You've probably heard of Citibank, but what about Banque Worms? No? Well, you probably aren't the only one. But surprisingly enough, both of these banks have something in common: one massive loan mishap. Let's take a look.
Lending to a Big Fish
Most people have to come in contact with a lender at one point or another. Whether you get a student loan, mortgage, or business loan, you have to work with a lender. Not all lenders are the bank, and not all banks are lenders, so it's important to understand the terms of your loan so you can proceed with payments accordingly.
For Citibank, they were simply the one holding the purse strings for Revlon Inc., a cosmetics company. Revlon owed nearly $900 million to a host of lenders due by 2023, and Citibank's job was to transfer funds to the lenders every month on behalf of Revlon.
Generally, Citibank operates under what they call a "six-eye system" for making payments. One person makes the initial money order in the system, another checks it for errors, yet another employee reviews the order and confirms the transfer. Three pairs of eyes look over every transfer of this magnitude to ensure that everything runs smoothly.
However, things went sideways when the bank transferred the remaining loan balance to lenders in August 2020. Instead of paying the $7.8 million interest payment, Citibank wired $893 million overnight.
Typically, if a bank accidentally gives away too much money on a large or small scale, they make sure to get it back. If you're one of the (unlucky) few to catch a few hundred in your bank account out of nowhere, you know how. . .tenacious the bank can become.
In civil cases, if the bank customer doesn't return the money, the bank will sue them for the faulty amount and more. This is more or less what happens with big lenders and accounts as a rule, but things went a little differently for Citibank.
After sending out a polite but urgent series of requests for the money, Citibank began to receive piecemeal amounts - $10 million here, another $750,000 there. In some cases, the lenders failed to respond to the requests and made requests of their own for the bank to stop harassing them.
Naturally, this behavior didn't bode well for Citibank. Traditionally, banks are the patriarch of the financial industry family – and the patriarch runs the show. By refusing to return the money, these lenders were spitting in the face of tradition, and Citibank wouldn't stand for it.
So, they took the wayward lenders to court.
Two attorneys took the case – litigators, ready to fight what they thought would be a predictable battle. They used the case of Banque Worms, a French bank that made a similar (smaller scale) hiccup and got their money back.
In the Worms case, the court ruled that any money given in error is not the recipient's property but rather the mistaken giver. Using this as the basis for their argument, Citibank's attorneys said that regardless of lending principles, the money wired by Citibank employees to the lenders is still the bank's property and should be given back.
The court? Well, it ruled in favor of the lenders.
Since losing their first case, Citibank has filed an appeal. And they lost that too. Ultimately, the issue comes down to lending practices.
The way Revlon Inc. had been borrowing money set the stage for the Citibank catastrophe of the century. When big companies like Revlon borrow, it's usually from more than one source, and one way to keep interest down is to pit lenders against each other.
In creating this playground infighting among the lenders, Revlon unknowingly created a future where these same lenders would become unsure of the likelihood of getting their money back and, as a result, do anything in their power to get it back.
The concern with big companies and industry giants is while they may be "too big to fail" or "cornerstones of the industry," all things must end, and when they do, all the kings horses and all the kings men might not be able to put Citibank back together again.
From Worms to Revlon Inc., lending on a large scale is the reality show version of real-life for individual borrowers like you. If you are a borrower and either you or the lender make a mistake, recovery is often out of budget and out of reach.
The best thing you can do to manage your loans efficiently and fruitfully is to research your options. You might be surprised at all the ways you can modify your loans and build a better financial future.
Schedule a loan modification consultation with Buchalter & Pelphrey Attorneys At Law today.