New York Legal Exceptions and Technical Limitations Cost Citibank $500 million in Mistakenly Wired Funds

On February 16, 2021, following what the industry has called “one of the biggest blunders in banking history,” U.S. District Judge Jesse M. Furman of the Southern District of New York ruled Citibank is not entitled to a return of half a million dollars wired by mistake.

In August 2020, Citibank, as an administrative agent for a syndicated term loan for Revlon, Inc., mistakenly wired nearly $900 million of its own money in addition to the $7.8 million they intended to send as interest payments to Revlon’s lenders. While some lenders did return the excess money, $500 million had not been returned from ten investment advisor firms when Citibank filed a lawsuit to rectify its mistake.

In 2016, Revlon Inc. took out a seven-year syndicated loan totaling $1.8 billion. In the loan agreement, Citibank’s duties to administer this loan included receiving payments from Revlon and passing those payments of principal and interest on to the lenders. That loan was set to mature by September 7, 2023. The loan agreement also provided that the loan would be governed and interpreted in accordance with the laws of New York state.

In May 2020, Revlon looked to raise additional capital. To do so, Revlon amended the 2016 loan agreement “to make collateral that had previously secured the 2016 Term Loan available instead as collateral for new loans.” Additionally, the amendments added a new section to the loan agreement that allowed for “roll-up” rights, in which a lender exchanges one loan for another. These amendments were opposed by most of the defendants in the 2020 case who preferred to have their loan to be paid in full in 2023.

This change in the terms of the loan separated the lenders into two groups: one that held 2020 extended term loans and the other with their loan maturing in 2023. Citibank’s technical limitations in paying interim payments to both groups meant that in June 2020, only those of the first group were paid interim payments, while those with the original loan maturing in 2023 were not paid.

The defendants in the court case are all in the latter group who did not receive interim payments in June 2020. The court saw this as further evidence that this group of lenders expected a higher amount of payment in August 2020, since they had not received their earlier interim payments in June 2020.

Generally, the law treats failures to return money that was not intended to be sent as an “unjust enrichment or conversion” requiring the recipients to return the total of the mistakenly wired funds. As an example, in September 2019, a couple in Pennsylvania faced felony theft charges after they spent more than $100,000 that their bank accidentally deposited into their account.

New York law has an exception to this rule, however. The “discharge-for-value defense” states that if the recipient did not notice the mistake or did not make any fraudulent misrepresentation to receive the money, they are permitted to keep the wired money. This exception was recognized in the 1991 New York court case Banque Worms v. BankAmerica International.

In mid-February 2021, The U.S. District Court for the Southern District of New York ruled that “the evidence shows that the entities believed – in good faith with ample justification – that the payments they received were prepayments in full of the Revlon loan.” Unfortunately for Citibank, the mistake totaled the exact principal and interest that Revlon owed to its lenders. The Court also commented that Citibank did not realize its mistake until a day later. Had Citibank realized the mistake at the time it occurred and notified the lenders, they could have been entitled to the money to be returned.

Citibank’s mistake, had it happened in any other state, or had it not been clouded in confusion by the bank’s own technical limitations, might have seen a different outcome from the lawsuit. Unfortunately for Citibank, if the lenders choose to keep the wired money, it is in their right to do so.