Erroneous Payment Provisions in Credit Agreement

August 17, 2021

In a recent court case1, a New York district court judge held (to the surprise of some in the lending industry) that certain lenders to Revlon who received payments sent by the administrative agent in error were entitled to retain such payments. The judge noted that under New York law (specifically, a so-called “discharge-for-value” defense), a recipient of mistakenly sent funds could still keep such funds if: (i) they discharge a valid debt, (ii) the recipient made no misrepresentations to induce the payment and (iii) the recipient did not have notice of the mistake.

In response to the judge’s ruling, industry groups such as the Loan Syndication and Trading Association (LSTA) and the Loan Market Association (LMA), as well as individual lending institutions, have now developed model language intended to protect administrative agents against potential liabilities arising from any payments made in error.


Erroneous Payments. Each Lender hereby agrees that (i) if the Administrative Agent notifies such Lender that the Administrative Agent has determined in its sole discretion that any funds received by such Lender from the Administrative Agent or any of its Affiliates were erroneously transmitted to, or otherwise erroneously or mistakenly received by, such Lender (whether or not known to such Lender) and demands the return of such Erroneous Payment, such Lender shall promptly, but in no event later than one Business Day thereafter, return to the Administrative Agent the amount of any such Erroneous Payment (or portion thereof) as to which such a demand was made, in same day funds (in the currency so received), together with interest thereon in respect of each day from and including the date such Erroneous Payment (or portion thereof) was received by such Lender to the date such amount is repaid to the Administrative Agent in same day funds at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation from time to time in effect and (ii) to the extent permitted by applicable law, such Lender shall not assert any right or claim to the Erroneous Payment, and hereby waives, any claim, counterclaim, defense or right of set-off or recoupment with respect to any demand, claim or counterclaim by the Administrative Agent for the return of any Erroneous Payments received, including without limitation waiver of any defense based on “discharge for value” or any similar doctrine.

What is it and what does it do?

Erroneous payment provisions are included in credit agreements to grant the administrative agent the right to be repaid if it makes an erroneous payment, and to specifically waive the recipient’s right to bring any defenses relating to the erroneous payment. While market practice is still evolving, it is becoming increasingly common for administrative agents to include this protective language, and most lending institutions, as well as industry groups like the LSTA in the United States and the LMA in the United Kingdom, have now developed model language to address the Revlon case.

Why is it there?

Erroneous payment provisions have been developed largely in response to the Revlon case described above. Generally, the law requires mistakenly wired money to be returned. However, there is an exception to this general rule under New York law that allows a recipient to keep mistakenly distributed funds if the funds discharged a valid debt, the recipient made no misrepresentations to induce payment, and the recipient did not have notice of the mistake. Although cases where the exception applies are uncommon, administrative agents are inserting erroneous payment provisions into credit agreements to shield themselves from this scenario, and to mitigate their assumed risk.

Why is it important to investment funds?

Investment funds often are participants in all aspects of loan facilities.

If a fund is a lender, this case and the resulting language could impact the ability of the fund to keep and apply certain payments made by the administrative agent. In addition, erroneous payment provisions need to be kept in mind by a lender because such provisions may obligate a lender to: (i) indemnify the administrative agent for any loss it has suffered, (ii) waive its rights to bring any defenses relating to accidental payments, or (iii) assign its interests in the loan in favor of the administrative agent in an amount equal to any erroneous payment that is not recovered from such lender. In some cases, a lender may need to pay interest on any retained accidental payment.

If a fund is a borrower, it should keep in mind that erroneous payment provisions are sometimes drafted broadly to pick up any person that has received funds. This could mean that any accidental payment made by an administrative agent to a borrower could fall within the reach of the provisions, and a borrower may be bound by the same obligations and limitations detailed above. The application of payments and the implications for the administrative agent and lenders could also impact the borrower of a facility to the extent that the erroneous payment corresponds to a payment made by the borrower.

If a fund is acting as an agent under a loan facility, this provision provides important protection. Mistakes are sometimes made, especially in smaller institutions that do not have an extensive operations department or agency function. Administrative agents should not suffer a potentially catastrophic loss due to simple human error.

How is it negotiated?

It would be rare for an erroneous payment provision to be rejected by the borrower or any lender entirely, because an administrative agent needs protection in light of the potentially severe consequences of an unintentional error. However, the contours of such provision may be negotiated, and lenders and borrowers are advised to ensure that they do not overreach. For example, accrual of interest on erroneous payments may be resisted, the language relating to preservation of a borrower’s obligation to pay in an erroneous payment scenario may be scaled back or removed entirely, or a deadline for the administrative agent to notify the lenders of an erroneous payment could be required.


1 In re Citibank August 11, 2020 Wire Transfers, Case 1:20-cv-06539 (S.D.N.Y. 2021)