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- Bloomberg
Citigroup Wants Extended Freeze on Mistaken Revlon Payments
(Bloomberg) -- Citigroup Inc. will seek to extend a court order freezing more than $500 million the bank accidentally sent to Revlon Inc. creditors last summer while it challenges a ruling that it can’t recover the funds.In a court filing Tuesday, the bank told U.S. District Court Judge Jesse Furman that it will ask him to issue an injunction putting a hold on the funds while it appeals his refusal to force a group of Revlon creditors to return the money.Read More: Citi Loses Bid to Recoup Massive Mistake in Surprise RulingFurman last week rejected the bank’s attempt to recover $504 million it accidentally sent to asset managers for Revlon lenders. They include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management.The lenders -- some of whom were locked in a bitter restructuring battle with Revlon when they received the payments -- oppose Citigroup’s request to extend the judge’s orders freezing the funds.The current freeze remains in effect pending the outcome of Citi’s motion.The case is In re Citibank August 11, 2020 Wire Transfers, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).(Updates with freeze remaining in effect pending outcome of motion)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
- Bloomberg
Citi Faces ‘Finders Keepers’ in Fighting $500 Million Ruling
(Bloomberg) -- A 30-year-old legal precedent that essentially says “finders keepers” in certain financial transactions will make it hard for Citigroup Inc. to get a half-billion-dollar decision against it overturned.The bank has said it will appeal the ruling -- issued Tuesday by a federal judge -- that rejected its attempt to recover $504 million it accidentally sent to asset managers for Revlon Inc. lenders last summer. The recipients include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management.It won’t be easy, said Columbia Law School professor Eric Talley, an expert in corporate law and finance. “Citi has a reasonable chance on appeal, but this outcome will create some stiff headwinds,” Talley said.Citigroup’s shares pared gains on the verdict, and finished Tuesday up less than 1%. The stock has gained 4% this year.Read More: Citi Loses Bid to Recoup Massive Mistake in Surprise RulingIn a 101-page ruling, U.S. District Judge Jesse Furman in New York said the outcome of the case was surprisingly straightforward, even if it may not seem the fairest result.“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” Furman wrote. “The accompanying notices referred to interest being ‘due,’ and the only way in which that would have been accurate was if Revlon was making a principal prepayment.”The key precedent is a 1991 New York state court case called Banque Worms v. BankAmerica International. In that case, New York’s highest court ruled that under a principle called discharge for value, when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it didn’t realize it was sent in error and didn’t make any misrepresentations.QuickTake: ‘Unjust Enrichment’ and Citi’s $900 Million ErrorInstead of making an interest payment as administrative agent on the Revlon loan, Citibank paid the full outstanding $900 million, and out of its own pocket. Some of the recipients returned the money.Applying the testimony in the Citibank case to the law spelled out in the Banque Worms decision, Furman said the central issue at hand was whether, at about 6 p.m on Aug. 11 -- at the moment of the mistaken transfer -- the lenders were all “on constructive notice of Citibank’s mistake.” Ticking through the evidence, he found they weren’t.That’s a challenge for Citibank, Talley said.It can argue that Furman simply interpreted the facts incorrectly when he found that the lenders had no reason to believe the payment was in error, he said. But “because appellate courts are a step removed from the trial, they tend to be much more deferential to trial court judges’ interpretation of the facts,” Talley said.Read More: Citi Trial Shows Chain of Gaffes Leading to $900 Million BlunderThe bank may have more luck arguing that Furman got the law wrong, when he found that the lenders could have reasonably expected that Citibank was paying off the loan since they received the exact amount they were owed -- despite the fact that the full debt wasn’t due yet.“To take the most likely example, Citi might argue that the discharge-for-value defense doesn’t apply unless the debt is due and payable, which it wasn’t here,” Talley said. “And thus the trial court judge just got it wrong on the ingredients of the claim. This type of claim is probably their best chance on appeal, because it involves very little deference by the appellate court.”‘Virtually Inconceivable’ ErrorCitigroup on Tuesday said Furman got it wrong.“We strongly disagree with this decision and intend to appeal,” Danielle Romero-Apsilos, a spokeswoman for the bank, said in a statement after the ruling. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.” The bank had no additional comment.Furman said representatives of each lender “credibly and persuasively testified that they reasonably believed the payments were intentional prepayments” of the 2016 loan. The judge rejected Citibank’s claim that the size of the transfer alone should have alerted the lenders to the blunder.Given that banks have security procedures to ensure that such mistakes don’t occur, “it would have been virtually inconceivable to a reasonable investor in [the lenders’] position that Citibank had wired nearly $900 million by mistake,” Furman said.Read More: Citi Trial Puts Banks on Notice to Ensure They’re Not Next“Citigroup has an uphill battle succeeding on an appeal,” said Braden Perry, a partner at Kennyhertz Perry and an expert on legal and regulatory matters. The judge found that the bank’s “six eyes” system, in which three people must approve a transaction, “broke down after a contractor checked the wrong box on a digital payment form,” he noted.