Opinion
No. 600898/2010.
08-20-2014
SUMITOMO MITSUI BANKING CORPORATION, Plaintiff and Counterclaim, Defendant, v. CREDIT SUISSE and Credit Suisse, Cayman Islands Branch, Defendants and Counterclaim Plaintiffs.
Opinion
O. PETER SHERWOOD, J.
This case arises out of a participation interest in a syndicated bridge loan that defendants-counterclaim plaintiffs Credit Suisse and Credit Suisse, Cayman Islands Branch (together, Credit Suisse), sold to plaintiff-counterclaim defendant Sumitomo Mitsui Banking Corporation (Sumitomo) in 2006. The underlying bridge loan was restructured in May, 2009, during the financial crisis. At the heart of this dispute is the nature of the May, 2009 transaction, and whether a distribution received by Credit Suisse as part of that transaction was “secured debt” or “cash.” Sumitomo filed this action alleging a single claim for breach of contract, claiming the 2009 transaction included a new loan and a cash pay-off of the original loan, which, Sumitomo asserts, triggered its right to repayment in cash. Credit Suisse contends that the distribution was, in substance, secured debt, as the obvious purpose of the 2009 transaction was to collateralize a deeply troubled loan, and that Sumitomo was only entitled to its share of the new, secured debt. Credit Suisse made a single counterclaim, seeking a declaratory judgment that it was not obligated to make any further distributions. Both parties previously moved for summary judgment based on these positions before any discovery was taken. Both motions were denied by Justice Yates. The First Department affirmed and remanded the motions for development of the factual record regarding the economic substance of the 2009 transaction.
Credit Suisse now moves for summary judgment on Sumitomo's claim and its own counterclaim. Sumitomo cross-moves for summary judgment on its claim and Credit Suisse's counterclaim. For the reasons set forth below, Credit Suisse's motion for summary judgment is granted, and Sumitomo's cross motion is denied.
FACTS
The operative agreements and transactions that were entered into in 2006, establishing the underlying loans and Sumitomo's participation interest in the bridge loan, are undisputed. On March 23, 2006, various banks (including Credit Suisse and Sumitomo) agreed to provide nonparty Capmark Financial Group, Inc. (Capmark) and related borrowers with a $5.5 billion unsecured term loan and revolving credit facility (the 2006 Credit Agreement, and the facility thereunder, the RC/TL). The RC/TL was scheduled to mature on March 23, 2011 (see 2006 Credit Agreement, § 1.1 [aff of Charles T. Spada, exhibit D] ). Citibank, N.A. (together with Citicorp North America, Inc. and related entities, Citi) was the administrative agent for the RC/TL (see id., § 9.1). Also on March 23, 2006, Credit Suisse and five other major banks (all of whom were also lenders under the RC/TL) entered into a bridge loan agreement with Capmark (the Bridge Loan Agreement, and the facility thereunder, the Bridge Loan), under which Credit Suisse and the other banks agreed to loan Capmark $5.25 billion, with the banks each committing $875 million (see Bridge Loan Agreement, schedule I [Spada aff, exhibit C] ). The Bridge Loan was also structured as an unsecured credit facility, but was scheduled to mature on March 23, 2009, two years before the RC/TL maturity (see id., § 1.1).Sumitomo was not a Bridge Loan lender, but on March 27, 2006, it purchased from Credit Suisse a $200 million “participation in and to the Seller's interest” (i.e., Credit Suisse's interest) in the Bridge Loan pursuant to a participation agreement (the Participation Agreement) (see Participation Agreement, § 2 [Spada aff, exhibit B] ). Credit Suisse retained a $675 million interest in the Bridge Loan (see Bridge Loan Agreement, at schedule I).
The Participation Agreement set forth the parties' rights and obligations with respect to Sumitomo's interest. Section 5 governs Sumitomo's right to repayment. With respect to “Distributions,” Credit Suisse was required to pay to Sumitomo its pro rata share of any Bridge Loan distribution that it received. Two different types of distributions were contemplated—“cash” distributions, and “non-cash” distributions of notes, securities, or other property (including collateral) or proceeds. The agreement provides different procedures for distributions of each. The Participation Agreement provides that, upon receipt by Credit Suisse of any “cash Distribution,” Credit Suisse shall pay Sumitomo its pro rata share:
“Upon receipt by Seller of any cash Distribution, Seller shall (i) accept and hold such Distribution for the account and sole benefit of Participant; (ii) have no legal, equitable or beneficial interest in such Distribution and (iii) distribute within two (2) Business Days after receipt of immediately available funds or after funds become available for distribution.... For the avoidance of doubt, Seller and Participant agree that Participant is entitled to receive its pro rata share of any Distribution”
(Participation Agreement, § 5.1).
