A. Overview[1]
In early December 2020, a federal judge for the Southern District of New York rendered a 100-page decision determining the outcome of the so-called “Black Swan” event that made headlines – Citibank’s $900 million mistake.[2]
The Judge allowed Citibank’s mistake to go unfixed on the basis of a 30-year-old precedent relating to the principle of “discharge for value.”
1. Facts
In 2016, the cosmetic giant Revlon closed a 7-year $1.8 billion syndicated loan, with a maturity date of September 2023. Citibank served as the administrative agent for the loan.
In August 2020, Citibank intended to wire $7.8 million in interest payments to Revlon’s lenders and instead, following an erroneous “check” in the wrong box, wired nearly $900 million – which corresponded to the exact amount of principal and interest that Revlon owed to its lenders. While some lenders returned the money after being notified of the mistake, others opted to keep it as a prepayment of their loan.
The Hon. Judge Furman was left to decide whether Citibank was entitled to claim the money back or whether the lenders were permitted to keep it.
2. Decision
The Court held that Citibank was not entitled to claim the money back and the lenders could keep it based on the common law “discharge for value” principle.
As a general rule, if a party does not return money that was sent to it by mistake, it will inevitably be required to return that money to the sender based on the common law concepts of unjust enrichment or conversion.
However, the leading 1991 New York Court of Appeals[3] decision cited in support of Judge Furman’s findings presents an exception, known as discharge for value:
“When a beneficiary (1) receives money to which it is entitled and (2) 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.”[4]
Ultimately, the use of this defense in the Citibank case was contingent on whether the lenders had constructive notice of Citibank’s mistake when they received the wire transfer. The lenders argued that the applicable form of constructive notice was that “reasonably should have known… that the funds had been sent by mistake.”[5] On the other hand, Citibank asserted that it was the “inquiry” notice standard that applied, which would have required the lenders to conduct further inquiry, thus revealing the error made. However, the Court did not rule on which formulation of the constructive notice standard applied and concluded that “when the August 11th wire transfers were received, Defendants did not have constructive notice of Citibank’s mistake under either standard.”[6]
B. Further analysis
Let’s delve a little further into the concepts, as discussed in Citibank.
(1) Receiving money to which a party is entitled: Citibank tried to argue that since the money was not “due” until 2023, the lenders were not “entitled to the funds at the time of the transfer.”[7] However, so long as the recipient is a bona fide creditor, it is “entitled” to the funds regardless of the payment schedule.[8]
(2) Having constructive notice that payment was made by mistake: the discharge for value defense can be defeated if the recipient has constructive notice that the payment was made by mistake. The Court concluded that the lenders had not received notice, as the evidence demonstrated that they believed in good faith that the payments received were an intentional early paydown by Revlon – and, according to Judge Furman, that belief was reasonable as:
(i) the payments matched to the penny the outstanding amount; and
(ii) Citibank is one of the most sophisticated financial institutions in the world and no bank had ever made a similar mistake of such nature or magnitude.[9]
What about the notice of prepayment requirement that is systematically placed in loan agreements? Citibank tried to argue that the lack of such notice effectively should have placed the lenders on constructive notice of the mistake – but the Court found a way to circumvent this boilerplate provision.
Judge Furman found that, putting contractual obligations aside, it is not uncommon practice for lenders to receive separate prepayment notices, to receive them after payment, or not to receive them at all.[10] Furthermore, the loan agreement required Citibank to “promptly” notify each lender of prepayments and, since that term was not explicitly defined in the agreement, it was deemed ambiguous.
Citibank appealed the Court’s ruling[11] and oral arguments in the appeal are expected in August or September 2021. Will the appellate court agree to review the Court’s ruling?[12] The suspense remains…
To mitigate the risks raised by the decision, administrative agents have begun inserting what are now being called “Revlon clawback” provisions into their credit agreements to ensure that lenders repay any amount mistakenly transferred and waive any defense that can be set up against the claim.[13] From an operational standpoint, financial institutions may also consider reviewing their internal procedures for issuing payments and executing wire transfers to avoid errors in the process.
C. What principles would apply in Canada?
1. Common Law
While Canadian courts have not dealt with a case based on facts similar to those of Citibank, they have dealt with the notion of mistaken payments.
