U.S. District Judge
“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
Not Over Yet
“We strongly disagree with this decision and intend to appeal,”
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
The decision is a boon to the creditors, which have been locked in a battle with billionaire investor
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.
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,
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.”
Citibank argued that the transfers were a clear error and that the firms had no right to them. Under
“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
“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.”
(Updates with Citigroup’s vow to appeal and with analysis starting in second section.)
--With assistance from
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