The Participation Agreement further provides that upon receipt of a “non-cash Distribution,” Credit Suisse shall transfer to Sumitomo, at Sumitomo's expense, its share of “the beneficial and record ownership of such ... non-cash Distribution”:
“Upon receipt by Seller of any securities or other non-cash Distribution, Seller shall hold the same for the account and sole benefit of Participant ... And cooperate with Participant and use commercially reasonable efforts ... to cause to be transferred to Participant or its nominee as soon as practicable ... the beneficial and record ownership of such securities or other non-cash Distribution”
(id., § 5.2).
The Participation Agreement defines “Distribution” as “any payment or other distribution (whether received by set-off or otherwise) of cash (including interest), notes, securities or other property (including collateral) or proceeding under or in respect of the Seller's interest” (id., § 1.1).
In late 2008 and continuing through 2009, the United States experienced one of its worst financial crises. It is undisputed that Capmark, a real estate financial company, was severely negatively impacted. In early 2009, with the Bridge Loan balance coming due on March 23, 2009, Capmark commenced negotiations with the Bridge Loan and RC/TL lenders to restructure its debt, including the $833 million principal balance of the Bridge Loan.
In February and March, 2009, the bank lenders pressed Capmark for full repayment of the Bridge Loan at maturity (10/6/10 Thomas Fairfield dep at 40–41 [Spada aff, exhibit J]; 5/29/13 Fairfield dep at 48–49, 61–64 [Spada aff, exhibit G] ). Capmark refused and informed the lenders that it would not repay or refinance the Bridge Loan, and threatened to file for bankruptcy if the lenders would not agree to an acceptable restructuring of the Bridge Loan and RC/TL (see Allison Taylor expert report for Sumitomo [Spada aff, exhibit I] ). The Bridge Loan and RC/TL Lenders were concerned that, as unsecured creditors, their recovery in a Capmark bankruptcy would be diminished (8/19/13 Michael Schadt dep at 20 [Spada aff, exhibit M] ).
Between February and May, 2009, the lenders, represented by a Steering Committee, led by Citi as the agent, negotiated with Capmark to restructure the Bridge Loan and the RC/TL. The major direct lenders on the Bridge Loan were Credit Suisse, Deutsche Bank AG, Goldman Sachs & Co., Credit Partners, JP Morgan Chase Bank and Royal Bank of Scotland, each with $138,833,333.33 in remaining commitments, and Citi with $82,595,018.27 of Bridge Loan exposure (see consolidated lender list [Spada aff, exhibit U] ).
To avoid a Capmark default, the major direct lenders agreed to several extensions of the Bridge Loan in March, April, and May (see amendments 4, 5, 6, 7 and 8 to the Bridge Loan [Spada aff, exhibit W] ). A few “de minimus” lenders, who had purchased assignments from original lenders, refused to agree to the extensions, and Capmark repaid these lenders in the total amount of approximately $2.8 million (5/29/13 Fairfield dep at 190). Capmark, however, was unwilling to repay any “substantial” Bridge Loan lender (i.e., any lender holding more than approximately $5 million) (id. at 86–87).
When the major Bridge Loan lenders realized that Capmark would not repay the bulk of the Bridge Loan, their primary objective became to improve their position by securing their exposure under the unsecured Bridge Loan and RC/TL (7/12/13 Yoshiro Hyakutome dep at 127, 148–149 [Spada aff, exhibit Z]; 8/19/13 Schadt dep at 29, 31, 66–68, 79, 116).
