Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling
Pedestrians walk past a Citibank branch in Chicago, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)

Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling

Citigroup Inc. unexpectedly lost a legal battle to recover half a billion dollars it sent Revlon Inc. lenders, after the embarrassing blunder forced it to answer to regulators and tighten its internal controls.

U.S. District Judge Jesse Furman on Tuesday ruled that 10 asset managers for the lenders -- which include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management -- don’t have to return $504 million that Citibank said it mistakenly transferred in August while trying to make an interest payment. He said they shouldn’t have been expected to know that the transfer, which totaled more than $900 million before some lenders returned their share, was an error.

“To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion would have been borderline irrational,” wrote Furman, who presides in Manhattan.

Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling

The decision is the latest blow to Citigroup, which is in the midst of a yearslong effort to update its underlying controls and technology after regulators slapped it with a $400 million fine for deficiencies in both areas last year. The New York-based company is also undergoing a leadership change, with incoming Chief Executive Officer Jane Fraser set to take the reins on March 1.

Not Over Yet

“We strongly disagree with this decision and intend to appeal,” Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in a statement. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”

Robert Loigman of Quinn Emanuel, the law firm representing the investment firms, said they were “extremely pleased with Judge Furman’s detailed and thorough decision.”

Citigroup briefly pared gains on the news, but its shares were up 0.9% at $64.18 at 12:33 p.m. in New York.

“The court was constrained by New York precedent favoring finality in business transactions,” Bloomberg Intelligence senior analyst Elliott Stein said. “Still, it likely isn’t the end of the road for this litigation.” In addition to appealing the ruling, the bank “may also seek to recoup the mistakenly transferred funds from Revlon, which may result in more litigation,” he said.

The decision is a boon to the creditors, which have been locked in a battle with billionaire investor Ronald Perelman’s struggling cosmetics company over its May restructuring. They argued that the Aug. 11 payment -- one of the biggest banking errors in recent memory -- settled Revlon’s debt to them under a 2016 term loan, didn’t look like a mistake when it arrived and was theirs to keep. They can keep the money, pending an appeal, but can’t spend it, the judge said.

Representatives of Brigade and HPS declined to comment. Symphony didn’t immediately return messages seeking comment.

Impact on Industry

The ruling could also have a lasting impact on the role administrative agents play in the syndicated loan industry by exposing them to higher operational and regulatory risks.

Furman said prior court decisions forced him to conclude that the lenders were entitled to take the money.

“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” he said in his decision. “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 judge said New York’s top court adopted a “discharge for value” rule almost 30 years ago, making it clear that banks making wire transfers to creditors should bear the risk of loss in case of a mistake, and fees for such payments have remained low. The “disastrous consequences” predicted in the wake of that decision haven’t happened, Furman said, proving the court’s conclusion that transferring banks are the best parties positioned to avoid errors.

Read More: Citi Had ‘Six Eyes’ on $900 Million Blunder Before It Went Out

Citibank “took that role seriously in adopting the six-eye approval process for wire transfers of the kind made here,” he wrote. “And while that process obviously failed in this instance, the unprecedented nature of the mistake in this case suggests that it has generally been successful. Moreover, banks could -- and, perhaps after this case, will -- take other relatively costless steps to both minimize the risk of errors and increase the probability of clawing back erroneous payments.”

It isn’t yet clear how the court decision will affect Revlon’s existing capital structure. The debt-laden cosmetics company contended earlier in the case that the money sent to lenders came from Citibank alone and not from Revlon’s own accounts. The loan due 2023 is quoted at below half its face value, around 43 cents on the dollar, according to Bloomberg data. Revlon, which wasn’t directly involved in the litigation, narrowly avoided a bankruptcy filing last year.

A representative of Revlon declined to comment.

Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling

‘Thumbed Their Nose’

At the trial in December, which was held by videoconference, executives of the asset managers testified that they had no reason to believe the wire transfers were an error. They said the sum was what they were owed, and although the credit agreement required three days’ notice for an early full payment of the loan -- notice the recipients didn’t get -- Revlon and the bank had breached the agreement before.

The pair “had really thumbed their nose” at the pact, including in the May restructuring, Scott Caraher, head of loans at Symphony, testified.

Caraher described the relationship between Symphony, Revlon and Citibank as contentious and complicated.

“It’s not that we didn’t want to return the money,” he said. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess.”

Clear Error

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 error was a painful lesson for the bank, which had to explain it to the Office of the Comptroller of the Currency and the Federal Reserve.

The judge wrapped up the six-day trial on Dec. 16 with a warning.

“The industry should figure out a way of dealing with these things even if this was a black swan event,” he said. “Whatever my ruling is in this case, I hope the world, the market takes notice of what’s happened here and the uncertainties that have resulted.”

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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