In re Citibank Aug. 11, 2020 Wire Transfers
| Decision Date | 12 May 2021 |
| Docket Number | 20-CV-6539 (JMF) |
| Parties | IN RE CITIBANK AUGUST 11, 2020 WIRE TRANSFERS |
| Court | U.S. District Court — Southern District of New York |
Last August, Citibank N.A. ("Citibank"), acting as the Administrative Agent for a syndicated term loan taken out by Revlon, Inc. ("Revlon"), mistakenly wired nearly a billion dollars to Revlon's lenders. Although some lenders returned the money at Citibank's request, many did not, and this litigation — against ten investment advisory firms that managed these "non-returning" lenders — promptly followed. From the get-go, the case turned largely on an affirmative defense under New York law called the "discharge-for-value" rule. After expedited discovery, the case proceeded to trial and, on February 16, 2021, the Court held that the discharge-for-value rule applied and that Defendants are entitled to the funds at issue. Citibank filed an appeal from the Court's decision and now seeks an order maintaining a freeze on the funds pending the outcome of its appeal. For the reasons that follow, its motion is denied.
The events underlying this case are detailed at length in the Court's Findings of Fact and Conclusions of Law, see In re Citibank Aug. 11, 2020 Wire Transfers, — F. Supp. 3d — , No. 20-CV-6539 (JMF), 2021 WL 606167, at *2-11 (S.D.N.Y. Feb. 16, 2021) (ECF No. 243), familiarity with which is assumed.1 Thus, the Court will recount the relevant facts only briefly, focusing on the additional background relevant to the present motion. On August 11, 2020,Citibank, acting in its capacity as Administrative Agent for Revlon's syndicated term loan, intended to wire approximately $7.8 million in interest payments to Revlon's lenders. Instead, it mistakenly wired, in addition to Revlon's $7.8 million, almost $900 million of its own money as well. Some of the lenders refused to return the funds, leading Citibank to file lawsuits against Defendants here, investment advisory firms to those lenders.
With each complaint, Citibank also filed a motion for a temporary restraining order ("TRO") enjoining each Defendant and its "officers, agents, employees, successors, and all those in active concert or participation with them from removing, withdrawing, transferring, assigning, or otherwise disposing of" the mistakenly transferred funds. ECF No. 5, at 1; see also 20-CV-6617, ECF No. 7, at 2; 20-CV-6713, ECF No. 6, at 2. Briefing and oral argument quickly made clear that the critical, and perhaps dispositive, issue would be the applicability of a doctrine under New York law known as the "discharge-for-value" rule: that "[w]hen a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation." Banque Worms v. BankAmerica Int'l, 570 N.E.2d 189, 196 (N.Y. 1991). Citing the fact that the discharge-for-value rule was "an affirmative defense" and that Defendants, at the time, had submitted no cognizable evidence in support of the defense, ECF No. 44 ("Aug. 19 Tr."), at 3-4, the Court granted Citibank's motion and entered TROs with respect to each Defendant, ECF No. 25; 20-CV-6617, ECF No. 16; 20-CV-6713, ECF No. 14. On consent of the parties and a finding of good cause, the TROs were later extended through the date of trial, see ECF Nos. 28, 46, 94, and later still through the date of this Opinion and Order, see ECF No. 183; In re Citibank, 2021 WL 606167, at *42.
From December 9 to 16, 2020, the Court held a bench trial (remotely using a Zoom-based video-conferencing platform due to the COVID-19 pandemic). On February 16, 2021, the Court issued its Findings of Fact and Conclusions of Law, totaling 101 pages, concluding that the discharge-for-value rule does apply and, thus, that the Non-Returning Lenders are entitled to retain the funds that Citibank had transferred by mistake. In re Citibank, 2021 WL 606167. Ten days later, Citibank filed a notice of appeal. ECF No. 249. On March 2, 2021, Citibank moved to convert the existing TROs into an injunction pending appeal. ECF No. 252 ("Pl.'s Mem."). On April 9, 2021, the Court conducted oral argument on Citibank's motion (using the same Zoom-based video-conferencing platform). ECF Nos. 262, 263.
