An interpretation of “discharge for value” | Cadwalader, Wickersham & Taft LLP
As most players in the loan market now know, the United States District Court in the Southern District of New York issued a ruling on February 16, 2021. In Re Citibank August 11, 2020 Wire transfers that some lenders were allowed to hold approximately $ 500 million in funds mistakenly sent by the administrative agent under a credit facility to Revlon, Inc. The court ruling came as a shock to many lenders. However, it is based on an interpretation of the “value discharge” doctrine and testifies to the fact that payers are in the best position to avoid payment errors and are the appropriate party to assume the risk of associated losses.
What does this mean for agent banks? As a first principle, institutions should redouble their efforts to ensure that erroneous payments are not made in the first place. In addition, many agents have started to incorporate “clawback” language into agency arrangements in new transactions so that they will contractually resort to payees in the event of an erroneous payment. The Loan Syndications and Trading Association (LSTA) has started a recovery language standardization project which, when finalized, will likely be included in many credit agreements.
One often wonders why credit agreements are so long – the answer is that many provisions in every agreement relate to court decisions, default rules, situations or outcomes that the parties wish to contractually change. At least for a while, most of us will be able to remember why the provision “if you receive a payment in error, you must return it” is included in the agency section.
For a more in-depth discussion of the case, click here for the Cadwalader Clients & Friends memo by partners Steve Herman and Chris Dickson.