MEMORANDUM ORDER
JED S.RAKOFF, District Judge.
On August 18, 2010, the above-captioned plaintiffs moved for a stay of the Court's August 6, 2010 Order pending their appeal of that Order. The August 6 Order vacated an arbitrator's June 1, 2009 award, which had permitted the plaintiffs to pursue class certification in the arbitral forum with respect to their claims that defendant Sterling Jewelers, Inc. ("Sterling") discriminated against them in pay and promotion on the basis of their gender in violation of Title VII, 42 U.S.C. § 2000e et seq., and the Equal Pay Act, 29 U.S.C. § 206(d). In their motion, plaintiffs also seek related relief in the form of a stay of the class arbitration proceedings and an order tolling the statute of limitations for class action claims during the pendency of plaintiffs' appeal. Sterling opposes the motion in all respects. The Court received full briefing and heard oral argument on September 15. For the following reasons, the Court grants the motion in part and stays the final effect of the August 6, 2010 Order, nunc pro tunc to the date of that order, while plaintiffs' appeal is pending, but denies the remaining aspects of the motion.
While Sterling's brief raises certain challenges to the Court's authority to stay the class arbitration proceedings and/or enter a tolling order, the Court undoubtedly has the power to stay the final effect of the August 6 Order during the pendency of the appeal. See, e.g., Ivor B. Clark Co. v. Hogan, 296 F. Supp. 407, 409 (S.D.N.Y. 1969) ("It appears beyond question that a district court has the power to grant a stay of its own order pending the determination of an appeal therefrom."); see also Fed.R.App.P. 8(a)(1) (providing that "[a] party must ordinarily move first in the district court" for "a stay of the judgment or order of a district court pending appeal"); Nken v. Holder, 129 S.ct. 1749, 1754 (2009) (noting that it "has always been held, . . . that as part of its traditional equipment for the administration of justice, a federal court can stay the enforcement of a judgment pending the outcome of an appeal" (omission in original) (quotingScripps-Howard Radio, Inc. v. FCC, 316 U.S. 4, 9-10 (1942)) (internal quotation marks omitted)). But even when a Court is empowered to grant a stay, the decision to grant a stay always involves an "exercise of judicial discretion" and "is dependent upon the circumstances of the particular case." Nken, 129 S.ct. at 1760 (internal quotation marks omitted).
In evaluating plaintiffs' motion to stay, the Court is guided by the traditional four-factor standard, which considers "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Id. at 1761 (internal quotation marks omitted). As to the first factor, while the Court remains confident in the soundness of the reasons for vacatur set forth in its July 30, 2010 Memorandum Order (reported at Jock v. Sterling Jewelers, Inc., ___ F. Supp. 2d ___, 2010 WL 2898294), there is no doubt that the plaintiffs' appeal presents an issue of first impression that relates to the application of a newly minted rule by a sharply divided Supreme Court inStolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S.ct. 1758 (2010), which reversed the contrary rule that the Second Circuit previously set forth in that case. What is more, the thrust of the appeal arguably rests on factual distinctions between this case and Stolt-Nielsen that were trumpeted by the dissenting Justices as limitations on the majority's holding. See id. at 1783 (Ginsburg, J., dissenting) ("by observing that `the parties [here] are sophisticated business entities,' and `that it is customary for the shipper to choose the charter party that is used for a particular shipment,' the Court apparently spares from its affirmative-authorization requirement contracts of adhesion presented on a take-it-or-leave-it basis"). While this Court is still of the view that those asserted distinctions were immaterial, the Court of Appeals may disagree, and for that reason alone the plaintiffs have sufficiently demonstrated a likelihood of success on the merits.
