Transcript of OA475: Citibank’s $900 Million Oopsie

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Topics of Discussion:

[Show Intro]

Thomas:         Hello and welcome to Opening Arguments, this is episode 475, what a number.  What a number!  Speaking of, we’ve got new intro quotes coming at you next episode!

Andrew:         Oh! [Sighs]

Thomas:         Andrew already posted the Patreon thread where you can suggest them and you can vote on your favorites.  That helps me, it helps me see who’s interested in what.  Make sure to do that, but all that aside, Andrew, how’re you doing today?

Andrew:         I am fantastic, Thomas, how are you?

Thomas:         Doing great.  What a number, 475.  We’re closing in on 500.  I guess it’ll be a few months away, but-

Andrew:         What are we gonna do for our 500th episode?

Thomas:         Probably a deep dive on something.

Andrew:         [Laughs]  

Thomas:         Carburetor law, I dunno. 

Andrew:         Carburetor law, alright.

Thomas:         It was just the first thing that came to my mind.  I’d be like well-

Andrew:         Huh.

Thomas:         Andrew’ll be like “there’s regulation on how much … carbonation?”  I don’t know what carburetors do.

Andrew:         [Laughs]  

Thomas:         Do they carbonate your car?

Andrew:         [Laughing] I don’t think- I know very, very little about auto-

Thomas:         It’s carbohydrates.  Not carbon.

Andrew:         [Laughs]  

Thomas:         Yeah.  I dunno.  Anyway I drive a Tesla, I dunno. [Laughs]  

Andrew:         The car has to have the proper balance of carbohydrates and carbonation in order to run.

Thomas:         [Laughs]  

Andrew:         And that’s what the carburetor does!  That makes total sense!  That makes total sense to me, I have talked myself into hiring you.

Thomas:         Anyway, carburetor law, deep dive, coming at you episode 500.

Andrew:         [Laughs]  

Thomas:         But for now we’ve got so much to talk about, as always.  We’ve got friggin Dershowitz, Clownhorning Clownhorn Dershowitz’s new clownhorning thing. 

Andrew:         [Laughs]  

Thomas:         And, as promised, no takesies backsies law, a deep dive-

Andrew:         No takesies-backsies law!

Thomas:         This is not your typical no takesies backsies, this is a $900 million dollar no takesies backsies law.  I can’t wait for this deep dive.  Let’s see, anything to talk about before we get to that?

Andrew:         Oh, we should say, if you have not yet received the Law’d Awful Movies number 42, Cop Rock with Eli Bosnick, I don’t know what’s wrong with you.  It’s hysterical.  It’s cop, it’s rock, it’s law, it’s … um… we may do nothing but Cop Rock for the rest of our natural lives.  We actually talked about that-

Thomas:         For at least a year, anyway.  They only made a few episodes.  [Laughs]  Ten or twelve.  But you’re saying we could repeat it?

Andrew:         Rich tapestry.

Thomas:         Yeah, once we finish the season – it’s better than Law’d Awful Rudy’s, I’ll tell you that.

Andrew:         [Laughs]  

Thomas:         I’d rather do Law’d Awful Cop Rock for the rest of my career than have to do another Rudy Giuliani thing.  I’m tired of that Muppet.

Andrew:         Ooh.  [Laughs]  Well, speaking of, that’s a great transition to our first segment, something else we are definitely not going to do on Law’d Awful Movies.

Thomas:         Alright, let’s get to it!

Alan Dershowitz Has a Podcast

[3:59.6] [Segment Intro]

Thomas:         Dershowitz has a new podcast.

Andrew:         [Laughs]  

Thomas:         It’s something like “Cancel Cancel Culture” or something.

Andrew:         [Laughs]  

Thomas:         I mean, it’s so predictable. 

Andrew:         “Before Cancel Culture Cancels You,” yeah.

Thomas:         [Sighs] Is that the name of it, or was that just episode 1?  I’m not sure.

Andrew:         That was just episode 1.

Thomas:         Oh, okay.

Andrew:         -of what he unironically has named the Dershow.

Thomas:         Ah.

Andrew:         The strange, fall, decline, and postmortem shamblings of somebody who – I’ve said on here multiple times, was a mentor to me in law school.  Our episode, it’s episode 198, that was super painful for me to do.  I’m gonna link that in the show notes, if you haven’t – if you came on in the two or three-hundreds like a bunch of our listeners have done, go back and listen to that one.  It was tough on me, for somebody that I looked up to for a very, very long time.  Anyway, now he has the Dershow over on a platform called [Laughing] Rumble?

Thomas:         [Laughs]  

Andrew:         I want to point out, it is not-

Thomas:         Rumble.

Andrew:         Not just Alan Dershowitz’s podcast, but the Rumble platform is not the first hit you get when you type “Rumble podcast” into Google.

Thomas:         Hmm.

Andrew:         [Laughing] It actually brings you Michael Moore’s Rumble in the Jungle podcast, or whatever it is.

Thomas:         Smart branding.  Good … good job, there.

Andrew:         When you find this Rumble platform, it is the strangest thing.  I have taken this characterization, all credit goes to ace associate Morgan Stringer [Laughs]  who texted me (quote) “this site is 50% public domain puppy videos, and 50% the KKK happy fun time smile hour.”

Thomas:         Oh my gosh!

Andrew:         [Laughs]  It is dead on, exactly correct as a description.  Dan Bongino has his horrible podcast there.

