JED S. RAKOFF, District Judge.
In this action, plaintiff CFIP Master Fund, Ltd. (the "Fund") asserts various claims against defendants Citibank, N.A., Citigroup Global Markets Inc., and Citigroup Global Markets Limited (collectively, the "Citi Defendants"), as well as against defendant U.S. Bank National Association ("U.S. Bank"), arising from a credit default swap transaction
Before turning to the parties' arguments, the Court recounts the following undisputed background facts regarding the complex credit default swap transaction from which this litigation arises. The Fund, the plaintiff in this lawsuit, is a private investment fund organized under the law of the Cayman Islands and managed by Chicago Fundamental Investment Partners, LLC. See Pl's Statement of Undisputed Facts Pursuant to Local Civil Rule 56.1 in Support of its Motion for Summary Judgment Against Citi Defendants ("Pl's 56.1 Re: Citi") ¶ 1.
In February 2007, CGMI approached the Fund about entering into a credit default swap transaction. Pl's 56.1 Re: Citi ¶ 5. Over the next several months, the parties, represented by counsel, negotiated the form of this transaction. Id. ¶¶ 6-17. By May 2007, the Fund and CGMI had agreed that the Fund would provide credit protection on a "floating" rather than a "fixed" basis. Id. ¶ 18. In contrast to a "fixed" recovery transaction, where the credit protection seller pays a fixed percentage of a "notional" amount assigned to a particular company if that company experiences a credit event, in a "floating" recovery transaction the amount of the settlement payment due following a particular company's credit event is based on the post-credit event market valuation of that company's loans. Id. ¶¶ 7, 10.
On May 29, 2007, CGMI and the Fund executed a trade on the basis of a term sheet attaching a "Reference Portfolio" composed of 71 "Reference Entities" and identifying a "Reference Obligation" with respect to each Reference Entity. Id. ¶¶ 19, 22. The defined term "Reference Portfolio" refers to the list of companies for which the Fund provides credit protection; "Reference Entity" refers to each particular company in the overall Reference Portfolio; and "Reference Obligation" refers to the particular loan used as a basis for calculating the floating loss protection payment due following a credit event with respect to a given Reference Entity.
In June 2007, the parties negotiated the definitive documentation of this transaction. See Pl's Statement of Undisputed Facts Pursuant to Local Civil Rule 56.1 in Support of its Motion for Summary Judgment Against U.S. Bank ("Pl's 56.1 Re: U.S. Bank") ¶ 16. Consistent with the manner in which CGMI had arranged previous credit default swap transactions, the instant credit default swap was structured such that the Fund purchased the beneficial
This transaction closed on June 29, 2007 and is memorialized in the form of various interrelated agreements. The Trust was created pursuant to a Series Trust Instrument ("STI"), annexed to which is a Master Trust Agreement Supplement ("MTAS"), that in turn incorporated an April 6, 2006 Base Trust Agreement ("BTA"), to which CGMI and U.S. Bank, as Trustee, are parties. Decl. of Rachel M. Cherington, 3/12/10 ("Cherington Decl."), Exs. 6 (STI & MTAS) & 7(BTA). The credit default swap component of the transaction is memorialized in the form of a Default Swap Confirmation ("Confirmation") between CGML,
At the time of the closing, the Fund purchased all beneficial interest in $44,988,000 of Class F credit-linked certificates (the "Class F Certificates") issued by the Trust. Pl's 56.1 Re: Citi ¶ 41.
When loss protection payments become due to CGML under the swap because a credit event occurs with respect to a given Reference Entity, the Trustee funds that payment by liquidating a portion of the
The Fund filed this lawsuit on July 10, 2009. Its complaint, as twice amended, brings various claims against the Citi Defendants and U.S. Bank arising from the following events that occurred under the swap: (1) a credit event that occurred when Lyondell Chemical Company ("Lyondell"), one of the Reference Entities, filed for bankruptcy in January 2009; (2) credit events that occurred in late March 2009 in connection with the bankruptcies of two other Reference Entities: Charter Communications Operating, LLC ("Charter") and Idearc Inc. ("Idearc"); and (3) CGML's substitutions into the Reference Portfolio of various Reference Obligations in May and August 2009.
The various issues presented by the parties' summary judgment motion may be grouped into three broad categories. First, the parties dispute the propriety of the Citi Defendants' actions with respect to the events occurring under the swap that give rise to this litigation. Second, the parties dispute the extent to which U.S. Bank can be held liable in its role as Trustee under the swap. Third, the parties dispute the Fund's standing to bring claims against the Citi Defendants and/or U.S. Bank.
The Court turns first to the cross-motions for summary judgment filed by the Fund and the Citi Defendants. (For purposes of this discussion, the Court assumes arguendo that the Fund has standing to bring claims against the Citi Defendants.) The first aspect of the Fund's claims in this respect has to do with the credit event experienced by Lyondell in January 2009, and the basic facts relevant thereto are as follows. The Reference Obligation identified for Lyondell in the Confirmation is a loan with the "Bloomberg Loan Identifier" LN193943. Citi 56.1 ¶¶ 87-88. The identification of this particular loan as the Lyondell Reference Obligation was a mistake, because the loan terminated in 2006, before the credit default swap transaction closed. Id. ¶ 90. It is undisputed that
Lyondell filed for bankruptcy on January 6, 2009. Id. ¶ 92. On January 13, 2009, the Trustee was sent a Credit Event Notice stating that Lyondell's bankruptcy filing constituted a Credit Event under the Confirmation.
