Citibank, N.A. v. Brigade Capital Mgmt., LP
| Decision Date | 08 September 2022 |
| Docket Number | Docket No. 21-487,August Term, 2021 |
| Citation | 49 F.4th 42 |
| Parties | CITIBANK, N.A., Plaintiff-Appellant, v. BRIGADE CAPITAL MANAGEMENT, LP, HPS Investment Partners, LLC, Symphony Asset Management LLC, Bardin Hill Loan Management LLC, Greywolf Loan Management LP, ZAIS Group LLC, Allstate Investment Management Company, Medalist Partners Corporate Finance LLC, Tall Tree Investment Management LLC, New Generation Advisors LLC, Defendant-Appellees, Investcorp Credit Management US LLC, Highland Capital Management Fund Advisors LP, Defendants. |
| Court | U.S. Court of Appeals — Second Circuit |
Neal Kumar Katyal (Sean Marotta, Reedy C. Swanson, Erin Chapman, Nathaniel A.G. Zelinsky, Hogan Lovells US LLP, Washington D.C.; Nicole A. Saharsky, Mayer Brown LLP, Washington D.C.; Matthew D. Ingber, Christopher J. Houpt, Mayer Brown LLP, New York, N.Y., on the brief), Hogan Lovells US LLP, Washington, D.C., for Plaintiff-Appellant.
Kathleen M. Sullivan (Adam M. Abensohn, David M. Cooper, Benjamin I. Finestone, Robert S. Loigman, Quinn Emmanuel Urquhart & Sullivan, LLP, New York, N.Y., on the brief), Quinn Emmanuel Urquhart & Sullivan, LLP, Los Angeles, CA, for Defendant-Appellees.
Before: LEVAL, SACK, and PARK, Circuit Judges.
Judge Park concurs in a separate opinion.
This case raises the question whether, under New York law, the recipients of an accidental, unintended payment of approximately $500 million were required, under the circumstances, to return the payment. Citibank N.A. is the Plaintiff-Appellant. Citibank served as Administrative Agent for the lenders of a $1.8 billion syndicated seven-year loan to Revlon, Inc. ("the Loan" or "the Debt"), with responsibility to collect interest and principal payments from Revlon and transmit them to the Loan Managers for the lenders. Citibank appeals from the judgment of the United States District Court for the Southern District of New York (Jesse M. Furman, J .) in favor of the Defendant-Appellees,1 who were Loan Managers for lenders of the majority of the loan.
In undertaking to transmit accrued interest to the lenders’ Loan Managers, Citibank had made a ministerial error in administering a computer program, which caused the unwitting transfer by wire of Citibank's funds in the full amount of Revlon's outstanding principal balance, three years before Revlon's loan repayment was due, and, at a time when, because Revlon was understood to be deeply insolvent, loan participations were trading at 20% to 30% of the face amount. The next day, when Citibank discovered that the accidental transmission had occurred, it demanded the return of the portion representing principal. Upon the Defendants’ refusal, Citibank brought this action for restitution.
Based on a ruling of the New York Court of Appeals in Banque Worms v. BankAmerica International, 77 N.Y.2d 362, 568 N.Y.S.2d 541, 570 N.E.2d 189 (1991), the district court decided that Defendants were not obligated to return the money. In re Citibank August 11, 2020 Wire Transfers , 520 F. Supp. 3d 390 (S.D.N.Y. 2021). In Banque Worm s, the Court of Appeals had ruled in favor of a lender's right to retain a bank's mistaken repayment of a loan to the bank's client that was due and payable. Id. 568 N.Y.S.2d 541, 570 N.E.2d at 190-91. The Court of Appeals had explained that its ruling was based on the American Law Institute's "discharge-for-value" rule, published at Section 14 of the RESTATEMENT (FIRST) OF RESTITUTION (Am. Law Inst. 1937) ("First Restatement"). The rule of Section 14 specified circumstances that excuse the recipient of a payment made in discharge of a debt pursuant to a mistake of the payor as to his rights or duties from the customary obligation to return mistaken payments.
We conclude that that this case does not fall within the scope of the New York Court of Appeals's Banque Worms ruling. We accordingly VACATE the judgment of the district court and REMAND this case to the district court for further proceedings consistent with this opinion.
The great majority of the complex facts are not in dispute. This recitation of the facts is largely taken, nearly verbatim, from Judge Furman's clear, fastidious, and scholarly exposition.2
In 2016, pursuant to a credit agreement, Revlon took out the seven-year, $1.8 billion syndicated, collateralized Loan. In re Citibank , 520 F. Supp. 3d at 397.
Citibank serves as the Administrative Agent for the lenders in administering the Loan. Its duties, set forth in the Amended Loan Agreement ("the Agreement"), included receipt of payments of principal and interest from Revlon to be transmitted to the lenders (the "Debtholders" or "Lenders"). Agreement, § 2.8.