Thomas:         Yeah, I would love to see the graveyard of right wing grifting on this thing.  There are right wing dating apps that I’ve come across that are now defunct that, you know, took an ad on Fox News.  There’s so many little things where, like, hey, you know how all of society hates you for your totally normal justified beliefs?  Let’s create a segregated component of society where it’s only Nazis and you guys can feel great together.  I don’t think they usually do that well?  I’m glad, there’s not quite enough Nazis, I guess, to support like Nazi dating?  I don’t think?  [Laughs]  

Andrew:         [Laughs]  We do not yet have a critical mass of Nazis.

Thomas:         Anyway, I think this is another one of those things.  Rumble?  I’m sure that’ll be the next Stitcher, or something.

Andrew:         Yeah, once they’ve managed to grift out all the money they can, I’m sure-

Thomas:         Mm-hmm.

Andrew:         It will be as defunct as, you know,, or whatever the hell that was.

Thomas:         Well, what’s funny – I know I’m probably derailing you, but what’s really funny about this is it follows a very familiar pattern.  I’ve read a few articles about this where they always want to go in as “we are the real free speech” thing, and then what happens is they realize you just … unmitigated free speech is not sustainable.  They realize, oh, wait, child porn, sorry, forgot, we can’t do that.  Sorry, we’re the real free speech site, except obviously no child porn.  Then other lines will be drawn and you’ll get a bunch of people, these conservatives, reacting badly to there being any lines drawn and then it implodes.  Almost like clockwork.  There’s several of them that have gone through that same life cycle of “unmitigated free speech” and then you very quickly realize that’s not a good idea and you can’t do it, and then they implode.

Andrew:         [Laughs]  Have you had a chance yet to read the “A Libertarian Walks Into a Bear?”

Thomas:         Dude, I thought I shared you that.

Andrew:         Okay.

Thomas:         I was the first one who read it and shared it out, then everybody started saying [Laughs]  I’m sorry.

Andrew:         Good, good good.  I thought so!  The last section of that, that was basically talking about the confluence of all of these libertarian small government, no government types getting together and being like “alright, can we have $12 to replace” Nope!  Voted down.

Thomas:         [Laughs]  Sorry, raw sewage flowing through the city because you can’t-

Andrew:         Nope!  Voted down! 

Thomas:         [Laughs]  

Andrew:         But back to Dersh for just a minute or two-

Thomas:         So, Rumble.  [Laughs]  

Andrew:         Yeah.  Rumble is gonna be-

Thomas:         Speaking of raw sewage, Rumble!

Andrew:         Yeah, right.  I also found, as long as we’re dunking on Dersh, and I’m going to do that for the rest of his natural life, now that he’s finally doing a thing that objectively I can say he’s worse at than I am.

Thomas:         [Laughs]  

Andrew:         So, you know, I’m never gonna let him live that one down.  He’s also, uh, doing that thing that Alan Dershowitz does where he’s lying about the law in such a way as to try and maintain plausible deniability.

Thomas:         Hmm.

Andrew:         This has to do with his latest client, Mike Lindell, the MyPillow guy.  Mr. MyPillow went on Fox News on Monday, last Monday, and said “I’ve got” – [Laughs]  I love this quote.  “I’ve got probably over 12 attorneys now.”

Thomas:         [Laughs]  

Andrew:         That sentence.  I could just frame that sentence and live under it for a month.  Anyway, “I’ve got probably over 12 attorneys now, including Alan Dershowitz,” Lindell said Monday.  “He came on board because he believes this is going to be the biggest 1st Amendment lawsuit in history.”  That was then picked up by CNBC, who called Alan Dershowitz, who said [Laughing] (and I quote), “My role is extremely limited.”

Thomas:         [Laughs]  

Andrew:         [Laughs]  Dershowitz told CNBC on Tuesday in a phone call, “Dershowitz maintained that he is” – and this is the lie, (quote) “not representing either Lindell or MyPillow, and that he is only offering advice on the 1st Amendment issues surrounding the case.”  Let me explain this.

Thomas:         He wants to cash a check from an idiot who made a zillion dollars on pillows, but be involved as little as he can because he knows this is a giant stupid thing.  That’s my guess.  Did I get it?

Andrew:         [Laughs]  That’s really good.  Yeah, exactly right.

Thomas:         Yeah.

Andrew:         Look, you can be brought into a case for a limited purpose, and in fact, Dershowitz often is. 

Thomas:         [Laughs]  Very limited, check cashing purposes.

Andrew:         [Laughs]  

Thomas:         [Laughing]  That’s all I’m here for!  I have a certain set of skills.

Andrew:         [Laughs]  

Thomas:         [Laughs]  That certain set of skills is depositing things into my bank account.  That’s all I – that’s my expertise!  [Laughs]  

Andrew:         [Laughs]  Oh, so good!  It would not make sense to hire Dershowitz to defend you in a lawsuit, in a civil defamation lawsuit, at trial, because Dershowitz is just a guy, and he’s an old guy.

Thomas:         Yeah.

Andrew:         And a professor, I think he’s professor emeritus now, but in any event, he’s a law professor.  He doesn’t have a firm, he doesn’t have associates, he doesn’t have Morgan Stringer, he doesn’t have paralegals.  He’s just a guy.  Yes, it makes total sense and you can be brought on for a limited engagement, “I am here to do X, but not Y.”  I sometimes take cases like that.

Thomas:         Yeah.

Andrew:         But you’re still representing him.  That is still your client.

Thomas:         Right.

Andrew:         However little you would like it.

