A US judge dealt a blow to Citigroup’s efforts to recover hundreds of millions of dollars mistakenly sent to a group of asset managers, ruling that beneficiaries are allowed to keep erroneous payments.
The decision stems from a dispute between Citigroup and creditors from one of its clients, the cosmetics company Revlon. In August, Citi intended to send the funds interest payments of less than $ 8 million on a loan made in 2016 to finance Revlon’s acquisition of rival Elizabeth Arden.
Instead, it ended up sending Revlon lenders $ 900 million – all of the principal and all unpaid interest – in what the bank described as an “operational error.”
The bank moved quickly to collect the funds, but most funds refused to cooperate, which led to a legal battle over some $ 500 million in unreturned payments. The bank recovered the remaining $ 400 million.
Although he found that the money sent by Citi was “unmistakably transferred in error,” Jesse Furman, a US District Judge in Manhattan, wrote that he was bound by precedent to rule in favor of the funds. .
“If the court wrote on a blank slate,” the judge wrote, he could have ruled in favor of Citi, given that the bank “realized its mistake and informed the lenders within a period of One day”.
But New York law is straightforward, he found: a recipient may keep funds transferred in error if they repay a debt, the recipient was unaware of the error, and the recipient was unaware. not prompted the sender to make payment.
Judge Furman said beneficiaries had good reason to believe the payments were intentional. “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 bordered on the irrational “he writes.
In a statement, Citi said it “strongly” disagreed with the decision and intended to appeal. “We believe that we are entitled to the funds and will continue to recover them in full.”
Following the erroneous payment, US banking regulators fined Citigroup $ 400 million in October for “longstanding deficiencies” in its risk management and control systems. The Federal Reserve said the bank “has failed to take swift and effective action to correct previously identified practices [in] compliance risk management, data quality management and internal controls ”. Citigroup then committed $ 1 billion for system upgrades.
The 10 lenders involved were Brigade Capital Management, HPS Investment Partners, Symphony Asset Management, Bardin Hill Loan Management, Greywolf Loan Management, ZAIS Group, Allstate Investment Management Company, Medalist Partners Corporate Finance, Tall Tree Investment Management and New Generation Advisors.
Symphony, HPS and Bardin Hill declined to comment. The other lenders did not immediately respond to a request for comment.