Citigroup’s Mistaken-Transfer Trial at Risk With 11th-Hour Query

(Bloomberg) -- First it was Citigroup Inc. that messed up by erroneously transferring $900 million to Revlon Inc. creditors. Now, a judge wants to know if the bank’s lawyers also messed up by suing for a return of the money in the wrong court.

If so, then a high-profile trial that was scheduled to start next week in New York may have to be scrapped.

The issue threatening the trial is the so-called diversity jurisdiction federal courts have under Article Three of the U.S. Constitution. A federal judge has authority to hear a case if it involves a dispute of more than $75,000 and none of the plaintiffs is a citizen of the same state as the defendants.

In this case, South Dakota-based Citigroup NA, a unit of Citigroup, sued Brigade Capital Management LP, HPS Investment Partners and Symphony Asset Management, among others -- all limited liability corporations and partnerships. Such organizations are deemed to be citizens of all the states where their partners or members are citizens, increasing the likelihood they overlap with Citigroup and can’t be sued in federal court.

“The court is not prepared to make matters worse by commencing trial if the issue is in doubt,” U.S. District Judge Jesse Furman wrote in a Wednesday order, telling lawyers in the case he wants an explanation at a hearing on Thursday.

If Citigroup’s citizenship overlaps with that of the defendants, “the court would have no choice but to dismiss the case without prejudice,” Furman said. That would allow the bank to refile the lawsuit in state court.

A Citigroup spokeswoman declined to comment on the judge’s order. Lawyers for Citigroup didn’t immediately respond to emails and voice-mail messages left after hours seeking comment. Brigade Capital also declined to comment. Lawyers for the other defendants didn’t respond to requests for comment.

Citigroup says it mistakenly sent more than $900 million to Revlon creditors in August while trying to make a much smaller interest payment as administrative agent on Revlon’s loan. The bank recovered almost $400 million but some recipients declined to hand over their share.

The bank sued to get the money back. The trial is scheduled to start on Dec. 9.

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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