University professors back Citi as it challenges $900M payment error ruling

As Citi continues to challenge a district court ruling against it in a lawsuit about $900 million sent by mistake, the bank has secured the support of academia.

A letter of the so-called “friends of the court” (amici curiae) offers Citi some backing in its fight against those recipients of the money that refuse to return the funds they allegedly got due to an error. The letter, seen by FX News Group, is signed by 12 university professors. They research and teach in the areas of contract theory, corporate law, corporate finance, securities law, mergers and acquisitions, global markets, and the economic analysis of law.

They say they have no economic interest in the case on appeal, but seek a legal regime comporting with economic common sense and good public policy. As a result, they have a substantial interest in the subject of the instant litigation.

Let’s recall that the lawsuit concerns wire transfers from August 11, 2020 regarding Revlon’s 2016 Loan. In 2016, Revlon acquired Elizabeth Arden, Inc. The deal was partially facilitated by a seven-year, $1.8-billion loan. Citibank serves as the administrative agent and collateral agent for the loan.

On August 11, 2020, several months of accrued interest came due under a credit agreement. The interest payment was to be processed by Citibank in its capacity as administrative agent. No other amount was due at the time, and Revlon transferred no additional funds to Citibank.

The interest payment was processed by Citibank on August 11, 2020. Due to issues with the loan-processing system, the payment to each lender was on average more than 100 times the interest that was actually due.

This operational mistake caused Citibank to transfer approximately $900 million of its own money to parties that were not entitled to it. When Citibank discovered the mistake, it promptly asked the recipients to return its money. Some recipients did return the money, but some did not. The bank brought the lawsuit in an attempt to get the money back.

In February 2020, the Court sided with the defendants, dealing a bitter blow to Citi, which later challenged the district court’s ruling. The bank has now received support from 12 university professors.

According to the “amici”, under ordinary principles of restitution, the monies Citibank wired to Defendants should have been repaid because they were indisputably sent by mistake. Defendants insist they are entitled to keep the funds under the discharge for value defense, a “narrow exception” to usual restitutionary principles.

Invoking the New York Court of Appeals’ decision in Banque Worms, the District Court concluded that the discharge for value defense barred Citibank’s recovery, even though the debt was concededly not “due” for many years and despite the fact that Defendants were on inquiry notice that the transfer was made in error. Because the District Court’s decision was both wrong as a matter of law and unsound as a matter of policy, it should be reversed, the “amici” say.

According to them, the mistaken payments were executed in a fashion that clearly abrogated the Credit Agreement’s mandated course of conduct was also sufficient to put a reasonable lender on notice of Citibank’s mistake.

The managers representing some 200 lenders certainly made that inference: Acting in accordance with the settled expectations of the parties and established market practice, they returned nearly half of the mistakenly transferred funds at Citibank’s request. Of the ten Defendants who refused, six were not even aware of the transfer until after they received Citibank’s recall notice, yet they still declined to return the funds. The rest turned a blind eye to the salient facts, floating a self-serving hypothesis that the transfer must have been a voluntary prepayment based on conjecture and assumptions which the District Court largely—but mistakenly—accepted.

Despite the obvious fact that it would be irrational for Revlon (which was struggling financially if not insolvent) to prepay at par almost a billion dollars in debt that was trading at a steep discount and not due for years, the Defendants failed to do what any person acting in good faith and in a commercially reasonable way would do: contact the administrative agent (Citibank) to inquire as to why the payments were made.

“The law should not countenance—no less encourage—such self-serving, self-imposed ignorance in situations where it is nearly costless for a party in Defendants’ shoes to uncover and remedy the error”, the professors insist.

Finally, the amici note that the Judgment is likely to have substantial, detrimental effects that are inconsistent with sound legal and economic policy, including (i) unnecessarily adding substantial costs on those participating in the leveraged loan market; (ii) allocating risk inefficiently across the leveraged loan market; (iii) discouraging parties from engaging in collaborative contracting and punishing those who do; and (iv) introducing substantial transaction costs and uncertainty into both new and already existing leveraged loan agreements.

“Because we believe the law should comport with economic common sense and good public policy, Amici respectfully request that this Court reverse the Judgment,”the professors conclude.

The list of professors who signed the letter in support of Citi includes:

1. Eric L. Talley is the Isidor and Seville Sulzbacher Professor of Law and Faculty Co-Director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.
2. Robert Bartlett is the I. Michael Heyman Professor of Law at UC Berkeley, Faculty Co-Director of the Berkeley Center for Law and Business, and a director of the American Law and Economics Association.
3. Albert Choi is a professor of law at the University of Michigan Law School.
4. Talia B. Gillis is an Associate Professor at Columbia Law School.
5. Ronald J. Gilson is the Marc and Eva Stern Professor of Law and Business at Columbia Law School, a Senior Fellow at the Stanford Institute of Economic Policy Research, and the Charled J. Meyers Professor of Law and Business Emeritus at Stanford Law School.
6. David Hoffman is a Professor of Law at the University of Pennsylvania Carey School of Law.
7. Matthew Jennejohn is Professor of Law at BYU Law School, was the Justin W. D’Atri Visiting Professor of Law, Business & Society at Columbia Law School in 2019, and held the Robert W. Barker Research Professorship at BYU Law in 2017.
8. Joshua Mitts is Associate Professor of Law and Milton Handler Fellow at Columbia Law School.
9. Edward Morrison is the Charles Evans Gerber Professor and co-director of Columbia University’s Richard Paul Richman Center for Business, Law, and Public Policy at Columbia Law School.
10. Julian Nyarko is an Assistant Professor of Law at Stanford Law School, where he teaches and does research in contract law, commercial law, smart contracts and treaties.
11. Sarath Sanga is Associate Professor of Law and Strategy at Northwestern Pritzker School of Law and Kellogg School of Management.
12. Robert Scott is the Alfred McCormack Professor of Law at Columbia Law School.