Speaker 1: This is Bloomberg Law with June Brussel from Bloomberg Radio.
Speaker 1: That's the way you're doing. That's what you're doing. It
Speaker 1: wasn't exactly money for nothing, but it certainly was an
Speaker 1: unexpected windfall. City Bank accidentally paid nine hundred million dollars
Speaker 1: of its own money to a group of lenders, expecting
Speaker 1: an interest payment on behalf of Revlon paying off the
Speaker 1: loan in full. Some of the lenders returned four hundred
Speaker 1: million dollars, and City Bank took the other investment firms
Speaker 1: to court, and after a trial, a federal judge ruled
Speaker 1: that City Bank is out the five hundred million dollars
Speaker 1: because of a thirty year old legal precedent that essentially
Speaker 1: says finders keepers joining me is Chris Dolmesh, Bloomberg Legal reporter.
Speaker 1: Did this verdict come as a surprise, It did, so,
Speaker 1: it was not necessarily complete shock. Some of our own
Speaker 1: analysts had seen the way the judge was going and
Speaker 1: sort of thought that he was leaning towards saying that
Speaker 1: the hedge funds didn't have to give back the money.
Speaker 1: But it certainly was not locked in stone, and a
Speaker 1: lot of people thought that City Bank was going to
Speaker 1: escape by and be able to get some money back
Speaker 1: despite some of the problems that they documented during the trial.
Speaker 1: But the judge felt otherwise. He felt that the creditors
Speaker 1: had established that they didn't know this was a mistake
Speaker 1: and that they thought they were actually getting their loans
Speaker 1: paid off. Go back and explain how this happened, whose
Speaker 1: fault it was. It happened because of the failure of
Speaker 1: a system they used as City Bank to send out
Speaker 1: loan interest payments on a regular basis, usually scheduled interest
Speaker 1: payments on that quarterly interest pay and things like that.
Speaker 1: The system is called a six eye system, meaning there's
Speaker 1: three people that checked the way that the wires sent out.
Speaker 1: But that system failed. There was a mistake made on
Speaker 1: a digital form that was being filled out, and they
Speaker 1: didn't realize it at the time, and by the time
Speaker 1: they realized it the next morning, nine million dollars had
Speaker 1: gone out. So it was essentially a failure of a
Speaker 1: kind of an antiquated system at the bank that they
Speaker 1: were already in the process of replacing. At the time
Speaker 1: that had happened, the lenders were locked in a battle
Speaker 1: with Revlon over its restructuring. They get this unexpected windfall
Speaker 1: out of the blue, and the judge found that they
Speaker 1: were correct to conclude that it was money being paid
Speaker 1: for what they were owed. Well, it's not necessarily they
Speaker 1: corrected that. He established that they had no other knowledge
Speaker 1: that would have convinced them otherwise until they got a
Speaker 1: notice from City Bank later in the day that the
Speaker 1: transfers had been a mistake and asking for the money back.
Speaker 1: Their testimony was pretty consistent that they didn't know what
Speaker 1: this was, but their best guests was that they were
Speaker 1: actually paying off the loans in full. They were engaged
Speaker 1: in this big restructuring battle with Revlon. Some of the
Speaker 1: people testified that they weren't sure if this was some
Speaker 1: sort of move by Revlon to extinguish the debt, to
Speaker 1: increase leverage, you know, on other lenders and that sort
Speaker 1: of thing. So there was a lot of uncertainty about
Speaker 1: what this was, and really what the judge found at
Speaker 1: the end was that it kind of would have boggled
Speaker 1: the mind to think that this would have been a
Speaker 1: mistake of the magnitude that it was by one of
Speaker 1: the world's largest financial institutions. Tell me about this, The
Speaker 1: judge said. The outcome was surprisingly straightforward, even if it
Speaker 1: may not seem the fairest result. I mean, he's saying
Speaker 1: in terms of the law and the precedence that he followed,
Speaker 1: which is a thirty year old New York State case
Speaker 1: in which the money went out the door and it
Speaker 1: was spent before even the credits to even get a
Speaker 1: notice after them, and that was not the case year.
Speaker 1: But in the end he just found that there was
Speaker 1: enough uncertainty about it. They certainly could have thought that
Speaker 1: this was a legit payoff of the loan, given the
Speaker 1: contentious history between the parties. Now that's gonna be a
Speaker 1: big issue on appeal I. And there's an interesting footnote
Speaker 1: in the decision where the judge says there's not really
Speaker 1: a lot of precedent in case law to establish whether
Speaker 1: or not the defendants had to show, by her ponderance
Speaker 1: of the evidence that they were not unnoticed. In other words,
Speaker 1: they would have had to have proven that they didn't
Speaker 1: know this was a mistake. But he also said because
Speaker 1: he can't prove a negative, that he didn't have to
Speaker 1: reach that question. But that might be an area where
Speaker 1: the appeals court kind of seeks to see if if
Speaker 1: it was the burden of the defendants to prove that
Speaker 1: they had no idea that this was a mistake, that
Speaker 1: there's testimony that they at least thought maybe there was
Speaker 1: something wrong happened here. On appeal, they can appeal based
Speaker 1: on the facts or on the lass. Based on the facts.
