We have all done it before. You open Venmo to request $10 from a friend and accidentally send the money instead, or you add an extra zero and send the wrong amount. It is never enjoyable having to ask for money back, but most people are reasonable and the correct amount ends up where it belongs; however, there is always that one person who decides to keep the money and uses “possession is nine-tenths of the law” or another equally unconvincing line as their defense. Obviously, this is a major inconvenience no matter the amount, but imagine accidentally sending someone $900 million. Now, stop imagining because that’s exactly what Citigroup did.

In August 2020, Citigroup accidentally wired $900 million to the lenders of the cosmetic brand Revlon Inc. while trying to transfer a $7.8 million interest payment that was owed on a 2016 loan. After realizing the mistake, Citi asked the lenders for the money back. About $400 million was returned to Citi, but the remaining lenders, of which the largest were Brigade Capital Management, HPS Investment Partners, and Symphony Asset Management, decided to live up to the reputation of distressed credit hedge funds and refused to return the remaining $500 million (Cowley). You are all probably saying to yourself, “Why would the evil hedge funds do this? They are greedy and only care about how much money they make.” While I am sure there are plenty of fund managers who fit this generalization, there is much more to the story here.

Before this incident, Revlon was struggling to survive due the COVID-19 pandemic and an already large debt load (Yerak and Gladstone). Revlon decided to use some creative methods to secure the financing they needed to survive the pandemic (Yerak and Gladstone 2020). Any time the word “creative” is used in the context of hedge funds, investment banks, and distressed credit, it usually means:

1. The legality of what happened is questionable at best.

2. Someone is left holding the short end of the stick.

Both assumptions hold true in this case. Revlon, with the help of Citi, received a new loan package that involved stripping the collateral off of the original loan, making the new debt senior to the original loan held by the hedge funds (Gladstone and Yerak 2020). In the world of distressed credit, receiving full payment is never a guarantee, so the collateral backing a loan could be the difference between a profitable trade and a loss. Naturally, this made Revlon’s original lenders quite angry, so they filed a lawsuit just before the accidental payment (Yerak and Gladstone 2020). Distressed credit battles are not at all uncommon, and I imagine the lenders had taken on a trench warfare mindset ready to dig in and fight as they had done countless times; however, all of a sudden, the exact amount appeared in their bank account. Why wouldn’t they keep it? Since they already believed it was theirs and were about to devote serious time and resources fighting for it, why not at least see if they can win in court?

Of course, this led to a massive lawsuit from Citi against the lenders. As the largest of the lenders, Brigade Capital Management took the most public role of the defendants. As news of the lawsuit was reported, there was nobody who believed the lenders would be allowed to keep the money outside of the defendants and their lawyers. I was not even able to find one source arguing on their behalf dated before the court ruling. After learning of each side’s respective arguments for the case, the odds were looking even more in Citi’s favor. Citi’s argument focused around proving that the payment was not intentional and in no way were they trying to pay back the loan’s principal. The evidence they presented included internal statements containing the amount intended to be sent, lack of prepayment notice to the lenders, and the sheer size of the overpayment (S.D.N.Y. 2021, 80-89). They also presented Revlon’s poor financial state and the lawsuit already occurring between Revlon and its lenders as evidence that the company did not want Citi to pay back the lenders (S.D.N.Y. 2021, 89-90). This is a logical and reasonable argument that the lenders should return the money.

For the lenders, here is the best Brigade’s portfolio manager Jeff Frusciante could put together: “It seemed more plausible that the payments were intentional than that one of America’s largest banks accidentally paid off our loans down to the penny.” A partner and portfolio manager at Bardin Hill had a quote during his testimony that I cannot believe was said in a courtroom with a straight face. When asked if he had thought the payment could have been a mistake, he said, “not in my wildest imagination … That just – the thought literally never crossed my mind. I still find it kind of mind blowing” (S.D.N.Y. 2021, 65). Luckily for the lenders, their legal team had an ace up their sleeve, the Restatement of Restitution. Adopted by the American Law Institute in 1937 and certified by the New York Second Circuit in Banque Worms v. Bank Am. Int’l (S.D.N.Y. 1989), it states, “a creditor of another or one having a lien on another’s property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation” (S.D.N.Y. 2021, 36-37). In English, this essentially means that a lender is under no duty to return accidental payments as long as the lender did not misrepresent themselves to induce the payment. This proved to be a sufficient legal precedent and the court ruled in the lenders’ favor in early February (Cowley 2021). Do the lenders deserve to keep the money? Most would say no. Some would say they should not have kept the money in the first place, but I disagree. Revlon’s collateral-stripping tactics and the cutthroat nature of distressed debt markets give the lenders more than enough incentive to take the case to court. In the end, it was a law nobody outside the strange corner of Finders Keepers law knew about that came to the lenders’ rescue.

These events have already had an impact on major credit markets. One thing is for sure: this will not happen again. Within 3 weeks of the court ruling, Bloomberg reported that banks including Citigroup, Barclays Plc, and Jeffries Financial Group Inc. have been offering loans with provisions included for “Revlon clawback language” (Lee and Doherty 2021). I assume that blanket legal language like this is automatically used in the terms of every future loan. There is no harm in including it, but now we know that there is a lot of harm in excluding it. I hope that one day a credit analyst asks why it needs to be said in the terms that accidental payments must be returned and the portfolio manager says “get the popcorn. It is time for a story.”

Sources

Citibank NA v. Brigade Capital Management, 1:20-cv-06539-JMF (S.D.N.Y. 2021). v0 (bwbx.io)

Cowley, Stacy. 2021. “Citi Loses Its Bid to Reclaim Cash from a $900 Million Mistake.” The New York Times, February 16, sec. Business. https://www.nytimes.com/2021/02/16/business/citibank-revlon-loan.html.

Gladstone, Becky Yerak and Alexander. 2020. “Citigroup Pays Revlon Lenders Nearly $900 Million by Mistake.” The Wall Street Journal, August 14, sec. WSJ Pro. https://www.wsj.com/articles/citigroup-pays-revlon-lenders-nearly-900-million-by-mistake-11597360983.

Lee, Katherine Doherty and Lisa. 2021. “”Citi’s $900 Million Mistake Prompts Banks to Seek New Safeguards.” March 3, sec. Business. Citi’s $900 Million Mistake Prompts Banks to Seek New Safeguards - Bloomberg.

Yerak, Alexander Gladstone and Becky. 2020. “Citi Sues Revlon Lender Brigade for Return of Payment It Says Was a Mistake.” Wall Street Journal, August 17, sec. WSJ Pro. https://www.wsj.com/articles/citi-sues-revlon-lender-brigade-seeks-return-of-mistaken-payment-11597694604.