During the April–May, 2009 period, the principal negotiators were Citi, through then-director (now managing director) Michael Schadt and his associate Liu Shi, on behalf of the lenders, and Capmark, through its then-general counsel Thomas Fairfield (Taylor report for Sumitomo at 8–9, 12). These witnesses consistently testified that Capmark threatened to file for bankruptcy, refused to make any substantial repayment on the Bridge Loan, and sought to extend the Bridge Loan maturity and to obtain relief from certain existing financial covenants in the Bridge Loan and RC/TL (see 5/29/13 Fairfield dep at 44–45, 78, 81, 113–115; 8/19/13 Schadt dep at 19, 65–66). These witnesses further testified that, given the gravity of Capmark's financial condition, the lenders were willing to agree to Capmark's demands, but only in exchange for Capmark giving them collateral to secure a substantial portion of the unsecured exposure (8/19/13 Schadt dep at 29–30, 31, 66–68, 79; 10/11/10 Schadt dep at 96–97, 123; 5/29/13 Fairfield dep at 113–115; 7/12/13 Hyakutome dep at 148–149). Schadt repeatedly testified that the lenders' “intent was to get collateral for the antecedent debt, which included both the bridge loan and a portion of the revolver term loan” (8/19/13 Schadt dep at 30; see also id. at 31, 66, 79). Likewise, Fairfield testified that “[t]he lenders were seeking from us collateral as consideration for their agreements to restructuring terms of the debt that were important to Capmark” (5/29/13 dep at 114; see also id. at 47–48).
In May, 2009, the lenders and Capmark agreed to a restructuring of the Bridge Loan and RC/TL, which was consummated on May 29, 2009 (the May 2009 Restructuring). The material economic components of the transaction were as follows:
i.Small Cash Repayment: Capmark made a small cash repayment (the “Cash Repayment”) of $75 million total from its own cash—$28,125,000 to the Bridge Loan Lenders and $46,875,000 to the RC/TL lenders;
ii.Partial Collateralization: Capmark allowed the lenders to swap a $562,500,000 portion (or approximately 70%) of the outstanding Bridge Loan exposure and a $937,500,000 portion of the RC/TL for secured debt under a new $1.5 billion secured term loan (the “Roll–Up Facility”). These portions were shifted dollar-for-dollar into the Roll–Up Facility, resulting in no increase or decrease in each of the existing lenders' exposure to Capmark; and
iii.Maturity Extension and Covenant Relief: In exchange for the Cash Repayment and partial collateralization, the Bridge Loan lenders agreed to extend the maturity of the remaining Bridge Loan debt (including both the $562.5 million that was rolled up and the $234,203,620.89 that remained under the unsecured Bridge Loan) approximately two years to March 23, 2011, and to grant Capmark relief from certain financial covenants in both the Bridge Loan Agreement and the 2006 Credit Agreement.
(see 2009 Agreement [Spada aff, exhibit EE]; amendment no. 9 [Spada aff, exhibit FF]; amendment no. 3 [Spada aff, exhibit GG] ).
The May 2009 Restructuring was documented in three parts:
(i) Term Facility Credit and Guaranty Agreement, dated May 29, 2009 (the 2009 Agreement), which provided for advances from the lenders to Capmark. The advances were to be secured by Capmark's assets and were designated to be used “solely” to make substantially contemporaneous repayments of approximately 70% of the Bridge Loan debt ($562,500,000) and a portion ($937,500,000) of the RC/TL debt (see 2009 Agreement at §§ 2.13, 3.01[a] and [c] [Spada affirmation, exhibit EE] );
(ii) Amendment No. 9 and Waiver to the Bridge Loan Agreement, dated May 20, 2009 (Amendment No. 9), which extended the majority of the Bridge Loan Agreement to March 23, 2011, and required Capmark to make the Cash Repayment of the Bridge Loan in the amount of $28,125,000 and to use the proceeds of the 2009 Agreement “solely” to make repayments of portions of the Bridge Loan ($562.5 million) and the RC/TL ($937.5 million) (see Amendment No. 9 at recital [2] and §§ 1[k] and [n] [Spada aff, exhibit FF] ); and
(iii) Amendment No. 3 and Waiver to the Credit Agreement, dated May 29, 2009 (Amendment No. 3), which required Capmark to make the Cash Repayment of the RC/TL in the amount of $46,875,000 and to use the proceeds of the 2009 Agreement “solely” to make repayments of portions of the Bridge Loan ($562.5 million) and the RC/TL ($937.5 million) (see Amendment No. 3 at Recital [2] and § 1[gg] [Spada aff, exhibit GG] ).
The 2009 Agreement provides that the proceeds of the advances made by the lenders were to be used “solely to make an Existing Bridge Loan Agreement Repayment and an Existing Credit Agreement Repayment” (2009 Agreement, § 2.13). Existing Bridge Loan Agreement Repayment is defined as “any ratable repayment or prepayment in cash of outstanding Existing Bridge Loans” (id., § 1.01). Existing Credit Agreement Repayment is defined as “any ratable repayment or prepayment of outstanding loans' under and as defined in the [2006 Credit Agreement] in cash (accompanied, in the case of any repaid Revolving Credit Loans, with a permanent reduction in the corresponding Revolving Credit Commitments)” (id . ). Amendment No. 3 and Amendment No. 9 similarly provide that Capmark would make repayments “in cash.”
