A Supreme Court action on Monday left Citicorp responsible for repaying about $2 million to Wells Fargo & Co. after the Philippines government blocked an international funds transfer.

Ending a nine-year legal battle, the Supreme Court declined to review an appeals court ruling that favored Wells Fargo's claim.

The ruling opens the possibility that U.S. banks could be forced to reimburse customers if movements of their money are prevented by foreign-government fiat.

Legal experts said that the Supreme Court decision does not imply that banks are automatically liable under all circumstance for all the hundreds of billions of dollars in deposits held in foreign branches.

Many financial institutions may now try to protect themselves by contractual means to limit liability to customers.

A Citicorp spokesman expressed disappointment with the outcome and said the bank would seek legislative or regulatory relief.

Approach to Documentation

Citicorp officials also plan to discuss the ruling "with our industry colleagues who are active in these international markets, specifically on the feasibility of increased documentation" that would limit their exposure, the spokesman said.

"This doesn't end the dispute," said Steven Lucas, an attorney specializing in international banking with Wiley, Rein & Fielding in Washington.

Mr. Lucas and others predicted that banks will likely protect themselves from responsibility for deposits blocked by foreign governments by writing safeguards into deposit-confirmation documents.

Written Safeguards Needed

"Banks will be attempting to limit their liability," said Peter Smedresman, a lawyer with Watson, Farley & Williams in New York.

However, lawyers also said that until such safeguards are written in, billions of dollars in overseas deposits remain subject to potential risk.

In the Citicorp-Wells dispute, Citibank had declined to reimburse some $2 million in Wells deposits blocked at Citi's Manila branch in 1983. The Philippines government had restricted transfers of funds out of the country.

Portfolio of Court Cases

The case is one of several in which Citicorp had contested its liability when transfer of overseas deposits were blocked.

In an earlier case, courts ordered the bank to reimburse depositors of a branch in Saigon after deposits where seized by North Vietnam.

The Supreme Court's refusal to reverse the lower court ruling comes despite support for Citicorp from the Justice Department, U.S. Treasury, the Federal Deposit Insurance Corp., and other agencies.

Exempt from Insurance

U.S. banks held about $310 billion in overseas deposits as of March 31, according to the FDIC.

Citicorp held $87.4 billion in overseas deposits out of its total $122.7 billion; J.P. Morgan & Co. had $32 billion of a total $37 billion; and Chase Manhattan Corp. $26 billion of a total $55.6 billion, the FDIC said.

Because overseas deposits are exempt from insurance premiums, they have come under increasing scrutiny from regulators as well as criticism from smaller U.S. banks.

Legal sources suggested that the court ruling could strengthen moves in Congress that would require outside deposits to U.S. banks to be accepted through locally chartered subsidiaries, rather than branches.

This legal approach, they pointed out, would limit legal liability for deposits to the local subsidiary.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.