Citigroup v Brigade Capital Management: Difference between revisions

{{a|casenote|[[File:Seymour.jpg|thumb|450px|center|“They say ''[[indebitatus assumpsit]]'' is back in style. I say it never went out.”]]}}A judgment that will surely strike terror into earnest hearts in the global trust and agency community, the US District Court’s [https://int.nyt.com/data/documenttools/ruling-on-citi-s-900-million-transfer-to-revlon-lenders/5f57c39ebdb6e58c/full.pdf stonking 105-page judgment] in the {{casenote|Citigroup|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''.

Revlon — you know, ''that'' Revlon: lippy, perfume, nail polish; a struggling “heritage” brand — borrowed a ton of money in 2016 to acquire Elizabeth Arden.<ref>What made Elizabeth Arden? When Max Factor. Oldie but a goodie.</ref> The financing was complex but the thing to know was that Citi acted as Revlon’s ''[[loan servicing agent]]''. {{loan service agent capsule}} 

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.

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''.

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''.

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?

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.

'''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, [[Ostensible authority|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.

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:

{{quote|“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.” {{citer|Banque Worms|Bank America|1991|570 N.E. 2d|189}}}}

''Ouch''. This is the “[[discharge-for-value defense]]” — criticised by some US authorities,<ref>A Schall, ''Three-Party Situations in Unjust Enrichment Epitomised by Mistaken Bank Transfers'' [2004] RLR 110.</ref> but still the law there. The English courts have come to an opposite conclusion: {{cite|Barclays Bank Ltd|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 [[Anus matronae parvae malas leges faciunt|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 {{casenote|Banque Worms|Bank America}}, and I dare say that [[precedent]] will get a good testing on appeal.

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”. One might take the court to task for being a little too literal there.

{{quote|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.}}

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, Citi was ''not'' an agent. 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 [[paradox]]ical position: as regards the lenders it ''is'' an agent; as against the principal, it is ''not''.

{{c|Paradox}}