As both sides acknowledge, what Citibank seeks is a stay of the Court's ruling after trial. See ECF No. 254 ( ), at 3; ECF No. 256 ("Pl.'s Reply"), at 1. In deciding whether to grant a stay pending appeal, the Court must consider "(1) whether the stay applicant has made a strong showing that [it] is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Nken v. Holder, 556 U.S. 418, 434 (2009) (internal quotation marks omitted); accord New York v. U.S. Dep't of Homeland Sec., 974 F.3d 210, 214 (2d Cir. 2020) (per curiam). "The first two factors — the likelihood of success and irreparable harm — are the most critical, and have typically been evaluated on a sliding scale, so that a strong showing that the applicant is likely to succeed excuses a weaker showing of irreparable injury." Usherson v. Bandshell Artist Mgmt., No. 19-CV-6368 (JMF), 2020 WL 4228754, at *1 (S.D.N.Y. July 22, 2020) (cleaned up). Nevertheless, as the Supreme Court has emphasized (in the similar context of issuing a preliminary injunction),see Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 22 (2008), "the applicant must demonstrate that both factors are satisfied," New York v. Trump, 490 F. Supp. 3d 736, 741 (S.D.N.Y. 2020) (three-judge court) (per curiam) (emphasis added) (internal quotation marks omitted). Notably, Nken, 556 U.S. at 433 (cleaned up). "Ultimately, the party or parties seeking the stay bear the heavy burden of demonstrating that a stay is warranted." New York, 490 F. Supp. 3d at 741 (internal quotation marks omitted).
Applying these standards here, the Court concludes that Citibank fails to carry its "heavy burden." Id. The Court will address each of the stay factors in turn.
The Court begins with the merits. At the outset, the parties dispute the relevant standard — that is, what Citibank must show to demonstrate a likelihood of success on the merits. Citibank argues that it can satisfy its burden by showing that there are "'serious questions' going to the merits of the dispute and . . . that the balance of hardships tips decidedly in its favor." In re A2P SMS Antitrust Litig., No. 12-CV-2656, 2014 WL 4247744, at *2 (S.D.N.Y. Aug. 27, 2014); see ECF No. 278 ("Apr. 9 Tr."), at 11-12. There are indeed some district court decisions that have applied that standard in this posture. In fact, at least one judge in this District has opined that the "'serious questions' standard is particularly appropriate when a district court is asked to stay its own order" because In re A2P, 2014 WL 4247744, at *2. By contrast, citing recent Second Circuit authority, Defendants argue that the "serious questions" standard is applicable only to motions for preliminary injunctive relief and that, to obtain a stay after final judgment, a party must make a "strong showing that [it] is likely to succeed on appeal on the merits." Apr. 9 Tr. 28-29 (). The Court need not resolve the parties' dispute because, either way, Citibank falls short.
In arguing that the Court's ruling is likely to be reversed on appeal, Citibank simply reprises the three arguments that it made at trial, namely that: (1) the discharge-for-value defense includes a "present entitlement" element, Pl.'s Mem. 10-12; (2) the relevant point in time for the discharge-for-value inquiry is the moment the debt is "actively 'discharg[ed]'" by the recipient, id. at 15-17; and (3) Defendants were on constructive notice of Citibank's mistake, id. at 12-14. The Court has already spilled copious amounts of ink on why these arguments fail, and will not repeat its analyses here, but a few additional comments are in order. Taking the issues in reverse order, Citibank's arguments about notice are actually weaker on appeal than they were at the time of trial because it must now contend with this Court's findings of fact. In fact, the Court agreed with Citibank that the relevant standard was constructive notice, not actual notice. See In re Citibank, 2021 WL 606167, at *22-25. Nevertheless, the Court found, based on the testimony of Defendants' witnesses and contemporaneous documentary evidence, that "the Lenders at issue in this case were not on notice of Citibank's mistake and, thus, that the discharge-for-value defense applie[d]." Id. at *26; see id. at *26-38. The Court's ultimate determination that the Non-Returning Lenders did not have constructive knowledge may be subject to de novo review,but the many "factual findings that underpin" that determination are reviewable only for clear error. Diebold Found., Inc. v. Comm'r, 736 F.3d 172, 187 (2d Cir. 2013).
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