Citibank, N.A. v. Brigade Capital Management, LP, No. 1:20-cv-06539
Human error is inevitable, but for Citibank in August of 2020, human error made the $105 billion capitalized bank the laughingstock of the financial industry. Citibank attempted to wire an interest payment of $7.8 million on behalf of Revlon, Inc. to creditors. Instead, an incredible mistake occurred: Citibank wired nearly $900 million dollars to various creditors, which matched the accrued interest and remaining outstanding principal under the 2016 Term Loans to Revlon to the penny. The following day, Citibank realized its blunder and immediately sought its money’s return, citing human error.
While some creditors readily understood the overpayment to have been made in error, and returned the money, others were not so considerate of Citibank's blunder. Some creditors refused to return the funds to Citi, citing that the structure of the debts and collateral could cause some institutions and creditors to default if the debt were to be reworked, creating serious issues within the industry. Other creditors argued simply they no longer had the money, as it went straight to their end clients, changing their position in reliance on the understanding that Citi’s wire was not in error.
Recently, a major decision was issued in favor of those creditors that felt entitled to keep the money paid. The question was whether the discharge-for-value rule or the mistake-of-fact rule of restitution should be applied. Under the former, creditors can keep the money even if it was mistakenly wired so long as it discharged a debt owed, the receiving party made no misrepresentations, and the receiving party had no notice of the error. The mistake-of-fact rule, on the other hand, holds the party that made the transfer is entitled to have the money returned so long as the creditor has not changed its legal position in reliance of the payment such that it would be unjust to require a refund.
Based on precedent set by the New York Court of Appeals, the judge applied the discharge-for-value rule, noting the non-returning lenders did not have to demonstrate a detrimental reliance in order to keep the payments. Instead, the questions turned on whether the lenders had notice that the wire was, in fact, a mistake. Controlling precedent says that the time at which to measure notice is when the payments were received. These decisions, together with the circumstances surrounding the transfer, led to the conclusion that the lenders could lawfully keep the money.
The judge reasoning notes that part of the rationale for the decision was that the payments matched the amount owed to each lender— in principal and interest—to the penny. The court further noted that the accompanying notices referenced interest being “due,” something that only makes sense if making a principal prepayment. Furthermore, there was no precedent in which Citibank, nor any other major bank, has ever made a mistake of this magnitude on a simple wire transfer, and no other misrepresentations were made by the lenders to induce the wire. The transfers were, thus, “final and complete transactions, not subject to revocation” because the creditors had no reason to believe at the time of receipt the wire transfers were a mistake. Citibank has publicly rejected the decision and made apparent its plan to continue to appeal. The one concession provided by the court was a temporary ban on the individual lender's use of the funds, pending the appeal.
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