Citibank Suing Brigade Capital Management for $176M Sent in Error
Monday 31st August 2020
The US banking giant Citigroup is taking the hedge fund manager, Brigade Capital Management to court to force it to return $175m (£134m) that Citigroup sent to them in error. However, this is only a portion of the $900m that was sent in error to the creditors of the struggling cosmetics company Revlon. The bank was only meant to send Brigade $1.5m to cover the interest on a $174.7m loan the hedge fund is holding. Brigade instead received $176.2m and is refusing to repay the funds.
The tremendous, accidental overpayment has been described by Citigroup as an operational error. Whilst some individuals that received the overpayments have returned the money to Citigroup, others such as Brigade have been less forgiving. This is despite Citigroup making an effort to recover the funds within hours of the transfers. Citigroup also added that there is "crystal-clear evidence" that the payments have been erroneously made, as a result filing to the District Court for the Southern District of New York.
The loan which Brigade is holding was sealed in 2016 to help Revlon cover the cost for its acquisition of Elizabeth Arden. However, as a result of the coronavirus pandemic, Revlon's business has suffered. The loan's value has collapsed since the start of 2020 with it trading at 26 cents to the dollar this month compared to 77 cents at the start of the year. Nevertheless, Citigroup has described Brigade as having taken advantage of their more than 100 times overpayment, now serving to pay off Revlon's entire principal balance (as well as the original purpose of covering the interest on the loan).
Can Brigade Capital Management keep the money paid by mistake? In general, no. If Brigade were to also subsequently spend the money, it can result in being a criminal matter. However, the issue with this case is that Brigade had lent an initial amount of money to Revlon, with this erroneous amount from Citigroup ultimately covering the outstanding amount Brigade is owed by Revlon. Although, this does not mean Brigade is automatically entitled to receive it now – only the interest on that loan (a much smaller amount) that the bank planned to pay on behalf of Revlon. Furthermore, another significant issue is that another bank acting on behalf of other creditors (including Brigade), is already suing Revlon. This is to do with Revlon being accused of "stealing" collateral used for the loans. Revlon's brands (their assets) could be used to cover any loan repayment shortfalls. Citigroup is also named alongside Revlon as one of the defendants in the complaint. This is because they have been accused of wilful misconduct and gross negligence. That specific complaint asked the New York court to make the loan payable now, therefore making the creditors (including Brigade) legally entitled to the money now. They have, in fact, to their surprise received the repayment of the loan due to Citigroup's error. It will, however, be for the court to decide if Brigade can keep it.
So far, a temporary order has been issued by a judge, freezing the funds that Brigade have declined to give back. A trial is set to begin in late September to settle the dispute.
