Background
On February 16, 2021, a U.S. federal judge held that Citibank, as administrative agent, was not entitled to recover nearly $500 million which it had transferred in error, paying off some participants in a syndicated loan for Revlon, and which the receiving syndicate lenders refused to repay. Citibank intended to transfer amounts representing interest of c.$8m to Revlon’s lenders, but instead sent the lenders the exact amount of the principal and interest owing to each of them on Revlon’s loan, an amount of almost $900m. Citibank realised their mistake the next day and requested the money back, but ten of the lenders involved in the syndicate refused to return a total of $500m in funds which they had received.
The court’s decision
Under New York law, the recipient of a mistaken payment is usually required to give it back on the basis of unjust enrichment, and this was the argument Citibank tried to run in this matter. However, there is an exception which allows creditors to keep money that was owed to them, even if the payment was unintentional (the ‘discharge for value’ principle). A recipient may keep funds that are paid by mistake if:
- the funds discharge a valid debt owed to the recipient;
- the recipient makes no misrepresentations to induce the payment; and
- the recipient has no notice of the mistake at the time it receives payment.
The discharge for value principle operates on the basis that the risk of loss from an accidental payment should lie with the party making the payment, because they are in the best position to avoid making errors in the first instance. The court agreed with the lenders that the principle applied in this matter, and so the loan was deemed discharged.
What would happen under English law?
The following points would need to be considered in a similar English law case:
- The LMA forms of facility agreement contain clawback provisions which are intended to ensure that where the agent makes a payment to the lenders in the expectation of a payment from a borrower, the lenders shall refund the amount if the relevant borrower payment is not received by the agent. However, it is doubtful whether this provision would be of assistance to an agent in a Revlon scenario, given that there was no stated intention on Revlon’s part to repay the loan.
- LMA facility agreements also provide extensive protections for agents, including wide-ranging indemnities from both lenders and borrowers, but these indemnities are typically not applicable in the event of gross negligence on the part of an agent and so again may be of limited assistance in a Revlon scenario.
- Looking outside of documentation, the doctrine of unjust enrichment exists in English law. However, there is a defence on the part of the enriched party where a payment has been made in error, which is in respect of a debt which is due and owing (as was the case in Revlon). In order to rely on this defence in a scenario where the error has been made by a third party such as an agent, it must be shown that the debtor had authorised the payment of the debt – this proviso could have proved useful for Citibank in an English law decision.
- However, under English law a further potential defence for the enriched party might still apply, if the payment recipient can demonstrate that it had reallocated the funds to other investments or loans following receipt and could not easily retrieve them.
It is therefore not definitively possible to say how Citibank might have fared if this matter had been decided by the English courts; whilst there are some additional arguments which it might have been able to run, it is also possible that an English court may have reached a the same conclusion on the facts at hand.
What might happen next in England?
In March 2021, the LSTA (the US equivalent to the LMA) released a discussion draft of language that an administrative agent may opt to include in a credit agreement to provide additional protections against this type of scenario. This language would allow agents to serve notice of payment made in error, subject to an agreed long-stop date. If a notice were received, such lender would be obliged to return the funds to the agent, together with accrued interest. The draft provision also waives any claims or defences a lender might mount against such claim.
Interestingly, the draft provision effectively forces any lender without immediate ability to access equivalent funds, to hold payments in a suspense account until they are sure no notice requesting the return of the funds is capable of being sent. This would represent a significant practical change and an additional layer of administrative burden for lenders operating in the market, and as such it remains to be seen whether the approach proposed by the LSTA will gain market traction. Citibank is also expected to appeal the court’s decision, and the outcome of that appeal may also affect the approach the LMA chooses to take.
This serves as a timely reminder that agents should continue to ensure that they have robust internal checks in place to prevent payment errors from occurring in the first instance and how it communicates with a lender syndicate in relation to payments due to such parties.
Written by Rachael Ruane and Alison Logan.