Citigroup v Brigade Capital Management
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The Jolly Contrarian Law Reports
Our own, snippy, in-house court reporting service. 
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A judgment that will surely strike terror into earnest hearts in the global trust and agency community, the US District Court’s stonking 105-page judgment in the Citigroup v Brigade Capital Management addresses a perfect storm of unexpected factors to come to quite the eye-catching — well, eye-watering, at any rate — conclusion.
Headline: Citigroup, who as Revlon’s loan servicing agent, accidentally paid half a billion dollars of principal to lenders when it only meant to pay $8m of interest, couldn’t have its money back.
This case has everything: it is as if all the ghastly phantoms of commercial legal practice converged in some mountain eyrie for a satanic feast on the bones of a poor, harmless, well-meaning global banking conglomerate. The JC liked it so much he has formulated a new equitable principle: durum caseum per magnos canibus: “hard cheese for big dogs”: a sort of dark inversion of the JC’s anus matronae parvae malas leges faciunt[1] principle.
Facts
Revlon — you know, that Revlon: lippy, perfume, nail polish; a struggling “heritage” brand — borrowed a ton of money in 2016 to acquire Elizabeth Arden.[2] The financing was complex but the thing to know was that Citi acted as Revlon’s loan servicing agent. A loan servicing agent keeps a register of lenders, who is owed what, and handles interest and principal payments to the lenders on the borrower’s behalf.
The key concept here is “agent”, my little legal eaglets. Citi had no responsibility for Revlon’s obligations: Revlon would pre-fund all the payments it needed to make to the lenders. If — as seemed increasingly likely — Revlon could not meet its obligations, this was the lenders’ problem, not Citi’s.
You can just imagine the indemnities, disclaimers, waivers and exclusions of liability littered through Citi’s standard agency legal documents, can’t you. If they were bad before, just imagine what they look like now.
Revlon’s decline
Things aren’t quite as rosy for Revlon as they were when Charlie and Tweed strode globe. By the spring of 2020, its “liquidity position” was “extremely tight”. Revlon was short of the readies. It had become a “distressed” name. Some of its debt has found its way onto the books of hedge funds, who did not appreciate Revlon’s cute attempts to raise further finance against their collateral. They launched all kinds of litigation, which turned out not to matter.
Distressed debt
Though syndicated loans are private contracts, they are actively traded by means of novations, participation agreements, derivatives and the like. When a borrower is distressed its loans trade at a discount to their “face value”, reflecting the diminished likelihood that they will be repaid. Activist investors were in the Revlon deal and they paid less than par. Now, short of the borrower agreeing a debt-for-equity swap or some such thing, the borrower unexpectedly repaying the loan in full would be, like, Christmas for the lenders. Better, in fact: at least Christmas does happen every now and then. Distressed borrowers never prepay their loans in full. They can’t.
Important point of fact here: if a distressed lender’s agent did suddenly repay its whole loan without warning, every lender would know immediately it was a ghastly mistake and that something had gone badly wrong. There is no chance anyone thought this was a bona fide loan repayment.
The repayment
It came time, in August 2020, for Revlon to pay about $8m in interest on its loan. It put Citi in funds, as it was obliged to. Then someone at Citi made what, on hindsight, we might regard as a “bit of a bish.”[3] Instead of instructing the interest payment, the operations team instructed a full repayment of principal. Eight-hundred and ninety-three million dollars of the stuff. Nearly, as the bankers like to call it, a “yard”. Principal that was not, according to the loan, due to be repaid until 2023. Principal that was not in Revlon’s account with Citi, because Revlon didn’t have it.
Citi had funded a nearly a billion dollars of its own money to pay a sum that was not due by a borrower with no money to lenders it was already in an argument with. Awkward, right?
“Ok, look, an innocent mistake, okay — would you mind awfully wiring that money back?”
Some complied. Those who rather liked the idea of being repaid early, in full, a loan from a crappy credit that they had bought at a discount, did not.
Citi sued the hold-outs. Its rationale, essentially, was “this cannot be right”. But the jurisprudence of gut instinct can only find its voice through the detailed articulations of common law, equity and restitution as those have been developed by New York courts.
Issues
Because Citi was — and perhaps, at the same time, was not — Revlon’s agent, there is quite the four-dimensional chess game going on here. It is one thing to work out where the money should end up, in an equitable resolution; tracing that through the tangled skein of interrelations is something else again.
