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Second Circuit Determines Agent’s Mistaken Payment of Principal to Lenders Does Not Invoke “Discharge-For-Value” Exception to Restitution

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On September 8, 2022, a three-judge panel in the United States Court of Appeals for the Second Circuit (the “Second Circuit”) reversed the United States District Court for the Southern District of New York (the “District Court”) when it determined that lenders of a syndicated loan facility to Revlon, Inc. (“Revlon”)1 who received an accidental and unintended payment from the loan agent of approximately $500 million dollars were not excused from returning a mistaken payment under New York’s “discharge-for-value” exception to restitution.2 The Second Circuit’s ruling clarifies application of the discharge-for-value rule and provides guidance to creditors on issues of notice.


In 2016, pursuant to a credit agreement governed by the laws of the State of New York (the “Credit Agreement”), Revlon took out a seven-year, $1.8 billion syndicated, collateralized term loan (the “2016 Term Loan”).  The 2016 Term Loan had a “springing” maturity determined as the first to occur of September 7, 2023, or the Accelerated Maturity Date. “Accelerated Maturity Date” was defined as “the date that is 91 days prior to the stated maturity” of a specified set of senior notes due in 2021 (the “2021 Notes”), “if on such date, any 2021 Notes remain outstanding.”

Citibank, N.A. (“Citibank”) served as the administrative agent (the “Agent”) for the lenders under the Credit Agreement (the “Lenders”). In May 2020, as a result of its constrained liquidity position, Revlon entered into a series of liability management transactions to raise additional capital by using certain of its intellectual property collateral that originally secured the 2016 Term Loan (the “BrandCo IP Collateral”) to secure three new loan facilities (the “BrandCo Facilities”) from a subset of the Lenders of the 2016 Term Loan on a priming basis vis-à-vis the 2016 Term Loan (collectively, the “May 2020 Transactions”). The May 2020 Transactions included an amendment to the Credit Agreement that accomplished the following: first, the amendment allowed the BrandCo IP Collateral to be released from securing the 2016 Term Loan and to secure a new money facility (the “2020 New Money Facility”)3 on a first-priority basis; second, the amendment included a provision allowing 2016 Term Loan Lenders who approved the May 2020 Transactions and participated in funding the 2020 New Money Facility (the “BrandCo Lenders”) to convert their respective 2016 Term Loan claims into new claims via two roll-up facilities (the “Roll-Up Facilities”) secured by the BrandCo IP Collateral on a second-and third-priority basis (as applicable)with the 2020 New Money Facility and by the remaining assets securing the 2016 Term Loan on a pari passu basis with the 2016 Term Loan. Effectively, in a variation of what is commonly referred to as an “uptier” exchange transaction, the BrandCo Lenders, by participating in the May 2020 Transactions, would continue to have their existing claims in respect of the 2016 Term Loan and their claims in respect of the 2020 New Money Facility secured by the BrandCo IP Collateral while those existing Lenders withholding their consent to the May 2020 Transactions would lose their previously existing first-priority liens on the BrandCo IP Collateral.5 On August 7, 2020, Revlon offered to exchange the 2021 Notes for new notes due in 2024 to avoid the acceleration of the 2016 Term Loan, and ultimately retired the 2021 Notes at a discount to par.

On August 11, 2020, Revlon tasked the Agent with executing an out-of-court roll-up transaction with five Lenders who were exchanging their positions in the 2016 Term Loan for positions in the BrandCo Facilities. Effectuating the roll-up in the manner requested by Revlon (i.e., making an off-cycle payment of accrued interest not yet due under the 2016 Term Loan to all Lenders) required the Agent to treat the transaction as a full payment of the 2016 Term Loan in the Agent’s loan processing software and to enter certain manual overrides of such software (including an intended internal transfer of the related principal amount to an internal “wash” account) in a manner intended to avoid any funds in respect of principal of the 2016 Term Loan from actually being transmitted; however, the overrides were not properly executed and, as a result, the total amount of principal and accrued interest outstanding on the 2016 Term Loan for each Lender — nearly $1 billion and including almost $900 million of Citibank’s own money for which the Agent had not received any related payment from the Revlon borrower — was wired to the Lenders, with the almost $900 million principal portion being wired in error at a time when no principal payment was due (the “Mistaken Payment”).6 The day after the Mistaken Payment, Citibank sent recall notices to the Lenders notifying them of the mistake.  Managers controlling about half of the total Mistaken Payment agreed to return the mistakenly wired funds; however, certain of the Lenders (the “Defendants”) refused to do so.

