Generally, an erroneous transfer of funds, if unreturned by the beneficiary, constitutes unjust enrichment, and a re-payment must be made to the sender. However, under New York law, there is a notable exception to this general rule.
According to the “discharge for value” rule of restitution, a beneficiary that receives erroneously wired funds may keep the erroneously wired funds if: (1) the erroneously wired funds discharge a valid debt; (2) the beneficiary did not make any misrepresentations to induce the payment; and (3) at the time the beneficiary received the payment, it was not aware that the funds were erroneously wired. If these conditions are met, the beneficiary may consider the wire final and maintain ownership of the erroneously wired funds, not subject to revocation.
In the case of In re Citibank August 11, 2020 Wire Transfers, the United States District Court for the Southern District of New York upheld the discharge for value rule of restitution and held that the defendants were entitled to keep funds that were erroneously wired by Citibank. The defendants were certain lenders on a $1.8 billion dollar syndicated term loan that had received an erroneous wire transfer from Citibank, the administrative agent under the loan for the borrower, Revlon. Citibank claimed that it had intended to wire just under $8 million dollars in interest payments to the lenders, but instead wired almost $900 million dollars of its own money to the lenders, in addition to the $8 million dollars in interest payments. The aggregate amount of the wire transfers was exactly equal to the amount of principal and interest outstanding on the loan. Notably, Citibank realized its mistake and promptly notified the lenders before any of the lenders relied to their detriment on the belief that the wire transfers were intentional. Nonetheless, the District Court, citing Banque Worms v. BankAmerica International, ultimately held that the discharge for value rule of restitution applied because: (1) the amount of erroneously wired funds was exactly equal to the amount that Revlon owed to the lenders; (2) the lenders did not make any misrepresentations to induce the mistaken payment from Citibank; and (3) at the time the funds were received, the lenders were not aware that Citibank had made the payment by mistake.
To avoid the occurrence of a similar situation, the District Court advised banks to determine clear standards for the content and timing of payment notices. Further, many commentators have suggested that administrative agents utilize contractual provisions that effectively waive the discharge for value rule of restitution. Though In re Citibank August 11, 2020 Wire Transfers is not precedential in Ohio, it will likely be instrumental in shaping internal wire procedures and payment notice standards across the country.
