49 F.4th 42
2d Cir.2022Background
- In 2016 Revlon borrowed $1.8 billion; Citibank was Administrative Agent responsible for receiving and transmitting interest and principal to syndicated lenders. The loan matured in 2023 (with a possible earlier acceleration condition).
- On Aug. 11, 2020 Citibank intended to pay $7.8 million of interim interest as part of a partial "roll‑up" transaction but, due to a data‑entry error in its Flexcube system, wired approximately $894 million of Citibank funds (the full outstanding principal) plus interest to lenders instead of routing principal to an internal wash account.
- Citibank discovered the error the next day, sent multiple recall notices, and recovered about $385 million from many recipients; ten loan‑manager Defendants refused to return roughly $500 million.
- Citibank sued for restitution (claims: unjust enrichment, conversion, money had and received, payment by mistake). The district court held for Defendants, applying New York’s Banque Worms discharge‑for‑value rule.
- On appeal the Second Circuit vacated, holding (1) many recipients were on inquiry notice of a mistake and (2) the discharge‑for‑value defense does not protect recipients who were not entitled to payment at the time (debt was not due). Case remanded.
Issues
| Issue | Plaintiff's Argument (Citibank) | Defendant's Argument (Loan managers) | Held |
|---|---|---|---|
| 1. Applicable notice standard for discharge‑for‑value (constructive notice) | New York applies an "inquiry notice" standard; recipients were on inquiry notice because objective red flags required reasonable inquiry. | Constructive notice should be judged by a lower "knew or should have known" or actual knowledge standard; recipients reasonably believed payment was intentional. | Court: New York uses inquiry‑notice; objective red flags here would have prompted a reasonable inquiry, so recipients were on notice. |
| 2. Whether recipients were on inquiry notice under the facts | The absence of required prepayment notice, Revlon’s insolvency, market trading at 20–30¢ on the dollar, and the recent exchange offer were red flags; a simple call would have revealed the mistake. | Recipients reasonably relied on transaction documents and matching payment amounts; many checked market data and believed payment genuine. | Court: Those red flags, considered objectively against the risk of avoidable loss, required at least a phone inquiry; matching dollar amounts did not dispel the red flags. |
| 3. Whether Banque Worms / Restatement §14 protects recipients when the debt was not yet payable | Banque Worms’ discharge‑for‑value defense requires that the recipient be "entitled" to the funds (i.e., debt due); here the loan was not payable for three years, so defendants were not entitled. | Defendants read Section 14 broadly; argue no present‑entitlement requirement and emphasize finality of wire transfers. | Court: Banque Worms requires present entitlement (debt due); because the debt was not payable, discharge‑for‑value does not apply and restitution is available. |
| 4. Whether reasonable inquiry would have uncovered the mistake | A minimal inquiry (call to Citibank) would have revealed the error; recipients are chargeable with knowledge they would have obtained. | Some defendants performed internal checks and relied on confirmations/matching amounts; further inquiry not required. | Court: Internal checks were inadequate; a reasonable inquiry to Citibank would have uncovered the mistake and therefore defendants are chargeable with that knowledge. |
Key Cases Cited
- Banque Worms v. BankAmerica Int’l, 570 N.E.2d 189 (N.Y. 1991) (New York Court of Appeals adopts Restatement discharge‑for‑value rule but frames it to protect beneficiaries who are entitled to funds and lack notice)
- Ball v. Shepard, 95 N.E. 719 (N.Y. 1911) (articulates general rule that mistaken payments may be recovered in equity)
- Fidelity & Deposit Co. of Maryland v. Queens County Trust Co., 123 N.E. 370 (N.Y. 1919) (discusses inquiry‑notice principle: one who has reasonable grounds for suspecting should inquire)