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