Citigroup loses bid to recover $500m sent to funds by mistake

A US judge has dealt a blow to Citigroup’s efforts to recover hundreds of millions of dollars mistakenly sent to a group of asset managers, ruling the recipients are allowed to keep the erroneous payments.

The decision stems from a dispute between Citigroup and funds that were creditors of one of its clients, the cosmetics company Revlon. In August, Citi intended to send the funds interest payments of less than $8m on a loan made in 2016 to finance Revlon’s acquisition of rival Elizabeth Arden. 

Instead, it ended up sending the Revlon lenders $900m — the entire principal and all outstanding interest — in what the bank described as an “operational error”.

The bank quickly moved to retrieve the funds, but most of the funds refused to co-operate, leading to a legal battle over some $500m of the payments that were not returned. The bank has recovered the remaining $400m.

Despite finding that the money Citi sent was “indisputably transferred by mistake”, Jesse Furman, a US district judge in Manhattan, wrote that he was bound by precedent to rule in favour of the funds.

“Were the court writing on a blank slate,” the judge wrote, he might have ruled in favour of Citi, given that the bank “realised its error and notified the lenders within one day”.

But New York law is explicit, he found: a recipient may keep funds transferred by mistake if they pay off a debt, the recipient did not know of the mistake and the recipient did not trick the sender into making the payment.

Judge Furman said the recipients had good reason to believe the payments were intentional. “To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1bn — would have been borderline irrational,” he wrote.

In a statement, Citi said it “strongly” disagreed with the decision and that it intended to appeal. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”

Following the mistaken payment, US bank regulators fined Citigroup $400m in October over “longstanding deficiencies” in its risk and control systems. The Federal Reserve said the bank “has not taken prompt and effective actions to correct practices previously identified [in] compliance risk management, data quality management, and internal controls”. Citigroup subsequently committed $1bn to systems upgrades.

The 10 lenders in the case were Brigade Capital Management, HPS Investment Partners, Symphony Asset Management, Bardin Hill Loan Management, Greywolf Loan Management, ZAIS Group, Allstate Investment Management Company, Medalist Partners Corporate Finance, Tall Tree Investment Management and New Generation Advisors.

Symphony, HPS and Bardin Hill declined to comment. The other lenders did not immediately respond to a request for comment.

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