Citigroup Inc. unexpectedly lost a legal battle to recover half a billion dollars it sent Revlon Inc. lenders, after the embarrassing blunder forced it to answer to regulators and tighten its internal controls.
U.S. District Judge Jesse Furman on Tuesday ruled that 10 asset managers for the lenders—which include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management—don’t have to return $504 million that Citibank said it mistakenly transferred in August while trying to make an interest payment. He said they shouldn’t have been expected to know that the transfer, which totaled more than $900 million before some lenders returned their share, was an 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,” wrote Furman, who presides in Manhattan.
The decision is the latest blow to Citigroup, which is in the midst of a yearslong effort to update its underlying controls and technology after regulators slapped it with a $400 million fine for deficiencies in both areas last year. The New York-based company is also undergoing a leadership change, with incoming Chief Executive Officer Jane Fraser set to take the reins on March 1.
Not Over Yet
“We strongly disagree with this decision and intend to appeal,” Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in a statement. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”
Robert Loigman of Quinn Emanuel, the law firm representing the investment firms, said they were “extremely pleased with Judge Furman’s detailed and thorough decision.”
Citigroup briefly pared gains on the news, but its shares were up 0.9% at $64.18 at 12:33 p.m. in New York.
“The court was constrained by New York precedent favoring finality in business transactions,” Bloomberg Intelligence senior analyst Elliott Stein said. “Still, it likely isn’t the end of the road for this litigation.” In addition to appealing the ruling, the bank “may also seek to recoup the mistakenly transferred funds from Revlon, which may result in more litigation,” he said.
The decision is a boon to the creditors, which have been locked in a battle with billionaire investor Ronald Perelman’s struggling cosmetics company over its May restructuring. They argued that the Aug. 11 payment—one of the biggest banking errors in recent memory—settled Revlon’s debt to them under a 2016 term loan, didn’t look like a mistake when it arrived and was theirs to keep. They can keep the money, pending an appeal, but can’t spend it, the judge said.
Representatives of Brigade and HPS declined to comment. Symphony didn’t immediately return messages seeking comment.
Impact On Industry
The ruling could also have a lasting impact on the role administrative agents play in the syndicated loan industry by exposing them to higher operational and regulatory risks.
Furman said prior court decisions forced him to conclude that the lenders were entitled to take the money.
“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” he said 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.”
The judge said New York’s top court adopted a “discharge for value” rule almost 30 years ago, making it clear that banks making wire transfers to creditors should bear the risk of loss in case of a mistake, and fees for such payments have remained low. The “disastrous consequences” predicted in the wake of that decision haven’t happened, Furman said, proving the court’s conclusion that transferring banks are the best parties positioned to avoid errors.