May 13, 2021 - by Bridget Marsh. Following the court’s decision in the Revlon Case in February, administrative agents have been including specific provisions in new credit agreements (“Erroneous Payments Provision” or “EPP”) that allow them to demand repayment of amounts paid to lenders in error. Shortly after that decision, the LSTA published a draft Market Advisory and draft form of Erroneous Payments Provision and since then has monitored its use in deals. Notably, the LSTA’s language includes the possibility of a cutoff date after which the agent would not be permitted to demand repayment of a mistaken payment. Although the market continues to negotiate different aspects of the EPP, the inclusion of any such cutoff date is a point about which lenders remain deeply concerned because there are serious ramifications for not including a time limit on the ability of the agent to clawback any amounts paid in error.
As Covenant Review notes in their recent Report, “[v]iewed from the perspective of a member of the syndicate, imposing a drop-dead date on the administrative agent’s ability to demand repayment would be beneficial as it is often the case that the lender will no longer possess the funds. For example…. the lender may have already distributed the funds to its investors by the time the mistake is realized. At that point, one could argue, it would not be fair for the lender to be forced to repay the administrative agent for the administrative agent’s mistake, particularly if the mistake went unnoticed for a long period of time. Taken in this light, a reasonable time frame would protect lenders from these risks.”
In the LSTA’s draft EPP, we propose language that gives the parties some flexibility to negotiate a mutually agreeable time frame; however, only three of more than 100 deals reviewed by Covenant Review include a restriction on how long the administrative agent has to demand repayment — in one case, it is three business days after receipt of the mistaken payment, in another, ten business days, and in the third, 30 calendar days. The LSTA continues to gather comments on the draft language and to monitor the EPP ultimately included in deals. We ask members to continue to send us examples of this provision in their executed credit agreements when possible. As noted in last week’s LSTA Newsletter, the LSTA has filed another amicus brief in support of Citibank’s appeal of the decision. In that brief, the LSTA 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. We note 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.