## Facts

- Calumet Farm, Inc. owned a thoroughbred horse operation and owed White Birch Farm, Inc. and its owner, Peter Brant, on a $6.5 million promissory note related to a shared interest in a stallion.
- Calumet defaulted on scheduled principal and interest obligations and sought to make an interest payment in March 1991.
- Calumet instructed its bank, First National Bank & Trust Co., to wire $77,301.58 in interest to White Birch’s Citibank account.
- Due to an error, First National wired $770,301.58 (about ten times the intended amount) with a transfer description referencing interest.
- On March 11, 1991, Calumet learned of the overpayment and First National promptly notified White Birch of the mistake.
- Citibank did not reverse the transfer after crediting White Birch’s account.
- White Birch refused to return the excess funds; after notice, White Birch credited the funds against Calumet’s debt and Brant moved the excess to his personal account.
- Calumet sued First National over the error; the parties settled (about $550,000), and Calumet assigned to First National any claims against White Birch.
- First National, as assignee, filed an adversary proceeding in Calumet’s bankruptcy seeking restitution of the mistaken overpayment (approximately $693,000).

## Issues

1. Whether White Birch proved the elements of the discharge-for-value defense, permitting it to retain the mistaken overpayment as a payment in discharge of Calumet’s debt.
2. Whether notice of the mistake to White Birch before it credited the funds to the debt defeats the defense and requires restitution.

## Decision

- The Sixth Circuit reversed the district court (which had affirmed the bankruptcy court) and remanded for entry of judgment for First National.
- The court held White Birch failed to establish the discharge-for-value defense because it had notice of the mistake before treating the funds as discharging the debt.
- The court applied the general rule that mistaken payments, including overpayments, are recoverable in restitution absent a valid affirmative defense.

## Legal Principles

- A payor who makes a payment under a mistake of fact is generally entitled to restitution from the payee, including when the mistake concerns the amount.
- Discharge for value is a limited affirmative defense allowing a creditor to keep a mistaken payment only when the creditor, in good faith and without notice of the mistake, accepts the payment in satisfaction of a valid debt.
- The defense requires proof that (1) the recipient was a creditor, (2) the payment was accepted in discharge of a valid debt, and (3) the recipient lacked notice of the mistake at the time it changed position by accepting the payment as satisfaction.
- A creditor cannot create protected “discharge” by applying funds to a debt after receiving actual notice that the payment was mistaken.

## Conclusion

Because White Birch received notice of the wire-transfer error before it credited the funds as payment on Calumet’s debt, it could not invoke the discharge-for-value defense, and restitution of the overpayment was required.


In re Calumet Farm, Inc., 398 F.3d 555 (6th Cir. 2005)