JACOBS, Justice.
In 2006, a German bank organized two affiliated entities under Delaware law. One of those entities sold a class of securities — Trust Preferred Securities — to investors as part of the bank's effort to raise capital. In 2009, the bank acquired a second German bank by merger, whereby the bank assumed an obligation of the acquired bank to make certain payments with respect to a class of the acquired bank's securities. Post-merger, the bank made those payments in 2009 and 2010. In 2010, the Plaintiff, who is the Property Trustee for the holders of the acquiror bank's Trust Preferred Securities ("Trustee"), filed this action in the Court of Chancery. The Trustee claimed that the 2009 and 2010 payments on the acquired bank's securities, which was a "Parity Security," triggered a contractual obligation by the bank to make comparable payments on the Trust Preferred Securities. The bank took the position that it had no such contractual obligation.
On cross motions for summary judgment, the Court of Chancery rejected the Trustee's claim on the basis that, because the 2009 and 2010 payments were not made on "Parity Securities," the bank had no obligation to make payments on the Trust Preferred Securities. Having decided that question, the court declined to reach the other issues generated by the Trustee's claim. Because we conclude that the Court of Chancery erred, we reverse and remand with instructions to enter final judgment for the Trustee consistent with the rulings in this Opinion.
In 2006, Commerzbank Aktiengesellschaft ("Commerzbank" or the "Bank"), a German stock corporation and international bank, formed two affiliated entities. One of them, Commerzbank Capital Funding LLC II (the "Company"), is a Delaware LLC that is governed by an Amended and Restated Limited Liability Company Agreement ("LLC Agreement"). The other, Commerzbank Capital Funding Trust II ("Trust II"), is a Delaware entity governed by an Amended and Restated Trust Agreement ("Trust II Agreement"). The LLC Agreement and Trust II Agreement, both executed on March 30, 2006, are governed by Delaware law. That same day, the Bank and the Company entered into a separate, third agreement — the Support Undertaking — that is governed by German law. These three entities — the Bank, and its two affiliates, the Company, and Trust II — are the defendants in this action (collectively, "Defendants").
The Company and Trust II were formed to issue and sell trust preferred securities, in order to raise "consolidated Tier I regulatory capital" for the Bank.
In 2009, Commerzbank acquired a second German bank, Dresdner Bank AG ("Dresdner Bank"), by merger. In that merger, the Bank assumed all of Dresdner Bank's assets, liabilities, and contractual obligations — including Dresdner Bank's obligation to make certain capital payments and distributions with respect to its DresCap Trust Certificates. Discharging that assumed obligation, the Bank made payments on the DresCap Trust Certificates in 2009 and 2010. The Bank (acting through Trust II) also made payments on its own Trust Preferred Securities in 2009. After 2009, no further payments on the Trust Preferred Securities were made.
Under German law, the Bank's capital is classified as either Tier I ("core") capital, Tier II ("supplementary") capital, or Tier III capital. Tier I capital is "the core measure of a bank's financial strength for regulatory purposes and consists primarily of common stock and disclosed reserves, but [it] may also include non-redeemable, non-cumulative preferred stock."
After issuing the Trust Preferred Securities in 2006, Trust II used the sale proceeds to purchase Class B Preferred Securities issued by the Company. The Company, in turn, used those sale proceeds to purchase Initial Debt Securities (subordinated notes) from the Bank. These sales occurred at the direction of the Bank, which controls both the Company and Trust II through its ownership of the Company's and Trust II's common and preferred securities. In this round-about
For our purposes, what is important is the flow of money to and from the public investors. Under the intricate capital payment structure depicted above, the Bank's distributions on its Initial Debt Securities served to fund the distributions on the Company's Class B Preferred Securities. Trust II, in turn, used the distributions it received on the Class B Preferred Securities to make capital payments to the holders of the Trust Preferred Securities.
