Money and the Law: Appeals Court Rules Bank Should Get Money Back After Error | Company
On August 11, 2020, a day they will never forget, three Citibank employees (or possibly former employees) made a big mistake.
Due to an incorrect entry in a money transfer software called Flexcube, they had $894 million of the bank’s money transferred to Revlon’s creditors. These creditors were supposed to receive an interest-only payment on outstanding loans — $7.8 million — using money from Revlon. Instead, they received the interest owed to them (the Revlon money) and the principal balance owed on their loans (the Citibank money). The principal balance was not due for three years.
The majority of recipients of the wrong payment returned the funds to Citibank. However, several did not, knowing no doubt that Revlon was in serious financial trouble and would likely default when the principal balance of the loans came due. (Revlon filed for Chapter 11 bankruptcy in June.) When the dust settled on that mistake, Citibank had lost $500 million of its own money.
Within days, Citibank sued the parties who refused to return the wrong payment. However, in December 2020, the Court of First Instance (the court first hearing the case) ruled that the beneficiaries could keep the money. Citibank appealed that decision to the US Circuit Court of Appeals for the 2nd Circuit, which finally ruled on the matter this month. The 2nd Circuit reversed the trial court, finding that the recipients of the erroneous principal payment should return the money to Citibank.
The decision of the 2nd circuit makes good reading.
First, it provides a detailed overview of how large-value commercial loan transactions involving multiple lenders are structured. Then, fending off criticism of why the case took so long, Judge Pierre Leval, who wrote the 100-page majority opinion, said: “Finding the best compromise between the goals of speed and legal soundness is not always easy.
And: “In a monetary dispute, the parties generally care little about the precedent effect of the decision; their interest is to get a quick answer as to who is getting the money. A court, however, must pay particular attention to the precedent function of the decision.
One of the other judges on the three-judge panel deciding this case, Judge Michael Park, wrote a concurring opinion in which he said: “In my opinion, this is a simple case that many people have become overly complicated and that we should have decided months ago. (The concurring opinion was only 30 pages.)
Park included in his concurring opinion some sarcastic comments that he attributed to the parties receiving and refusing to return the erroneous payments. “How was work today, honey?” It was OK, except I accidentally sent $900 million to people who weren’t supposed to have it. And: “Disadvantages of working from home. Maybe the dog hit the keyboard. And: “I feel really bad for the person who got the wrong payment of $900 million. Not a big career move.
In the end, Leval and Park agreed that the rule of law that should have been applied by the trial court is that people who receive money in error must return it.
There is an exception to this rule, invoked by the trial court, called the value discharge rule. However, it only comes into play when the money received in error was fully due at the time it was received. Here, the money received in error by Revlon’s creditors was not due for three years. Thus, the discharge-for-value rule did not apply.
Jim Flynn is with the Colorado Springs company of Flynn & Wright LLC. You can contact him at [email protected]