The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge
Defendant Aquila, Inc. ("Aquila" or the "Borrower") has moved
under Rule 12(b) (6), Fed.R.Civ.P., to dismiss the complaint
of plaintiffs Citadel Equity Fund Ltd. and Citadel Credit Trading
Ltd. (collectively, "the Citadel Funds"), which seeks to enforce
a particular prepayment premium under a credit agreement entered
into by Aquila. For the reasons set forth below, the motion is granted.
At issue is the $27 million prepayment amount sought by the
Citadel Funds on behalf of certain of Aquila's creditors and the
differing interpretations of the carefully negotiated credit
agreement under which Aquila obtained approximately $430 million
of financing. The parties are sophisticated and well advised.
This dispute demonstrates that the disposition of substantial
sums of money can result in surprisingly different views of the
most carefully contemplated contract.
Aquila is a Missouri-based corporation that operates
electricity and natural gas distribution utilities and owns and
operates power generation assets. In April 2003, Aquila entered
into a credit agreement pursuant to which a syndicate of lenders
extended $430 million in credit to Aquila, apparently in the form of term loans and letters of credit (the "Credit Agreement" and
The Citadel Funds are private investment funds, both Cayman
Island entities. The Citadel Funds hold $62,826,095.22 of loans
subject to the Credit Agreement.
The Citadel Funds' complaint was filed on October 15, 2004. The
first two counts allege breach of contract, and the third count
seeks a declaratory judgment that, pursuant to the Credit
Agreement, they are entitled to a pro rata share of funds
currently held in escrow. Aquila's motion to dismiss the
complaint was heard and marked fully submitted on February 4,
The following facts are drawn from the complaint, which
includes "any documents incorporated in it by reference, annexed
to it as an exhibit, or `integral' to it because it `relies
heavily upon [such document's] terms and effect.'" Pollock v.
Ridge, 310 F. Supp. 2d 519, 524 (W.D.N.Y. 2004) (quoting
Chambers v. Time Warner, Inc., 282 F. 3d 147, 153 (2d Cir.
2002) (internal quotations omitted)). All well-pleaded
allegations are accepted as true for the purpose of this motion. See Chambers, 282 F.3d at 152.
The following statements do not constitute findings of the Court.
On or about April 9, 2003, Aquila entered into the Credit
Agreement with a syndicate of lenders. This Agreement provided
credit to Aquila in the form of term loans and letters of credit
in an aggregate principal amount not in excess of $430,000,000.
The Credit Agreement was negotiated by Credit Suisse First Boston
("CSFB") as the administrative agent of the credit
facility.*fn1 The scheduled maturity date of the loans under
the Credit Agreement was May 15, 2006.
At the time Aquila entered into the Credit Agreement, it had
debt obligations with preexisting creditors. In particular,
Aquila owed $250 million under a series of 7.00% Senior Notes
(the "7.00% Senior Notes") due on July 15, 2004, and it owed $150
million under a series of 6.875% Senior Notes (the "6.875% Senior
Notes") due on October 1, 2004 (collectively, the "Senior
The Credit Agreement required Aquila to prepay its obligations
pursuant to the Credit Agreement if it failed to take specified
actions relating to timely payment of the Senior Notes. Specifically, Section 2.7(d) of the Credit Agreement, entitled
"SPECIAL MANDATORY PREPAYMENT," provided in pertinent part as
If (a) the Borrower does not consummate an exchange
offer, tender offer, refinancing or otherwise
consummate retirement transactions with respect to,
or otherwise economically or legally defease (i) at
least 80% in aggregate principal amount outstanding
on March 21, 2003 of the 7.00% Senior Notes on or
before July 1, 2004 or (ii) at least 80% in aggregate
principal amount outstanding on March 21, 2003 of the
6.875% Senior Notes on or before September 15, 2004,
. . . then . . . the Loans shall become due and
payable in full on July 1, 2004 or September 15,
2004, as applicable. . . .
(Compl. Ex. A at 40.)
