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CIBC BANK & TRUST CO. v. BANCO CENT. DO BRASIL

May 9, 1995

CIBC BANK AND TRUST COMPANY (CAYMAN) LIMITED, Plaintiff, against BANCO CENTRAL DO BRASIL, BANCO DO BRASIL, S.A., and CITIBANK, N.A., in its capacity as agent under the Brazil Multi-Year Deposit Facility Agreement, Defendants.


The opinion of the court was delivered by: LORETTA A. PRESKA

 LORETTA A. PRESKA, U.S.D.J.

 Plaintiff, CIBC Bank and Trust Company (Cayman) Limited ("CIBC"), has brought this action relating to an alleged breach of the Multi-Year Deposit Facility Agreement dated September 22, 1988 (the "MYDFA" or the "Agreement"). Defendants, Banco Central do Brasil (the "Central Bank"), Banco do Brasil, S.A. ("BdB"), and Citibank, N.A., in its capacity as agent under the MYDFA ("Citibank"), have each moved to dismiss the First Amended Complaint (the "Complaint") pursuant to Fed. R. Civ. P. 12(b)(6). Oral argument was held on May 5, 1995. For the following reasons, the Central Bank's motion is granted in part and denied in part; the motions of BdB and Citibank are granted.

 The MYDFA is an agreement originally between the nation of Brazil, its Central Bank, and the numerous creditors holding Brazilian sovereign debt. Its purpose was to restructure that debt, and to facilitate an orderly repayment of it, in the wake of Brazil's inability to make timely loan payments during the mid-1980s. Among other things, the MYDFA includes provisions concerning assignment of creditors' MYDFA debt and the potential acceleration of all MYDFA debt in the event of a default if more than 50% of the creditors, calculated by amount of debt holdings, vote for such an acceleration. The Central Bank is an obligor under the MYDFA; BdB, a Brazilian commercial bank, which is 51% owned by the Brazilian Treasury, is both an obligor under the MYDFA and a creditor Bank; Citibank is the designated agent under the Agreement.

 Just a year after the Agreement was consummated, Brazil once again became unable to make regular payments to its creditors. In response, the parties to the MYDFA embarked on yet another significant restructuring, this time of the MYDFA debt. These negotiations were conducted on the part of the creditors through the Bank Advisory Committee for Brazil (the "BAC"), a body consisting of sixteen large creditors charged with "acting as a communications link between Brazil and the International Financial Community." (MYDFA Section 1.01 at I-8.) These negotiations resulted in a significant restructuring of the MYDFA debt pursuant to the model suggested by then-Secretary of the Treasury Nicholas Brady. Under this new Brady-type plan (the "1992 Financing"), creditors could exchange their MYDFA debt for new debt instruments with principals due in 30-year maturities. When the 1992 Financing closed on April 15, 1994, nearly all of the MYDFA debt was so converted.

 Two creditors, both of which are parties to this action, did not convert their MYDFA debt at the closing of the 1992 Financing. First, the beneficial owners of plaintiff's MYDFA debt, various trusts representing the interests of the Dart family (the "Darts"), refused to exchange their MYDFA debt for new instruments. According to the Complaint, creditors originally were provided with an option of six types of debt instruments, including uncollateralized capitalization bonds ("C-Bonds"). The Darts, through the then-holders-of-record, Bankers Trust (Cayman) International ("Bankers Trust"), Bear Stearns Global Asset Trading, Ltd. ("Bear Stearns"), and Salomon Brothers International Limited ("Salomon"), elected to take all of their MYDFA debt in the form of C-Bonds. Brazil rejected this request, asserting that such an election violated the guidelines of the 1992 Financing. Thwarted from receiving the instruments they wanted, the Darts refused to convert their MYDFA debt of approximately $ 1.4 billion at the April 15, 1994 closing of the 1992 Financing.

 The other creditor that did not fully convert its MYDFA debt was BdB. BdB, itself an obligor under the MYDFA, was also an original creditor Bank under that Agreement. At the April 15, 1994 closing, BdB converted all of its MYDFA debt except approximately $ 1.6 billion, which it continued to hold under the MYDFA. According to the Complaint, Brazilian officials ordered BdB to retain that amount of MYDFA debt in order to ensure that the Darts would not hold a majority of the remaining MYDFA debt, and, thereby, have the opportunity to declare an acceleration under the acceleration provisions of the Agreement. (Complaint P 53.)

