ALAN C. KAY, District Judge.
For the reasons set forth below, the Court DENIES Plaintiffs' Motion for Partial Summary Judgment on Their and the Putative Class's Claim for Breach of Contract, ECF No. 251, GRANTS in part and DENIES in part Defendant Lloyds TSB Bank PLC's Motion for Summary Judgment, ECF No. 249, and sua sponte GRANTS partial summary judgment to Plaintiffs on Count II. The Court also DENIES Plaintiffs' request for declaratory relief.
On September 13, 2013, Plaintiff Bradley Willcox filed a Complaint on behalf of himself and a similarly situated class against Defendant Lloyds TSB Bank, PLC, now known as Lloyds Bank PLC ("Lloyds" or "Defendant"), in the Circuit Court of the First Circuit, State of Hawaii. Compl., ECF No. 1-2. On October 7, 2013, Lloyds removed the case to federal court pursuant to the Class Action Fairness Act, 28 U.S.C. § 1332.
On December 3, 2013, Willcox filed a First Amended Complaint, adding Frank Dominick as a named plaintiff. The First Amended Complaint brought a claim under the Hawaii Unfair and Deceptive Trade Practices Act, H.R.S. §§ 480-2 and 481A-3(a)(12), and requested declaratory relief pursuant to H.R.S. §§ 632-1
On December 17, 2013, Lloyds moved to dismiss the First Amended Complaint. Def. Lloyds' Mot. to Dismiss the Claims Asserted in the First Am. Compl., ECF No. 26. On June 10, 2014, the Court granted Lloyds' motion. Order Granting Def.'s Mot. to Dismiss, ECF No. 49. The Court concluded that the Hong Kong choice-of-law provision in the parties' contractual agreements precluded the assertion of Hawaii and U.S. statutory claims; accordingly, it dismissed the First Amended Complaint in its entirety.
On August 14, 2014, Willcox and Dominick filed a Second Amended Complaint ("SAC"), bringing claims under Hong Kong law for Breach of Contract (Count I), Breach of an Implied Term Limiting Lloyds' Discretion to Change the Interest Rate (Count II), and declaratory relief (Count III).
On September 19, 2014, Lloyds moved to dismiss the SAC on grounds of forum non conveniens and failure to state a claim. Def. Lloyds' Mot. to Dismiss the Claims Asserted in the Second Am. Compl., ECF No. 62. On December 23, 2014, the Court issued an Order Granting in Part and Denying in Part Defendant's Motion to Dismiss. ECF No. 73. The Court denied Lloyds' motion to dismiss for forum non conveniens and for failure to state a claim as to Counts I and II of the SAC. However, it granted Lloyds' motion as to Willcox and Dominick's claim for declaratory relief (Count III), noting that such relief was a remedy (rather than an independent cause of action) and that the Court could "provide any appropriate declaratory relief or remedy" if it "ultimately rules that Plaintiffs prevail on their contractual claims."
On January 9, 2015, Lloyds moved to join Michele Sherie Dominick, wife of named Plaintiff Frank Dominick, as a party. ECF No. 76. Magistrate Judge Puglisi issued an Order Granting Defendant Lloyds' Motion to Join Michele Sherie Dominick as a Party on March 16, 2015. ECF No. 94. That order directed that an amended complaint naming Ms. Dominick as a party to this action be filed by March 27, 2015.
Plaintiffs filed the operative Third Amended Complaint ("TAC") on March 27, 2015. ECF No. 100. The TAC names Frank Dominick, Michele Sherie Dominick, and Bradley Willcox (collectively, "Plaintiffs") as class representatives and brings claims for Breach of Contract (Count I) and Breach of an Implied Term Limiting Lloyds' Discretion to Change the Interest Rate (Count II).