Citibank’s Lawsuit and the District Court Ruling: On August 17, 2020, the Agent sued the Defendants in the District Court under theories of unjust enrichment, conversion, money had and received, and payment by mistake.7 The Agent sought relief in the form of specific restitution of its identifiable funds.  The District Court granted a temporary restraining order freezing the funds,8 and after a bench trial, the District Court, relying on the Banque Worms9 decision of the New York Court of Appeals, entered judgment for the Defendants and held that recovery by the Agent was barred by the discharge-for-value defense.10 The Agent appealed the District Court’s ruling to the Second Circuit. While the appeal was pending, Revlon filed for chapter 11 bankruptcy in the United States Bankruptcy Court in the Southern District of New York.

The Syndicated Lending Market’s Reaction: In late 2020 and 2021, in reaction to the District Court’s ruling and in response to widespread surprise and dismay of financial institutions engaged in the business of acting as administrative agents under syndicated credit facilities, participants in the syndicated lending market developed and incorporated so-called “erroneous payment” provisions (also known as “Revlon Blocker” provisions) in form loan agreements in an effort to avoid the results that would otherwise be implicated by the District Court’s ruling in the event of future mistaken payments by institutions acting as administrative agents.11

The Second Circuit’s Ruling: September 8, 2022, the Second Circuit reversed the District Court and concluded that because the Lenders were on inquiry notice that the Mistaken Payment was erroneously paid and the 2016 Term Loan was not “due” at the time of the Mistaken Payment, the Defendants could not retain the funds via New York’s discharge-for-value exception.

New York law calls for restitution of mistaken payments unless the recipient of the payment significantly changed its position in reliance on the mistake such that it would be unjust to require repayment.  In Banque Worms, the New York Court of Appeals endorsed an exception to this general rule based on the First Restatement’s discharge-for-value principle, which provides that:

[a] creditor of another or one having a lien on another’s property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor’s mistake.12

The Restatement describes this rule as a “specific application of the underlying principle of [a] bona fide purchase.”  The Banque Worms court further explains:

[w]hen a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.13

In its ruling, the Second Circuit focused on two components of the discharge-for-value defense: whether the recipients of the Mistaken Payment were (1) on notice that the Mistaken Payment was accidental and (2) entitled to the money paid at the time of the Mistaken Payment.

Notice. As to notice, the Second Circuit concluded that the Defendants were on inquiry notice14 of the Agent’s error and, therefore, could not satisfy the notice requirement of the discharge-for-value exception. The Second Circuit examined notice from the perspective of a reasonably prudent investor and determined that the attendant “facts were sufficiently troublesome such that a reasonably prudent investor would have made reasonable inquiry, and [that such] inquiry would have revealed that the [Mistaken Payment] was made in error.”15 In making this assessment, the Second Circuit observed:

  • The Defendants received no prior notice that Revlon intended to prepay the principal of the 2016 Term Loan, as required by the Credit Agreement,16
  • The Defendants believed at the time of the Mistaken Payment that Revlon was insolvent by as much as $1.71 billion.17
  • The 2016 Term Loan was trading at 20−30 cents on the dollar, and Revlon could have retired 2016 Term Loan more cheaply by buying available participations on the market rather than by paying the full face amount of the debt.18
  • Revlon’s offer to exchange the 2021 Notes for new ones due in 2024 to avoid acceleration of the 2016 Term Loan was inconsistent with an intent to retire the 2016 Term Loan a few days later.19