Thomas:         [Laughs]  

Andrew:         In fact, if he’s not your client, if neither Mike Lindell nor MyPillow are your client, if that statement were true, then every piece of advice that Alan Dershowitz offers on (quote) “1st Amendment issues” (end quote) is now discoverable.

Thomas:         Oooh.

Andrew:         Would not be protected by attorney/client privilege.  Of course he represents them.  Of course there is an executed retainer agreement by and between Mike Lindell or Mike Lindell and MyPillow, Inc., or whatever the hell that name of that company is, and Alan Dershowitz.  Alan Dershowitz will defend himself by saying “well, I meant representing in the colloquial sense, not in the legal”- he is deliberately trying to mislead because he wants to do what you said, which is cash this right wing grift check and not have the permanent stain on what is quickly becoming an embarrassing third act of his career. 

Thomas:         Absolutely.  My other question is at what point can we demeritus him?

Andrew:         [Laughs]  

Thomas:         Can he – is that like tenure or something?  Because this is Harvard Law we’re talking, right?

Andrew:         Yup.

Thomas:         He’s still-

Andrew:         Yeah, yeah.

Thomas:         Can they get rid of him?  Can we … end this relationship?

Andrew:         I… yeah. 

Thomas:         What would it take?

Andrew:         That would be nice.  [Laughs]  Well… I have some ideas, I’ll have to share them with you off the air.

Thomas:         Okay.  Well, I mean, he’s already got all the weird Epstein stuff and “oh, I kept my shorts on while the child gave me a massage.”  What does it take-

Andrew:         [Sighs]

Thomas:         -to get… demeritus.  Un-meritus.

Andrew:         [Laughing] I will say, when we shared that Alan Dershowitz had a podcast, AG’s retweet was “is it called Captain Underpants?”

Thomas:         [Laughs]  

Andrew:         Which, I thought that was genius.  I’m leaving all that in there because if I know my old professor at all, and I do, he’s listening to this show.

Thomas:         Yeah, right.

Andrew:         Oh, absolutely.  Not any of the other 474 episodes, but if you don’t think-

Thomas:         Alright Dersh.  I just want to say, I take back everything I said and I double down on it!  I’m gonna say it again even stronger!

Andrew:         [Laughs]  

Thomas:         Fake out!  I don’t take back anything!  Creep.

Andrew:         Excellent fake out, and as always – if as always, you would like to sue us for defamation, Opening Arguments Media, LLC, is a Maryland Limited Liability Company with its principal place of business in Towson, Maryland.  Bring it on, prof.!

Thomas:         And I think Dersh is a creep.

Andrew:         [Laughs]  

Thomas:         If this is still in the show that means my lawyer advises me it’s okay to say he is a  creep.

Andrew:         Absolutely, I’ll advise you on the air!  Don’t take legal advice from a podcast.

Thomas:         [Laughs]  

Breakin’ Down the Law: Citibank Lawsuit

[14:09.2] [Segment Intro]

Thomas:         Alright, it’s time for no takesies backsies law.  This was a huge one.  I don’t want to spoil it, but why don’t you give us the breakdown involving almost a billion dollars of no takesies backsies? 

Andrew:         You may have seen the headlines, you may have clicked through and read the first paragraph of the story.  You probably didn’t read all thirteen paragraphs of the story, because this is which side are you on?  Citibank or a dozen hedge funds.  [Laughs]  

Thomas:         Yeah, yeah.

Andrew:         There are a lot of low cards at this hand, is what I’m saying here.  But yeah, Citibank mistakenly wired $900 million dollars, we’re gonna explain how that happened, and the question is, is there takesies backsies law?  It turns out this is a super fascinating question.  There is a law of takesies backsies.  It’s under the principle of mistake of fact and restitution, and generally the law says if you get something that doesn’t belong to you and the person making the oopsie asks for it back, you’ve gotta give it back.  In fact, that’s the law in England, no exceptions.

Thomas:         Right.  Yeah, I mean this was kind of the spirit of the show early on, of Opening Arguments early on was like look, there’s no magical – yeah, okay, I accidentally – the bank accidentally gives you $10 million dollars, it might be clickbait to be like yeah, you get to keep that, but no.  In reality, the law isn’t magical, it’s what you would think.  If someone makes a mistake and gives you $10 million dollars in your bank account you don’t get to just have it, that’s not how things usually work.  Except… [Laughs]  Maybe in this circumstance.

Andrew:         Except in the United States we have an exception to the general takesies backsies rule, and it is called “Discharge for Value.”  It was first articulated in the 1937 First Restatement of Restitution.  Again, because this is 1937 and it’s a legal treatise, apologies for the language but, you know.  It says, “A creditor of another who has received from a third person any benefit in discharge of the debt or lien is under no duty to make restitution therefore, although the discharge was given by mistake of the transferor if the transferee made no misrepresentation and did not have notice of the transferor’s mistake.”

Thomas:         Oh, thank god.  I thought – so you just meant like dense old timey language.  [Laughs]  I thought we were just gonna be like racial epithets or something.

Andrew:         [Laughs]  

Thomas:         Whatever you said, it’s 1937 so apologies for the language, so I’m like oh, okay, here it goes. 

Andrew:         [Laughs]  

Thomas:         Be like “a white man being the only one who can have” or something, you never know. 

Andrew:         [Laughs]  Yeah, this is just a lot of kind of unhelpful legal jargon, but here’s the way to understand it.  Thomas, you borrow $100 bucks from me, then you, intending to mail $100 dollars to your cousin for her birthday, accidentally mail it to me instead.  Then you call me up and say “oh, hey man, that $100 bucks, sorry, I meant to send that to my cousin not to you,” then I say yeah, right, but no takesies backsies, and I win.

