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Citigroup v Brigade Capital Management (view source)

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===Distressed debt===
===Distressed debt===
Though syndicated loans are private contracts, they are actively traded by means of [[novation]]s, [[participation]] agreements, [[derivative]]s 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''.
Though syndicated loans are private contracts, they are actively traded by means of [[novation]]s, [[participation]] agreements, [[derivative]]s 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====
====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''.”<ref>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]]”.</ref> 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''.
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''.”<ref>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]]”.</ref> 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?
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?
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''Ouch''. The “[[discharge-for-value defense]]”, generally, has been criticised by some US authorities<ref>A Schall, ''Three-Party Situations in Unjust Enrichment Epitomised by Mistaken Bank Transfers'' [2004] RLR 110.</ref> and has no equivalent in English law, where courts have reached the opposite conclusion (see: {{cite|Barclays Bank Ltd|WJ Simms|1980|QB|677}}) but even if the principle is valid, its application here seems rather to have the quality of [[Durum caseum per magnos canibus|hard cheese one feeds to big dogs]].
''Ouch''. The “[[discharge-for-value defense]]”, generally, has been criticised by some US authorities<ref>A Schall, ''Three-Party Situations in Unjust Enrichment Epitomised by Mistaken Bank Transfers'' [2004] RLR 110.</ref> and has no equivalent in English law, where courts have reached the opposite conclusion (see: {{cite|Barclays Bank Ltd|WJ Simms|1980|QB|677}}) but even if the principle is valid, its application here seems rather to have the quality of [[Durum caseum per magnos canibus|hard cheese one feeds to big dogs]].
===No notice of the mistake? ''Seriously''?===
===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 of the lenders 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.
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.<ref>“[[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.”<ref> 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”?===
===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 Restituion'', on which {{casenote|Banque Worms|Bank of America}} relied, or any of the [[common law]] precedents, that required a “present entitlement”.  
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 {{casenote|Banque Worms|Bank of America}} relied, or any of the [[common law]] precedents, that required a “present entitlement”.  


Section 14 of the ''Restatement'' provides:
Section 14 of the ''Restatement'' provides:
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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.
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:
*[[Operator error]]
*[[Design]]
*[[Subject matter expert]]ise
*[[Don’t take a piece of paper to a knife fight]]


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