However, in connection with an earlier (December 2007) merger between Lyondell and Basell AF S.C.A. ("Basell"), the Approved Lyondell Loan had been paid off in full and was no longer outstanding at the time of the January 13 Credit Event Notice. Id. ¶ 99. On January 28, 2009, CGML sent a Notice of Substitute Reference Obligation purporting to substitute LN385221 (the "Substituted Lyondell Loan")—a Lyondell term loan that was subordinated to debtor-in-possession ("DIP") financing that was approved following Lyondell's bankruptcy filing—as the Lyondell Reference Obligation pursuant to the swap agreements' Reference Obligation substitution provisions, which are discussed in more detail below. Id. ¶ 107, see also Decl. of Kanchana Wangkeo Leung Re: Citi, 3/12/10 ("Leung Citi Decl."), Ex. 15 (Notice of Substitute Reference Obligation). On January 29, 2009, the Fund objected to this substitution. Citi 56.1 ¶ 109. On March 20, 2009, CGML advised the Trustee that it had conducted a valuation of the Substituted Lyondell Loan and determined that the "final price" based on this Reference Obligation for the purpose of calculating the amount of the loss protection payment due was 16.75%. Id. ¶ 110. Thereafter, the Trustee, applying that percentage to the $11.04 million Notional Amount allocated to Lyondell under the Confirmation, liquidated over $9 million of the Term Asset, and made a payment to CGML over the Fund's objection. Id. ¶ 111.
The Fund attacks several aspects of the Citi Defendants' actions with respect to the Lyondell Credit Event. First, the Fund raises procedural objections to the form of the January 13 Credit Event Notice. Under the ISDA Definitions, which are incorporated by reference into the Confirmation, a Credit Event Notice is "an irrevocable notice from a Notifying Party. . . to the other party that describes a Credit Event that occurred. . . ." ISDA Defs., § 3.3. It is undisputed here that CGML is the Notifying Party under the Confirmation and that the January 13 notice did not indicate that the notice was sent on behalf of CGML. Pl's 56.1 Re: Citi ¶ 68.
The Fund, however, made no objection to this misidentification until after this lawsuit was filed, see Second Am. Compl. ¶ 88, and the Fund nowhere identifies any harm or prejudice that resulted from the error. Indeed, as the Citi Defendants point out, the ISDA Definitions permit a Credit Event Notice to be given telephonically, and even though these definitions
The Fund's only response to these indications that the corporate identification error was immaterial is to assert that the precise timing of an effective Credit Event Notice is of the utmost importance because, as discussed below, the date of the notice triggers a contractually defined "window" of 45 to 60 business days from the date of the notice during which the market valuation of the Reference Obligation must take place. Thus, the Fund hypothesizes, the Citi Defendants could have knowingly issued a technically defective notice so as to give themselves the option of later substituting a conforming notice so as to manipulate the timing of the valuation window. There is, however, no evidentiary support that the Citi Defendants acted with any such nefarious intentions.
Next, the Fund asserts that the January 13 notice was invalid because of several defects going beyond the corporate misidentification, including that (1) the notice specified as an Reference Obligation a loan facility rather than a particular individual loan; (2) the Reference Obligation identified in the notice was not previously identified by the parties in the applicable agreements and schedules; and (3) the Reference Obligation had expired before the date of the notice. Indeed, it is undisputed by the Citi Defendants that this notice was defective at least insofar as that the Reference Obligation identified in this notice (the Approved Lyondell Loan) had expired. See Citi Mem. Opp., 4/5/10, at 26. But notwithstanding this defect, Citi contends that its January 28 substitution notice cured all defects in the January 13 Credit Event Notice. The Fund disputes this.
According to the Confirmation, "if in the opinion of [CGML] a Credit Event Notice is deficient in that it fails to designate . . . [qualifying] Obligation, [CGML] may deliver a revised Credit Event Notice." Confirmation, Annex A, at 8. Thus, the Citi Defendants argue, the Confirmation expressly contemplates that Credit Event Notices that contain some defect in identifying the relevant Obligation can be cured, and consistently with its provision, CGML identified a Substitute Reference Obligation in its January 28 notice. The Fund responds that the Citi Defendants' "cure" argument falters because of the significance of the date of the Credit Event Notice in setting the valuation window.
The Court agrees that the Fund is not entitled to summary judgment on this basis. While the Confirmation expressly provides for the issuance of a "revised Credit Event Notice" when a Credit Event Notice is deficient in failing to designate a proper Obligation, the terms of the agreements do not specify whether the issuance of a revised notice renders the initial notice effective as of the date that the initial notice was issued.
If, given this ambiguity, extrinsic evidence of the parties' intentions is to be considered, it appears that the Fund's theory that a revised notice must restart the valuation period lacks any grounding in the purposes served by the valuation window: According to the Fund, CGMI requested this valuation window to avoid "noise" generated by the Loan Credit Default Swaps auction that takes place 20-30 calendar days after a default. Aff. of Levoyd Robinson Re: Citi, 3/26/10, ¶ 28. According to the Citi Defendants, this valuation period was chosen in order to satisfy the requirements of credit rating agencies, which have defined various periods from the dates of a credit event that they consider to be sufficient for the market to process information resulting from the event. See Reply Aff. of Rachel E. Cherington, 4/16/10, Exs. 41-43. Under either of these understandings, the function of the valuation window is tied to the date that the credit event actually takes place, rather than the date that the credit protection buyer sends notice of the credit event. Thus, the interpretation advanced by Citi has the advantage of being consistent with the purpose behind the valuation window provisions.
Independently, because the Fund failed to object to the Trustee's payment of the settlement amount with respect to the Lyondell Credit Event on the ground that the valuation was untimely—or on any other ground having to do with the validity of the January 13 Credit Event notice—until the filing of the Second Amended Complaint, there is at least a question of fact as to whether the Fund has forfeited its right to assert its technical objection by failing to promptly raise it. Cf. Rode & Brand v. Kamm Games, Inc., 181 F.2d 584, 587 (2d Cir.1950) ("a party to a contract may not repudiate the contract on one ground and later assert entirely different grounds as a defense for such refusal to perform").