In addition to, and apart from, the LLC Agreement and the Trust II Agreement, there is a third agreement implicated on this appeal — the Support Undertaking. That Undertaking contractually obligates the Bank to elevate the priority right to payment of the Trust Preferred Securities, in specified circumstances discussed more fully below. The Trustee, which holds the Class B Preferred Securities for the benefit of the Trust Preferred Securities holders, is a third-party beneficiary of the Support Undertaking. Both the Class B Preferred Securities and the Trust Preferred Securities are profit-dependent, meaning that payments on them are due only if and when the Bank is deemed profitable under the criteria of the LLC Agreement.
The LLC Agreement requires the Company to make capital payments on its Class B Preferred Securities (which, in turn, fund Trust II's payments on the Trust Preferred Securities) in one of two circumstances: (1) if the Company has operating profits, and the Bank has distributable profits; or (2) if a capital payment is "deemed" declared.
This case focuses on the Company's obligations under the LLC Agreement to make a capital payment on its Class B Preferred Securities where the Bank makes a payment on a "Parity Securit[y]." That obligation arises under the so-called "Pusher Provision" of the LLC Agreement, which mandates that:
At the heart of the parties' dispute is the question: what is a "Parity Security"? "Parity Securities" are defined in the LLC Agreement as:
The Support Undertaking reinforces those obligations. That agreement provides that where the Company is required to — but does not — make a capital payment on the Class B Preferred Securities, the Bank "ensure[s] that the Company shall at all times be in a position to meet its obligations if such obligations are due and payable, including its obligations to pay Capital Payments" on the Class B Preferred Securities. Section 6 of the Support Undertaking mandates that the Bank:
Put differently, the Bank guaranteed in the Support Undertaking that it would not elevate the priority right to payment of any Parity Security above that of any other security (including the Trust Preferred Securities), unless the Bank and the Company modify the Support Undertaking to permit that priority elevation. That guarantee is one of the contract rights that the Trustee seeks to enforce in this action.
As earlier noted, when the Bank acquired Dresdner Bank by merger on May 11, 2009, it assumed all of Dresdner Bank's assets, liabilities, and contractual obligations, including Dresdner Bank's obligation to make capital payments on its DresCap Trust Certificates. As a result of the merger, the DresCap Trust Certificates, which are capital-ratio-dependent securities, became consolidated Tier I regulatory capital of the Bank.
After the Dresdner Bank merger, the Bank made payments on its Trust Preferred Securities and the DresCap Trust Certificates in 2009. Thereafter, the Bank encountered serious financial difficulties that required it to seek aid from the German government. As a condition to receiving that aid, the Bank was required to refrain from making any distributions on its profit-dependent securities in 2010 (for fiscal year 2009) and in 2011 (for fiscal year 2010). Accordingly, in November 2009, the Bank announced that it would not make payments on any of its profit-dependent securities (including the Trust Preferred Securities) in 2010, since the Bank did not return a profit for the 2009 fiscal year.
The Bank remained obligated, however, to make payments on its capital-ratio-dependent securities, i.e., the DresCap Trust Certificates. When making those payments, the Bank assumed that the DresCap Trust Certificates were both "Parity Securities" (and "consolidated Tier I regulatory capital") under the LLC Agreement. Accordingly, the Bank represented to German bank regulators and other third parties, both directly and indirectly, that the DresCap Trust Certificates were Parity Securities.
The Bank later did an about-face, out of concern that its payments on the DresCap Trust Certificates would "push" or trigger payments on the Trust Preferred Securities under the LLC Agreement's "Pusher Provision."
On March 5, 2010, the Bank again announced that it would not make any distributions on the Class B Preferred Securities or the Trust Preferred Securities before the April 12, 2010 Payment Date. In response to that announcement, the Trustee sent the Bank a letter on March 26, 2010, asserting that: (i) the DresCap Trust I and IV Certificates were "Parity Securities" under the LLC Agreement; (ii) under that Agreement's Pusher Provision, the Bank's 2009 and 2010 payments on the DresCap Trust Certificates required ("pushed") a mandatory April 12, 2010 payment on the Class B Preferred Securities and Trust Preferred Securities; and (iii) under the Support Undertaking, the restructuring of the DresCap Trust IV Certificates required an equivalent priority elevation of the Trust Preferred Securities' liquidation preference, from Tier I to Lower Tier II capital.
