines the rights of the parties, mistaken overpayment or the equivalent clearly involves the unjust enrichment of the payee and unjust impoverishment of the payor.
J. Calamari & J. Perillo, The Law of Contracts 309-10 (2d Ed. 1977) (footnotes omitted). See also ITT World Directories, Inc. v. Cia. Editorial de Listas, S.A., 525 F.2d 697, 700 & n. 4 (2d Cir.1975).
For the reasons stated above, I concur in the majority’s disposition as to MEBCO’s claims against State Street, respectfully dissent from its disposition of State Street’s claims against Citibank and would allow State Street judgment over against Citibank, and accordingly do not reach State Street’s claims against SAMBA.

. So far as we are advised, no cross-claim has been pleaded by Citibank against SAMBA.

. Even if this quotation stated the New York rule, it would be appropriate to inquire, as the majority does not, whether State Street’s mistake must have been obvious and apparent to, and therefore was known or ought to have been known by, Citibank.

. The majority distinguishes two cases cited by State Street, In Re Kelleher’s Will, 19 A.D.2d 147, 241 N.Y.S.2d 275 (4th Dep’t 1963), and Wheeler v. State, 286 A.D. 310, 143 N.Y.S.2d 83 (3d Dep't 1955), on the grounds that "they involved mistakes as to the very nature of the documents executed, and misrepresentations by someone in a fiduciary relationship to the plaintiff.” The cases are indeed distinguishable; there is, however, more compelling authority on behalf of State Street's position, as will become apparent.

. Albert Elia quoted sections 295 and 296 of Tent. Draft No. 10 of the Restatement (Second) of Contracts, which provisions are substantially identical to and the predecessors of sections 153 and 154 of the final version.

. It should nonetheless be noted that the statement from the CIB Amicus Brief, page 13, quoted by the majority at p. 23 of its opinion, that ‘‘[t]he release of the guarantee is considered equally as encompassing as the guarantee itself,” is directly contrary to more contemporaneous evidence of the CIB’s position. See State Street Exhibit T, Minutes of the Inquiries and Investigation Committee of the CIB held January 12, 1983. It is, of course, the CIB position at or about the time of the transaction in question, rather than some later version of that position, that is relevant to this litigation.

. Gen.ObI.Law § 1-203(27) (McKinney 1978) renders Section 15-303 thereof applicable to written instruments executed on or after April 3, 1936.