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]]. 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.

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?

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.

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.  

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.

{{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.}}

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]].

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 not 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.

There is a question as to whether this was a prepayment of principal per the terms of the contract. The contract allowed this, upon the Borrower delivering prior written notice to Citi, about which Citi must “promptly” notify lenders on receipt. Not only did the lenders not receive such a notification — since it wasn’t given, ''but nor did Citi''. That notice seems to be a condition precedent to prepayment under the contract, and was not delivered. Without it, Revlon would not be ''entitled'' to pay down the loan, even if it wanted to. To be sure, it is a low hurdle to cross, but Citi’s appeal team may feel it is a significant one all the same.

===Real world effects===

{{c|Paradox}}