Additionally, the Second Circuit explained that the inquiry notice test does not examine “whether the recipient of the mistaken payment reasonably believed that the payment was genuine and not the result of mistake[, but rather] whether a prudent person, who faced some likelihood of avoidable loss if the receipt of funds proved illusory, would have seen fit in light of the warning signs to make reasonable inquiry in the interest of avoiding that risk of loss.”20  That is, “[i]t is an objective test, not dependent on what the actual recipient believed.”21

Entitlement to Funds. The Second Circuit also determined that New York law, as articulated by the New York Court of Appeals in Banque Worms, requires that in order for recipients of erroneous payments to take shelter in the discharge-for-value exception, such recipients must be entitled to the payment which they received. Therefore, because the debt on which the Agent mistakenly made a payment was not due for another three years, Defendants could not invoke the discharge-for-value exception as a shield against the Agent’s claims for restitution. In further support of its reasoning, the Court also noted the following policy considerations:

  • A present entitlement requirement harmonizes with New York’s general rule covering receipt of mistaken payments, which is that a party receiving money as the result of a mistaken must in equity and good conscience return it.22
  • A present entitlement requirement serves as an administratively convenient way to allocate a loss between two parties when “there is no reason in justice why one should suffer rather than the other.”23
  • Allowing the Defendants to retain the Mistaken Payment under these facts results in a windfall to the Defendants over and above what they bargained for, while an order of restitution would leave the Defendants exactly where they contracted to be.24

Addendum. In an addendum to the opinion, Senior Judge Pierre N. Leval submitted that the facts before the Court were beyond the scope of the discharge-for-value exception because (1) the Agent had no intent to discharge Revlon’s debt when it made the Mistaken Payment, and (2) the Agent was not mistaken as to its interests or duties.25

Concurrence. In a concurring opinion, Judge Michael H. Park posited that Defendants’ lack of entitlement to the funds is dispositive of the dispute as the Lenders did not have a preexisting right to keep the money it received.  Simply put, he explains that:

[w]hen people receive money by mistake, the law usually requires them to give it back. This commonsense rule allows transferors to reclaim property that rightfully belongs to them—whether misdirected funds, an accidental overpayment, or a credit to the wrong account. An exception to the general rule can sometimes protect a recipient who was owed the mistakenly paid money. Under this narrow equitable defense, called ‘discharge-for-value,’ a creditor who receives a payment in discharge of a debt he is owed can defeat restitution by invoking his own competing claim to the disputed funds. But here, Defendants had no such claim—not when they received Citibank’s money, and not when they were asked to give it back—because they were not entitled to payment for another three years after Citibank erroneously sent them half a billion dollars. Allowing them to keep that money would turn equity on its head and topple the settled expectations of participants in the multitrillion-dollar corporate debt market.  It would also be brutally unfair.26

Key Takeaways and Implications

The Second Circuit’s decision is significant for credit agreements governed by New York law, as it declares that in New York, a creditor may not invoke the discharge-for-value exception unless the debt at issue is presently payable. Moreover, the Second Circuit’s ruling helps define for creditors New York’s test of what constitutes adequate notice in the case of mistaken payments. As demonstrated by this case, such an analysis is an objective analysis from the perspective of a reasonably prudent investor and largely fact-dependent.

From a policy perspective, the decision clarifies the application of the discharge-for-value rule among parties to syndicated loan facilities, and recognizes that the consequences of nullifying bargained-for rights and obligations due to unintended and accidental conduct is contrary to well-settled law and public policy considerations.

