Citigroup wins appeal in $500 million Revlon transfer deal


(Bloomberg) – A federal appeals court saved Citigroup Inc. from an epic blunder that got Wall Street talking, overturning a ruling that Revlon Inc.’s creditors could keep more than half a billion dollars that the bank had accidentally sent to them.

After a ruling process one expert likened to “The Twilight Zone,” a trio of judges in Manhattan on Thursday overturned a surprise trial court ruling early last year that lenders — which include Brigade Capital Management LP, HPS Investment Partners LLC and Symphony Asset Management – failed to return $504 million, the bank mistakenly wired them in 2020.

The appeal decision is a major victory for Citigroup’s main banking unit in its effort to redeem the embarrassing default, which forced the bank to explain to regulators how such a failure was possible. Chief Executive Officer Jane Fraser called it a “massive direct error” and showed examples of manual processes that needed to be automated.

“Today’s decision reaffirms our long-standing belief that these erroneously transferred funds should be returned under the law, as well as ethics,” a Citigroup spokesperson said in a statement. “While Citi has taken steps to reduce the likelihood of such an error in the future, today’s decision provides welcome stability and confirms the concept of cooperation necessary for the well-functioning syndicated loan market.”

“A great victory”

Bloomberg Intelligence senior analyst Elliott Stein called the reversal a “big win” for the bank, but also a surprise.

“While we thought this was a very close case, it appeared after oral argument that the federal appeals court would refer the case to the highest court in New York State to clarify the main issue. legal regarding the ‘discharge for value’ rule,” he said. He was referring to a defense established by a 1991 New York court ruling that creditors can keep money sent to them by mistake if they don’t realize the transfer was an accident.

Instead, in deciding the case for itself, the panel “ruled that promoting the finality of transactions, while important, should not be elevated above returning erroneous payments in these circumstances,” Stein said.

Read more: Citibank asks Court of Appeals to correct its $500 million Revlon error

Eric Talley, a Columbia Law School professor who is an expert in corporate law and finance, said the judges “got the right result” but added that “the delay was significant and costly”.

“Stuck in Limbo”

“It stuck Revlon’s bankruptcy in limbo,” Talley said. “It will clear things up in the future, but it really felt like an episode of ‘Twilight Zone,’ without a peek from the court and the parties trying to figure out how to reorganize Revlon’s debts in the meantime.”

Creditors had been locked in a bitter battle with Revlon and Ronald Perelman, the billionaire whose holding company controls the cosmetics maker, over its May 2020 restructuring.

Representatives for Brigade, HPS and Symphony declined to comment on Thursday’s decision.

The August 2020 mess took place as Citigroup tried to send an interest payment to some Revlon lenders. Instead, the bank accidentally paid all of the creditors on the loan, over $900 million. He managed to recover nearly half of the funds, but other lenders refused to return their sums, saying Revlon had already defaulted and should have repaid them.

In a painfully bad moment, the bank was about to step down from its role as administrative agent on the loan when it wired the huge sum to the lenders.

Boon for creditors

U.S. District Judge Jesse Furman ruled for creditors in February 2021, saying they shouldn’t have known the transfer was a mistake. The decision was a boon for them.

Read more: Citibank loses bid to recover massive mistake in surprise decision

At a hearing last year, Neal Katyal, a lawyer for the bank, told the three-judge appeal panel that the lenders should have been skeptical about the payments because they never received formal notification indicating that the Revlon term loan was paid off. He noted that the loan was trading as low as 20 cents on the dollar and that some creditors believed Revlon was insolvent, and said six of the 10 lenders weren’t even aware of the transfers until Citigroup told them. inform.

“All those red flags” should have caused them to ask “one of the millions of questions that would have led to the discovery of the error,” Katyal said.

Kathleen Sullivan, representing the lenders, told the panel that the ruling should stand because those receiving funds from a third party “shouldn’t have to wonder” whether the payments are legitimate.

“On the edge of the irrational”

“It would have been unreasonable to think that this was an unprecedented mistake on the part of a bank like Citibank,” she argued. “That would have been borderline irrational.”

Katyal said Thursday he was “satisfied” with the decision.

“The idea that a mistake would lead to a finder-guard rule would be destabilizing for financial markets,” he said. ” It was a mistake. Humans make mistakes.

Long after the payment error, Revlon filed for Chapter 11 bankruptcy as the global supply chain crisis proved to be the tipping point for the debt-ridden company. The bankruptcy filing capped a tumultuous period for the cosmetics giant, owned by Perelman’s MacAndrews & Forbes, which has suffered during the pandemic after years of declining sales and financial controversies.

Read more: Revlon files for bankruptcy amid supply issues and loan controversy

Revlon and some of its creditors refused to recognize the bank’s rights as a secured lender in the company’s bankruptcy financing. Citigroup sued the company to resolve the nagging legal question of whether, after the accidental payment of $900 million to Revlon’s lenders, it would become a lender itself.

Thursday’s decision could mean that lenders who were paid by Citigroup before the bankruptcy filing will have to return the funds to the bank, resolving the question of who is or is not a Revlon creditor.

Rare Window on Courtyard

The opinions of the three-judge panel provide a rare window into his disagreements on the case.

“In my view, this is a simple matter that many intelligent people have over-complicated and which we should have decided months ago,” Circuit Judge Michael Park said in a separate opinion in agreement with the result. “Simply put, you can’t keep money sent to you by mistake unless you’re entitled to it anyway.”

Read more: A bank error in your favor – Citi’s fight to recover $900 million

Responding to Park’s complaint, Judge Pierre Leval acknowledged in an addendum to the main opinion that the decision “took a long time to produce” and said, “I take full responsibility for it.”

Leval said he and Judge Robert Sack initially decided to ask the New York Court of Appeals, the state’s highest court, for a ruling. He said they changed course because they were persuaded by the bank’s arguments and felt the Court of Appeals route could add more than a year to the backlog.

“Subtle Matters”

“Furthermore, we did not find the answers as simple, obvious and easy as Judge Park,” Leval wrote. “The arguments put forward for the parties by their exceptionally capable counsel raise complex and subtle issues that have required attention and study.”

Park, who was appointed to the court by former President Donald Trump, is the junior member of the panel.

A number of law professors, advocacy groups and industry associations sided with the bank, saying Furman’s move had already disrupted the functioning of the market and changed the expectations of its participants.

One of the briefs supporting the bank’s position was filed by the Loan Syndications and Trading Association, a nonprofit group that represents more than 500 companies involved in loan origination, syndication and trading. commercial companies, including Citigroup and most of the creditors in the case.

LSTA General Counsel Elliot Ganz said in a statement Thursday that the appeal decision is consistent with “long-standing market expectations and standards that where erroneous payments are sometimes made, money is promptly returned.”

The case is Citibank NA v. Brigade Capital Management LP, 21-487, 2nd US Circuit Court of Appeals (Manhattan).

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