On July 15, 2015, Plaintiffs filed a Motion for Class Certification pursuant to Federal Rule of Civil Procedure 23. ECF No. 156. After briefing and oral argument from the parties, Magistrate Judge Puglisi issued his Findings and Recommendation to Grant in Part and Deny in Part Plaintiffs' Motion for Class Certification ("F&R") on November 12, 2015. ECF No. 317. The F&R recommended: (1) certifying the instant case as a class action, (2) appointing Willcox (but not the Dominicks) as class representative, (3) appointing Alston Hunt Floyd & Ing and Steptoe & Johnson LLP as class counsel, (4) directing the parties to meet and confer regarding notice to class members, (5) denying any remaining relief requested in Plaintiffs' class certification motion, and (6) defining the certified class as:
On January 8, 2016, the Court issued an Order Adopting in Part, Rejecting in Part, and Modifying in Part the Findings and Recommendations to Grant in Part and Deny in Part Plaintiffs' Motion for Class Certification. ECF No. 366. For the reasons explained therein, the Court adopted the F&R over Lloyds' objections, except as to the class definition, which the Court modified to include only plaintiffs of U.S. and Canadian citizenship. On January 22, 2016, pursuant to Federal Rule of Civil Procedure 23(f), Lloyds filed with the Ninth Circuit a Petition for Permission to Appeal the class certification Order. ECF No. 397.
Meanwhile, on October 16, 2015, Plaintiffs and Lloyds had filed the instant cross-motions for summary judgment. Lloyds moves for summary judgment as to both of Plaintiffs' Counts I and II.
On the same date, each party also filed a Concise Statement of Facts in support of its motion.
On December 29, 2015, Plaintiffs filed an Opposition to Lloyds' summary judgment motion and a Concise Statement of Facts in support thereof.
On January 5, 2016, each party filed a Reply in support of its summary judgment motion.
The Court held a two-day hearing regarding the instant motions on January 19-20, 2016.
The instant case involves the issuance by Lloyds of certain dual currency loans (also referred to as International Mortgage System ("IMS") loans). Dual currency loans are mortgage loans with a currency switching feature that allows borrowers to switch the currency of their loans between United States dollars and other currencies.
Lloyds is organized under the laws of the United Kingdom but maintains branches throughout the world, including a Hong Kong branch from which it issued IMS loans to Plaintiffs.
The IMS loans at issue in this case were made from approximately 2005-2009 and secured by mortgages on real property in Hawaii and California.
Plaintiff Bradley Willcox is a resident of Hawaii who, in 2007, took out approximately $1,284,500.00 in four IMS loans from Lloyds, secured by four real properties located in Honolulu, Hawaii.
Shortly thereafter, the world was struck by the 2008 financial crisis and the U.S. Dollar to Japanese Yen exchange rate fell (i.e., the Yen grew stronger relative to the U.S. Dollar), and Willcox's quarterly interest payments "dramatically increased" by 2012.
Plaintiffs claim that, in or around 2009, Lloyds added several new basis points to its Cost of Funds calculation in order to reflect the imposition by its parent company, LBG, of a "liquidity transfer pricing" ("LTP") charge.
According to Plaintiffs, the LTP charge added to the Cost of Funds an amount "based not on the actual cost of funds for the Loans, but for Lloyds' parent's significantly longer-term set of obligations."
As noted above, Plaintiffs filed this putative class action against Lloyds on September 13, 2013. They allege that Lloyds' inclusion of the LTP charge in its Cost of Funds constitutes a breach of the express terms of Plaintiffs' loan agreements and a breach of an implied term limiting Lloyds' discretion to change Plaintiffs' interest rates.
A party is entitled to summary judgment on any claim or defense if it can be shown "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'"
The movant has the burden of persuading the court as to the absence of a genuine issue of material fact.
Plaintiffs allege that Lloyds breached the IMS loan agreements by arbitrarily adding to its Cost of Funds an LTP charge issued to Lloyds by its parent company, LBG. Pls.' MSJ at 1-2; TAC ¶¶ 1, 55-64. For its part, Lloyds emphasizes that "between 2009 and 2015, the element of the variable `Cost of Funds' component reflecting Lloyds Bank's liquidity costs changed six times, increasing three times and decreasing three times." Def.'s MSJ at 2. Further, it contends these adjustments were implemented only after various committees within Lloyds "carefully reviewed and formally approved" the proposed changes.
The loans' facility agreements contain a Hong Kong choice of law provision, and this Court has previously concluded that Hong Kong law governs Plaintiffs' contractual claims. Order Granting Def.'s Mot. to Dismiss at 34, ECF No. 49. To prevail on a breach of contract claim under Hong Kong law, a plaintiff must establish (1) that there were express or implied contractual terms requiring the defendant to act in some manner, and (2) that the defendant has acted contrary to those express or implied terms.