In 2009, the Supreme Court of Canada in B.M.P. Global Distribution Inc. v. Bank of Nova Scotia,[14] adopted the United Kingdom’s Simms[15] test for recovering money paid under a mistake of fact. The test lays out that a claim for money paid under a mistake of fact is prima facie recoverable. However, this recovery may fail if the payment is made for good consideration. This defense of good consideration can be invoked if the money transferred is paid to discharge, and does discharge, a debt owed to the payee (or a principal who is authorised to receive the payment on the payee’s behalf) from the payor (or by a third party authorized by the payor to discharge the debt).[16]
The B.M.P. Supreme Court decision involved mistakenly paid funds on the basis of fraudulent cheques. Therefore, the Court did not analyze the defense of good consideration because value was not given for the money mistakenly transferred. In her reasoning, Justice Deschamps differentiated the case from “a case where a party pays a debt it owes or where other similar circumstances preclude the payor from denying that it intended the payee to keep the funds.” [17] This distinction seems to suggest that the outcome may have been different if this were a case where a debt was owed to the recipient of the mistakenly transferred funds.
Subsequent Canadian case law has analyzed the notion of mistaken payments in relation to fraudulent cheques, payment over a countermand request,[18] and belief of sufficient funds,[19] but never regarding an honest mistake to a recipient that would have been entitled to receive the sums at one point in time or another. In the UK case Lloyds Bank PLC v. Independent Insurance Co Ltd,[20] the Court of Queen’s Bench confirmed that the Simms test adopted by Canadian courts applies to electronic bank payments as well. This case also highlights that determining who the drawee bank can turn to in order to recover funds mistakenly transferred (that discharge a debt owed to the payee) will depend on whether the bank acted with or without a mandate from its client.
The prevailing principle at common law[21] is that if the bank acts on its client’s instructions when making a mistaken payment that discharges a debt (ex: a cheque is paid by the bank while the client has insufficient funds), the bank will not be able to seek recovery from the payee who has a defense of good consideration, but will have to seek recovery from its client. However, if the bank is not within its mandate when making the mistaken payment (ex: payment over client’s countermand request), then on the basis of its contractual obligations towards its client, the bank will credit the funds back to its client and, in turn, seek recovery from the payee. However, as the Simms test established, if the recipient of a mistaken payment can prove that good consideration was given and that it had a debt that was discharged by the payment, the claim for recovery by the bank against the payee will fail. Evidently this creates a dilemma, as the bank’s client is unjustly enriched by having its debt extinguished, while simultaneously getting credited the funds mistakenly transferred. However, Canadian courts have yet to clarify this unsettled area of law.[22]
2. Quebec Civil Law
Quebec is a civil law jurisdiction and we would therefore turn to the concept of “réception de l’indu” or “receipt of a payment not due” set out in article 1491 of the Civil Code of Quebec (“1491 CCQ”). This concept can form the basis for restitution in a case similar to Citibank. It requires (1) the existence of a payment, (2) the absence of a debt, and (3) a payment made in error.[23]
The first condition is straightforward and rarely raises issues. The debate often revolves around the absence of a debt which is extrinsically linked to the existence or not of an obligation and the error on the part of the payor.
The fulfillment of the second condition, i.e. the absence of a debt, is paramount. The onus is placed on the payor to prove that the debt does not exist. Then, the burden is shifted to the payee to prove that the payment was not made in error, but that, in fact, was made with liberal intent, which intent is not presumed.[24] Quebec courts have recognized the existence of a debt as barring a claim under 1491 CCQ. In 1989, a bank who acted against a countermand request from its client was unable to seek recovery from the payee as it failed to prove that the payment was made for a debt not due.[25] In Quebec law, there is a presumption that any payment implies an obligation (1554 CCQ) and the bank was unable to prove the contrary in order to benefit from the “réception de l’indu”.
However, courts have upheld an action for recovery for a payment not due in cases where the payor has paid more than was provided for in the contract.[26] This conclusion seems to recognize the recovery of an overpayment, leaving us to question whether a Quebec court would qualify a Citibank-type mistaken transfer as either an overpayment of the scheduled interest payment due at the time of the transfer or a prepayment for a debt later due. In the former scenario, the claim for a payment not due could be made in order to recover the funds mistakenly transferred to the creditors. If, however, the transfer was considered a prepayment of a debt due, could a Quebec court potentially arrive to the same conclusion as in Citibank?