Citi vs lenders
As principal: If Citi acted as a principal, then no debt was due, no contract existed, and we would look at common law principles of unjust enrichment and restitution to return money had and received.[4] An alternative action might lie in the tort of conversion. But, as against the lenders, Citi was acting, and holding itself out as acting, as agent.
As agent: If Citi acted as agent, then we look through Citi to its principal, Revlon. That Revlon didn’t, itself, ask anyone to pay anything to anyone, and didn’t itself pay anything to anyone, doesn’t matter. Citi’s actions, ostensibly on its behalf, are attributable to it. Here there is a conflict, in English law, between agency principles from the eye of the third party (in particular ostensible authority) and bank mandate principles, which are viewed from the perspective of the customer. In New York law, this tension is resolved differently, as we shall see.
Revlon v lenders
Revlon might try to claim under a mistake, though that would be difficult as any mistake was not mutual, and unilateral mistakes are not compensable under the ancient doctrine of durum caseum. It might also claim that as the debt was not then due the lenders should be obliged to return the money under some kind of constructive trust (or even money had and received). But — since it wasn’t out of pocket and wasn’t being sued, Revlon might be forgiven for just sitting quietly and keeping its powder dry in case it needed it against Citi.
The discharge-for-value defense
We struggle to agree with the court’s conclusion, and the heart of the matter is its application of the discharge-for-value defense.
The discharge-for-value defense defeats a claim for unjustified enrichment under New York law where a recipient, without notice of mistake and not having induced the payment, receives funds that discharge a valid debt:
“When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.” Banque Worms v Bank America (1991) 570 N.E. 2d 189
This is the crux of the decision: the payment, though mistaken, discharged a debt, was made without inducement and receiveed without notice of the mistake.
Ouch. The “discharge-for-value defense”, generally, has been criticised by some US authorities[5] and has no equivalent in English law, where courts have reached the opposite conclusion (see: Barclays Bank Ltd v WJ Simms [1980] QB 677) but even if the principle is valid, its application here seems rather to have the quality of hard cheese one feeds to big dogs.
No notice of the mistake? Seriously?
It is not at all clear that prepaying a loan when the loan is not due does discharge the debt, nor is it remotely credible that any lender laboured for an instant under the misapprehension that the payment was anything but a howling clanger: it is axiomatic that distressed lenders can’t repay their loans at all, let alone ahead of time. The judge agreed with Citi that, to defeat the discharge-for-value defense it need show only the Lenders had constructive, and not actual, notice of the mistake.[6] Citi must have been encouraged by this finding.
You might, therefore, be surprised to hear the lenders’ evidence about their own states of mind on receiving the funds was strikingly consistent: not one of them thought it could possibly be an error. The transcript catalogs their testimony: “Not in my wildest imagination ... [did I suspect that the payments could have resulted from an error] ... That just — the thought literally never crossed my mind.”
Now you might think the loan service personnel in the New York lender community to have demonstrated themselves to be an uncommonly unimaginative and credulous bunch, therefore — the JC couldn’t possibly comment — but happily, their extraordinary lack of curiosity as to how, or why, a distressed debtor was suddenly paying down a massive loan with money it didn't have, worked to their great advantage. This is a finding of fact which it will be hard to overturn on appeal.
Must the debt be “due”?
A way out occurred to Citi: at the time of the payment, Revlon’s debt to the lenders was not, then, due and payable. It would not mature for another three years. This seems strikingly sensible, but the Judge could find nothing in the American Law Institute’s 1937 Restatement (First) of Restitution, on which Banque Worms v Bank of America relied, or any of the common law precedents, that required a “present entitlement”.
Section 14 of the Restatement provides:
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 and did not have notice of the transferor’s mistake.
One might take the court to task for being a little too literal there. Nor does the court seem to have considered what “in discharge of the debt” means, but assumes it means that, mathematically, “has the effect of discharging the debt”. One could apply a reductio ad absurdam here: any payment made by a debtor to a creditor, apropos anything, would have the effect of retiring debt. If I have a contract and, for good consideration, have borrowed money for eight years, my accidental factual repayment of it early, without legal obligation to do so — worse, my dopey agent’s — surely cannot unilaterally amend that contract.
