On September 8, Second Circuit ruled that lenders must return $500 million to Citibank, which had mistakenly wired the funds to them. The decision vacates a 2021 Southern District of New York ruling, which held that the lenders were not on constructive notice of the mistake and could rely on the discharge-for-value doctrine to retain 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 the lenders. Although the loan had not yet matured, in 2020, Citibank, through administrative error, transmitted over $900 million of its own funds — the entire outstanding principal — by wire to the lenders instead of the $7.8 million interest payment due from Revlon that it meant to send. Citibank realized the system’s error the next day and immediately sent recall notices to the lenders. While some lenders returned their portion of the principal, others refused to return their shares, totaling approximately $500 million.
Citibank sued, bringing claims of unjust enrichment, conversion, money had and received, and payment by mistake. Following a bench trial, the district court ruled that since the lenders had received the exact amount each was owed, had not made misrepresentations to induce the wire transfer, and were not on notice of the mistake at the time it occurred, they had satisfied New York’s discharge-for-value defense.
The Second Circuit reversed, vacated, and remanded, explaining that under New York law, the elements of the discharge-for-value defense were not satisfied because the lenders had constructive notice and because they were not entitled to the money at the time of the payment.
First, the court held that the inquiry notice standard was the proper standard for determining constructive notice, not whether the lenders “knew or should have known.” Under the circumstances — an unexpected early payment of all of the principal owed from a debtor that was known to be insolvent at the time and was taking creative measures to avoid acceleration of the loan, without the contractually required notice of prepayment — the lenders had “visible red flags” that would have induced “the hypothetical prudent investor” to investigate and call Citibank, at which point, they could have immediately learned that the payment resulted from a mistake.
Second, the court held that because the loan was not due and payable for another three years, the lenders were not entitled to the money at the time it was wired. The court thus applied a “present entitlement requirement” to the discharge-for-value doctrine, which it explained was consistent with past precedent, and to the doctrine’s loss-allocation purposes, which applies when there is “no reason in justice” to prefer the payor over the recipient. Here, there was “substantial justice” in returning the funds to Citibank to prevent a windfall to lenders. The court found that restitution placed the lenders back in their contracted-for position.
The ruling brings a long-anticipated resolution to the dispute, as the mistakenly wired funds have been subject to an injunction prohibiting the lenders from transferring or otherwise disposing of them, pending the decision on appeal or an un-appealed district court decision. The Second Circuit initially considered certifying a question to the New York Court of Appeals but decided against it, reasoning that New York law was consistent with Citibank’s position and opting not to further delay the proceedings. The decision relieving the sending bank from a $500 million blunder runs counter to established caselaw and the purpose of UCC Article 4A to promote the finality of wire transfer payments.