Turning next to irreparable injury, the plaintiffs assert that grave harm would result absent a stay essentially because the August 6 Order, if given final effect, might end the tolling of the statute of limitations as to class claims,see Am. Pipe Constr. Co. v. Utah, 414 U.S. 538, 554-55 (1974); Crown, Cork Seal Co. v. Parker, 462 U.S. 345, 353-54 (1983), thus compelling the named plaintiffs and members of the putative class to choose between pursuing their claims in individual arbitrations while the plaintiffs' appeal is pending or else risk losing the possibility of bringing an individual claim if the Court's decision is affirmed. According to the plaintiffs, this Hobson's choice would result in multiple, potentially duplicative proceedings and would entail filing fees and litigation costs that would be prohibitive if they are to be shouldered by claimants on an individual rather than classwide basis. Plaintiffs also assert that individual arbitrations will not permit the development of the panoply of evidence that would be available in a class proceeding, and that the relief available in individual proceedings pales in comparison to what might be granted in a collective action. Finally, they point to the possibility that certain plaintiffs and putative class members, if they elect to bring individual arbitrations pending the appeal and these arbitrations then conclude adversely to them before the appeal is resolved, might be barred from relief even if a class claim were ultimately successful.
Sterling responds primarily by contending that plaintiffs' asserted harms involve little more than litigation costs, which ordinarily are not considered to exact an injury that justifies a stay. Relatedly, Sterling argues that the differences between individual and class arbitrations cannot give rise to a cognizable injury for these purposes.
The Court concludes that the plaintiffs have made a sufficient showing on this factor. While it is true that the expenses attendant to litigation and arbitration do not typically amount to irreparable harm, see, e.g., Emery Air Freight Corp. v. Local Union 295, 786 F.2d 93, 100 (2d Cir. 1986), it is similarly clear that irreparable harm may exist "where, but for the grant of equitable relief, there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied." Brenntag Int'l Chems., Inc. v. Bank of India, 175 F.3d 245, 249-50 (2d Cir. 1999). That circumstance would appear to be present here, where, for example, if an individual plaintiff with a meritorious claim did not pursue an individual arbitration pending appeal because she could not afford the filing fee and other litigation costs, and if the August 6 Order is determined to have restarted the statute of limitations on her claim, then she might be deprived of any right to relief regardless of the appeal's outcome. In any event, courts have held that the likelihood of unnecessary, duplicative litigation can warrant a stay, see, e.g., Woodlawn Cemetery v. Local 365, Cemetery Workers Greens Attendants Union, 930 F.2d 154, 156 (2d Cir. 1991), and have stayed orders denying class certification based on the prospect of harms similar to what plaintiffs assert here, see, e.g., Nat'l Asbestos Workers Med. Fund v. Philip Morris. Inc., 2000 WL 1424931, at *2 (E.D.N.Y. Sept. 26, 2000) ("Were the statute of limitations period to begin to run before an appeal is taken — or waived — hundreds of thousands of potentially viable claims might expire unless new actions were promptly brought.").
Indeed, the American Pipe tolling rule was established in part in response to the concern that a contrary rule would provoke the filing of a "needless multiplicity of actions" pending class certification. See In re WorldCom Sec. Litig., 496 F.3d 245, 254 (2d Cir. 2007) (quoting Crown, Cork, 462 U.S. at 351).
In addition, Sterling's opposition to the stay appears to espouse the position that the differences between class and individual arbitration are merely procedural in nature and cannot serve as the predicate for a stay. This position is contrary not only to the basis of the Supreme Court's holding in Stolt-Nielsen, 130 S.ct. at 1775 ("class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator"), but also to the fact that Sterling has for over two years vigorously litigated its position that class arbitration is not permitted under its RESOLVE program.
Third, Sterling protests that it will suffer substantial injury if the stay is granted because a stay would further delay the resolution of claims that have already been pending for several years. For several reasons, these protestations ring hollow to the Court. First, the Court takes notice of the facts that Sterling has previously agreed to stay the running of the statute of limitations for eighteen months while the parties and the EEOC attempted to reach a resolution of these claims, and, in connection with its motion practice seeking vacatur of the arbtirator's June 2009 award, twice moved this Court for a further stay. While Sterling contends that these previous abeyances were sought for purposes distinct than those pursued by plaintiffs here, these facts at the very least cast doubt on Sterling's assertions of harm that will be caused by a further stay.
Next, while there is certainly some risk that the evidence relating to plaintiffs' claims will grow stale over time, it is far from clear that this staleness would redound to the plaintiffs' benefit. In any event, a stay of the August 6 Order does not prevent any individual plaintiff or putative class member from bringing an individual arbitration while the appeal is pending; it merely mitigates the extent to which the operation of the statute of limitations forces them to do so.
