Many articles have been written about the important decision of Judge Jesse Furman of the United States District Court for the Southern District of New York in In re Citibank August 11, 2020 Wire Transfers (a.k.a. "Revlon"). That decision raised a number of issues for the loan market, and the LSTA assisted the market in addressing those issues by drafting a new erroneous payment provision (“EPP”) for credit agreements and leading the operations teams at the agent banks in the creation of appropriate payment notices to limit the risk of a Revlon type situation - where an agent bank mistakenly pays lenders and cannot recoup those funds - happening again.
In this note, I discuss the LSTA’s legal and operations responses to Judge Furman’s decision, review the LSTA form of Erroneous Payment Provision (“EPP”), and highlight the EPP issues that were in dispute amongst our members until the market began to coalesce around language in the provision in deals.
In August 2020, the administrative agent under a Revlon credit agreement was due to pay approximately $7.8 million in interest then due under that facility. Due to a series of errors, however, the agent ended up wiring Revlon's syndicate of lenders approximately $900 million (an amount coinciding with the aggregate principal and interest then outstanding). The agent – who realized its error within 24 hours – promptly notified the lenders of the mistake and requested that they return the funds. Adhering to current market practice, many lenders promptly returned the funds they had mistakenly been wired, and the agent quickly recouped about $385 million. But about $500 million was not returned, as certain lenders instead chose to keep the funds. In subsequent litigation before the United States District Court for the Southern District of New York (“SDNY”), the agent sought to recover the monies paid by mistake from those “non-returning lenders.” The non-returning lenders, in turn, relied upon the common law defense of “discharge-for-value” (as set forth in New York state law precedent) as a basis for retaining the funds. As articulated by the non-returning lenders – based upon a 1990 decision by the Court of Appeals of New York -- a discharge-for-value defense defeats an unjust enrichment claim under New York law, provided that the recipient can show that, without notice of any error, it received funds that discharged a debt then owed to them.
Even before it was decided, the Revlon case had prompted much debate within the market. As may be imagined, there are strong feelings on both sides of the issue.
In February 2021, after discovery and a full bench trial, Judge Jesse Furman of the SDNY issued a 101-page opinion containing his findings of fact and conclusions of law. Ultimately, His Honor ruled against the agent (Citibank), and in favor of the non-returning lenders.
In his opinion, Judge Furman acknowledged that Citibank had developed processes to reduce errors in its loan processing and wire transfers process – and that, in general, those processes have worked successfully in the past. Unfortunately, as His Honor noted, those processes failed on August 11, 2020. His Honor went on to hold that, under current New York law, he was constrained to uphold the “discharge-for-value” defense.
In the course of reaching his conclusions, Judge Furman considered the parties’ submissions about current market practice and policies. Although His Honor considered that these arguments were insufficient to overcome the “discharge-for-value” defense, he went to note that banks could work with the LSTA to develop standards to govern the content and timing payment notices to help minimize the risk of errors and stated:
“Moreover, banks could — and, perhaps after this case, will — take other relatively costless steps to both minimize the risk of errors and increase the probability of clawing back erroneous payments. For example, banks could, either on their own, or through an industry association like the LSTA, create clear standards governing the content and timing of payment notices. If a payment notice akin to the Calculation Statements here always preceded an actual payment by some specified interval (and banks adopted security procedures, akin to the six-eyes process, to ensure that they did), then the absence of such a notice would indeed raise a red flag that the payment was erroneous. So too, if such notices always unambiguously and explicitly described the size and nature of the payment, the recipient of a payment that deviated from the notice would plainly be on notice of the mistake.”
As the case has been appealed to the United States Court of Appeals for the Second Circuit, we now await that court’s decision on that matter. (An amicus brief from the LSTA was submitted because the LSTA remains concerned that the result in Revlon runs counter to market practices and policies.) On a separate track -- and in view of Judge Furman‘s dicta quoted above -- the LSTA’s legal and operations committees took immediate action in 2021 to address aspects of Revlon.
On the operational side, agent banks added language to notices, which alert lenders to circumstances pursuant to which the lender agrees to return wired funds to the agent, either systemically or manually.
On the legal side, the LSTA drafted the new LSTA form of EPP for credit agreements. The LSTA EPP provides that if a lender is notified by an agent that the agent has made an erroneous payment, the lender must return the funds within two business days, and if a lender receives an amount that is different from the amount in the payment notice, then an error must be presumed, and it should promptly notify the agent. Lenders also agree to waive any defense based on “discharge for value”.