The Federal District Court for the Southern District of New York provided guidance to banks regarding payment notices in the case of In re Citibank August 11, 2020 Wire Transfers after Citibank erroneously transferred over $900 million to lenders. After concluding that Citibank was not entitled to return of the funds, the Court offered several suggestions to banks. Specifically, the Court recommended that banks create clear standards regarding payment notices. If a payment notice always come before an actual payment by a certain period of time (and there were security mechanisms to ensure it happened), then failure to have such notice would raise a flag that the payment was in error. Notices should “unambiguously and explicitly” describe the size and nature of the payment. The Court suggested language like the following: “You will shortly receive a wire payment of $X. This payment is for interest only; it does not include any payment of principal. If you receive more than $X, any excess would be the result of an error and you would not be entitled to keep it.”
The erroneous payment in this case was made by Citibank who was acting administrative agent for a syndicated term loan taken out by Revlon. In August 2020, Citibank planned to wire nearly $8 million in interest payments to Revlon’s lenders. In reality, however, Citibank wired that nearly $8 million interest payment as well as $900 million of Citibank’s own money to those lenders. The payment was the exact amount of principal and interest that was due to the lenders under the loan. Citibank immediately attempted to claw back the $900 million in funds that it had paid, and several lenders agreed to return nearly $400 million. But other lenders — totaling nearly $500 million — refused. Citibank brought suit, demanding repayment of that $500 million mistaken payment.
The federal court in New York concluded that the lenders were not required to return the funds. The Court first cited the general rule that money that is wired by mistake must be returned to the sender. The Court, however, cited an exception to this rule under New York law stating, "The recipient is allowed to keep the funds if they discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake.”
After a trial in front of only the judge in December 2020, the Court ruled that the lenders could keep the nearly $500 million. The Court next concluded that the critical question was whether the lenders were on constructive notice of the mistake the “moment they received the August 11 wire transfers.” The Court concluded that credible testimony provided at the trial showed that the lenders believed that the payments were prepayments on the loan. Every relevant witness testified to believing that the payments were an intentional full paydown of the outstanding principal and interest on the loan. One witness stated: “Not in my wildest imagination … [did I suspect that the payments could have resulted from an error] … That just — the thought literally never crossed my mind. I still find it kind of mind-blowing in general.” The Court was persuaded by the fact that the lenders had been minding their own business and received “an unexpected and unscheduled payment from a borrower that matches exactly the amount of the borrower’s outstanding debt.” Under such circumstances, the Court found it “reasonable to assume that the borrower has intentionally paid off the debt.” The Court thus concluded that the fact that the payments were in error “understandably” did not occur to the lenders until the next day when Citibank sent out notices demanding return of the funds.
In reaching its conclusion, the Court was unpersuaded that there had been sufficient “red flags” such that the lenders were on notice of the mistake. While the lenders had received Calculation Statements in advance of the payment, they did not indicate that the lenders would be receiving “only interest payments.” The Court was surprised that, according to expert testimony, there is no standard for payment notices in the banking industry. Banks also do not generally have rigorous internal controls in connection with the “creation and dissemination of payment notices.” Payment notices often arrive late or not at all. Thus, even upon receipt of a Calculation Statement, “a reasonable investor reviewing the Calculation Statements in this case would not have (and should not have) known upon later receiving the exact amount of principal and interest outstanding that the payment was by mistake.”
In addition to the Court’s suggestion that parties create clear standards and processes for payment notices, parties to syndicated facilities might also consider contracting around the Court’s result by adding language to the underlying credit agreement waiving the discharge for new value defense and including a contractual obligation to return any funds received in excess of the amounts identified on the payment notice.