Citibank “took that role seriously in adopting the six-eye approval process for wire transfers of the kind made here,” he wrote. “And while that process obviously failed in this instance, the unprecedented nature of the mistake in this case suggests that it has generally been successful. 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.”
It isn’t yet clear how the court decision will affect Revlon’s existing capital structure. The debt-laden cosmetics company contended earlier in the case that the money sent to lenders came from Citibank alone and not from Revlon’s own accounts. The loan due 2023 is quoted at below half its face value, around 43 cents on the dollar, according to Bloomberg data. Revlon, which wasn’t directly involved in the litigation, narrowly avoided a bankruptcy filing last year.
A representative of Revlon declined to comment.
‘Thumbed Their Nose’
At the trial in December, which was held by videoconference, executives of the asset managers testified that they had no reason to believe the wire transfers were an error. They said the sum was what they were owed, and although the credit agreement required three days’ notice for an early full payment of the loan—notice the recipients didn’t get—Revlon and the bank had breached the agreement before.
The pair “had really thumbed their nose” at the pact, including in the May restructuring, Scott Caraher, head of loans at Symphony, testified.
Caraher described the relationship between Symphony, Revlon and Citibank as contentious and complicated.
“It’s not that we didn’t want to return the money,” he said. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess.”
Clear Error
Citibank argued that the transfers were a clear error and that the firms had no right to them. Under questioning by a lawyer for the bank, a senior loan operations associate at Symphony testified that it’s standard practice to look into fund transfers made without notice and to return the money if it was sent in error. He said he had seen money sent by mistake to his firm or to counterparties before.
“We would review the wire, confirm it was a mistake” and, if “money was not owed, we would send it back,” he testified. Asked whether mistaken interest payments were common, he said they were.
The error was a painful lesson for the bank, which had to explain it to the Office of the Comptroller of the Currency and the Federal Reserve.
The judge wrapped up the six-day trial on Dec. 16 with a warning.
“The industry should figure out a way of dealing with these things even if this was a black swan event,” he said. “Whatever my ruling is in this case, I hope the world, the market takes notice of what’s happened here and the uncertainties that have resulted.”
The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).
—With assistance from Felice Maranz.
This article was provided by Bloomberg News.