What happens if you make a payment in error? – LMA responds to Revlon loan dispute | Sullivan and Worcester

Few cases in recent memory have sparked as much concern and controversy in the syndicated loan market – on both sides of the Atlantic – as the Revlon Case.[1] The New York Federal Court decision in Revlon was that the recipients of erroneous wire transfers made by Citibank NA (Citibank), acting in its capacity as administrative agent for a syndicated credit facility made available to Revlon, Inc., were entitled to retain close to $ 500 million of Citibank equity. This notwithstanding the fact that Citibank had only intended to transfer $ 7.8 million in interest payments and not the approximately $ 900 million that was actually transferred in error. Indeed, had it not been for the return of some of the recipients of the erroneous payment they had received, Citibank’s losses could have been even greater.

The court’s judgment was based on the “discharge for value defense,” a well-established exception to unjust enrichment under New York law. In short, beneficiaries will generally be allowed to retain funds transferred in error when: (i) the funds discharge a valid debt; (ii) the beneficiary has not made any false declaration to induce payment; and (iii) the recipient was not informed of the error. In rendering its decision, the court placed great emphasis on the fact that wire transfers were “to the penny” for the amount of principal and unpaid interest, thus underlining how much this case was based on its facts.[2]

Understandably, this decision came as a shock to many lenders, and market participants considered whether or not to include additional wording in their facility documents to avoid a similar outcome in the event that they, as an agent, make an incorrect payment.

Market reactions

Despite the Revlon decision being quite specific to the facts and, we understand, now on appeal,[3] both the Loan Market Association (LMA) and the US-based Loan Syndications and Trading Association (LSTA) moved quickly to publish new wording that market participants may wish to use in their facility documentation in light of the shutdown of Revlon.

On June 30, 2021, the LMA released a new erroneous payment clause intended to help market participants and provide express contractual protection to a facility agent in the event of an erroneous payment.[4] Among other things, the clause obliges recipients of erroneous payments to reimburse those amounts to the facility agent and provides for a waiver of any available defense or right (such as a right of set-off) that the recipient might otherwise have. to have. It should be noted that the LMA has made no recommendation as to whether the clause should be included in the parties’ documentation or any comment as to the availability or adequacy of any right or remedy that may be available to any party. party under applicable law in an erroneous payment scenario. This would include remedies under the Restitution Act (discussed further below). The parties will have to decide whether to include this clause (either in its current form or with modifications) on the basis of the agreed commercial position. As such, it remains to be seen to what extent the use of this clause will become widespread. One thing is clear, this is one more tool in the arsenal of agents made available under English law and, more specifically, the LMA documentation.

The approach of the LMA seems generally consistent (although arguably less cumbersome) with that adopted by the LSTA in the additional wording published by it on June 16, 2021.[5] in response to Revlon Case.[6]

The law of restitution and unjust enrichment

The issue of erroneous payments made by agents engages the principles of English law of unjust enrichment and restitution, according to which one party receives an advantage from another in “unfair” circumstances. Restitution aims to reverse this unjust enrichment by restoring the benefit in question to the applicant (here, the facilitator). In the case of a payment made in error, it means that the money is returned to the applicant.

In order to have a successful claim for restitution under English law, applicants will need to answer the following questions in the affirmative:

  1. Did the defendant get rich or received any advantage (eg money or property)? This is a distinct benefit from a benefit conferred as a gift or otherwise owed by the claimant.
  1. Was the enrichment unfair? This usually includes the unintentional or inadvertent transfer of money by the applicant. This is different from a scenario in which a party makes a payment, although they have doubts as to whether such a payment is actually due.
  1. Was the enrichment at the expense of the applicant? This is usually established by proving that the plaintiff transferred the money or other non-pecuniary benefit to the defendant.

Ultimately, whether or not an English court determines that an erroneous payment should be returned depends on the specific circumstances of how that payment was made.

It remains to be seen how the market will react to the wording published by the LMA and whether it will become a standard part of protective language for settlement officers. However, Citibank’s appeal against Revlon decision suggests that this is not the last we will hear on this issue.

[1] In re Citibank August 11, 2020 Bank transfers, n ° 1: 20-CV-06539 (JMF). See the decision here.

[2] Other relevant factors included the deteriorated relationship between the lenders, as well as the deteriorating financial condition of Revlon.

[3] It was reported that the United States Court of Appeals for the Second Circuit agreed to expedite Citibank’s appeal.

[4] The clause is available on the LMA website: https://www.lma.eu.com.

[5] A first draft was published by the LSTA in March 2021.

[6] This was covered in our June 24, 2021 trade and export finance webinar, “Payments, issues and practical solutions for trade and export finance transactions”, which you can access. here.

Comments are closed.