According to the  “discharge for value” rule of restitution, a beneficiary that receives erroneously wired funds may keep the erroneously wired funds if: (1) the erroneously wired funds discharge a valid debt; (2) the beneficiary did not make any misrepresentations to induce the payment; and (3) at the time the beneficiary received the payment, it was not aware that the funds were erroneously wired. If these conditions are met, the beneficiary may consider the wire final and maintain ownership of the erroneously wired funds, not subject to revocation.

In the case of In re Citibank August 11, 2020 Wire Transfers, the United States District Court for the Southern District of New York upheld the discharge for value rule of restitution and held that the defendants were entitled to keep funds that were erroneously wired by Citibank. The defendants were certain lenders on a $1.8 billion dollar syndicated term loan that had received an erroneous wire transfer from Citibank, the administrative agent under the loan for the borrower, Revlon. Citibank claimed that it had intended to wire just under $8 million dollars in interest payments to the lenders, but instead wired almost $900 million dollars of its own money to the lenders, in addition to the $8 million dollars in interest payments. The aggregate amount of the wire transfers was exactly equal to the amount of principal and interest outstanding on the loan. Notably, Citibank realized its mistake and promptly notified the lenders before any of the lenders relied to their detriment on the belief that the wire transfers were intentional. Nonetheless, the District Court, citing Banque Worms v. BankAmerica International, ultimately held that the discharge for value rule of restitution applied because: (1) the amount of erroneously wired funds was exactly equal to the amount that Revlon owed to the lenders; (2) the lenders did not make any misrepresentations to induce the mistaken payment from Citibank; and (3) at the time the funds were received, the lenders were not aware that Citibank had made the payment by mistake.

To avoid the occurrence of a similar situation, the District Court advised banks to determine clear standards for the content and timing of payment notices. Further, many commentators have suggested that administrative agents utilize contractual provisions that effectively waive the discharge for value rule of restitution. Though In re Citibank August 11, 2020 Wire Transfers is not precedential in Ohio, it will likely be instrumental in shaping internal wire procedures and payment notice standards across the country.

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The availability of coverage for business losses will vary among policy forms, exclusions and jurisdictions. Each policy must be examined for specific coverage and exclusions, while paying particular attention to the losses for which recovery is being sought.

There are several policies and exclusions to consider.

Commercial Property Insurance (Business Interruption)

Companies often purchase business interruption coverage as part of traditional “all-risk” commercial property policies. Business interruption coverage is designed to cover lost income arising from disruptions to an insured’s business operations. Under most policies, insureds will have to prove that a “Covered Cause of Loss” caused direct physical loss of damage to the property, at the described premises, resulting in a suspension or interruption of business operations and the resulting loss of business income.

Business interruption coverage is generally tied to a suspension of an insured business caused by direct physical loss of, or damage to, the insured property.

Some policy holders will argue that the presence of a virus in a structure qualifies as physical damage. Further, business interruption coverage often only extends coverage to losses caused by specific perils, such as fires, earthquakes, storms, and other expressly designated causes.

In addition, many business interruption policy forms frequently exclude “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Contingent Business Interruption

A policy may provide “contingent business interruption” coverage, which typically provides coverage for economic loss caused by damage to the property of a key supplier. Policy terms may limit coverage to damage to the property of a direct supplier or may include damage to the property of suppliers of suppliers.

Civil Authority Coverage

Many property insurance policies also include “Civil Authority” coverage, which covers similar business income losses that result from a public authority restricting the use of or access to an insured’s premises. However, as with business interruption coverage, “Civil Authority” coverage often requires the underlying civil order or restriction to directly result from physical loss or damage to the property.

Event Cancellation Insurance

An event cancellation policy may protect an insured from financial losses such as lost ticket sales, out-of-pocket expenses, contractual guarantees, and perhaps reimbursement to attendees. Most often, event cancellation policies are crafted to kick-in when events become either legally or physically impossible to hold.

General Liability Insurance

Typically, commercial general liability policies provide liability coverage for third party claims for “bodily injury” and/or “property damage” resulting from an “occurrence.” Riders for communicable disease coverage tend to have specific limitations in the form of specified trigger events and other limitations on the amount of recovery.

Pollution Policies

First party pollution policies may provide business interruption coverage for “releases” and “exposures” to “toxics.” However, many pollution policies have limitations on communicable diseases.

