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LSTA Form of Erroneous Payment Provision

Bridget K Marsh

LSTA Form of Erroneous Payment Provision
Photo by Michael Dziedzic on Unsplash

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.”

LSTA’s Response

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”.

After distributing different drafts of the LSTA EPP to our membership for review and comment in 2021, we found that there were a few recurring issues. Outlined below are some of the key issues relating to the provision about which our lender member community was concerned in 2021 and the ultimate language that was included in the EPP:

  1. Clawback Cut-off Date: After an accidental payment has been made, the “clawback cut-off date” is the date after which the agent can no longer seek the return of the mistakenly paid funds. Lenders sought certainty and a tight timeframe for the “clawback cut-off date”. It can be exceedingly tricky or even impossible for certain lenders to repay funds to the agent, if they have already distributed the funds or moved them to an account in preparation for distribution to their own investors, so swift identification of any mistake is important.

    The LSTA EPP currently provides for a bracketed cut-off date of 5 business days. Lenders had asked that the LSTA remove these brackets and/or further shorten the cut-off date. We understand from the LSTA Operations Groups that most banks would typically recognize such an error in five business days. However, a review by Covenant Review of deals in the market revealed that very few of them included any clawback cut-off date, and where a date was included those dates were 3, 10, and 30 days. Although the LSTA’s lender community was disappointed by our inclusion of brackets around the language in the revised draft, it would have been misleading for the LSTA to include language without brackets since so few deals included any cutoff date. By way of comparison, it was also brought to our attention that the DTCC Distributions Service Guide provides a description of DTC’s longstanding rule regarding “Post-Payment Adjustments”. There it states that “DTC has a standing practice to only allocate monies upon receipt from the paying agent, trustee and/or issuer. On occasion, after crediting participants with a dividend, principal, or interest payment, DTC may have to create a post allocation rate change which may result in either additional credit or a debit to your account. Reasons to this include but are not limited to, an error on the part of DTC, the paying agent, trustee or issuer or a change in the principal factor or rate on a security.” DTC accommodates paying agent requests to process these types of post-payable adjustments when the request for the adjustment is received within one calendar year from the initial payment date.
  2. Determination of Whether a Mistake Has Been Made: The LSTA draft EPP had included two options when determining whether a mistake had in fact been made. The LSTA had added “reasonable”, at the request of our lender community to describe the threshold for the agent’s determination of whether a mistake had occurred. As such, parties had been presented with two bracketed options, “sole” or “reasonable”, when describing the determination of whether a mistake has been made. Ultimately, the LSTA EPP included only “sole” such that the agent is able to make that determination in its sole discretion because that was what had been included in credit agreements.
  3. Payment Notices: In the LSTA EPP, if lenders receive an amount that is in a different amount than, or on a different date from, that specified in a notice (or the credit agreement) or that was not accompanied by a notice, then an error shall be presumed to have been made and they must promptly notify the agent of their receipt of such payment. Agents began to include language to this effect in their payment notices in 2021, and as noted above, by doing so addressed one of the specific suggestions of developing a market standard that had been expressly mentioned by Judge Furman.
  4. Payment of Interest on Returned Funds: The LSTA EPP also provides that the recipient will return the funds with interest. Certain lenders objected to this because the provision was triggered by the agent – not them - making a mistake. There is, of course, precedent in typical credit agreements for the return of funds paid by the agent on the presumption that either the borrower or the lenders were going to fund them an equivalent amount. If they fail to fund the agent, then the borrower or the lenders, as the case may be, are required to repay to the agent on demand the amount so distributed to them, with interest at the federal funds rate. The Loan Market Association’s EPP also similarly provides for the payment of interest on returned funds. Although it is understandable that the lender community would object to this because the agent would have been solely responsible for the mistaken payment, the LSTA EPP includes the requirement for interest to be paid.
  5. Contractual Right of Set-off: The agent is also expressly permitted to set off amounts owing to a non-returning lender under any loan document against any amount that the agent has demanded to be returned. No member disputed the inclusion of this set-off clause.
  6. Deemed Assignment of Loans: Earlier drafts of the LSTA EPP provided if the agent does not recover an erroneous payment from a lender, then that lender shall be deemed to have assigned its loans (but not its unfunded commitments) to the agent with respect to which that erroneous payment was made in the same amount (calculated at par plus any accrued and unpaid interest) and is deemed to execute and deliver an Assignment and Assumption Agreement with respect to that amount. The agent may then sell the loan thereby reducing the amount owed to it. An important drafting note was included highlighting that, to the extent a credit agreement provides for a revolving credit facility, additional modifications to revolving loan and commitment mechanics may be required (e.g., when calculating aggregate revolving credit exposures and unfunded commitments, and related provisions including voting) to address the assignment of revolving loans but not the commitments. Because of the complexities of this, the footnote further stated that agents may elect to limit the assignment provisions to non-revolving credit facilities. After circulating drafts a couple of more times in 2021, we made further edits to clarify that the unfunded commitments remained with the lender.

    Ultimately, however, the deemed assignment of loans presented too many challenges for the market, including the secondary trading documents which did not contemplate such assignments. The LSTA was reluctant to include this provision because of its impact on the secondary market, and after learning that agents no longer included it in their own credit agreements, it has been removed from the final provision as it was no longer representative of the market.
  7. Waiver of the Discharge for Value Defense: Importantly, lenders are required to waive the discharge for value defense under the LSTA EPP as follows:

    To the extent permitted by applicable law, no Payment Recipient shall assert any right or claim to an Erroneous Payment, and hereby waives, and is deemed to waive, any claim, counterclaim, defense or right of set-off or recoupment with respect to any demand, claim or counterclaim by the Administrative Agent for the return of any Erroneous Payment received, including, without limitation, any defense based on “discharge for value” or any similar doctrine.
    Certain agents asked us to consider expanding the waiver of the discharge for value defense so that it included borrowers while some lenders have asked us to consider narrowing it. Those looking to expand it highlighted that there may be circumstances where the borrower is in fact a creditor of the agent (perhaps under a swap arrangement) and, therefore, asked that the borrower also waive that defense in our form. For those lenders seeking a narrower waiver, they did not believe it is equitable to require that lenders lose all their rights to challenge the determination of an Erroneous Payment, highlighting that unfortunately in the loan market, mistaken wire transfers are common. This is one point that we shall continue to monitor to see if the market departs from the LSTA language above.
  8. Contractual Rights of Subrogation: In addition to any rights of equitable subrogation that the agent may have, the LSTA EPP also expressly provides for the remedy of contractual subrogation. The parties agree that in the event an erroneous payment is not recovered from a lender for any reason, the agent shall be subrogated to all the rights and interests of that lender under the loan documents with respect to that amount. In this way, the agent may stand in the shoes of the lender. Although we explained the meaning of this clause to members, we received no pushback on its inclusion in the form.


We currently are awaiting the decision of the Second Circuit, and after we read that decision we are prepared to make further revisions to our form. As with all our documents, the LSTA will also continue to monitor the type of language parties ultimately agree to include in their deals. If it seems that the market coalesces around new language, we will update the existing LSTA Form of EPP. To that end, we invite our members periodically to share their feedback on this issue and, to the extent permitted, the language included in their deals.

This article was prepared by the Business Law Section's Commercial Finance and Uniform Commercial Code Committees.