Following a trial in the Southern District of New York, a federal judge ruled that Citibank is not entitled to recover approximately $500 million dollars of the $900 million the bank mistakenly sent to lenders of Revlon. The ruling turned on the conclusion that the recipients neither knew nor reasonably should have known that the payment was made in error.
On August 11, 2020, Citibank, acting as the administrative agent for a syndicated loan to Revlon, mistakenly sent approximately $900 million dollars to a group of Revlon’s lenders. Realizing its massive error, the following day Citibank requested the lenders return the funds and many lenders complied. A group of ten lenders who were owed approximately $500 million of the $900 million, however, refused to return the funds arguing that they were indeed owed the money they received.
The error stems from a $7.8 million interim interest payment that Revlon intended to pay to its lenders through Citibank. The interim interest payment was part of a complex restructuring of Revlon’s loan whereby certain lenders, but not others, would be repaid. To effect this interest payment, Citibank’s internal system required the entire loan to be constructively paid off and for the principal balance to be paid to an internal Citibank “wash account.” Citibank’s complex payment system, however, caused its operations employees to mistakenly believe they indeed directed the principal payment to the internal wash account; in fact, the entire principal balance was sent out the door to Revlon’s lenders. Because Revlon only provided $7.8 million to Citibank to pay the interim interest payment, the $900 million sent was from Citibank’s own funds.
The lenders who refused to return the $500 million prevailed in court by successfully arguing a “discharge-for-value” defense. Under New York law, a creditor may retain funds inadvertently paid by a third party to satisfy a debt if the creditor did not have notice of the third party’s mistake. The arguments at trial focused on whether the recipients should have known that the payments were made in error and thus had notice of Citibank’s mistake. Here, the Revlon lenders pointed out that the payments made by Citibank were for the exact amounts owed––to the penny––to each lender. Thus, they argued that it was reasonable for them to assume that the wire was made to repay Revlon’s debt and that it was not made in error. The court further agreed that the alternate assumption the lenders could have made––that a sophisticated financial institution like Citibank mistakenly wired almost one billion dollars to lenders––was less plausible.
Curiously, jokes made at Citibank’s expense by the lenders also weighed in favor of the lenders. The opinion lists a number of chats and communications from employees at the lenders poking fun at Citibank for one of the largest banking errors in history. (“I feel really bad for the person that fat fingered a $900mm erroneous payment. Not a great career move.”) Notably, the teasing only began after the lenders received Citibank’s demand for return of the funds. The court considered the absence of these jokes before Citibank’s demand as evidence that lenders were initially not on notice that the wire was made in error. Citibank announced its intention to appeal the district court’s ruling.