In re Citibank August 11, 2020 Wire Transfers

Background

Citibank N.A., acting as administrative agent for a syndicated term loan taken out by Revlon, Inc., intended to send approximately $7.8 million in interest payments to Revlon’s lenders. Instead, it also sent almost $900 million of Citibank’s own money. Some lenders returned the money, but others did not. Citibank sued ten investment advisory firms that managed the non-returning lenders.

The dispute centered on New York’s “discharge-for-value” rule. Under that rule, a creditor that receives money to which it is entitled, without knowing that the transfer was mistaken, generally may treat the payment as final and need not return it. The court initially issued temporary restraining orders preventing the defendants and related persons from transferring or disposing of the funds.

After a six-day bench trial, the court ruled on February 16, 2021, that the discharge-for-value rule applied and that the non-returning lenders were entitled to retain the transferred funds. Citibank appealed and then moved to convert the existing restraints into an injunction, or stay, pending appeal.

Legal Standard

A stay pending appeal is not automatic. The court considered four factors: whether Citibank made a strong showing that it was likely to succeed on appeal, whether it would suffer irreparable harm without a stay, whether a stay would substantially injure other interested parties, and where the public interest lay. Citibank carried the burden of showing that a stay was warranted.

Likelihood of Success

The court held that Citibank did not meet the required showing. Citibank repeated three arguments from trial: that the discharge-for-value rule required the recipient to have a present entitlement to the money; that the relevant time was when the recipient actively discharged the debt rather than when it received the funds; and that the defendants had constructive notice of Citibank’s mistake.

The court rejected those arguments for purposes of the stay motion. It had already found that the lenders did not have constructive notice, based on witness testimony and documentary evidence. It also concluded that its interpretation of the timing rule was supported by decisions of the New York Court of Appeals and the Second Circuit. Finally, it found that Citibank’s cited authorities did not establish a separate present-entitlement requirement. The court stated that the recipient’s status as a bona fide creditor, rather than the timing of the transfer in relation to the payment schedule, entitled the recipient to the funds.

The court concluded that Citibank had not raised serious questions supporting a stay and had not made a strong showing that it was likely to succeed on appeal.

Irreparable Harm

The court also held that Citibank had not shown irreparable harm. Although monetary losses ordinarily can be compensated with money damages, the court recognized that harm may be irreparable when specific, identifiable funds are at issue and cannot later be recovered. Here, however, the defendants had represented that they would not argue that the case was moot because the particular transferred funds had been spent. They also agreed to satisfy any judgment in Citibank’s favor with available funds.

The court explained that Citibank had not shown that the defendants or non-returning lenders were insolvent or would otherwise frustrate a future judgment. Citibank’s concerns about becoming an unsecured creditor, facing increased credit risk, or having to pursue numerous collection actions did not establish irreparable harm. The court also noted that Citibank had chosen to sue the advisory firms rather than the non-returning lenders themselves.

Other Stay Factors and Disposition

The court found that the remaining factors did not support a stay. A stay could prevent the non-returning lenders from using money that the court had ruled was rightfully theirs. The public-interest factor was neutral because the defendants’ waiver concerning traceability would allow the Second Circuit to decide the appeal without the funds’ possible use preventing review.

The court denied Citibank’s motion for a stay pending appeal. It separately ordered that the existing temporary restraining orders would remain in effect while the Second Circuit considered a stay request, but only if Citibank filed that request within seven days. If Citibank did not do so within seven days, the temporary restraining orders would no longer be in effect. The Clerk of Court was directed to terminate ECF No. 252.