In 2016, Revlon, Inc. entered into a syndicated term loan for which Citibank served as the administrative agent. On August 11, 2020, Citibank, intending to wire an interest payment in the amount of $7.8 million, mistakenly wired $900 million the majority of which was its own money. The amount wired was equal to the outstanding amount of the loan. Citibank requested the overpayment be returned. Some of the recipients honored Citibank’s request. However, ten investment advisory firms managing lenders that collectively received more than $500 million of the overpayment refused the request. Citibank filed suit to recover its money in the United States District Court for the Southern District of New York.

Under New York law, which applied to the transfer, the general rule is that failing to return money wired by mistake is an unjust enrichment or conversion. The law requires that the recipient return such money to the sender. There is an exception to the general rule, however. The recipient is allowed to keep the funds, provided, that, they discharge a valid debt, the recipient made no misrepresentations to induce the payment and the recipient did not have notice of the mistake. This exception was first identified in the Banque Worms decisions.

The first of the two Banque Worms decisions was issued by the Court of Appeals for the State of New York (Banque Worms One) in response to a certified question from the United States Court of Appeals for the Second Circuit.  A copy of the Banque Worms One opinion can be found here: https://spelusolawoffice.com/wp-content/uploads/2021/03/banque-worms-v-bankamerica.pdf. The second was issued by the United States Court of Appeals for the Second Circuit (Banque Worms Two) based upon the answer to the certified question received from the New York Court of Appeals. A copy of the Banque Worms Two opinion can be found here: https://spelusolawoffice.com/wp-content/uploads/2021/03/Banque-Worms-v.-Bankamerica-International.pdf.

In Banque Worms One, the New York Court of Appeals adopted the “discharge for value rule” as set forth in Section 14(1) of the Restatement of the Law of Restitution which provides that:

§ 14 Discharge for Value (1) A creditor of another or one having a lien on another’s property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor’s mistake.

In applying the discharge for value rule to the Citibank transfer the District Court held that:

1. There is no requirement that the debt be due just that it is owed.
2. The recipient must be on notice of the mistake when the payment is made not when the payment is credited or the debt discharged on the recipient’s books.
3. The recipient need not demonstrate detrimental reliance on the mistaken payment.
4. The knowledge of a lender’s agents is imputed to the lender.
5. Constructive notice of the mistake by the recipient is sufficient, however, the court demurred on establishing the related standard stating that application of either of the two standards proposed by the parties (“knew or should have known” or “prudent to conduct further inquiry”) would not result in a finding of notice.

As a result, the District Court held that the non-returning lenders were entitled to keep the money. The court’s opinion can be found here: https://spelusolawoffice.com/wp-content/uploads/2021/03/gov.uscourts.nysd_.542310.243.0_2.pdf.