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Friday, Jan 22, 2021

Citi Bank sent $900 million to customers by mistake. Half of them refuse to give it back.

Citi Bank sent $900 million to customers by mistake. Half of them refuse to give it back.

Bank now goes to trial to get rest back from Revlon creditors. Citibank has recovered only about $400 million in legal dispute.

A trial over Citigroup Inc.’s efforts to recover more than $500 million it mistakenly sent to Revlon Inc. lenders got underway on Wednesday morning after a Citi official suggested that the creditors blew the bank off when it alerted them to the error. 

A contractor in India for Citigroup Inc.’s Citibank retail business, Raj had been the “checker” on a periodic interest payment to a group of Revlon Inc. creditors, with the bank acting as administrative agent on the loan. Suddenly he realized that Citi had instead sent some of those creditors the full remaining principal.


“Bad news,” his supervisor told the head of North American loan operations by chat on Aug. 12. It was, in fact, $900 million of bad news.

Raj will testify this week by videoconference in federal court in Manhattan as Citibank goes to trial to recover the more than $500 million it still hasn’t gotten back from the defendants, asset managers including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management. Unless there’s a last-minute settlement, the trial -- over one of the biggest banking errors 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 case. A representative for HPS didn’t immediately provide comment outside of business hours.

‘Shot Across the Bow’

Citibank argues that because the funds were its own, not Revlon’s, and were transferred in error, they must be returned. To Revlon creditors already locked in a bitter fight with the cosmetics giant over its restructuring earlier in the year, the money satisfied a debt, and they should be allowed to keep it.


Citibank has “a pretty strong case,” said Eric Talley, a professor of corporate law at Columbia Law School, but it’s “not so crystal clear that it doesn’t involve a little bit of risk.” The outcome will likely hinge on the creditors’ contention that they got what they were entitled to, he said.

If they prevail, Talley said, it could be “a shot across the bow” of the big commercial banks, signaling that they won’t be able to get courts “to ride to the rescue to salvage an error that you committed because of poor internal controls.”

Read More: Revlon to Avoid Bankruptcy Filing Upon Completing Debt Deal

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

Citigroup said it would do better.

“As previously stated, we take pride in the role that we play 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 look forward to presenting our case in court.”

‘Mistakes Do Happen’

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

A ruling for the defendants would “undermine the smooth functioning of syndicated lending” and promote “the kind of non-cooperative 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 only to have the bank send interest. Revlon was allowed to pay the loans off early only if it notified the creditors three days in advance, Citi argues in court filings, and the balance wasn’t set to mature for another three years.

In addition, the bank says, a lawsuit the creditors filed just one day after the transfers, demanding that Revlon accelerate payment of the debt, shows they knew they weren’t entitled to the early full payment Citibank sent on Aug. 11. And the creditors alleged in their suit that Revlon was insolvent, meaning they knew it didn’t have the money to make the payments, Citi argues.

“They should at least have suspected a mistake when they received payments totaling the amount of principal outstanding,” the bank contends.

Perelman’s Record

The defendants argue that they accepted the money in good faith and didn’t receive notice of the error until almost 20 hours after the transfers were completed. They say they had ample reason to believe Revlon intended to pay off the loan. For instance, if Revlon hadn’t repaid the debt or repurchased enough of it, the company probably would have defaulted and “almost certainly” would have filed for bankruptcy, they argue.

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

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

Referring to Ronald Perelman, the billionaire whose holding company MacAndrews & Forbes owns more than 80% of Revlon, they say “it is simply nonsense to suppose that sophisticated lenders, familiar with Mr. Perelman’s track record, would have doubted his ability to pay down the term loans, just as he had found ways to pay other Revlon debt before.”


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

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