Thomas:         Wow.

Andrew:         I get to keep the $100 bucks, and the reason why are Banque Worms.

Thomas:         Bank worms?

Andrew:         Bank worms.  Put a pin in this.  Put a pin in “Banque Worms,” because here is where we enter Citibank.  Actually, we start off with a struggling makeup company called Revlon.  I get the sense they have not been particularly popular for the past 20 or 30 years?  They were everywhere when I was growing up.

Thomas:         I was gonna say, yeah, I thought Revlon, I would’ve told you that’s still – I just remember the commercials.  That’s not a thing anymore?

Andrew:         They’re still a thing, but in 2016 Revlon borrowed $1.8 billion dollars on a seven year loan-

Thomas:         Wow.

Andrew:         That was due in 2023.  When you borrow almost $2 billion dollars you can’t really like just go to a bank and say-

Thomas:         [Laughs]  Yeah.

Andrew:         How about $2 billion dollars?  What Citibank did was they got together a dozen different hedge funds.  Revlon put up a bunch of different offices and other things as collateral for that $1.8 billion dollars.  Now fast forward 4 years, we’re in May of 2020 and Revlon needs to borrow even more money.

Thomas:         Jeez.

Andrew:         Its liquid position is not good; is how it’s described in the case.  It entered into a whole bunch more transactions, and [Sighs] without getting into more incredibly dense legal language, basically what happened was Revlon got some of the collateral moved out from the 2016 loan so that it could secure a new round of loans.

Thomas:         Hmm.

Andrew:         Now, if you’re one of those 2016 lenders, and now think about it, if you’re one of those 2016 lenders you’re kind of stuck, because on the one hand you don’t want to lose collateral that is securing your loan-

Thomas:         Right, but on the other hand you don’t want them to go out of business and not be able to pay you back?

Andrew:         Exactly right.

Thomas:         Yeah.

Andrew:         Exactly right.  The lenders agreed to restructure the transaction in return for what are called roll-up rights.  A roll-up transaction is where you, as a lender, exchange one loan for another, dollar for dollar.  As part of the roll-up transaction, the borrower pays the interest that was accrued as of the date of the roll-up, but they’re not paying down any of the principle.  Instead, principle on the existing loan is exchanged for the principle on a new loan.  It gives them the right to say okay, we’re exchanging this loan to diversify our portfolio and we’re gonna take a different kind of indebtedness and hopefully spread the risk of loss around.

[20:32.6] [Commercial]


Andrew:         Now, [Laughs] that’s where we are in 2020, and now we have [Laughs]  a piece of software called Flexcube.

Thomas:         Flexcube.

Andrew:         Flexcube is the software that is used by Citibank’s ABTF team.  ABTF is Asset Based Transitional Finance.  Citibank has this team, it’s not a Taint Team, it’s an ABTF team.  They process and service asset based loans.  They use this piece of software called Flexcube.  Here I am going to quote directly from the court’s opinion because it seems to me that I do not want to be accused of making defamatory remarks about Flexcube.  The Court says “on Flexcube, the easiest, or perhaps only, way to execute the rollup transactions, was to pay the lenders their share of the principal and the interest owed as of the date of the transaction, then to reconstitute the loan with the remaining lenders, was then to enter it into the system as if paying off the loan in its entirety, thereby triggering accrued interest payments to all the lenders, but then direct the principal portion of the payment to what was called a wash account; that is an internal Citibank account that shows journal entries used for certain Flexcube transactions to account for internal, cashless fund entries, and ensure that the money does not leave the bank.”

Thomas:         Okay, I did not follow all that. [Laughs]  A little bit.

Andrew:         [Laughs]  Yeah, let me try and break that down.  The idea is for these rollup transactions, where you’re exchanging one loan for another, the software that they use to do that, called Flexcube, doesn’t have a “rollup button.”

Thomas:         Hmm.

Andrew:         Instead, the way you process it is it looks like you’re paying off the whole loan, but instead of paying off the whole loan, which would be where you would pay not only the interest due as of the time of the transaction, but all the outstanding principal.

Thomas:         Sure.

Andrew:         All of the principal is then paid by Citibank into a wash account.  It all comes out in the wash.

Thomas:         Okay.

Andrew:         The idea is, it looks to Flexcube like you’re paying off both principal and interest, but the interest goes out to the lenders and the principal just goes into a circle, goes into another Citibank account.

Thomas:         Is this just their internal accounting software?  I’m trying to figure out what this even is.

Andrew:         Yeah, this is their loan product processing program that the bank uses for initiating and executing wire payments.

Thomas:         Okay.

Andrew:         This is how they make payments to the outside world.

Thomas:         Gotcha.

Andrew:         And, as you might suspect, Citibank doesn’t do this themselves.  They’ve offshored it.

Thomas:         Oooh.

Andrew:         To a group called Wipro Limited, an Indian company that runs Flexcube.  This is truly the Office Space “What is it you say you do around here?”  No, I don’t actually push the numbers into Flexcube, I call India and tell India to put the numbers into Flexcube.  Two Wipro employees, Arokia Raj and Santhosh Kuppusamy Ravi, went to process this rollup transaction in Flexcube, and they processed it according to the instructions.  Principal goes to wash, interest goes to the lenders.  If you’re wondering what that division is, the interest payments to go out to the lenders were $7.8 million dollars.  The principal going to the wash was $894 million dollars. 

