Entrepreneur in India for Citibank retail business of Citigroup Inc., Raj had been the “auditor” of a periodic interest payment to a group of creditors of Revlon Inc., the bank acting as administrative agent on the ready. Suddenly he realized that Citi had instead sent some of these creditors the entire remaining principal.

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“Bad news,” his supervisor told the North America lending operations manager via chat on Aug. 12. It was actually $ 900 million bad news.

Raj will testify by videoconference in Manhattan federal court this week as Citibank goes on trial to recover the more than $ 500 million it still has not recovered from the defendants, asset managers including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management. Unless there is a last-minute settlement, the lawsuit – over one of the biggest banking mistakes in recent memory – will be closely watched on Wall Street, and its outcome could have a significant impact on the industry. .

Representatives for Brigade and Symphony declined to comment on the matter. A representative from HPS did not immediately provide an after-hours comment.

‘Shooting through the bow’

Citibank maintains that because the funds were its own, not Revlon’s, and were transferred in error, they must be returned. For Revlon’s creditors already locked in a tug-of-war with the cosmetics giant over its restructuring earlier this year, the money has satisfied a debt, and they should be allowed to hold onto it.

Citibank has “a pretty solid record,” said Eric Talley, professor of corporate law at Columbia Law School, but it’s “not so clear that it doesn’t involve a bit of risk.” The outcome will likely depend on whether creditors claim they got what they were entitled to, he said.

If they win, Talley said, it could be a “gunshot” from the big commercial banks, signaling that they won’t be able to get courts “to go to the rescue to save a mistake that you committed because of bad internal controls. “

Meanwhile, Citi, which had to explain the embarrassing error to the Office of the Comptroller of the Currency and the Federal Reserve, already has “a bit of a black eye,” said Talley. Even if the bank wins, he said, “It would be an overshoot for Citibank to blow the champagne corks and say we are justified after all.”

Citigroup said it would do better.

“As previously stated, we are proud of our role as a global leader in financial services and recognize that an operational error of this nature is unacceptable,” the company said in a statement. “We are eager to present our case in research.”

“Mistakes can happen”

Financial services business groups have defended Citibank in court cases, arguing that a victory for creditors would expose banks that facilitate wire transfers and serve as administrative agents to unnecessary risk. The Loan Syndications and Trading Association, of which more than 500 members include Citi as well as most of the creditors involved in the case, said “mistakes happen” and participants routinely return incorrect payments, as did many creditors of Revlon.

A ruling in favor of the defendants “would undermine the proper functioning of syndicated loans” and foster “the kind of uncooperative opportunistic behavior that destabilizes any market dependent on trust and transparency,” the group said.

At the trial, which begins Wednesday, Citibank plans to present testimony from witnesses like Raj who can explain the processing errors that led to the payments, as well as internal communications showing that Revlon intended to get the bank to only sends interest. Revlon was only allowed to prepay the loans if it notified creditors three days in advance, Citi argues in court documents, and the balance was not expected to fall due for three days. years.

In addition, according to the bank, a lawsuit brought by creditors just a day after the transfers, demanding that Revlon expedite the payment of the debt, shows that they knew they were not entitled to the prepayment in full sent. by Citibank on August 11. creditors alleged in their lawsuit that Revlon was insolvent, meaning they knew he didn’t have the money to make the payments, Citi claims.

“They should at least have suspected an error when they received payments totaling the principal amount outstanding,” says the bank.

Perelman’s record

The defendants claim that they accepted the money in good faith and were not made aware of the error until almost 20 hours after the transfers ended. They say they had good reason to believe Revlon intended to repay the loan. For example, if Revlon had not repaid the debt or had not bought back enough, the company would likely have defaulted and “almost certainly” would have filed for bankruptcy, they say.

They note that Revlon paid off debt at face value at least five times as part of the restructuring in May and twice more over the summer. They also note that Revlon gave creditors who consented to the restructuring the right to force the company to repurchase its loans under the amended credit agreement. As a result, once they received the wire transfers, they considered the loans to be repaid.

“It was particularly unlikely that a term lender would have concluded that the August 11 transfer was a mistake given recent history between the parties,” they argue.

Referring to Ronald Perelman, the billionaire whose holding MacAndrews & Forbes owns more than 80% of Revlon, they say “it is just absurd to assume that sophisticated lenders familiar with Mr. Perelman’s track record would have doubted of its ability to repay. term loans, just as he had found ways to pay off other Revlon debts before. “

The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, US District Court, Southern District of New York (Manhattan).

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