“The court recognized the likelihood of an appeal and kept its TRO in place for the funds,” Perry said of the temporary restraining order Furman put on the use of the money. “The trial court followed the Banque Worms precedent, and we will soon see if the appellate court will do the same.”The judge brushed aside some of Citigroup’s other arguments, including its claims that allowing the transfer to proceed was simply unfair and that the New York state rule is bad law. Those arguments are “squarely foreclosed” by the decision in Banque Worms, Furman said.“The problem for Citibank is that the court does not write on a blank slate,” he wrote.Power to Change LawThat doesn’t mean the law is unchanging. While the federal appeals court in Manhattan, which would hear the bank’s appeal, doesn’t have the power to change state law, New York’s top court can revisit its own decision. It might do just that if it finds, as Talley does, that Tuesday’s ruling “was probably not a good development for the most sensible evolution of the law.”Opinion: Citigroup-Revlon Ruling Shows a Need for New LawsCertainly the bank seemed to score its share of points at the trial in December, where Citibank argued that the transfers were a clear error and that the firms had no right to them.Under questioning by a lawyer for the bank, a senior loan operations associate at Symphony testified that it’s standard practice to look into fund transfers made without notice and to return the money if it was sent in error. He said he had seen money sent by mistake to his firm or to counterparties before.“We would review the wire, confirm it was a mistake” and, if “money was not owed, we would send it back,” he testified. Asked whether mistaken interest payments were common, he said they were.The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).(Adds Perry’s analysis under ‘Virtually Inconceivable’ Error.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
- Bloomberg
Citi May Get Stuck With Huge Chunk of Distressed Revlon Debt
(Bloomberg) -- It was hardly the role Citigroup Inc.’s bankers signed up for when they helped Ron Perelman’s Revlon Inc. borrow $1.8 billion in 2016. But, now a back-office blunder is leaving the financial behemoth faced with the prospect of becoming one of the biggest creditors to the troubled cosmetics empire.A surprise ruling by a New York judge on Tuesday blocked Citigroup’s efforts to recover $500 million it had mistakenly sent Revlon’s lenders last year as the so-called administrative agent on the company’s loan. While the bank says it will appeal the decision, a failure to overturn it will leave Citigroup holding the bag on the bulk of the $900 million remaining on the loan that Revlon hasn’t itself paid.“Revlon’s loan was never paid off. So if appeals fail, Citi will ultimately step into the shoes of the lenders and own $500 million of that nearly $900 million term loan.” said Philip Brendel, a senior distressed debt analyst at Bloomberg Intelligence.Representatives for Citigroup and Revlon declined to comment.In an extra twist of irony, Citigroup would also be holding a loan that -- just nine months ago -- Revlon’s lenders had accused the cosmetics company of defaulting on when it moved certain intellectual property to receive another loan. In that situation, the angry creditors had sent the default notice to Citigroup as administrative agent.Agent JobThe typically sleepy loan agent role tasks a bank with collecting and distributing interest payments, managing amortization schedules and providing other housekeeping services while maintaining contractual obligations to both a borrower and its lenders. It isn’t high-fee work, but is seen as necessary to gain more lucrative underwriting and advising mandates.Administrative agents have been sued by aggrieved borrowers before, and they’ll often resign when creditor disputes get heated, citing guidance from credit agreements borrowers enter with their lenders.Tuesday’s ruling thrusts Citi in an unlikely position alongside the likes of Highland Capital and Investcorp Credit Management, Revlon lenders that received the mistaken payment but opted to return the funds. Firms including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management were dealt a victory after keeping the transferred money, effectively making them whole on their investments.What’s more, Citi effectively paid in full for a deeply distressed loan. The debt, which is due in 2023, was last quoted at around 43 cents on the dollar, according to data compiled by Bloomberg, raising the possibility that the bank could take another hit if it has to mark the position down to current levels.Fight Continues”An interesting question remains in the wake of this opinion,” Columbia Law School professor Eric Talley said in an interview. “Does Citibank now try to recover from Revlon? In other words, they might claim they have purchased the loan from the lenders, and now Revlon owes Citibank.”Revlon has been struggling to stem falling sales and fend off upstart beauty companies. The pandemic made its finances worse as customers staying at home had fewer reasons to buy new makeup.The fight over the mistaken transfer is far from over. Citi has vowed to appeal the case, and Brendel said future lawsuits against Citi and Revlon are also possible.Read more: Citi Faces ‘Finders Keepers’ in Fighting $500 Million RulingFor now, the firms can keep the money, pending an appeal, but can’t spend it, U.S. District Judge Jesse Furman ruled. The judge said prior court decisions forced him to conclude that the lenders were entitled to hold on to the money.“I’m pleased the clients’ decision to retain the funds, not withstanding Citibank’s demand to have them returned, has been validated by the court” applying previous legal precedent, Ben Finestone of Quinn Emanuel Urquhart & Sullivan said.Representatives for Brigade and HPS declined to comment. Symphony didn’t immediately return messages seeking comment.The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).(Updates to add Symphony Asset Management in eighth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
