What Is a Receipt Release and Refunding Agreement?
A receipt release and refunding agreement is exactly what it states—it is an agreement that releases one party to the agreement from liability related to a disbursement of funds, while at the same time provides a mechanism for recouping the funds disbursed.
Such an agreement is typically implemented under circumstances where there is a legal dispute, and one or more parties to the dispute has submitted a request to take some action with the funds at issue in the dispute. In such a case, the deposition of the funds may be delayed by the other party, or parties, to the dispute in order to preserve their rights, or to delay access to the funds .
A receipt release and refunding agreement allows the party that is prepared to disburse the funds, a party referred to as the payor, to release the party requesting the funds, a party referred to as the payee, from all claims arising from that disbursement. The agreement is a guarantee that the payee will refund, or return, the money to the payor if it is subsequently determined that the payee brought the original demand in error or without rightful basis.
Such agreements are commonly entered into in the context of releases and dismissals in lawsuits, alternative dispute resolution, and more generally in any context in which it is important to preserve a party’s rights while simultaneously granting them access to funds.
Essential Elements of the Agreement
In a typical receipt release and refunding agreement, there are several key components that are included:
- A receipt clause. This clause is generally at the top of the agreement, and provides that the bondholder acknowledges receipt of the refunding bond proceeds.
- A release from all claims. Following the receipt of the refunding bond proceeds, the bondholder will release the issuer from all claims or liability. The release can also extend to other parties, including the underwriters and the trustee under the refunded bond indenture.
- A agreement to refund. The agreement will provide that the bondholder agrees to surrender the refunded bonds to the trustee, which trustee tends to be the bondholder’s agent for such purpose.
- A waiver clause. Some agreements will provide that the bondholder waives any defenses against the payment of the refunding bond. Often, this clause will provide that the failure of the municipality to budget for the payment of the refunding bond does not constitute a defense to such payment.
- A conditional refunding clause. Most agreements will include a condition precedent to refunding. The condition precedent will tend to be the receipt of the refunding bond proceeds. In some instances, the condition precedent may include other contingencies as well – for example, the inclusion of an opinion of counsel that the refunding is valid and binding obligations of the municipality.
- A failure to refund clause. The failure to refund clause will be included in the event the condition precedent is not satisfied.
Advantages of a Receipt Release and Refunding Agreement
Engaging an agent or a commission facilitator without a receipt, release, and refund agreement is highly risky for both parties and can lead to disputes and misunderstanding about who the commission belongs to if and when a closing takes place.
The receipt, release, and refund agreement protects both parties in a number of ways: The agreement also prevents any future dispute as to commission by stipulating exactly who is entitled to the payment and also safeguards against any inappropriate deduction of commission from the cheque sent. As a result, the receipt, release, and refund agreement is one of the most important agreements that a licensee should use. It allows licensees to rest assured that they have received adequate compensation for their services.
Common Situations Where a Receipt Release and Refund Agreement Is Used
The most common application of a receipt, release and refunding agreement ("Agreement") would be where a portion of the consideration to be paid is the return of a deposit paid by the purchaser. For example, in commercial real estate transactions and residential resale transactions, it is quite common for the Agreement to be signed by the vendor or seller where a deposit is refunded to the purchaser or buyer upon closing, in satisfaction of the contractual obligation to repay the deposit. It is also very important in such contexts to provide that the rescinding party will not seek specific performance of the Agreement pending the expiration of the Restriction Period.
Although less common with respect to estate matters, one also sees the use of the Agreement where distribution of estate assets is made to one beneficiary subject to a right of another beneficiary to demand payment of a portion of that distribution or to demand a distribution of estate assets subsequently received .
In the case of business refunds, there may be circumstances where portions of a purchase price are payable over time to the vendor or seller and are to be recouped where the purchaser becomes unsatisfied with the business and the vendor or seller agrees to buy back the business. In this scenario, the Agreement would be used to effect the recoupment of the business price and the terms of the Agreement would satisfy the purchaser’s concerns with a potential claim against the vendor or seller for the return of the money.
Finally, in the case of real estate transactions, we have also seen beneficiaries sign the Agreement where they are being distributed real property and agree as between themselves to take the risk that one or both of them may have been paid more than their proportionate share of the price for the property.
Legal Issues and Tips for Creating an Effective Receipt Release and Refund Agreement
One important legal consideration is whether the party providing or waiving a right has knowingly and voluntarily agreed to do so. Illinois courts require that employees knowingly and voluntarily waive certain rights, though it remains an open question how to best address a knowing and voluntary standard in an employment agreement involving a wide range of issues, such as severance packages or non-competes. In general, it is a best practice to clearly state the effect of the receipt release and refunding agreement or release and waiver agreement. Stating that the waiver has no effect unless and until the employee returns the payment to the employer may be a way to emphasize the effect of the waiver. Also, stating that the agreement is part of a negotiation or settlement may make it more convincing to a court as evidence of the parties’ intent. Regardless, ensuring that the agreement is clear, unambiguous, and unmistakable may help preempt efforts to rescind it as illusory.
Ideally a receipt release and refunding agreement should also be enforceable under applicable state and federal law, and satisfy any other statutory requirements. For example, there are special considerations under the Employee Retirement Income Security Act (ERISA) for certain employee benefit plans. Because receipt release and refunding agreements can have both tax and retirement plan tax consequences, it can be a good idea to have a tax advisor review the receipt release and refunding agreements.
Receipt Release and Refunding Agreement FAQs
Q: What is the aim of a Receipt Release and Refunding Agreement?
A: These agreements are designed to both expedite the receipt of counsel fees through the early stages of a case, while also providing creditors with a means for protection in the event of an overpayment of such fees. The Agreement allows for the payment of counsel fees prior to the end of the case or the entry of a final order, by releasing and refunding such fees in the event that it turns out that the debtor has overpaid for his or her counsel fees.
Q: How is the possible overpayment of fees addressed?
A: Language is included in the Agreement which addresses the possibility that the fees paid exceed those calculated by the court at a later point in time. The creditor is obligated to return to the debtor’s estate the greater of the amount of fees released or the amount of overpaid fees.
Q: When would it become necessary to return excess fees?
A: Should a debtor’s case convert from Chapter 7 to Chapter 13, the creditor must return excess fees to the Chapter 13 Trustee . Should the debtor’s case terminate other than by way of discharge (for example, because the case is dismissed before discharge is granted), the creditor must return excess fees to the Chapter 7 Trustee. If the case closes with a discharge, the creditor would be obligated to reimburse any excess itemized fees to the debtor.
Q: Does this affect the priority of the creditor’s claim or create a super priority?
A: No. Receipt Release and Refunding Agreements do not alter the priority of the claim or confer any sort of super priority. The intended purpose is to assure the creditor’s right to the payment of fees in full, where, under the appropriate circumstances, a court later alters that determination.
Q: How is this affected by Rule 2016(B) and disclosures made thereunder?
A: The submission of an Agreement does not obviate the necessity of making a disclosure of compensation in Rules 2016 & 2016(B). The amount of compensation disclosed should include only those fees secured by the Agreement, and will otherwise be the subject of the standard filing and approval procedures applicable to fee applications.