Additionally, the Court finds troubling Sterling's refusal to accede to the plaintiffs' request for an expedited appeal, see Jock v. Sterling Jewelers, Inc., 2d Cir. Dkt. No. 10-3247, D.I. 33. While Sterling is certainly entitled to avail itself of its rights under the Federal Rules of Appellate Procedure, one could draw the inference that Sterling's refusal to expedite its appellate briefing, which will undoubtedly consist primarily of arguments that have already been briefed on numerous occasions both before this Court and before the arbitrator, is motivated largely by tactical considerations. In such circumstances, Sterling's proffer as to the injury that would be occasioned by the stay does not persuade the Court.
By letter to the Clerk of the Court for the Second Circuit dated September 15, 2010, Sterling confirmed its opposition to the motion to expedite the appeal and requested that the Court of Appeals defer decision on that motion until Sterling had an opportunity to file its response to that motion. See Jock v. Sterling Jewelers, Inc., 2d Cir. Dkt. No. 10-3247, D.I. 36.
Turning finally to consideration of the public interest, the parties have offered competing conceptions of the interests at stake. Sterling identifies the public interest in prompt resolution of litigation, which is a concern that this Court emphatically shares. Plaintiffs, however, point to the interest in preserving potentially meritorious claims of invidious sex discrimination. The Court finds that these values are sufficiently in equipoise so as not to require a result contrary to that suggested by the other three factors.
While the Court concludes that the foregoing analysis compels a stay of the final effect of the August 6 Order, the same cannot be said for the other forms of relief that the plaintiffs seek in their motion. First, as to the request to stay the class arbitration proceedings, the Court has previously noted that its authority to do so is unclear.See Jock v. Sterling Jewelers, Inc., 677 F. Supp. 2d 661, 667 n. 2 (S.D.N.Y. 2009). In any event, the Court sees no reason not to permit the arbitrator to determine in the first instance whether to stay the class arbitration proceeding in light of the Court's stay of the August 6 Order, the pendency of plaintiffs' appeal, and the fact that neither Sterling nor the plaintiffs wish to go forward with class arbitration while the appeal is pending.
Next, plaintiffs request that the Court enter an order tolling the statute of limitations during the pendency of the appeal "to the same extent it was tolled prior to the entry of the August 6, 2010 Order." In light of the Court's decision to stay the final effect of the August 6 Order, any specification that tolling applies to the same extent it did before entry of that Order would at best at amount to a tautology, and would likely raise more questions than it would answer. Indeed, plaintiffs have identified no any authority that empowers this Court to issue an order that would prospectively bind other tribunals and arbitrators and would require them to reject hypothetical arguments by Sterling that hypothetical future claims brought by the plaintiffs and putative class members are time-barred due to the stayed August 6 Order. For these reasons, the Court declines to offer any further pronouncement as to the tolling consequences of its decision to grant the stay.
For the foregoing reasons, the Court hereby stays the effect of its August 6 Order nunc pro tunc to August 6, 2010, and denies all other aspects of plaintiffs' motion. The Clerk of the Court is directed to close document number 89 on the docket of this case.
SO ORDERED.
Dated: New York, NY September 17, 2010
hallenge 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
until the notice of a proposed substitute is sent and may take place up until the Calculation Agent makes its determination of economic equivalence.
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:
I asked them what are they going to do about Lyondell because it's expired, and the only thing that's out there that's eligible is the asset base [
i.e., the asset-backed revolver referred to by the Fund as the Equivalent LCC Loan]. He responded, if that's the case, that's fine. And then I get this — this substitute.
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 issue of economic equivalence with respect to the Lyondell substitution cannot be resolved on summary judgment.
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 because of this error. The Fund's position with respect to these valuations is incompatible with the well-established doctrine of forfeiture, whereby "[t]o the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange." Restatement (Second) of Contracts § 229; see also Wuhan Airlines v. Air Alaska, Inc., 1998 WL 689957, at *3 (S.D.N.Y. Oct. 2, 1998) ("In Cardozo's famous formulation of the role of common sense in contract construction, `The law has outgrown its primitive stage of formalism when the
precise word was the sovereign talisman, and every slip was fatal.'" (quoting Wood v. Duff-Gordon, 222 N.Y. 88, 91 (1917))). There is absolutely no indication from the terms of the swap agreements that an error of a few days based on a failure to account for bank holidays was the sort of material breach that should result in a complete forfeiture by the protection buyer with respect to the credit event at issue. For these reasons, the Court holds as a matter of law that the Fund is not entitled to the wholesale invalidation of the settlement payments made with respect to the Charter and Idearc credit events.
