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02 Jul 2021

Give back the money I sent you – I have made a mistake!


In most cases, if you have paid out monies by mistake and the recipient has been “unjustly enriched”, you can get your money back.

However, the ruling of the New York federal court in In Re Citibank August 11, 2020 Wire Transfers serves as an important reminder for financial institutions that, in some cases and under the laws of some jurisdictions, the recipients of mistaken payments may be entitled to retain the money.

As we explain in this article, this decision has also prompted the publication of some new agent protection provisions by both the Loan Syndication Trading Association (“LSTA”) in the US and, more recently, by the Loan Market Association (“LMA”) in the UK.

The Citibank case

On 11 August 2020, Citibank, acting in its capacity as administrative agent under a New York law-governed syndicated term loan to Revlon, made one of the biggest banking blunders in history.

Citibank was due to make an interest payment of $7.8 million to Revlon’s lenders. However, it mistakenly wired, in addition to Revlon’s $7.8 million, almost $900 million of its own money as well. The resulting payments equalled the amounts of principal and accrued interest that Revlon owed to each lender under the loan agreement.

Citibank notified the lenders shortly after the error was discovered and issued Recall Notices asking for the principal to be returned. While some lenders returned the overpayments, others refused to do so. Citibank sued those lenders who had not returned the overpayment for restitution on the ground of unjust enrichment.

The New York court ruled that the non-returning lenders were entitled to keep the money because they had established the elements of the “discharge-for-value” defence under New York law. This defence relieves a recipient of a mistaken payment from a duty to make restitution, if the payment discharges a valid debt owed to the recipient, the recipient made no misrepresentation which induced the payment and the recipient did not have notice of the payer's mistake. On the facts of the case, the judge found that the non-returning lenders had provided credible evidence that they reasonably believed the payments to be intentional prepayments of the original term loan to Revlon. Therefore, they had a full defence to Citibank's claim for restitution.

Regardless of the existence of this defence under New York law, it still feels somehow shocking that an administrative agent (a party with no economic interest in the transaction, other than its fee for performing the function) could find itself in this position. Recognising this, the New York court itself suggested in its Findings of Fact and Conclusions of Law that had it been “writing on a blank slate” (which it was not) it would have been far from clear that it would have reconciled the legal principles in a way that allowed the non-returning lenders to keep the money that Citibank indisputably transferred by mistake.

Citibank are in the process of appealing the decision.

Would the case be decided differently in the UK?

The courts in England have recognised, since at least the mid-19th century1, that a person who pays money to another whilst labouring under a mistake of fact is entitled to claim this money back under the law of restitution. Restitution is a remedy which seeks to reverse the unjust enrichment of the defendant by restoring the relevant benefit or enrichment to the claimant. The justification behind this doctrine is that it would be unfair to allow a party that has received a payment in error to keep it.2

There are a number of defences to a restitution claim under English law. The two which are the most common and which would be of principal relevance in a situation akin to the Citibank case are (1) change of position and (2) good consideration. 

In order to successfully run a “change of position” defence, a defendant must show that they have changed their position such that it would be inequitable to require them to make restitution. Therefore, if this case had been decided under English law, the non-returning lenders could have benefited from this defence if they could prove that their circumstances had changed as a result of the mistaken payment by Citibank and that they would be worse off by making restitution than if they had not obtained the mistaken payment. For example, if a lender had dissipated the funds (such that the lender could not recover them easily) before receiving the recall notice from Citibank. However, on the facts, this does not seem to have been the case. It was acknowledged by the New York court that Citibank realised its error and notified the lenders within one day, and there was no evidence or suggestion that, in the intervening hours, the non-returning lenders relied to their detriment on the belief that the transfers were an intentional, albeit unexpected, pay down of the Revlon loan.

In order to successfully run a “good consideration” defence, a defendant must show that the payment was made in discharge of, and does discharge, a debt owed to the payee by a third party by whom the payer is authorised to discharge the debt.3  The requirement for the defendant to have been “authorised” to discharge the debt by the third party is key here, as the case of Lloyds Bank v Independent Insurance shows. 

In this case, the court found that it was not appropriate to order restitution on the basis that the defendant could not be said to have been unjustly enriched at the bank's expense. The payment made to the defendant by the bank was made for good consideration in that it discharged a debt owed to the defendant by a third party who had given the bank actual authority to discharge the debt and the payment had been accepted as such by the defendant. The court said (albeit obiter) that if it had not found that there was “actual” authority, it would have made an order for restitution of the money to the bank and that the alleged presence of “ostensible” authority would not have been sufficient to establish a defence based on the “authorised” discharge of a debt. It also suggested (without deciding the point) that, in the absence of “actual” authority, the relevant inquiry would be whether, as between the debtor and the payee/creditor, the payee/creditor would (or may) be precluded from asserting that the debt had not been discharged i.e. might the creditor be put in the position where it no longer had a remedy against the debtor because the debt could not be reinstated. The court suggested that in such circumstances, the appropriate defence to a claim for restitution would be one of change of position.

Ultimately, it seems to be quite difficult to say, with certainty, how the English courts would decide the Citibank case. The principles in Lloyds Bank v Independent Insurance (some of which are obiter) suggest that the English court would order restitution of the funds to the Agent in these circumstances unless the payee could make out a credible case of change of position. This uncertainty raises some potential areas of concern for an agent in the same position as Citibank found itself. 

It is also interesting that in Lloyds Bank v Independent Insurance, the court observed that its decision not to allow restitution in circumstances where the payment by an agent (albeit an authorised one) discharged a debt was in line with the American Restatement of the Law of Restitution. Whether or not it would consider it in line with the “discharge-for-value” defence remains to be seen.

Practical considerations for Agents – new industry drafting

In response to the decision in the Citibank case, the LSTA published optional model clauses which can be inserted into its New York law agreements for the protection of the Administrative Agent.

The LSTA's proposed language allows Administrative Agents to serve a notice of an erroneous payment to lenders, subject to an optional claw-back cut-off date. When notified, lenders are obliged to return the amount of the erroneous payment within two business days, together with any interest accrued since the receipt of money. The proposed language also waives any claims, counterclaims, or defences a lender might have in connection with such payments.

On 30 June 2021, the LMA also published a form of optional “Erroneous Payment Clause” to provide contractual protection for Agents in the event of the Agent making an erroneous payment. The LMA has been careful to make clear that it makes no recommendation as to whether to include this optional drafting in facility documentation, or not - this will need to be a commercial decision for the parties.

The LMA clause provides an obligation on the relevant party who has received an erroneous payment to return the payment to the Facility Agent (with the option to require the payment of interest on the returned amount). The party who has received the erroneous payment also expressly waives any available defence or right of set-off it may have in relation to the erroneous payment. The waiver of defences language is intended to assist in the event the Agent opts to make a claim for restitution (where various defences could apply at law) instead of pursuing a contractual claim under this clause.

A party who might be on the receiving end of a payment by the Agent is likely to want to ensure that this clause is not “open ended” and require there to be a time limit on the ability of the Agent to demand the return of an erroneous payment. This drafting is presented as optional in the draft clause.

While the LMA has introduced this drafting to its members as an optional clause, we would expect to see Agents starting to request its inclusion in many first draft facility agreements. While the jury may be out on whether the drafting is essential or not, an Agent will probably feel happier having its claim for the recovery of a mistaken payment securely rooted in contract than having to rely on a restitution claim.

1 Kelly v Solari (1841) 9 M&W 54.

2 Barclays Bank Limited v Simms [1980] QB 679.

3 Lloyds Bank Plc v Independent Insurance Co Limited [1998] EWCA Civ 1853.