Efforts by Citibank to fix a $900 million payment error now hang in the balance, as the case brought by the financial services major against companies that refuse to return money they allegedly got by mistake faces problems.

On December 2, 2020, the New York Southern District Court confirmed that a potential jurisdictional problem was discovered. This may lead to a dismissal of the case.

Let’s recall that the lawsuit concerns wire transfers from August 11, 2020 regarding Revlon’s 2016 Loan. In 2016, Revlon acquired Elizabeth Arden, Inc. The deal was partially facilitated by a seven-year, $1.8-billion loan. Citibank serves as the administrative agent and collateral agent for the loan.

On August 11, 2020, several months of accrued interest came due under a credit agreement. The interest payment was to be processed by Citibank in its capacity as administrative agent. No other amount was due at the time, and Revlon transferred no additional funds to Citibank.

The interest payment was processed by Citibank on August 11, 2020. Due to issues with the loan-processing system, the payment to each lender was on average more than 100 times the interest that was actually due.

This operational mistake caused Citibank to transfer approximately $900 million of its own money to parties that were not entitled to it. When Citibank discovered the mistake, it promptly asked the recipients to return its money. Some recipients did return the money, but some did not. Now, the bank is trying to get the money back.

As the case was heading to trial, the Court detected issues. On December 2, 2020, Judge Jesse M. Furman issued an order stating that “the Court has come to the conclusion that there is a potential jurisdictional problem that, regrettably, the parties and the Court previously overlooked”.

Specifically, the third Complaint in this case alleges that the named defendants are either LLCs or LPs, but it fails to allege the citizenship of the defendants’ members and partners. And upon reflection, while the first and second Complaints allege that the named defendants are “corporations” (and would properly plead their citizenship if they were, in fact, corporations), it is pretty clear from their names that they too are LLCs. Thus, at present, Citibank has not established that the New York Southern District Court has subject-matter jurisdiction.

If the parties are able to swiftly confirm that they are actually completely diverse and the problem is merely one of pleading, it may have no bearing on the trial date. But, mindful that Court has an independent obligation to confirm its jurisdiction at all times and that subject-matter jurisdiction is not waivable (and may be raised even after judgment), the Court is not prepared to make matters worse by commencing trial if the issue is in doubt.

And, of course, if there is no diversity, the Court would have no choice but to dismiss the case without prejudice.

Counsel should be prepared to address these issues during the telephone conference scheduled for December 3, 2020.