An earlier post reported on the New York application of the “discharge-for-value rule” with respect to a payment made in error to the creditors of Revlon by Citibank the loan administrator. In that case, In Re Citibank August 11, 2020 Wire Transfers, the District Court for the Southern District of New York applied the rule as set forth in Banque Worms Two and held that the creditors could keep the overpayment. The earlier post can be found at: https://spelusolawoffice.com/2021/02/21/citibanks-costly-mistake/.

The United States Court of Appeals for the Second Circuit recently vacated the District Court’s decision and found that Citibank was entitled to repayment because (i) the defendants had constructive notice of Citibank’s error; and (ii) the defendants were not entitled to the money at the time of Citibank’s accidental payment.

The Court found that the facts and circumstances of the payment were such that “a reasonably prudent investor who faced an avoidable risk of loss if the payment proved mistaken and therefore subject to recall, would have seen fit to make a telephone call to inquire of Citibank [about the payment]” and that such an inquiry would have revealed the mistake. The Court also found that under New York law, a creditor may not invoke the discharge-for-value rule unless the debt at issue is “presently payable.” As under its terms the loan was not due for another three years, the loan was not “presently payable.” Therefore, the defendants were not afforded the protection of the rule.

A copy of the Court of Appeals decision can be found at:https://spelusolawoffice.com/wp-content/uploads/2022/09/21-487-2022-09-08.pdf.