Citi Asks Appeals Court to Fix Its $500 Million Revlon Error
Citi’s $500 Million Blunder Back in Court as Bank Argues Appeal
(Bloomberg) -- Citigroup Inc. tried to persuade an appeals court that disgruntled Revlon Inc. creditors should give back more than half a billion dollars the bank accidentally sent them last year.
A trio of federal judges in Manhattan heard arguments from both sides Wednesday on whether it should reverse a lower court’s surprise decision that the lenders can keep the money -- a decision Citigroup’s main banking unit calls a misapplication of the law that sent “shockwaves through the markets.”
Neal Katyal, a lawyer for Citibank, told the panel that the lenders should have been skeptical of the payments because they never received formal notice that Revlon’s 2016 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.
“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.
‘Borderline Irrational’
Kathleen Sullivan, representing the lenders, said the decision needs to stand because those who receive funds from a third party “should not have to wonder” if the payments are legitimate. Prepaid loans “are the norm” in the industry, and lenders shouldn’t have to wait for formal notices that sometimes never arrive, she argued, adding that the lenders “reasonably believed this was an intentional prepayment.”
A lawsuit filed against Revlon two days after the error -- which alleged that the cosmetics company had used the intellectual property rights serving as collateral for the 2016 loan for a series of other transactions -- helped cement that thinking, Sullivan said.
“They thought this was a litigation tactic,” she said, adding that “it would have been unreasonable to think this was an unprecedented mistake by a bank like Citibank. It would have been borderline irrational.”
Katyal countered that when payments are made outside of the terms of a loan agreement, and there isn’t any formal notice, almost any lender would reach out to confirm the payments were made on purpose.
“They never expected this money until 2023 anyway. They want now a windfall,” he said.
‘Discharge for Value’
Citibank, which sued the lenders for the money last year, could get the decision overturned, but it won’t be easy, said Bloomberg Intelligence senior litigation analyst Elliott Stein. It would require the appeals panel to dial back the lenders’ key legal defense “in a way that undermines finality in business transactions and shifts responsibility for catching errors to creditors,” he said.
Stein noted that the federal judges could also kick the case over to New York’s highest court for its views, an option at least one judge on the panel on Wednesday indicated was a distinct possibility.
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. In the Citibank case, the bank was trying to make an interest payment to one of the cosmetics company’s creditors in August 2020 -- acting as administrative agent on the loan -- when a series of employee errors led to a mistaken transfer of more than $900 million to other lenders.
Some returned the money, but a group including Brigade Capital Management LP, HPS Investment Partners LLC and Symphony Asset Management refused, saying Revlon had already defaulted on its obligations under the 2016 term loan and should have repaid them by that point. Citibank sued the lenders for the $504 million it hadn’t recovered. Following a two-week trial in December, U.S. District Judge Jesse Furman ruled for the Revlon lenders in February, saying they shouldn’t have been expected to know the transfer was in error.
‘Mistakes Do Happen’
Furman’s decision was a windfall for the creditors, which had been battling Revlon, controlled by billionaire investor Ronald Perelman, over its May 2020 restructuring. It was a black eye for Citibank, which was forced to explain the embarrassing blunder to regulators, including the Office of the Comptroller of the Currency and the Federal Reserve. Chief Executive Officer Jane Fraser in June called it a “massive unforced error” and showed examples of manual processes that need to be automated.
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, “mistakes do happen” and participants routinely return incorrect payments.
The creditors say that courts have placed the burden of reconciling mistaken transfers on the banks, rather than the recipients. They say Citibank’s arguments ignore the fact that there had never been a mistaken payment of the exact amount of an outstanding loan like the one in the case.
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).
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