Thomas:         [Laughs]  Yeah.

Andrew:         You know what happened next.

Thomas:         Mm-hmm.

Andrew:         Raj proceeded with the final steps to approve the transfers, which popped up a stop sign, what they actually call in the case a stop sign on the screen, which is a little warning that says “account used is Wire Account and Funds will be sent out of the bank.  Do you want to continue?  Y/N.”  

Thomas:         [Laughs]  Right. 

Andrew:         Yup.  But, the stop sign didn’t indicate the amount that was going to be sent out of the bank, it just said yeah, some funds are gonna be paid.  And he was like, well, yeah, the $7.8 million is gonna be paid.

Thomas:         Oh.

Andrew:         And so he hit “Y.”  And, yes, Flexcube paid all of the lenders both the principal and the interest.

Thomas:         Yikes.

Andrew:         Yup, that was on August the 11th.  Citibank noticed this on August the 12th.

Thomas:         [Laughs]  God.

Andrew:         They sent a bunch of recall notices.  Interestingly enough, some of the lenders gave the money back.

Thomas:         Right.

Andrew:         About $400 million dollars’ worth, actually.  But, some of them kept it.  Then Citibank sued them for conversion.  Conversion, despite being another old timey word, is actually a thing that I have sued people for.  It is the civil tort that says “you have our stuff, and we want you to give it back.”  In this case, yeah, I mistakenly directed $900 million dollars, you have that, I want you to give it back.  Here’s where we get Worms.

Thomas:         [Laughs]  

Andrew:         [Laughs]  

Thomas:         I got worms!  That’s what we’re gonna call it.

Andrew:         Yeah, this is a case called Banque Worms.

Thomas:         [Laughing] Banque Worms!  Sand worms.  You hate, right?

Andrew:         Yup.

Thomas:         I hate ‘em myself.

Andrew:         Between – [Laughs]  Every party in this case is delightfully named.  Between Spedley Securities Limited, an Australian Company, and Banque Worms, a French bank.  It’s probably like “Bonk-eh Verms” but I will call this case the Bank-Worms case until the day I die.

Thomas:         Do the French who made that name think that means something better in English than what it means?  Is what I’m asking.

Andrew:         [Laughs]  

Thomas:         [Laughs]  

Andrew:         I don’t know, I will ask – my son is nearly fluent in French, so I will ask him if –

Thomas:         We’ve been watching a number of foreign shows on HBO, coincidentally lately, with subtitles, and it is curious to hear, you can pick out English phrases from time to time that I guess are just idioms that they say but are in English?  It is really fascinating to see, oh, yeah, they just say this thing in English.  It’s like when we say déjà vu, they have things like that but for English.  Maybe – I dunno.  Bank Worms?  Is that something they think mean something?

Andrew:         [Laughs]  I don’t think so.  So, French bank, Banque Worms.  Spedley Securities had this revolving credit agreement, and they paid it off every 90 days.  That’s a very typical arrangement, it’s just like a business credit card, revolving line of credit.

Thomas:         Mm-hmm.

Andrew:         March, 1989, Banque Worms told Spedley that it would not renew the agreement again, your credit has fallen, we’re no longer interested, we’re demanding payment of our outstanding debt as of April 10, 1989 the due date on the credit, so the next month in April.  Then on April 10th, 1989, Spedley called up its bank, Security Pacific International Bank, and said I want you to wire the balance (which is almost $2 million dollars) to Banque Worms.  That was at 12:36 in the morning.  Literally [Laughing] 36 minutes after midnight.  Then three hours later Spedley said “yeah, you know what?  Never mind on that.”

Thomas:         Hmm.

Andrew:         They sent – this is 1989 so it’s a telex.  [Laughs]  

Thomas:         I don’t know what that is.

Andrew:         [Laughs]  

Thomas:         Is it a fax?  What’s a telex?  Like an old timey text message?

Andrew:         Yeah, a telex is a custom name of a product.  If you google this you will see the delightfully old timey typewriter, but basically it was over the telegraph wires. [Laughs]  

Thomas:         Wow!

Andrew:         And it was a way of having international communications before the era of fax machines.

Thomas:         Now, this is so funny because there’s the Radiohead song Planet Telex, and I’ve never even thought about it, it’s just one of those things I was like “oh, whatever that is,” I didn’t think about it.

Andrew:         Yeah, you’re by Planet Kolob and-

Thomas:         No, I look it up and he was gonna name it Planet Xerox but Xerox is a copyrighted thing-

Andrew:         Yeah.

Thomas:         -so they had to go with telex.  [Laughs]  What?

Andrew:         [Laughs]  

Thomas:         It’s so random, okay.

Andrew:         Well there you go.  So, sent a telex – I mean, literally, a telex causes the other side’s telex machine to type the keys out.

Thomas:         Oh, wow.

Andrew:         So, it starts like clacking away.

Thomas:         It is an old timey text message.

Andrew:         It is!  Yeah!  That says “stop payment to Banque Worms, instead make payment in the same amount to National Westminster Bank USA,” different creditor.  Notwithstanding getting both of these, the bank sent the almost $2 million dollars to BankAmerica, which was the agent for the account of Banque Worms.  Then two hours later, Security Pacific, Spedley’s broker, told BankAmerica “oh, look, that was a mistake, give us the money back,” and expecting that they would they then sent out the $2 million dollars to National Westminster Bank USA.  Then we wound up in court to figure out who gets the money.  Does Security Pacific get that $2 million dollars?  Or was Banque Worms allowed to keep it?  There were a trio of cases that went to the 2nd Circuit and also the New York State Supreme Court, called the New York Court of Appeals, and the New York Court of Appeals, under New York law, said when a beneficiary receives money to which it is entitled, and has no knowledge that the money was erroneously wired-

Thomas:         Mm-hmm.