After the Bank made payments on the DresCap Trust IV Certificates on March 31, 2010, it responded to the Trustee's March 26 letter on April 12, 2010.
On June 18, 2010, the Trustee commenced this Court of Chancery action for declaratory and specific performance relief. The Trustee requested the court to mandate the Defendants to make a capital payment on the Trust Preferred Securities due and payable on April 12, 2010, and to elevate the priority of those Securities from Tier I to Lower Tier II capital, so as to rank them equally with the restructured DresCap Trust IV Certificates. The Trustee also sought an award of its costs and expenses, including reasonable attorneys' fees. In its opening brief in support of its summary judgment motion, the Trustee additionally sought an order mandating the capital payment on the Trust Preferred Securities that would fall due on the April 12, 2011 Payment Date.
On February 15, 2011, the parties cross-moved for summary judgment. In a Memorandum Opinion issued on August 4, 2011, the Court of Chancery deemed the cross-motions as the equivalent of a stipulated request for a determination on the merits.
This appeal followed.
Three issues are presented on this appeal. The first is whether the DresCap Trust Certificates are "Parity-Securities" under the LLC Agreement, which is governed by Delaware law. If those Certificates are found to be "Parity Securities," then two additional issues arise as a consequence. The second issue is whether the payments on the DresCap Trust Certificates in 2009 and 2010 "pushed" or triggered an April 12, 2010 payment on the Trust Preferred Securities under the LLC Agreement. The third issue is whether under the Support Undertaking, the Bank became contractually obligated to elevate the Trust Preferred Securities to a priority rank equal to that of the DresCap Trust IV Certificates. These contentions require this Court to review de novo the Court of Chancery's interpretation of the contracts in dispute.
The threshold issue is whether the DresCap Trust Certificates are "Parity Securities" under the LLC Agreement. The outcome of that dispute turns on the meaning of subsection (ii) of the LLC Agreement's definition of "Parity Securities." Subsection (ii) defines Parity Securities as:
To better understand the parties' differing interpretations of the quoted definition, the definition is broken down into separate elements represented by bracketed formula language. Thus, the Parity Securities definition may be parsed as follows:
Using these formulaic terms, the Parity Securities definition may be expressed as follows:
The Trustee claims that the DresCap Trust Certificates are Parity Securities, because they are "other instruments qualifying as consolidated Tier I regulatory capital of the Bank" (i.e., Term 2 plus the Internal Modifier). The Defendants disagree. They argue that the DresCap Trust Certificates cannot be Parity Securities, because to qualify as such, the DresCap Trust Certificates must be "other instruments qualifying as consolidated Tier I regulatory capital of the Bank ... subject to any guarantee or support agreement of the Bank" (i.e., Term 2 plus the Internal Modifier plus the Trailing Modifier). Since the DresCap Trust Certificates were not "subject to any guarantee or support agreement of the Bank" (i.e., the Trailing Modifier), Defendants argue, the Certificates do not fall within the definition of Parity Securities.
The dispute thus turns on whether the definitional phrase "subject to any guarantee or support agreement of the Bank" (i.e., the Trailing Modifier) should be read to modify the preceding phrase "other instruments qualifying as consolidated Tier I regulatory capital of the Bank" (i.e., Term 2 plus the Internal Modifier). All parties agree that the DresCap Trust Certificates were not, on a standalone basis, "subject to any guarantee or support agreement of the Bank" (i.e., the Trailing Modifier). Thus if, as Defendants argue, the Trailing Modifier modifies all the Terms that precede it, then the DresCap Trust Certificates are not Parity Securities.
The Trustee contends that the Trailing Modifier, properly interpreted, modifies only Term 3, but not Term 1 or Term 2. If that construction is correct, then the DresCap Trust Certificates are Parity Securities, because they would be "other instruments qualifying as consolidated Tier I regulatory capital of the Bank" (i.e., Term 2 plus the Internal Modifier). The Court of Chancery accepted the Defendants' contrary interpretation, and held that the Trailing Modifier modifies all three preceding Terms.
