In a opinion last week, the Second Circuit, reversing a decision by Judge Furman (covered here), ruled that Citibank could sue to recover nearly $500 million that it mistakenly sent to certain lenders of troubled borrower Revlon.
Citibank was the administrative agent for the loans and, based on a technical error, wired the entire principal balance (nearly $900 million) before the due date. Justice Furman applied the “release for value” defense to conclude that even a wrongful payment need not be repaid when it relates to a valid debt.
The Second Circuit concluded, however, that the defense is inapplicable as long as the recipient is on “inquiry notice” of the error. The notice of investigation was evidenced by the fact that there was no notice of loan repayment, as required by the transaction documents, and by the fact that Revlon was not supposed to have the funds. required to repay:
A hypothetical prudent investor, who suddenly received an unannounced prepayment of loan principal, would have been surprised, in light of Revlon’s apparent deep insolvency, that he could find the resources to make a payment of nearly a billion dollars.
Judge Furman had focused on making the amount of the payment consistent with the principle of the loan, but the Second Circuit felt that was not enough:
[W]whether it was reasonable for the defendants to begin their investigation to resolve the red flags by assuring that the payments equaled the size of the debt, when that fact failed to explain the red flags, the test of l notice of inquiry forced them to go further. the step of making a call to their Citibank agent, who had sent the payment. Not having made this call, they were responsible for the notice of what they would have learned.
Justice Park concurred with the judgment, while expressing frustration with the complexity of the majority’s reasoning and the delay in reaching the decision. According to Judge Park, the defense of release for value was not available for the simple reason that the debt was not yet due (i.e. the due date had not been reached) :
In my opinion, this is a simple case that many smart people have over-complicated and that we should have decided months ago. The Court finally comes to the right conclusion, but only after making an unnecessary detour through the factual record.
. . . .
A recipient of funds transferred in error cannot invoke the discharge. . . unless and until he has a current right against the debtor. Simply put, you cannot keep money sent to you by mistake unless you are entitled to it anyway.