A US appeals court reversed a ruling that allowed hedge funds to keep $500 million that Citigroup wrongfully transferred to them, in a victory that could allow the Wall Street bank to recover the money.
Citi accidentally transferred $900 million to creditors at cosmetics company Revlon in August 2020. A group of funds that held about $500 million of the loan amount refused to repay the money they received.
A lower court judge upheld the hedge funds’ position, ruling last year that the law allowed creditors to keep the money, in part because they had no reason, at the time of the transfer, to believe it had happened in error. .
On Thursday (8), the judges of the appeals court of the second circuit of the American Federal Justice, in New York, rejected the arguments of the judge of first instance and returned the case to the lower court, for it to decide again, this time in a according to your guidance.
Hedge funds, including Brigade Capital Management and HPS Investment Partners, “are not protected against Citibank’s claims for restitution,” the appeals judges ruled, noting that companies were aware of “clear signs that indicated that the transfer had taken place by mistake or accident.”
The ruling indicated that “the circumstances were suspicious enough that the creditors picked up the phone to check with Citigroup, and had they done so, they would have quickly discovered that the transfer was a mistake,” said Eric Talley, a professor at the University of Columbia Law School, who submitted to the court an opinion in which he argued that the lower court judge’s decision was incorrect.
Uncertainty over the $900 million payment hurt Revlon’s business, which filed for bankruptcy in June over a crisis in its supply chain. The company told the bankruptcy court that its efforts to raise capital had been hampered by its inability to identify all of its creditors, due to the dispute over Citi’s payment.
Citi itself had argued in bankruptcy court that if it didn’t get the $500 million back, it would have the right to recover the amount as Revlon’s creditor in its bankruptcy.
The bank announced on Thursday that the appeals court decision reaffirmed the position that the transferred money should be returned.
“While Citi has taken steps to reduce the likelihood of similar mistakes in the future, today’s decision provides welcome stability and underpins the concept of cooperation necessary for a syndicated lending market to function properly,” the bank said.
Lawyers for the funds that withheld the $500 million that are the subject of the lawsuit did not immediately respond to requests for comment.
Citi’s transfer error exposed deficiencies in the bank’s technology infrastructure. The incident was later followed in 2020 by a $400 million fine imposed by US bank regulators for deficiencies in the group’s controllership and risk management systems.
In an out-of-court settlement accepted by the bank, the US Federal Reserve ordered Citi to update its procedures and technology.
Translation by Paulo Migliacci
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