But there is an exception that applied in Citigroup’s case under a New York law. This law was brought forward by precedent in a 1991 case where New York’s Court of Appeals ruled that if a third party mistakenly sends money to a creditor, the creditor can keep the funds.
That exception, called the discharge-for-value rule, allows the recipient to keep funds accidentally wired to them if the mistakenly transferred money was unprompted, relieves a valid debt, and the recipient wasn’t aware the payment was made in error.
“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,” said US District Court Judge Jesse Furman in his decision. “Based on the credible testimony of Defendants’ employees and the documentary record, the Court concludes that they were not.”
Revlon lenders stated they believed the transfers from Citibank were prepayments for an outstanding loan — which wasn’t due to be paid off until 2023. “The transfer matched to the penny the amount of principal and interest outstanding on the loan,” the judge said.
Therefore, the court ruled it was reasonable for Revlon lenders to believe the payments were not made in error.
“Citibank is one of the most sophisticated financial institutions in the world. Thus, Defendants and their clients could assume — and did, in fact, assume — that the bank had effective internal controls to avoid significant mistakes,” the decision reads.
Citigroup said it intends to appeal the decision.