Opinion
No. 650461–2011.
2012-02-16
US ONCOLOGY, INC., Plaintiff, v. WILMINGTON TRUST FSB, Defendant.
Robert J. Giuffra, Esq., Sullivan & Cromwell, LLP, New York City, for Plaintiff. Daniel A. Ross, Esq., Stroock Stroock & Lavan, LLP, New York City, for Defendant.
Robert J. Giuffra, Esq., Sullivan & Cromwell, LLP, New York City, for Plaintiff. Daniel A. Ross, Esq., Stroock Stroock & Lavan, LLP, New York City, for Defendant.
BERNARD J. FRIED, J.
The instant action involves a contract dispute between plaintiff U.S. Oncology, Inc. (USON) and defendant Wilmington Trust FSB (Wilmington), solely in its capacity as the indenture trustee for the security holders (the Security Holders) who held certain debt securities issued by USON (the Securities). Specifically, the dispute arises in connection with USON's calculation of the redemption premium for redeeming the Securities prior to the maturity date. In its motion, USON seeks, inter alia, summary judgment in its favor on its claim for a declaratory judgment, and an order directing Wilmington to release to USON the escrowed funds that are the subject of this action. For the reasons stated below, USON's motion is denied without prejudice.
The relevant facts for this action are summarized below. On or about June 28, 2009, USON issued $775 million in principal amount of senior secured debt that was evidenced by a form of 9.125% secured note due on August 25, 2017 (the Note), pursuant to an indenture where Wilmington served as the indenture trustee. Both the indenture and the Note are governed by New York law. The initial purchasers of the Securities were Morgan Stanley & Co., Deutsche Bank Securities Inc., JPMorgan Securities Inc. and Wachovia Capital Markets LLC. The initial purchasers later sold the Securities in a private placement to qualified institutional investors, including the Security Holders. The Securities become due for payment, in full, on August 15, 2017, if not redeemed earlier. Pursuant to the Note, and as also described in the related indenture, USON may redeem all or a portion of the Securities at any time prior to August 15, 2013, four years before the maturity date of August 17, 2017, by paying a redemption premium, plus certain amounts in accordance with a certain specified formula, as discussed in detail below.
In particular, the Note permits USON to redeem or call the Securities before August 15, 2013, at a redemption price equal to the sum of (1) 100% of the principal amount of the Securities to be redeemed; (2) an “Applicable Premium,” as defined in the Note; and (3) any accrued and unpaid interest.
As defined in Section 5 of the Note, which is captioned Optional Redemption, “Applicable Premium” means, in relevant part, as follows:
The redemption price for redemptions after August 15, 2013 (which is irrelevant here) is simply calculated as a stated percentage of the outstanding principal amount of the Note, as opposed to using the Applicable Premium formula.
the excess of (A) the present value at such time of (i) the redemption price of such Security at August 15, 2013 ... plus (ii) any required interest payments due on such Security through August 15, 2013 (including any accrued and unpaid interest) computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Security [emphasis added].
In turn, “Treasury Rate” is defined in Section 5 of the Note as: “with respect to any redemption date, the rate per annum equal to the yield to maturity of the Comparable Treasury Issue ... assuming a price for such a Comparable Treasury Issue ... equal to the Comparable Treasury Price for such redemption date.” Further, “Comparable Treasury Issue” is defined in Section 5 as:
the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Securities that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Securities [emphasis added].
On December 30, 2010, USON announced that it would call the Securities for redemption on February 16, 2011. On February 4, 2011, USON filed a Form 8–K which indicated that the redemption premium would be based upon a formula that would use a discount rate keyed to a U.S. Treasury security maturing on or about August 15, 2017, plus 50 basis points. A significant portion of the Security Holders objected to USON's calculation of the Applicable Premium and instructed Wilmington not to acknowledge the satisfaction and discharge of the indenture,
unless USON calculated the Applicable Premium using a U.S. Treasury security maturing on or about August 15, 2013, as opposed to August 15, 2017. The lower yield-to-maturity of an August 15, 2013 U.S. Treasury security advocated by the Security Holders leads to a lower discount rate, which inversely leads to a higher redemption premium of approximately $40 million.
According to the affirmation of Robert C. Lawrence, counsel for Wilmington, Security Holders who held, in the aggregate, approximately 85% of the outstanding Securities formed an ad hoc committee to challenge USON's proposed calculation of the “make-whole” redemption premium (i.e., the Applicable Premium), as described in USON's Form 8–K. Lawrence Affirmation, ¶ 4.