In addition, as noted, the record evidence indicates that the purpose of the 45-to-60 business-day valuation window was to ensure the integrity of the market pricing of the Reference Obligation on the valuation date, not to set a trap for CGML. There is no evidence that CGML's counting error was intentional or was made for any malicious purpose.
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 on considerations such as whether "the judgment will serve a useful purpose in clarifying and settling the legal relations in issue." Dow Jones Co., Inc. v. Harrods, Ltd., 237 F. Supp. 2d 394, 432 (S.D.N.Y. 2002) (internal quotation marks omitted). The Court concludes that the alleged failure to consult with respect to the May
and August substitutions is not the sort of dispute that merits the exercise of such discretion. Whatever the contours of the Fund's consultation right are, this obligation itself is relatively-insignificant in the overall context of the swap agreement, as it pertains only to the economic equivalence criterion for substitution but not to the other three criteria or any other aspect of the transaction. Moreover, unlike its more particularized objections to the Substituted Lyondell Loan, the Fund makes no claim that any of the substituted loans included in the May and August substitutions do not satisfy the economic equivalence criterion, far less that it has identified alternative eligible substitute loans that are more economically equivalent that would be the subject of a "consultation." Absent any indication that the Fund, if consulted, would have objected to any of the substitutions noticed by CGML, the Court concludes that the parties' competing interpretations regarding the consultation right do not present the type of issue for which a declaratory judgment would serve a useful purpose. Accordingly, the Citi Defendants' motion for summary judgment dismissing such claims is hereby granted.
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:
The occurrence at any time with respect to a party . . . of any of the following events constitutes an event of default (an "Event of Default") with respect to such party: . . . (vii)
Bankruptcy. The party . . . (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights,
or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such
proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B)
is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up,
official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver or other similar official for it or for substantially all its assets; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (6) (inclusive).
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:
The Purchaser, by its acceptance of a Certificate, 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.
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 have been breached, thus entitling the Citi Defendants to various forms of relief.
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. The interpretation urged by Citi would have the effect of turning any action by the Fund to address an alleged breach of the swap terms into an Event of Default by the protection seller, thus chilling the ability of the Fund to vindicate its rights under the swap where, as here, the Trustee has allegedly failed to protect the Fund's interests. Because the Court concludes that the Citi Defendants' counterclaims rest on the legally untenable proposition that the instant lawsuit is the functional equivalent of a "petition" for "liquidation" or "winding up," the Court hereby grants the Fund summary judgment in this respect and hereby dismisses the three counterclaims.
Thus, the Court need not address the Fund's objection that this testimony fell outside the scope of Robinson's Rule 30(b)(6) deposition notice.
Additionally, it would be incongruous to conclude that the Fund's bringing of this lawsuit amounts to an Event of Default when the Fund alleges in the Eighth Claim of its Second Amended Complaint that CGML has itself defaulted by failing to make the full amount of premium payments (because of allegedly improper valuation notices and settlement payments), and the Court concludes that this claim presents genuine issues of material fact.
