Few cases in recent memory have stirred up as much concern and controversy in the syndicated loan market—on both sides of the Atlantic—as the Revlon case.[1] The ruling of the New York federal court in Revlon was that the recipients of erroneous wire transfers made by Citibank N.A. (Citibank), acting in its capacity as administrative agent for a syndicated loan facility made available to Revlon, Inc., were entitled to keep almost $500 million of Citibank’s own money. This was notwithstanding the fact that Citibank had only intended to transfer $7.8 million in interest payments and not the $900 million or so that was actually transferred by mistake. Indeed, had it not been for some of the recipients returning the mistaken payment they received, Citibank’s losses could have been even more significant.
The court’s judgment was based upon the “discharge-for-value defense”, a well-established exception to unjust enrichment under New York law. In short, recipients will generally be allowed to keep funds transferred erroneously where: (i) the funds discharge a valid debt; (ii) the recipient made no misrepresentations to induce payment; and (iii) the recipient did not have notice of the mistake. In reaching its decision, the court made a great deal of the fact that the wire transfers equalled “to the penny” the amount of principal and interest outstanding, thus underscoring the degree to which this case turned upon its facts.[2]
Understandably, this ruling has come as a shock to many lenders, and market participants have been considering whether or not to include additional wording in their facility documents to avoid a similar outcome in the event that they, as agent, make an erroneous payment.
Reactions from the market
Despite the Revlon decision being quite fact specific and, we understand, now under appeal,[3] both the Loan Market Association (LMA) and the US-based Loan Syndications and Trading Association (LSTA) have acted swiftly to publish new wording that market participants may wish to use in their facility documentation in light of the judgment in Revlon.
On 30 June 2021, the LMA published a new Erroneous Payment Clause intended to assist market participants and to provide express contractual protection for a facility agent in the event it makes an erroneous payment.[4] Among other things, the clause obliges recipients of erroneous payments to refund such sums to the facility agent and provides for a waiver of any available defence or rights (such as a right of set-off) that the recipient may otherwise have. It is worth noting that the LMA has made no recommendation as to whether the clause needs to be included in parties’ documentation or any comment as to the availability or adequacy of any rights or remedies that may be available to any party under applicable law in an erroneous payment scenario. This would include remedies under the law of restitution (discussed further below). Parties will need to decide on the appropriateness of including this clause (whether in its current form or with amendments) based on the agreed commercial position. As such, it remains to be seen how widespread the use of this clause will become. One thing is clear—this is yet another tool in the armoury of agents made available under English law and, more specifically, LMA documentation.
The LMA’s approach appears generally consistent (although arguably less heavy-handed) with that taken by the LSTA in the additional wording published by them on 16 June 2021[5] in response to the Revlon case.[6]
The law of restitution and unjust enrichment
The issue of erroneous payments made by agents engages the English law principles of unjust enrichment and restitution, whereby one party receives a benefit from another under “unjust” circumstances. Restitution seeks to reverse such unjust enrichment by restoring the benefit in question to the claimant (here, the facility agent). In the case of a payment made by mistake, this means the money being returned to the claimant.
In order to bring a successful claim for restitution under English law, claimants will need to answer the following questions in the affirmative:
- Has the defendant been enriched or received a benefit (e.g. money or goods)? This is distinct from a benefit conferred as a gift or otherwise owed by the claimant.
- Was the enrichment unjust? This will typically include the involuntary or inadvertent transfer of money by the claimant. This is distinct from a scenario in which a party makes a payment, despite having doubts about whether such payment is actually owed.
- Was the enrichment at the expense of the claimant? This is generally established by proving that the claimant transferred the money or some other non-pecuniary benefit to the defendant.
Ultimately, whether or not an English court will determine that an erroneous payment must be returned depends upon the specific circumstances of how that payment came to be made.
It remains to be seen how the market will respond to the wording published by the LMA and whether this will become a standard part of the protective language for facility agents. However, Citibank’s appeal of the Revlon decision suggests that this is not the last we will be hearing on this issue.
For further information on the LMA’s Erroneous Payment Clause or syndicated loans more generally, please contact Geoff Wynne, Sam Fowler-Holmes or your usual contact at the firm.
[1] In re Citibank August 11, 2020 Wire Transfers, No. 1:20-CV-06539 (JMF). See decision here.
[2] Other relevant factors included the souring relationships between the lenders, as well as Revlon’s deteriorating financial situation.
[3] It has been reported that the United States Court of Appeals for the Second Circuit has agreed to fast-track Citibank’s appeal.
[4] The clause can be accessed on the LMA’s website: https://www.lma.eu.com.
[5] An initial draft was published by the LSTA in March 2021.
[6] This was covered in our 24 June 2021 Trade & Export Finance webinar, “Payments, Problems and Practical Solutions for Trade and Export Finance Transactions”, which can be accessed here.
