UPDATE: Aug. 19, 2020: A judge on Tuesday gave Citi a temporary court order, freezing nearly $175 million that Brigade Capital Management refused to return after the bank said it mistakenly transferred more than $900 million to lenders of the cosmetics firm Revlon last week. Brigade may not withdraw, transfer or dispose of the money, the judge said.
In other court action Tuesday, Citi filed a lawsuit against HPS Investment Partners and Symphony Asset Management over their refusal to return their shares of the errant payment — $127.3 million for HPS and $109.7 million for Symphony.
And the same judge on Wednesday ordered a temporary freeze on that money, too — bringing to $411.7 million the amount Citi has had frozen out of its $900 million transfer.
“Many lenders are continuing to return Citibank’s money” over the past 24 hours, Matthew Ingber, a lawyer for Citi, told U.S. District Judge Jesse Furman on Wednesday, according to Bloomberg, and the bank is “working closely” with other cooperating companies.
Attorneys for Citi and Brigade were back in court Wednesday. Benjamin Finestone, a lawyer for Brigade and HPS, told Furman the companies don’t think the transfer was a mistake.
“There is strong evidence, your honor, that this was in fact a payoff,” he said, adding the Aug. 11 date of the payment was “odd” because it wasn’t the usual interest payment date.
Lenders should be able to presume the payments they receive are correct and received in good faith without having to refer to past records, Brigade lawyer Robert Loigman said in a letter Tuesday, noting the payments were in the exact amount of principal and interest that Revlon owed, down to the penny.
Furman called that "significant" and asked why Citi sued Brigade rather than the funds Brigade managed.
"To target Brigade as if they were the lender here, it just doesn't work and it doesn't make sense with respect to the type of relief they're seeking," Loigman said Tuesday, according to Reuters.
Furman may decide to hear Citi's request for a preliminary injunction, which would force Brigade to return the money while the case proceeds.
Another hearing is scheduled for later this month, where Brigade must explain why it shouldn't have to give the money back, The Wall Street Journal reported. Additionally, a two-day trial is set to begin in late September to address the combined HPS and Symphony cases.
Neither HPS nor Symphony has returned their payments after repeated emails and requests, Citi said in its suit.
“We’re hopeful we don’t have to file any more lawsuits,” Ingber told Furman.
Elsewhere, Citi resigned Tuesday as lead arranger for a collateralized loan obligation managed by Brigade, according to Bloomberg.
- Citi sued Brigade Capital Management on Monday to get a district court to order the hedge fund manager to return roughly $175 million the bank said it mistakenly overpaid last week due to a clerical error. That amount is just some of the $900 million the bank distributed last week to creditors of cosmetics firm Revlon in connection with a 2016 loan. Citi is the administrative agent on Revlon's loan.
- The bank said it meant to pay several months of accrued interest on the loan. For Brigade, that would have amounted to $1.5 million. However, the bank wired Brigade $176 million. And the money didn't come from Revlon's accounts. Rather, it came from Citi's. The bank has blamed "issues with the loan-processing system."
- Citi moved to recover the money within hours of the transfers, and some of Revlon's lenders have complied. Brigade, however, said Tuesday it can't return the money because it went to other funds.
Revlon's lenders last week sued the cosmetics company, along with Citi, over debt restructuring tactics. Specifically, the lenders claim Revlon moved brands such as American Crew and Elizabeth Arden out of their reach to use the intellectual property as collateral on a separate loan.
Private-equity-backed companies such as Cirque du Soleil also have shifted assets away from lenders to help secure rescue financing amid the pandemic.
Citi, according to Bloomberg, was preparing to resign as administrative agent on the loan when it accidentally wired a total of roughly $900 million to several lenders' accounts, $176 million of which was sent to Brigade. That amount represents full repayment of not just interest but debt that wasn't yet due — and that had been changing hands at less than 30 cents on the dollar as recently as last week.
"Brigade has taken the baseless position that Citibank's overpayment — more than 100 times the amount of the intended transfer — served to pay off Revlon's entire principal balance as well," the bank wrote in its suit Monday. "Brigade's actions are not just unconscionable; they threaten the integrity of the administrative agency function and the trust in the global banking system."
Firing back in a court filing of its own Tuesday, Brigade said it doesn't have the money — and that it isn't a lender per se but an investment manager. "As Citibank is well aware, Citibank wired money to approximately 40 different funds that employ Brigade as their investment/collateral manager, and thus must know that Brigade itself was not a lender and does not have the money for which Citibank is now suing," Brigade said.
The bank has briefed the Office of the Comptroller of the Currency (OCC) and the Federal Reserve on how it misdirected the funds, sources told Bloomberg. The regulators likely won't focus on the cash settlement aspect of the matter — rather on ensuring such errors can't happen again.
Brigade, in an email to Citi, said it was "not at all clear that the funds were sent as a result of 'clerical mistake.'"
The hedge fund manager said Tuesday the lenders were "lawfully owed every penny that was transferred by Citibank in Revlon's name" and that it couldn't have known the payments were made in error.
"It is not believable that a sophisticated institution like Citibank could have transferred nearly $1 billion, in the exact amount outstanding under the 2016 Credit Agreement, in error," Brigade said in its court filing. "How should the lenders have been on notice when Citibank itself cannot explain its story?"
Citi, in its suit Monday, asserted Brigade is "well aware that virtually no company, let alone a distressed retail and consumer company such as Revlon, would ever make such a substantial prepayment while dealing with the significant financial consequences caused by the ongoing pandemic."
Revlon had $415.7 million of liquidity as of June 30, against a debt load of several billion dollars, according to Bloomberg.