Citi entitled to repay mispayment of Revlon loan, appeals court says

An appeals court ruled Sept. 8 that Citibank was entitled to repay $500 million it mistakenly sent to Revlon lenders in August 2020.

At the time, the bank intended to make an interest payment on the company’s outstanding leveraged loan of $7.8 million, but due to a In error, it transferred approximately $900 million to the lenders in repayment of all principal and interest owed under the company’s 2016 term loan. due in 2023. Citi quickly demanded the return of the funds paid in error, and while most lenders complied, others did not, retaining about $500 million of the mistaken payment.

The lenders, representing 126 creditors, who have refused to return payments are Brigade Capital, HPS Investment Partners, Symphony Asset Management, Bardin Hill, Greywolf, Allstate, Medalist Partners, Tall Tree Investment Management and New Generation Advisors.

Citibank sued the lenders in federal court in Manhattan, but in February 2021 the court ruled in favor of the lenders, citing a rule known as a “release for value” that provides that monies mistakenly paid to a lender need not be returned provided the debt owed was valid, the lender did nothing wrong to cause the payment to be wrong and the lender was unaware that the payment was wrong.

In overturning this decision on appeal, however, the Court of Appeals for the Second Circuit found that the principle of acquittal by value did not apply because Revlon’s lenders had received “implied notice” that the payments made to them were erroneous (the trial court found that the release-for-value rule required that the lenders be actually notified that the payments were erroneous). The appeals court found that the principal payment was sufficiently unusual, given all the circumstances at the time, including Revlon’s contentious efforts to restructure the 2016 loan, that reasonable lenders should have asked whether a mistake had been made.

The Court of Appeal also found that at the time of the erroneous payment, the principal of the loan had not yet been due for three years and that for the purposes of the “release for value” rule, the amounts were not then not due to lenders.

The effect of the ruling on Revlon’s Chapter 11 case was not immediately clear, although at first glance it would appear, at a minimum, to add potentially disgruntled new parties to the bankruptcy proceedings, to namely the lenders under the 2016 loan who had refused to return Citi’s funds, which could confuse negotiations of the reorganization plan.

The decision, however, does not appear to affect the total amount of Revlon’s debts. Last month, Citi filed a Chapter 11 lawsuit against Revlon asking for a definitive statement that Citi was “fairly subrogated” in the rights of lenders it had repaid in error. Put simply, Citi is seeking a bankruptcy court ruling that Revlon owes the bank money that Citi accidentally repaid to the company’s term lenders that has not been returned.

Citi said it was compelled to file the contradictory action because, although there was clearly no legal or factual basis for denying Citi’s subrogation rights, “it became abundantly clear that the Revlon Group and other constituencies have refused to recognize Citibank’s subrogation rights in an attempt to gain bargaining power in Chapter 11 cases.”

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