However, the explicit language of the 2009 Agreement, stating that the advances made by the Bridge Loan and the RC/TL lenders were specifically earmarked for the sole purpose of contemporaneously repaying an equal amount of the same lenders under the Bridge Loan and the RC/TL, makes it clear that, although branded as making a “repayment” in “cash,” the new debt was merely being substituted for the old debt. It is undisputed that no cash actually moved from the lenders to the agent (Citi) or Capmark, or from Capmark or the agent back to the lenders (8/19/13 Schadt dep at 55–56; 10/11/10 Schadt dep at 186–187). Rather, Citi, as agent, effected a dollar-for-dollar “roll-up” of each lender's piece of the Bridge Loan and RC/TL, reallocating the existing unsecured exposure into secured debt under the Roll–Up Facility (see 2009 Agreement, Amendment No. 9 and Amendment No. 3). Accordingly, Citi informed the lenders that no funding was required for the new secured facility, and that their existing balances in the unsecured facilities would simply be reduced by the same amount under the Roll–Up Facility (see Shi emails dated May 15, 2009 [Spada aff, exhibits SS, TT). Schadt, the principal negotiator for the agent bank, repeatedly testified that the transaction was “cashless” (see 10/11/10 Schadt dep at 186–187).
Shi, a vice president (now director) at Citi, worked with Capmark to implement the transaction smoothly, including by providing a roll-up mechanics spreadsheet, which showed each lender's portion of the cash pay-down and non-cash roll-up amounts (see 6/27/13 Shi dep at 79, 84 [Spada aff, exhibit HH]; see also various Shi emails [Spada aff, exhibits T, V, and S] ). In addition, Capmark and Citi each issued official notices to the lenders, reflecting that the relevant portion of the debt disputed here was “rolled up” or “reallocated” to secured debt, not repaid with cash (see Spada aff, exhibits S, ZZ, BBB] ).
Consistent with the Citi and Capmark official notices and roll-up allocation spreadsheets, Citi sent Credit Suisse a cash repayment in the amount of $4,733,937.94 (representing Credit Suisse's portion of the Cash Repayment), and notified Credit Suisse that $96,687,758.74 (approximately 70%) of its Bridge Loan exposure, representing Credit Suisse's share of the $562,500,000 roll-up, was reallocated/rolled-up to the secured Roll–Up Facility (see Citi notices dated May 29, 2009 and June 15, 2009 [Spada aff, exhibits CCC and DDD] ). To fulfill its obligations under the Participation Agreement, Credit Suisse then transmitted to Sumitomo its pro rata share of the Cash Repayment ($1,082,042.96) and offered to transfer to Sumitomo its pro rata share of the $562,500,000 non-cash distribution of secured debt that was substituted for unsecured Bridge Loan debt ($21,640,859.14 face amount). Sumitomo refused to accept the secured debt, and claimed it was entitled to repayment in cash.
In April, 2010, Sumitomo brought this action, alleging breach of the Participation Agreement. Credit Suisse counterclaimed for a declaratory judgment that it had fully performed. Before any discovery occurred, Sumitomo moved for summary judgment, arguing it was entitled to judgment because the 2009 Agreement and Amendment No. 9 brand the relevant portion of the Bridge Loan as being repaid in “cash,” and the Bridge Loan balance was technically reduced. Credit Suisse cross-moved for summary judgment, arguing that Sumitomo was improperly seeking to elevate the form of the 2009 transaction over its economic substance, a restructuring through which the lenders received secured debt in exchange for unsecured debt, and not a true cash repayment. In reply, Sumitomo argued that the notion of “economic reality” was “contrary to all principles of contract law,” and that the form and the terms of the 2009 Agreement controlled (6/17/10 Sumitomo memorandum of law at 6). Sumitomo claimed that “if the Court gives any credence to Credit Suisse's economic reality' of the May 2009 Facility Agreement argument (which it should not), [Sumitomo] is entitled to discovery” (id. ).