Under Hong Kong law, contractual language is interpreted by "ascertain[ing] . . . the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."
Because the parties dispute the meaning of the Cost of Funds provision contained in the facility agreements, the Court must first determine whether that provision is ambiguous. Whether a contractual term is ambiguous is a question of law for the Court to decide.
"Generally, language will be deemed ambiguous when it is reasonably susceptible to more than one interpretation."
Again, the bank's Cost of Funds is defined in the facility agreements as:
Plaintiffs first argue that the language used in the parenthetical, "calculated to include the costs of complying with liquidity . . . requirements," (emphasis added), permits Lloyds to include in the Cost of Funds calculation only those charges that constitute "mandatory costs" imposed by regulatory or supervisory bodies to which the bank is subject. Pls.' MSJ at 18. Plaintiffs contend that, had the agreements granted Lloyds the absolute right to define what figures went into the cost calculation, "it would have been entirely unnecessary to then explicitly define `cost' to include `liquidity and reserve asset requirements.'" Pls.' Opp. at 30;
Lloyds counters that the plain language of the provision simply defines the Cost of Funds to include the costs of complying with liquidity requirements. Def.'s Opp. at 17. It argues that the language does not, as Plaintiffs contend, single out liquidity requirements as the sole liquidity charge that Lloyds may figure into its cost calculation.
The Court is not convinced that the language of the Cost of Funds provision limits the cost calculation to liquidity requirements, as Plaintiffs contend. Courts will employ certain canons of construction, such as ejusdem generis and noscitur a sociis, to limit the meaning of a general term when a list of specific terms is delineated within the text of a provision. However, those canons do not apply here, where, as Lloyds rightfully points out, "cost" is simply defined to include liquidity requirements. Indeed, while Plaintiffs contest the propriety of certain other costs that were factored into the Cost of Funds equation prior to 2009, namely, treasury administration costs and the bid/offer spread, they do concede that for over twenty years Lloyds had calculated its cost to include more than just "liquidity and reserve asset requirements."
Nor does Plaintiffs' argument that explicit inclusion of two specific factors precludes other costs related to those factors persuade the Court. Again, use of the word "include" indicates that "cost" is meant to encompass a more expansive list of factors, including standard, "non-required" liquidity costs that Lloyds actually incurred. This is also confirmed by Lloyds' historical practice, prior to implementation of the LTP charge, in which it routinely passed on "non-required" liquidity costs to borrowers.
Plaintiffs and Lloyds next dispute the meaning of the phrase "as conclusively nominated by the Bank from time to time." Plaintiffs argue that the phrase refers to Lloyds' right to change the IMS loans' currency — not the Cost of Funds calculation for the loans. Pls.' MSJ at 22-23. Plaintiffs support this notion by drawing attention to the fact that no other provision in the agreements outlines Lloyds' "critical right" to switch the currency of the loans; this, Plaintiffs maintain, necessitates that the Cost of Funds definition provide this entitlement. Pls.' Opp. at 32.
Plaintiffs also outline several textual arguments which they assert support their reading of the provision. Plaintiffs argue that since "nominate" means "to name," the use of this term in the Cost of Funds provision must be in reference to Lloyds' right to choose the currency of the loans, because numerical interest rates are calculated. Pls.' Opp. at 29. Plaintiffs also contend that the phrase "from time to time" is used in connection with "currency" elsewhere in the agreements; further, since the facility agreements already provide for updated interest rates every three months, the use of the phrase "from time to time," if made in reference to the calculation of "cost," would be "mere surplusage."
Lloyds responds that the phrase at issue appears in the interest rate provision of the agreements under the heading "Costs." Def.'s Opp. at 23. It asserts, "The notion that a clause governing currency switching would be hidden deep within the interest rate provision, under the heading `Costs,' is commercially unreasonable and defies basic principles of contract interpretation."
The Court again finds merit in Lloyds' reading of the contractual term. To begin, the Court finds that, as Lloyds correctly observes, the facility agreements do not require Lloyds to determine the Cost of Funds figure using a specific calculation.
