alleges that BdB retained the $ 1.6 billion MYDFA debt, at the direction of the Central Bank, in a bad faith maneuver designed to block CIBC's acceleration attempt. CIBC argues that under New York law there is an implied covenant of good faith and fair dealing that prohibits defendants from using the BdB holdings in such a manner. For support of this proposition, CIBC looks to four areas of law: the New York common law of compositions; the federal Bankruptcy Code; the federal Trust Indenture Act of 1939; and the New York Business Corporation Law.
A composition is defined as "an agreement, made upon sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter, for the sake of immediate or sooner payment, agree to accept a payment less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole." Black's Law Dictionary 286 (6th ed. 1990); see In re Clarence A. Nachman Co., 6 F.2d 427, 430 (2d Cir. 1925). Prior to the adoption of the federal bankruptcy laws, New York developed common law rules to interpret compositions and address the relationships of the parties thereto. Parties to a composition, for example, owe each other a duty of "scrupulous good faith" -- the law "enforces wholesome morality, and inculcates the principles of honest and fair dealing by defeating any advantage attempted to be gained, either by working upon the necessities of the debtor, or by colluding with him." Almon v. Hamilton, 100 N.Y. 527, 3 N.E. 580, 580 (N.Y. 1885). As part of this body of law, courts applying New York law have disregarded the votes of creditors who were controlled by the debtor in determining whether a composition should be approved. See, e.g., In re Henry, 9 Ben. 449, 11 F. Cas. 1148, 1150 (S.D.N.Y. 1878) (party who was also creditor had no right to vote on whether composition should be adopted) ; In re Hannahs, 8 Ben. 533, 11 F. Cas. 446, 447 (S.D.N.Y. 1876) (in vote on whether composition would be adopted, court disregarding shares of creditors obviously voting not in their own interest, but in the interest of the debtor). As defendants point out, under this doctrine, controlled creditors' votes are disregarded when deciding whether the composition would be approved in the first place, not, as in the instant case, a vote pursuant to the terms of the agreement itself.
The second source for CIBC's good faith and fair dealing argument is the federal Bankruptcy Code. Like the common law of compositions, the Code prevents "insiders" from voting on whether a reorganization plan will be accepted by a class of impaired creditors. See 11 U.S.C. § 1129(a)(10). Insiders are defined as entities controlled by, or under common control with, the debtor. See 11 U.S.C. §§ 101(2)(B), 101(30)(E). As above, however, this provision affects the determination of whether the reorganization plan will be adopted in the first instance -- it does not affect how the reorganization plan should be interpreted once consummated. Moreover, the Code does not apply to foreign sovereign debt. See 11 U.S.C. § 109(a).
The third source of CIBC's argument is the Trust Indenture Act of 1939. Under that Act, certain provisions become part of any Trust Indenture unless otherwise excluded. One of those provisions controls which bondholders can vote to determine whether to give consent to any past default and to determine its consequences. That section excludes from the voting those bondholders "owned by any obligor . . . or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with any such obligor." 15 U.S.C. § 77ppp(a). The Act explicitly does not apply to foreign sovereign debt, however. See 15 U.S.C. § 77ddd(a)(6).
CIBC's final source for its proposition that BdB's share must be disregarded is the New York Business Corporation Law. Under § 612(b) of the Business Corporation Law, a New York Corporation cannot vote reacquired shares, nor can a subsidiary vote shares held in the parent corporation. See N.Y. Bus. Corp. Law § 612(b).
Based on these four sources, CIBC argues that, as part of an implied covenant of good faith and fair dealing under the MYDFA, BdB's share of the MYDFA debt should be disregarded when calculating whether an acceleration should be declared. Though CIBC concedes that it has found no case suggesting such an application of an implied covenant of good faith and fair dealing,
it asks me to apply such an implied covenant in this case. (CIBC Mem. at 37.)
I find CIBC's argument, while quite creative, wholly unpersuasive. The law of compositions and the Bankruptcy Code provide little or no support to plaintiff's claim; it is unremarkable that an entity controlled by the debtor should not be allowed to vote on whether the composition or reorganization plan -- instruments that define the debtor-creditor relationship -- should be adopted. To allow such voting would alter the relative bargaining strengths of the debtor and his or her creditors in such reorganization negotiations. In the instant case, on the other hand, the issue revolves around whether BdB should be able to exercise rights that are already set out in the provisions of the existing "composition," i.e., the MYDFA.
The Trust Indenture Act, though more squarely on point, is no more helpful to CIBC. The provisions of the Act concededly are not applicable to sovereign debt instruments and can be excluded from even those indentures that do fall under the scope of the Act. Moreover, as suggested by defendants, I find the absence of the Act's exclusion provisions in the MYDFA just as persuasive as the rationale behind those provisions: if the drafters of the MYDFA wished to have such a covenant in the Agreement, in the words of the BAC, "they would have had to look no further for precedent than the Trust Indenture Act" for language to accomplish their goal. (Memorandum of Law of the Bank Advisory Committee for Brazil ("BAC Mem.") at 11-12.)
