Finders Keepers? New York’s Discharge for Value Doctrine May Lead to a Big Loss for Citigroup

By: Evan Federico


In August of 2020, Citigroup Inc. inadvertently wired almost $900 million to a group of hedge funds to pay off a syndicated loan for the struggling multinational cosmetics company Revlon, Inc. However, the money had come from Citigroup–not Revlon–and neither Revlon nor Citigroup intended to pay the loan off. Citigroup was merely the administrative agent for the loan, meant to collect and distribute interest payments, manage amortization schedules, and provide other administrative services to Revlon and its lenders. An employee in Citigroup’s back-office had failed to check two boxes in the software Citigroup used to process loan interest payments. Citigroup noticed their error the following day and contacted the hedge funds to ask for their money back. However, some hedge funds, who were also in an unrelated dispute with Revlon, refused to give back the money. Those hedge funds failed to return roughly $500 million to Citigroup, and Citigroup sued to recover the funds.

Unfortunately for Citigroup, in February of 2021, U.S. District Judge Jesse Furman ruled that the bank could not recover the $500 million. Furman described Citigroup’s mistake as “a banking error of perhaps unprecedented nature and magnitude.” However, Furman ruled that under the discharge for value principle, adopted in the 1991 New York Court of Appeals case Banque Worms v. BankAmerica International, Citigroup had no right to the $500 million transferred to Revlon’s lenders.

In Banque Worms, New York’s highest court stated that the discharge for value doctrine applies when a creditor receives from a third party a benefit in discharge of a debt. If the creditor made no misrepresentation and did not have prior notice of the third party’s mistake, they are under no duty to make restitution. The Banque Worms court stated that “the discharge for value rule is consistent with and furthers the policy goal of finality in business transactions and may appropriately be applied in respect to electronic funds transfers.”

Judge Furman wrote that the Citigroup transfers were clearly a benefit in discharge of a debt because “[t]he transfers matched to the penny the amount of principal and interest outstanding on the loan.” He also noted that the lenders were not on notice of Citigroup’s mistake when the mistaken transfers occurred. Although Citigroup urged Judge Furman to deviate from the Banque Worms precedent, arguing that allowing the transfer to proceed was unfair, Furman wrote, “[t]he problem for Citibank is that the court does not write on a blank slate.”

Citigroup intends to appeal Judge Furman’s ruling, and a spokesperson for the bank stated that the bank would continue to pursue a complete recovery of the funds. Recognizing the likelihood that Citigroup would appeal, Judge Furman did keep a temporary restraining order on the funds in effect. Judge Furman’s ruling in the Citigroup case has led banks to add so-called “Revlon clawback language” to existing credit agreements. The clawback language grants banks the power to determine when a payment is a mistake and to set procedures to recover the funds. Citigroup faces an uphill battle in its appeal. It may argue that the discharge for value defense should not apply unless the debt is due and payable. Hopefully, an appellate ruling will limit the application of this outdated doctrine. For now, banks serving as administrative agents on loans would be wise to include clawback language in their credit agreements.


Evan Federico is a third-year law student at Wake Forest School of Law.