However, given the lack of clarity in the language of the agreements as to the effect of the issuance of a revised Credit Event Notice on the valuation window, the Court concludes that the narrow issue of whether the Lyondell valuation was timely given the issuance of a revised Credit Event Notice cannot be resolved in the Citi Defendants' favor without the consideration of extrinsic evidence of the parties' intentions, and accordingly denies their cross-motion on this point. See, e.g., Palmieri v.
Apart from these more technical objections, the Fund challenges the substance of CGML's designation of the Substituted Lyondell Loan as the Reference Obligation with respect to which the loss protection payment was calculated following the Lyondell Credit Event. This contention requires consideration of the rather complex procedures for substituting a Reference Obligation under the swap.
As noted, the original Reference Portfolio under the swap consisted of 71 Reference Entities and their corresponding Reference Obligations. Citi 56.1 ¶ 59. The Confirmation provides that if a particular Reference Obligation identified in the Confirmation had been paid off or refinanced, then CGML, as "Calculation Agent" under the swap, may in certain circumstances substitute into the Reference Portfolio a new Reference Obligation provided that that loan meets certain criteria. Id. ¶ 44. The four relevant criteria are underscored below:
Confirmation, Annex A, at 9 (emphasis added). The Confirmation defines "Senior Secured" to mean:
Id. at 8-9. The ISDA Definitions further provide:
ISDA Defs. § 2.19(b)(1)(B).
In addition to those noted above, the facts relevant to the substitution of the Lyondell Reference Obligation are the following. Loan LN287481, which both the Fund and the Citi Defendants intended to designate as the Lyondell Reference Obligation, was secured by, among other things, a first lien on certain of Lyondell's cash, accounts receivable, and inventory, and was also secured by Lyondell's plants, property, and equipment ("PP & E"). Pl's 56.1 Re: Citi ¶¶ 94-95. According to the Fund, it selected this loan in part because it was secured by a first lien on high-quality collateral and because the Fund discounted the value of Lyondell's PP & E, which were subject to environmental remediation liabilities. Id. ¶¶ 96-98. As part of Lyondell's December 2007 merger with Basell, all of Lyondell's loans were paid off and replaced with $12.7 billion in new debt. Id. ¶ 103. CGMI was one of the joint lead arrangers for this merger. Id. ¶ 116.
The new debt issued in connection with the merger included, among other things, a five-year $1 billion asset-backed revolving credit facility, later increased to $1.6 billion, which is secured by a first lien on cash, accounts receivable, and inventory, and which the Fund has denominated in its papers as the "Equivalent LCC [i.e., Lyondell] Loan." Id. ¶¶ 104-06. This new debt also included a facility comprising six loans secured in part by a first lien on PP & E, which the Fund has tendentiously dubbed "Toxic LLC Loans." Id. ¶¶ 107-08. Whereas the Equivalent LCC Loan was syndicated at the time of the Lyondell-Basell merger, the Toxic LLC loans were not, but rather were restructured into several tranches to aid in syndication. Id. ¶¶ 110-12. A loan from one of these tranches (Bloomberg Number LN385221) is the Substituted Lyondell Loan. Id. ¶ 113.
Lyondell and its domestic subsidiaries and affiliates filed for Chapter 11 bankruptcy protection on January 6, 2009, and that same day, the debtors sought an order to approve more than $8 million in DIP financing. Id. ¶¶ 118-19. The DIP financing consisted of a $1.5 billion asset-backed revolver, a $3.25 billion new money term loan, and a $3.25 billion "roll-up" term loan. Id. ¶ 120. Citi was one of the arrangers and lenders with respect to Lyondell's DIP financing package, which was set forth in a term sheet executed by Citi and several other arrangers of this financing. Id. ¶¶ 127-28. On January 8, 2009, the Bankruptcy Court entered an interim order authorizing the DIP financing. Id. ¶ 122. Pursuant to 11 U.S.C. § 364(c)(1), this order had the effect of, among other things, granting these DIP loans "superpriority" status relative to prepetition loans. Additionally, the interim order supplemented the liens of prepetition lenders with so-called "adequate protection" liens in order to protect against diminution in the value of these lenders' collateral as a result of the "priming" of their liens. Thus, following the entry of
As noted, on January 28, 2009, CGML sent the substitution notice designating the Substituted LLC Loan as the Substitute Reference Obligation. The Fund objected to this notice on the same day, and throughout the next two months until the settlement payment was eventually made, the Fund, the Citi Defendants, and the Trustee disputed the propriety of this substitution. See, e.g., SAC ¶¶ 99-108, Citi Ans. ¶¶ 99-108; Cherington Decl., Ex. 23.
In its summary judgment motion against the Citi Defendants, the Fund contends that the substitution of the Substituted Lyondell Loan was invalid because it failed to comply with three of the Substitute Reference Obligation criteria, which are that the substituted loan (1) in the reasonable opinion of CGML, satisfies the "Senior Secured" characteristic; (2) ranks pari passu in priority of payment with the Approved Lyondell Loan; and (3) preserves the economic equivalent, as closely as practicable as determined by CGML "in consultation with the parties," of the parties' obligations under the transaction.
The parties' arguments as to the first two of these criteria essentially reduce to the question of whether the subordination of a loan that occurs by way of a Bankruptcy Court's approval of DIP financing precludes that loan from satisfying the "Senior Secured" characteristic. It is undisputed here that the Substituted Lyondell Loan was, as a factual matter, subordinated to several levels of the DIP financing and that Citi had agreed to a term sheet proposing financing that, when approved by the Bankruptcy Court, effected this subordination.
