Writing in Equipment Finance Advisor and ABL Advisor, Partner Julia Gavrilov covers the latest developments in Citibank, N.A.’s case against a group of Revlon, Inc. lenders who refused to return millions of dollars mistakenly wired to them in an incident that one U.S. District Court judge described as “one of the biggest blunders in banking history.”

Her article, “Inquiry Notice Resolves the Billion Dollar Blunder,” discusses the United States Court of Appeals for the Second Circuit’s recent unanimous decision in favor of Citibank but also walks readers back for a clearer understanding of the case history. She explains why an earlier District Court decision favored the Revlon group, prompting more lenders to include preventative language concerning erroneous payments in their loan documentation. Gavrilov urges them to continue doing so despite Citibank’s recent victory.

The ‘Blunder’

It all began in August 2020, when Citibank was the acting administrative agent on a $1.8 billion syndicated seven-year-term loan that was due to mature in three years. Citibank had intended to transfer a $7.8 million accrued interest payment to the syndicate group of Revlon lenders involved, but inadvertently wired nearly $1 billion of its own funds and in doing so sent the full amount of the outstanding principal balance to the lenders.

Citibank alerted the Revlon lenders to the error the next day but recouped only part of the amount – about $385 million – from those that agreed to return funds.

District Court Decision

Citibank filed an action for restitution in the United States District Court for the Southern District of New York to recover the remaining $500 million from the other Revlon syndicate lenders.

“The lenders, as part of their defense, alleged that they not only believed the erroneous payment was intentional because each was paid precisely the amount of principal and accrued interest that each was respectively owed but that they otherwise would have had no reason to believe that Citibank, one of the most sophisticated financial institutions in the world, would ever make a mistake of such magnitude,” Gavrilov writes.

It was in this Court that U.S. District Court Judge Jesse Furman referred to Citibank’s mistaken wiring of the funds as one of banking history’s biggest blunders.

A trial ensued. In February 2021, the Southern District of New York ruled in favor of the Revlon lenders based on New York’s “discharge-for-value” doctrine. Gavrilov discusses the doctrine in her article and describes it as the one exception to New York State common law, which otherwise upholds the return of mistakenly issued funds.

The impact of the Southern District’s decision reverberated throughout the lending industry, as it immediately
“sent loan agents scurrying to amend existing loan agreements to include ‘erroneous payment’ provisions in an effort to provide administrative agents with a contractual right to seek a return of erroneously made payments,” she notes. Citibank filed an appeal with the United States Court of Appeals for the Second Circuit shortly thereafter.

Second Circuit Ruling

The United States Court of Appeals for the Second Circuit reversed the Southern District’s decision on Sept. 8, 2022, holding that all of the requirements for New York’s “discharge-for-value” exception had not been satisfied.  Gavrilov explains the Second Circuit’s ruling in detail and its finding that the lenders were aware of “four red warning flags” at the time that suggested the payments were the result of an accident or mistake.

“The Second Circuit was ultimately guided by equity in making its final ruling, stating that the ‘[a]pplication of the discharge-for-value rule to our facts brings the Lenders a huge windfall over and above what they bargained for, while an order of restitution would leave them exactly where they contracted to be.’ As further echoed by one of the concurring Second Circuit judges, the Honorable Michael H. Park, a ruling in favor of the lenders would otherwise ‘turn equity on its head and topple the settled expectations of participants in the multi-trillion-dollar corporate-debt market’ and be ‘brutally unfair,’” she writes.

The Revlon, Inc. lenders involved are required to return $500 million pursuant to the Second Circuit’s ruling. While they asked for a rehearing, their request was denied by the Second Circuit on Oct. 12, 2022.

Gavrilov concludes, “While the Citibank events have led to the inclusion of preventative language in loan documentation across the lending industry, the Second Circuit’s reversal of the District Court’s decision and ultimate ruling in favor of Citibank should not deem such language unnecessary. In fact, notwithstanding the Second Circuit’s holding, erroneous payment language should continue to be included as boilerplate provisions in syndicated loan transactions, as other jurisdictions may differ in their analyses depending on the specific facts at bar.”

To read her in-depth coverage, visit:

Equipment Finance Advisor https://www.equipmentfa.com/articles/35383/inquiry-notice-resolves-the-billion-dollar-blunder

ABL Advisor https://www.abladvisor.com/articles/35550/inquiry-notice-resolves-the-billion-dollar-blunder