On September 8, 2022, the U.S. Court of Appeals for the Second Circuit reversed a judgment entered for a group of lenders (or their representatives) of cosmetics company Revlon, Inc. in a case over entitlement to $500 million that Citibank, N.A., the lenders’ administrative agent, mistakenly transferred from its own funds. The court held that the non-returning lenders failed to establish the “discharge-for-value” defense to Citibank’s claims seeking return of the funds because of numerous “red flags” that put the lenders on inquiry notice that the transfer was in error and because the lenders were not “entitled” to the funds as the Revlon loans were not due at the time of the transfer.
In 2016, Revlon borrowed $1.8 billion under a seven-year syndicated secured loan for which Citibank acted as administrative agent. In May 2020, when its liquidity position was “extremely tight,” Revlon restructured certain debts by entering into a new facility that allowed certain lenders under the 2016 loan to participate in a “roll-up” of their positions to new loans (a transaction contested by other 2016 lenders and the subject of separate litigation). In August 2020, in connection with a 2016 lender’s participation in the roll-up, Revlon made a payment to all lenders of its then-accrued interest under the 2016 loan (but not any principal payments, which were not due until 2023). To effect the interest payment and roll-up transaction, Citibank’s back-office procedures required it to also make an internal transfer, between Citibank accounts, of the full principal amount. Due to an error in setting up that transfer, however, Citibank mistakenly transferred the full principal—$894 million—to the lenders instead of the internal account. After discovering the error the next day, Citibank asked the lenders to return the payments. Some did. Others, who collectively received $500 million, did not, and Citibank sued them to recover the funds in the Southern District of New York.
After a bench trial, the trial court found that the non-returning lenders could keep the funds under the discharge-for-value defense, which, as adopted previously in New York, allows the recipient of a mistaken wire transfer to retain the funds if it “is entitled” to the funds and “has no knowledge that the money was erroneously wired.” On appeal, the Second Circuit reversed. First, it held that the knowledge prong of the discharge-for-value defense means that a recipient is on inquiry notice of the error in the face of red flags of the payment’s nature. Here, the court found that four red flags put the lenders on inquiry notice: the absence of contractually required advance notice of loan repayment; Revlon’s known financial inability to repay the full loan balance; that participation interests in the 2016 loan were trading for far less than the face value of the loans; and extensive efforts by Revlon just days before the payment to avoid a potential acceleration of the 2016 loan. Second, the court held that the non-returning lenders were not “entitled” to the payment because the loan was not due for three more years.
The case is Citibank, N.A. v. Brigade Capital Mgmt., LP, No. 21-487 (2d Cir. Sept. 8, 2022). Citibank is represented by Hogan Lovells US LLP and Mayer Brown LLP. The lenders are represented by Quinn Emmanuel Urquhart & Sullivan LLP. The opinion is available here.
