WEBVTT - Finders Keepers in Citibank's $500 Million Mistake 0:00:03.200 --> 0:00:17.119 This is Bloomberg Law with June Brussel from Bloomberg Radio. 0:00:17.680 --> 0:00:26.200 That's the way you're doing. That's what you're doing. It 0:00:30.160 --> 0:00:33.839 wasn't exactly money for nothing, but it certainly was an 0:00:33.920 --> 0:00:38.880 unexpected windfall. City Bank accidentally paid nine hundred million dollars 0:00:38.880 --> 0:00:41.760 of its own money to a group of lenders, expecting 0:00:41.800 --> 0:00:45.120 an interest payment on behalf of Revlon paying off the 0:00:45.200 --> 0:00:48.519 loan in full. Some of the lenders returned four hundred 0:00:48.520 --> 0:00:51.879 million dollars, and City Bank took the other investment firms 0:00:51.920 --> 0:00:55.240 to court, and after a trial, a federal judge ruled 0:00:55.280 --> 0:00:58.640 that City Bank is out the five hundred million dollars 0:00:58.880 --> 0:01:01.720 because of a thirty year old legal precedent that essentially 0:01:01.760 --> 0:01:06.560 says finders keepers joining me is Chris Dolmesh, Bloomberg Legal reporter. 0:01:07.120 --> 0:01:10.320 Did this verdict come as a surprise, It did, so, 0:01:10.880 --> 0:01:14.000 it was not necessarily complete shock. Some of our own 0:01:14.000 --> 0:01:17.119 analysts had seen the way the judge was going and 0:01:17.160 --> 0:01:19.880 sort of thought that he was leaning towards saying that 0:01:19.920 --> 0:01:22.160 the hedge funds didn't have to give back the money. 0:01:22.400 --> 0:01:26.360 But it certainly was not locked in stone, and a 0:01:26.400 --> 0:01:28.280 lot of people thought that City Bank was going to 0:01:28.400 --> 0:01:30.240 escape by and be able to get some money back 0:01:30.680 --> 0:01:33.600 despite some of the problems that they documented during the trial. 0:01:33.680 --> 0:01:36.400 But the judge felt otherwise. He felt that the creditors 0:01:36.400 --> 0:01:39.480 had established that they didn't know this was a mistake 0:01:39.760 --> 0:01:42.360 and that they thought they were actually getting their loans 0:01:42.360 --> 0:01:46.000 paid off. Go back and explain how this happened, whose 0:01:46.040 --> 0:01:49.960 fault it was. It happened because of the failure of 0:01:50.120 --> 0:01:53.320 a system they used as City Bank to send out 0:01:53.680 --> 0:01:57.520 loan interest payments on a regular basis, usually scheduled interest 0:01:57.560 --> 0:02:00.880 payments on that quarterly interest pay and things like that. 0:02:01.160 --> 0:02:03.800 The system is called a six eye system, meaning there's 0:02:03.840 --> 0:02:06.760 three people that checked the way that the wires sent out. 0:02:07.080 --> 0:02:10.000 But that system failed. There was a mistake made on 0:02:10.040 --> 0:02:12.960 a digital form that was being filled out, and they 0:02:12.960 --> 0:02:15.959 didn't realize it at the time, and by the time 0:02:16.000 --> 0:02:19.280 they realized it the next morning, nine million dollars had 0:02:19.320 --> 0:02:21.799 gone out. So it was essentially a failure of a 0:02:21.960 --> 0:02:24.800 kind of an antiquated system at the bank that they 0:02:24.800 --> 0:02:27.880 were already in the process of replacing. At the time 0:02:27.880 --> 0:02:30.880 that had happened, the lenders were locked in a battle 0:02:30.919 --> 0:02:36.520 with Revlon over its restructuring. They get this unexpected windfall 0:02:36.680 --> 0:02:39.799 out of the blue, and the judge found that they 0:02:39.800 --> 0:02:43.680 were correct to conclude that it was money being paid 0:02:43.880 --> 0:02:47.400 for what they were owed. Well, it's not necessarily they 0:02:47.560 --> 0:02:51.119 corrected that. He established that they had no other knowledge 0:02:51.200 --> 0:02:53.639 that would have convinced them otherwise until they got a 0:02:53.720 --> 0:02:56.440 notice from City Bank later in the day that the 0:02:56.600 --> 0:02:59.640 transfers had been a mistake and asking for the money back. 0:03:00.120 --> 0:03:03.160 Their testimony was pretty consistent that they