Hedge funds are penalized by the court for an "unintentional" $500 million Citigroup payment

According to a Financial News story, a federal appeals court in the US decided that hedge funds should not be permitted to keep the nearly $500 million that Citigroup unintentionally paid them on a debt owed by the now-bankrupt cosmetics giant Revlon.

Incorrect, according to the US Second Circuit Court of Appeals, was a lower court decision that allowed Revlon lenders Brigade Capital Management, Symphony Asset Management, and HPS Investment Partners to keep the "substantial windfall" they had received as a result of the bank's back-office error.

The appeals court's ruling is a big win for Citi, which in 2020 paid off a nearly $900 million debt that a then-struggling Revlon owed by using its own funds prematurely.

When the error was uncovered, some lenders, including a few hedge firms, agreed to return about $385 million at the bank's request, while others balked, sparking a legal conflict.

The appeals court claims that the grounds for its decision are that the Revelon's debt was not due at the time it was paid off and

Since Revlon filed for chapter 11 in June, it's possible that those lenders will now find themselves in a legal battle with the corporation over how much of the original loan they can recover.

Because Revlon's debt wasn't yet due when it was paid off, the appeals court determined that the investment firms weren't entitled to the money and that giving them a chance to keep it would be "brutally unfair" given that the payment was made "by accident and inadvertently."

The case has now been returned to the district court, and if Revlon, which declared bankruptcy with obligations totalling more than $3.5 billion, does so, the lenders may once more become creditors.