The Citi Defendants respond, however, that the subordination that occurs by a Bankruptcy Court's approval of DIP financing is disregarded under the swap pursuant to the ISDA Definitions, which are expressly incorporated into the Confirmation. As noted, these definitions provide that the determination of whether an obligation is "Subordinated" does not take into account "the existence of preferred creditors arising by operation of law." Thus, the Citi Defendants argue, any subordination that took place through the DIP financing was not by the terms of the Substituted LLC Loan, but rather occurred by operation of the Bankruptcy Code, and, for similar reasons, there was no "agreement to subordinate" by way of Citi's execution of the DIP financing term sheet. Moreover, the Citi Defendants aver that allowing subordination by way of the Bankruptcy Code to disqualify a loan
The Fund responds by arguing that the ISDA definition of "Subordination" is not incorporated into the Confirmation's definition of the "Senior Secured/First Lien" Obligation Characteristic because the term "subordinate" in the latter definition is not capitalized and, therefore, does not incorporate a defined term. Moreover, the ISDA definition of "Subordination" appears as part of the standard definition of the "Not Subordinated" Obligation Characteristic, 2003 ISDA Defs. § 2.19(b)(1)(A), which, the Fund argues, was rejected in favor of the customized Senior Secured Obligation Characteristic negotiated by the parties. The Fund also contends that the subordination that occurred here did not occur `by operation of law" (i.e., the Bankruptcy Code), but rather took place because of an agreement reached by the DIP lenders. And the Fund asserts that its interpretation is consistent with one of the purposes of the Senior Secured/First Lien characteristic, which is to remove any incentive of a secured creditor/credit protection buyer to devalue a loan on which it can claim credit protection.
Having carefully considered these arguments, the Court is of the conclusion that this issue cannot be resolved on summary judgment. While the ISDA Definitions clearly exclude subordination by operation of law from the "Not Subordinated" characteristic, it is at best ambiguous—even after taking the evidence of industry custom and usage into account—whether this definition of subordination is incorporated into the Senior Secured/First Lien characteristic that was negotiated by the parties. Even assuming that this definition is incorporated,
For similar reasons, summary judgment cannot be granted with respect to the Senior Secured characteristic, which under the Confirmation's provisions regarding substitutions of Reference Obligations, needs to be satisfied only in the "reasonable opinion" of the Calculation Agent and is binding absent manifest error. Insofar as the Citi Defendants have created an issue for trial with respect to whether subordination due to DIP financing should be disregarded under the swap, it follows that CGML could in its reasonable opinion conclude accordingly and that doing so would not be manifest error.
The Fund also raises a procedural challenge to CGML's determination that the Substituted Lyondell Loan satisfied the economic equivalence criterion. It contends that the Citi Defendants failed to comply with the Confirmation's requirement that it determine economic equivalence "in consultation with the parties" in that there was no consultation at all prior to sending the January notices. The Citi Defendants respond as an initial matter that their obligation to consult with the "parties" extends only to consultation with the Trustee, who they contend is the sole counterparty under the Confirmation. This argument, however, is of limited force, given that there is no evidence of pre-substitution consultation with the Trustee. But even assuming that the consultation obligation extends to the Fund as well as (or in lieu of) the Trustee, the Citi Defendants urge that the terms of the Confirmation contemplate that "consultation" takes place following an initial identification of a Substitute Reference Obligation. This is because the Confirmation requires that "[p]romptly upon identifying a Loan as a Substitute Reference Obligation (the `Proposed Substitute Reference Obligation'), the Calculation Agent shall provide notice to each party." Confirmation, Annex A, at 9. This notion of a Proposed Substitute Reference Obligation, the Citi Defendants maintain, suggests that the consultation is not required to occur
The Fund responds that the ISDA Definitions, unlike the terms of the Confirmation itself, provide that "the Calculation Agent shall (after consultation with the parties) identify one or more Obligations to replace such Reference Obligations." ISDA Defs. § 2.30(a). However, Annex A to the Confirmation, which contains the language requiring only that the economic equivalence determination be made "in consultation with the parties," controls to the extent it is inconsistent with the 2003 Definitions, see Confirmation, Annex A, at 1. Thus, the interpretation offered by the Fund would render superfluous the Confirmation's introduction of the concept of a Proposed Substitute Reference Obligation and the requirement that CGML send notice upon identification thereof.
While the Court is of the tentative view that consultation may indeed take place following the identification of the Proposed Substitute Reference Obligation, it ultimately need not reach this issue, because the evidence here shows that CGML discharged whatever obligation it had to consult with the Fund even accepting the Fund's position that consultation must take place prior to sending the substitution notice. This is because Levoyd Robinson, the Fund's Managing Principal, testified at his deposition that he had spoken with Adam Bentch (a CGMI employee) the week before he received the January 28 notice regarding the Lyondell Credit Event. Robinson testified:
Cherington Decl., Ex. 12 (Dep. of Levoyd Robinson, 12/8/09 ("Robinson Dep.")), at 163-64. This testimony indicates that the Fund was aware that the Approved Lyondell Loan had expired and conveyed its view as to the only loan that, in its opinion, was an appropriate Substitute Reference Obligation. Although the Fund contends that this exchange did not amount to a consultation because there was no specific discussion of the Substituted Lyondell Loan, the Court finds this distinction to be immaterial. Any conceivable purpose behind the consultation requirement was fully satisfied once the Fund had the opportunity, prior to the identification of a Proposed Substitute Reference Obligation, to make known its views on economic equivalence. Indeed, the issue of economic equivalence with respect to the Lyondell substitution was vigorously debated among the parties in the months between the January 28 notice and the March 20 settlement. For these reasons, the Court can identify no genuine issue of material fact as to whether the duty of CGML to consult with respect to economic equivalence was satisfied, and accordingly grants the Citi Defendants' motion in this respect.