didn't know what 0:03:03.200 --> 0:03:06.040 this was, but their best guests was that they were 0:03:06.040 --> 0:03:08.880 actually paying off the loans in full. They were engaged 0:03:08.880 --> 0:03:11.760 in this big restructuring battle with Revlon. Some of the 0:03:11.760 --> 0:03:14.160 people testified that they weren't sure if this was some 0:03:14.280 --> 0:03:17.520 sort of move by Revlon to extinguish the debt, to 0:03:17.639 --> 0:03:20.639 increase leverage, you know, on other lenders and that sort 0:03:20.639 --> 0:03:22.960 of thing. So there was a lot of uncertainty about 0:03:23.000 --> 0:03:26.080 what this was, and really what the judge found at 0:03:26.080 --> 0:03:28.680 the end was that it kind of would have boggled 0:03:28.680 --> 0:03:32.000 the mind to think that this would have been a 0:03:32.080 --> 0:03:34.400 mistake of the magnitude that it was by one of 0:03:34.440 --> 0:03:37.880 the world's largest financial institutions. Tell me about this, The 0:03:37.960 --> 0:03:42.040 judge said. The outcome was surprisingly straightforward, even if it 0:03:42.080 --> 0:03:45.920 may not seem the fairest result. I mean, he's saying 0:03:46.080 --> 0:03:49.400 in terms of the law and the precedence that he followed, 0:03:49.440 --> 0:03:52.160 which is a thirty year old New York State case 0:03:52.280 --> 0:03:55.080 in which the money went out the door and it 0:03:55.160 --> 0:03:58.080 was spent before even the credits to even get a 0:03:58.200 --> 0:04:00.200 notice after them, and that was not the case year. 0:04:00.320 --> 0:04:02.920 But in the end he just found that there was 0:04:03.320 --> 0:04:06.360 enough uncertainty about it. They certainly could have thought that 0:04:06.480 --> 0:04:09.360 this was a legit payoff of the loan, given the 0:04:09.400 --> 0:04:12.600 contentious history between the parties. Now that's gonna be a 0:04:12.600 --> 0:04:15.960 big issue on appeal I. And there's an interesting footnote 0:04:16.240 --> 0:04:20.320 in the decision where the judge says there's not really 0:04:20.360 --> 0:04:23.760 a lot of precedent in case law to establish whether 0:04:23.920 --> 0:04:27.640 or not the defendants had to show, by her ponderance 0:04:27.640 --> 0:04:30.880 of the evidence that they were not unnoticed. In other words, 0:04:30.920 --> 0:04:33.760 they would have had to have proven that they didn't 0:04:34.040 --> 0:04:36.360 know this was a mistake. But he also said because 0:04:36.400 --> 0:04:38.520 he can't prove a negative, that he didn't have to 0:04:38.560 --> 0:04:41.800 reach that question. But that might be an area where 0:04:42.320 --> 0:04:45.160 the appeals court kind of seeks to see if if 0:04:45.200 --> 0:04:47.800 it was the burden of the defendants to prove that 0:04:47.880 --> 0:04:51.560 they had no idea that this was a mistake, that 0:04:51.600 --> 0:04:54.159 there's testimony that they at least thought maybe there was 0:04:54.400 --> 0:04:58.279 something wrong happened here. On appeal, they can appeal based 0:04:58.320 --> 0:05:01.120 on the facts or on the lass. Based on the facts. 0:05:01.920 --> 0:05:04.560 What's the likelihood of a good outcome for City Bank 0:05:05.320 --> 0:05:07.240 pretty slay. I mean the fact that the facts and 0:05:07.360 --> 0:05:09.360 they were pretty established a trial at least with the 0:05:09.440 --> 0:05:12.159 judge bound. So they'd have to prove that the judge 0:05:12.240 --> 0:05:15.320 totally got the law wrong and his interpretation of the 0:05:15.360 --> 0:05:18.640 facts is completely wrong, and that's going to be an 0:05:18.680 --> 0:05:21.560 uphill battle given the fact that he's pretty much relied 0:05:21.560 --> 0:05:24.040 on precedent to make his ruling. Like he said, it's 0:05:24.080 --> 0:05:26.600 not the fairest outcome in the world, but it is 0:05:26.600 --> 0:05:29.240 pretty straightforward, and there isn't a lot of precedent in 0:05:29.279 --> 0:05:32.839 this area. You just don't have large financial institutions stakingly 0:05:32.920 --> 0:05:37.840 sending almost a billion dollars to