As discussed above, prior to the Second Circuit rendering this decision, market participants responded to the District Court’s ruling by drafting and incorporating various forms of erroneous payment provisions into new and existing credit agreements. The intent of this language is to provide parameters around the parties’ respective obligations with respect to erroneous payments, reduce the administrative agent’s assumed risk in syndicated loan transactions, and negate the consequences of the District Court’s ruling. Variations of such provisions contain different features, but the language generally addresses:

  • under which circumstances the recipient of an erroneous payment must return such payment, including the form and timing of notice that triggers a recipient’s obligation to return an erroneous payment;
  • whether or not interest may accrue on an erroneous payment until it is returned;
  • obligations of syndicate lenders to notify administrative agents upon receiving payments not yet due, without prior notice, in different amounts than notified, or that such lenders are otherwise aware of being transmitted or received by mistake;
  • conditions under which a mistaken payment shall be presumed to have been made;
  • an administrative agent’s rights and remedies in the event an erroneous payment is not returned (including setoff rights and/or deemed assignment by the lender not returning such payment of an equivalent portion of its loans);
  • a waiver of rights or claims to an erroneous payment and waiver of any defense based on discharge-for-value or any similar doctrine; and
  • in some cases, the effect or non-effect of erroneous payments on increasing or otherwise affecting the Agent’s ability to collect such erroneous payments from the borrower and other credit parties.27

While administrative agents may take some comfort from the Second Circuit’s decision, due to the fact and governing law-dependent nature of the analysis, and out of an abundance of caution to avoid unintended consequences of common law doctrines like the “discharge for value” defense, financial institutions acting as administrative agents and/or collateral agents will likely continue to require variations of erroneous payment provisions in their credit agreements for the foreseeable future.

1 In re Revlon, Inc., No. 22-10760-DSJ (Bankr. S.D.N.Y.). See infra note 26 for additional details regarding the impact of this litigation on Revlon’s bankruptcy case.

2 Citibank, N.A. v. Brigade Cap. Mgmt., 49 F.4th 42 (2d Cir. 2022).  On September 22, 2022, the Defendants (defined below) filed a petition for rehearing and rehearing en banc contending that the panel’s decision conflicts with New York law and that the panel exceeded its appellate authority by disregarding the District Court’s findings of fact. On October 12, 2022, the Second Circuit, after considering Defendants’ arguments, issued an order denying Defendants’ petition.  Citibank, N.A. v. Brigade Cap. Mgmt., LP, No. 21-487, Dkt. Nos. 252 and 256.

3 The 2020 New Money Facility is a senior secured term loan facility in an initial aggregate principal amount of $815 million secured by the BrandCo IP Collateral on a first-priority basis on and by the assets securing the 2016 Term Loan on a pari passu basis.

4 The Roll-Up Facilities are comprised of the following: (1) a senior secured term loan facility in an aggregate principal amount of $950 million (the “2020 Roll-Up Facility”) secured by the BrandCo IP Collateral on a second-priority basis; and (3) a senior secured term loan facility in an initial aggregate principal amount of $3 million (the “2020 Junior Roll-Up Facility”). Like the 2020 New Money Facility, the Roll-Up Facilities also secured on a pari passu basis by the assets securing the 2016 Term Loan. 

The proceeds of the Roll-Up Facilities were to be used to purchase at par an equivalent amount of term loans under the 2016 Term Loan Facility held by the lenders participating in the 2020 New Money Facility.

5 On August 12, 2020, approximately twenty hours after the Mistaken Payment occurred, UMB Bank, purported successor to Citibank as administrative agent, at the direction of a number of Lenders, including those associated with most Defendants here, filed a lawsuit against Revlon and Citibank challenging the transfer of the BrandCo IP Collateral and the overall enforceability of the credit agreement underlying the BrandCo Facilities. Specifically, UMB Bank asserted a variety of claims, including (1) improper siphoning of collateral away from the Lenders, (2) improper manipulation of the voting provisions in the Credit Agreement, and (3) acceleration of 2016 Term Loan debt due to an alleged event of default. Ultimately, the issues were not adjudicated as the lawsuit was voluntarily dismissed on November 6, 2020. 