This leaves the issue of whether the Substituted Lyondell Loan "preserves the economic equivalent, as closely as practicable" (as determined by the Calculation Agent), of the parties' delivery and payment obligations under the swap. This issue, on its face, requires the resolution of material factual disputes, especially in the context of the changes in Lyondell's capital structure as a result of the Basell merger and Lyondell's bankruptcy. Indeed, none of the parties contends that this issue can be resolved as a matter of law on the undisputed facts. For that reason, the
Turning next to those aspects of the Fund's claims against the Citi Defendants that relate to the Charter and Idearc credit events, the relevant facts are as follows. Charter and Idearc filed for bankruptcy in March 2009. Pl's 56.1 Re: Citi ¶ 172. On April 1, 2009, CGML issued Credit Event Notices for each of these entities. Id. ¶ 173; see also Cherington Decl., Exs. 15 (Charter notice) & 16 (Idearc notice). On June 4, 2009, CGML sent the Trust separate notices stating a final settlement price for the Charter and Idearc Reference Obligations using a valuation date of June 3. Pl's 56.1 Re: Citi ¶ 175. The parties agree, however, that the 45-to-60 "Business Day" window following the April 1 Event Determination date did not begin until June 9, 2009; CGML selected June 3 as a valuation date because it failed to account for several New York and London bank holidays in its day count. Id. ¶¶ 174-75, 181.
It is undisputed that the Fund knew of the day count error by June 23, 2009. Citi 56.1 ¶ 118. The Citi Defendants contend that they were not informed of the day count error until July 16. Id. The Fund's general counsel, S. Jay Novatney, testified that he called U.S. Bank regarding the day count immediately after the Fund received copies of the valuation notices on June 23, 2009, but that, at that point, U.S. Bank had already paid the settlement amounts for Charter and Idearc based upon the valuation notices. Id. ¶¶ 178, 179. Following the Fund's written objections to the validity of these valuations, CGML submitted "amended valuation notices," which contained valuations using historical pricing data provided by a third-party pricing service. Id. ¶ 182; see also Cherington Decl., Ex. 20. U.S. Bank accepted the amended valuation notices over the Fund's objection, Citi 56.1 ¶¶ 185-86, and Citi returned $458,160 to adjust for the final price based on the corrected valuation date, Cherington Decl., Ex. 11, ¶ 19.
The Fund moves for summary judgment declaring that CGML's valuations of Charter and Idearc are entirely invalid and awarding the recovery of the over $6 million paid by the Trust in connection with the Charter and Idearc credit events. It is undisputed, as noted, that the initial valuations came before the 45-to-60 business day window as defined by the swap agreements. The Citi Defendants argue that returning to the Funds the entire $6 million amount of the loss protection payments paid with respect to these credit events merely because of this technical breach would be completely contrary to the economic purpose of the Confirmation, which was to provide credit protection when a Reference Entity undergoes a Credit Event. They contend that the Fund delayed in notifying them of the day count error until after the proper valuation window had already closed. Moreover, they assert that the pricing methodology that CGML used to correct the valuation error generates pricing more favorable to the Fund than would have resulted had actual dealer bids been solicited, and posit that the Fund has come forward with no evidence to the contrary.
The Court can identify no reason to permit the Fund to be relieved entirely of its obligation to provide credit protection following the Charter and Idearc bankruptcies merely because the Citi Defendants failed to account for certain banking holidays in setting the valuation window. Even assuming that the Fund has created a genuine factual dispute as to whether the call from Novatney put the defendants on notice of the day count discrepancy as of June 23, 2009, there is no basis for completely invalidating the settlement payments
That said, there is no dispute that the Charter and Idearc Violations were several days premature and that CGML's amended valuation notices rely on a pricing methodology that is not authorized under the swap agreements. While the Fund's summary judgment papers provide no basis for the Court to conclude that it suffered actual damages from the valuation error when the $458,160 cure payment is taken into account, the Court will permit the Fund to attempt to make this showing at trial, and accordingly denies the Citi Defendants' summary judgment motion to that limited extent.
The Fund's final set of claims against the Citi Defendants have to do with a number of substitutions of Reference Obligations that CGML effectuated in May and August 2009. On May 15, 2009, CGML delivered a notice indicating that it substituted 26 Reference Obligations with respect to the Reference Entities in the Reference Portfolio. Pl's 56.1 Re: Citi ¶ 187; see also Leung Citi Decl., Ex. 23. In August 2009, CGML substituted another five loans. Pl's 56.1 Re: Citi ¶ 188; see also Leung Citi Decl., Ex. 30. The Fund objected to CGML's August substitution by letter dated August 26, 2009. Pl's 56.1 Re: Citi ¶ 189; see also Leung Citi Decl., Ex. 32. CGML did not consult with the Fund or U.S. Bank prior to sending these notices. Pl's 56.1 Re: Citi ¶ 190. CGML asserts that it made these substitutions because it determined, given the Fund's actions with respect to the Lyondell substitution, that it would be wise to review Reference Obligations and identify substitutes for those that had expired. See Cherington Decl., Ex. 21 (Dep. of Michael W. Cooney, 12/1/09), at 104.
Based on its view that consultation with respect to a Substituted Reference Obligation's economic equivalence must take place prior to the issuance of the notice of substitution, the Fund moves for summary judgment granting declaratory relief holding that these substitutions are invalid due to the lack of timely consultation. As the Fund recognizes, however, the Court's decision to grant declaratory relief is a discretionary one, and is based
As noted, the Citi Defendants have interposed three counterclaims against the Fund, and the parties cross-move for summary judgment with respect to these counterclaims. The counterclaims all arise from allegations that by bringing this litigation, the Fund has in effect petitioned for the liquidation of the Trust, thus entitling CGML to various forms of relief under the swap agreements.
The counterclaims arise from the following facts. The Fund's Second Amended Complaint, like the Fund's previous two complaints, seeks a judgment declaring that the swap agreement terminated as of January 28, 2009, because the Citi Defendants failed to pay the full premium due on account of the challenged settlement payments, and directing U.S. Bank to return the amount maintained in its cash reserve as of that date. Second Am. Compl., p. 77. In the Fund's Rule 30(b)(6) deposition, Levoyd Robinson, the Fund's managing principal, answered "Yes" to the question, "Am I correct that you essentially want to liquidate the assets of the trust at this point in the litigation?". Robinson Dep. at 371-72.
