To address the key issue in the litigation In re: Citibank August 11, 2020 Wire Transfers 1, on March 19, 2021, the Loan Syndication and Trading Association (LSTA) circulated a Market Advisory2 that contains draft erroneous payment language to be incorporated into credit agreements that purports to protect administrative agents and contractually entitles administrative agents to claw-back erroneous payments in the future.

Importantly, the LSTA language grants administrative agents sole discretion to determine whether a payment was made erroneously. In addition to that fundamental grant of discretion, the LSTA language also provides for recovery of erroneous payments by administrative agents, states that a notice of an erroneous payment from an administrative agent to a lender is conclusive absent manifest error, and creates a presumption that any payment that is received by a lender that differs from the scheduled amount or that does not match the amount set forth in a prepayment notice was made in error and must be returned to the administrative agent.

Additionally, the LSTA language also penalizes noncompliant lenders that do not return any agent-determined erroneous payments by causing such erroneous payments to accrue interest at the overnight rate/federal funds rate and entitles administrative agents to (i) set-off such erroneous payment against any future payments that are received by the administrative agent for credit against the noncompliant lender and (ii) recover the erroneous payments by selling a portion of the noncompliant lender’s loan (but not its commitment to fund future loans) at par plus accrued and unpaid interest.

In light of the severe limitations that a lender has to dispute whether a payment was in fact an erroneous payment and in light of the broad authority granted to administrative agents to claw-back payments that they determine (in their sole discretion) to be erroneous, we expect lenders may resist the verbatim inclusion of the LSTA language in subsequent credit agreements and amendments.

One way that lenders might want to resist is by including the optional “deadline” provision included in the LSTA language, which provision creates a deadline for administrative agents to notify lenders of an erroneous payment. Since the administrative agent should know fairly quickly that it has made an erroneous payment, this deadline should be no more than five business days from the date of the payment in question. The notification should also be in the form of an officer’s certificate that includes calculations that show that the payment was in fact erroneous.

Furthermore, lenders might want to request that interest not begin to accrue on the amount of the erroneous payment until at least two to three business days after such notification is received by a lender.

Finally, to the extent that deal logistics and circumstances allow, lenders might also demand that their credit agreements include an equitable dispute mechanism relating to the determination of erroneous payments that enables the winning party to recover its out-of-pocket expenses and damages.

While credit agreements should include terms that permit administrative agents to recoup erroneous payments from lenders, such terms should be fair to both administrative agents and lenders.