In what most will find a shocking and unjust ruling, on February 16, 2021, Judge Furman of the United States District Court for the Southern District of New York ruled in In re Citibank August 11, 2020 Wire Transfers that Citibank could not recover $900 million that all parties and the Court acknowledge it inadvertently wired to lenders.
Citibank, which was acting as the cosmetic company Revlon’s loan agent, intended to send $8 million in interest payments to Revlon’s lenders. Instead, Citibank accidentally wired a total of $900 million to a group of 10 asset managers (whose clients received more than half of the $900 million payment) and other creditors behind a 2016 syndicated term loan to Revlon. The next day, Citibank advised the lenders of its mistake and asked that the money erroneously wired be returned. About $400 million was returned, but the recipients of the remaining $500 million refused to return those funds. Citibank sued to recover the money.
Finders should not be keepers
Citibank made a mistake that could happen to any financial institution. In fact, mistakes, perhaps not on this scale, happen often. When they do, the recipients of the mistakenly transferred money give it back or face severe (and possibly criminal) consequences. Why in this case wasn’t the money returned either voluntarily or by swift court action? The answer lies in New York’s unique discharge-for-value law which allows the lenders to keep the money because they reasonably believed that it was an intentional prepayment of their loan to Revlon, for which the bank was serving as administrative agent, and made no misrepresentations to induce the payment. Under New York law “when a beneficiary receives 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 the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.”
Important to the court’s holding was evidence presented by the lenders that they claimed they did not know that the payment of all outstanding principal and interest to the tune of almost a billion dollars was in error. The court concluded that the testimony reflected that the lenders believed Citibank was wiring prepayments for a loan, even though the loan wasn't set to mature for many years. As unbelievable as it may sound, the lenders testified, and the court agreed, that the lenders learned of the mistake only when Citibank asked that the funds be returned the next day. "Taken together, the evidence shows that the entities believed — in good faith and with ample justification — that the payments they received were prepayments in full of the Revlon loan."
"Indeed, to believe otherwise — to believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational," the Court noted. "Accordingly … the court holds that the . . . wire transfers at issue were final and complete transactions, not subject to revocation." The Court also noted that "given that early paydowns do happen, and a mistaken total paydown had perhaps never happened before, it was natural and reasonable for defendants and their clients to conclude that the . . . wire transfers were an intentional early paydown by Revlon.”
After Citibank initiated litigation to recover the funds, the Court entered temporary restraining orders essentially freezing the money received by the lenders. The restraining orders remain in place pending Citibank’s appeal of the district court’s decision. Although a finding of good faith is an intensely factual inquiry and can be difficult to overturn on appeal, it will be interesting to see if the Second Circuit sustains that conclusion when considering the issue on appeal, especially where, as here, the trial court appears to have relied on the fact that the recipients of the disbursements were entitled to rely on the size and sophistication of their counterparty with no duty to inquire.
An international perspective
While also common law jurisdictions, neither Hong Kong nor English law recognizes the concept of New York’s ‘discharge-for-value’ law. In fact, no other state in the United States has a similar law. As a result, had this case been determined in virtually any other jurisdiction, domestic or international, the outcome would likely have been different – and some would say justly so - in accordance with the principles governing claims to recover money paid under a mistake as outlined in Barclays Bank v WJ Sims  QB 677.
Pursuant to these principles, a person who pays money to another under a mistake of fact is generally entitled to recover the money paid. In usual circumstances, the only way of defeating such a claim is to demonstrate a change of position in good faith on the part of the payee. As noted above, there is no suggestion of any change of position on the part of the lenders in the present case. In particular, those monies paid by Citibank which have not been repaid are frozen pending Citibank’s appeal.
However, in Barclays Bank, Mr Justice Goff (as he was then) considered that the claim could also fail in a number of other limited circumstances. These include where the payment is made for good consideration and the money is paid to discharge a debt owed to the payee by the payer (or a third party by whom he is authorized to discharge the debt).
On its face, this principle might apply to the Citibank case. However, helpfully in Barclays Bank, Mr Justice Goff held that where a bank was acting without a mandate to make the payment from the payee, the payment could not be effective to discharge consideration on the part of the payee. Given Revlon had only intended to send $8 million in interest payments to its lenders, it does not appear possible to argue that Citibank was authorized by Revlon to discharge the debt which it owed.
No doubt, the lenders’ arguments would have been presented differently had this matter been litigated in either Hong Kong or England or elsewhere. However, on the basis of the available information, one might argue that Citibank was twice victimized, first by those entities that refused to return the erroneously wired funds and second by application of a rather unforgiving and, indeed, penal New York law. Many eyes will be on the appellate court as it reviews the lower court’s decision. In the interim, financial institutions can protect themselves by including in loan documents a provision governing mistaken payments giving the lender the right to unilaterally declare a payment to have been made by inadvertence or mistake and compelling the return of such funds.