Citibank has secured an important win in a lawsuit regarding a $500 million payment made in error. On September 8, 2022, the Second Circuit U.S. Court of Appeals issued an opinion vacating the judgment of the district court which had sided with the recipients of the money.

Citibank, N.A, the Administrative Agent for the lenders on a $1.8 billion seven-year syndicated loan to Revlon Inc., appealed from the judgment of the United States District Court for the Southern District of New York (Jesse M. Furman, J.) in favor of the Loan Managers for certain lenders, who received and refused to return Citibank’s accidental, unintended early repayment of the loan. The district court, after a bench trial ruled that the rule of discharge-for-value provided a defense against Citibank’s suit for restitution.

This case raises the question whether, under New York law, the recipients of an accidental, unintended payment of approximately $500 million were required, under the circumstances, to return the payment. Citibank N.A. is the Plaintiff-Appellant.

In undertaking to transmit accrued interest to the lenders’ Loan Managers, Citibank had made a ministerial error in administering a computer program, which caused the unwitting transfer by wire of Citibank’s funds in the full amount of Revlon’s outstanding principal balance, three years before Revlon’s loan repayment was due, and, at a time when, because Revlon was understood to be deeply insolvent, loan participations were trading at 20% to 30% of the face amount.

The next day, when Citibank discovered that the accidental transmission had occurred, it demanded the return of the portion representing principal. Upon the Defendants’ refusal, Citibank brought an action for restitution.

Based on a ruling of the New York Court of Appeals in Banque Worms v. BankAmerica International, 570 N.E.2d 189 (N.Y. 1991), the district court decided that Defendants were not obligated to return the money. In Banque Worms, the Court of Appeals had ruled in favor of a lender’s right to retain a bank’s mistaken repayment of a loan to the bank’s client that was due and payable.

The Court of Appeals had explained that its ruling was based on the American Law Institute’s “discharge-for-value” rule, published at Section 14 of the RESTATEMENT (FIRST) OF RESTITUTION (Am. Law Inst. 1937).The rule of Section 14 specified circumstances that excuse

the recipient of a payment made in discharge of a debt pursuant to a mistake of the payor as to his rights or duties from the customary obligation to return mistaken payments.

The Appeals Court concluded that that this case does not fall within the scope of the New York Court of Appeals’s Banque Worms ruling. Accordingly, the Appeals Court vacated the judgment of the district court and remanded the case to the district court for further proceedings consistent with the Appeals Court’s opinion.