February 18, 2021
A New York precedent decided 30 years ago has proven to be a near unsurpassable roadblock for Citigroup, Inc. in its pursuit to recover $504 million of an accidental loan payment. On August 11, 2020, Citibank, acting as an Administrative Agent for a syndicated term loan taken out by Revlon, Inc., intended to wire approximately $7.8 million in interest payments to Revlon’s lenders. Instead, the bank accidentally wired nearly $900 million of its own money, paying the entire balance of principal and interest on the loan, to the penny.
In a 101-page ruling, U.S. District Judge Jesse Furman, presiding in the Southern District of New York, decided that based on the rule called “Discharge for Value,” Citibank was not entitled to recover any of the funds it mistakenly sent out. While generally the law treats a failure to return money sent by mistake as unjust enrichment, New York law provides an exception to this rule. Judge Furman based his decision on the 1991 New York case called Banque Worms v. BankAmerica International. In that case, the New York Court of Appeals declared that a recipient is permitted to keep mistakenly sent funds if, 1) the funds discharge a valid debt; 2) the recipient made no misrepresentations to induce the payment; and 3) the recipient did not have notice of the mistake.
Based on testimony from beneficiaries of the loan as well other ample evidence, the court found that Citibank paid off a valid loan and the recipient lenders showed no knowledge that a mistake had occurred. Judge Furman stated that the vast security measures taken by the bank “would have been virtually inconceivable to a reasonable investor…that Citibank had wired nearly $900 million by mistake.”
Further, because the findings of fact in the trial court are given significant deference, it will be difficult for Citibank to change this outcome on appeal based solely on the evidence. Its best bet at this stage would be to bring the case up through the appeal process to the highest court and argue that New York should reassess this legal principal itself. Either way, significant challenges await Citibank as it forges ahead in this case. The full opinion can be found on the federal court docket at case number 20-cv-06539.
While the Pennsylvania Supreme Court has not yet formally adopted the “Discharge for Value” principle, some PA appellate courts have shown a willingness to apply this rule under similar circumstances. Our firm has successfully been involved in some of these lower court proceedings at both the trial and appellate court level.
It is necessary to note that this case was based upon an occurrence of mistake, rather than a fraudulent act. Nevertheless, it is a significant example demonstrating the problems that can arise when sending wires and it is important to always be vigilant when processing them. Meaningful checks and balances are an absolute must for any institution or company in processing wires.