May 6, 2021 - written by Elliot Ganz. This week the LSTA filed an amicus brief with the US Court of Appeals for the 2nd Circuit (the “2nd Circuit”) in the “mistaken payment” case involving Citibank and several institutional lenders.  The LSTA, as the trade association representing the interests of both buy-side and sell-side participants in the syndicated loan market, urges the Court to reverse the ruling of the district court which held that the lenders could keep the mistaken payment.

Background.  On August 11, 2020 Citibank, as administrative agent in a loan to Revlon, intended to make an interest payment but mistakenly wired almost $900 million of its own money to the lenders, representing the full amount of the interest and principal outstanding.  After discovering the mistake, Citibank notified the lenders and requested the return of the funds.  While many lenders complied, several did not, invoking the “discharge for value” defense which permits recipients of mistaken payments to retain such funds under limited circumstances.  Citibank sued and the district court judge ruled for the defendants.  Citibank immediately filed a notice of appeal to the 2nd Circuit and recently submitted a brief arguing that the discharge for value defense is very narrow and does not apply in this case.  The funds they erroneously paid to lenders must be returned, consistent with New York law’s overriding legal principle that requires restitution of mistaken payments

The LSTA Amicus Brief. The LSTA brief supports Citibank’s view, noting that, given the large number of wire transactions in the syndicated loan market, mistakes are inevitable, and it is the well-established practice for market participants to routinely return mistaken payments.  Administrative agents are paid small fees and requiring them to “insure over” billions of dollars in payments is unworkable. Moreover, noting that the Revlon loan did not mature until 2023, the LSTA argues that the very narrow discharge for value defense does not extend to loans that are not yet due.  It suggests that permitting recipients to retain mistaken payments of funds that are not yet due would be particularly jarring to market expectations and customs.  Finally, the LSTA notes that a decision that permits recipients to retain mistaken payments would be extremely disruptive, putting lenders in the untenable position of having to freeze whenever they potentially receive them – retain counsel, consult their investors, seek information from others – instead of doing what they have been doing from the inception of the market: return money to which they have no entitlement.

What’s next?  This appeal is being handled on an expedited basis.  By the end of July, defendants will submit an opposition brief and Citibank will submit a reply brief.  Oral arguments will likely take place in August or September.  The LSTA will continue to monitor the situation closely.

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