A recent decision out of the federal Southern District Court of New York found that Citibank could not claw back $900 million accidentally transferred to lenders. On August 11, 2020, Citibank, acting as loan agent for Revlon, Inc., committed “one of the biggest blunders in banking history.” Citibank mistakenly wired, in addition to Revlon’s $7.8 million interest payments, almost $900 million of its own money. Interestingly, these payments equaled the exact amount owed by Revlon to its lenders. On August 17, 2020, Citibank commenced an action seeking to recover the money accidentally transferred. United States District Judge Jesse M. Furman ultimately concluded that Citibank was not entitled to get its money back and the recipients of the erroneous transfers were entitled to keep the money.
The law generally treats a failure to return money that is wired by mistake as unjust enrichment or conversion and requires the recipient to return such money to the sender. Recipients that spend money accidentally deposited into their accounts may be subject to civil and criminal penalties. However, an exception to the general rule exists under New York law. This exception, known as the “discharge-for-value defense”, provides that a recipient of an accidental transfer is permitted to keep the funds if (1) such funds discharge a valid debt, (2) the recipient made no misrepresentations to induce the payment, and (3) the recipient did not have notice of the mistake. In other words, “[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 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, 77 N.Y.2d 362, 373, 570 N.E.2d 189, 196 (N.Y. 1991).
In In re Citibank August 11, 2020 Wire Transfers, Case No. 20-cv-06539, ten investment advisory firms, which collectively received more than $500 million of the accidental transfer, argued that the “discharge-for-value defense” applied and Citibank was not entitled to the return of its money. The Southern District Court of New York agreed with the investment advisory firms. The Court found that whether the discharge-for-defense rule applied turned on whether the recipients had constructive notice of Citibank’s mistake at the moment they received the wire transfer. Based on the evidence presented, the Court concluded that the recipients did not have constructive notice as they believed in good faith and with ample justification that the payments they received were prepayments in full of Revlon’s loans. In fact, Citibank’s error did not become known to the recipients until nearly a day later when Citibank itself discovered the error and sent notices to the recipients demanding the money back.
This issue is not over as Citibank filed an appeal of Judge Furman’s decision and has requested an injunction be entered “preserving the status quo” pending appeal. This case highlights the importance of implementing strict internal wire procedures and putting in place multiple failsafe protections. In his decision, Judge Furman also suggested that banks would be well served to establish clear and consistent standards governing prepayment notices.
Whether you are a federally protected banking institution, credit union or any other business that engages in wire transfers, having the proper safeguards and compliance checks and balances in place is critical to protecting your business. The attorneys at Pullano & Farrow can assist you with implementing and/or reviewing internal compliance policies and safeguards.
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