UPDATE: May 3, 2021: Lawyers for Citi on Thursday filed paperwork asking the 2nd Circuit Court of Appeals to overturn a February district court ruling that allowed Revlon creditors to keep more than $500 million the bank said it accidentally sent them in August 2020. Oral arguments in the appeal are set for August or September.
Judge Jesse Furman’s use of discharge for value in his ruling expands “far beyond” the standard’s “historical bounds,” applying, in the judge’s eyes, “regardless of whether a creditor is entitled to the funds when they arrive,” the bank wrote Thursday, according to Bloomberg.
“Even though defendants had every reason to suspect a mistake had occurred, the district court held that a reasonably prudent inquiry would not have led defendants to discover that Citibank’s payment was a mistake,” the bank wrote, adding that the $500 million came three years ahead of schedule from the account of Citi, “which owed no money to any of the lenders on Revlon’s loan.”
Benjamin Finestone, a lawyer representing the creditors, called Citi’s points “rehashes of arguments considered and thoughtfully rejected by the District Court,” Bloomberg reported Friday.
Citi lost its legal battle with creditors of cosmetics firm Revlon on Tuesday after a federal judge ruled the asset managers do not need to return $504 million the bank sent them by mistake in August.
After a six-day December trial, Judge Jesse Furman of the U.S. District Court for the Southern District of New York ruled the wire transfers made by Citi, acting as Revlon's loan agent, were "final and complete transactions, not subject to revocation."
- Human error led Citi to mistakenly transmit $900 million to creditors on a 2016 Revlon loan, instead of the $7.8 million interest payment it intended to send, the bank said in a court filing in August. Although some asset managers returned about $385 million of the funds, 10 refused, leading to Citi's lawsuit.
In his 101-page decision, in which he called Citi's error "one of the biggest blunders in banking history," Furman ruled the asset managers are not required to return the money, citing precedent from a 1991 case in which New York's highest court ruled that when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it didn’t realize it was sent in error and didn’t make any misrepresentations — a principle called discharge for value.
"The discharge-for-value defense ultimately turns on whether Defendants (or, more precisely, their clients) were on constructive notice of Citibank's mistake at the moment they received the August 11th wire transfers," Furman wrote. "Based on the credible testimony of Defendants' employees and the documentary record, the Court concludes that they were not."
The asset managers, Furman said, should not have been expected to know the transfer was made in 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," he wrote.
Citi, during the trial, revealed internal chat messages in which employees of some lenders used words such as “unbelievable,” “erroneous,” “accidental” and “overpayment” to describe the sudden payoff of the Revlon loan that was not due until 2023, The Wall Street Journal reported.
However, creditors testified that Revlon owner Ron Perelman had bailed out the cosmetics company before. In November, for example, Perelman’s private-equity firm MacAndrews & Forbes put up some of its own capital to secure a bond restructuring that helped Revlon avoid bankruptcy.
Furman said it was reasonable for the creditors to believe that Revlon and Citi, with Perelman’s help, had “figured out a creative way to pay down” the debt.
“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” Furman wrote 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.”
Asset management executives testified that although the credit agreement with Revlon required three days’ notice for an early full payment of the loan — which the creditors did not receive — Revlon and Citi had breached that agreement before.
“It’s not that we didn’t want to return the money,” Scott Caraher, head of loans at Symphony Asset Management, testified, according to Bloomberg. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess.”
Creditors had been preparing to sue Citi and Revlon through another loan agent they had chosen to replace Citi before the errant $900 million payment came through, The Wall Street Journal reported. The creditors reportedly took issue with a May 2020 effort by Revlon to restructure its debt in ways that would weaken creditors’ claims on some of the brand’s key assets.
Although, under the judge's ruling, creditors don't have to return the $504 million, Furman said the restraining order he issued to freeze the funds in August should remain in force.
Indeed, Citi intends to appeal. "We believe we are entitled to the funds and will continue to pursue a complete recovery of them," Danielle Romero-Apsilos, a bank spokesperson, said in a statement.
In terms of next steps, Citi might argue that the discharge-for-value defense doesn’t apply “unless the debt is due and payable, which it wasn’t here,” Columbia Law School professor Eric Talley told Bloomberg.
Furman noted that Citi took seriously its role as risk bearer, as evidenced by its "six-eyes" policy, in which three people review and execute wire transfers.
"While that process obviously failed in this instance, the unprecedented nature of the mistake in this case suggests that it has generally been successful," Furman wrote. "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.”
Citi, for example, said it was spending $1 billion in 2020 on improving its risk management frameworks and controls. Still, the massive overpayment on the Revlon loan called into question the bank's system of checks and balances, and potentially contributed to the $400 million fine the Office of the Comptroller of the Currency (OCC) levied against Citi in October.
Considering court precedent, however, Citi's realization of its error after the fact could stand as a case of too little, too late, Furman suggested in his decision.
“The problem for Citibank is that the court does not write on a blank slate,” he wrote.