Citibank Gets Its Money Back

• Published date: 16 September 2022
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Trials & Appeals & Compensation
• Law Firm: Davies Ward Phillips & Vineberg
• Author: Mr Michael Disney, Marc Berger and John McCamus

A February 16, 2021 decision of the United States District Court for the Southern District of New York held, in In re Citibank August 11, 2020 Wire Transfers, 520 F. Supp. 3d 390, that lenders who received almost $900 million mistakenly wired to them by Citibank (the administrative agent for a $1.8-billion syndicated seven-year term loan to Revlon [2016 Loan]) were entitled to keep the money. See our bulletin A One-in-a-Billion (-Dollar) Mistake, in which we describe the decision. The United States Court of Appeals for the Second Circuit has now reversed that decision.

The District Court Decision

The District Court had held that the lenders were protected by a doctrine known as the "discharge-for-value" defence. Under New York law, a creditor does not have to return mistakenly paid funds that discharged a debt owed to them if the creditor (i) was unaware and did not have notice (which could include constructive as well as actual notice) of the mistake at the time it received the payment, and (ii) made no misrepresentation to the debtor that it was required to make the payment. The District Court had relied on the leading New York case on this defence, Banque Worms v Bank America Int'l, 570 N.E.2d 189 (N.Y. 1991). In that case, the New York Court of Appeals (the highest New York State appellate court) said, at 196:

"When a beneficiary received money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation."

The District Court had found that, under New York law, the lenders did not have constructive notice of Citibank's mistake for various reasons, including the following:

• The amounts wired were the exact amounts that would have been owed had Revlon decided to prepay the loans in full.
• Since Revlon had been engaged in negotiations to restructure its debt, it was not unreasonable for lenders to believe that it must have decided to prepay this facility.
• While the credit agreement required Revlon to provide three days' written notice of prepayment to Citibank, which Citibank was in turn required to provide to each lender "promptly" after its receipt, it was not uncommon for such notices not to be received by lenders before the actual prepayment itself, or never to be sent at all.
• Calculation statements provided to the lenders...