Court wrong to let Citi's US$504m transfer error stand, groups say

New York

INVESTMENT firms should not be allowed to keep half a billion US dollars that Citigroup accidentally sent them because the payment was not due for three more years, legal experts and advocacy groups said in asking a court to overturn the ruling.

A group of law professors said in a brief filed last Thursday with the federal appeals court in Manhattan that the lower-court ruling, allowing Revlon lenders to hold on to US$504 million the bank wired them last August, misapplied legal precedent and could harm the industry's standards.

"The sheer magnitude of the transfer, constituting nearly 100 times the size of defendants' scheduled coupon payments, was a giant 'red flag'," the professors told the court.

They said the prepayment of the 2016 loan, at par and without notice, "constituted another glaring red flag that would have caused a reasonable person to inquire".

The law should not encourage similar "self-imposed ignorance in situations where it is nearly costless for a party" to "uncover and remedy the error", the professors said in their friend-of-the-court brief offering the judge their views. They are not a party to the case.

The conflict started after Citigroup inadvertently wired more than US$900 million to asset managers for the Revlon lenders and then asked for it back. The bank sued firms, including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management, that would not return the funds. It unexpectedly lost that battle in February.

The embarrassing blunder forced Citigroup to answer to regulators and tighten its internal controls. The ruling was a boon to creditors, which had been locked in a battle with billionaire investor Ronald Perelman's struggling cosmetics company over previous restructuring maneuvers.

Citigroup has asked the appeals court to overturn US District Judge Jesse Furman's decision, saying it "sent shockwaves through the markets and generated outcry across the financial industry". Oral argument in the appeal will be held in August or September.

The professors said the funds "were not due until the term loan matured in 2023", and full repayment required prior written notice from both Revlon and Citibank that never occurred and was never questioned.

The payment occurred outside of the contract between the investors, the company and the bank, which was acting as administrative agent on the loan. That should have "put a reasonable lender on notice of Citibank's mistake", they said.

The Loan Syndications and Trading Association offered similar arguments in its own friend-of-the-court brief, saying the mistaken payment has already "significantly disrupted" the drafting and negotiation of credit facilities and the expectations of participants in the market. Mistakes will happen because the often automated transactions require "manual touches", the trade group said.

Another brief was filed by the American Bankers Association, the Bank Policy Institute, the Clearing House Payments Company and the Clearing House Association in support of Citi.

They said allowing the decision to stand would "upset well-settled industry customs and practices" followed for 30 years.

"The daily volume and size of wire transfers executed by banks have increased exponentially," those groups said.

"Banks should not solely bear the risk of human error vis-a-vis lenders who, in this case, would suffer no injury if the mistakenly transferred funds were returned."

Mr Furman's decision letting the investment firms keep the money was based on a 1991 New York state court case, Banque Worms v BankAmerica International.

In that case, New York's highest court ruled that under a principle called discharge for value, when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it did not realise it was sent in error and did not make any misrepresentations.

But the mistaken payment in the Banque Worms case was money due to the creditors at the time it was sent, critics of the Citi ruling noted. BLOOMBERG