In the event that mandatory prepayment was triggered pursuant
to Section 2.7(d), Aquila was required to pay a fee equivalent to
"two percent (2%) of the aggregate principal amount of the Loans
and the Total Credit-Linked Deposits then outstanding." (Id.)
Section 2.7(d) further provided that "[n]o other Make Whole
Premium [would] be due as a result of such mandatory prepayment."
According to Citadel, the purpose of Section 2.7(d) was to
protect the lenders against the risk that Aquila would fail to
pay, refinance, retire, or otherwise defease the Senior Notes in
a timely manner. Citadel and the other lenders had an interest in
seeing that Aquila met its obligations under the Senior Notes in order to protect the lenders from a cross-default that could
interfere with their economic interest in the outstanding loans
under the Credit Agreement.
Pursuant to Section 9.1 of the Credit Agreement, Aquila's
lenders had the power to waive the requirements imposed on Aquila
pursuant to Section 2.7(d). Entitled "AMENDMENTS AND WAIVERS,"
Section 9.1 provides in pertinent part as follows:
The Required Lenders*fn2 may, . . . from time to
time, (a) enter into with [Aquila] written
amendments, supplements or modifications hereto for
the purpose of adding any provisions to this
Agreement or changing in any manner the rights of the
Lenders or [Aquila] hereunder, . . . or (c) waive . . .
any of the requirements of this Agreement or the
other Loan Documents or any Default or Event of
Default and its consequences; PROVIDED that no such
waiver . . . (i) shall reduce the principal amount or
extend the scheduled date of maturity of the Loan or
[Letter of Credit] Disbursement of any Lender or of
any installment thereof, or reduce the stated rate of
any interest or fee payable hereunder or extend the
scheduled date of any payment thereof or increase the
amount or extend the expiration date of any Lender's
Commitment, in each case, without the consent of such
Lender. . . .
(Id. Ex. A at 81.)
The Credit Agreement also contained a term governing Aquila's
obligations in the event that it opted to voluntarily prepay its
loan obligations. Entitled "OPTIONAL PREPAYMENT," Section 2.7(a) of the Credit Agreement provided in pertinent part
The Borrower may, at any time and from time to time
prepay the Loans or direct the Administrative Agent
to reduce the then unused portion of the Total
Credit-Linked Deposits, upon at least three Business
Days' irrevocable written notice, to the
Administrative Agent. . . . If any such notice is
given, the amount specified in such notice shall be
due and payable on the date specified therein,
together with the Make-Whole Premium, if any, due
with respect thereto.
(Id. Ex. A at 36.)
Pursuant to Section 2.7(a), if Aquila opted to effect optional
prepayment, it was required to pay a "Make Whole Premium."
(Id.) Pursuant to Section 1.1 of the Credit Agreement, the
Section 2.7(a) Make Whole Premium was calculated as the
discounted present value of the remaining principal and interest
payments owing under the Credit Agreement through the maturity
date less the amount of the principal being repaid. (See id.
Ex. A at 18.)
B. The Events Giving Rise To The Dispute
In the quarterly financial statement*fn3 signed by its
chief financial officer on August 4, 2004, Aquila stated that on
June 30, 2004, it had irrevocably deposited $258.8 million with the
trustee for the 7.00% Senior Notes due on July 15, 2004, thereby
economically defeasing this obligation. (See Aquila Inc. Form
10-Q for the Quarterly Period ended June 30, 2004 ("the June 30,
2004 10-Q"), at 18.) Aquila further stated that the 7.00% Senior
Notes were retired on July 15, 2004. (See id.)
On or about August 2, 2004, Aquila initiated two securities
offerings, one involving shares of common stock and the other
involving premium equity securities (PIES). In an August 18, 2004
supplement to the prospectus for the common stock offering,
Aquila stated that it "intend[ed] to use the net proceeds from
this offering and our concurrent offering of the PIES to . . .
fund the retirement of the $250.0 million of 7.00% senior ...