The Billion Dollar Mistake: An Insight into the Citibank Wire Transfer Case

[By Raj Shekhar and Krati GuptaI]

Raj is a student at the National University of Study and Research in Law, Ranchi and Krati is a student at the Rajiv Gandhi National University of Law, Punjab.

The US District Court in the Southern District of New York on 16th February 2021 declared that In the Re Citibank Wire Transfers case, the “discharge-for-value” principle stands applicable and the defendants (the lenders for Revlon Inc.) in the case were entitled to retain funds sent by the plaintiff (Citibank) under a credit facility to which the defendants were a party. The present judgment finds its roots in the precedent established in the 1991 case of Banque Worms v. Bank America International[i] which also involved a similar question of a wire transfer worth $2 million. However, a lot of hue and cry surrounds the matter as the overall reasoning behind the judgment and the potential impact are unclear to the public at large. In light of the above judgment, this article tries to analyze the questions of law involved, the reasoning behind the judgment, and its potential impact on the banking industry wherein the principles deliberated upon in the case are expected to set precedents.

The Citibank Case: Background and Factual Matrix

In August 2020, Citibank (“the bank”) acted as an administrative agent for a syndicated term loan taken by Revlon, Inc. had intended to wire $7.8 million in interest payments to Revlon’s lenders. However, owing to a human error, the bank not only wired the $7.8 million which constituted Revlon’s interest but along with it the bank also wired an additional amount of nine hundred million dollars ($900 million) of its own money as well. Co-incidentally, the total amount received as a result of such wire transfer was equivalent to the total amount (principal and the incurred interest) which Revlon owed to its lenders.

The bank put on the defence that the money was transferred as a result of human error and believing it, some lenders co-operated by returning the money. However, one of the lenders believed that the transfer was intentional and hence, declined to return the money wired to them by the bank. Aggrieved by the denial to return the wired funds, the bank approached the New York Court which to the bank’s dismay ruled in the favour of the lenders. Justifying its stance, the court held that the amount wired “by mistake” was to be held as “final and complete transactions, not subject to revocation” and under no condition can be returned as it was barred under the principle of “discharge-for-value-defence“, which provides that in case of accidental transfers, the lenders can keep the money if it discharges an existing liability and they didn’t know it was an accidental transfer.

The New York Court’s Ruling: Understanding ‘discharge-for-value’ Principle

The discharge-for-value principle that was used in the case is generally operational in cases where a claim for unjustified enrichment has been made. It discharges the liability of returning the mistaken credit when the beneficiary receives money to which it is entitled, in this case, the principal plus the incurred interest on money lent to Revlon amounted to the wired sum, and hence, has a bonafide belief that it is entitled to such amount and should retain the funds. The beneficiary should not be expected to consider what has to be done with the funds but is expected to consider the transfer of funds as a final transaction. This principle finds its roots in the case of Banque Worms v Bank America. Along with this, Citibank, a leading financial institution in the world, could make a mistake of billions was quoted by the court to be borderline irrational to assume and so the lender cannot be held liable for handling the money with a mala fide intent.

The “Unjust Enrichment” Conundrum: What do the Indian Laws Say?

As per Section 72 of the India Contract Act, a person to whom a commodity has been delivered or money has been paid by mistake is bound to repay or return it to the person who transferred it mistakenly. In the famous case of Kelly v. Solari[ii], it was held that in cases where the money is paid to another under a mistake of fact that made the transferor believe that the transferee was entitled to the money and the same would not have been paid if the transferor would have known that the fact was a mistaken belief, then there would be a legally valid ground for instituting a suit towards the recovery of such amount as it would be against conscience as well as the law to retain it. In such cases, however careless the party paying may have been, omitting due diligence to inquire into the fact a valid ground for recovery of such money would still stand true.