To decide whether the DresCap Trust Certificates are "Parity Securities," this Court must construe the Parity Securities definition under applicable rules of contract interpretation.
The Court of Chancery determined that to be a Parity Security, a security must be "subject to any guarantee or support agreement of the Bank" (i.e., the Trailing
In concluding that the LLC Agreement's definition of Parity Securities is unambiguous, the Court of Chancery relied upon the definition of Parity Securities in the Trust II Agreement.
On appeal, the Trustee claims that the Court of Chancery erred, because the Trust II Agreement's definition of "or" as an "inclusive or" is not legally relevant to, let alone dispositive of, a proper construction of the Parity Securities definition in the LLC Agreement. Relevance aside, we agree with the Trustee that the mere presence of an "inclusive or," alone and without more, is not ipso facto dispositive of how the contested definition of Parity Securities should be interpreted.
The Trustee urges that the term "other instruments" (i.e., Term 2) is more reasonably read as modified by only its immediately following neighbor — the Internal Modifier, "qualifying as consolidated Tier I regulatory capital of the Bank" — and not by the more distant phrase "subject to any guarantee or support agreement of the Bank" (i.e., the Trailing Modifier). The Court of Chancery agreed — as do we — that the Trustee's reading of the Parity Securities definition "does flow somewhat more naturally than the Defendants'."
It is settled that a contract must be read as a whole and in a manner that will avoid any internal inconsistencies, if possible.
The Defendants counterargue that the Trustee's interpretation would be similarly flawed, because under the Trustee's construction, Term 1 ("preference shares") would be subsumed by Term 2 ("other instruments"), and thereby rendered surplusage.
To summarize, the Defendants' definition of Parity Security may be expressed formulaically as follows:
By contrast, the Trustee's definition of Parity Security would be:
As earlier noted, under each side's reading of the Parity Securities definition, at least one Term — either Term 1 or Term 2 — would be rendered surplusage. The fact that both readings would yield a surplusage does not afford a basis to prefer one over the other. Because each side's reading is otherwise reasonable, the Parity Securities definition in the LLC Agreement must be deemed ambiguous.
Where, as here, a contract term is ambiguous, a court normally will consider extrinsic evidence of the parties' contractual intent,
Here, an inquiry into what the parties intended would serve no useful purpose, because it would yield information about the views and positions of only one side of the dispute — the Bank, the Company, and Trust II. This case does not fit the conventional model of contracts "negotiated" by and among all the interested parties.
That approach implicates the rule of construction, employed in some contract cases, that ambiguities in a contract will be construed against the drafter.
The reasonable expectation of the public investors — in this case, the holders of the Trust Preferred Securities — must therefore be given effect. The investors' reasonable expectation in this case is that the DresCap Trust Certificates are Parity Securities. That result is hardly novel or surprising, because the Bank itself created that expectation: (i) in various communications with its German regulators, (ii) in its own internal communications, and (iii) with third parties.
We accordingly construe the Parity Securities definition in the LLC Agreement consistent with the position of the Trustee. Specifically, we conclude that the Trailing Modifier ("subject to any guarantee or support agreement of the Bank") modifies only Term 3 ("any other instrument of any Affiliate of the Bank"), and not Term 1 ("preference shares") or Term 2 ("other instruments") of that definition. We further conclude — and this the parties do not dispute — that the Internal Modifier ("qualifying as consolidated Tier I regulatory capital of the Bank") modifies both Term 1 ("preference shares") and Term 2 ("other instruments"). Here, the DresCap Trust Certificates fall within the category of "other instruments qualifying as consolidated Tier I regulatory capital of the
Our determination that the DresCap Trust Certificates are Parity Securities under the LLC Agreement generates two additional issues, which the Court of Chancery did not reach. In the interest of justice and for the sake of judicial economy,
The second issue is whether, under the Pusher Provision of the LLC Agreement, the Bank's 2009 and 2010 payments on the DresCap Trust Certificates triggered ("pushed") a capital payment on the Class B Preferred Securities — which, in turn, would have triggered a capital payment on the Trust Preferred Securities. We hold that they did.
