The $900 million Citi-Revlon lawsuit that started on Wednesday is a law professor’s dream. The case, which is being heard by Judge Jesse Furman in federal district court in New York, pits two entirely logical and reasonable principles against one another. On the one hand is the idea that if someone pays you money by mistake, you should give it back. On the other is the intuition that if someone owes you money and transfers it to you — whether by Venmo or by a direct bank transfer — you should be able to keep what you are owed.

But what if someone owes you a whole lot of money and, when he means to transfer just the interest payment to you, he accidentally repays the whole debt?

That’s roughly what happened in this case. Citi was responsible for sending interest payments to Revlon’s creditors. But through what the bank says was human error, Citi sent the creditors not the interest payments but exactly the total that they were eventually due to receive — down to the penny, more or less.

It’s as if instead of paying your monthly mortgage payment online, you accidentally sent the entire outstanding principal to the bank. Could you ask for your money back on the theory that obviously you didn’t intend to pay off your mortgage? Or could the bank keep your payment, on the theory that you do in fact owe them the money and hey, some people pay off their mortgages early?

You will be unsurprised to hear that lawyers have technical names for the rules that would lead to the two alternate outcomes. One rule is called the “mistake of fact” doctrine. It says that, as a general matter, money paid based on a factual mistake can be recovered “unless the payment has caused such a change in the position of the other party that it would be unjust to require him to refund.”

This rule is based on the moral notion that no one deserves to be enriched unjustly. If out of the blue I get a payment for $1,000 in my PayPal account from someone I’ve never heard of, I should have to pay it back. (Unless it’s from a Nigerian prince. In that case all bets are off.) The caveat built into this rule is that there might be some circumstances in which the person who gets the payment has relied on the belief that the money actually does belong to him, and that it might be unjust to make him repay it. Either way, the point of this rule is to be guided by principles of justice.

Citi, of course, wants the current case to be decided based on the “mistake of fact” rule. The payment was an error and the money should be returned.

On the other side, however, is a rule known as the “discharge for value” rule. This rule says that when a creditor gets a payment from a third party (like Citi) “in discharge” of any debt, the creditor doesn’t have to pay it back even if “the discharge was given by mistake,” so long as the creditor “did not have notice of the transferor’s mistake.” The idea here is, roughly, that if someone owes you money and it gets paid back, you should be able to assume that the payment belongs to you, even if it came to you at an unexpected time. After all, in some sense, it’s your money, since it was owed to you.

In 1991, the New York Court of Appeals, the highest court in the state, directly considered the issue of which rule should prevail in a case involving electronic transfers. (The case was called Banque Worms v. Bankamerica — a case name for the ages, if you ask me.) The application of that precedent to the Citi-Revlon case will likely determine the outcome.

The court in the Banque Worms case explained that there was especially good reason to apply the discharge for value rule when it came to electronic transfers, which at the time were still a relatively new financial technology. Its logic was that people need to rely on the finality of such transfers — once they are made, the thing is done. The court even added a self-interested, pro-New York argument, namely that “this state is considered the national and international center for wholesale wire transfers.” Getting the law right would therefore be good for business.

The court therefore adopted the discharge for value rule because it was “consistent with and furthers the policy goal of finality in business transactions.” It framed the rule this way:

When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.

That sounds good for Revlon’s creditors; but not so fast. The creditors will only get to keep the money under the Banque Worms precedent if they had “no knowledge” that the money was transferred to them by mistake. That leaves the question of whether sophisticated financial actors like the creditors knew the money they were getting was received in error.

Technically, that’s a question of fact: Did the creditors know this was a blunder? The reality is that they must have known it almost instantaneously. No creditor expects to get the full principal from a sophisticated borrower when only interest is owed. The creditors were already angry at Revlon for allegedly eroding the value of their collateral. It seems almost unimaginable that they thought Revlon was somehow making their dreams come true.

Furman, the judge in the case, is one of the intellectual stars of the Southern District. He knows how to be skeptical of parties who describe their motives in sketchy terms. His long opinion on the Trump administration’s outrageous efforts to add a citizenship question to the census was what convinced the Supreme Court, in particular Chief Justice John Roberts, the swing voter, to rule against the government.

It seems extremely likely that Furman will conclude that the creditors had knowledge — knowledge based on their common sense — that the payments were erroneous. I expect them to have to pay the money back. The basic moral intuition against unjust enrichment will prevail over the more abstract interest in finality.

In a world where apps enable us to split checks using electronic transfers, the decision will be an important precedent beyond the rarefied world of corporate finance.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Feldman is a Bloomberg Opinion columnist and host of the podcast “Deep Background.” He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”



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