Justice Yates denied both motions and the First Department affirmed on appeal (89 AD3d 561 [1st Dept 2011] ). The First Department agreed with Credit Suisse that the dispositive issue to be determined was the economic substance of the 2009 transaction:
“Although the documents in connection with the 2009 transaction brand the $562,500,000 as a cash repayment, it is the economic substance of a transaction that should determine the rights and obligations of the interested parties”
(id. at 564). That court remanded the case to continue with discovery. Justice Catterson, in a dissenting opinion, agreed with the majority that the economic substance test governs, and dissented only because he would have granted summary judgment to Credit Suisse without discovery:
“I agree with the majority that we must consider the substance of the entire transaction, rather than its form.' Chemical Bank v.. Meltzer, 93 N.Y.2d 296, 202, 690 N.Y.S.2d 489, 492, 712 N.E.2d 656, 660 (1999). In Chemical Bank, the Court further cautioned that we must not focus on a few words of a single instrument, [the] transaction must be analyzed as an integrated whole.” 93 N.Y.2d at 304, 690 N.Y.S.2d at 493, 712 N.E.2d at 661. We must not elevate form over substance, obfuscate the nature of [the parties'] legal obligations and gloss over the essential character of the transaction.' Id. In this case, the essential character' of the transaction was to substitute secured debt for unsecured debt”
(id. at 566 [Catterson, J., dissenting] ).
Discovery ensued, and the parties again move for summary judgment.
DISCUSSION
“[T]he proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact' “ (Ayotte v. Gervasio, 81 N.Y.2d 1062, 1062 [1993];Winegrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851 [1985] ). “Failure to make such showing requires denial of the motion, regardless of the sufficiency of the opposing papers” (Winegrad v. New York Univ. Med. Ctr., 64 N.Y.2d at 853;see also Lesocovich v. 180 Madison Ave. Corp., 81 N.Y.2d 982 [1993] ).
The party opposing summary judgment has the burden of presenting evidentiary facts sufficient to raise triable issues of fact (Zuckerman v. City of New York, 49 N.Y.2d 557, 562 [1980];CitiFinancial Co. [DE] v. McKinney, 27 AD3d 224, 226 [1st Dept 2006] ). The court is required to examine the evidence in a light most favorable to the party opposing the motion (Martin v. Briggs, 235 A.D.2d 192, 196 [1st Dept 1997] ). Summary judgment may be granted only when it is clear that no triable issues of fact exist (Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 [1986] ), and “should not be granted where there is any doubt as to the existence of a triable issue” of fact (American Home Assur. Co. v. Amerford Intl. Corp., 200 A.D.2d 472, 473 [1st Dept 1994] ).
Credit Suisse moves for summary judgment on the ground that the essential character of the 2009 transaction was to substitute secured debt for unsecured debt, and Sumitomo is, therefore, only entitled to its share of the secured debt, pursuant to § 5.2 of the Participation Agreement. Sumitomo cross-moves for summary judgment, arguing that because of the form of the transaction—a new secured facility branded as making a “repayment” “in cash” of a portion of the Bridge Loan and RC/TL—Sumitomo should receive a cash repayment (and reduction in exposure to Capmark), pursuant to § 5.1 of the Participation Agreement, that the direct lenders did not and could not receive.
When the earlier motions for summary judgment were considered by the First Department, that court declined to reverse the earlier denial of summary judgment as there was
“an issue of fact as to whether there was a cash payment to satisfy the bridge loan or a reallocation of debt. Although the documents in connection with the 2009 transaction brand the [money] as a cash repayment, it is the economic substance of a transaction that should determine the rights and obligations of the interested parties.”
(Sumitomo, 89 AD3d at 564). As that court noted, it is the “economic substance” of the 2009 transaction which governs, and not the form or labels used in the transaction (see Sumitomo, 89 AD3d at 564, 566;see also Chemical Bank v. Meltzer, 93 N.Y.2d 296, 302, 304 [1999] [“it is clear that a court must first look to the substance of the entire transaction, rather than its form,' and it is the “essential character” of the transaction that governs]; International Trade Admin. v. Rensellaer Polytechnic Inst., 936 F.2d 744, 748 [2d Cir1991] [courts look to “the economic substance of the transaction and not its form”]; see also Utica City Nat. Bank v. Gunn, 222 N.Y.204, 207–208 [1918]
[“[t]o ascertain the meaning of this contract, we must recall the surrounding circumstances.... In such a situation, the genesis and aim of the transaction may rightly guide our choice”] ).