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 this notice to DTC on January 14. Id. ¶ 36. Similarly, U.S. Bank promptly forwarded the DTC the January 28, 2009 notice of substitution with respect to the Lyondell Reference Obligation. Id. ¶ 37. On January 30, the Fund sent U.S. Bank a letter disputing the validity of that substitution, and thereafter, U.S. Bank requested that CGML explain
why it believed that substitution was permissible. Id. ¶ 38; see also Decl. of Michael S. Kraut, 3/12/[10] ("Kraut Decl."), Ex. 55 (Dep. of Marlene J. Fahey, 1/5/10 ("Fahey Dep.")), at 267. CGML sent a letter explaining its substitution on February 11. U.S. Bank 56.1 ¶ 38; see also Kraut Decl., Ex. 14. After consulting with outside counsel, U.S. Bank ultimately concluded that the substitution was proper. See Kraut Decl., Ex. 20. U.S. Bank then sought and obtained an indemnification agreement from CGML, which recited that U.S. Bank requested the indemnification to hold U.S. Bank harmless so that U.S. Bank could act consistently with CGML's position with respect to the substitution. Id. Ex. 44. The indemnification agreement was executed on March 20, and, that same day, U.S. Bank liquidated a portion of the Term Asset and made a settlement payment following the receipt of a valuation notice from CGML. U.S. Bank 56.1 ¶ 41. On April 3, the Fund's counsel wrote to U.S. Bank to give notice of CGML's alleged breach of the swap agreements, requested that U.S. Bank initiate an action against CGML, and offered U.S. Bank an indemnification to do so. Pl's 56.1 Re: U.S. Bank ¶ 156; see also Kraut Decl., Ex. 46. U.S. Bank rejected this proposal by letter dated April 14, which noted that the Trustee concluded that CGML acted appropriately in substituting the Lyondell Substituted Reference Obligation. Pl's 56.1 Re: U.S. Bank ¶ 157; see also Decl. of Kanchana Wangkeo Leung re: U.S. Bank, 3/12/10, Ex. 94.
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. On June 4, 2009, CGML sent valuation notices for these credit events to U.S. Bank, which forwarded them to DTC. Id. ¶¶ 46-47. U.S. Bank accepted the notices and paid CGML over $6 million to settle the trade. Pl's 56.1 Re: U.S. Bank ¶ 168. After the Fund objected to the timing of the valuations, CGML responded by-submitting amended valuation notices dated July 27, 2009, and the Fund sent U.S. Bank a letter on July 28 objecting to the nature of CGML's proposed revaluation. Id. ¶ 177. After conferring with counsel, U.S. Bank sent CGML a letter on July 28 acknowledging receipt of the amended notices, applying the corrected amounts, and reserving its rights as to any errors CGML may have made. Kraut Decl., Ex. 34.
Prior to issuing the Charter credit event notice, CGML sent a notice substituting the Charter Reference Obligation that was in the Reference Portfolio. In connection with accepting this substitution notice, U.S. Bank sought and obtained an indemnification agreement from CGML in the amount of $6 million. Pl's 56.1 Re: U.S. Bank ¶ 163; see also Kraut Decl., Ex. 45. While the Fund argues that this indemnification is yet another indication of U.S. Bank's alleged breaches of contractual and fiduciary duties as trustee, the Fund does not appear to contest the substantive validity of CGML's Charter substitution in this litigation.
Given the Court's ruling that the May and August substitutions do not present issues fit for declaratory judgment, the Court does not discuss U.S. Bank's role with respect to these substitutions.
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, by "stepping into the Fund's shoes" as protection seller under the swap agreement,
would assume substantive responsibilities to enforce the Fund's rights. This argument relies primarily on the terms of the trust agreements, which, the Fund contends, make clear that U.S. Bank's responsibilities are substantive in nature. For example, there are numerous provisions of the trust agreements indicating that U.S. Bank was to discharge its responsibilities "for the benefit of the holders of the Certificates," i.e., the Fund. See, e.g., Cherington Decl., Ex. 7 (BTA) § 2.2(c) ("The terms and conditions of this Agreement shall inure for the benefit of and be binding on each Certificate holder and all persons claiming through or under it (including all persons on whose behalf such Certificate holder holds Certificates) as if each Certificate holder and other such persons had been a party to and had executed this Agreement. . . ."); id. § 3.1(a) (Trustee "shall administer the Term Assets and any Credit Swap for each given Trust for the benefit of the Certificateholders of the related Series"); id. Ex. 6, MTAS § 12(a) ("The Trust is constituted solely for the purpose of . . . enforcing the Trustee's rights under the Term Assets, the Base Trust Agreement, the Series Supplement and the Credit Default Swap. . . ."); id. § 2(a) (Trust was created "for the benefit of the holders of the Certificates"). In addition, a number of provisions limit U.S. Bank's authority to take actions other than those specified in the trust agreements. See, e.g., MTAS § 12(a); BTA § 8.13. Based on these provisions, the Fund claims that by-taking the Citi Defendants' side with respect to the disputed credit events and valuations, U.S. Bank breached these provisions of the trust agreements and its fiduciary duties thereunder.
