Citibank loses USD 500 mln in accidental payments

In August 2020, Revlon attempted to pay off accrued interest in connection with a ‘roll-up’ transaction. Because of limitations in Citibank’s software, the easiest method to effectuate this transaction was to pay interim interest accrued to all lenders—whether or not they were participating in the roll-up.

Revlon obliged and wired Citibank USD 7.8 million to facilitate the interest payments to all lenders. Similar technical limitations in Citibank’s software ‘forced’ them to enter payment information into the system as if it were paying off the loan in its entirety, although the principal portions of the payments were to be routed to an internal ‘wash account’ that never left the bank.

However, because two boxes were not checked on the software, the entire principal and interest payment went out Citibank’s doors to each of the unsuspecting creditors. Realising the mistake, Citibank requested a return of the funds the next day. Only upon this communication did the lenders realise the situation. When certain creditors representing about USD 500 million of the erroneously paid-out money refused to return the funds (defendants), Citibank instituted this action to recover.

Judge Furman ruled that the defendants should keep the money under the discharge-for-value defence – cutting off an otherwise valid claim by Citibank. Relying on precedent, the court explained that this defence is available when a creditor has received funds in discharge of a currently owed debt even though the payment was given by mistake, if the transferee did not induce the payment through misrepresentation and did not have actual or constructive notice of the mistake at the moment of transfer.