UPDATE: Dec. 3, 2020: Lawyers representing Citi and creditors of Revlon reassured Judge Jesse Furman during a hearing Thursday that most defendants could proceed in a case in which the nation's third-largest bank sued creditors of the cosmetics company who refused to return their portions of a $900 million loan payoff Citi said was a mistake.
The hearing came a day after Furman raised concerns that he would have to dismiss the case without prejudice because of a jurisdiction technicality.
“I’m relieved in that it seems like it won’t blow up the trial on this issue,” Furman said Thursday, according to Reuters.
The trial is set to start Dec. 9.
- A federal judge presiding over the court case between Citi and some of cosmetics giant Revlon's creditors, to whom the bank errantly transferred $900 million in August, is questioning whether the trial, set to start Dec. 9, should be scrapped because of improper jurisdiction.
- 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, a concept known as diversity jurisdiction.
- A hearing Thursday will determine how Judge Jesse Furman of the U.S. District Court for the Southern District of New York will proceed. "The court is not prepared to make matters worse by commencing trial if the issue is in doubt," Furman wrote in an order Wednesday, according to Bloomberg.
In the case, Citi subsidiary Citigroup NA, based in South Dakota, is suing Brigade Capital Management, HPS Investment Partners and Symphony Asset Management to get back the portions of the $900 million a bank employee erroneously transmitted to the firms.
The Citi employee, manually adjusting the creditors' share of what was intended to be a payoff of several months' interest, selected the wrong option and transferred the entirety of a 2016 Revlon loan to the cosmetics company's creditors. Citi was serving as administrative agent on the loan, a role it has since ceded.
The transaction caught the attention of bank regulators, who had long warned Citi to update the patchwork of loan operation software systems it uses. The Office of the Comptroller of the Currency (OCC) fined Citi $400 million in October to prod the bank to solve its risk management, data governance and internal controls woes. The Federal Reserve is also demanding the bank submit a report by January detailing how it will hold senior management accountable for errors in those arenas.
Citi has said it is spending $1 billion this year to improve its risk management frameworks and controls, but the threat of regulator reprimand prompted the bank's CEO, Michael Corbat, to push up his intended retirement date to February, so his successor, Jane Fraser, could, in Corbat's words, "lead this important work from the beginning."
Other Revlon creditors returned their share of the money to Citi after the bank recognized the $900 million error, but the defendants held firm. "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 an August court filing. The creditors were "lawfully owed every penny that was transferred by Citibank in Revlon's name," and couldn't have known the payments were made in error, Brigade added.
Because the defendants in the case are limited liability corporations or partnerships, which are deemed to be citizens of all the states where their partners or members are citizens, it is likely that one or more holds citizenship in South Dakota and can't be sued in federal court.
In that case, "the court would have no choice but to dismiss the case without prejudice," Furman wrote, according to Bloomberg. However, Citi could refile the lawsuit in state court.
Spokespeople for Citi and Brigade declined to comment to the wire service about the judge's order. Lawyers for both sides didn't respond to requests for comment.