More recently, on October 31, 2022, lenders holding “more than 50%” of outstanding 2016 Term Loans under the Credit Agreement filed a complaint against Revlon and certain of its affiliates, various investment funds, and financial institutions challenging a series of transactions, including the May 2020 Transactions, pursuant to which the defendants allegedly divested the non-participating 2016 Term Loan Lenders of their first-priority liens on the BrandCo IP Collateral that was used to collateralize the BrandCo Facilities. AIMCO CLO 10 LTD et al. v. Revlon, Inc. et al. (In re Revlon, Inc. et al.), Adv. Proc. No. 22-01167-DSJ (Bankr. S.D.N.Y 2022). The status of the complaint remains pending in with the Bankruptcy Court for the Southern District of New York.

6 “As part of a ‘roll-up’ transaction, the borrower usually pays interim interest accrued as of the date of the transaction to the rolling-up creditor but does not pay cash with respect to outstanding principal; instead, the principal of the existing loan is exchanged for the principal of a new loan.” In re Citibank August 2011, 2020 Wire Transfers, 520 F. Supp. 3d 390 (S.D.N.Y. 2021), vacated and remanded sub nom. Citibank, N.A. v. Brigade Cap. Mgmt., LP, No. 21-487, 2022 WL 4102227 (2d Cir. Sept. 8, 2022).

7 In re Citibank August 2011, 2020 Wire Transfers, 520 F. Supp. 3d 390 (S.D.N.Y. 2021), vacated and remanded sub nom. Citibank, N.A. v. Brigade Cap. Mgmt., 49 F.4th 42 (2d Cir. 2022).

8 Id.  By agreement of the parties, the funds remained frozen through the pendency of the appeal.  In its decision, the Second Circuit enjoined the Defendants from taking any action with respect to the funds in contention with the suit (except with the approval of Citibank) until authorized by the Second Circuit, the Supreme Court, or by a ruling of the District Court from which no appeal is taken.  Citibank, N.A., 2022 WL 4102227 at *26.

9 Banque Worms v. BankAmerica Int’l, 570 N.E.2d 189 (N.Y. 1991).

10 Id.

11 Erroneous Payment Provision, Loan Syndications & Trading Ass’n (March 19, 2021),

12 Banque Worms, 570 N.E.2d at 192 (citing Restatement (First) of Restitution § 14[1] (the “Restatement”)). 

13 Id.

14 The inquiry standard endorsed and adopted by the New York Court of Appeals was explained as:

One who has reasonable grounds for suspecting or inquiring ought to suspect, ought to inquire, and the law charges him with the knowledge which the proper inquiry would disclose . . . .  If a person has knowledge of such facts as would lead a fair and prudent man, using ordinary thoughtfulness and care, to make further accessible inquiries, and he avoids the inquiry, he is chargeable with the knowledge which by ordinary diligence he would have acquired.  Knowledge of facts, which, to the mind of a man of ordinary prudence, beget inquiry, is actual notice, or, in other words, is the knowledge which a reasonable investigation would have revealed. 

Citibank, 2022 WL 4102227 at *11 The Defendants argued that constructive notice should be analyzed by asking whether the transferee “knew or should have known” of the transferor’s mistake. Conversely, Citibank argued that the inquiry notice standard should apply. The District Court did not decide the issue of which notice standard to apply as it concluded that the Defendants lacked constructive notice under either standard, and insofar as the inquiry notice standard did apply, Defendants conducted a reasonable inquiry into the facts which did not reveal error and, therefore, such notice did not negate Defendants’ entitlement to the discharge-for-value exception. Citibank, 520 F. Supp. 3d at 431–40.

15 Citibank, 2022 WL 4102227 at *11.

16 Id. at *15.  The Credit Agreement permitted Revlon to make prepayments, but only “upon irrevocable written notice delivered to [Citibank] . . . three Business Days prior thereto.” Id. at *3.  “Upon receipt of any such notice [Citibank was required to] promptly notify each relevant Lender thereof.” Id. (emphasis added).

