## Facts

- General Electric Capital Corporation (GECC) financed Duchow’s Marine, Inc.’s boat inventory and held a perfected Wisconsin security interest in the boats and identifiable sale proceeds.
- Duchow agreed that sale proceeds would be deposited into a “blocked” account at Central Bank, from which disbursements required GECC’s signature; Duchow also maintained a separate regular operating account at the same bank.
- After Duchow sold a yacht, the buyer initiated a wire transfer intended for Duchow’s regular account, but an intermediary bank transmitted incomplete instructions that omitted the destination account number and indicated only that the payment was for Duchow’s benefit.
- Central Bank, faced with two Duchow-related accounts, initially credited the wire proceeds to the blocked account.
- Duchow wrote a check on the regular account and, when the account became overdrawn, asserted the wired funds belonged in the regular account.
- After receiving the full wire instructions from the intermediary bank, Central Bank, without notifying GECC, reversed the blocked-account credit, credited the regular account, and honored Duchow’s check, effectively allowing diversion of the proceeds.
- GECC sued Central Bank for conversion; the district court entered judgment for the bank, and GECC appealed.

## Issues

1. Whether a secured creditor with a perfected interest in identifiable proceeds may recover from a depository bank that reverses a credit from a blocked account and enables the debtor to divert proceeds.
2. Whether Article 4A of the U.C.C. and related restitution doctrines permitted the beneficiary bank to reverse the mistaken credit without liability to the secured creditor.
3. Whether the bank was protected by a “banker’s privilege” theory when it reallocated funds between the debtor’s accounts and paid the debtor’s check.

## Decision

- The Seventh Circuit reversed and remanded.
- The court held that GECC could pursue recovery against Central Bank for the reversal and payout that defeated GECC’s perfected interest in identifiable proceeds.
- The court rejected Central Bank’s broad “banker’s privilege” defense and treated the bank’s reversal and payment as a voluntary act with legal consequences, not a purely ministerial correction.

## Legal Principles

- A perfected security interest in identifiable proceeds can support a conversion claim against a bank that wrongfully pays out or transfers those proceeds in a manner that impairs the secured party’s rights.
- A bank is not automatically insulated from liability merely because a wire transfer involved an intermediary-bank error; reallocating funds between a debtor’s accounts after an initial credit may expose the bank to claims by a secured party with rights in the proceeds.
- Article 4A’s risk-allocation framework does not grant a cost-free right for a beneficiary bank to reverse a credit in a way that defeats a known blocked/escrow arrangement established to protect a secured creditor.

## Conclusion

The court held that a bank that reverses a wire credit from a blocked account and enables a debtor’s diversion of collateral proceeds may be liable to a secured creditor with a perfected interest in those identifiable proceeds, and it sent the case back for further proceedings.


Gen. Elec. Cap. Corp. v. Cent. Bank, 49 F.3d 280 (7th Cir. 1995)