In Re: Citibank

DISCHARGE-FOR-VALUE DEFENSE
In re Citibank August 11, 2020 Wire Transfers
Date: May 6, 2021

Issue: Does the “discharge for value” defense prevent Citibank from recovering $500 million mistakenly wired to lenders?

Case Summary: ABA, the Bank Policy Institute and the Clearing House Payments Company LLC (Amici) filed an amicus brief in the United States Court of Appeals in the 2nd Circuit supporting Citibank and opposing the district court’s ruling.

The group of organizations urge the 2nd Circuit to reverse the district court’s decision for three reasons. First, the group claims that the district court misapplies the discharge-for-value defense to the controlling facts and expands the contractual defense beyond the facts found in Banque Worms v. BankAmerica International (Banque Worms). The Amici distinguish Banque Worms from the present facts, arguing the discharge-for-value defense is only applicable when the beneficiary is entitled to the payment. The defendant was not entitled to payment as the loan was not scheduled to mature for another three years. Furthermore, the steps necessary to even trigger prepayment under the credit agreement were not yet taken. The Amici maintain the general rules of mistake and restitution in the context of erroneous payment are applicable, and only in certain circumstances is it justified “taking such a case out of the general rule.” 

Second, the group argues the application of the discharge-for-value defense would have “unjust” and “anomalous” consequences. The district court’s decision would disrupt industry norms and lead to increased transactional costs. The group contends that the expansion of the defense under the present circumstances would be felt more now by the industry than when Banque Worms was decided. In addition, they argue the defense’s application would upset the parties’ contractual expectations. The discharge-for-value defense, in this circumstance, would make it harder to calculate and insure against risk, adjust operational and security procedures, and price fund transfers. 

Finally, the organizations claim that limiting the discharge-for-value defense to a simplified version consistent with the Uniformed Commercial Code will ensure a “consistent and predictable application.” They argue that the district court’s ruling upholds a broader defense that will lead to a more “circumstance-intensive inquiry” and “inconsistent results.”

While Citibank appealed to the 2nd Circuit, a district court recently denied Citibank’s request to keep the $504 million frozen pending appeal to the 2nd Circuit. Subsequently, Citibank appealed this decision to the 2nd Circuit. 

Bottom Line: The 2nd Circuit decision is expected in September.

Download to amicus brief to read the full text.