The Defendants are Loan Managers for those Debtholders that refused to return the mistakenly transmitted funds. The outstanding principal and accrued interest on these Debtholders’ loans was $558,558,375.74 on August 11, 2020, the date of Citibank's mistaken payment. In re Citibank , 520 F. Supp. 3d at 398.
The Loan was not payable for three more years – until September 7, 2023 (seven years after the closing date). That maturity date was subject to acceleration if any notes representing an unsecured senior debt (a set of notes due in early 2021 – the "2021 Notes") remained outstanding on November 16, 2020, in which case the Loan would also mature on November 16, 2020.3 Id.
Several provisions of the Agreement are pertinent. First, the Agreement provides that it is to be "governed by, and construed and interpreted in accordance with, the laws of the state of New York." Agreement, § 10.11 (capitalization and emphasis omitted). Second, to the extent relevant here, it defines the "Interest Payment Date" — that is, a date on which an interest payment is due — as either "the last day of" each "Interest Period" or "the date of any repayment or prepayment." Agreement, § 1.1. Finally, under Section 2.11(a), entitled "Optional Prepayments," Revlon was permitted to prepay any part of the Debt "upon irrevocable written notice delivered to [Citibank] ... three Business Days prior thereto." Agreement, § 2.11(a). Upon receipt of any such notice Citibank was required to "promptly notify each relevant Lender thereof." Id.4 The Agreement does not define the term "promptly."
In the spring of 2020, Revlon's "liquidity position" was "extremely tight," and the company sought to raise additional capital.5 In re Citibank , 520 F. Supp. 3d at 399. Revlon accomplished this through a series of transactions in May 2020 (together, "the May 2020 Transaction"). Revlon entered into a credit agreement with a subset of the 2016 Lenders (or their affiliates), using collateral that had originally secured the 2016 Loan to secure instead new loans extended by these Lenders.6
In re Citibank , 520 F. Supp. 3d at 399.
As part of the May 2020 Transaction, Revlon issued a senior secured term loan facility in an aggregate principal amount of $815 million, plus the amount of certain fees and accrued interest that had been capitalized. J.A. 1132. Of that $815 million, Revlon used (i) $65 million to repay a revolving credit facility, id. , which it had obtained the previous month, J.A. 1135, (ii) approximately $246 million to pay outstanding principal, interest, and other fees on a Term Loan obtained in 2019 and due in 2023, J.A. 1134, and (iii), $112.8 million to repurchase and cancel a portion of the 2021 Notes, id.
The May 2020 Transaction also included an amendment to the Agreement that granted a subset of Lenders that participated in the refinancing ("BrandCo Lenders") what are called "roll-up" rights – the right to exchange their position in the 2016 Term Loan for a position in new term loans scheduled to mature in 2025. In re Citibank , 520 F. Supp. 3d at 399. The aggregate principal amount that could be "rolled-up" from the 2016 Term Loan to the new loans was $953 million. J.A. 1132.
The aggregate result is that the May 2020 Transaction enabled Revlon to issue a new $1.7 billion debt facility, of which over $800 million was "new financing." In re Citibank , 520 F. Supp. 3d at 399.
As part of the May 2020 Transaction, Revlon issued a "solvency certificate" asserting "that the company is solvent and would be able to meet [its] liabilities or service those liabilities as they come due." Id.
As previously noted, the May 2020 Transaction included an amendment to the 2016 Loan Agreement making some collateral that had previously secured the 2016 Loan serve instead as collateral for new loans. Id. Several of the Debtholders, including Defendants’ clients, objected to the May 2020 Transaction, contending that it violated the terms of the 2016 Loan Agreement, and labeling it an effort to "siphon away collateral that was providing essential security for payment of the 2016 Loans." Id. Nonetheless, Revlon executed the transaction in May 2020, asserting that it had secured the approval of a sufficient number of the holders of the 2016 Loan to allow that withdrawal of collateral.
This dispute gave rise to litigation in which a number of Debtholders — including those associated with all Defendants here except Tall Tree — authorized UMB Bank, the designated successor to Citibank as their Administrative Agent on the 2016 Loan, to file a lawsuit against Revlon and Citibank, asserting a variety of claims stemming from the May 2020 Transaction. Id. at 409.
Several allegations in the UMB Bank Complaint are pertinent here. First, the UMB Bank Complaint alleged inter alia that, in the May 2020 Transaction, Revlon improperly siphoned collateral away from the 2016 Debtholders, such as the trademarks and other intellectual property associated with Revlon's most famous brands including Elisabeth Arden, the value of which was "enormous relative to the value of the entire Revlon enterprise." UMB Comp. ¶ 2. Second, it alleged that Citibank and Revlon had improperly manipulated the voting provisions...
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