Finders, keepers? On Citi's US$900m error

New York

CITIGROUP Inc says an employee error caused it to mistakenly pay out more than US$900 million of its own money to a group of lenders expecting an interest payment on behalf of Revlon Inc.

So far at least one of the lenders has given the money back, but the bank is suing 11 others - including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management - who say the money should be regarded as payment of Revlon's debt.

The case, which is set for a November trial, raises the question of what happens when somebody comes into money by accident. Do courts follow the schoolyard rule of "finders, keepers?" Or does the money have to be returned?

1. How does the law treat mistaken payments?

As a general rule, people who mistakenly receive things to which they're not entitled have to give them back. That's as true when a cashier accidentally slips an extra US$20 into your change as when a bank mistakenly transfers a larger amount. The law views the recipient as being unjustly enriched and therefore obligated to return the property. A recipient who refuses can be sued. The doctrine dates to 18th century England and enshrines fairness, as opposed to contract or injury, as the basis for a legal remedy.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

2. Are there exceptions to the law?

Yes. Courts will sometimes hold that it's even more unfair to make someone return money received in error, said David Pikus, co-leader of the bankruptcy practice at Bressler, Amery & Ross in New Jersey. If, for instance, a person reasonably believes funds were legitimately transferred and then uses the money to pay off a mortgage, a court may decide the burden rests on the bank even if the transfer was a mistake. If no one actually claims the money, different laws may apply. In New York, someone finding unclaimed money or property can usually keep it after a certain amount of time has passed - as much as three months for something worth less than US$100 or as many as three years for the equivalent of US$5,000 or more - provided they've turned it over to the authorities within 10 days.

3. So is the case a slam-dunk for Citigroup?

Not necessarily. An important issue is whether or not the Revlon lenders knew the payment was a mistake. Citigroup was acting as an administrator for them, which means it had the responsibility of distributing payments on behalf of the company. The recipients of the money can try to argue the payments were due to them and shouldn't be treated as mistaken under the law, said Anat Alon-Beck, who teaches corporate law at Case Western Reserve School of Law in Cleveland. (Revlon says it had no intention of repaying the lenders at this time, however.) Citigroup has said the size of the error means the lenders would certainly have realised the payment was a mistake. Citigroup pinned responsibility on human operators of older software that was being phased out.

4. What do prior cases say?

The lenders are likely to rely on the New York Court of Appeals' 1991 ruling in the so-called Banque Worms case. The state's highest court ruled that, when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the money if it didn't realise the payment was sent by mistake and didn't make any misrepresentations.

5. What other arguments might the lenders have?

They could also try to argue that the underlying credit agreement allows them to keep the money. Both sides will scrutinise the loan documents for language that supports their case, said Braden Perry, a partner in the Kansas City law firm of Kennyhertz Perry. But Matthew Bergman, a partner with Washington-based Potomac Law Group who has read the credit agreement, said he doesn't think there's anything in it that helps the lenders. "I just don't see how they think they're legally entitled to keep this money," he added.

6. Is there any possibility of a deal?

One advantage the lenders have is they actually hold the funds, which gives them some leverage in negotiations with Citigroup. "It's better to have the cash and fight over it and maybe have to give it back in the future than not to have the cash," Mr Bergman said.

Even if a party thinks it has a strong case, the time and expense involved in litigation may push it toward a settlement. Ms Alon-Beck said she usually tells her students about a famous case in which a law firm secretary's typo transformed US$93 million owed to Prudential Insurance Co of America into US$93,000. The ensuing litigation went on for years, and Prudential estimated it lost US$31 million before reaching a confidential settlement. BLOOMBERG