Turning next to what the agreements do state, the Court finds that the agreements refer to the right to change the currency of the loans as belonging to the borrower. For example, the agreements state, "The Bank may (but is not obliged to) permit the Borrower to switch the currency of the loan. . . ." Ex. 6 to Def.'s Opp. at 2, ECF No. 350-7 (emphasis added). Additionally, in the acknowledgements section included at the end of the agreement, the language states, "I acknowledge that I am fully aware . . . my obligation is to make payment to the Bank of principal and interest in the currency in which the loan is denominated from time to time (this will be different from the currency stated in the Facility Amount in this letter if I exercise my option to borrow in a different currency). . . ."
In support of their contention that Lloyds was also entitled to choose the currency of the loans, Plaintiffs point to sections of the agreement stating that the borrower's choice of currency was subject to Lloyds' approval.
Plaintiffs argue that because Lloyds possesses the "critical right" to switch the IMS loans' currency, this right must be specifically provided for in the facility agreements; however, because no other term in the agreements outlines this right, it necessarily lies in the interest rate provision, under the heading "Costs." But this argument merely begs the question whether that right really is critical to Lloyds — indeed, the agreements may not provide for the right because it is not in fact critical.
Finally, Plaintiffs offer several textual arguments in support of their reading. First, Plaintiffs argue that because "nominate" means to "name" or "designate," use of this term is made in reference to "currency" because a currency may be named. Pls.' Opp. at 29. And while Plaintiffs argue that numerical interest rates are calculated, it is also true that a bank may "designate" the cost calculation it intends to employ. Additionally, Plaintiffs argue that use of the phrase "from time to time," when made in reference to changes in cost, creates a redundancy in the provision because the agreements state that interest rates on the loans will be set every three months. However, the Court does not find this reading to be problematic, as the "from time to time" language simply appears to refer to this event. Ultimately, when reading the contract as a whole it is clear that Lloyds' construction of the Cost of Funds definition squares with the overall purpose of the facility agreements.
Accordingly, the Court holds that the Cost of Funds provision is not ambiguous, and that the plain meaning of the provision permits Lloyds to include both liquidity costs and liquidity and reserve asset requirements in its cost calculation, as well as to alter this calculation "from time to time."
Arguing that Lloyds violated the express terms of the facility agreements, Plaintiffs contend that "[i]nterest rate increases can . . . be based only on (1) a rise in Lloyds' actual cost of funding Plaintiffs' and the Class's loans, and (2) increases in applicable `mandatory costs,' i.e., liquidity or reserve asset requirements imposed and enforced by regulatory authorities." Pls.' MSJ at 2 (emphasis in original). According to Plaintiffs, the LTP charge represents neither an actual cost to Lloyds in funding the loans nor a liquidity requirement. Id.
Plaintiffs argue that Lloyds breached the facility agreements because the LTP charge did not constitute an "actual cost" of funding the IMS loans; rather, it represented the "cost of funding Lloyds' parent's overhead and operations as a whole," making the loans "dramatically more profitable for Lloyds." TAC ¶ 5. Plaintiffs further contend that the LTP charge was built into the Cost of Funds component to address a "perceived risk" of potential future costs due to concerns about liquidity issues brought on by the global financial crisis. Pls.' MSJ at 26. As Lloyds explains, the onset of the financial crisis increased so-called "liquidity risks" — "the risk that lenders, by lending out money for longer periods of times, will no longer have sufficient liquid assets . . . available to pay depositors or other short term creditors." Def.'s MSJ at 13. This led to an increase in the cost of borrowing money on a medium- or long-term basis, leading LBG to implement the LTP charge that Lloyds subsequently passed on to borrowers.
As Plaintiffs argue, however, the IMS loans at issue were funded with three-month money, rather than with the medium- and long-term funding that saw rising costs. Pls.' Opp. at 3, 27; Exs. 30, 44, 46, 59, 62. According to Plaintiffs, because the actual cost to Lloyds on the IMS loans was the cost to cover interest for the three-month period, Lloyds had no right to increase the Cost of Funds on the basis that its cost to maintain those loans had risen, as it had for loan products funded with medium- or long-term money.