Against this factual background, the Citi Defendants bring their counterclaims based on the following provisions of the swap and related agreements. The ISDA Master Agreement defines an Event of Default as follows:
Confirmation, Annex B (ISDA Master Agreement) § 5(a)(vii) (emphasis added); see also Leung Decl., Ex. 1C (Confirmation, Annex C). The Master Agreement also provides that "[i]f at any time an Event of Default with respect to a party (the `Defaulting Party') has occurred and is then continuing, the other party (the `Non-defaulting Party') may . . . designate. . . an Early Termination Date." Confirmation, Annex B, § 6(a). In a representation letter executed in connection with the Fund's purchase of Class F Certificates, the Fund represented as follows:
Cherington Decl., Ex. 13 (Purchaser Representation Letter), ¶ 21 (emphasis added). Similarly, under Section 24(u) of the Master Trust Agreement, each purchaser of a Class F certificate or a beneficial interest therein is deemed to represent that it covenants and agrees that the Purchaser shall not, prior to the date which is one year and one day after the termination of the Trust Agreement, acquiesce, petition or otherwise invoke or cause the Depositor to invoke the process of any court or governmental authority for the purpose of commencing or sustaining a case against the Depositor [CGMI], the Trustee or the Trust under any federal or state bankruptcy, insolvency, reorganization or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Depositor, the Trustee or the Trust or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Depositor, the Trustee or the Trust.
Id. Ex. 6, MTAS, § 24(u) (emphasis added).
Based on the underscored portions of these provisions, the Citi Defendants contend that the Fund has petitioned for the Trust's liquidation or otherwise invoked judicial process for the purpose of liquidating or winding up the Trust, that such a petition has been pending for over thirty days, and that as a result, an Event of Default has occurred and the representation letter and Master Trust Agreement
The Citi Defendants are correct, as a superficial matter, that some of the relief sought by the Fund through this lawsuit resembles liquidation. The Term Asset is the Trust's primary asset, see PPM at 20, and if the Fund prevails in its position that the Citi Defendants committed an Event of Default by failing to make the required settlement payments, the Fund, as the "Non-defaulting Party," would have the right to designate an "Early Termination Date," Confirmation, Annex B, § 6(a), thus terminating the Trust on that date. It is apparent, however, that the portions of the swap agreements relied upon by the Citi Defendants with respect to their counterclaims are addressed to bankruptcy petitions or other similar insolvency proceedings, rather than the claims for breach of contract asserted by the Fund in this lawsuit. The fact that the Fund's 30(b)(6) witness agreed to the Citi Defendants' counsel's characterization of this lawsuit as seeking "liquidation" cannot change the fact that the provisions of the ISDA Master Agreement, representation letter, and Master Trust Agreement relied upon by the Citi Defendants clearly contemplate petitions filed under the bankruptcy laws, far different from what is presented here.
Next, the Court addresses the cross-motions for summary judgment filed with respect to the actions taken by U.S. Bank as Trustee. The facts relevant to these motions are as follows. As noted, CGMI requested that this credit default swap transaction be structured as a credit-linked note issued by a trust pursuant to Citi's proprietary "Beach Street" trust structure. Pl's 56.1 Re: U.S. Bank ¶¶ 11-14. The substantive terms of this transaction were negotiated between the Citi Defendants and the Fund. U.S. Bank 56.1 ¶ 8. CGMI and the Fund agreed that U.S. Bank would serve as Trustee for the Trust, but the Fund did not communicate with U.S. Bank concerning the transaction prior to its closing. Id. ¶¶ 10, 12. The Fund did not review the Base Trust Agreement or the Series Trust Instrument prior to the day of the closing. Id. ¶ 14. The Fund did not negotiate any provisions of the trust agreements directly with U.S. Bank. Id. ¶ 15.
The following facts relate to U.S. Bank's actions taken with respect to the aforementioned credit events and valuations that gave rise to this litigation. After receiving the January 13, 2009 Lyondell Credit Event Notice, U.S. Bank forwarded
Next, as to the Charter and Idearc bankruptcies, U.S. Bank promptly forwarded the credit event notices to DTC. U.S. Bank 56.1 ¶¶ 44-46.
In its summary judgment motion against U.S. Bank, the Fund contends that U.S. Bank violated its contractual obligations and fiduciary duties as Trustee. The gist of the Fund's position is that it believed and reasonably understood that U.S. Bank,
U.S. Bank does not contest that the aforementioned provisions required it to administer the Trust for the benefit of the Fund. U.S. Bank argues, however, that the terms of these agreements, read in the context of the Beach Street transaction generally and well-established law on the nature of the duties of indenture trustees, require U.S. Bank to perform only limited, ministerial responsibilities as Trustee, which it properly discharged. For the following reasons, the Court agrees with U.S. Bank's position and accordingly grants its motion for summary judgment.