creditors that are involved 0:05:37.880 --> 0:05:41.039 in a contentious dispute every day. So that was kind 0:05:41.040 --> 0:05:44.120 of the problem with this case. And this case might 0:05:44.200 --> 0:05:46.760 help clarify the law in a lot of those areas, 0:05:47.000 --> 0:05:49.320 or it just might make it murkier. As experts have 0:05:49.400 --> 0:05:51.640 told me, this is a very murky area of the law. 0:05:52.120 --> 0:05:54.400 You know, these are kind of black Swan events. When 0:05:54.400 --> 0:05:57.599 we see these things happen. It's very interesting and it 0:05:57.680 --> 0:06:00.200 raises a lot of questions, but it doesn't necessary really 0:06:00.880 --> 0:06:04.400 make it clear what happens when something like this goes wrong. 0:06:04.800 --> 0:06:06.960 So I take it that the New York Court of 0:06:07.000 --> 0:06:10.240 Appeals could change the law if it wanted to, But 0:06:10.320 --> 0:06:14.040 this is going up to the Second Circuit Federal Court Appeals. 0:06:14.400 --> 0:06:17.279 The likelihood that they would be able to overturn the 0:06:17.320 --> 0:06:20.359 law that way is slim. I mean, certainly the Second 0:06:20.400 --> 0:06:23.680 Circuit could ask the Court of Appeals a question to 0:06:23.720 --> 0:06:26.480 certify a question involved in the case, but they wouldn't 0:06:26.520 --> 0:06:29.800 make the ultimate decision. If City Bank does not win 0:06:29.960 --> 0:06:33.839 an appeal, City Bank now holds the five billion dollar 0:06:34.080 --> 0:06:39.320 loan of Revlon. That is the nillion dollar question as 0:06:39.360 --> 0:06:42.640 it is what happens to that debt. Do they become 0:06:42.760 --> 0:06:46.000 the de facto owners of the debt? Do they go 0:06:46.120 --> 0:06:49.279 after Revalon in some way? That's there's a lot of 0:06:49.360 --> 0:06:53.160 questions as what happens with that next, and it's not 0:06:53.279 --> 0:06:55.719 really clear what the road will be on that. I 0:06:55.760 --> 0:06:59.560 mean until there's an actual judgment in terms of the 0:06:59.680 --> 0:07:01.800 end of the appeal and they get a final judgment. 0:07:01.880 --> 0:07:04.039 At this point, I would say it's status quo because 0:07:04.040 --> 0:07:07.479 the money is frozen and Revlon is still obligated to 0:07:07.560 --> 0:07:11.240 make regular interest payments on that debt. Looking at the future, 0:07:11.280 --> 0:07:15.040 if this case remains as it is on the books, 0:07:15.200 --> 0:07:20.480 will this expose banks that facilitate wire transfers or serve 0:07:20.520 --> 0:07:25.640 as administrators to more liability? Might there be change in 0:07:25.800 --> 0:07:28.679 rules because of this? I mean at the very least, 0:07:28.760 --> 0:07:32.200 you know, City Group even before the lawsuit and the trial, 0:07:32.360 --> 0:07:35.840 it was already revealing its internal controls because of responses 0:07:35.880 --> 0:07:38.960 from regulators about these kind of problems with this system 0:07:39.000 --> 0:07:41.720 and other things that had happened. So you know, on 0:07:41.760 --> 0:07:44.400 that level, there will certainly probably be changes at City 0:07:44.400 --> 0:07:47.120 Group that will probably have a full autopsy of what 0:07:47.240 --> 0:07:51.560 happened here. As to other transfer agents, administrative agents and 0:07:51.600 --> 0:07:54.320 banks that service administrative agents, and it's hard to say. 0:07:54.680 --> 0:07:57.320 Experts have said, you know, it certainly could increase the 0:07:57.400 --> 0:08:00.280 cost of doing this kind of business, but this is 0:08:00.320 --> 0:08:02.920 not a big profit center for banks. These are more 0:08:03.400 --> 0:08:07.400 services they provide in order to be close to borrowers 0:08:07.640 --> 0:08:09.720 and you know, to get better business and to provide 0:08:09.720 --> 0:08:12.880 a service. And so therefore, you know, it might just 0:08:13.040 --> 0:08:15.000 lead to some banks you decide they just don't want 0:08:15.000 --> 0:08:17.840 to do this anymore for the very little amount of 0:08:17.880 --> 0:08:19.360 money they get out of it. It might just need 0:08:19.400 --> 0:08:22.240 to lead to another layer of compliance. Um with more 0:08:22.360 --> 0:08:24.640 lawyers who have to sign off on these things, are 0:08:25.000 --> 0:08:29.440 certainly a more robust and uniform way of making these transfers. 