In fact, Plaintiffs claim that as Lloyds increased the rates it charged borrowers by introducing the LTP charge, the actual cost of borrowing to fund the IMS loans fell. Pls.' MSJ at 12-13; Pls.' Opp. at 12. According to the TAC, "Lloyds improperly increased its alleged `Cost of Funds' during a time when the index measuring the actual cost of funds to Lloyds in Yen or Swiss Francs (for example, the London Inter-Bank Offered Rate for Yen `LIBOR'), fell dramatically." TAC ¶ 4. In response, Lloyds asserts that the facility agreements do not require the Cost of Funds component to track LIBOR or any other reference index. Def.'s MSJ at 11-12.
Additionally, Lloyds maintains that the IMS loans are funded not with three-month money, but instead with a mix of short-, medium-, and long-term funding. Def.'s Opp. at 26, Exs. 1, 3, 10, 11, 17;
There was much debate during the two-day hearing on the instant motions regarding how Lloyds funds the IMS loans. Lloyds' attorney argued that funding a long-term obligation with short-term money would not make sense from a business efficacy standpoint.
Ex. 17 to Def.'s Opp at 1, ECF No. 350-18. Although it is unclear from the face of the document whether the Lloyds representative was speaking to how IMS loans were funded, Lloyds cites this document in its Concise Counterstatement of Material Facts for the proposition that "IMS loans are funded with a mix of short-term, medium-term and long-term funds." Def.'s Opp. CSF ¶ K.
Minutes from a LBG Pricing Committee meeting held in July 2009 state, "IMS — cost of funds reprice[.] Background to the proposal: Over the last 12 months there has been a significant reduction in the availability of funding across the world's money markets, leading to an increased cost of funding medium to long term mortgages and loans. In response to this, we are no longer able to hold off from passing these cost increases to our customers and will therefore be revising our own Cost of Funds rates." Ex. EE to Def.'s MSJ at 1, ECF No. 299
Plaintiffs submit documents that seem to state that Lloyds funded its IMS loan products with short-term money only. For instance, an April 2010 presentation given to Lloyds' executive committee summarizes a proposal that was made to Lloyds' Treasury and Trading group to fund the IMS loan portfolio with longer-term money. Ex. 61 to Pls.' Opp. at 17, ECF No. 391-14. The presentation explains, "The key financial risk in the current funding structure is the short term funding of the long term mortgage book. . . . IMS have identified it would be possible to mitigate this risk by funding up to 35% of the book at 12 month+ funding. . . ."
A Treasury and Trading presentation from September 2009 states, "[Lloyds] can only fund these asset positions [i.e. multi-currency mortgages] by funding each quarterly roll for 3 months. Group is therfore [sic] forced to short fund 100% of these assets in 3m tenor, whilst group policy is to fund 35% of all assets with over one year money. [Lloyds] can never match fund these mortgages to maturity. . . ." Ex. 46 to Pls.' MSJ at 2, ECF No. 280. Other Lloyds documents similarly imply that the IMS loans were funded with short-term money.
Expert reports submitted by the parties likewise fail to clarify the issue. Plaintiffs' expert contends, "There can be no misunderstanding about the word `cost' and given it is unequivocally clear from the plethora of [Lloyds'] internal Cost of Funds discussion papers and e-mails, the methodology for funding the IMS loan portfolio was to source funds using the 3 month London Inter-bank market, as I would have expected and as is the market convention for 3 month tenures in foreign currency loan facilities." Petley Rebuttal ¶ 5. Lloyds' expert counters that "[t]he IMS Loans included an absolute maturity of between 7 and 30 years with an average maturity behavior of 5.5 years. . . . As such, the long-term nature of the funding requirement would not be consistent with a 90 day LIBOR maturity." Belanger Report ¶ 47.
Relatedly, as discussed above, the parties dispute whether Lloyds obtained its funding from LBG under a centralized funding model prior to implementation of the LTP charge in 2009. If it did, as Lloyds contends, the LTP charge arguably represented "a more sophisticated methodology for allocating pre-existing liquidity costs which had always been incurred by LBG in obtaining funds." Def.'s Opp. at 10. If the centralized model was a novel approach established in 2009 when the LTP charge was introduced, as Plaintiffs assert, the more relevant question becomes whether it was appropriate for Lloyds to restructure the manner in which it obtained funding for its IMS loans. Pls.' MSJ at 8-9.