Recent Legislative and Executive Developments

Recently, states like Ohio have drafted proposed legislation seeking to provide business interruption coverage for the Covid losses even if the business interruption insurance policies in issue have exclusions which apply. In Ohio, HB 589 currently proposes providing coverage to businesses with less than 100 employees who have sustained a Covid-related business loss up to the policy limits set forth in the policy. As proposed currently, the insurance company would administer and pay the claim and the insurance company could then apply to The State of Ohio for reimbursement. Although this Bill is in its early discussion stage, if passed it would provide much needed protection. Each Ohio business should immediately contact their respective state representatives and lobbyists with their stated support of this bill and encourage other similarly situated businesses to do the same.

Recently, President Trump has also supported insurance companies paying business interruption claims due to Covid-caused damage since it is the right thing to do.

Thus, there is an evolving school of thought that such claims should be paid even though there may exist arguable policy defenses. It is expected the insurance industry and their lobbyists will strongly oppose such efforts arguing that claims such as this were not actuarily foreseen nor planned for and such claims would pose an undue burden on insurance companies.

What To Do To Preserve Your Rights Today

Many business owners believe they can wait and see how the Covid upheaval all plays out. Damages may still be evolving, they may believe they have no claim, they may have applied for the PPP or other loan or grant. However, that is simply not the case. Time is of the essence even if all damage is not complete and is ongoing or some of the damage is offset by grants or loans. Most insurance policies require an insured to submit a formal claim in order to timely place the insurance company on notice. Failure to do so will likely result in a policy defense to a valid claim down the road should the claim not be made NOW. Simply calling your agent is arguably not sufficient. Further, many agents have advised no coverage exists even if that is not necessarily the case. Agents do not make this determination. Claims personnel and eventually trial courts if needed, do. You therefore must submit the claim immediately to the claim department of the insurance company and obtain an official claim number. You can do this through the agent but must verify an official claim has been set up.

Your insurance policy likely has a time period listed within it where suit must be filed. Submitting an early claim provides you with the best chance for avoiding the need to file suit due to time limits. Submitting a claim does not mean you will eventually file suit. However, it will protect your rights should you need to do so later.

If after submitting the claim, the insurance company requests evidence of damages or otherwise as required by the policy, you need to reasonably comply. Failure to do so may result in the insurance company raising a second defense of failure to cooperate as required by the policy.

McCarthy Lebit offers to Help Businesses in Assessing COVID Business Interruption Insurance Claims

No cost for the initial assessment, pursued claims to be done on a contingency fee basis

At this time, McCarthy Lebit is offering any business which has a business interruption policy and has/will incur at least $250,000 in damages due in any way to COVID-19 to submit their policy, declaration sheet, contact person and information, and a short paragraph statement identifying nature of damage and amount. Send the information to Christian Patno crp@mccarthylebit.com with a copy to his assistant Amy Thorne adt@mccarthylebit.com.

Once a conflict check is cleared, the policy will be assessed along with the evolving legal, executive and legislative law in order to determine the potential validity of a claim. Communication will then take place with the submitting person to assess what further steps, if any should take place, and if the claim is one that if denied, suit should be filed. There will be no cost for the initial assessment and if a claim is pursued thereafter it will be done on a contingency fee basis where there will be no cost to the client unless MLCL is successful in prosecution.

The time to act is NOW.

The attorneys at McCarthy Lebit are continuing to stay apprised of COVID-19 developments and remain available to discuss any needs that your business may have during these uncertain times.

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Expanded Eligibility 

In addition to small business concerns, small agricultural cooperatives, and private non-profit organizations, the following entities are now eligible to receive an EIDL through December 31, 2022:

• Any business with not more than 500 employees;
• Any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor;
• A cooperative with not more than 500 employees;
• An Employee Stock Ownership Plan (“ESOP”) with not more than 500 employees; or
• A tribal small business concern with not more than 500 employees.

Rules Waiver

To further accommodate the many businesses affected by COVID-19, the SBA relaxed some of its EIDL-specific requirements. Among the requirements waived pursuant to the CARES Act is the requirement that an applicant must have been in business for 1-year preceding the COVID-19 “disaster”, except that no waiver may be made for a business that was not in operation on January 31, 2020. Not only that, but applicants are no longer required to demonstrate the inability to obtain credit elsewhere, and the SBA may approve an applicant based solely on its credit score.