0:08:29.880 --> 0:08:34.800 Thanks Chris. That's Crystal Mesh Bloomberg Legal reporter joining me now. 0:08:34.880 --> 0:08:37.520 Is one of the attorneys for the winning investment firms, 0:08:38.000 --> 0:08:41.960 Adam Abenson, a partner a Quinn Emmanuel. Many people were 0:08:42.040 --> 0:08:46.400 surprised by the judges ruling. Were you surprised? We were pleased, 0:08:46.400 --> 0:08:48.880 but not surprised. We have been deep in the law 0:08:49.120 --> 0:08:51.760 on the case over the course of four months at 0:08:51.760 --> 0:08:56.000 that point and understood that, notwithstanding with some other folks 0:08:56.200 --> 0:08:59.960 thought we had a really effluent defense under the longest 0:09:00.000 --> 0:09:02.959 that wished doctrine in New York. What do you think 0:09:03.080 --> 0:09:07.400 the trial turned on? What point in the trial convinced 0:09:07.440 --> 0:09:10.640 the judge. It's an interesting question here. I don't know 0:09:10.679 --> 0:09:13.240 that I could point to one moment or one witness. 0:09:13.360 --> 0:09:16.480 I think it was becoming increasingly clear over the course 0:09:16.559 --> 0:09:19.680 of the trial that no one in the position of 0:09:19.720 --> 0:09:22.959 our clients would have thought that this was a mistake 0:09:23.000 --> 0:09:25.959 by City Bank. They had never made a mistake of 0:09:26.000 --> 0:09:29.719 that type or on that scale, and under long established 0:09:29.720 --> 0:09:32.320 doctrine in New York. It's all under a case called 0:09:32.320 --> 0:09:35.960 bank worms. That that really was a key and I 0:09:36.000 --> 0:09:40.120 think ultimately this positive point. So the average person might 0:09:40.160 --> 0:09:43.120 look at this and say, if I went to a 0:09:43.160 --> 0:09:47.000 bank machine and fifty dollar bills just started flying out, 0:09:47.320 --> 0:09:50.080 I would have to return it. So why shouldn't the 0:09:50.120 --> 0:09:53.520 hedge funds have to return this windfall? Even the judge 0:09:53.559 --> 0:09:57.200 said that it might not seem like the fairest result. Well, look, 0:09:57.240 --> 0:09:59.920 I think that the key difference between, you know, the 0:10:00.120 --> 0:10:03.079 the money machinery pathetical and what we had here it 0:10:03.160 --> 0:10:06.800 was undisputed that the lenders represented by our clients were 0:10:06.840 --> 0:10:10.640 actually owed the amounts they received. What they got was 0:10:10.880 --> 0:10:13.840 to the penny there as in principle, and a crude interest. 0:10:14.400 --> 0:10:17.920 So this wasn't, you know, the kind of windfall the 0:10:17.920 --> 0:10:21.040 other side wanted to portray it. What it was was 0:10:21.080 --> 0:10:24.360 a group of lenders receiving exactly what they were oute 0:10:24.640 --> 0:10:27.600 and that's an important distinction under New York law, and 0:10:27.679 --> 0:10:30.079 we think it was a compelling distinction here at trial. 0:10:30.559 --> 0:10:33.000 City Bank says it's going to appeal. What do you 0:10:33.000 --> 0:10:36.320 think their chances are an appeal? Look, I hesitate to 0:10:36.320 --> 0:10:39.679 try and sort of handicapped, you know what arguments City 0:10:39.720 --> 0:10:43.120 Bank might make. We certainly think that court did an 0:10:43.160 --> 0:10:46.000 excellent job in its opinion. We think it gave a 0:10:46.000 --> 0:10:48.800 lot of detail and explanation as to why it was 0:10:48.920 --> 0:10:51.720 persuaded as it was. Much of its analysis has to 0:10:51.760 --> 0:10:54.480 do with what the court ocurred and saw from the witnesses. 0:10:54.880 --> 0:10:56.839 We're confident in our case. We very much think we're 0:10:56.920 --> 0:10:59.240 right on the law. And if City think, you know, 0:10:59.280 --> 0:11:02.040 follow us through its plans, we certainly like our chances. 