Discharging the Discharge for Value Defense

Despite its massive size, the corporate debt market is often considered a sleepy refuge for the risk-averse. Yet, corporate debt contracts are often mindnumbingly detailed. That complexity—when coupled with the financial stakes in play— can be a recipe for calamity. And in late 2020, calamity struck in the form of an accidental $1 billion payoff sent to Revlon Inc.’s distressed creditors—not by Revlon itself but rather by Citibank, the administrative agent for the loan. When several lenders refused to return the cash, Citibank commenced what many reckoned would be a successful (if embarrassing) lawsuit to claw it back. But in a dramatic 2021 opinion, a New York federal court sided with the creditors, applying an obscure equitable doctrine known as the “Discharge for Value” defense. The lenders could keep their wayward windfall, and Citibank got stuck with a sizeable write-down. Regardless of how it comes out on appeal, the case seems destined to feature prominently in contracts classes and textbooks for years to come.

Against this backdrop, this Article makes three contributions: First, it spotlights several doctrinal and logical irregularities in the District Court’s opinion. Second, it builds on these inconsistencies to critique the opinion from an economic policy perspective. Third (and most substantially), it presents novel empirical data to analyze how market participants have reacted to the opinion. Consistent with the policy critique, I document a rapid, precipitous trend towards writing and/or amending debt contracts to nullify the Citibank opinion in its entirety, manifested in a variety of “Revlon blocker” provisions that have appeared in hundreds of publicly disclosed contracts. The firms that adopt Revlon blockers are systematically the largest and most sophisticated companies in the public markets, and their rejection of Citibank appears to have met with general market approval. Beyond demonstrating how legal theory and empirical evidence can helpfully interact, this analysis underscores the critical role that default rules play in contract law and policy, and the high stakes involved in getting them right.