Banks across New York are scared they’ll accidentally give their money away.
The backstory. Last August, Citigroup accidentally wired $900m to a handful of hedge funds to pay off a loan for Revlon Inc. The loan wasn’t due, and neither Revlon not Citi intended to pay it off. A few people in Citi’s back-office, presumably after a long day, tapped the wrong keys on a computer and, oops, the money was sent out.
They noticed the problem the next day and asked the hedge funds for the money back. Alas, many of the hedge funds were in a bitter, unrelated spat with Revlon and decided they’d rather pocket it. Around $500m wasn’t returned, so Citi sued.
And Citi lost.
In a shocking (and really weird) judgement, a federal judge ruled
the hedge funds were allowed to keep the money under an old New York doctrine called the ‘discharge-for-value-defence.’
Citibank and other lenders are adding boilerplate “Revlon Clawback language to credit agreements”, Xtract Research
revealed last week.
A “Revlon Clawback” basically means no finders keepers.
- If you get money by mistake, like the hedge funds did, you have to give it back, like the hedge funds didn’t.
“If I accidentally send you money, you can keep it” is not a rule anyone wants in their loan agreements - but it is a rule that apparently exists.
And now that everyone’s extremely aware of it, big banks want to opt-out before any more money is misplaced. Luckily, avoiding rules is what lawyers do best; most laws can be dodged with boilerplate clauses that say “we respect that weird court decision, buuut it doesn’t apply to this deal or any other possible deal we will ever do in the future.”
Citi is currently appealing the Revlon decision, it’s unlikely banks will erase Revlon clawback language from their contracts. Once a clause is promoted to boilerplate status, it never goes back, per Matt Levine