Cases from the Second Circuit and New York State courts have recognized the limited nature of the duties of an indenture trustee: "An indenture trustee is not subject to the ordinary trustee's duty of undivided loyalty. Unlike the ordinary trustee, who has historic common-law duties imposed beyond those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agreement." Meckel v. Cont'l Res. Co., 758 F.2d 811, 816 (2d Cir.1985); see also Elliott Assocs. v. J. Henry Schroder Bank & Trust Co., 838 F.2d 66, 71 (2d Cir.1988) ("It is . . . well-established under state common law that the duties of an indenture trustee are strictly defined and limited to the terms of the indenture, although the trustee must nevertheless refrain from engaging in conflicts of interest." (citations omitted)); accord A.G. Capital Funding Partners, L.P. v. State
The Fund attempts to distinguish the aforementioned cases by claiming that they involved indentures wherein the trustee assumed only ministerial duties, while here U.S. Bank took on substantive responsibilities under the terms of the relevant agreements. For the following reasons, however, the Court finds it plain from the context of this transaction that the Fund manifestly did not intend that U.S. Bank would "step in its shoes" to enforce its rights under the swap. As the Fund acknowledges, U.S. Bank's duties as trustee are limited to those set forth in the trust agreement. Upon inspection, it is apparent that these duties are limited, administrative, and ministerial (rather than substantive) in nature. Such duties include, by way of example, delivering certificates, BTA § 2.6, preparing and transmitting reports to DTC, id. § 4.2, and forwarding notices to the DTC, id. § 5.1, MTAS § 17.
Even assuming arguendo that U.S. Bank had substantive responsibilities to advance the Fund's interests with respect to the challenged substitutions, valuations, and settlement payments, the trust agreements contain various provisions insulating the Trustee from liability for actions taken in good faith. See, e.g., BTA § 8.2(a)(iv) (providing that the Trustee "shall not be personally liable for any action taken, suffered or omitted by in good faith and believed by it to be authorized or within the discretion of the rights or powers conferred upon it by this Agreement"); id. § 8.2(v) (Trustee "shall not be bound to make any investigation into the facts of matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, approval, bond or other paper, or document believed by it to be genuine, unless requested in writing to do so by Holders of the Required Percentage. . . ."); id. 8.1(d)(ii) (Trustee "shall not be personally liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts").
Finally, it bears noting that the preclosing negotiations between the Fund and the Citi Defendants involved U.S. Bank only tangentially. The Fund never negotiated directly with U.S. Bank, and U.S. Bank did not agree to serve as Trustee until the month before closing. See Kraut Decl., Ex. 9. On June 22, 2007, U.S. Bank agreed to serve as Trustee for this transaction in exchange for a $3,500 onetime fee and a $4,500 annual fee, as well as reimbursement for out-of-pocket expenses or extraordinary events. Id. Ex. 10. Given these undisputed facts, the Court finds implausible the Fund's contention that it was relying on the Trust to enforce its rights and economic interests under the swap agreement. It is patent that the issues that arose under the swap's operation are of such complexity that no reasonable investment fund in the plaintiff's position would have permitted its interests under the swap to be protected only by a Trustee, of which it asked no questions prior to closing, and which was being compensated by the Citi Defendants in an amount that was pocket change in comparison to all other economic aspects of this transaction.
For these reasons, the Court grants summary judgment to U.S. Bank on the Fund's breach of contract claims.
The Fund also asserts claims that U.S. Bank breached its fiduciary duties as Trustee and contends that such duties required it to "step in the shoes" of the Fund to enforce its rights under the swap. The Court finds, however, that there is no legal support for the broad, free-floating fiduciary duties alleged by the Fund, and that there is no record evidence indicating that U.S. Bank breached the narrow fiduciary duties of an indenture trustee that are recognized by law.
As to the Fund's contentions that U.S. Bank is subject to sweeping fiduciary duties in its capacity as Trustee, the Second Circuit has rejected the notion "that an implied fiduciary duty is imposed on a trustee to advance the financial interests of the debenture holders during the period
The Fund is correct that indenture trustees are subject to an implied duty to "refrain from engaging in conflicts of interest," Elliott, 838 F.2d at 71, and from there argues that U.S. Bank was conflicted because it served as indenture trustee for other Beach Street transactions, thus generating at least $185,000 in annual revenues, Pl's 56.1 Re: U.S. Bank ¶ 18, and because it executed the indemnification agreements with CGML with respect to the disputed substitutions. In considering similar claims, the Second Circuit has disregarded "bald assertions of conflict," and has instead required a showing that the trustee "personally benefitted" from the disputed action. Elliott, 838 F.2d at 70, 73; see also In re E.F. Hutton Sw. Props. II, Ltd., 953 F.2d 963, 972 (5th Cir.1992) (observing that the Second Circuit does not "take into account. . . hypothetical possibilities of conflict," and concluding that "[a] mere hypothetical possibility that the indenture trustee might favor the interests of the issuer merely because the former is an indenture trustee does not suffice" to allege a conflict).
The Court concludes that the Fund has standing to assert claims against the Citi Defendants derivatively on behalf of the Trustee.
With respect to the Fund's standing to sue on behalf of the Trustee pursuant to Section 10.3(c) or otherwise, the Citi Defendants argue primarily that this provision does not give Certificateholders any rights, it merely restricts rights to institute suit under other provisions of the trust agreements, and that there are no such provisions that authorize the claims here asserted against the Citi Defendants. Secondarily, the Citi Defendants contend
The Citi Defendants' arguments against derivative standing are not without force, and might well have been availing if this were the sort of transaction where the Trustee embraced substantive responsibilities to maximize the Fund's economic interests with respect to the operation of the swap or if there were otherwise good reason to defer to its decision not to sue the Citi Defendants. But, as described above, the Court concludes that the Trustee's obligations under the swap are limited and ministerial in nature. Given this conclusion, it cannot be the case, as the Citi Defendants would have it, that the Fund is without any legal remedy for alleged breaches of the Confirmation by the Citi Defendants where, as here, the Trustee refuses to pursue that cause of action. The contention that U.S. Bank has the exclusive right to bring suit for breaches of the swap is simply incompatible with the Trustee's limited role in this transaction's structure, not to mention its meager compensation.