The finding that it can, n the JC’s (literally) unqualified view, rather mounts the pavements — sidewalks, sorry — and runs down peaceable pedestrians perambulating the common law of contract. This is something which the law of restitution, being really no more than a life-hack to cover the parts of commercial life that tort and contract somehow contrive to miss — really ought not to be able to do.
Surely a contract, being an explicit, detailed, construction of rights and obligations between consenting parties must displace general common law principles like those of tort and restitution that the law has developed to mediate relationships between strangers. The contract must prevail. It cannot be right that an action that was neither requested, supported by consideration nor accompanied by any representation, let alone one on which the beneficiary has relied to its detriment, can unilaterally amend a contract. Nor, to our reading, does the Restatement require it to. The Restatement is silent on the matter.
This litigation may be causing sleepless nights at Citi, but it is to be appealed, and it is hard to see how the appeal could fail.
Redux: Citi and Revlon
This all leaves things rather delicately poised between Citi and Revlon. Forgetting for a moment that Revlon might not be able to pay Citi back, does it have to? A rather odd artefact of agency law comes into play here.
As against a third party without notice, an agent with the ostensible authority to bind a principal, in fact, does so: this is part of the legal case for the lenders. Here Citi had been explicitly appointed by Revlon as agent and, for all the lenders knew or cared (let’s park constructive knowledge for now) is acting on instructions, within the scope of authority, and binds the principal. Hence — if such a payment would operate to automatically discharge the debt, and the court concluded it did — the debt is discharged. To the rest of the world, Citi was an agent.
But to Revlon, in making that payment, Citi was not an agent. It was acting in excess of its mandate. Revlon might say, “I did not ask you to make that payment. I did not want my debt discharged. I was rather enjoying not having to discharge it for the time being. So this one, Citi, is on you.” This might, indeed seem fair, if Citi can then proceed against the lenders in an action for money had and received, as it would be able to under English law. But, as long as this judgment remains the law, it can’t. Citi is in a paradoxical position: as regards the lenders it is an agent; as against the principal, it is not. This is one more reason that Justice Furman’s decision seems to be wrong. Citi is left without a remedy.
We might suppose that Citi has somehow assumed the lenders’ claims, then. But has it? This does not seem to be what it has done at all. It has repaid those loans, unasked, on Revlon’s behalf. Revlon neither agreed to it doing this, nor provided any consideration for it.
Real world effects
Leaving the legal conundrums aside, this cleaves to a few interesting management observations, and themes dear to the JC’s heart:
See also
References
- ↑ “little old ladies make bad law”
- ↑ What made Elizabeth Arden? When Max Factor. Oldie but a goodie.
- ↑ You could, and I just might, write a whole article about the wisdom of the inevitable claims of “operator error” here: that that “someone” worked for an outsourced operation in a low-cost jurisdiction might be an irony beyond the capacity of those Citi executives who are still there, to see the funny side of. The application he was obliged to use to make that payment, and the accompanying playbook explaining how to use it, was utterly baffling. Doubtless, Citi will put this down to “operator error”.
- ↑ Restitution — a.k.a unjust enrichment, or money had and received — is a claim made feasible through an imaginative synthesis of long-“forgotten” rules[1] of the common law, dreamt up by Lord Goff[2] to bring justice to little old ladies, welsh hoteliers and others — not, apparently, including financial services conglomerates — who have been dealt a short hand by the cosmic game. Difficult cases involving such unfortunates (and the odd gambling-addict conveyancer) gave rise to an entire branch of civil law known as restitution, a common lawyer’s duck-billed platypus: an ancient civil action, latterly back in fashion, that sounds neither in contract — there is none — or tort — there has been none — but sits uneasily between them, in its own jurisprudential space, rather like our old friend Bob Cunis: neither one thing nor the other; a sort of law of equity for people who don’t like the law of equity or the floppiness and uncertainty it tends to bring.
- ↑ A Schall, Three-Party Situations in Unjust Enrichment Epitomised by Mistaken Bank Transfers [2004] RLR 110.
- ↑ “Constructive notice” is a term of legal art: “it means a person either knows or has reason to know” the fact in question; “reason to know” including “other facts known to the person would make it reasonable to infer the existence of the fact, or prudent to conduct further equity that would reveal it.”