Erroneous Revlon Payment Ruling Overturned On Appeal – Financial Services
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On September 8, 2022, the United States Court of Appeals for the Second Circuit reversed and returned a decision from the Southern District of New York that allowed lenders to reap the benefits of Citibank’s $1 billion error. .
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In August 2020, acting as agent under Revlon’s $2 billion credit facility, Citibank intended to transfer payment of $8 million of accrued interest from Revlon to Revlon lenders when she accidentally included $900 million of her own money as payment for the outstanding principal amount. Citibank alerted lenders to the error and sued those who refused to return the funds, arguing that fair principles required recipients of erroneous payments to return them.
On February 16, 2021, the Southern District ruled against Citibank finding that the “discharge for value” exception to the fair principle applied. This defense provides that the recipient of an erroneous payment is not required to return it if the recipient is a bona fide creditor who was not advised that the payment was in error, because in these situations the assignor is better placed to prevent the error than the transferee. . The Second Circuit reversed and remanded the ruling on the basis that the “discharge for value” exception did not apply and the funds should be returned.
The Southern District had determined that the beneficiaries were bona fide creditors because the amounts paid were actually due under the credit facility, and although there was a payment schedule that did not provide for payment at that time There, Revlon had the right to voluntarily repay the loan. at any time. In reversing the decision, the Second Circuit noted that precedents applying the “release for value” defense in loan transactions that included a payment schedule only extended it to overdue payments. The Second Circuit found that the recipients were not bona fide creditors because the debt that had been paid was not yet due and the lenders had no present right to the funds when they were received. .
In concluding that recipients had received no actual or implied notification that the payment was an error, the Southern District noted that an error of this magnitude had never occurred before and would have been inconceivable. The Second Circuit noted that the applicable standard is notice of inquiry, or whether a reasonable or prudent person in the same position would inquire into the nature of the payment. Because the lenders knew that Revlon was in financial difficulty and was unlikely to be able to pay its debt in full at any time, the Second Circuit concluded that the lenders had received a notice of investigation and , after investigation, would have been informed that the payment was erroneous.
The Second Circuit also noted that the market moved quickly to circumvent Southern District opinion by incorporating flawed payment provisions drafted by the Loan Syndication and Trading Association and other trade groups. Although the decision that gave rise to this wording has been reversed, we recommend that these provisions be retained in case the obligation to return erroneous payments is again called into question.
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