Thus, the Court concludes that the Fund is entitled to bring suit on behalf of the Trustee given the Trustee's alignment with the Citi Defendants' position, as many courts have permitted trust beneficiaries to do in analogous circumstances. Indeed, it is well established under New York law that "[w]here a claim exists in favor of the trust (properly speaking, of the trustees in their trust capacity) against third persons and the trustees are under a duty to enforce that claim and have improperly and unjustifiably failed to do so, the beneficiaries may bring a suit on behalf of the trust, analogous to stockholders' derivative suits on behalf of a corporation." Velez v. Feinstein, 87 A.D.2d 309, 314, 451 N.Y.S.2d 110 (1st Dep't 1982); see also Bowen v. U.S. Postal Serv., 459 U.S. 212, 243, 103 S.Ct. 588, 74 L.Ed.2d 402 (1983) ("a trust beneficiary may sue to enforce a contract entered into on his behalf by the trustee if, but only if, the trustee `improperly refuses or neglects to bring an action against the third persont'") (quoting Restatement (Second) of Trusts § 282(2)). The beneficiary's showing of why the beneficiary should be entitled to bring a suit on behalf of the trustee "will normally require either a showing of a demand on the trustee[ ] to bring the suit, and of a refusal so unjustifiable as to constitute an abuse of the trustee's discretion, or a showing that suit should be brought and that because of the trustee['s] conflict of interest, or some other reason, it is futile to make such a demand." Velez, 87 A.D.2d at 315, 451 N.Y.S.2d 110. Similarly, when presented with allegations by a trust beneficiary not unlike those the Fund asserts here, courts in this District have narrowly construed the scope of so-called "no-action" clauses and/or excused the failure to comply with such clauses. See, e.g., Metro. W. Asset Mgmt., LLC v. Magnus Funding, Ltd., 2004 WL 1444868, at *4-5 & n. 4 (S.D.N.Y. June 25, 2004); Williams v. Nat'l Hous. Exch. Inc., 1996 WL 19017, at *1 (S.D.N.Y. Jan. 18, 1996); see also Feldbaum v. McCrory Corp., 1992 WL 119095, at *6 (Del.Ch. June 2, 1992) ("The primary purpose of a no-action clause is thus to protect issuers from the expense involved in defending lawsuits that are either frivolous or otherwise not in the economic interest of the corporation and its creditors. . . . [Such clauses] protect against the exercise of poor judgment by a single bondholder or a small group of bondholders, who might otherwise bring a suit against the issuer that most bondholders would consider not to be in their collective economic interest.").
Here, the Court finds that the Fund has complied with Section 10.3(c) with respect
For these reasons, the Court concludes that the Fund has standing to assert its claims against the Citi Defendants on behalf of the Trustee that are alleged in the Third Claims.
The Court, however, agrees with the Citi Defendants that the Fund lacks standing to sue the Citi Defendants on its own behalf or as a third-party beneficiary to the confirmation. The Confirmation plainly provides that it is an agreement between CGML, as "Party A," and the Trustee, as "Party B," and that "No person other than the Parties shall have any right to enforce any provision of this Transaction." This unequivocal language defeats the Fund's standing to bring claims either directly or as a third party beneficiary. See, e.g., Adelaide Productions, Inc. v. BKN Int'l AG, 38 A.D.3d 221, 226, 834 N.Y.S.2d 3 (1st Dep't 2007).
To be sure, the Fund contends that the Confirmation should be "read together" with the other transaction agreements— some of which the Fund is a party to and clearly has the right to bring suit to enforce—as part of an "overarching loss protection agreement." See, e.g., This Is Me, Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir. 1998) ("Under New York law, all writings forming part of a single transaction are to be read together."). Relatedly, the Fund assets that certain provisions of the Confirmation refer to terms defined only in the other transaction documents and that both U.S. Bank and the Citi Defendants have acted as if the Fund is the real party in interest with respect to the Confirmation. Indeed, some courts have applied this rule of reading all documents to a single transaction in tandem with one another even when one of those documents contains an integration clause. See, e.g., Rhythm & Hues, Inc. v. Terminal Marketing Co., Inc., 2002 WL 1343759, at *6 n. 6 (June 19, 2002). The Court has no quarrel with the notion that the various transaction documents should be "read together" in that they are constituent parts of a single transaction. It does not follow, however, that express limitations in a particular agreement on non-parties' rights to enforce that agreement should be disregarded. See, e.g., Coleman Co. v. Hlebanja, 1997 WL 13189, at *7 (S.D.N.Y.Jan.15, 1997) ("even if several contracts that constitute part of the same transaction are considered one contract, the different obligations within each contract may be independent and divisible").
Here, the Confirmation uses a defined term "Parties" to refer to two parties that do not include the Fund, and expressly limits enforcement of the provisions of that agreement to the two Parties. The Court sees no reason to disregard these clear provisions simply because many other agreements formed part of this single transaction. While, as noted, the Court would be troubled by an interpretation of the transaction agreements that leaves the Fund without any legal means to enforce the its interests under the Confirmation where (as here) the Trustee chooses not to
The Court has considered all of the parties' other arguments and finds them to be without merit or otherwise not warranting discussion. In summary, then, the Court rules as follows:
The remaining parties (the Fund and the Citi Defendants) are directed to call Chambers by no later than September 24, 2010 to schedule the bench trial for the remaining claims (i.e., the remaining aspects of the Third and Eighth Claims). The Clerk of the Court is directed to close the documents numbered 49, 55, 61, and 67 on the docket of this case.
SO ORDERED.
A credit default swap is the most common form of credit derivative, i.e., "a contract which transfers credit risk from a protection buyer to a credit protection seller." Protection buyers ... can use credit derivatives to manage particular market exposures and return-on-investment; and protection sellers. . . generally use credit derivatives to earn income and diversify their own investment portfolios. Simply put, a credit default swap is a bilateral financial contract in which "[a] protection buyer makes[ ] periodic payments to . . . the protection seller, in return for a contingent payment if a predefined credit event occurs in the reference credit," i.e., the obligation on which the contract is written. Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 171-72 (2d Cir.2004) (alteration and third omission in original) (footnotes omitted).
