This morning a three-judge panel of the U.S. Court of Appeals for the Second Circuit heard oral argument on Citibank’s appeal
of U.S. District Judge Jesse Furman’s Feb. 16 decision
allowing a group of Revlon lenders to keep more than $500 million accidentally wired
to them by the agent. The parties’ arguments today generally followed their briefs, with Citibank focusing
on the fact that the Revlon loan was not due when paid and on the defendants’ failure to inquire on receipt despite several “red flags,” and the defendants
focusing on a strict application of the Banque Worms
decision relied on by lower courts and the reasonableness of their belief that the payment was intentional.
However, the panel seems to be considering certification of the issues to the New York Court of Appeals (the highest state court in New York) for a definitive interpretation of New York law on the “discharge for value” exception to the general rule that mistaken transfers must be returned. Certification is a procedural device available to federal circuit courts that seek input from state courts on state law matters. Judge Pierre Leval interrupted Citibank counsel Neal Katyal of Hogan Lovells almost immediately to suggest that certification on the “four big questions” in the case relating to the exception - whether a debt must be due at the time of the transfer, whether the debt must be booked as paid by the recipients prior to notice of a mistaken payment from the transferor, whether a recipient must make an inquiry with the transferor upon receiving a suspicious transfer and whether the defendants’ inquiry was proper in this case - is appropriate because these are all “questions of policy.”
The New York Court of Appeals’ decision in Banque Worms
setting forth the elements of the discharge-for-value defense - itself issued upon a certification by the Second Circuit - “doesn’t supply clear answers to any of these questions,” Judge Leval said. “We would largely be guessing,” the judge continued, and the answer “wouldn’t be very informative to the world.”
Katyal responded that Citibank supports certification as a fallback position but believes that it is entitled to a decision without certification on the basis of the language of and policies underlying Banque Worms. Like Katyal, Kathleen Sullivan of Quinn Emanuel, counsel for the defendants, pressed the panel to decide the case without certification on the basis of Banque Worms, which she said was “just like” the instant case
Sullivan argued that should the Second Circuit certify the case to the New York court, it should deny Citibank’s long-pending motion for a stay pending appeal
, which would require the lenders to keep the transferred funds in segregated accounts “for another two years” while “Albany” considers the matter. Katyal asserted that the stay motion should be granted to ensure Citibank can recover its funds if it prevails on appeal, citing the terms of CLO documents requiring lenders to distribute virtually all cash to investors.
With respect to the merits, Katyal emphasized that the court of appeals in Banque Worms
said the discharge-for-value defense applies only to a recipient that “is entitled” to payment “in the present tense,” and the Revlon lenders had no present entitlement at the time of Citibank’s mistaken transfer because Revlon’s loans were not due and payable. Judge Leval responded that although the court of appeals did use the word “entitled” in Banque Worms, the policy rationale behind that decision seems to apply equally to debts not yet due.
Sullivan took the position that Citibank’s interpretation of Banque Worms
would require the panel to add “presently” to the word “entitled” in the court of appeals’ decision, effectively making new law on the discharge for value exception. Citibank’s contention that the defense requires a payment to be “booked” by the recipient before receipt of notice that the transfer was mistaken, Sullivan said, would also add a new element to the Banque Worms
One of the judges asked Sullivan whether these requirements would constitute new law or merely an application of Banque Worms
to the instant case - and inquired whether Banque Worms
might be limited to a finite set of wire transfers rather than setting a general policy. Sullivan answered that the court of appeals in Banque Worms
specifically intended to resolve a general policy issue for banks and financial institutions.
The court of appeals cited two policy considerations in support of the discharge for value exception in Banque Worms
, Sullivan said: allowing recipients certainty that they do not “have to wonder” whether a wire transfer was mistaken, and placing the “onus of responsibility” on the transferor when a mistaken transfer is made to a “bona fide” creditor. Judge Furman “faithfully” applied these policy considerations in denying Citibank’s claims for a return of the funds, Sullivan concluded.
Sullivan further emphasized Judge Furman’s findings of fact regarding the “red flags” cited by Citibank. The district court, Sullivan said, specifically found that it would be “irrational” for the defendants to believe that the transfer was a mistake by Citibank rather than an intentional prepayment by Revlon using funds obtained from Ronald Perelman or another source. In order to reverse the lower decision, Sullivan asserted, the panel must determine that finding was a “clear error.”
Katyal argued for Citibank that no reasonable person could have believed the wire transfer was an intentional repayment at par by an insolvent Revlon, especially where Revlon’s loans were trading at a substantial discount. The idea that Revlon would have simply paid the loans using funds from Perelman or a “secret stash” without instead repurchasing them at a discount, Katyal asserted, is the kind of “speculation” that cannot be “objectively reasonable.”
The defendants cannot point to a single other instance where a mistaken wire transfer was not returned, Katyal asserted. “People give the money back every time,” Katyal said, and no court has ever “endorsed what happened here.”
Katyal also took issue with the defendants’ failure to contact Citibank and inquire about the unexpected payment when they discovered it. The fact that the defendants thought Revlon was insolvent and “all of a sudden got a billion dollars three years early,” with the loans trading at 20-30 cents, should have “led them to pick up the phone,” Katyal said. This would have been the “cheapest cost avoider,” Katyal added, and would have prevented the entire litigation.
In response, Sullivan emphasized that prepayment is the norm with syndicated loans, not the exception - even with insolvent borrowers. It was more reasonable for the defendants to believe that “Perelman did it again” and “pulled a rabbit out of a hat” than to suspect that Citibank made an “unprecedented black swan mistake,” Sullivan said.