In re Citibank
| Decision Date | 15 September 2022 |
| Docket Number | 21-487 |
| Parties | In re: Citibank |
| Court | U.S. Court of Appeals — Second Circuit |
When people receive money by mistake, the law usually requires them to give it back. This commonsense rule allows transferors to reclaim property that rightfully belongs to them- whether misdirected funds,[1] an accidental overpayment,[2] or a credit to the wrong bank account.[3] An exception to the general rule can sometimes protect a recipient who was owed the mistakenly paid money. Under this narrow equitable defense, called "discharge for value," a creditor who receives a payment in discharge of a debt he is owed can defeat restitution by invoking his own competing claim to the disputed funds. But here, Defendants had no such claim-not when they received Citibank's money, and not when they were asked to give it back-because they were not entitled to payment for another three years after Citibank erroneously sent them half a billion dollars. Allowing them to keep that money would turn equity on its head and topple the settled expectations of participants in the multitrilliondollar corporate-debt market. It would also be brutally unfair.
In my view, this is a straightforward case that many smart people have grossly overcomplicated. The Court ultimately arrives at the correct conclusion but only after taking an unnecessary detour through the factual record. I agree with the majority that the district court clearly erred in concluding that there were insufficient red flags to put Defendants on notice of Citibank's mistake. I also agree that the district court erred as a matter of law in its overreading of Banque Worms. But Defendants' case fails on a more basic level: A recipient of mistakenly transferred funds cannot invoke the discharge-for-value defense-a general legal rule incorporated by the Restatement (First) of Restitution and the New York Court of Appeals-unless and until it has a present entitlement against the debtor. Put simply, you don't get to keep money sent to you by mistake unless you're entitled to it anyway. I respectfully concur only in the judgment.
On August 11, 2020, Citibank set out to process a $7.8 million interest payment to the lenders of its client Revlon, Inc., a global cosmetics company. But instead, Citibank inadvertently wired the entire principal balance of the loan-nearly $1 billion-from the bank's own account. Some recipients gave the funds back. Defendants ("the Creditors") managers who controlled over $500 million of the mistakenly transferred funds, did not. Citibank sued, lost at a bench trial, and appealed to this Court.
In 2016, Revlon took out a $1.8 billion loan (the "2016 Term Loan") to finance its purchase of Elizabeth Arden, Inc., another cosmetics brand. A syndicate of lenders agreed (under the "2016 Term Loan Agreement") to provide the funds in exchange for periodic interest payments and a return of principal on September 7, 2023, the maturity date. Revlon offered certain intellectual property ("IP") as collateral.
In addition to Revlon and the lenders, Citibank was party to the contract as the "Administrative Agent and Collateral Agent." In that role, Citibank was charged with receiving interest and principal payments from Revlon and passing them along to the lenders. Those lenders-investors and investment vehicles that took a variety of corporate forms-were represented by portfolio managers, including Defendants, who controlled the lenders' funds.
By spring 2020, liquidity had become tight for Revlon in the face of slumping sales numbers and the beginning of the COVID-19 pandemic. Revlon tried to raise additional capital to meet its immediate financial obligations, and it again sought to put up its IP as collateral. But to do so, it had to win majority approval of the 2016 Term Loan lenders, whose loans were secured by the same property. So Revlon proposed a "roll-up" transaction: A lender who agreed to the refinancing would convert its 2016 Term Loan position into a new one in the 2020 loan. The consenting creditors would thus continue to have their loans secured by Revlon's IP, while those maintaining their 2016 positions would effectively lose their priority.
Not all agreed. The objecting lenders-Defendants here among them-campaigned to block the deal, fearing that the restructuring would leave them holding the bag in the event of a default if others acceded to Revlon's plan and they did not. But ultimately, Revlon prevailed, and the IP transfer took place in May 2020. Afterwards, some objectors, including Defendants, accused Revlon of manipulating the vote. In an effort to accelerate the debt's maturity and to demand repayment immediately, they planned a lawsuit in which they would allege that Revlon was "deeply insolvent." Joint App'x at 177. By then, the value of the 2016 Term Loan had fallen to roughly 25 to 30 cents on the dollar. The Creditors' lawsuit, naming Revlon and Citibank as defendants, was eventually filed on August 12, 2020, at 2:06pm.
Just one day before then, however, the Creditors were suddenly repaid in full. Notwithstanding Revlon's dire financial straits, its reputation for playing leveraged-finance hardball, [4] and the impending lawsuit alleging its chronic insolvency, each creditor on the 2016 Term Loan received, without notice or explanation, every penny of its principal and interest balance three years early, for a total of $893,944,008.52 in prepaid principal.
Of course, Revlon had not suddenly acquired the cash, or the irrational impulse, to prepay all of its outstanding debt to the 2016 creditors at four times its market value. Instead, Citibank had paid off the balances by mistake.
That day, August 11, 2020, Citibank was tasked with executing a roll-up for a few of the 2016 lenders. This required Citibank (1) to pay accrued interest to those lenders, and (2) to move their principal balance to a new loan facility. Under the constraints of Citibank's "Flexcube" payments software, the best way to do that was apparently to pay all of the 2016 lenders their accrued interest. Then, Citibank would synthetically pay all those lenders their principal by routing it into a "wash account," from which the principal could be reallocated into the old and new tranches of loans.
Revlon agreed to pay accrued interest to all of the 2016 lenders in this way, and Citibank delegated execution to an employee at its contractor in India. In order to pay out interest but redirect the principal into a wash account, that employee had to check three cryptically named boxes in Flexcube: "FRONT," "FUND," and "PRINCIPAL." But the employee checked only "PRINCIPAL," and neither of the two supervisors charged with verifying the transaction spotted the error. So, instead of booking a wash transfer, Flexcube actually wired nearly $1 billion of Citibank's own money out the door to the 2016 Term Lenders.
The lenders each received a "Calculation Statement" showing only a payoff of accrued interest. The dollar amounts they were wired, however, were over 100 times larger. Per the 2016 Term Loan Agreement, Revlon was permitted to prepay the loan, but it had to give notice to Citibank three days in advance, and Citibank then had to notify the lenders of the decision "promptly." No lender received notice that Revlon was prepaying any debt.
The day after the transfer, on August 12, at around 2:25pm, Citibank began sending "Recall Notices" to the lenders notifying them of the mistake. Managers controlling about half of the total sum quickly agreed to return the mistakenly wired funds. Defendants decided not to do so.
Then came strategy. After receiving the Recall Notices, the Creditors paused. There were calls and emails with counsel. There were sudden reversals, instructions to stop payment. See, e.g., Joint App'x at 1302-03 (). And then, a few months later, there was voluntary dismissal of the Creditors' earlier lawsuit against Revlon. After all, the Creditors already had more than what they wanted: They could, as one employee put it, "take the money and run." Id. at 1295.
Less than a week after the error, on August 17, 2020, Citibank sued under theories of unjust enrichment, conversion, money had and received, and payment by mistake. Citibank sought equitable relief in the form of specific restitution of its identifiable funds.[5] The United States District Court for the Southern District of New York granted a temporary restraining order freezing the funds,[6] but after a bench trial, the district court entered judgment for Defendants and held that recovery was barred by the discharge-for-value defense. In re Citibank Aug. 11, 2020 Wire Transfers, 520 F.Supp.3d 390 (S.D.N.Y. 2021). Citibank appealed, arguing the defense does not apply for three reasons: (1) Defendants were not yet entitled to payment, (2) Defendants did not apply the funds to credit Revlon's account before receiving the Recall Notices, and (3) Defendants were on constructive notice of the mistake...
To continue reading
Request your trial