Finally, I find the New York corporations law totally inapposite to the case at bar -- the provisions cited by CIBC are as distant in terms of reasoning as New York is from Brazil in terms of geography. Simply stated, the interests engaged are much different: the shareholders of a corporation have the statutory right to make various decisions concerning the corporation, and the statute, not surprisingly, prohibits the officers of the corporation from usurping those rights. See Norlin Corp.v. Rooney, Pace Inc., 744 F.2d 255, 262 (2d Cir. 1984) ("If cross-ownership and cross-voting of stock between parents and subsidiaries were unregulated, officers and directors could easily entrench themselves by exchanging a sufficient number of shares to block any challenge to their autonomy."). The MYDFA is not a corporation, however, and no particular party to the Agreement is entitled by statute to control how the plan is effectuated. Instead, like any contract, the rights of the parties are defined by the Agreement itself. The New York Business Corporation Law provides no guidance on how to interpret that Agreement.
In sum, the implied covenant sought by plaintiff would not merely complement the express provisions contained in the Agreement, it would change those provisions and significantly alter the rights of the parties. I refuse to make such an extreme leap on the basis of the cited "sources" -- to do so would change the substantive rights of the parties and impair the ability of both debtors and creditors to order their relationships through contractual debt agreements. See Hartford Fire Insurance Co. v. Federated Dep't Stores, Inc., 723 F. Supp. 976, 991 (S.D.N.Y. 1989) ("Nor can a court imply a covenant to supply additional terms for which the parties did not bargain."); Carlock v. Pillsbury Co., 719 F. Supp. 791, 819 (D. Minn. 1989) (under New York law, covenant of good faith and fair dealing does not create "independent substantive rights").
Even if I concluded that CIBC's suggested implied covenant were appropriate, it would provide CIBC no assistance in this case. It is axiomatic that an implied covenant cannot override the express provisions of a contract. In the words of the New York Court of Appeals, "the implied obligation is in aid and furtherance of other terms in the agreement of the parties. No obligation can be implied, however, which would be inconsistent with other terms of the contractual relationship." Murphy v. American Home Products Corp., 58 N.Y.2d 293, 461 N.Y.S.2d 232, 237, 448 N.E.2d 86 (N.Y. 1983); see Hartford Fire, 723 F. Supp. at 991; see also Metropolitan Life Insurance Co. v. RJR Nabisco, 716 F. Supp. 1504, 1517 (S.D.N.Y. 1989) ("In contracts like bond indentures, an implied covenant derives its substance directly from the language of the Indenture, and cannot give the holders of Debentures any rights inconsistent with those set out in the Indenture." (internal quotations omitted)). In this instance, it is clear that the provisions of the MYDFA expressly allow BdB to retain MYDFA debt and to vote its share of that debt in order to hinder an attempt at acceleration by another creditor.
The assignment provision of the MYDFA, Section 10.01, states that acceleration can be triggered "at the request, or with the consent, of more than 50% of the Banks . . . ." (MYDFA Section 10.01 at X-7.) The method of calculating percentages is set out in the definitions section of the MYDFA. For example,
"Banks " preceded by " % of the" means, at the time of determination, Banks which hold the specified percentage of . . . the then aggregate unpaid principal amount of the Interim Deposits and Existing DFA Deposits held by all Banks (other than (A) Interim Deposits or Existing DFA Deposits which are considered paid pursuant to Section 2.05(b) and (c) and (B) Interim Deposits as to which a Guaranteed Affected Debt Notice and a related Rejection Notice have been timely given) . . . .
(MYDFA Section 1.01 at I-9.) The term "Bank" is defined as "(i) each Original Bank and each Adopting Bank, and (ii) any successor or permitted assignee of such person." In this case, there is no dispute that BdB was an Original Bank under the MYDFA.
Nor is there any dispute that BdB holds unpaid principal of MYDFA deposits. (Complaint PP 51, 111; CIBC Mem. at 25 n.14.) Under the very terms of the Agreement, as noted above, all such Banks' shares are to be included when calculating percentage. This plain statement of the Agreement's intent would be sufficient by itself to prohibit exclusion of BdB's holdings.
Several other sections of the MYDFA also support this view. Based on the terms of the MYDFA, there can be no question that the relationship between Brazil and BdB was known by the parties to the MYDFA. Pursuant to Section 11.04,
Each Bank represents and warrants and agrees to and with each other Bank [that] . . . such Bank is familiar with such matters (including, without limitation, the economic and financial condition of the Central Bank and the Guarantor [Brazil]) as in its opinion may affect the performance by the Central Bank and the Guarantor of their respective obligations hereunder and in that condition has made its own independent appraisal of the economic affairs, financial condition, foreign exchange and reserve holdings, prospective foreign exchange income and holdings, creditworthiness, condition, affairs, status and nature of the Central Bank and the Guarantor.