Speaker 1: What's the likelihood of a good outcome for City Bank
Speaker 1: pretty slay. I mean the fact that the facts and
Speaker 1: they were pretty established a trial at least with the
Speaker 1: judge bound. So they'd have to prove that the judge
Speaker 1: totally got the law wrong and his interpretation of the
Speaker 1: facts is completely wrong, and that's going to be an
Speaker 1: uphill battle given the fact that he's pretty much relied
Speaker 1: on precedent to make his ruling. Like he said, it's
Speaker 1: not the fairest outcome in the world, but it is
Speaker 1: pretty straightforward, and there isn't a lot of precedent in
Speaker 1: this area. You just don't have large financial institutions stakingly
Speaker 1: sending almost a billion dollars to creditors that are involved
Speaker 1: in a contentious dispute every day. So that was kind
Speaker 1: of the problem with this case. And this case might
Speaker 1: help clarify the law in a lot of those areas,
Speaker 1: or it just might make it murkier. As experts have
Speaker 1: told me, this is a very murky area of the law.
Speaker 1: You know, these are kind of black Swan events. When
Speaker 1: we see these things happen. It's very interesting and it
Speaker 1: raises a lot of questions, but it doesn't necessary really
Speaker 1: make it clear what happens when something like this goes wrong.
Speaker 1: So I take it that the New York Court of
Speaker 1: Appeals could change the law if it wanted to, But
Speaker 1: this is going up to the Second Circuit Federal Court Appeals.
Speaker 1: The likelihood that they would be able to overturn the
Speaker 1: law that way is slim. I mean, certainly the Second
Speaker 1: Circuit could ask the Court of Appeals a question to
Speaker 1: certify a question involved in the case, but they wouldn't
Speaker 1: make the ultimate decision. If City Bank does not win
Speaker 1: an appeal, City Bank now holds the five billion dollar
Speaker 1: loan of Revlon. That is the nillion dollar question as
Speaker 1: it is what happens to that debt. Do they become
Speaker 1: the de facto owners of the debt? Do they go
Speaker 1: after Revalon in some way? That's there's a lot of
Speaker 1: questions as what happens with that next, and it's not
Speaker 1: really clear what the road will be on that. I
Speaker 1: mean until there's an actual judgment in terms of the
Speaker 1: end of the appeal and they get a final judgment.
Speaker 1: At this point, I would say it's status quo because
Speaker 1: the money is frozen and Revlon is still obligated to
Speaker 1: make regular interest payments on that debt. Looking at the future,
Speaker 1: if this case remains as it is on the books,
Speaker 1: will this expose banks that facilitate wire transfers or serve
Speaker 1: as administrators to more liability? Might there be change in
Speaker 1: rules because of this? I mean at the very least,
Speaker 1: you know, City Group even before the lawsuit and the trial,
Speaker 1: it was already revealing its internal controls because of responses
Speaker 1: from regulators about these kind of problems with this system
Speaker 1: and other things that had happened. So you know, on
Speaker 1: that level, there will certainly probably be changes at City
Speaker 1: Group that will probably have a full autopsy of what
Speaker 1: happened here. As to other transfer agents, administrative agents and
Speaker 1: banks that service administrative agents, and it's hard to say.
Speaker 1: Experts have said, you know, it certainly could increase the
Speaker 1: cost of doing this kind of business, but this is
Speaker 1: not a big profit center for banks. These are more
Speaker 1: services they provide in order to be close to borrowers
Speaker 1: and you know, to get better business and to provide
Speaker 1: a service. And so therefore, you know, it might just
Speaker 1: lead to some banks you decide they just don't want
Speaker 1: to do this anymore for the very little amount of
Speaker 1: money they get out of it. It might just need
Speaker 1: to lead to another layer of compliance. Um with more
Speaker 1: lawyers who have to sign off on these things, are
Speaker 1: certainly a more robust and uniform way of making these transfers.
Speaker 1: Thanks Chris. That's Crystal Mesh Bloomberg Legal reporter joining me now.
Speaker 1: Is one of the attorneys for the winning investment firms,
Speaker 1: Adam Abenson, a partner a Quinn Emmanuel. Many people were
Speaker 1: surprised by the judges ruling. Were you surprised? We were pleased,
Speaker 1: but not surprised. We have been deep in the law
Speaker 1: on the case over the course of four months at
Speaker 1: that point and understood that, notwithstanding with some other folks
Speaker 1: thought we had a really effluent defense under the longest
Speaker 1: that wished doctrine in New York. What do you think
Speaker 1: the trial turned on? What point in the trial convinced
Speaker 1: the judge. It's an interesting question here. I don't know
Speaker 1: that I could point to one moment or one witness.