 As evident from the discussion above, CIBC was not always the holder-of-record for the Dart family. Indeed, it was on May 25 and 26, 1994, after the close of the 1992 Financing, that the previous holders-of-record, Bankers Trust, Bear Stearns, and Salomon, submitted assignment documents for the Dart MYDFA debt. CIBC submitted an "Agreement to be Bound" pursuant to the terms of the Agreement on May 25, 1994. The Central Bank, arguing that the assignment must be to the Darts themselves, rejected those assignments in June, 1994. After the thirty-day waiting period mandated by the MYDFA assignment provision, CIBC filed this action seeking the accrued but unpaid interest pursuant to the terms of the MYDFA and seeking to accelerate the entire principal amount owed.

 The Complaint alleges eight separate claims in connection with the alleged breach of the CIBC MYDFA debt. Claim One alleges that the Central Bank is liable for breach of contract for the accrued but unpaid interest. Claim Two alleges that the Central Bank is liable for breach of contract relating to a written correspondence from the Central Bank's counsel to the Darts' counsel promising to pay the past interest due at or about the time of the closing of the 1992 Financing. Claim Three alleges that the Central Bank is liable for indemnification of the costs incurred due to the alleged breach pursuant to the indemnification provisions contained in the MYDFA. Claim Four names all three defendants and seeks a declaration that CIBC has the right to trigger acceleration of the MYDFA principal without the consent of any other creditor. Claim Five alleges that the Central Bank is liable for breach of an implied covenant of good faith and fair dealing as to the Central Bank's actions taken to prevent CIBC from declaring an acceleration. Claim Six alleges the same cause of action against BdB. Claims Seven and Eight allege that the Central Bank and BdB, respectively, are liable in tort for interfering with the other defendant's performance relating to the refusal to declare an acceleration.

 The Central Bank and BdB each have moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). Citibank has made a conditional motion requesting that it be dismissed if the Fourth Claim is dismissed on the other defendants' motions. In addition to the parties' submissions, the BAC has submitted a brief amicus curiae urging me to grant the defendants' motions. Finally, the United States has submitted a Statement of Interest pursuant to 28 U.S.C. § 517 also arguing that I should dismiss the Complaint.

 DISCUSSION

 I. Standard for a Motion to Dismiss

 Motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) are designed to test the legal sufficiency of a plaintiff's claims. In construing such a motion, I must accept all material facts alleged in the plaintiff's complaint as true and must draw all reasonable inferences in the plaintiff's favor. See Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993), cert. denied, 127 L. Ed. 2d 375, 114 S. Ct. 1054, 114 S. Ct. 1055 (1994). As plaintiff correctly has pointed out, dismissal is not appropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In deciding a Rule 12(b)(6) motion, I may consider only those matters contained in the complaint, the documents attached to the complaint, *fn2" and matters of which I may take judicial notice. See Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994).

 Defendants' motions argue that plaintiff's complaint must be dismissed in its entirety. They assert two arguments that apply to every claim and then make other arguments that relate to each claim separately. The two "global" defenses, which argue that the assignment to CIBC was (1) not effective under the MYDFA and (2) violated the New York champerty statute, will be addressed first. The arguments relating to each individual claim will follow in turn.

 II. Defenses Relating to All Claims

 A. Improper Assignment

 The defendants' first argument is that CIBC does not have standing to bring this action because the assignment to CIBC of the Darts' MYDFA debt was not effective under the assignment provisions of the MYDFA. Pursuant to Section 12.10 of the MYDFA, any creditor Bank may assign all or part of its position in the MYDFA to any person, provided that the assigning bank submit a signed assignment notice and that the assignee Bank submit an "Agreement to be Bound." Assignees that are non-financial institutions are required to submit an Agreement to be Bound that includes a Notice that the debt "may be subject to restructuring as if such non-financial institution Assignee were a financial institution." (MYDFA Section 12.10.) Upon proper assignment, the Central Bank would reflect the change in holding on the MYDFA records after a thirty-day waiting period.