As for the third condition, being that the payment must have been made in error, in 2019, the Quebec Court of Appeal settled a long-standing debate as to whether errors deemed “inexcusable” would bar a claim for a payment not due.[27] The Court confirmed that irrespective of the gravity of the error, this recourse is available to the payor.
On balance, it is unlikely that a Quebec court would come to the same conclusion as in Citibank.
D. Concluding Thoughts
If a Citibank-type mistake were to occur in Canada, it would be interesting to see what a Canadian court (or a Quebec court) would in fact decide… One thing is for sure: lenders cannot disregard the outcome of the Citibank decision. To mitigate the risks highlighted in Citibank, lenders should ensure that their loan documentation includes provisions allowing for the “clawback” of sums paid in error and that the proper operational checks and balances are in place to avoid having payment errors occur, which can be costly and lead to high stakes litigation.
[1] Ashley is legal counsel and Kiriakoula is Senior Manager, legal counsel, in the Retail, Commercial and International Sector of the Legal Affairs Department of National Bank of Canada. The opinions and comments expressed in this article are solely their own and do not represent the opinions or views of the National Bank of Canada. Ashley and Kiriakoula wish to gratefully thank Michel Deschamps, Counsel in the Business Law Group at McCarthy Tétrault for his insight.
[2] RE Citibank, August 11, 2020 Wire Transfers, 20 CV 6539 (JMF) (S.D.N.Y. Feb. 16, 2021) (“Citibank”).
[3] Banque Worms v. BankAmerica Int’l, 570 N.E.2d 189, 196 (N.Y. 1991).
[4] Citibank, p. 3.
[5] Citibank, p. 63.
[6] Citibank, p. 64.
[7] Citibank, p. 43.
[8] Citibank, p. 44.
[9] Citibank, p. 87.
[10] Ibid.
[11] Citibank NA v. Brigade Capital Management LP, 21-487, U.S. Court of Appeals, Second Circuit (Manhattan).
[12] Bloomberg Business (2021). Citi Asks Appeals Court to Reverse Ruling on Errant $500 Million Transfer. Retrieved May 5, 2021 from Bloomberg database. See: https://www.bloomberg.com/news/articles/2021-04-30/citi-asks-appeals-court-to-reverse-500-million-transfer-ruling.
[13] The Loan Syndications and Trading Association (LSTA) recently published a standardized “Erroneous Payment Provision” clause to be inserted into credit agreements (https://www.lsta.org/content/erroneous-payment-provision/); for a summary of the key provisions of the clause, see David W, Morse, “Revlon Decision Leads to New “Erroneous Payment” Provisions for Credit Agreements: The Backstory and the Consequences” at
https://www.sfnet.com/home/industry-data-publications/the-secured-lender/magazine/tsl-article-detail/revlon-decision-leads-to-new-erroneous-payment-provisions-for-credit-agreements-the-backstory-and-the-consequences.
[14] 2009 SCC 15. (“B.M.P.”)
[15] Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522.
[16] This is one of three defenses that can be set up against a claimant. The claim for recovery can also fail if (1) the payor intends that the payee shall have the money at all events or is deemed in law so to intend; or (2) the payee has changed his position in good faith or is deemed in law to have done so. B.M.P., para 22.
[17] Ibid., para 27.
[18] Ex.: a client asks a bank to cancel or reverse a payment.
[19] B.M.P., para 20.
[20]Lloyds Bank plc v. Independent Insurance Co Ltd., [2000] QB 110.
[21] Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522 (Q.B.).
[22] Ogilvie, M. H. Bank and Customer Law in Canada. Toronto: Irwin Law, 2007, p. 284.
[23] Lluelles, D. et B. Moore, Droit des obligations, 3e edition, Montréal: Éditions Thémis, 2018, para 1367.1.
[24] Droits des obligations, para. 1378; Banque Amex du Canada c. Adams, 2014 CSC 56.
[25] Toronto-Dominion Bank c. Extel Communications (Canada), J.E. 89-1046 (C.Q.).
[26] Green Line Investor Services Inc. c. Quin, C.A., 1996 CanLII 5734 (QC CA).
[27] Roy c. L’Unique, assurances générales inc., 2019 QCCA 1887.
