FOUR FAST FACTS ON: ERRONEOUS PAYMENTS APRIL 2022
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The Revlon case
The issue
A decision1 in the New York Federal Court has resulted in changes to agency provisions in syndicated facility documentation.
The decision prevented the agent from recouping around half a billion dollars mistakenly paid to lenders in what was described by the judge as “a banking error of perhaps unprecedented nature and magnitude”.
The agent for lenders to Revlon Inc. (Revlon) mistakenly paid more than US$893 million to syndicate lenders, seemingly repaying the full amount of all outstanding principal and interest three years early, instead of paying US$7.8 million in interest due. Some lenders returned the amounts they had received in error, but 10 lenders (totalling more than US$500 million) refused multiple recall requests by the agent to return the funds. The agent brought a claim against these lenders on the basis of unjust enrichment. However, judgement was found in favour of the lenders on the basis that the transfers were “final and complete transactions, not subject to revocation” and that the lenders “were justified in believing that the payments were intentional”.
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While an argument based on unjust enrichment may or may not have yielded different results in different jurisdictions, the implications of this case have raised awareness of a potential liability risk to agents for operational errors. The agent is appealing the decision, but in the meantime, banks are seeking to protect themselves by expanding documentary protections relating to erroneous payments.
The new provisions
Where to from here?
Syndicated facility documentation has for many years typically contemplated ‘clawback’ protections for agents – where payments made by an agent in anticipation of receipt of funds could be recovered from lenders if the agent didn’t end up in funds from the borrower.
Agent banks will understandably want to limit their exposure to liability for payments made in their role as agent to the fullest extent possible. To that end, the inclusion of additional provisions to address erroneous payments has become standard in the New Zealand market.
It is unclear how helpful standard clawback provisions would be in circumstances such as the Revlon case. Furthermore, agency indemnities would typically exclude losses resulting from an agent’s negligence. As such, industry bodies including the LSTA (US), LMA (UK) and APLMA (AsiaPac) have proposed additional protective provisions in light of the Revlon case to specifically require repayment by lenders of amounts paid to them in error.
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However, given that these provisions allow agents to serve notice on lenders to return payments, this raises questions for syndicate lenders as to when they can consider a payment made by an agent to not be subject to recall. This remains an open point for the market to resolve. Whether or not the agent is successful in its appeal, we expect agency teams will have to conduct considerable testing on an ongoing basis to ensure their operational systems work as intended. 1. In re: Citibank August 11, 2020 Wire Transfers, U.S. District Court, Southern District of New York, No. 20-06539
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