On February 15, 2011, the Second Supplemental Indenture was executed by USON and Wilmington, pursuant to which the parties agreed that, upon USON's payment of the redemption premium (as calculated by USON), together with the deposit in escrow of $42 million (the disputed difference of the Applicable Premium amounts plus an interest factor), Wilmington would grant USON a satisfaction and discharge of the indenture. Thereafter, USON commenced this action to seek summary judgment in its favor with respect to the calculation of the Applicable Premium, including, inter alia, the meaning of the phrase “the remaining term of the Securities,” as such phrase or language is used in the definition of “Comparable Treasury Issue” in Section 5 of the Note.
In setting forth the standards for considering a summary judgment motion, pursuant to CPLR 3212, the Court of Appeals noted, in Alvarez v. Prospect Hospital (68 N.Y.2d 320, 324 [1986] ):
As we have stated frequently, the 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. Failure to make such prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. Once this showing has been made, however, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action [citations omitted].
The courts scrutinize motions for summary judgment, as well as the facts and circumstances of each case, to determine whether relief may be granted. Andre v. Pomeroy, 35 N.Y.2d 361, 364, 362 N.Y.S.2d 131, 320 N.E.2d 853 (1974) (because entry of summary judgment “deprives the litigant of his day in court[,] it is considered a drastic remedy which should only be employed when there is no doubt as to the absence of triable issues”); Martin v. Briggs, 235 A.D.2d 192, 196, 663 N.Y.S.2d 184 (1st Dept 1997)(in weighing a summary judgment motion, “evidence should be analyzed in the light most favorable to the party opposing the motion”). However, conclusory allegations unsupported by competent evidence are insufficient to defeat a summary judgment motion. Alvarez, 68 N.Y.2d at 324–25, 508 N.Y.S.2d 923, 501 N.E.2d 572. Also, summary judgment is granted in favor of the movant if there are no triable issues of fact. Francis v. Basic Metal, 144 A.D.2d 634, 534 N.Y.S.2d 697 (2d Dept 1988).
Based on its interpretation of the subject phrase used in the Note—the remaining term of the Securities—USON argues that the phrase is clear and unambiguous, and simply refers to August 15, 2017, the maturity date of the Securities. USON also argues that because the language used in the Note is unambiguous, there is no need for discovery, as parol or extrinsic evidence is inadmissible as a matter of law. Therefore, USON asserts that summary judgment should be granted in its favor, and Wilmington's counterclaims and affirmative defenses should be dismissed. In sum, USON takes the position that a U.S. Treasury security with a maturity comparable to “the remaining term of the Securities” can only reasonably mean a U.S. Treasury security with a maturity of August 15, 2017, the same date when the remaining term for the Note/Securities ends. Plaintiff's Moving Brief, at 9–11.
In opposition, Wilmington contends that the subject phrase is ambiguous because it does not clearly state August 15, 2017 as the maturity date of the Note/Securities, and that such phrase cannot be read in isolation, particularly when viewed against the overall redemption provisions contained in Section 5 of the Note. More specifically, Wilmington contends that the maturity date is irrelevant in calculating the redemption premium (the Applicable Premium) because the Security Holders will not be paid the principal amount plus interest due at maturity on the redemption date; instead they will be paid a different amount on such date (i.e., the “initial call date” of August 15, 2013) plus interest payments up to that date. Defendant's Opposition Brief, at 5–6.
In addition, Wilmington asserts that, based on the affidavit of its expert-Professor John Finnerty of Fordham University, who has conducted an analysis of 431 issues of high yield debt instruments issued between 2007 and 2009 that contained “make-whole” provisions–93% of such instruments have language containing a date which stated that the present value of the “make-whole” premium
As further explained by Wilmington's counsel, “if you redeem, you don't get the payments to maturity ... [thus,] for the redemption section, the maturity date is irrelevant. At no time can you ever redeem, under this note can you get any payment that's in any way tied to the maturity date. You either get that plugged number [104.56% of the principal amount of the note] or you get your present value of what you would have gotten on August 15, 2013. That's what the [remaining] term means.” Hearing Transcript of August 2, 2011, at 32.
would be calculated using a Comparable Treasury Issue with a maturity date equal to the “initial call date” of the instruments, not the stated maturity date of such instruments. Id. at 7, 534 N.Y.S.2d 697 (referencing Finnerty Affidavit, dated May 25, 2011, and the exhibits thereto). Thus, Wilmington contends that a proper interpretation of the subject phrase of the Note should be consistent with general industry practice, particularly where, as here (1) the Note itself provides that the selection of a comparable U.S. Treasury security should be made in accordance with “customary financial practice,” and (2) the related offering memorandum, the registration statement, as well as the public SEC filings (Form 8–K and Form 10–Q) for the Securities/Note indicate that USON may redeem the Securities on or prior to August 15, 2013 at a price equal to 100% of the principal amount, plus the accrued interest and a “make-whole” premium. Id. at 8–9, 14–17, 534 N.Y.S.2d 697. Moreover, Wilmington asserts that USON failed to indicate to the marketplace that the “make-whole” provision contained in its public filings was inconsistent with general industry practice, and that USON's interpretation of the subject phrase produces a “commercially unreasonable and absurd result” that “violates fundamental rules of basic finance.” Id. at 18, 534 N.Y.S.2d 697. Wilmington further contends that any grant of summary judgment in favor of USON is unwarranted at the pre-discovery stage of this litigation because USON's own interpretation is “against all evidence of industry practice.” Id. at 22, 534 N.Y.S.2d 697. Indeed, Wilmington asserts that it is entitled to discovery with respect to, inter alia, “whether USON initially calculated the make-whole' premium by reference to a U.S. Treasury security with a maturity comparable to the initial call date of August 15, 2013, rather than the maturity date of August 15, 2017.” Id. at 9.