Although the Trust was created under Cayman Islands law, the summary judgment briefing relies on New York law, and no party contends that Cayman law differs from New York law in any respect material to these motions.
For purposes of this discussion, the Court assumes arguendo that the Fund, as sole beneficial owner of the Class F Certificates, is in all relevant respects treated as a "holder" of Certificates, even though the nominal record owner is DTC.
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 Street Bank Trust Co., 896 N.E.2d 61, 66-67 (N.Y. 2008).
While these cases and the Trust Indenture Act recognize that an indenture trustee may be responsible for exercising a higher standard of care and may be charged with extracontractual duties following the issuer's default, see A.G. Capital, 896 N.E. 2d at 57 n. 7 (citing 15 U.S.C. § 77ooo(c)), under the terms of the instant trust agreements, there can be no event of default. MTAS §§ 8, 16.
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. While certain provisions of the trust agreement do require the Trustee to "administer" or "enforce" the Term Asset and the rights of the Trustee under the swap for the Fund's benefit, it does not follow that the Trustee should be charged with a generalized duty to advance the Fund's economic interests in any manner other than with respect to the narrowly circumscribed responsibilities identified in the trust agreement. Similarly, while the Fund relies on provisions of the trust agreements that prohibit the Trustee from impairing the Trust's interests, from amending the credit default swap, and from protecting the Fund from improper depletion of the Term Asset, and also charge the Trustee with safeguarding the Fund's collateral, there is no reason to read these provisions to impose substantive, as opposed to ministerial, obligations.
The Fund's summary judgment papers do not appear to dispute that U.S. Bank's responsibilities with respect to the transmission of notices were limited to forwarding such notices to DTC. Although apparently under no contractual obligation to do so, DTC then posted each of these notices to a "Legal Notices Website" viewable by the Fund.
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"). The undisputed record shows that with respect to the disputed events, U.S. Bank made the decision to accept the Citi Defendants' notices and valuations after having received the relevant notices from CGML and conferring with outside counsel, and in the case of the Lyondell substitution, asking CGML for further explanation of its belief that the substitution was valid. Thus, the Court alternatively concludes that U.S. Bank's
The Fund objects that U.S. Bank has waived any reliance on these provisions because it failed to include them as affirmative defenses in its answer to the Fund's complaints. However, U.S. Bank's affirmative defenses included the defenses that the Fund's claims fail because they are based on U.S. Bank's having duties that are not supported by the governing agreements and because U.S. Bank fully performed its obligations under these agreements.See U.S. Bank Answer to Amended Compl., 2/22/10, ¶¶ 193, 202. The Court finds that these affirmative defenses were sufficiently pleaded, and in any event, the Fund can show no prejudice even if these defenses are assumed to be newly raised, as the Fund has clearly scoured every potentially relevant provision of the governing agreements in preparing its claims in this litigation.
Contrary to the Fund's contentions, U.S. Bank is not asserting an "advice of counsel" defense, which would require the waiver of attorney-client privilege, by referring to the fact of its communication with counsel in the context of demonstrating its good faith. U.S. Bank has specifically disclaimed reliance on a provision of the BTA that allows an advice of counsel defense,see BTA § 8.2(a)(ii). The focus of U.S. Bank's "good faith" defense is on the nature of the inquiry that U.S. Bank undertook, not the substance of the legal advice that was eventually provided.
actions with respect to these disputed events were not done negligently or in bad faith as required for the Trustee to be liable in the event these events violated the swap agreements.
Finally, it bears noting that the pre-closing 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 one-time 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 prior to default." Elliott, 838 F.2d at 73; see also A.G. Capital, 896 N.E.2d at 67 (recognizing that "an indenture trustee owes a duty to perform its ministerial functions with due care, and if this duty is breached the trustee will be subjected to tort liability," but holding that the alleged breach of such duty does not "give[] rise tofiduciary duties").
