No $500 million windfall for lenders in misguided wire transfer case | Troutman pepper


September 8, second circuit ruled that the lenders must return $500 million to Citibank, which mistakenly transferred the funds to them. The decision overturns a 2021 decision by the Southern District of New York, which tenuous that the lenders had not received implied notice of the error and could rely on the doctrine of discharge for value to preserve the funds.

Citibank administered a $1.8 billion loan to Revlon, Inc., funded by a group of lenders. Citibank was responsible for transmitting Revlon’s payments to lenders. Although the loan has not yet expired, in 2020 Citibank, by administrative error, passed on more than $900 million of its own funds – the entirety of the outstanding principal – by wire transfer to the lenders instead of payment of $7.8 million in interest owed by Revlon that he meant to send. Citibank realized the system error the next day and immediately sent reminder notices to lenders. While some lenders have repaid their share of capital, others have refused to return their shares, totaling around $500 million.

Citibank filed a lawsuit, claiming unjust enrichment, conversion, money held and received, and payment in error. Following a bench trial, the district court ruled that since the lenders received the exact amount owed to them, did not make any misrepresentations to induce the wire transfer, and were not informed of the error at the time it occurred, they had satisfied New York’s release-for-value defense.

The Second Circuit quashed, rescinded and remanded, explaining that under New York law the elements of the value discharge defense were not satisfied because the lenders had been given implied notice and because they were not entitled to the money at the time of payment.

First, the court ruled that the inquiry notice standard was the proper standard to determine implied notice, not whether the lenders “knew or ought to have known”. In the circumstances – an unexpected prepayment of all principal owed by a debtor who was known to be insolvent at the time and was taking creative steps to avoid acceleration of the loan, without the contractual prepayment notice – the lenders had “visible red flags” that would have prompted the “hypothetical prudent investor” to investigate and call Citibank, in which case they could have immediately learned that the payment was the result of an error.

Second, the court ruled that because the loan was not due and payable for three years, the lenders were not entitled to the money at the time it was wired. The court therefore applied a “present law requirement” to the pay-for-value doctrine, which it found to be consistent with past precedents, and the doctrine’s loss allocation objectives, which apply where there is “no legal reason” to favor the payer over the beneficiary. Here there was “substantial justice” in returning the funds to Citibank to avoid a windfall for lenders. The court concluded that the restitution placed the lenders back in their contractual position.

The decision provides a long-awaited resolution to the dispute, as the funds mistakenly transferred were subject to an injunction prohibiting the lenders from transferring or otherwise disposing of them, pending the decision on appeal or from a decision of the district court without appeal. The Second Circuit originally considered certifying a matter to the New York Court of Appeals, but decided against it, believing that New York law was consistent with Citibank’s position and choosing not to delay further. the procedure. The decision relieving the sending bank of a $500 million error goes against established case law and the purpose of UCC Article 4A to promote the finality of wire transfer payments.


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