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Second Circuit Orders Refund of Citibank’s $500 Million Payment

On September 8, 2022, via a 101-page opinion, the U.S. Court of Appeals for the Second Circuit overturned the district court and ruled that under New York law, the recipients of an accidental, unintended payment of approximately $500 million were required, under the circumstances, to return the payment.

In 2016, pursuant to a credit agreement, Revlon took out a seven-year, $1.8 billion syndicated, collateralized loan. Citibank serves as the Administrative Agent for the lenders in administering the Loan. On August 11, 2020, Citibank made a ministerial error in administering a computer program, which caused Citibank to accidentally wire the full amount of Revlon’s outstanding principal balance (approximately $500 million), three years before Revlon’s loan repayment was due. At the time, Revlon was understood to be deeply insolvent. When the debtholders refused to return the mistakenly transmitted funds, Citibank commenced a lawsuit and asserted claims of unjust enrichment, conversion, money had and received, and payment by mistake.

The district court found that the defendants were not obligated to return the money because of the “discharge-for-value” rule, which provides that a beneficiary can consider the transfer of funds as a final and complete transaction, not subject to revocation, when the beneficiary (i) receives money to which it is entitled and (ii) has no knowledge that the money was erroneously wired.

The Second Circuit disagreed with the district court and concluded that the defendants were not protected by the “discharge-for-value” rule because (i) the defendants were not entitled to the money at the time of Citibank’s accidental payment, and (ii) under New York law, the defendants had notice of Citibank’s error.  

As to the first prong, the court found that to invoke the discharge-for-value rule, the debt at issue must be presently payable. The debt on which Citibank mistakenly made a payment was not due for another three years, so the defendants did not meet the first prong of the discharge-for-value rule.

As to the second prong, the Second Circuit found that inquiry notice, not constructive notice, is the applicable notice standard in adjudicating a discharge-for-value defense in New York. The Second Circuit then determined that the defendants were on notice of Citibank’s mistake because a reasonably prudent investor who faced an avoidable risk of loss if the payment proved mistaken and therefore subject to recall, would have seen fit to make a telephone call to inquire of Citibank.

In light of the above, the Second Circuit concluded that the defendants were not protected by the “discharge-for-value” rule, so the defendants must return the mistaken payment to Citibank.

A hypothetical prudent investor, who suddenly received an unannounced prepayment of the principal of the loan would have been astonished, in light of Revlon’s apparent deep insolvency, that it could find the resources to make a payment of nearly $1 billion.

Tags

restructuring & insolvency, corporate trust

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