17 Id. at *15.

18 Id. at *16.

19 Id.

20  Id. at *18.

21 Id.

22 Id. at *24 (citing Ball v. Shepard, 202 N.Y. 247, 95 N.E. 719, 721 (1911)).

23 Id. at *25 (citing The Restatement, §§ 13­14, Reporters Notes).

24 Id.

25 In response to Judge Park’s commentary regarding the Court’s delay in rendering a decision (see infra n.23), Judge Leval also recognized the amount of time taken to produce the court’s decision and explained that the delay resulted in part from an initial determination to certify the question to the New York Court of Appeals and then a change in that decision. He also noted the importance of the complex and subtle issues that arose during the case and the care and study required to address those issues, explaining that:

[a] decision of a court of appeals must satisfy two requirements, which pull it in different directions.  It should, as rapidly as reasonably possible, tell the parties who wins.  At the same time, recognition that the decision serves as precedential law requires that it rest on, and clearly explain, sound legal principles. In a money dispute, the parties ordinarily care little for the precedential effect of the decision; their interest is to get a rapid answer to who gets the money. A court, however, must pay careful attention to the decision’s precedential function. This is because unavoidably the decision will affect the resolution of future disputes and influence public behavior and business planning. A decision of a precedential court that rests on unsound, poorly reasoned, or poorly explained, legal principles will therefore cause great future mischief. Finding the best accommodation between the objectives of speed and legal soundness is not always easy.


26 Id. at * 28 (Park, J . concurring.)  Judge Park also addressed the impact that the amount of time taken by the Court to render a decision has had on the parties and market participants:

Although the Court has ultimately arrived at the correct conclusion, our timing is unfortunate. Citibank filed suit within six days of its mistake, the district court conducted a full bench trial and published a detailed opinion six months later, and we set out to expedite consideration of this case. But it has now been nearly a year since oral argument and over two years since the mistaken transfer. In that time, Citibank has lost out on tens of millions of dollars in returns on its frozen funds. Businesses and their lenders have scrambled to negotiate various new terms into their agreements.  And the parties, as well as the market at large, have had to manage the uncertainty our indecision has caused them. 

This delay has had dire repercussions for Revlon, the company at the center of this case.  Both sides contend that through subrogation, the district court’s judgment has put Citibank in the shoes of the [Lenders], obliging Revlon to pay Citibank instead and transferring to Citibank the credit risk of Revlon’s distressed debt.  A company like Revlon—no stranger to restructuring its debts—would normally try to negotiate with its creditors when struggling to meet its obligations.  But Revlon never recognized Citibank’s subrogation claim, and even if it had, Citibank would have been at best a substitute creditor, whose claim (if any) would revert to Defendants once Citibank finally reclaimed its funds. Revlon cannot secure additional senior financing without the consent of a majority of the 2016 Term [Loan Lenders], but for the past two years, no one has been able to agree on who would constitute such a majority.  So Revlon ‘effectively has had, since August 11, 2020, no 2016 Term Loan[ ] counterparty with which it can negotiate,’ and on June 15, 2022, Revlon filed for [c]hapter 11 bankruptcy.  Revlon, a century-old American company, cited not just its business troubles, but also ‘significant and unprecedented difficulty in managing its capital structure out of court.’  That difficulty, Revlon said, stemmed from the fact that ‘the Second Circuit ha[d] not yet issued a decision’ in this case.

Id. (citations omitted).  See also Declaration of Robert M. Caruso, Chief Restructuring Officer, (I) In Support of First Day Motions and (II) Pursuant to Local Bankruptcy Rule 1007, at 6–7, In re Revlon, Inc.. No. 22-10760-DSJ (Bankr. S.D.N.Y. June 16, 2022).

27 See, e.g., Erroneous Payment Provision, Loan Syndications & Trading Ass’n (June 16, 2021), 

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.