What We All Can Learn from One of the “Biggest Blunders” in Banking History

February 19, 2021 at 9:39 am 1 comment

Imagine going to work one day and realizing that you wired 100 times more out of an escrow account than you were supposed to.

That’s pretty much what happened to CitiBank in August 2020. Now, a federal judge has ruled that CitiBank isn’t entitled to get the money back in what he describes as one of the “biggest blunders in banking history.” Next time your employees grumble about all those policies you make them follow, tell them about this case. 

CitiBank was responsible for dispersing payments that Revlon owed on a loan it had been given by a syndicate of creditors who were anxious that the company was near bankruptcy. An employee at CitiBank was supposed to wire $7.8 million to the lenders. Instead, the employee wired them $900 million of its own money. This gracious payment represented the total amount of principal in interest that Revlon owed to its lenders. CitiBank recognized their mistake within hours and explained the situation as well as requesting the excess funds be returned. But then the lawyers got involved, and most of the lenders refused to give the money back. CitiBank sued.

Let’s put this in context. One of the first questions I remembered answering from a credit union when I joined the Association was what right a credit union had to withdraw a deposit that it had mistakenly put in the wrong member’s account. Fortunately, the answer to this question can be found in basic contract law concepts. Whether you call it a mistake of fact or unjust enrichment, New York has long recognized that individuals are not entitled to make windfalls from other people’s mistakes, unless the person receiving the mistaken funds reasonably relied on the representation that the money was hers to spend, and changed her position accordingly. This is an extremely high standard to meet.

So, our friends at CitiBank thought they were on solid ground when they demanded the erroneous payments back from the creditors and sued when they refused to pay. But wire transfers, which are regulated by Article 4A of the UCC are, in our circumstances, subject to a different rule. In fact, in 1991, New York’s Court of Appeals examined a similar set of facts and explained that, under some circumstances, courts should use the discharge for value rule. Under this rule, “When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.” In reaching this decision, the Court of Appeals examined the legislative history behind the rule and concluded that one of its primary goals was to encourage the certainty of electronic fund transfers between banks and businesses. As a result, a heavy responsibility was placed on banking institutions when executing wire transfers. 

But, CitiBank argued, it quickly put the creditors on notice that a mistake had been made and that it wanted its money back. Even though the bank took this action within a day of the error, the court concluded that this wasn’t fast enough. On appeal – and I guarantee you with $1 billion at stake, there will be an appeal – the Court of Appeals for the second circuit can provide guidance on why the discharge for value rule as applied to wire transfers is superseded by timely notice of a mistake. 

On that note, enjoy your weekend secure in the knowledge that although you may not be perfect, you are not that CitiBank employee.

Entry filed under: Legal Watch, New York State, Regulatory. Tags: , , , .

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1 Comment Add your own

  • 1. Mark Welshoff  |  February 19, 2021 at 12:25 pm

    I am guessing several people would have had to be involved with that large of a transaction. I person to have that large of approval authority? Good story.

    Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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