Citigroup v Brigade Capital Management: Difference between revisions

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Citigroup v Brigade Capital Management (view source)

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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]]''<ref>“[[little old ladies make bad law]]”</ref> principle.
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]]''<ref>“[[little old ladies make bad law]]”</ref> principle.
==Facts==
==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.<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]]. A [[loan servicing agent]] keeps a register of the lenders, who is owed what, and handles interest and principal payments to the lenders on the borrower’s behalf.  
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.<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.
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]], [[waiver|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''.
You can just imagine the [[indemnities]], [[disclaimers]], [[waiver|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''.
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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 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?
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?”
“Ok, look, an innocent mistake, okay — would you mind awfully wiring that money back?”
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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.
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===
===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 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, [[Ostensible authority|ostensibly]] on its behalf, are attributable to it.
'''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.


===Revlon v Lenders===
===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.  
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:
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:
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''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}}
''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 ''Banque Worms'', and I dare say that precedent will get a good testing on appeal.
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 ''Banque Worms'', and I dare say that precedent will get a good testing on appeal.


==Citi and Revlon==
==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.
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.
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 [[paradox]]ical position: as regards the Lenders it ''is'' an agent; as against the principal, it is ''not''.
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 [[paradox]]ical 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
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


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