An appellate court on Sept. 8 ruled that Citibank is entitled to repayment of $500 million it erroneously sent to lenders of Revlon in August 2020.

At the time, the bank intended to make an interest payment on the company's outstanding leveraged loan  in the amount of $7.8 million, but due to an error wired about $900 million to lenders in repayment of all principal and interest owed under the company's 2016 term loan due 2023. Citi quickly requested the return of the erroneously paid funds, and while most lenders complied, others did not, retaining about $500 million of the erroneous payment.

The lenders, representing 126 debtholders, that refused to return the payments are Brigade Capital, HPS Investment Partners, Symphony Asset Management, Bardin Hill, Greywolf, Allstate, Medalist Partners, Tall Tree Investment Management, and New Generation Advisors.

Citibank sued the lenders in federal court in Manhattan, but in February 2021 the court ruled in favor of the lenders, citing a rule known as "discharge-for-value" that provides that monies erroneously paid to a lender need not be returned provided that the debt owed was valid, the lender did nothing wrong to induce the erroneous payment, and the lender was unaware that the payment was in error.

In reversing that decision on appeal, the Second Circuit Court of Appeals found, however, that the discharge-for-value principle did not apply because the Revlon lenders were on "constructive notice" that the payments to them were in error (the trial court found that the discharge-for-value rule required that lenders have actual notice that the payments were in error). The appellate court found that the payment of the principal was unusual enough, given all the circumstances at the time, including Revlon's contentious efforts to restructure the 2016 loan, that reasonable lenders should have inquired whether an error had been made.

The appellate court also found that at time of the erroneous payment, the loan principal was not yet due for three years, and that for purposes of the "discharge-for-value" rule the amounts were not then owed to lenders.

The effect of the ruling on Revlon's Chapter 11 case was not immediately clear, though at first blush it would appear, at a minimum, to add new and potentially disgruntled parties to the bankruptcy proceeding, namely, the lenders under the 2016 loan that had refused to return Citi's funds, potentially scrambling reorganization plan negotiations.

The ruling does not appear, however, to impact the total amount of Revlon's debts. Last month, Citi filed a lawsuit in Revlon's Chapter 11 seeking a definitive declaration that Citi was "equitably subrogated" to the rights of the lenders that it erroneously repaid. In plain English, Citi is seeking a ruling from the bankruptcy court that Revlon owes the bank the money that Citi accidently repaid to the company's term loan lenders that was not returned.