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Compassion for Citibank? After billion-dollar payment blunder, panel weighs refund plea

The financial giant says lenders shouldn't be entitled to keep the full amount when it intended to only pay a small fraction.

MANHATTAN (CN) — A panel of the Second Circuit heard Citibank's demand for an enormous refund Tuesday, which turns on whether creditors should have had controls in place to put up red flags when it received repayment of a $900 million loan in full rather than the $7.8 million that was intended.

The overpayment occurred in August 2020. On behalf of the beauty company Revlon, which was paying down a $1.8 billion loan it took out to buy Elizabeth Arden in 2016, Citibank intended to send roughly $8 million in interest. Instead it transmitted the entire outstanding principal on the loan — an amount that Revlon still had another three years to pay off.

Some 200 of Revlon's lenders honored Citibank’s nearly immediate recall notices, refunding about $385 million from that overpayment. Citibank then sued 10 holdouts — representing over 100 lenders — that together have withheld more than $500 million that the bank seeks returned.

The bank is appealing now after a federal judge ruled for the creditors in February, saying it would be “borderline irrational” for them to have believed the payment was in error.

At oral arguments Wednesday in Manhattan, attorney Neal Katyal, representing Citibank for the firm Hogan Lovells, emphasized that there were plenty of factors, including the 2023 loan-repayment deadline, for the lenders to think that the nearly $1 billion payment was not intended.

“When you have all these red flags you could have simply made a phone call to avoid all this litigation,” Katyal said.

While Katyal conceded that prepayments are common, he said they also require a notice, and in this case no notice occurred.

Kathleen Sullivan, a Quinn Emanuel attorney representing the lenders, says because prepayments are so common in the banking industry it's not fair to say it would be a red flag. Sullivan noted that the procedure for giving notices is much different for Revlon than it is for Citibank.

“Revlon needs to give three-days notice for prepayment,” said Sullivan. “Citibank only needs to give prompt notice.”

U.S. Circuit Judge Michael Park appeared confused as to why Revlon failed to give the three-days notice to Citibank prior to distributing the money to creditors as required in an agreement between the two companies.

“Despite how common it is, there is a prepayment procedure that was not done here,” said Park, a Trump appointee. “The three-day Revlon notice wasn’t given here.”

Sullivan pushed back, saying while prepayments are common, giving notices is not.

“Notices come in haphazardly, sometimes late, sometimes not at all,” said Sullivan. “You can't find that a lack of notice is an error in Citibank's favor.”

Sullivan added that there is a “finality in wire transfers,” referencing a New York case from the '90s, Banque Worms v. BankAmerica, where the court held “when a beneficiary receives money to which he is entitled and has no knowledge that the money was erroneously wired, the beneficiary can treat the wire as final and not repay funds erroneously wired.”

Attorneys from both parties did not immediately respond to email seeking comment.

U.S. Circuit Judges Pierre Leval and Robert Sack, both Clinton appointees, rounded out the panel Wednesday.

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