Speaker 1: I think it was becoming increasingly clear over the course
Speaker 1: of the trial that no one in the position of
Speaker 1: our clients would have thought that this was a mistake
Speaker 1: by City Bank. They had never made a mistake of
Speaker 1: that type or on that scale, and under long established
Speaker 1: doctrine in New York. It's all under a case called
Speaker 1: bank worms. That that really was a key and I
Speaker 1: think ultimately this positive point. So the average person might
Speaker 1: look at this and say, if I went to a
Speaker 1: bank machine and fifty dollar bills just started flying out,
Speaker 1: I would have to return it. So why shouldn't the
Speaker 1: hedge funds have to return this windfall? Even the judge
Speaker 1: said that it might not seem like the fairest result. Well, look,
Speaker 1: I think that the key difference between, you know, the
Speaker 1: the money machinery pathetical and what we had here it
Speaker 1: was undisputed that the lenders represented by our clients were
Speaker 1: actually owed the amounts they received. What they got was
Speaker 1: to the penny there as in principle, and a crude interest.
Speaker 1: So this wasn't, you know, the kind of windfall the
Speaker 1: other side wanted to portray it. What it was was
Speaker 1: a group of lenders receiving exactly what they were oute
Speaker 1: and that's an important distinction under New York law, and
Speaker 1: we think it was a compelling distinction here at trial.
Speaker 1: City Bank says it's going to appeal. What do you
Speaker 1: think their chances are an appeal? Look, I hesitate to
Speaker 1: try and sort of handicapped, you know what arguments City
Speaker 1: Bank might make. We certainly think that court did an
Speaker 1: excellent job in its opinion. We think it gave a
Speaker 1: lot of detail and explanation as to why it was
Speaker 1: persuaded as it was. Much of its analysis has to
Speaker 1: do with what the court ocurred and saw from the witnesses.
Speaker 1: We're confident in our case. We very much think we're
Speaker 1: right on the law. And if City think, you know,
Speaker 1: follow us through its plans, we certainly like our chances.
Speaker 1: There are some legal scholars who are saying that the
Speaker 1: New York Court of Appeals should change the law. I
Speaker 1: don't expect that it will change, and I don't see
Speaker 1: why it should. I think that the decision that we
Speaker 1: relied on, which has decided I think over thirty years ago,
Speaker 1: has has now stood the test of time. The Court
Speaker 1: of Appeals decided that decision as it did in part
Speaker 1: because it wanted to incentivize banks and not to make
Speaker 1: these kinds of mistakes. And as a lot of the
Speaker 1: reports for indicating there haven't been a lot of these
Speaker 1: kinds of mistakes. So I think that authority in large
Speaker 1: part has worked. Um So, I I don't think there's
Speaker 1: a need for a change. I wouldn't anticipate a change,
Speaker 1: um And. And we think certainly that the decision here
Speaker 1: was very much in keeping with what the President required.
Speaker 1: What was the highlight of the trial for you? You You know,
Speaker 1: we had we had a really outstanding team working on this,
Speaker 1: Kates um I was co counsel of trial with two
Speaker 1: partners of mine at Quinnmanuel um Ben Finstone and Bob Lloydman.
Speaker 1: Both of them are outstanding and working closely with them,
Speaker 1: working in the trenches with them, um And that was
Speaker 1: the highlight of it. We also had really an excellent
Speaker 1: team of associates involved, um And. And. Look, it's not
Speaker 1: it's never easy to be in trial. It's intense, it's
Speaker 1: a lot of hours, but it was a really fantastic
Speaker 1: group to be doing it with. I was referring to,
Speaker 1: for example, if there was a cross examination or a
Speaker 1: direct examination that that stood out to you. We divveed
Speaker 1: up the witnesses, um, you know among the group that
Speaker 1: I mentioned, UM, And so for me, the high heights
Speaker 1: were the ones that I handled. UM. You know, I
Speaker 1: don't know if that's much the the the answer that
Speaker 1: you'd be looking for, but I I did a couple
Speaker 1: of the early witnesses who were the city bank folks
Speaker 1: who were actually involved in um, uh you know, making
Speaker 1: the transfer, UM. And that was very much the start
Speaker 1: of the case, sort of getting feet wet um. And
Speaker 1: uh you know that that it was, you know, an
Speaker 1: exciting opportunity for me to be handling those and again
Speaker 1: we we we liked how the evidence was coming in
Speaker 1: and uh you know, we felt as if it stayed
Speaker 1: on a good track from there on. I want to
Speaker 1: emphasize again what a great team effort this was, um.
Speaker 1: You know, not only with the partners and associate if
Speaker 1: I worked on, but also our firm quin Immanual, which UM,
Speaker 1: you know, it takes cases that that others might think unusual, um,
Speaker 1: and have we have a great track record of winning them,
Speaker 1: and UM, you know we're proud to I knew with
Speaker 1: the result here. Thanks Adam. That's Adam Abenson of Queen Emmanuel.
Speaker 1: And that's it for the edition of Bloomberg Law. I'm
Speaker 1: June Grosso and you're listening to Bloomberg