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A federal judge ruled Tuesday that Citigroup will not be able to recoup half a billion dollars of its own money that accidentally sent to Revlon creditors in a financial transaction gone awry last year.
Citigroup made the costly mistake over the summer. Instead of transferring a $7.8 million interest payment to the cosmetic company’s lenders, the bank transferred the full loan amount — totaling nearly $900 million — of its own funds.
The bank notified the creditors within 24 hours that they had not intended to pay the full amount which was not due until 2023. Some firms returned the money, but 10 others refused to return about $500 million of the funds, prompting Citigroup’s lawsuit.
We read through the over 100 page ruling to learn more about the court’s decision. Here are the four most important takeaways.
Citigroup’s lawsuit could be considered “borrower’s remorse”
The New York federal judge Jesse Furman said the crux of the issue revolves around a clash between two principles: money sent by mistake should be returned, but, if a lender is paid back in full, the creditor should not have to worry about “borrower’s remorse.”
Furman said the fact that the debt was paid back “to the penny” meant the lender had no reason to believe the transfer was a mistake and should not have to worry about returning the money owed, even upon receipt of the funds before they were due.
The judge also said the date the funds were sent also played into creditors’ confusion. Citigroup transferred the funds on August 11, while the interest payment date was not due until August 28.
“There was only one way in which the interest would have been ‘due’ on August 11, 2020: If Revlon was prepaying the principal,” Furman said.
The judge is cracking down on “irrational mistakes”
Furman said Citigroup should have more effective measures for avoiding these kinds of mistakes — one which the judge dubbed “one of the biggest blunders in banking history.”
The mistake — which Furman attributes to a “fat finger” — happened as a result of an employee not checking the right boxes on an electronic wire transfer. The transfer went through a three-person approval process and was not caught until the next morning.
Furman said he hopes other banks will learn from Citigroup’s half a billion dollar mistake and implement more steps to minimize the risk of errors, as well as last ditch efforts to force lenders to return the funds.
“Returning Lenders believed, and were justified in believing, that the payments were intentional,” Furman said. “To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational.”
While Citigroup said ruling in favor of the creditors would undermine financial institutions, one of the asset manager representatives told DealBook the judge was setting an important precedent.
“New York wants to discourage banks from making these kinds of mistakes,” Adam Abensohn of Quinn Emanuel told DealBook.
The ruling follows the precedent of a similar case from 1991
In his ruling, Furman said he “cannot operate off a blank slate.” Through his decision, the judge was following a similar ruling from the 90’s.
The judge cited a 1991 case, Banque Worms v. Bank America Int’l 1991. In the old suit, New York’s highest court ruled that a third party which mistakenly sends money from a debtor to a creditor, the creditor can keep the funds if it does not realize the mistake.
The concept is called “discharge for value defense,” and protects creditors who were unaware of the transfer mistake from being forced to return funds.
“The relevant time for evaluating whether a lender was on notice of a mistaken payment is clear,” Furman said. “It is when the payment is received.”
The creditors are not yet free to use the money
While Furman ruled the lenders do not have to return the money to Citigroup, the $504 million is still frozen.
The temporary restraining order that the federal judge imposed during the summer is still in full effect, according to the ruling. Furman cited the likelihood of Citigroup appealing the court’s decision.
The court will decide within the next week whether to lift the freeze on the funds, though Citigroup plans to fight back.
“We believe we are entitled to the funds and will continue to pursue a complete recovery of them,” a Citigroup spokesperson said in a public statement on Tuesday.
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