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Banking & financial disputes

Why a mistake in London is more of a blunder in New York

A federal judge decided that Citibank is not entitled to recoup $900 million of its own money that it mistakenly transferred lenders of Revlon. Members of our Banking & financial disputes team comment on this and how the situation could have played out differently if it had occurred in the UK.

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Last year, Citibank committed one of the most embarrassing blunders in recent Wall Street history.

The bank, acting in its capacity as Administrative Agent for a syndicated loan taken out by Revlon, had intended to wire approximately $8 million in interest payments to Revlon’s lenders.

Instead, it mistakenly transferred almost $900 million of its own money as well, equalling the entire principal and outstanding interest owed by Revlon to its lenders.

Citibank notified the lenders of this mistake, but some refused to return the money. Last month, the District Court in New York held that Citibank was not entitled to recoup its funds. Lenders who chose not to return the money were allowed to keep it.  Click here for a link to the judgement.

English lawyers might be surprised. By operation of the “discharge-for-value defense” under New York law, it was held that the lenders had no liability to Citibank in its claim for restitution. “When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation” (see Banque Worms v Bank America (1991) 570 N.E. 2d 189). Interestingly, to invoke the “discharge-for-value defense”, the recipient of the funds does not even need to show that the outstanding debt was “due” at the relevant time. It is sufficient for the recipient to show that, when the funds were received, it was a bona fide creditor.

New York lawyers may be interested to learn that there is no equivalent “discharge-for-value defense” in English law. Here, if a person pays money to another under a mistake of fact, they are prima facie entitled to recover the funds. If a bank transfers money to a customer’s creditor without being instructed to do so, then the underlying debt is not discharged. The bank is entitled to recover the money from the payee, unless the payee has changed their position in good faith, or is deemed in law to have done so (see Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] Q.B. 677).

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Jean-Martin Louw

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jean-martin.louw@collyerbristow.com