Loan Advances

An eligible entity may request an advance of not more than $10,000 when applying for an EIDL. An applicant that requests such an advance must self-certify under penalty of perjury that they are, in fact, an eligible entity. Advances may be used to address any allowable purpose for an EIDL, including maintaining payroll, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses, among others. Most importantly, there is no requirement that an applicant repay any amount of an advance, even if they are subsequently denied an EIDL. However, if an applicant receives an EIDL advance and is later approved for the SBA Paycheck Protection Program, the advance amount will be reduced from loan forgiveness amount under the Paycheck Protection Program.

The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.

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Fortunately, the U.S. Small Business Administration (SBA) offers Economic Injury Disaster Loans (EID Loans) through a program designed to provide monetary relief to small businesses facing economic hardship due to no fault of their own. Ohio is now among the many states that has been approved by the SBA as a declared disaster area based on the disruptions caused by COVID-19.

To be eligible for an EID Loan, you must either own a small business, small agricultural cooperative, or have a private non-profit organization. As for whether your business qualifies as a “small” business that is eligible for Federal Government programs such as an EIDL Loan, the SBA has an established Table of Small Business Size Standards that is broken down into specific industries. These size standards define the largest a business can be to still qualify for federal programs. The standards vary by industry and are generally based on a business’s employment count (including full and part time employees) or the amount of its annual receipts (i.e. gross annual income plus the cost of goods sold). To determine whether your business fits within the size standard for its particular industry, consult the U.S. Small Business Administration Table of Small Business Size Standards Matched to North American Industry Classification System Codes.

EID Loans can be for as much as $2 million, are repayable over a 30-year period, and are coupled with low interest rates: 2.75% for non-profits and 3.75% for small businesses. The precise terms of each EID Loan may vary depending on the nature of a business and its ability to repay the loan.

Beginning the EID Loan application process is easy. Simply create an account with the SBA and follow the prompts to complete an application on the U.S. Small Business Administration website.

In addition to the application, you will need to complete an IRS Form 4506-T that authorizes the IRS to provide your tax return information to the SBA.

Although there remains uncertainty as to the long-term effects of COVID-19, the EID Loan program offers some much-needed relief for small business owners struggling amid this crisis.

The attorneys at McCarthy Lebit are continuing to stay apprised of COVID-19 developments and remain available to discuss any needs that your business may have during these uncertain times.

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A borrower’s interest rate is often calculated based on a LIBOR-based index plus an applicable margin. For example, if the one-month LIBOR is 2.0% and the applicable margin is 1.5%, then the interest rate is 3.5%. It is estimated that close to $300 trillion in loans, derivatives and other financial contracts are based on LIBOR pricing. It is based on submissions from banks estimating the daily interest rate for each bank to borrow money from another bank. As a result, LIBOR can fluctuate as economic conditions change. In recent years, however, price-fixing scandals have undermined LIBOR into a questionable standard. As a result, the United Kingdom authority which oversees LIBOR has stated that reference banks will no longer be required to quote LIBOR by the end of 2021, and the future of LIBOR is now in doubt.

The proposed U.S. replacement for LIBOR is the Secured Overnight Financing Rate (SOFR). It is a broad Treasurys financing rate linked to the cost of borrowing cash secured against U.S. government debt. This rate is based on actual transactions so, in theory, is less subject to market manipulation. It remains to be seen how and when the banking industry will ultimately adopt SOFR. However, most banks are already figuring out how to best transition away from LIBOR in loan transactions.

What this means for you – Existing loan agreements maturing after December 31, 2021 will need to be reviewed to determine whether there is fallback language to choose a replacement rate in the event that LIBOR ceases to be published. Otherwise, loan agreements will need to be amended to provide for such event. New loan agreements that mature after December 31, 2021 will also need such fallback language to account for the transition away from LIBOR. Companies will need to discuss with their bank how interest will be calculated going forward and what impact, if any, the LIBOR phase-out will have on their business.

If you have any questions regarding LIBOR phase-out or need assistance in updating loan document provisions, please contact McCarty, Lebit, Crystal & Liffman’s Michael Makofsky, 216-696-1422, mdm@mccartylebit.com.

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