In "Doofus Of The Day 1,072", back in December, we read how Citibank had mistakenly paid out $885.2 million too much to creditors of one of its clients. It had persuaded some of them to return the money, but was suing others who'd refused.
Well, the verdict is in . . . and Citibank lost. Big-time.
Citigroup Inc. unexpectedly lost a legal battle to recover half a billion dollars it sent Revlon Inc. lenders, after the embarrassing blunder forced it to answer to regulators and tighten its internal controls.
U.S. District Judge Jesse Furman on Tuesday ruled that 10 asset managers for the lenders -- which include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management -- don’t have to return $504 million that Citibank said it mistakenly transferred in August while trying to make an interest payment. He said they shouldn’t have been expected to know that the transfer, which totaled more than $900 million before some lenders returned their share, was an 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,” wrote Furman, who presides in Manhattan.
There's more at the link.
I'm sure there'll be appeals galore - after all, even a financial giant like Citibank can't take a half-billion-dollar loss lying down! - but they'll face ongoing problems.
A 30-year-old legal precedent that essentially says “finders keepers” in certain financial transactions will make it hard for Citigroup Inc. to get a half-billion-dollar decision against it overturned.
. . .
In a 101-page ruling, U.S. District Judge Jesse Furman in New York said Tuesday that the outcome of the case was surprisingly straightforward, even if it may not seem the fairest result.
“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” Furman wrote. “The accompanying notices referred to interest being ‘due,’ and the only way in which that would have been accurate was if Revlon was making a principal prepayment.”
The key precedent is a 1991 New York state court case called Banque Worms v. BankAmerica International. In that case, New York’s highest court ruled that under a principle called discharge for value, when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it didn’t realize it was sent in error and didn’t make any misrepresentations.
. . .
Furman said representatives of each lender “credibly and persuasively testified that they reasonably believed the payments were intentional prepayments” of the 2016 loan. The judge rejected Citibank’s claim that the size of the transfer alone should have alerted the lenders to the blunder.
Given that banks have security procedures to ensure that such mistakes don’t occur, “it would have been virtually inconceivable to a reasonable investor in [the lenders’] position that Citibank had wired nearly $900 million by mistake,” Furman said.
Again, more at the link.
I haven't heard of any consequences for the officials in Citibank who made the mistake in the first place. I wonder how many of them are still employed there? If they're fired, of course, I daresay the creditors who received the unexpected windfall of full repayment of their loans might be willing to offer them a job . . .