Andrew:         -the beneficiary should not have to wonder whether it may retain the funds. 

Thomas:         Yeah.

Andrew:         Rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.

Thomas:         But, what I’m wondering there is the part where you throw in “and they don’t know that it’s under false pretenses,” or whatever you said.  What’s the timing on that?  You know, it would be weird to assume you’d have to know it was wrong ahead of time in order for that little caveat to apply.  Is there a time limit where it’s like yeah, five minutes is fine, an hour is not?  I dunno.

Andrew:         You have cut to one of the two major questions that were at issue in this case, and will be at issue on appeal.  Let me dispense with the other one first.  The other one is must that debt be due at the time that you receive it?

Thomas:         Hmm.

Andrew:         Because think about all the analogous cases and the Banque Worms case and the little hundred dollars that I made up.  All of that you would say “I’m expecting to get my $100 dollars.  I’m expecting to get my $2 million dollars, and then all of a sudden it comes in and you’re like “oh look!  There’s my $2 million dollars.”

Thomas:         Yup.

Andrew:         It was then due and owing.  In the case of this Revlon loan that Citibank sent out, it wasn’t due until 2023.  Now, can you prepay loans?  Absolutely you can prepay loans, and this loan specifically had a prepayment clause.

Thomas:         Yeah.

Andrew:         That was their argument in the first half of the case, essentially Citibank arguing “look, for this exception to apply the amount has to be due and owing.”  Otherwise it’s not a discharge for value because they know they’re not expecting to get the money right now.  The Court said “nope, when we look at Banque Worms we don’t see any requirement that it be presently due,” in fact in revolving lines of credit cases, they weren’t expecting it for another month, or another three months, or whatever.  Nope, doesn’t have to be presently due, just has to be due at some point.  You’re indebted to a person and if you wire them a sum equal to or less than that indebtedness they can keep it.

Then Citibank raised the same argument you raised, which was, well, there’s gotta be a notice period.  There has to be a time in between-

Thomas:         Yeah.

Andrew:         We’ve sent this out, and then we figured out that we’ve made a mistake.

Thomas:         Otherwise it seems like that provision is useless.  The only way it would apply is if while you were sending it you were like “this isn’t real!” and sent it.  Seems like that would be the only application of it.

Andrew:         Yeah.  That’s right.  The Citibank Court said “you are on notice when you get the money. “ That concludes the transaction, even though the wiring is instantaneous.  The transaction is transferred over into your account, the second that it’s done so long as you meet the rest of the criteria, then there’s no takesies backsies.

Thomas:         Are you saying Citibank is arguing that?  Or this is what the Court said, I couldn’t tell.

Andrew:         No, the Court said there is no notice period.

Thomas:         They essentially read that part out of the ruling.

Andrew:         Yeah.

Thomas:         Okay.  Hmm.

Andrew:         If you think about it, that is the equivalent of saying “oh, you can take back” – if I’ve mailed you a check.

Thomas:         Ah.

Andrew:         I can call you and take it back while it’s in the mail.

Thomas:         Yeah, that’s fair.  Yeah, yeah.

Andrew:         Yup.  But if I’ve wired you the money-

Thomas:         Unless you can call faster than the speed of wire.

Andrew:         Well-

Thomas:         Which I doubt you can.  Maybe.

Andrew:         [Laughs]  

Thomas:         What if the amount is still in settlement or whatever it is, it shows as “pending” in your bank account?  Maybe then.

Andrew:         Yeah, it would be very interesting.  The Court considered, and paused on the argument, but essentially where it ruled on the equities was look, we get that these are two – the Court described it as “two basic intuitive principles.”  Here, I’ll read a little bit from the decision.  “On the one hand, if [a] party sends money to another by mistake, the latter should generally be required to give it back.  On the other hand, if one party owes money to another and pays that money back … the latter should generally be allowed to keep and use the money as it wishes, without fear that the former will develop a case of borrower’s remorse and claim that the payment was [made] by mistake.  How to reconcile these principles would be hard enough in the abstract.  It is even harder in an age [where] money can be transmitted from one party to another instantaneously-

Thomas:         Yeah.

Andrew:         – and investors can, and often do, redeploy available funds almost as quickly.  Were th[is] Court writing on a blank slate, it is far from clear that it would reconcile these principles in a way that allowed the … Lenders to keep the money-

Thomas:         Hmm.

Andrew:         – that Citibank indisputably transferred by mistake. After all, Citibank realized its error and notified the Lenders within one day, and there is no evidence or suggestion that, in the intervening hours, the NonReturning Lenders” (that’s what it calls the people who kept the money) “relied to their detriment on the belief that the transfers were an intentional, albeit unexpected-

Thomas:         That was gonna be my question.  There doesn’t seem to be any discussion of, like, well did you spend the money?  It might be one thing if they’re like “sorry, we blew it on blackjack-  what is it?

Andrew:         [Laughs]  

Thomas:         Hookers and flapjacks.

Andrew:         Flapjacks, yeah! 

