Dive Brief:
-
Citibank lost its legal battle with creditors of cosmetics firm Revlon on Tuesday after a federal judge ruled the asset managers do not need to return the $500 million Citibank says it sent them by mistake on Aug. 11, 2020.
-
After a six-day trial that took place in December, U.S. District Judge Jesse Furman in Manhattan ruled the wire transfers made by Citigroup, acting as Revlon’s loan agent, were “final and complete transactions, not subject to revocation.”
- Human error led the bank to mistakenly transmit $900 million to creditors on a 2016 Revlon loan, instead of the $7.8 million interest payment it intended to send, the bank said in a court filing in August. While some asset managers returned the funds, 10 refused, leading to Citigroup’s lawsuit.
Dive Insight:
In his 101-page decision, where he called the Citibank error “one of the biggest blunders in banking history,” Furman ruled the asset managers are not required to return the money, citing a “discharge-for-value defense.”
“The discharge-for-value defense ultimately turns on whether Defendants (or, more precisely, their clients) were on constructive notice of Citibank’s mistake at the moment they received the August 11th wire transfers,” Furman wrote. “Based on the credible testimony of Defendants’ employees and the documentary record, the Court concludes that they were not.”
The asset managers, Furman said, should not have been expected to know the transfer was made in error.
“To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion would have been borderline irrational,” he wrote.
Furman said the evidence shows the lenders believed — “in good faith and with ample justification” — that the payments they received were prepayments in full of the Revlon loan, which wasn’t due until 2023.
“We strongly disagree with this decision and intend to appeal,” Danielle Romero-Apsilos, a spokesperson for Citigroup, said in a statement. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”
Citi’s massive error has called into question its system of checks and balances, which potentially contributed to a $400 million fine the Office of the Comptroller of the Currency (OCC) levied against it in October over what the regulator called “deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls.”
The threat of regulator reprimand, among other factors, prompted Citi CEO Michael Corbat to push up his expected retirement date to February. Jane Fraser will take over as the bank’s top executive on March 1, the bank said.
