Citigroup v Brigade Capital Management: Difference between revisions

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. “[[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''.” Citi must have been encouraged by this finding.  

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. There is a continuum between justified inadvertence, constructive notice, and outright willful blindness. We have only the lender’s own testimony to go on: the judge seemed greatly impressed that it ''did not, in fact, occur to the lenders'' that there might have be a mistake. Whether or not you buy that, that is ''not'' the test for constructive notice. The test is ''should it'' have occurred to the lenders that there was a mistake. Would it have been prudent to check? In our networked world, a simple email back to the loan agent is hardly much to ask: “Hey, dudes: did you ''mean'' to just pay us all that money? It wasn’t, like, ''due'' or anything, and Revlon’s not in the greatest shape right now.”

A way out occurred to Citi: at the time of the payment, Revlon’s debt to the lenders was not, ''then'', due. It would not [[Maturity|mature]] for another three years. 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”.  

One might take the court to task for being a little too literal there. There is nothing, either, that says it includes ''future'' entitlements. It is ''[[silent]]'' on the matter, and the point was not at issue in the leading case of ''[[Banque Worms]]''. 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 absurdum]]'' here: read in the same literal way, ''any'' payment made by a debtor to a creditor, apropos ''anything'', would have the effect of retiring existing debt. If under a [[mortgage]] one has, for good [[consideration]], borrowed money for a thirty-year term, the bank could apply one’s wage payments in retirement of the debt, notwithstanding our carefully worked out thirty-year amortisation schedule. This ''cannot'' be right. This would be a unilateral contract [[amendment]], unsupported by [[consideration]].

The finding that it can, in the JC’s (literally) unqualified view, 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 — ought not to be able to do.  

A contract, being an explicit, detailed, construction of rights and obligations between consenting parties must displace general [[common law]] principles 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 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.

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 their [[constructive knowledge]]) is acting on instructions, within the scope of its 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 seems fair, as long as Citi can then recover the mis-payment from the lenders, on the grounds that it did not owe them anything, and had an action for [[money had and received]]. ''But, as long as this judgment remains the law, it can’t''. Citi is in a [[paradox]]ical 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, when plainly it should have one, however egregious its error.