The Pusher Provision states that if the Defendants make any payment on Parity Securities (here, the DresCap Trust Certificates) "in any Fiscal Year," a capital payment on the Class B Preferred Securities "shall be authorized to be declared and paid on the Class B Payment Date falling contemporaneously with or immediately after the date" on which the payment on the Parity Securities was made.
Whether the Pusher Provision operated to trigger ("push") any payments on the Class B Preferred Securities and Trust Preferred Securities turns on what the term "Fiscal Year" in the Pusher Provision means. The dispute is over whether "Fiscal Year" means a calendar year (as the Defendants argue) or a year that runs from April 12 of a given year to April 11 of the following year (as the Trustee contends).
To reiterate the pivotal facts, the Bank made capital payments on the DresCap Trust I Certificates on June 30, 2009 and December 31, 2009. The Bank also made a payment on the DresCap Trust IV Certificates on March 31, 2010. The Bank further caused Trust II to make a sole payment on its own Trust Preferred Securities on April 12, 2009.
The Trustee claims that: (1) the Bank's payments on the DresCap Trust Certificates in 2009 and 2010 triggered a payment on the Trust Preferred Securities that fell due on the April 12, 2010 Payment Date; and (2) the Bank's more recent capital payments on the DresCap Trust Certificates during this litigation triggered a second payment on the Trust Preferred Securities that became due on April 12, 2011.
As support for its contrary interpretation — that "Fiscal Year" means April 12 of any year to the following April 11 — the Trustee points to analogous language in the Pusher Provision relating to Junior Securities. That analogous language provides that "if only one Junior Distribution was made in the Class B Payment Period preceding the relevant Class B Payment Date, Capital Payments shall be authorized to be declared" on the Class B Preferred Securities.
The Defendants disagree. They urge that under the plain language of the Pusher Provision that applies to Parity Securities, "Fiscal Year" means a calendar year running from January 1 through December 31,
We conclude that the Defendants' interpretation is unreasonable because it conflicts with the plain language of the specific
Because the Defendants' interpretation — equating "Fiscal Year" with a calendar year — is unreasonable, it must be rejected. The Trustee's interpretation, which is consistent with the plain language of the LLC Agreement, is the only reasonable alternative. We therefore conclude that, within the context of the Pusher Provision of the LLC Agreement, "Fiscal Year" means April 12 of a given year to April 11 of the following year.
In this case, because the Bank made payments on the DresCap Trust Certificates on June 30, 2009, December 31, 2009, and March 31, 2010, those payments "pushed" payments on the Class B Preferred Securities — which, in turn, pushed payments on the Trust Preferred Securities — that fell due on April 12, 2010. And because the Trustee properly requested the Court of Chancery to order a payment on the Class B Preferred Securities (and Trust Preferred Securities) falling due on April 12, 2011, we further conclude, by parity of reasoning, that the Defendants are also contractually obligated to make that payment.
Our determination that the DresCap Trust Certificates are Parity Securities under the LLC Agreement generates the third and final issue: whether the Bank was contractually obligated to elevate the Trust Preferred Securities to rank equal to the DresCap Trust IV Certificates under the Support Undertaking. We hold that the Bank was so obligated.