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.3d 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 there is no showing of an actual conflict of interest on this record. As to the indemnifications, the trust agreements make clear that the Trustee was not expected to expend its own funds or risk liability, BTA § 8.1(d)(iv), so it was reasonable for U.S. Bank to seek indemnification once it became clear that there was a dispute between the Fund and CGML with respect to the Lyondell substitution. And there is undisputed testimony from U.S. Bank's witnesses that it sought the indemnification after determining the substitution was permissible, see Fahey Dep. at 292; Kraut Decl., Ex. 50 (Dep. of Eric J. Donaghey, 12/3/09), at 134; id. Ex. 49 (Dep. of Michael W. Cooney, 12/1/09), at 169-71, as well as undisputed expert testimony that indemnifications in similar situations are a common industry practice, Decl. of Robert I. Landau, 3/9/10, Ex. A, ¶ 26. As to the Fund's allegations concerning U.S. Bank's status as "default trustee" for other Citi deals, the Court finds that there is no evidence supporting the hypothesis that the total revenues from such business, which are infinitesimal in comparison with the overall revenues of these financial institutions, in any way affected U.S. Bank's actions. Cf. Page Mill Asset Mgmt. v. Credit Suisse First Boston Corp., 2000 WL 877004, at *2 (S.D.N.Y. June 30, 2000) ("the existence of a conflict of interest can not be inferred solely from a relationship between an issuer and an indenture trustee that is mutually beneficial and increasingly lucrative"). For these reasons, the Court grants U.S. Bank's motion for summary judgment as to the Fund's claims alleging that it breached its fiduciary duties.
Indeed, there is a strong argument that Elliott is directly controlling, because the allegations in the complaint in that case, which the Second Circuit ultimately dismissed as "bald assertions of conflict of interest," included references to an indemnification agreement between the trustee and issuer and the trustee's service as a trustee under other indentures; i.e., precisely the same allegations of conflict asserted by the Fund here. Kraut Decl, Ex. 43 (Verified Complaint, Elliott Assocs. v. J. Henry Schroeder Bank Trust Co., No. 86 Civ. 3725 (LBS) (S.D.N.Y. May 6, 1986)), ¶¶ 21-23.
By "bottom-line" order January 18, 2010, the Court denied the Fund's application to compel U.S. Bank to produce otherwise privileged documents based on the so-called "fiduciary exception" and indicated that the reasons for that ruling would follow. These reasons are manifest in the preceding discussion of the extent of U.S. Bank's fiduciary duties as Trustee, which the Court concludes are limited and ministerial in nature. Assumingarguendo that the fiduciary exception applies to privilege assertions by indenture trustees relating to allegations that the trustee breached its fiduciary duties, see, e.g., AMBAC Indem. Corp. v. Bankers Trust Co., 151 Misc.2d 334, 340 (N.Y. Sup. Ct. 1991), the Court finds that this exception does not apply to the particular documents that the Trustee here asserts are privileged. These documents relate to the Trustee's request for legal advice regarding the Lyondell and Charter/Idearc substitutions and valuation notices, and accordingly, implicate the substantive terms of CGML's obligations under the Confirmation rather than the Trustee's limited fiduciary duties to avoid conflicts of interest. Cf. id. (applying fiduciary-exception where plaintiff charged that indenture trustee "invaded trust accounts and wrongfully appropriated to its own use funds from an account designated for bond redemption and . . . Trust charged excessive fees and paid them to itself in advance of payment of superior obligations"). In addition, all communications included in the privilege log occurred after March 5, 2009, i.e., well after the Fund objected to CGML's January 28 substitution notice with respect to the Lyondell Reference Obligation. It is clear from the Court's review of these communications that they were all made in anticipation of litigation, a fact that in itself renders the fiduciary exception inapplicable. See, e.g., Strougo v. BEA Assocs., 199 F.R.D. 515, 524 (S.D.N.Y. 2001) ("while the [fiduciary] exception permits disclosure of communications relating to the conduct of an alleged action in proper circumstances, it does not permit disclosure of communications regarding the defense of a lawsuit"). For these reasons, the Court denied the Fund's application to compel these otherwise privileged communications.
