Citibank made a triple-checked mistake which caused the bank to send out about a billion dollars in the loan payments rather than only $7.8 million. It is undoubtedly a costly lesson in software design. For a blunder like this, Citibank now blames an Oracle banking program with a confusing user interface.
A judge ruled on Wednesday that creditors do not need to return the amount that Citibank made to them mistakenly. Last August, the bank was trying to make $7.8 million payments on behalf of Revlon when an India-based subcontractor handling the transaction issued $900 million in error. The overly confusing procedure was described by the ruling as required when using the software called “Flexcube”—part of the Oracle Banking Suite.
“On Flexcube, the easiest (or perhaps only) way to execute the transaction—to pay the Angelo Gordon Lenders their share of the principal and interim interest owed as of August 11, 2020, and then to reconstitute the 2016 Term Loan with the remaining Lenders—was to enter it in the system as if paying off the loan in its entirety, thereby triggering accrued interest payments to all Lenders, but to direct the principal portion of the payment to a ‘wash account’—’an internal Citibank account… to help ensure that money does not leave the bank.'”
The subcontractor filled the user interface incorrectly, and the entire amount went out to the lenders instead of mostly being deposited to the wash account. Citibank makes three responsible persons sign off on such a large transaction. Two workers at the outsourced company approved the check and a Citibank senior official Delaware made a final signature, writing, “Looks good, please proceed. The principal is going to wash.”
Citibank asked the creditors to get the funds back and received about $400 million back while other lenders refused and said, “no way.” According to Bloomberg reports, Revlon’s debt is operating at just 43 cents on the dollar and few of its creditors were not ready to retake the risk of giving back the early payoff.
Citibank filed a case to lawfully get the funds back. But, District Court Judge Jesse Furman rejected the Bank’s plea. In such instances, the law usually supports the bank as it made the transaction by mistake. However, an exception called “discharge-for-value” is present in New York.
As per this defense, if the receiver of a wire transaction is authorized to the money sent is unaware that the funds were sent in an error, it does not need to reverse the transaction. Revlon’s lenders argue that they did not know the transfers were overpayments. They contend that they took it as the “prepayments” on the loans as the amounts were equal to the formidable balances “to the penny.” And the District Court agreed.
“To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational. Accordingly, and for the reasons discussed above, the Court holds that the August 11th wire transfers at issue were ‘final and complete transaction[s], not subject to revocation,” Judge Furman wrote in his opinion
Citibank intends to appeal the decision with the words, “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.” At the same time, the judge ordered the lenders to keep the amounts in security until the appeal process reach an end.
