Citi Faces ‘Finders Keepers’ in Fighting $500 Million Ruling

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.

Citi Faces ‘Finders Keepers’ in Fighting $500 Million Ruling

In 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.

Instead 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.

The 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’ Error

Citigroup 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.

“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 Law

That 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.”

Certainly 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).

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