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At the heart of the epic legal battle of Dumb vs. Dumber appeared to be the question of just who, in fact, was dumbest. The winner of that dubious distinction, it seemed, would also win the case, and as such both sides went to great disingenuous lengths to appear as inconceivably stupid as possible.

Citigroup (rightly) pointed out that it was clearly the dumber party: After all, hadn’t it mistakenly paid in full distressed bonds not due for three years, and with nearly $1 billion of its own money? Could the hifalutin, sophisticated hedge funds, insurers and other creditors in receipt of that money possibly be so thick as to think this unexpected windfall was anything but a massive cock-up on the part of a bank with risk controls as famously fatuous as Citi’s?

Slow down, there, pardner, cried the hedge funds! Who in tarnation would believe—could believe—that a big, fancy, sophisticated bank, even one as shitty as Citi, was even capable of making so colossal a mistake? Hadn’t never happened before, after all. And even we plain, rustic hedge funds can’t help but notice that this was no fat finger; we got paid back to the penny. And we’re so dumb that even after all of it we still want to do business with them! Did his honor really think that we simple folks were just supposed to assume stupidity on the part of a bank that had been pretty sophisticatedly trying to screw us over?

Turns out, his honor didn’t have to think too much about the question at all, thanks to the little-known legal doctrine of “finders keepers.”

The key precedent is a 1991 New York state court case called Banque Worms v. BankAmerica International. In that case, New York’s highest court ruled that under a principle called discharge for value, when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it didn’t realize it was sent in error and didn’t make any misrepresentations…. [U.S. District Judge Jesse] Furman said representatives of each lender “credibly and persuasively testified that they reasonably believed the payments were intentional prepayments” of the 2016 loan. The judge rejected Citibank’s claim that the size of the transfer alone should have alerted the lenders to the blunder.

That being said, the judge did have a thing or two to say about relative stupidity, and indeed, Citi was found the dumbest of them all. Unfortunately for the bank, the aforementioned assumptions about the dimmer being the winner were wrong.

“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,” wrote Furman, who presides in Manhattan…. “The transfers matched to the penny the amount of principal and interest outstanding on the loan,” he said in his decision. “The accompanying notices referred to interest being ‘due,’ and the only way in which that would have been accurate was if Revlon was making a principal prepayment….”

”While that process obviously failed in this instance, the unprecedented nature of the mistake in this case suggests that it has generally been successful. Moreover, banks could -- and, perhaps after this case, will -- take other relatively costless steps to both minimize the risk of errors and increase the probability of clawing back erroneous payments.”

Citi, of course, might take issue with the word “costless,” as well as everything else in Furman’s 101-page decision. As it of course plans to do, in the form of an appeal. It’s just that such a course of action may prove, well, stupid.

Citi has a reasonable chance on appeal, but this outcome will create some stiff headwinds,” [Columbia Law School professor Eric] Talley said…. “Citigroup has an uphill battle succeeding on an appeal,” said Braden Perry, a partner at Kennyhertz Perry and an expert on legal and regulatory matters. The judge found that the bank’s “six eyes” system, in which three people must approve a transaction, “broke down after a contractor checked the wrong box on a digital payment form,” he noted….

The judge brushed aside some of Citigroup’s other arguments, including its claims that allowing the transfer to proceed was simply unfair and that the New York state rule is bad law. Those arguments are “squarely foreclosed” by the decision in Banque Worms, Furman said.

“The problem for Citibank is that the court does not write on a blank slate,” he wrote.

Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling [Bloomberg]
Citi Faces ‘Finders Keepers’ in Fighting $500 Million Ruling [Bloomberg]



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