Section 6 of the Support Undertaking pertinently provides that the Bank "shall not give any guarantee or similar undertaking with respect to, or enter into any other agreement relating to the support or payment of" Parity Securities, "unless the parties hereto modify this Agreement such that the Bank's obligations under this Agreement rank at least pari passu with, and contain substantially equivalent rights of priority as to payment as" the Parity Securities. To determine whether the Bank violated the Support Undertaking, we must decide whether the Bank, by restructuring the DresCap Trust IV Certificates, "enter[ed] into [an] agreement relating to the support or payment of" the
In restructuring the DresCap Trust IV Certificates, the Bank entered into an Amendment Agreement that enabled it to assign those Certificates a senior liquidation preference, by elevating them from the lower priority Tier I class of capital to the higher priority category of Lower Tier II capital. The restructuring also enabled the Bank to replace the DresCap Trust IV Certificates' capital-ratio trigger with a guaranteed automatic payment mechanism. By virtue of the Amendment Agreement and the Bank's restructuring of the DresCap Trust IV Certificates thereunder, the Bank "enter[ed] into [an] agreement relating to the support or payment of" the DresCap Trust Certificates. That triggered the Support Undertaking.
Although the Amendment Agreement clearly "relat[ed] to the support or payment" of the DresCap Trust Certificates, the Defendants did not modify the Support Undertaking to reflect the changes effected by that Agreement. The Trustee contends that Section 6 of the Support Undertaking explicitly prohibits the Bank from entering into the Amendment Agreement "unless the parties hereto modify [the Support Undertaking]."
The Defendants read the Support Undertaking differently. They argue that to trigger the Support Undertaking, the Bank must first amend Section 2 of that Undertaking to provide a guarantee that ranks pari passu with an "agreement relating to the support or payment of" a Parity Security. Because the Bank never took that first step of amending Section 2, the argument goes, the Bank could not have taken the second step under Section 6 of "enter[ing] into [an] agreement relating to the support or payment of" the DresCap Trust Certificates. Therefore (the Bank concludes), the Amendment Agreement that restructured the DresCap Trust IV Certificates was not an "agreement relating to the support or payment of" those Certificates.
That convoluted argument ignores the facts, and turns the language of the Support Undertaking on its head. The Bank cannot be heard to claim that it never entered into an "agreement relating to the support or payment of" the DresCap Trust Certificates because it unilaterally decided not to satisfy Section 6's condition requiring the Bank to amend the Support Undertaking. To allow the Bank to defeat its contractual obligation in this way would defeat the purpose of the Support Undertaking and gut the protections afforded by it.
The Bank entered into an agreement that, in fact, related to the support or payment of the DresCap Trust Certificates. It must, therefore, be presumed in law that the Bank satisfied its prerequisite contractual obligation to modify the Support Undertaking accordingly. That construction is consistent with the maxim that "equity regards that as done which ought to be done."
Lastly, we address the remedy. The Trustee claims that specific performance is required, because under German law, specific performance is the general remedy for a violation of the Support Undertaking.
The Trustee's proposed remedies are consistent with the Support Undertaking, because they will ensure that the Trust Preferred Securities "rank at least pari passu with, and contain substantially equivalent rights of priority as to payment" as the DresCap Trust IV Certificates. Accordingly, we hold that the Trustee's proposed remedies are appropriate, and that on remand the Court of Chancery shall order the Defendants to specifically perform those terms, as the Support Undertaking and German law require.
For the foregoing reasons, the judgment of the Court of Chancery is reversed, and the case is remanded, with instructions to the Court of Chancery to enter final judgment for the Trustee on count I (declaratory judgment) and count II (specific performance), consistent with the rulings in this Opinion. Jurisdiction is not retained.
Tier I capital is further broken down into: 1) Tier I regulatory capital of the Bank, and 2) consolidated Tier I regulatory capital of the Bank. Tier I regulatory capital consists of securities that the Bank directly issues itself. Op. at 23 n. 74. Consolidated Tier I regulatory capital of the Bank includes securities issued by the Bank's affiliates and subsidiaries. Id.
The Bank further explained that after the restructuring of the DresCap Trust IV Certificates, those Certificates would be "thus no longer a Parity Security, and there [would be] no associated push effect from [that] instrument...." (Italics added). In addition, the Bank separately communicated to its German regulators that the "[c]omplete dissolution of Dresdner Funding Trusts I, III & IV removes [the] ... basis for `parity security pushes'." (Italics added). In those statements, the Bank implicitly admitted that before the restructuring of the DresCap IV Trust Certificates, the Certificates were "Parity Securities."