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February 2021: QE Trial Team Secures Win For Revlon Lenders Who Citibank Repaid ‘By Mistake’

February 2021

Quinn Emanuel secured a major victory at trial today in a high stakes litigation in the Southern District of New York.

On August 11, 2020, Citibank paid nearly $900 million to hundreds of the lenders to Revlon on a 2016 Term Loan.  All of the lenders received exactly what they were owed in principal and interest as of that date.  More than 20 hours after the payment, on the afternoon of August 12, Citibank notified the lenders for the first time that its payments were a mistake—that it had intended to pay only interest to all of the lenders—and Citibank demanded that the lenders return nearly all of the money that had been paid to them.

Over the next few days, lenders holding more than $300 million of the Revlon loans agreed to return the principal payments.  In contrast, the lenders managed by ten investment managers represented by Quinn Emanuel—more than 100 lenders that held over $500 million of the loans—refused to comply with Citibank’s demand.  Our clients were entitled to retain the funds because the payments were exactly the amounts owed to the lenders, because the lenders had no reason at the time they received the funds to believe the payments were made in error, and because the lenders did nothing to induce Citibank to make the payments.

Starting on August 17, 2020, Citibank filed a series of actions against Brigade, Symphony, HPS, and seven other investment managers, all of which were consolidated into In re Citibank August 11, 2020 Wire Transfers.  At the outset of the cases, Judge Furman issued temporary restraining orders preventing our clients from spending the disputed funds during pendency of the case.  The Court then set an expedited schedule, providing for all fact discovery, expert discovery, extensive pre-trial briefing and argument to be concluded in just over three months.  Starting on December 9, 2020, Judge Furman conducted a one-week bench trial—fully remote in light of the pandemic—and heard from several Citibank witnesses, as well as witnesses from each of the fund managers represented by our firm.  Earlier today, Judge Furman issued a 101-page decision rejecting Citibank’s claims, and confirming that the lenders managed by our clients do not need to return the money.

Throughout the case, Citibank expressed complete confidence in its position that those who receive money by mistake must return it.  We countered by invoking New York’s ‘discharge for value’ rule, which provides that a lender is entitled to keep funds where it is paid what it is owed, without receiving any notice, at the time of the payment, of a mistake.  In its extensive decision, the Court agreed that the doctrine applies on the unusual facts of this case.  Judge Furman found that Defendants’ witnesses credibly established that they did not know—and would have no reason to know—that Citibank had erred when it payed the lenders exactly the amounts they were owed.  Indeed, lenders would not have expected that Citibank had made an unprecedented error in paying out nearly $900 million to a syndicate of hundreds of lenders, precisely in the amounts owed to each lender.  As explained by the Court, “Given a choice between assuming that Revlon had paid off the 2016 Term Loan early — as borrowers sometimes do — and assuming that Citibank or Revlon had mistakenly transferred over $900 million — something no bank may have ever done before (and may never do again) — it would have been borderline irrational to choose the latter.”

In concluding the decision, Judge Furman explained:  “At its heart, this case involves a clash between two basic intuitive principles. On the one hand, if one party sends money to another by mistake, the latter should generally be required to give it back. On the other hand, if one party owes money to another and pays that money back to the penny, the latter should generally be allowed to keep and use the money as it wishes, without fear that the former will develop a case of borrower’s remorse and claim that the payment was by mistake.”  Applying New York law,  and the facts established by the witnesses at trial, the Court concluded that the lenders were not on notice of Citibank’s mistake when they received the transfers, were justified in believing that the payments were intentional, and thus are under no obligation to return the payments. In short, the Court agreed with Defendants that the discharge for value defense applied, and rejected Citibank’s claims.