Citigroup v Brigade Capital Management
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.
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The Jolly Contrarian Law Reports
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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, that sort of thing; 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. Short of forcing a debt-for-equity swap or some such thing, the loan unexpectedly repaying in full would be, like Christmas for these lenders. Better, in fact, because at least Christmas does happen every now and then. Distressed borrowers never prepay their loans in full. They can’t.
The repayment
It came time, in August 2020, for Revlon to pay about $8m ininterest 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. This is a common lawyer’s duck-billed platypus: a civil action that sounds neither in contract — there is none — or tort — there has been none — but just exists in its own jurisprudential space: a sort of equity for people who don’t like equity. 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.
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.
There is also New York law authority that defeats a claim for unjustified enrichment 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
Ouch. This is the “discharge-for-value defense” — criticised by some US authorities,[4] but still the law there. The English courts have come to an opposite conclusion: Barclays Bank Ltd v WJ Simms [1980] QB 677
This was the crux of the decision: the payment, though mistaken discharged a debt, was received without inducement or notice of the mistake. It is not at all clear that prepaying a loan when the loan is not due does discharge the debt, nor that the lenders can have been labouring under the slightest hint of an misapprehension that the payment was intentional and not mistaken — but the Judge was not prepared to play the little old lady card in favour of Citi. To the contrary, Citi got the durum caseum per magnos canibus treatment: the court considered itself bound rather literally by Banque Worms, and I dare say that precedent will get a good testing on appeal.
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 the debt is discharged. To the rest of the world, Citi was an agent.
To Revlon, in making that payment, it was not. 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. But it can’t. Citi is in a paradoxical position: as regards the lenders it is an agent; as against the principal, it is not.
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
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”.
- ↑ A Schall, Three-Party Situations in Unjust Enrichment Epitomised by Mistaken Bank Transfers [2004] RLR 110.