A failed bank transfer led to ‘one of the biggest mistakes in banking history’
Citigroup’s tower is pictured next to that of One Canada Square in the financial district of Canary Wharf on the Isle of Dogs on December 22, 2019 in London, England. (Photo by Jim Dyson/Getty Images)
- A federal judge ruled Tuesday that Citigroup would not be able to recover its $501 million error.
- The New York judge’s ruling calls the crash “one of the biggest blunders in banking history.”
- We read the 101-page court document to find four key points.
- Visit Business Insider for more stories.
A federal judge ruled Tuesday that Citigroup won’t be able to recover half a billion dollars of its own money accidentally sent to Revlon’s creditors in a financial deal gone wrong last year.
Citigroup made the costly mistake over the summer. Instead of transferring a $7.8 million interest payment to the cosmetics company’s lenders, the bank transferred the full amount of the loan – totaling nearly $900 million – from its own funds.
The bank informed creditors within 24 hours that they did not intend to pay the full amount which was not due until 2023. Some companies returned the money, but 10 others refused to return about $500 million of the funds, prompting Citigroup to file a lawsuit.
We read through the more than 100 decision pages to learn more about the court’s decision. Here are the four most important takeaways.
Citigroup lawsuit could be seen as ‘borrower’s remorse’
New York federal judge Jesse Furman said the crux of the matter revolves around a conflict between two principles: money sent in error must be returned, but, if a lender is repaid in full, the creditor shouldn’t have to worry about “the borrower”. remorse.”
Furman said the fact that the debt was repaid “to the penny” meant the lender had no reason to believe the transfer was a mistake and shouldn’t have to worry about returning the money owed, even upon receipt of funds prior to their maturity. .
The judge also said the date the funds were sent also played a role in confusing creditors. Citigroup transferred the funds on August 11, while the interest payment date was not due until August 28.
“There was only one way the interest would have been ‘due’ on August 11, 2020: if Revlon prepaid the principal,” Furman said.
Judge cracks down on ‘irrational mistakes’
Furman said Citigroup should have more effective measures to prevent these kinds of mistakes — a mistake the judge called “one of the biggest blunders in banking history.”
The error – which Furman attributes to a “fat finger” – occurred because an employee did not check the correct boxes during an electronic transfer. The transfer went through a three-person approval process and was not taken until the next morning.
Furman said he hopes other banks will learn from Citigroup’s half-billion-dollar mistake and implement more measures to minimize the risk of errors, as well as last-ditch efforts to force lenders to return the funds.
“Returning lenders believed, and were right to believe, that the payments were intentional,” Furman said. “To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of almost a billion dollars, would have been bordering on irrational. .”
While Citigroup said a ruling in favor of creditors would hurt financial institutions, one of the asset manager’s representatives told DealBook that the judge was setting an important precedent.
“New York wants to discourage banks from making these kinds of mistakes,” Quinn Emanuel’s Adam Abensohn told DealBook.
The decision follows the precedent of a similar case from 1991
In his ruling, Furman said he “cannot operate on a blank slate.” In his ruling, the judge was following a similar ruling from the 1990s.
The judge cited a 1991 case, Banque Worms v. Bank America Int’l 1991. In the former lawsuit, New York’s highest court ruled that a third party who mistakenly sends money from a debtor to a creditor, the creditor can keep the funds if he does not realize the error.
The concept is called “value defense release” and protects creditors who were unaware of the transfer error from being forced to return funds.
“The relevant time to assess whether a lender has been notified of an erroneous payment is clear,” Furman said. “That’s when payment is received.”
Creditors are not yet free to use the money
While Furman decided the lenders did not have to return the money to Citigroup, the $504 million is still frozen.
The temporary restraining order the federal judge imposed over the summer is still in full effect, according to the ruling. Furman cited the likelihood that Citigroup will appeal the court’s decision.
The court will decide next week whether or not to lift the funds freeze, although Citigroup plans to retaliate.
“We believe we are entitled to the funds and will continue to fully recover them,” a Citigroup spokesperson said in a public statement Tuesday.