0:11:02.320 --> 0:11:05.800 There are some legal scholars who are saying that the 0:11:05.840 --> 0:11:08.680 New York Court of Appeals should change the law. I 0:11:08.679 --> 0:11:11.000 don't expect that it will change, and I don't see 0:11:11.000 --> 0:11:13.160 why it should. I think that the decision that we 0:11:13.200 --> 0:11:16.160 relied on, which has decided I think over thirty years ago, 0:11:16.280 --> 0:11:18.640 has has now stood the test of time. The Court 0:11:18.679 --> 0:11:22.160 of Appeals decided that decision as it did in part 0:11:22.320 --> 0:11:25.240 because it wanted to incentivize banks and not to make 0:11:25.280 --> 0:11:27.920 these kinds of mistakes. And as a lot of the 0:11:27.920 --> 0:11:30.320 reports for indicating there haven't been a lot of these 0:11:30.400 --> 0:11:32.959 kinds of mistakes. So I think that authority in large 0:11:32.960 --> 0:11:35.480 part has worked. Um So, I I don't think there's 0:11:35.480 --> 0:11:38.360 a need for a change. I wouldn't anticipate a change, 0:11:39.200 --> 0:11:42.559 um And. And we think certainly that the decision here 0:11:42.640 --> 0:11:45.840 was very much in keeping with what the President required. 0:11:46.600 --> 0:11:49.600 What was the highlight of the trial for you? You You know, 0:11:49.640 --> 0:11:52.679 we had we had a really outstanding team working on this, 0:11:53.559 --> 0:11:58.080 Kates um I was co counsel of trial with two 0:11:58.120 --> 0:12:02.120 partners of mine at Quinnmanuel um Ben Finstone and Bob Lloydman. 0:12:02.880 --> 0:12:06.600 Both of them are outstanding and working closely with them, 0:12:06.600 --> 0:12:09.120 working in the trenches with them, um And that was 0:12:09.120 --> 0:12:11.560 the highlight of it. We also had really an excellent 0:12:11.600 --> 0:12:15.120 team of associates involved, um And. And. Look, it's not 0:12:15.320 --> 0:12:17.959 it's never easy to be in trial. It's intense, it's 0:12:18.000 --> 0:12:20.600 a lot of hours, but it was a really fantastic 0:12:20.600 --> 0:12:23.280 group to be doing it with. I was referring to, 0:12:23.400 --> 0:12:27.560 for example, if there was a cross examination or a 0:12:27.640 --> 0:12:32.000 direct examination that that stood out to you. We divveed 0:12:32.040 --> 0:12:34.720 up the witnesses, um, you know among the group that 0:12:34.760 --> 0:12:38.360 I mentioned, UM, And so for me, the high heights 0:12:38.400 --> 0:12:40.599 were the ones that I handled. UM. You know, I 0:12:40.640 --> 0:12:43.040 don't know if that's much the the the answer that 0:12:43.080 --> 0:12:45.440 you'd be looking for, but I I did a couple 0:12:45.480 --> 0:12:48.080 of the early witnesses who were the city bank folks 0:12:48.080 --> 0:12:51.760 who were actually involved in um, uh you know, making 0:12:51.760 --> 0:12:55.120 the transfer, UM. And that was very much the start 0:12:55.160 --> 0:12:58.319 of the case, sort of getting feet wet um. And 0:12:58.720 --> 0:13:00.959 uh you know that that it was, you know, an 0:13:00.960 --> 0:13:05.680 exciting opportunity for me to be handling those and again 0:13:05.800 --> 0:13:09.480 we we we liked how the evidence was coming in 0:13:09.559 --> 0:13:12.160 and uh you know, we felt as if it stayed 0:13:12.160 --> 0:13:14.240 on a good track from there on. I want to 0:13:14.240 --> 0:13:17.480 emphasize again what a great team effort this was, um. 0:13:17.559 --> 0:13:19.520 You know, not only with the partners and associate if 0:13:19.520 --> 0:13:22.800 I worked on, but also our firm quin Immanual, which UM, 0:13:22.840 --> 0:13:28.800 you know, it takes cases that that others might think unusual, um, 0:13:29.000 --> 0:13:31.360 and have we have a great track record of winning them, 0:13:31.400 --> 0:13:33.000 and UM, you know we're proud to I knew with 0:13:33.040 --> 0:13:37.400 the result here. Thanks Adam. That's Adam Abenson of Queen Emmanuel. 0:13:37.840 --> 0:13:40.480 And that's it for the edition of Bloomberg Law. I'm 0:13:40.559 --> 0:13:42.800 June Grosso and you're listening to Bloomberg