Citigroup persuaded a federal appeals court to force a group of Revlon creditors to return more than half a billion dollars it accidentally sent them.
A trio of judges in Manhattan overturned U.S. District Judge Jesse Furman's surprise decision allowing the lenders — which include Brigade Capital Management,
HP Investment Partners and Symphony Asset Management — to keep $504 million they were mistakenly sent in August of 2020.
The appellate decision is a major victory for Citigroup's main banking unit in its efforts to redeem the embarrassing blunder, which captivated Wall Street and forced Citibank to explain to regulators how it made the jumbo mistake. Chief Executive Officer Jane Fraser called it a "massive unforced error" and showed examples of manual processes that need to be automated.
The dispute turns on the "discharge for value" defense, established by a 1991 New York court ruling that creditors can keep money sent to them in error if they didn't realize the payment was a mistake.
$900 million error
Citibank was trying to send an interest payment to Revlon lenders managed by Angelo Gordon & Co., who were swapping their positions in a 2016 term loan for positions in a different credit facility. Instead, the bank accidentally paid all the creditors on the loan — more than $900 million. It managed to recover almost half the funds, but other lenders refused to give their sums back, saying Revlon had already defaulted and should have repaid them.
In a painful piece of bad timing, Citibank was preparing to resign its role as administrative agent on the loan when it wired the huge sum to the lenders.
Furman ruled for the creditors in February 2021, saying they shouldn't have been expected to know the transfer was a mistake. The decision was a windfall for a group of creditors that had been locked in a bitter battle with Revlon and Ronald Perelman, the billionaire whose holding company controls the cosmetics maker, over its May 2020 restructuring.
Separately, Citigroup
At a hearing last year, Neal Katyal, a lawyer for Citibank, told the three-judge appeals panel that the lenders should have been skeptical of the payments because they never received formal notice that the Revlon term loan was being paid off. He noted that the loan was trading as low as 20 cents on the dollar and that some creditors thought Revlon was insolvent, and said six of the 10 lenders didn't even know about the transfers until Citibank notified them.
'Red flags'
"All of these red flags" should have led them to ask "any one of the million questions that would have led to discovery of the mistake," Katyal said.
Kathleen Sullivan, representing the lenders, told the panel the decision needs to stand because those who receive funds from a third party "should not have to wonder" if the payments are legitimate.
"It would have been unreasonable to think this was an unprecedented mistake by a bank like Citibank," she argued. "It would have been borderline irrational."
A number of law professors, advocacy groups and industry associations have sided with Citibank, saying Furman's decision has already disrupted the way the market works and changed the expectations of its participants. One of the briefs in support of the bank's position was filed by the Loan Syndications and Trading Association, a not-for-profit group that represents more than 500 firms involved in the origination, syndication and trading of commercial loans, including both Citigroup and most of the creditors in the case.
The group said that while the syndicated loan market is largely automated, participants routinely return incorrect payments.
"Mistakes do happen," it said.
The appeal is Citibank NA v. Brigade Capital Management LP, 21-487, U.S. Court of Appeals, Second Circuit (Manhattan). The lower-court case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).
— With assistance from Jenny Surane and Katherine Doherty.
