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Second Circuit: Citibank Can Recoup $500 Million Accidental Debt Repayment


In an opinion last week, the Second Circuit, reversing a decision by Judge Furman (covered here), held that Citibank could sue to recoup almost $500 million that it had sent, in error, to certain lenders of a struggling borrower, Revlon.

Citibank was the administrative agent for the loans, and, based on a technical error, wired the full principal balance (nearly $900 million) before the maturity date. Judge Furman applied the “discharge for value” defense to conclude that even a mistaken payment need not be returned where it pertains to a valid debt.

The Second Circuit concluded, however, that the defense is inapplicable so long as the recipient is on “inquiry notice” of the mistake. Inquiry notice was shown by the fact that there was no prior notice of any loan repayment, as the transaction documents required, and by the fact that Revlon was not expected to have the funds to repay:

A hypothetical prudent investor, who suddenly received an unannounced prepayment of the principal of the loan would have been astonished, in light of Revlon’s apparent deep insolvency, that it could find the resources to make a payment of nearly $1 billion.

Judge Furman had focused on the fact that the payment amount matched the loan principle, but the Second Circuit found that was not enough:

[W]hile it was reasonable for the Defendants to begin their inquiry to resolve the red flags by ascertaining that the payments equaled the size of the debt, when that fact failed to explain away the red flags, the inquiry notice test required them to take the easy further step of placing a call to their agent Citibank, which had sent the payment. Having failed to make that call, they were chargeable with notice of what they would have learned.

Judge Park concurred in the judgment, while expressing frustration with the complexity of the majority’s reasoning and the delay in reaching a decision.  According to Judge Park, the discharge-for-value defense was unavailable for the simple reason that the debt was not yet due (i.e., the maturity date had not been reached):

In my view, this is a straightforward case that many smart people have grossly overcomplicated and that we should have decided many months ago. The Court ultimately arrives at the correct conclusion but only after taking an unnecessary detour through the factual record.

. . . .

A recipient of mistakenly transferred funds cannot invoke the discharge . . . unless and until it has a present entitlement against the debtor. Put simply, you don’t get to keep money sent to you by mistake unless you’re entitled to it anyway.



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