On September 8, 2022, the Second Circuit held that lenders to Revlon, Inc., a global cosmetics company, must return approximately $500 million to Citibank N.A., which Citibank had inadvertently paid on Revlon’s behalf. The decision vacated a lower court’s ruling from 2021 that the lenders could retain the funds.
On August 11, 2020, Citibank, as agent under a term loan agreement, intended to process a $7.8 million interest payment by Revlon to its lenders. Instead, Citibank mistakenly wired the entire principal loan balance of nearly $1 billion from Citibank’s own account, giving the lenders a “huge windfall,” per the Second Circuit’s decision.
The next day, after realizing its error, Citibank began sending recall notices to the lenders notifying them of the mistake. Some lenders returned funds, but the defendants did not.
After a bench trial in the Southern District of New York, the court ruled that the lenders could retain the funds under the discharge-for-value doctrine, which allows lenders to retain erroneously wired funds when they are legitimately owed the money and are not on notice that a mistake was made. The district court found the lenders did not have constructive notice of the mistake because they received the exact amount owed and were not aware of the mistake at the time it was made.
The Second Circuit disagreed and applied a different inquiry notice standard: “In our view, the Defendants are not shielded from Citibank’s claims for restitution under the discharge-for-value rule because they were on inquiry notice that the unexpected and surprising apparent repayment of the full principal amount of their loans was attributable to mistake.”
The Second Circuit pointed to “red flags” indicating a mistake was made, including that Citibank gave no warning that a prepayment was coming and that Revlon was under financial distress at the time. As a concurring judge stated: “Put simply, you don’t get to keep money sent to you by mistake unless you’re entitled to it anyway.”
The decision may give comfort to agents that make mistaken transfers, though it’s still not recommended.
The case is In re Citibank, N.A., No. 21-487 (2d Cir. 2021).