Thomas:         Or whatever [Laughs]  your famous quote.  Hookers and flapjacks.  Anyway, it wasn’t like – there was no discussion of that, and that would be interesting if it was like “well, if you can show that you in good faith used that money believing that it was due to you and that was all legitimate, then sure, but apart from that you should probably just return the money.”  Sounds like there’s not really any discussion of that, though.

Andrew:         Yeah, and the reason is because of the Banque Worms decision.

Thomas:         Banque Worms!

Andrew:         Because the Banque Worms said that you did not have to prove detrimental reliance in order to keep the money, you just had to resolve the question with finality.  In light of the Banque Worms opinions, the relevant time for evaluating whether a lender was on notice of a mistaken payment is clear, it is when the payment is received.

Thomas:         Wow.

Andrew:         These decisions compel the Court to conclude that the non-returning lenders are entitled to keep the money.

Thomas:         Yikes.

Andrew:         Now [Laughs] this is not over!  It has now been fully briefed, it’s on appeal to the 2nd Circuit, and Citibank has petitioned for an injunction preventing the lenders from spending the money while the case is on appeal to the 2nd Circuit.  I wanted to make sure we covered this now, it was finally briefed as of last Friday.  We should get a decision in the next couple of days.  I think Citibank is gonna lose that motion.

Thomas:         Wow.

Andrew:         If you’re thinking about it you’re like “okay, well, maybe a good way to split the baby is to say alright, we’re following this Banque Worms case, the equities kinda seem to go the other way, but we’re bound by existing precedent, let’s see what happens on appeal, but let’s not let these hedge funds get too crazy with the $500 million dollars.”  But, again, remember the standard for injunctive relief.

Thomas:         Yeah.

Andrew:         The standard for injunctive relief is you have to show – leave aside the likelihood of success on the merits, they’re probably not in this case.  Banque Worms seems pretty dispositive.  But here, the real difficult question is what’s the actual irreparable harm?  Saying, well, hedge funds might lose my money, that’s typically not enough.  Courts would look at it and be like “yeah, these hedge funds have a ton of money. “ You’re gonna be fine.  This is money judgment, that’s the definition of an injury that is reparable.  Sooo, no.

Thomas:         Wow.

Andrew:         We’re not going to require the funds to be segregated.  I’m very interested in where the judge comes out.

Thomas:         Boy, I bet those hedge funds that returned that $400 million dollars feel like real saps right now.

Andrew:         [Laughs]  Chumps?  Yeah.

Thomas:         Yeah, what are we thinking?  Because it is kind of a collective action-ey thing in this case where, well, okay, this is Citibank.  Was this still related to Revlon?

Andrew:         Yeah.

Thomas:         Okay.

Andrew:         Because Citibank is administering the Revlon loans.

Thomas:         Administering, yeah, yeah.  Gotcha.  So, for Revlon it’s kind of all or nothing.  Or if you’re a creditor, like you said earlier on, you might be fine to continue lending to them but only if everybody else was, too.  If half the people take their money back you’ve gotta imagine the other half of creditors is like “oh my gosh, now this might not get paid back if Revlon goes out of business,” so that’s gotta be a tough scenario there.

Andrew:         Yeah.  I mean, who – how the remaining principal balance will be allocated on the Revlon loan, that is above my paygrade.  [Laughs]  

Thomas:         Yeah.

Andrew:         I can do the law stuff, but the accounting on that seems like you need to get somebody who’s pretty damn good to figure that out.  So, there you go, a crazy case, some worms.

Thomas:         [Laughs]  

Andrew:         No clear – a telex machine, and-

Thomas:         Good times.

Andrew:         Whose side are you on?  Are you on Citibank’s or are you on, you know, these “poor hedge funds” that got a half billion dollars in windfall?

Thomas:         I’m on the side of, as kind of you said in the decision, I don’t care about either side of this, I guess, people wise.  I don’t care about that, but for the legal principle it feels like this is something if you were coming at it fresh without any weird Banque Worms law you would come up with something different than this.  This doesn’t feel right to me.

Andrew:         I think you would.  I will tell you, the argument that was made by the lenders and repeated by Judge Furman, who, you know, very well respected, this is Jesse Furman, we’ve talked about him before, very well respected District Court judge, was, you know Banque Worms has been the law for just about 30 years now, it doesn’t seem to have deterred banks from wiring large chunks of money.

Thomas:         Hmm.

Andrew:         From a social engineering perspective, saying yeah, it’s extra incumbent that Citibank inspect its billion dollar wires and give ‘em an extra once-over.  What’s the harm in that? 

Thomas:         Yeah.

Andrew:         That doesn’t seem like that’s crippled international finance.

Thomas:         Yeah, dot your T’s and cross your I’s before you [Laughs]  

Andrew:         Mind your I’s and Q’s, yeah.

Thomas:         Yeah, yeah.

Andrew:         There you go, that is the story of how Citibank came to erroneously wire almost a billion dollars and the folks who kept it and it looks like are going to continue to be able to keep it.

Thomas:         Alright, well, that was a classic deep dive, Andrew, it’s the Tuesday dive.  You learn so much each and every time listening to those dives, I love it.  Takesies backsies law.

[43:54.2] [Commercial]

[45:40.3 [Patron Shout Outs]

T3BE Answer

[57:34.6] [Segment Intro]

Thomas:         Now it’s time for T3BE.  Oh my god, I have been thinking about this one.  Oh! What happened here?  Let’s see what happened here.  Test porkage, let’s go.

