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Citibank wins $500 million at Second Circuit

The appeals court granted the bank a $500 million refund for an accidental loan payment it made.

MANHATTAN (CN) — Citibank is entitled to get over half a billion dollars back from an accidental payment they made to pay off a loan for Revlon, the Second Circuit ruled Thursday.

In August 2020 Citibank was working on paying down a $1.8 billion loan on behalf of Revlon, a loan they still had three years to pay off, when it accidentally paid off the full amount instead of the $7.8 million interest payment it meant to send.

Many of the lenders responded to requests to send the money back, refunding about $385 million, but several did not, prompting a lawsuit. A federal judge sided with the lenders last February, calling it “irrational” for them to believe the payment was an accident.

However, Citibank must have been persuasive at oral arguments last September, where they argued that the lenders should have inquired about the payment to make sure it was intentional, because Wednesday the three-judge panel vacated the ruling and granted the bank a refund.

“The lenders who received an unexpected apparent early repayment of principal from an insolvent debtor, in circumstances where there were visible red flags warning that the payment may have resulted from a mistake, had no incentive to investigate to ascertain the truth,”  U.S. Circuit Judge Pierre Leval wrote for the panel.

The lenders leaned on case law from a similar case, Banque Worms v. BankAmerica, which they say makes no mention of New York inquiry laws. Leval, a Clinton appointee, stressed that has no bearing on this case because unlike Banque Worms, the lenders here had several red flags that should have prompted an inquiry.

“If the suspicions and warnings raised by the red flags are so remote and improbable that it is consistent with reasonable prudence to ignore them without making inquiry, then the person is not on notice of the facts that reasonable inquiry would have revealed,” said Leval. “On the other hand, if reasonable prudence on confronting those suspicions and warnings would call for making inquiry in the interest of avoiding a risk of the loss that would befall him if the payments proved mistaken, the person is on notice of the facts that would be revealed by reasonable inquiry.”

A key factor here as well, Leval notes, is that a 2016 agreement between the lenders and Citibank would have required a notice if the loan was going to prepay the loan, but no notice was given. 

“The absence of prior notice from Citibank raised a substantial red flag supporting suspicion” Leval said. “Why would Citibank, the Lenders’ agent, have failed to perform its contractually required obligation to give the Lenders prior notice of Revlon’s huge prepayment?”

Citibank expressed it was pleased with today’s ruling.

“Today’s ruling reaffirms our long-held belief that these mistakenly transferred funds should be returned as a matter of law, as well as ethics. While Citi has taken steps to reduce the likelihood of such an error in the future, today’s decision provides welcome stability and upholds the concept of cooperation needed for a well-functioning syndicated lending market,” Danielle Apsilos, a representative for the bank said in a statement.

U.S. Circuit Judge Michael Park, a Donald Trump appointee, concurred on the ruling saying that the “discharge for value” rule, which applies to a creditor who is owed that money, does not apply to this case.

“But here, Defendants had no such claim—not when they received Citibank’s money, and not when they were asked to give it back—because they were not entitled to payment for another three years after Citibank erroneously sent them half a billion dollars,” said Park. “Allowing them to keep that money would turn equity on its head and topple the settled expectations of participants in the multi trillion-dollar corporate-debt market. It would also be brutally unfair.”

Citibank was represented by Neal Katyal with the firm Hogan Lovells, and the lenders were represented by Kathleen Sullivan with Quinn Emanuel. Neither attorney immediately responded to a request for comment.

U.S. Circuit Judge Robert Sack, a Clinton appointee, joined the ruling.

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