Here again, the record is rife with inconsistencies. Stuart Cheetham, former CEO of Lloyds' Hong Kong branch states, "[T]he Hong Kong branch, to the best of my knowledge and in my time there, did not purchase funding itself. . . . [T]hat activity was centralized into our, certainly latterly, into the Group Corporate Treasury function." Dep. of Stuart Cheetham at 11:1-5, ECF No. 350-11. Importantly, it is unclear from the portions of deposition testimony the parties submitted when and how long Cheetham was at the Hong Kong branch.
Plaintiffs cite to deposition testimony of Andrew Hutchinson, the sole deponent from LBG, as supporting their contention that funding for the IMS loans was decentralized prior to 2009:
Dep. of Andrew Hutchinson at 11:2-9, ECF No. 253-25. Lloyds counters that Hutchinson's use of the phrase "more centralized" does not indicate that LBG did not employ a centralized model at all prior to 2009,
The parties also dispute whether the LTP charge was implemented in response to regulatory requirements or recommendations. While the Court has determined that the Cost of Funds provision does not restrict the cost calculation to liquidity and reserve asset requirements, whether Lloyds acted in response to regulatory requirements or recommendations will bear on whether implementation of the LTP charge was appropriate. Lloyds contends that the LTP charge was implemented in response to regulations recommending, and later requiring, financial institutions to introduce funds transfer pricing in order to address heightened liquidity risks during the global financial crisis.
As Plaintiffs point out, however, the regulations upon which Lloyds claims it relied were issued subsequent to the LTP charge and Cost of Funds increases. Pls.' Opp. at 3. Further, Plaintiffs contend that several of these regulations neither addressed product pricing nor required additional liquidity premiums to be charged to borrowers.
Such inconsistencies and incomplete and conflicting information regarding the type of funding Lloyds used for the IMS loans, the manner in which that funding was obtained, and the reasons behind implementation of the LTP charge present material questions of fact that prevent this Court from granting either party's motion for summary judgment on these issues.
Because the parties present conflicting evidence regarding the specifics of Lloyds' centralized funding process, the money used to fund the IMS loans, and details regarding the LTP charge, the Court DENIES Plaintiffs' motion for summary judgment, and GRANTS in part and DENIES in part Lloyds' motion for summary judgment as to Count I.
The Court makes the following findings as a matter of law, and GRANTS partial summary judgment in favor of Lloyds with respect to these findings.
The Court otherwise DENIES Lloyds' Motion for Summary Judgment.
Plaintiffs also allege that Lloyds breached an implied duty to act honestly and in good faith by increasing the IMS loans' interest rates via the LTP charge. TAC 1 ¶¶ 65-72. Lloyds moves for summary judgment as to this cause of action, asserting that Hong Kong law does not provide for any implied terms in the instant scenario, and that even assuming, arguendo, that the facility agreements did contain an implied term, Lloyds did not violate the term by acting irrationally or perversely. Def.'s MSJ at 24.
Hong Kong law, which follows English common law,
In
In arguing that no term should be implied restricting its discretion to change interest rates, Lloyds asserts that Hong Kong courts are reluctant to imply such terms into contracts between sophisticated parties. Def.'s MSJ at 25. In support of this claim, Lloyds cites to
On the other hand, Plaintiffs argue that sophistication is only one of many potential factors a court may consider in determining whether to imply a term into a contract. Pls.' Opp. at 33;
Lloyds argues that Willcox is "an experienced real estate investor, having purchased at least five luxury condominiums or residential real estate properties in Hawaii . . . and employing a property manager to oversee his real estate holdings." Def.'s MSJ at 26. Yet regardless of whether Willcox was a "sophisticated" investor, the case law suggests that sophisticated parties may still benefit from the incorporation of implied terms into commercial contracts. Given this, Willcox's "sophistication" is not determinative of the issue.
In arguing against an implied term, Lloyds also maintains that the facility agreements were negotiable, given that Plaintiffs had the option to choose the "currency or currencies of the loan, whether to make payments on an interest only or principal and interest basis, and the contractual maturity of the loan." Def.'s Reply at 14-15 n.11. However, these are not the significant terms at issue in this case. Importantly, the parties did not negotiate at arms' length the Cost of Funds provision, which is the subject matter of this litigation. In fact, the IMS loans belonging to the entire class are based on facility agreements that contain a Cost of Funds term that is substantially the same in each of the respective contracts.
