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Reversing a lower court ruling, the 2nd U.S. Circuit Court of
Appeals in Manhattan said it was improper to give the lenders a
"huge windfall" by letting them keep Citigroup's money, and that
they had been on notice the wiring was a mistake.
The case highlights risks in a banking industry that wires an
estimated $5.4 trillion each day.
Citigroup, acting as Revlon's loan agent, had in August 2020
intended to make a $7.8 million interest payment on a loan for
billionaire Ronald Perelman's now-bankrupt cosmetics company,
but instead paid off the $894 million loan though it was not due
until 2023.
Some creditors returned what they received, but 10 asset
managers including Brigade Capital Management, HPS Investment
Partners and Symphony Asset Management, whose clients included
the Revlon lenders, did not.
They said Citigroup paid exactly what was owed, and they had no
reason to believe a sophisticated bank would err so badly. They
also noted that Perelman had bailed out Revlon before.
In February 2021, U.S. District Judge Jesse Furman in Manhattan
ruled against Citigroup after a nonjury trial, saying the
prepayment was a "discharge for value."
But in Thursday's 3-0 decision, Circuit Judge Pierre Leval
rejected that conclusion.
"Here, the debt on which Citibank mistakenly made a payment was
not due for another three years," Leval wrote in a 93-page
opinion. "Defendants may not invoke the discharge-for-value rule
as a shield against Citibank's claims for restitution."
Lawyers for the Revlon lenders did not immediately respond to
requests for comment.
Citigroup praised the decision.
"Today's ruling reaffirms our long-held belief that these
mistakenly transferred funds should be returned as a matter of
law, as well as ethics," Citigroup said in a statement. It also
said it has taken steps to avoid a recurrence.
INDUSTRY WARNING
Industry groups warned a ruling against Citigroup could subject
banks to excessive liability risks and destabilize the
approximately $1.2 trillion U.S. syndicated loan market.
Revlon filed for Chapter 11 protection from creditors on June
15, and Thursday's decision could result in the asset managers
being involved in restructuring talks.
The New York-based company's shares fell about 10% within
minutes of the decision, but recouped those losses.
Citigroup argued its appeal last September 29.
Leval said the court took a long time to rule in part because it
initially planned to ask New York state's highest court for
guidance on the complex case, before deciding it would take even
longer and that Citigroup's arguments were persuasive.
"Finding the best accommodation between the objectives of speed
and legal soundness is not always easy," Leval wrote.
The case is In re Citibank August 11, 2020 Wire Transfers, 2nd
U.S. Circuit Court of Appeals, No. 21-487.
(Reporting by Jonathan Stempel in New York; Additional reporting
by Luc Cohen; Editing by Chris Reese, Leslie Adler and Josie
Kao)
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