Evidence of “economic substance” consists of the objective evidence of the parties' intentions, as shown by their statements and conduct contemporaneous with the negotiation and execution of the May 2009 refinancing agreements, as well as industry custom and usage (see 67 Wall St. Co. v. Franklin Natl. Bank, 37 N.Y.2d 245, 248–249 [1975] [negotiations and statements “made prior to or contemporaneous with the execution” of a written contract]; Federal Ins. Co. v. Americas Ins. Co., 258 A.D.2d 39, 43 [1st Dept 1999] [any relevant course of performance or conduct] ). “The parties' objective manifestations of their intent—namely, their words to each other and their deeds'—are significantly more probative than uncommunicated subjective intent' “ (Credit Suisse Secs. (USA) LLC v. Grand Circle LLC, 2013 U.S. Dist LEXIS 135863, * 30 [SD N.Y.2013] [citation omitted] ).
Since the decision of the First Department, the parties have engaged in additional discovery
and no issue of disputed material fact remains regarding the economic substance of the 2009 transaction. Discovery has yielded undisputed evidence that the economic substance, “the essential character,” of the May, 2009 restructuring was a substitution of secured debt for an equal amount of unsecured debt held by the very same lender parties. Sumitomo's argument that the language in the 2009 documents using the labels “cash repayment” and “refinancing” is controlling only focuses on whether there was a technical reduction in the exposure under the Bridge Loan. It completely ignores that this was a distressed transaction with a troubled borrower, and that any technical reduction of unsecured debt was directly tied to and entirely contingent upon the lenders agreeing to a corresponding increase in secured debt in an equal amount. Thus, the distribution was, in substance, a non-cash distribution of secured debt implicating section 5.2 of the Participation Agreement, and Sumitomo was entitled only to its share of the secured debt. Accordingly, Credit Suisse has fully satisfied its obligations, and its motion for summary judgment must be granted.
The record in this case, including both documents and testamentary evidence, conclusively establishes the following facts:
Capmark was in dire financial condition in 2009 and refused to repay the Bridge Loan at the scheduled maturity in 2009;
Capmark threatened the lenders that it would file for bankruptcy if the existing lenders did not agree to the May 2009 restructuring;
the Bridge Loan lenders' objective was to improve their position by getting security for their exposure under the Bridge Loan and the RC/TL;
although the transaction was structured with a new loan facility for purposes of convenience, no new lender came in to refinance or repay the Bridge Loan, and no “new money” was loaned to Capmark; and
other than the small Cash Repayment, the existing lenders were not able to reduce their exposure to Capmark through the transaction but rather, the relevant debt was shifted dollar-for-dollar from the unsecured debt to the secured Roll–Up Facility.
These facts are confirmed by both documents and testimony that reflect the undisputed economic substance of the transaction for the banks was to secure their exposure in exchange for granting Capmark a maturity extension and covenant relief.
The evidence from both Citi and Capmark confirms this economic reality. Sumitomo agrees that the principal negotiators for the 2009 transaction were Schadt, of Citi, and Fairfield, Capmark's then-general counsel, who both, repeatedly and consistently, made clear in their deposition testimony that, when the lenders recognized Capmark would not repay the Bridge Loan, they negotiated the May 2009 Restructuring transaction with the purpose and economic substance of improving the lenders' position by substituting secured debt for a portion of the unsecured Bridge Loan and RC/TL, in exchange for granting Capmark a maturity extension and covenant relief. For instance, Schadt testified that “[w]e agreed to extend maturities principally ... in exchange for getting collateral for a portion of our unsecured exposure” (8/19/13 Schadt dep at 31), and that “we exchanged unsecured exposure at Citi for some portion of secured debt” (id. at 79; see also id. at 48 [“the intent was to be viewed as a secured creditor under the billion 5 term loan”] ). Lu Shi, Schadt's colleague, likewise testified that “[t]he intent was to improve bridge loan recovery by rolling up to a secured position” (6/27/13 Shi dep at 157–158).