The same precedent was followed in the case of the Imperial Bank of Canada v. Bank of Hamilton[iii]. Further, in the case of Kleinwort v. Dunlop Rubber Co[iv], it was held that if money is paid under a mistake of fact and is re-demanded from the person who received it the same shall be payable to the person demanding such a refund. The Calcutta High Court in Jagdish Prosad Pannalal v. Produce Exchange Corporation[v] had clarified the stance and stated that even though the sum paid under the mistake of fact is recoverable, the same is not true for all cases. In some cases owing to circumstances, a plaintiff may be disentitled by estoppel or other related factors. In other cases of mistaken credit like Union Bank of India v. Surana Bangles, S. Kotrabasappa v. Indian Bank[vi], Ganesh Cotton Traders v. General Manager[vii], UCO Bank, etc. the courts have always ruled in the favour of returning the mistaken credit.

However, there has been an exception, and in the case of Metro Exporters (P.) Ltd. v. State Bank of India[viii], where the Apex Court even though it appreciated the right to recover the money paid under a mistake as per Section 72 of the Indian Contract Act, did not allow the bank to realize the amount credited as had such an order been passed the appellant would have suffered the brunt of SBI’s mistake and hence, as previously mentioned, though it is a general rule that such mistaken credits can be realized, the court may order otherwise keeping in view the circumstances which differ from case to case.

Payment Notices: Time to Embrace Changes?

The major takeaway from the present issue could be restructuring the payment notice and ensuring a timely issuance and dissemination of the same. This point was even noted in the judgment where it was stated that due to the absence of a standard payment notice from Citibank, in particular, and across the banking institutions, in general, the confusion on part of the lenders who mistakenly received the money would be justified and it would only add weight to the argument that there was no notice of the mistake. Therefore, an immediate need to make provisions for clear drafting and uniform usage of payment notices need to be implemented.

Another aspect that needs to be carefully looked into is the absence of strict guidelines in the banking industry related to the issuance and dissemination of such payment notices. While it is indeed true that the banks do keep a rigorous six-step check on the payment part from their side, the same is not true in the case of payment notices which are often sent late or not at all. The fact that time is an essence in such cases, the introduction of checks surrounding the payment notices should be accompanied by supporting guidelines regarding the time frame for their issuance and dissemination.

Conclusion and the Way Forward

The case is interesting from the perspective of the Global Banking Sector. While it is sure that Citibank would go for an appeal, some respite has been provided by a restraining order against defendants on disposal of the money, which entitles them to keep the money but at the same time prevents them from utilizing it till the matter is disposed of. The case further exposes the flaws in Plaintiff’s standard “six-eye” approval procedure under which the default option for principal payments was not properly suppressed when executing the wire transfer leading to the whole conundrum.

The result of the appeal, if filed, would be curious to note as if the judgment is not overturned it would add an excessive liability risk to banks and would set a precedent while clarifying the principles, which would be crucial to the banking industry. Though the judgment’s effect might look ethically flawed the legal grounds on which it is based are completely sound. This could be a turning point in the internal mechanism and functioning of financial institutions that would otherwise restructure their internal controls to avoid repeating such mistakes in future. What happens post appeal is a different matter altogether? But the billion-dollar mistake has indeed proved that sometimes even ‘six eyes’ are not enough and it is in the best interest of parties to avoid errors in the high stakes world of wire transfers.

Endnotes:

[i] Banque Worms v. Bank America International, 570 N.E. 2d 189 (1991).

[ii] Kelly v. Solari, 9 M&W 54; 152 ER 24 (1841).

[iii] Imperial Bank of Canada v. Bank of Hamilton, 31 S.C.R. 344 (1901).

[iv] Kleinwort v. Dunlop Rubber Co, 97 LT 263 (1908).

[v] Jagadish Prosad Pannalal v. Produce Exchange Corporation Ltd., AIR 1946 Cal 245.

[vi] S. Kotrabasappa v. Indian Bank, AIR 1987 Kar. 236.

[vii] Ganesh Cotton Traders v. General Manager, (2013) 124 AIC 506.

[viii] Metro Exporters (P.) Ltd. v. State Bank of India, AIR 2014 SC 3206.

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