 In this case, CIBC has alleged that the three investment banks issued the required Notice of Assignment and that CIBC, a financial institution, issued the required Agreement to be Bound. (Complaint PP 68-79.) The defendants rejected the assignment, however, arguing that the debt could only be registered in the name of the Darts themselves and that the Darts, who obviously are a non-financial institution, would be required to submit the Agreement to be Bound with the additional Notice that the debt could be restructured as if the Darts were a financial institution. The defendants argue that the additional requirements for non-financial institutions under the MYDFA assignment provision would be meaningless if a non-financial institution, like the Darts, simply could engage a financial institution, like CIBC, to hold the debt on their behalf. The defendants argue, therefore, that under the terms of the MYDFA, the assignment to CIBC was improper and that the assignment should have been made directly to the Darts, or, at the very least, that the Darts should be required to submit the additional Notice in their Agreement to be Bound. Because CIBC and the Darts did not meet these additional requirements, defendants argue, the assignment was ineffective, and CIBC has no standing to sue on the Darts' MYDFA debt. *fn3"

 In response to the defendants' arguments, CIBC argues that a situation by which one party acts as the holder-of-record for another is common practice and is contemplated by the terms of the MYDFA itself. CIBC alleges, for example, that the Central Bank's assertion that CIBC cannot hold the MYDFA debt for the Darts is "inconsistent with prior statements by the Central Bank and its representatives, with past practice under the MYDFA, and with general practice under sovereign debt instruments." (Complaint P 80.) CIBC goes on to argue that the MYDFA's language authorizes the holding by one party on behalf of a beneficial holder. Section 12.10(b)(iv), CIBC points out, states that "nothing in this Section 12.10 shall prevent any Bank from granting participations in its rights under this agreement." (MYDFA Section 12.10(b)(iv).) CIBC alleges that its relationship with the Darts is just such a participation and that the fact the Darts hold the beneficial interest in the MYDFA debt in question in no way affects the validity of the assignment. (Complaint P 81.)

 Examining the MYDFA assignment section as a whole, and taking CIBC's allegations as true, as I must, I cannot say as a matter of law that the assignment to CIBC was improper. I note in particular the fact that "participations" expressly are provided for in the provision and that the term "assign" under the provision is defined broadly: "'assign' means assign or otherwise transfer, whether or not resulting, as a matter of law, in the assignee or transferee being a direct creditor of an obligor . . . ." *fn4" (MYDFA Section 12.10(c).) The intended scope of the terms "participation," which is undefined in the MYDFA, and "assign," which is defined broadly, is ambiguous and may permit relationships such as the one between CIBC and the Darts, particularly given CIBC's allegations that such relationships are common practice. I note that the Darts' long-standing relationship with the assignor investment banks seem to have been exactly the same as the one between CIBC and the Darts, yet those relationships were never challenged by the defendants. Although the defendants' arguments that recognition of the assignment would allow easy circumvention of the additional requirements placed on non-financial institutions makes sense logically, and yet may prove to be the correct interpretation of the MYDFA, the assignment provision is not so unambiguous to overcome the allegations of plaintiff and its plausible interpretation at this stage in the litigation. For purposes of this motion, therefore, the assignment to CIBC of the Darts' MYDFA debt will be treated as fully effective under the MYDFA.

 B. Champerty

 Defendants' second "global" defense is that, even if proper under the MYDFA, the assignment to CIBC violated the anti-champerty provisions of the New York *fn5" Judiciary Law and, therefore, should be declared void. Section 489 of the New York Judiciary Law provides, in relevant part, that

 
no . . . corporation or association directly or indirectly, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and purpose of bringing an action thereon.

 N.Y. Judiciary Law § 489 (McKinney 1983). A plaintiff who acquires a claim in violation of this provision may not recover on the claim -- indeed, assignments made in violation of this provision are void. See Refac Int'l, Ltd. v. Lotus Development Corp., 131 F.R.D. 56, 58 (S.D.N.Y. 1990); Koro Co. v. Bristol-Myers Co., 568 F. Supp. 280, 288 (D.D.C. 1983) (interpreting New York law) (citing cases).

 Defendants argue that the complaint itself demonstrates that the transfer to CIBC was made "with the intent and purpose of" having CIBC bring an action on the MYDFA debt. *fn6" Defendants point out, for example, that all of the alleged breaches as to unpaid interest occurred while CIBC's "predecessors in interest" held the debt. See, e.g., American Restaurant China Manufacturers Assoc., Inc. v. Corning Glass Works, 24 Misc. 2d 634, 198 N.Y.S.2d 366, 370-71 (N.Y. Sup. Ct. Erie Co. 1960) (allegations that damages caused by "plaintiff's assignors" is evidence of champertous ...


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