MANHATTAN (CN) — Calling a Citibank error “one of the biggest blunders in banking history,” a federal judge ruled Tuesday that the banking giant cannot reclaim more than $500 million it mistakenly distributed to Revlon lenders.
In August 2020, Citibank intended to send $7.8 million to investment managers, whose creditor clients have been locked in an underlying dispute with the beauty company, in order to pay down interest on a 2016 loan.
Instead, Citibank paid the entire balance of Revlon’s loans to the creditors — out of the bank’s own money — totaling an additional $900 million.
After Citibank acknowledged the mistake and asked lenders to return the money, some of them complied. Others held out, and in a complaint filed Aug. 18, 2020, Citibank tried to reclaim more than $500 million from them.
The result of a weeklong virtual bench trial in New York’s Southern District, which took place in December, was a court ruling allowing the lenders to keep the cash.
In his decision, U.S. District Judge Jesse Furman acknowledged that it was not a stretch for the creditors to believe they were repaid on purpose. After all, the amount repaid was precisely what Revlon owed the lenders.
“Faced with these circumstances, the non returning lenders believed, and were justified in believing, that the payments were intentional,” Furman, a Barack Obama appointee, wrote in the 105-page opinion.
He added, “Indeed, to believe otherwise — to believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational.”
The ruling, Furman wrote, was bound by case law stemming from a 1990s suit in the same district court, Banque Worms v. Bank America, which was heard in both the New York Court of Appeals and the Second Circuit.
Judges in Banque Worms applied what’s known as the “discharge for value rule,” which holds that “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.”
Writing on a blank slate, Furman wrote Tuesday, “it is far from clear” that the court would have decided the Revlon lenders could keep the Citibank money. The bank had realized its error within a day, before some of the lenders were aware of it themselves. Clearly, mistakes were made.
“But the court does not write on a blank slate,” Furman continued, finding Banque Worms made it clear that lenders don’t have to prove detrimental reliance in order to keep money that appears to be repayment on a bona fide debt.
Representing the lenders, attorney Robert Loigman applauded the order.
“We are extremely pleased with Judge Furman's thoughtful and detailed decision," said Loigman, an attorney for the firm Quinn Emanuel.
But even with cash in hand, Loigman’s investment manager clients — and their lender clients — “are not yet necessarily free to do with the money what they want,” Furman wrote, given the possibility of an appeal of the ruling.
Indeed, that’s the plan, said Danielle Romero-Apsilos, a spokesperson for Citibank.
“We strongly disagree with this decision and intend to appeal,” Romero-Apsilos wrote in an email. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”
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