As discussed above, the official borrowing and paydown notices issued by Capmark and Citi reflect the economic reality that the relevant debt was in substance “reallocated” or “rolled up” into an equal amount in secured debt, and not truly repaid. For example, Capmark issued to Citi, and Citi passed on to the other Bridge Loan and RC/TL lenders, an official notice relating to the Bridge Loan dated May 28, 2009 in which Capmark issued a “Loan continuation,” identifying the “Repayment amount” of $28,125,000, and the “Reallocation amount (roll up' amount) of $562,500,000 (see Capmark email attaching notices and allocation lists [Spada aff, exhibit S] ). Citi, as agent bank, also issued official notices under the various loans reflecting that $28,125,000 had been repaid and that $562,500,000 had been “reallocated” to the “Term Roll Up” (see Spada aff, exhibits CCC and ZZZ). Numerous other contemporaneous Citi documents confirm its witnesses' testimony as to the economic reality of the transaction:
“[T]he substance of the transaction was to amend the existing loan agreements to get collateral” (9/22/09 Schadt email [Spada aff, exhibit MMM] );
“[T]he May deal was effectively an amendment (although documented as a new deal)” (9/14/09 Schadt email [Spada aff, exhibit MMM] );
“The objective is to secure as much bridge loan, term loan and revolver exposure in an effort to improve our total recovery from Capmark. The strategy is to use the upcoming bridge loan maturity and the likely covenant default to obtain security. We are in negotiation with the Company on a restructuring that would provide security to the bridge, term loan and revolver” (4/30/09 Citi Classified Credit Summary [Spada aff, exhibit L] );
“The deal is essentially securing a portion of our existing facilities into a new secured $1.5 billion secured (by U.S. mortgage assets) facility and an amendment and extension of our existing bridge, term and revolver” (5/28/09 Smith and Schadt emails [Spada aff, exhibit VVV] );
“The roll-up means [ ] a portion of exposure is switched from unsecured to secured” (6/2/09 Shi email [Spada aff, exhibit LL] ); and
“Th[e] secured facility is simply a roll-up—it is NOT a new money” (6/12/09 Shi email [Spada aff, exhibit LL] ).
Fairfield's testimony similarly confirms that Capmark shared Citi's understanding of the economic substance of the transaction. Fairfield testified that:
“So, as a, presumably as a matter of the loan agreement, the way it was structured, there was a loan agreement that says we're loaning you a billion 5, of that billion 5, 562,500,000 was going—proceeds were going to, quote, repay, unquote, the bridge loan. And then—but that debt was going to be in effect remaining outstanding under the secured facility. Meaning the amount of the debt didn't decrease, but by borrowing money and paying off a like amount of the bridge loan, what we wound up with from the Capmark perspective was $562,500,000 of secured debt. And a bridge loan amount outstanding that was $562,500,000 lower”
(5/29/13 Fairfield dep at 124–125; see also id. at 114–115[“[t]he lenders were seeking from us collateral as consideration for their agreement to restructuring terms of the debt that were important to Capmark”]; id. at 129–130 [“the effect was that the billion 5, as it related to Capmark, effectively represented a refinancing or substitution where we got from the lender group the ability to reduce the amount of unsecured debt and replace it with an equal amount of secured debt”] ).
The evidence also demonstrates that Credit Suisse and Sumitomo agreed on the economic substance of the transaction. For instance, Sumitomo's internal “Approval Notification of Credit” dated May 6, 2009, noted:
“For the following reasons, the proposed preliminary change of condition application is approved.
1. The proposed restructuring allows for partial repayments as well as partial collateralization of the existing facility, further strengthening the bank's security position.
2. Not agreeing to the proposed restructuring will most likely lead to ultimate filing of the company, which could be detrimental to the asset value of the company. Furthermore, the bank group will be left as unsecured creditors pari passu with the existing bondholders and junior to the FDIC claim.
3. Comparing between the proposed restructuring scheme and the bankrupt scheme, recovery is calculated to be greater with the restructuring as opposed to going into CH11 now.”
(see Spada aff, exhibit P).
Similarly, a July 14, 2009 Sumitomo “Approval Notification of Miscellaneous Application” explains:
“Given such deterioration, the company sought to restructure its debt portfolio by extending the maturity of the bridge loan ($825MM) due 3/23/09 and also to amend/waive the leverage covenants of the bank facilities. This restructuring process ... was successfully executed in 5/29/09 by extending the bridge loan maturity to 3/2011, and also rolling up part of the bank/bridge facility into a newly created $1.5bn secured facility. As a result, the company was able to conserve its liquidity for the time being.”
(see Spada aff, exhibit WWW).