For the foregoing reasons, the Court sua sponte concludes as a matter of law that an implied term in the facility agreements limited Lloyds' exercise of the discretion afforded it by the Cost of Funds provision. The Court notes that the Ninth Circuit has "long recognized that, where the party moving for summary judgment has had a full and fair opportunity to prove its case, but has not succeeded in doing so, a court may enter summary judgment sua sponte for the nonmoving party."
The Ninth Circuit has expounded on Rule 56's notice requirement, stating, "Before sua sponte summary judgment against a party is proper, that party `must be given reasonable notice that the sufficiency of his or her claim will be in issue: Reasonable notice implies adequate time to develop the facts on which the litigant will depend to oppose summary judgment.'"
This Court similarly finds that Lloyds, as the movant for summary judgment as to Count II, had both a "full and fair opportunity," and indeed the incentive, to come forward with all of the evidence in support of its motion. Plaintiffs' arguments regarding the implied term having been fully set forth in both the TAC and Plaintiffs' Opposition Brief, Lloyds "had an adequate opportunity to show that there is a genuine issue and that [its] opponent is not entitled to judgment as a matter of law."
For the foregoing reasons, the Court sua sponte GRANTS partial summary judgment to Plaintiffs on Count II.
The Court next determines what the implied term shall require. At the hearing, Lloyds' attorney stated that both parties agreed that
Because both parties agree that
Addressing plaintiff's arguments, the
Thus, recognizing that a lender must take into account "purely commercial considerations," such as financial difficulty, in setting rates, the court found that an implied term in the mortgage agreements prevented defendant lender from exercising this discretion "dishonestly, for an improper purpose, capriciously or arbitrarily," or "in a way which is so unreasonable that it can be said of it that no reasonable lender would take that course if placed in that situation."
The Court therefore finds that, when exercising its discretion to change interest rates, Lloyds must do so in a manner that comports with "purely commercial considerations," including whether it "is in financial difficulty because it is obliged to pay higher rates on interest to the money market"; however, Lloyds must refrain from acting "dishonestly, for an improper purpose, capriciously, or arbitrarily," or in a manner so unreasonable that no reasonable lender would do the same (hereinafter referred to as the "
According to the
In sum, various questions of material fact preclude this Court from granting summary judgment in favor of either party on the issue whether Lloyds breached an implied term limiting its discretion to adjust interest rates, as determined by the
For the reasons set forth above, the Court DENIES Lloyds' motion for summary judgment on Count II.
Because issues of material fact remain as to whether Lloyds breached the facility agreements by passing on the LTP charge to borrowers, the Court DENIES Plaintiffs' request for declaratory relief.
For the foregoing reasons, the Court: (1) DENIES Plaintiffs' Motion for Partial Summary Judgment on Their and the Putative Class's Claim for Breach of Contract on Count I;
(2) GRANTS in part and DENIES in part Lloyds' Motion for Summary Judgment; (3) sua sponte GRANTS partial summary judgment to Plaintiffs on Count II, and (4) DENIES Plaintiffs' request for declaratory relief.
Regarding its second and third holdings, the Court finds that the Cost of Funds provision in the facility agreements does not prescribe a specific methodology for calculating the Cost of Funds component of the IMS loans' interest rate; does not specifically require the Cost of Funds component to track 3-month LIBOR; and does not specifically require Lloyds to fund Plaintiffs' loans with short-term money. However, the agreements do allow Lloyds to pass on liquidity costs and liquidity requirements to borrowers. Additionally, the Cost of Funds provision does not specifically restrict Lloyds from altering its cost calculation. However, the Court also finds an implied term in the agreements which limits Lloyds' discretion to alter interest rates. That implied term requires Lloyds, when altering interest rates, to do so in a manner that comports with purely commercial considerations, including whether it is in financial difficulty because it is obliged to pay higher rates on interest to the money market; however, Lloyds must refrain from acting dishonestly, for an improper purpose, capriciously, or arbitrarily, or in a manner so unreasonable that no reasonable lender would do the same (the
The Court otherwise DENIES both parties' motions for summary judgment, as issues of material fact regarding Lloyds' alleged breach of the express and implied terms of the facility agreements remain.
IT IS SO ORDERED.
The declarations of Reyes and Brewer in turn attach a series of Hong Kong and United Kingdom legal authorities upon which they rely.
