Revlon Reversal: Common Sense Prevails (Finally)

• Published date: 20 September 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Financial Services, Fund Management/ REITs, Insolvency/Bankruptcy
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Eric Starr

It is generally the law that mistakenly-received funds must be returned to the sender. Last summer, we covered in detail the now-familiar Revlon case in which that understanding was tested and, surprisingly, not followed.* On Thursday of last week, the United States Court of Appeals for the Second Circuit (the "Second Circuit") delivered a much-anticipated reversal of a lower court ruling - issuing a decision that feels like a return to the law as well as common sense.

In August of 2020, Citibank (acting as the administrative agent for a large syndicate of banks and hedge funds) mistakenly sent out payments of over $900 million in full satisfaction of a loan, instead of the intended $7.8 million interest-only payments. It is worth noting that the vast majority of the funds sent to lenders was not money received from Revlon, but was in fact Citibank's own funds − $894 million to be more precise. Of the $894 million of Citibank's funds, approximately $400 million was voluntarily returned by lenders after Citibank alerted them to the mistake the following day. Citibank filed suit to recover the other approximately $500 million of erroneous payments from lenders who refused to comply after multiple requests.

Much to the surprise of many market participants, in February 2021, a federal district court held that such lenders did not have to return the mistakenly-wired funds.

The general rule governing such situations is that "a party who pays money under a mistake of fact, to one who is not entitled thereto, must in equity and good conscience be permitted to get it back. That is a well-recognized principle of law." (Ball v. Shepard, 95 N.E. 719, 721 (N.Y. 1911)). But the lower court relied on the "discharge-for-value" exception which excuses a recipient of mistakenly-received funds from returning such funds if the erroneous payment discharges a debt and two requirements are satisfied: (1) the participant had no knowledge that the funds were sent in error and (2) the recipient was actually entitled to the payment. In particular, the court was heavily influenced by the fact the payments received were exactly the amount that would have been owed if Revlon opted to repay this credit facility on the date the wires went out. They also found that the lenders had no actual knowledge of the error because they only called other lenders to confirm if they had also received payment in full, as opposed to reaching out to the agent who actually initiated the wires.

Citibank...