Generally speaking, the “make-whole” premium is determined by discounting to present value the instrument's remaining cash flows at an appropriate Treasury interest rate that matches the length of the cash flow stream, plus a “spread” (in this case, 50 basis points). The make-whole premium is intended to compensate the security holders for an early redemption of such security.
As shown above, the parties take a divergent position as to whether the language in the subject phrase—the remaining term of the Securities—is ambiguous. “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990). Further, a clause or phrase in a contract should not be read in isolation, but the clause or phrase should be “read in the context of the entire agreement,” and the agreement should “be read as a whole to determine its purpose and intent.” Id. at 162–163, 565 N.Y.S.2d 440, 566 N.E.2d 639. In this case, it is not unreasonable to construe “remaining term” as having a meaning that refers to the period of time until the original stated term of the Securities ends (i.e., on August 15, 2017), when the Security Holders will not be entitled to receive additional payments under the Note after its maturity date. However, it is also not entirely unreasonable to construe the same phrase to mean—particularly when viewed in the context of the redemption provisions of the Note—the initial call date of August 15, 2013, when no more payments under the Note will be received by the Security Holders after such redemption date. Indeed, the indenture, which is integral to the Note, states, in relevant part, that the “Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the [redemption] notice.” Indenture, § 3.04. In other words, when the redemption price is discounted to present value to a particular redemption date after which no payments will be made, then the “remaining term” may be construed to refer to such redemption date, not the maturity date. In this regard, the subject phrase in the Note is ambiguous because it does not specifically state the maturity date of August 15, 2017.
In its reply brief, USON relies on the Jade Realty decision to support its motion for summary judgment. Jade Realty LLC v. Citigroup Commercial Mortgage Trust 2005–EMG, 83 A.D.3d 567, 922 N.Y.S.2d 37 (1st Dept 2011).
In Jade Realty, the trial court added the words “prepayment or” before the word “default” in the mortgage note to address a situation where the added words apparently represented a missing trigger or reference date for calculating the yield maintenance amount (i.e., a prepayment fee) when the mortgagor decided to prepay the mortgage note. In the trial court's opinion, the missing information rendered the prepayment provisions of the mortgage note illogical or absurd, for the reasons stated therein. In reversing the trial court, the First Department stated, inter alia, that, even if the contractual terms are “novel or unconventional,” they do not “bring them or the contract ... to the level of absurdity,” and that such rule has even greater force when the contract “was negotiated between sophisticated, counseled business people negotiating at arm's length.” Jade Realty, 83 A.D.3d at 568, 922 N.Y.S.2d 37 (internal citations omitted, quotation marks in original).
Notably, the Court of Appeals has granted the appellant leave to appeal, despite the unanimity of the appellate court's decision. See Jade Realty, 17 N.Y.3d 714 (2011). I do not speculate as to the reasons for granting leave to appeal.
USON's reliance on Jade Realty is misplaced because that case does not involve a contract with an ambiguous provision. Conversely, as discussed above, the subject phrase in this case is ambiguous because I am not absolutely sure that the “remaining term” can only mean the maturity date (as opposed to the initial call date), particularly when it is embedded and used within the context of the redemption provisions of the Note. Therefore, summary judgment at this stage, prior to any discovery, is premature. Because discovery may assist the parties (and this court) in narrowing or resolving certain issues of fact, I deny USON's summary judgment motion, without prejudice, and will permit a renewal of the motion after discovery is completed. Magee v. County of Suffolk, 14 A.D.3d 664, 789 N.Y.S.2d 289 (2d Dept 2005); Perroto Development Corp. v. Sear–Brown Group, 269 A.D.2d 749, 703 N.Y.S.2d 615 (4th Dept 2000) (denying summary judgment motion, without prejudice to renewal, after completion of discovery).
Accordingly, for all of the foregoing reasons, it is
ORDERED that plaintiff's motion for summary judgment is denied, without prejudice.