The Court turns finally to the Citi Defendants' contentions that the Fund lacks standing to bring suit to enforce the confirmation. In this respect, the Citi Defendants argue first that the Fund lacks standing to enforce the Confirmation directly because it is not a "Party" to the Confirmation and because the Confirmation expressly states that "No person other than the parties shall have any right to enforce any provision of this Transaction." Confirmation, Annex A, at 20. Next, the Citi Defendants argue that the Fund lacks standing to sue derivatively on behalf of the Trustee pursuant to Section 10.3(c) of the Base Trust Agreement, which provides:
U.S. Bank also raised certain objections to the Fund's standing to sue U.S. Bank as Trustee, which are moot given the Court's determination that these claims lack merit.
[n]o Certificateholder . . . shall have any right . . . to institute any suit, action or proceeding . . . unless [] such Holder previously shall have given to the Trustee a written notice of breach and of the continuance thereof and unless
also the Holders of [two-thirds] shall have made written request . . . to institute such action . . . and shall have offered to the Trustee such reasonable indemnity as it may-require against the costs, expenses, and liabilities to be incurred . . . and the Trustee . . . shall have neglected or refused to institute any such action. . . .
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 that the Fund failed to comply with Section 10.3(c)'s demand requirement with respect to claims other than those relating to the Lyondell substitution.
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 (1st Dep't 1982); see also Bowen v. U.S. Postal Serv., 459 U.S. 212, 243 (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 person'" (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. 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 to its challenges to the Lyondell substitution and that the Fund's failure to make demand as to the other alleged breaches is excused as futile given, inter alia, U.S. Bank's entry into the indemnification agreements with CGML. Even assuming arguendo that the Fund did not comply with the no-action clause as to any of its claims against the Citi Defendants, the Court would find that the Fund could still sue on behalf of the Trustee. Indeed, it is difficult to identify any conceivable that is served by requiring
compliance with the no-action clause here, or otherwise requiring pre-suit demand, given the Court's conclusions regarding the limited duties of the Trustee and the fact that the Fund is sole beneficial owner of the Class F Certificates, thus nullifying any risk of conflict with other trust beneficiaries.
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 (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 sue, the agreements (including the Confirmation) permit the Fund to bring claims against the Citi
Defendants on behalf of the Trustee. Given that available avenue of enforcement, the Court declines to contort the clear provisions of the Confirmation to permit the Fund to sue directly or as third-party beneficiary. For those reasons, the Court hereby grants the Citi Defendants' motion for summary judgment dismissing the First and Second Claims.
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 First and Second Claims, brought by the Fund directly and as intended third-party beneficiary, for breach of contract and breach of the Confirmation, are dismissed for lack of standing;
• The Third Claim, brought by the Fund on behalf of the Trustee against the Citi Defendants for breach of the Confirmation, is hereby dismissed in part, leaving for trial only the issues of: (1) with respect to the effectiveness of the Lyondell Credit Event Notice, (a) whether CGML's valuation with respect to the Lyondell Credit Event was premature in light of defects in the initial Credit Event Notice and CGML's subsequent issuance of a revised Credit Event Notice, (b) whether the Fund, by not promptly objecting to the initial Credit Event Notice on this basis, forfeited this challenge to the Notice's effectiveness, and (c) in the event that the Court finds that the challenge is not forfeited and that the valuation was premature, what damages, if any, were incurred; (2) whether CGML's substitution of the Substituted Lyondell Loan was consistent with the senior secured,
pari passu, and economic equivalence criteria for substitution as set forth in the Confirmation, and if not, what damages, if any, were caused by the defective valuation; and (3) what damages, if any, were caused by the premature Charter and Idearc valuations;
• all claims against U.S. Bank (
i.e., the Fourth, Fifth, Sixth, and Seventh Claims) are dismissed as against U.S. Bank;
• all claims seeking a declaratory judgment as to the validity of the May and August substitutions (
i.e., the Sixth and Seventh Claims) are dismissed in full;
• the Eighth Claim, which is brought on behalf of the Trustee and seeks a declaration entitling the Trustee to terminate the Confirmation, may proceed to trial, in that the Fund has standing to bring this claim and genuine issues of material fact exist as to whether the Citi Defendants failed to pay the full amounts of premiums due under the Confirmation, thus constituting an Event of Default; and
• the Citi Defendants' three counterclaims are dismissed.
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.
Dated: New York, NY
September 18, 2010