Credit Suisse's internal documents also reflect that it understood the transaction to be, in substance, an amendment of the unsecured facilities to obtain security (see May 6, 2009 internal memo [Spada aff, exhibit DD] [“Although the bridge loan ... will not be paid in full under the restructuring proposal, GRM is supportive of refinancing the combination of the bridge and the revolver/term loan in order to receive collateral and elevate some standing above the general unsecured creditors”]; see also internal email dated May 18, 2009 [Spada aff, exhibit LLL] [“We have agreed to the amendment, which will refinance up to $1.5B of the bridge and existing bank debt on a secured basis and push the maturity out to 3/2011”] ).
The foregoing evidence demonstrates that the economic substance of the 2009 transaction was to replace unsecured debt with an equal amount of secured to the same lender. Even if one were to accept Sumitomo's interpretation that there was technically a repayment in cash on one piece of the transaction, any such “repayment” would be merely one step in the restructuring transaction, the overall true purpose and effect of which was to replace unsecured debt with secured debt (see Chemical Bank, 93 N.Y.2d at 302, 304;Utica City Nat. Bank, 222 N.Y. at 207–208;Orr v. Kinderhill Corp., 991 F.2d 31, 35–36 [2d Cir1993] [looking to the “net effect” of a restructuring, noting that “where a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications” [internal quotation marks and citation omitted]; Salomon, Inc. v. United States, 976 F.2d 837, 842 [2d Cir1992] [for tax purposes, treating a two-step transaction as a single transaction, and noting that to do otherwise would “deny economic reality”] ).
In opposition to the motion, and in support of its cross motion, Sumitomo does not raise any factual disputes, but merely continues to emphasize the form of the transaction and the words “in cash” in the documents, arguing that because the transaction was in the form of a new facility, “repaying” the relevant portion of the Bridge Loan, Sumitomo—unlike Credit Suisse and the other direct lenders, whose interests were simply reallocated to the Roll–Up Facility—is entitled to an obligation-free cash repayment of its portion of the $562.5 million distribution. However, this position is contrary to the First Department's decision, in which that Court stated that the parties' right and obligations turn on the underlying economic substance of the 2009 transaction, and not narrowly on the language of the agreements documenting the transaction. It is also contrary to the commonly held understanding of the parties to the 2009 transaction.
Moreover, in opposing the motion, Sumitomo mischaracterizes the First Department's prior decision in this case, arguing that the Court made a finding—now “law of the case”—that the relevant distribution was a cash repayment to the Bridge Loan lenders that triggered Credit Suisse's obligation to pay Sumitomo its pro rata share. However, the First Department made no such finding. In fact, the First Department denied Sumitomo's motion, concluding that while the documents in question “brand” the relevant distribution as a cash repayment, it is the “economic substance” of the underlying transaction that determines the parties' rights and obligations, not its form.
Sumitomo also attempts to cast the dispute as an issue of contract construction concerning “the meaning of ... cash prepayment' in B/L Amendment 9 and in the May 2009 Term Loan Agreement and in Amendment No. 3” (Sumitomo memorandum at 6). This argument ignores the fact that the First Department has already rejected this position.
Finally, Sumitomo submits the expert report of Alison Taylor, which relies on the label “refinancing” in the 2009 documents, terms sheets, and other documents. Sumitomo argues that the term “refinance” means repay, and that thus, the various documents referring to a “refinancing” establish that Credit Suisse received a cash distribution. However, branding the transaction a refinancing in no way suggests that Credit Suisse received a “cash distribution” under the Participation Agreement. Indeed, Justice Catterson cited to the “repeated references in the 2009 agreement to refinancing the bridge loan,” in support of his conclusion that Credit Suisse was entitled to summary judgment.
Accordingly, there are no material issues of fact requiring a trial. It is plain that the “essential character” of the 2009 transaction was to substitute secured debt for unsecured debt. Because the economic substance of the relevant portion of the May, 2009 restructuring was not a true cash repayment, Sumitomo is entitled to no more than its share of the secured debt under the Roll–Up Facility, not a cash repayment. Accordingly, Credit Suisse's motion for summary judgment is granted, and Sumitomo's cross motion is denied.
The court has considered the remaining arguments, and finds them to be without merit.
Accordingly, it is
ORDERED that defendants' motion for summary judgment is granted, and the complaint is dismissed with costs and disbursements to defendants as taxed by the Clerk upon the submission of an appropriate bill of costs, and this court declares that defendants have fully performed their obligations to plaintiff; and it is further
ORDERED that plaintiff's cross motion for summary judgment is denied; and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.
This constitutes the decision and order of the court.