By Andrew Scurria, Alexander Gladstone and Becky Yerak
A federal judge denied Citigroup Inc.'s request to claw back roughly $500 million it mistakenly paid out of its own pocket to investment firms that made loans to cosmetics giant Revlon Inc.
Brigade Capital Management LP and other Revlon lenders can keep the money they collected from Citi when the bank wired them the full amount they were owed instead of the small interest payment that was due, according to a written ruling on Tuesday by Judge Jesse Furman of the U.S. District Court in New York.
The August blunder by Citi, Revlon's loan agent, satisfied a nearly $900 million debt that Revlon wasn't due to pay until 2023 and delivered an unexpected windfall to lenders on what had become an increasingly risky investment.
While some lenders that were mistakenly paid returned roughly $385 million to Citi, others refused the bank's request for repayment, touching off a legal dispute that strained relationships with big investors like Brigade, a longtime Citi client.
Judge Furman issued the decision after holding a trial in December that focused on the pivotal question of what Brigade and other recipients knew or suspected soon after they were paid.
Citi, which has blamed the snafu on human error, argued that recipients knew right away they had been paid in error. They said they didn't think the transactions were erroneous until Citi claimed as much and demanded repayment.
Judge Furman agreed with the lenders that they "believed, and were justified in believing, that the payments were intentional." Citi's mistake was "one of the biggest blunders in banking history," the judge said.
"We strongly disagree with this decision and intend to appeal. We believe we are entitled to the funds and will continue to pursue a complete recovery of them," a Citi spokesperson said.
Robert Loigman, a lawyer representing the lenders, said "we are extremely pleased with Judge Furman's detailed and thorough decision."
Internal chat messages unearthed by Citi showed that employees of some lenders were surprised when the Revlon loan they held was suddenly paid off ahead of schedule, using words like "unbelievable," "erroneous," "accidental" and "overpayment."
As soon as Citi realized its mistake, executives began trying to claw the money back. Some lenders, such as Carlyle Group Inc., KKR & Co. Inc. and Octagon Credit Investors LLC, granted the bank's request, people familiar with the matter have said. Citi sued those that declined, including Brigade, Symphony Asset Management LP and HPS Investment Partners LLC.
Revlon, owned by billionaire Ron Perelman, wasn't directly involved in the litigation. With masked-up, stuck-at-home consumers buying less makeup and nail polish, Revlon has struggled to stay afloat and narrowly avoided a bankruptcy filing in November.
Judge Furman backed up the lenders' argument at trial that it would have been irrational for them to believe that one of the world's largest financial institutions would transfer by accident the full amount they were owed by Revlon, down to the penny.
Lenders also pointed out at trial that Mr. Perelman had bailed out Revlon several times before, giving them reason to believe the company had come up with the funds needed to clear its loan debt. And indeed, Mr. Perelman did come to Revlon's rescue in November when his private-equity firm MacAndrews & Forbes put up some of its own capital to get a bond restructuring across the finish line.
The judge said it was reasonable for the lenders to believe that Revlon and Citi, perhaps with Mr. Perelman's help, had "figured out a creative way to pay down" debt.
The lenders aren't free to do with the money what they want, according to Judge Furman, who said that a restraining order he put in place to freeze the funds when the litigation began should remain in force for the moment, pending further arguments.
Citi blamed the payment in August on a human processing error that turned what was supposed to be an $8 million interest payment into a disbursement more than 100 times as big, made with the bank's own funds instead of Revlon's.
But mistrust between the lenders and Citi had been building even before then. They believed that Citi was helping Revlon restructure its debt and weather the Covid-19 pandemic in ways that would weaken their claims on key brand assets and hurt the value of their investments.
They began preparing a lawsuit against Citi and Revlon through a different loan agent they chose to replace Citi. Shortly before the lawsuit was filed, Citi made the $900 million payment.
Write to Andrew Scurria at email@example.com, Alexander Gladstone at firstname.lastname@example.org and Becky Yerak at email@example.com
(END) Dow Jones Newswires
February 16, 2021 12:49 ET (17:49 GMT)Copyright (c) 2021 Dow Jones & Company, Inc.