The Second Circuit Court of Appeals has ordered a new trial in Terra Firma’s lawsuit against Citigroup.

In August 2007, the private equity firm acquired EMI for 4 billion pounds ($6.5 billion). Two years thereafter, saddled with debt, Terra Firma sued Citigroup with allegations that during the auction, a Citigroup banker named David Wormsley who was one of the people advising the auction, had fraudulently induced the private equity firm to make an inflated bid for EMI.

Wormsley allegedly got Terra Firma to make a huge bid by telling one of Terra Firma’s principals that another bidder was bidding 262 pence per share when really, the bidder had already dropped out.

In 2010, a jury ruled in Citigroup’s favor, but on Friday, an appeals court vacated the ruling with a finding that the trial judge had made improper jury instructions.

At the end of the trial, the judge told the jury that Terra Firma had to prove, by a preponderance of the evidence, that it “did in fact rely on one or more [of Wormsley’s] misrepresentations and that the misrepresentations were a substantial factor in causing Terra Firma to make the bid it made for EMI Group on May 21, 2007.”

The Second Circuit now says that was an error.

According to today’s ruling, “Because the jury instructions incorrectly
shifted the burden of proof from Citi to Terra Firma on the reliance element, they were prejudicial and require reversal.”

Terra Firma can’t convince the appeals court that its negligent misrepresentation claim should have been decided by the judge rather than the jury nor is it able to revive a fraudulent concealment claim that was dismissed by the judge.

But the case has been remanded down to the trial court for a new trial.

Ironically, Citigroup took over control of EMI from Terra Firma in early 2011 — after the trial — and then parts of EMI were sold to Universal Music Group and Sony/ATF Music Publishing. [Billboard.biz]