The Federal District Court for the Southern District of New York has provided advice to banks regarding payment notices in cases of In re Citibank August 11, 2020 Bank transfers after Citibank mistakenly transferred over $ 900 million to lenders. After finding that Citibank was not entitled to the repayment of the funds, the court offered several suggestions to the banks. Specifically, the court recommended that banks set clear standards for payment advice. If a payment advice always precedes an actual payment by a certain amount of time (and there were security mechanisms to ensure that it did occur), then failure to have such a notice would raise an indicator. that the payment was in error. Notices must describe “unambiguously and explicitly” the amount and nature of the payment. The court suggested wording like this: “You will be receiving an electronic transfer of $ X shortly. This payment is for interest only; it does not include any principal payment. If you receive more than $ X, any excess would be the result of an error and you would not be allowed to keep it.

The erroneous payment in this case was made by Citibank acting as administrative agent acting for a syndicated term loan taken out by Revlon. In August 2020, Citibank planned to wire nearly $ 8 million in interest payments to Revlon lenders. In reality, however, Citibank wired this nearly $ 8 million interest payment. as good as $ 900 million of Citibank’s own money to these lenders. The payment was the exact amount of principal and interest that was owed to the lenders under the loan. Citibank immediately attempted to recover the $ 900 million in funds it had paid, and several lenders agreed to repay nearly $ 400 million. But other lenders – totaling nearly $ 500 million – refused. Citibank has filed a lawsuit, demanding repayment of this erroneous $ 500 million payment.

The New York federal court ruled that the lenders were not required to return the funds. The Court first cited the general rule that money transferred in error must be returned to the sender. The Court, however, cited an exception to this rule under New York law which read: “The recipient is permitted to retain the funds if he discharges a valid debt, the recipient has made no claim. false declaration to induce payment and the beneficiary was not notified of the error.

After a trial before the judge alone in December 2020, the court ruled that the lenders can keep the nearly $ 500 million. The Court then concluded that the crucial question was whether the lenders had received an implied notice of the error “when they received the wire transfers of August 11”. The court found that credible testimony provided at trial showed that the lenders believed the payments were prepayments on the loan. All relevant witnesses testified that they believed the payments were an intentional full repayment of the principal and interest on the loan. A witness said: “Not in my wildest imagination… [did I suspect that the payments could have resulted from an error] … It’s just – the thought literally never crossed my mind. I always find it a bit breathtaking in general. The court was convinced that the lenders were going about their own business and received “an unexpected and unscheduled payment from a borrower that exactly matches the amount of the borrower’s outstanding debt.” In such circumstances, the Court found “reasonable to assume that the borrower intentionally repaid the debt”. The Court therefore concluded that the fact that the payments were “understandably” wrong did not become apparent to lenders until the next day when Citibank sent notices demanding the return of the funds.

In coming to its conclusion, the Court was not convinced that there had been enough “red flags” for the lenders to have been informed of the error. Although the lenders received calculation statements prior to payment, they did not indicate that they would receive “”alone interest payments. “The Court was surprised that, according to expert testimony, there is no standard for payment advices in the banking sector. Banks also generally do not have internal controls. rigorous in connection with the “creation and dissemination of payment advices.” Payment advices often arrive late or not at all. Thus, even upon receipt of a calculation statement, “a reasonable investor reviewing the calculation in this case would not have (and should not have) known upon subsequent receipt of the correct amount of principal and unpaid interest that the payment was in error “.

In addition to the Court’s suggestion that the parties create clear standards and processes for payment advice, parties to syndicated facilities could also consider contracting around the court outcome by adding wording to the sub-credit agreement. underlying waiving the discharge for the defense of new value and including a contractual obligation to return all funds received in excess of the amounts indicated on the payment notice.

For more information, see our online copies of the Amended complaint and the Opinion of the Court.

© 2021 Faegre Drinker Biddle & Reath LLP. All rights reserved.Revue nationale de droit, volume XI, number 50