Andrew:         [Laughs]  Alright, so Thomas, this was a con-law question about whether the Supreme Court has jurisdiction to review the merits of a State court decision that was predicated upon the due process clause of the 14th Amendment, but in which the State Supreme Court also said in several of our earlier decisions we could have found you liable under State law, but that issue was not presented in this case so we don’t rule under the State constitution.  There were four answers, you immediately eliminated B and C, which I will tell you are good eliminations.  B was yes because the federal and State law issues in this case are so intertwined that a resolution of the federal law issues is necessary to facilitate a proper determination of the State law issues.  That’s a potential ground for when the Supreme Court can review the decisions of a State Supreme Court.  It states an operative legal principle, but that doesn’t match up with the facts.

Thomas:         Mm-hmm.

Andrew:         [Laughing] Right?  The facts stipulate otherwise.  So, B, good elimination.  C, no because the decision of the highest State court renders the case moot.  You were like that seems to make no sense, and that makes no sense.

Thomas:         Okay, good.

Andrew:         [Laughs]  Right?  That would say you can’t appeal things.

Thomas:         Yup.

Andrew:         Yeah, that’s a nonsense answer.  You were torn, and you were torn for a long time between A and D.  You said if the test is not porked then A is the correct answer, yes because the highest State court based its decision wholly on federal law grounds.  Then you’re like, but I think I’m being screwed.

Thomas:         Yup.

Andrew:         I think the answer is D, no because the independent State law grounds could have been used to justify the result in this case.  Well, Thomas, it’s a mixed bag. 

Thomas:         [Laughs]  Aaaah!

Andrew:         I hate to tell you the test is not porked.

Thomas:         No!  Dammit!

Andrew:         But you have gotten it wrong.  Yeah, no.

Thomas:         [Groans]

Andrew:         This is straightforward A.

Thomas:         Okay.

Andrew:         Here’s why.

Thomas:         I went out on a limb, I thought the porkage was so extreme that it would be D, but okay.  Alright.

Andrew:         Yeah, the standard that this was testing for when the U.S. Supreme Court can review, or can’t review-

Thomas:         Yeah.

Andrew:         -the State Supreme Court opinion is whether that State Supreme Court opinion rests on adequate and independent State law grounds.

Thomas:         Yeah yeah yeah.

Andrew:         Okay?  Those two are both independent tests.  Adequate, the State law must explain all of the result, and independent, it must be clearly State law and not anything else.

Thomas:         Yeah, that makes sense.

Andrew:         Yup.

Thomas:         Yeah, it was A.  I mean, I had it, I just thought this test is so porked-

Andrew:         I had typed up the winning answer-

Thomas:         Yeah.

Andrew:         -and calculated your winning percentage and then you were like “yeah, but-

Thomas:         Well then let’s just go with that.

Andrew:         -I’m going in for D.”

Thomas:         Yeah.  [Laughs]  Naw, you typed it, no takesies-backsies, we just did a whole deep dive on that.

Andrew:         [Laughs]  

Thomas:         You already wired the correct answer over to me, so…

Andrew:         [Laughs]  I kinda did.

Thomas:         You know it’s [Groans] oh, man.  I was really back and forth.  I think the part where it’s like “does the court have jurisdiction,” it’d be tough to say it doesn’t have the ability to do that.  That’s what I started to say before I switched up.  It’s just hard because this test has been so porked that I’m always looking for a way that it’s fooling me.  There’s a big difference in test taking when you think every question is a trick question versus the first 200 questions I did where, you know, some of them were and some of them weren’t.  I just, yeah, I’m really wrapped around the axle or whatever you say on this, because I had A, but I thought it’s – every question has been tricking me every time so there must be some weird thing that’ll make D the right answer.  Like, oh no, it could’ve been, so there you go, but nope, I got it wrong.

Andrew:         Yeah, and as I have said before, the real bar screws with you like that.  It really does.  I’m sorry [Laughing] that you’re experiencing it.  I will tell you, you have joined some pretty good company of a lot of us who also experienced that.

Thomas:         It’s the worst when you do it on something like this, because it’s like – everybody’s like “yeah, obviously A,” and it’s like yeah, I know, I knew it was obviously A, but every time – we’ve had ten questions where it’s been obviously A and then you’re like yeah, but there’s a really weird law that means it’s not A.

Andrew:         Yeah, not it’s tough.  I’m with you.

Thomas:         There you have it!  Well [Sighs] streak porked at one! [Laughs]  

Andrew:         [Laughs]  

Thomas:         One in a row is all I can muster, we’re back to losing.

[T3BE Defeat]

Thomas:         But I’m sure a very fine listener got this one right, so why don’t you tell us who this week’s big winner is.

Andrew:         Well, Thomas, this week’s winner is Andrew Rae on Twitter who writes “A.  Trying to double-bluff the examiners is a losing test strategy.  The obvious answer is the right one in this case.”  Good piece of advice, short, succinct, to the point.  Lots of people got A, but I thought that was some helpful advice.  Everyone, give Andrew Rae a follow on Twitter, that is @Dioptre, and everyone congratulate him on being this week’s winner.

Thomas:         And that’s our show.  Reminder, get that Stereo app, download it on your phone, follow @Torrez or @SeriousPod and we will come at you every Wednesday at 5 pm Pacific, 8 pm Eastern for a fun Q&A in which we get to hear your actual voices.  It’s so much fun, get that app, join us every Wednesday.  And we will see you then, or for Rapid Response Friday, whichever comes first for you.  [Laughs]  

Andrew:         [Laughs]  

Thomas:         See you!

[Show Outro]

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