Citigroup’s $500 million blunder ends in a win for the Bank

(Bloomberg) — A federal appeals court saved Citigroup Inc. from an epic blunder that became the talk of Wall Street, rejecting a ruling that creditors of Revlon Inc. they could keep more than half a billion dollars that the bank accidentally sent them.

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After a ruling process that one expert compared to “The Twilight Zone,” a trio of judges in Manhattan on Thursday overturned a trial court’s surprise decision early last year that the lenders — which include Brigade Capital Management LP , HPS Investment Partners LLC and Symphony Asset Management — did not have to return $504 million, the bank mistakenly connects them in 2020.

The appeals decision is a major victory for Citigroup’s main banking unit in its efforts to buy back the embarrassing error, which forced the bank to explain to regulators how such a failure was possible. CEO Jane Fraser called it a “massive unforced error” and pointed to examples of manual processes that should have been automated.

“Today’s decision reaffirms our long-standing belief that these wrongfully transferred funds must be returned as a matter of law, as well as morality,” a Citigroup spokesman 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 supports the idea of ​​cooperation needed for a well-functioning syndicated lending market.”

“A big win”

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

“While we thought it was a very close case, it appeared after oral arguments that the federal appeals court would send the case to the New York state supreme court to clarify the main legal issue regarding the ‘exemption for value’ rule,” he said . He was referring to a defense established by a New York court ruling in 1991 that creditors can keep money sent to them in error if they did not realize the transfer was an accident.

Instead, deciding the case on its own, the panel “decided that promoting finality in transactions, while important, should not override the return of erroneous payments in this case,” Stein said.

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

Columbia Law School professor Eric Talley, an expert on corporate law and finance, said the justices “reached the right result” but added that “the delay was significant and costly.”

“Stuck in Limbo”

“It’s made the Revlon bankruptcy hang in the balance,” Talley said. “That will clear things up in the future, but it really felt like a ‘Twilight Zone’ episode, with no hearing from the court and the parties trying to figure out how to restructure Revlon’s debts in the interim.”

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

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

The August 2020 bungle occurred as Citigroup attempted to send an interest payment to some of Revlon’s lenders. Instead, the bank mistakenly paid all of the loan’s creditors — more than $900 million. He managed to recover nearly half of the funds, but other lenders refused to repay their sums, saying that Revlon had already defaulted and should have repaid them.

In a painful piece of bad timing, the bank was preparing to relinquish its role as managing agent for the loan when it sent the huge sum to the lenders.

Unexpected for creditors

US District Judge Jesse Furman ruled for the creditors in February 2021, saying no one should have been expected to know the transfer was a mistake. The decision was unexpected for them.

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

In a hearing last year, Neal Katyal, a lawyer for the bank, told the three-judge appeals panel that lenders should have been suspicious of the payments because they never received formal notice that Revlon’s term loan was paid off. He noted that the loan traded as low as 20 cents on the dollar and that some creditors believed Revlon was insolvent, and said six of the 10 lenders did not even know about the transfers until Citigroup notified them.

“All these red flags” should have led them to ask “any of the millions of questions that would lead to the discovery of wrongdoing,” Katyal said.

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

“Borderline absurd”

“It would be absurd to think that this was an unprecedented mistake by a bank like Citibank,” he argued. “It would be borderline absurd.”

Katyal said Thursday that he was “delighted” by the decision.

“The idea that one mistake would lead to a gatekeeper rule would be destabilizing for financial markets,” he said. “That was wrong. People make mistakes.”

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

Read more: Revlon Files Bankruptcy Amid Supply Problems, Loan Dispute

Revlon and some of its creditors have refused to recognize the bank’s rights as a secured lender in the company’s bankruptcy financing package. Citigroup sued the company to resolve the vexed 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 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 creditor of Revlon.

Rare window on the pitch

The three-judge panel’s opinions provide a rare window into its disagreements over the case.

“In my view, this is a clear-cut case that many intelligent people have overcomplicated and that we should have decided many months ago,” U.S. District Judge Michael Park said in a separate opinion, concurring in the outcome. “Simply put, you can’t keep money that’s sent to you in error unless you’re entitled to it anyway.”

Read more: Bank error for your benefit — Citi fights 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 issue” and said: “I take sole responsibility for that.”

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

“Thin Questions”

“Furthermore, we did not find the answers as clear, obvious and easy as Judge Park,” Leval wrote. “The arguments advanced for the parties by their highly skilled counsel raise complex, delicate questions that require careful consideration and study.”

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

Several law professors, advocacy groups and industry associations sided with the bank, saying the Furman decision had already disrupted the way the market worked and changed participants’ expectations.

One of the documents 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 originating, syndicating and negotiating commercial loans, including both Citigroup and most of creditors of the case.

LSTA general counsel Elliot Ganz said in a statement Thursday that the appeals decision is consistent with “long-standing expectations and market norms that when erroneous payments are made occasionally, the money is quickly returned.”

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

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