September 15, 2022 - updated on September 15, 2022 – Over the past few years, the LSTA has closely monitored and engaged on the issue of “loan market norms”. We have written about and educated on some of the important cases and “liability management” strategies and other loan market tactics that have challenged market norms. One of those situations is the Revlon credit agreement “mistaken payment” case, where several lenders refused to return a large payment – collectively $500 million – they received by mistake. We briefly discuss the issue below, but also note that we will host a webcast on Revlon next week and discuss loan market norms more broadly at the LSTA Conference on September 22nd.
Last week, the United States Circuit Court for the Second Circuit (the “2nd Circuit”) reversed a controversial decision by the District Court for the Southern District of New York (“SDNY”) that permitted those lenders to retain the mistaken payment made by Citibank as Administrative Agent for a credit agreement with Revlon. The SDNY decision roiled the loan market, upending decades of expectations that mistaken payments are routinely returned. It also led the LSTA, through its Primary Markets Committee, to develop a widely adopted standard Erroneous Payment Provision for credit agreements designed to prevent such situations from happening again. The 2nd Circuit’s long-awaited decision conforms to long-standing market norms and expectations and, together with the LSTA’s new provisions, will result in a return to certainty for the disposition of mistaken payments. The LSTA submitted an amicus brief (which was cited in the concurrence) supporting the position that the mistaken payments had to be returned.
Background. On August 11, 2020, Citibank intended to make an interest payment on the Revlon credit agreement 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 appealed to the 2nd Circuit, arguing that the discharge for value defense is very narrow and does not apply in this case and that 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 2nd Circuit Decision. The Court’s opinion (signed by two of the judges) held that the lenders could not rely on the discharge for value defense for two primary reasons. First, the lenders had “constructive notice” of the mistake. And, in any event, because the payment was not “due and payable” (in fact, it was not due for three years after the mistaken payment was made), the lenders were not entitled to repayment at that time. The court’s second reason for rejecting the defendants position mirrors the position taken by the LSTA in its amicus brief which argued that the very narrow discharge for value defense does not extend to loans that are not yet due. Concurring in the result, a third judge would not have even considered the issue of constructive notice. Instead, he wrote,, “Put simply, you don’t get to keep money sent to you by mistake unless you are entitled to it anyway.”
What does this mean for the loan market? The 2nd Circuit’s decision has effectively codified a return to norms on the issue of returning mistaken payments. Combined with the LSTA’s standard Erroneous Payment provision, it will likely ensure that any future mistaken payments made in respect of credit agreements will be returned and will enhance the certainty that the loan market has always relied on.
Where can you learn more? The LSTA is hosting a webinar on the Revlon mistaken payment case next week, moderated by LSTA general counsel Elliot Ganz and featuring Ronald Mann and Eric Talley, two law professors at Columbia Law School, each of whom drafted an amicus brief supporting the position adopted by the 2nd Circuit. You can register here. The topic of fairness and loan market norms (including Revlon) will also be covered at a panel at the LSTA’s forthcoming Annual Conference on September 22nd.