A federal appeals court in the US has ruled that hedge funds should not be able to keep the roughly $500 million they were mistakenly paid by Citigroup on a loan owed by now-bankrupt cosmetics company Revlon, according to a report by Financial News.
The US Second Circuit Court of Appeals said a lower court ruling allowing Revlon lenders including Brigade Capital Management, Symphony Asset Management and HPS Investment Partners to retain the “huge windfall” they collected from the bank’s back-office blunder, was wrong.
The appeals court decision is a huge boost to Citi which, in 2020, prematurely used its own money to pay off a loan of almost $900 million owed by a then struggling Revlon.
At the bank’s request, some lenders returned roughly $385 million when the mistake was discovered, but others including several hedge funds refused leading to a legal dispute.
The appeals court says its ruling is based on the fact that the Revelon’s debt wasn’t due when it was paid down and
Those lenders could now find themselves fighting it out with Revlon to collect as much as they can on the original loan, though their prospects for repayment are uncertain after the company filed chapter 11 in June.
The appeals court said the investment firms weren’t entitled to the money because Revlon’s debt wasn’t yet due when it was paid down and that allowing them to keep the money would be “brutally unfair”, with the payment having been made “by accident and unintentionally”.
The matter has now been sent back to the district court with the lenders potentially once again finding themselves as creditors if Revlon which went into bankruptcy with debts totalling more than $3.5 billion.
