Citigroup loses battle to recover $664m in mistaken payments

NEW YORK • Citigroup unexpectedly lost a legal battle to recover half a billion US dollars in mistaken payments it sent out, according to a United States judgment that called the debacle "one of the biggest blunders in banking history".

The case centres on payments totalling some US$500 million (S$664 million) Citigroup sent in August last year to 10 financial companies who were parties to a term loan to cosmetic company Revlon.

Citi, the loan's administrative agent, mistakenly paid back the US$900 million principal to the members of the lending consortium, rather than interest payments. The firm quickly realised the error, and some lenders returned their share.

But the firm was rebuffed the following day by 10 lenders, which included Allstate Investments and Greywolf Loan Management.

These entities thought Revlon was repaying the loan early, said US District Judge Jesse Furman.

Because the defendants in the case believed "in good faith and with ample justification" that the payments were for the full Revlon loan, "defendants' clients are entitled to keep the money", Judge Furman said in a 105-page ruling.

Citi plans to appeal against the decision. A spokesman said: "We believe we are entitled to the funds and will continue to pursue a complete recovery of them."

Judge Furman said the lenders' assumption about repayment made sense, given that Revlon was known to be under financial duress due to the Covid-19 pandemic.

He said: "Given a choice between assuming that Revlon had paid off the 2016 term loan early, as borrowers sometimes do, and assuming that Citibank or Revlon had mistakenly transferred over US$900 million - something no bank may have ever done before (and may never do again) - it would have been borderline irrational to choose the latter."

Judge Furman pointed in his ruling to a 1991 case, which "unambiguously" said New York law holds that "banks making wire transfer payments to bona fide creditors bear a risk of loss should a mistake occur".

Still, the judge added that defendants "are not yet necessarily free to do with the money what they want", noting the possibility of appeal.

The decision is the latest blow to Citigroup, which is in the midst of a years-long effort to update its underlying controls and technology after federal regulators slapped it with a US$400 million fine for deficiencies in both areas last year.

The banking giant is also undergoing a leadership change, with incoming chief executive Jane Fraser set to take the reins on March 1.

Additionally, the ruling could have a lasting impact on the role administrative agents play in the syndicated loan industry by exposing them to higher operational and regulatory risks.

The judge wrapped up the six-day trial on Dec 16 with a warning.

"The industry should figure out a way of dealing with these things even if this was a black swan event," he said. "Whatever my ruling is in this case, I hope the world, the market take notice of what's happened here and the uncertainties that have resulted."


A version of this article appeared in the print edition of The Straits Times on February 18, 2021, with the headline 'Citigroup loses battle to recover $664m in mistaken payments'. Subscribe