![]() 11, the standard of inquiry notice was satisfied. Further, based on the facts available to the loan managers on Aug. Under New York law, the discharge-for-value rule does not shield the beneficiary of a mistaken transfer from claims for restitution if the beneficiary is on inquiry notice of the mistake. Constructive NoticeĬitibank argued the loan managers could not claim the benefit of the discharge-for-value rule because they were on notice of a mistake. On appeal to the Second Circuit, Citibank raised several arguments challenging the discharge-for-value rule and the applicability of Banque Worms to this case. It concluded that the defendants established the elements of the discharge-for-value defense because (1) the lenders were creditors of Revlon on the date of the mistaken payment, (2) each lender was owed in principal and interest the exact amount of money it received from Citibank, (3) neither the lenders nor the loan managers made misrepresentations to induce the mistaken wire transfers, and (4) neither the lenders nor the loan managers were on notice of Citibank’s mistake. The district court ruled that the loan managers were entitled to keep the funds that Citibank had mistakenly paid. The discharge-for-value rule outlines circumstances that excuse the recipient of a payment mistakenly made in discharge of a debt due, from the obligation to return the mistaken payment. The Court of Appeals based its ruling on the American Law Institute’s discharge-for-value rule, published at Section 14 of the Restatement (First) of Restitution (Am. In Banque Worms, the New York Court of Appeals upheld a lender’s right to retain a bank’s mistaken repayment to the bank’s client of a loan that was due and payable. Following a bench trial, the district court concluded that the rule of discharge-for-value protected the loan managers from Citibank’s restitution suit, relying on Banque Worms v. District Court for the Southern District of New York. Discharge-for-Value RuleĬitibank sued those loan managers in the U.S. However, certain loan managers, representing $500 million in debt, refused to return the funds. (Revlon later filed for Chapter 11 bankruptcy, on June 15, 2022.)Ĭitibank discovered the erroneous transmission the next day and issued a total of four recall notices over the next few days, requesting that the loan managers return the portion representing the principal. The transaction occurred at a time when, because Revlon was insolvent, loan participations were trading at 20% to 30% of the face amount. 11, 2020, Citibank made an error that caused the accidental wire transfer of $894 million-the full amount of Revlon’s outstanding principal balance-three years before Revlon’s loan repayment was due.ĭespite three people having reviewed and approved the transaction before it was executed, the transmission was sent without certain specific settings that would have prevented the principal balance from being wired. While transmitting accrued interest to the lenders’ loan managers on Aug. Further, a reasonable inquiry would have revealed the mistake, said the panel. The circumstances around the erroneous transfer showed red warning flags that would have prompted “a reasonably prudent person” who faced an avoidable risk of loss to look into whether the transfer resulted from a mistake. ![]() Judge Park also wrote a separate concurrence. ![]() Leval in an opinion joined by Judges Robert D. The “discharge-for-value” rule did not in fact shield the loan managers from Citibank’s restitution claims because they were on inquiry notice of the mistake, wrote Judge Pierre N. Recently, the Second Circuit determined that the lower court erred in deciding the loan managers did not have to return the money. As a consequence, administrative agents and the lawyers representing them began including in credit agreements express “erroneous payment” language, which required lenders to return erroneous payments to the administrative agent. In a suit filed by Citibank to seek the return of the erroneous payments, the district court ruled that the lenders did not need to return the money-a ruling that caused great concern within the financial community. While a number of the lenders participating in the syndicate did return the funds received upon Citibank’s request, some refused. Citibank, the administrative agent for the lenders, asked the lenders to return the funds. The $500 million error paid off Revlon’s outstanding principal balance three years before the company’s loan repayment was due. erroneously transmitted the funds to loan managers for certain lenders on a $1.8 billion seven-year syndicated loan to Revlon Inc. 8, reversing a New York federal district court ruling. Court of Appeals for the Second Circuit panel held on Sept. Recipients of an erroneous $500 million wire transfer that had the financial world buzzing must return the funds, a U.S.
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