United States District Court, S.D. New York
May 18, 2005.
CITADEL EQUITY FUND LTD., and CITADEL CREDIT TRADING LTD., Plaintiffs,
AQUILA, INC., Defendant.
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.
A. The Credit Agreement
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 notes
due July 15, 2004 and of the $150.0 million of 6.875% senior
notes due on October 1, 2004. . . ." (Compl. ¶ 34.)
On August 24, 2004, Aquila issued a press release announcing:
(1) that it had completed the offerings of the common stock and
the PIES; that these offerings had generated $447.4 million in
proceeds for Aquila; and (3) that Aquila intended to use these
proceeds to retire long-term debt and other liabilities. (See
id. Ex. H.)
On September 1, 2004, Aquila issued a press release stating
that it planned to prepay its obligations pursuant to the credit Agreement. Aquila announced that "it intend[ed] to retire
its existing $430 million secured credit facility and enter into
two new unsecured, working capital facilities." (Id. Ex. B.)
The press release added that Aquila "anticipate[d] this occurring
prior to or on September 16, 2004," and that "[the] transactions
[were] expected to reduce [Aquila's] aggregate debt outstanding
by approximately $230 million and lower [Aquila's] annual
interest expense." (Id.)
On September 8, 2004, the Citadel Funds faxed a letter to
Aquila asserting that Aquila's anticipated prepayment of the
loans, as described in the September 1, 2004 news release, would
be an "Optional Prepayment" pursuant to Section 2.7(a) of the
Credit Agreement, and thus would require payment of the Section
2.7(a) Make-Whole Premium. (See id. Ex. C at 1-2.) The
Citadel Funds also asserted that "the proposed prepayment of the
Loans does not qualify as a `Special Mandatory [Pr]epayment' as
set forth in Section 2.7(d) of the Credit Agreement, as the
conditions set forth therein have not been, and cannot be,
satisfied to trigger such a payment." (Id. Ex. C at 1.)
In a faxed letter dated September 10, 2004, Aquila advised the
Citadel Funds that the necessary preconditions for prepayment
under Section 2.7(d) had been satisfied, and that Aquila would
prepay the Loans by means of the Special Mandatory Prepayment.
(See id. Ex. D.) Specifically, the letter noted that Section 2.7(d) had been triggered "because less than 80% of the
Senior Notes will be retired or defeased on or before September
15, 2004, and . . . the Maturity Date of the Senior Notes will
not be extended." (See id.)
On September 14, 2004, Required Lenders holding two-thirds of
the outstanding debt under the credit facility faxed to Aquila
and CSFB a document stating that they had "waive[d] the
requirement that [Aquila] comply with section 2.7(d) of the
Credit Agreement and any default or acceleration of the Loans
that, if not for such waiver, would arise under such Section
2.7(d). . . ." (See id. Ex. F.)
By September 15, 2004, Aquila had not completed an exchange
offer, tender offer, refinancing, or other retirement transaction
with respect to 80% of the 6.875% Senior Notes. (See Aquila
Inc. Form 10-K for the Fiscal Year ended December 31, 2004, at
On or about September 15, 2004, Aquila completed the issuance
of two unsecured credit facilities of $330 million in the
Also on September 15, 2004, pursuant to the provisions of
Section 2.7(d), Aquila tendered to CSFB $430,000, an amount
equivalent to 102% of the debt then outstanding under the Credit Agreement. Upon making such payment, Aquila sought release from
CSFB of the approximately $1 billion that was held as collateral
to secure the loans issued pursuant to the Credit Agreement.
Acting through CSFB, the lenders refused to release this
collateral unless Aquila placed into escrow approximately
$27,303,000, an amount representing the difference between the
Section 2.7(d) 2% prepayment fee paid by Aquila and the Section
2.7(a) Make-Whole Premium claimed by the lenders.
Aquila acceded to this request, and $27,303,000*fn4 was
placed into an escrow account maintained by CSFB on September 15,
2004. Pursuant to the escrow agreement, these funds have been
held pending a court order directing their release.
This action concerns the disposition of the $27 million in
C. The Issues
The above-described events raise two fundamental issues. First,
did Aquila's conduct with respect to the 6.875% Senior Notes
trigger Section 2.7(d)'s mandatory prepayment requirement?
Second, if Section 2.7(d)'s mandatory prepayment requirement was
triggered, did the Required Lenders make an effective waiver of this
The resolution of these issues as set forth below results in
the granting of Aquila's motion, the dismissal of the Citadel
Funds' complaint, and an order that the $27 million currently
held in escrow be returned to Aquila.
A. Jurisdiction and Choice of Law
The parties do not dispute that the Court has jurisdiction over
this action pursuant to 28 U.S.C. § 1332. Furthermore, pursuant
to Section 9.13 of the Credit Agreement, this action is governed
by the applicable substantive law of the state of New York.
(See id. Ex. A at 89.) There is no dispute as to the validity
of this choice of law provision.
B. Rule 12(b) (6) Standard
In considering a motion to dismiss pursuant to Rule 12(b) (6),
the Court should construe the complaint liberally, "accepting all
factual allegations in the complaint as true, and drawing all
reasonable inferences in the plaintiff's favor." Chambers v.
Time Warner, Inc., 282 F. 3d 147, 152 (2d Cir. 2002) (citing
Gregory v. Daly, 243 F. 3d 687, 691 (2d Cir. 2001)). "The issue is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the
claims." Villager Pond, Inc. v. Town of Darien, 56 F. 3d 375,
378 (2d Cir. 1995) (quoting Scheuer v. Rhodes, 416 U.S. 232,
236 (1974)). Dismissal is only appropriate when "it appears
beyond doubt that the plaintiff can prove no set of facts which
would entitle him or her to relief." Sweet v. Sheahan,
235 F. 3d 80, 83 (2d Cir. 2000).
Issues of contract interpretation "are generally matters of law
and therefore [are] suitable for disposition on a motion to
dismiss." Thayer v. Dial Indus. Sales, Inc.,
85 F. Supp. 2d 263, 269 (S.D.N.Y. 2000) (internal quotation marks and citation
omitted); see also Lind v. Vanguard Offset Printers, Inc.,
857 F. Supp. 1060, 1065 (S.D.N.Y. 1994). Furthermore, in deciding
a motion to dismiss, the Court may consider exhibits to the
complaint and documents incorporated in the complaint by
reference. See, Chambers v. Time Warner, Inc., 282 F. 3d 147,
153 (2d Cir. 2002).
C. Applicable State Law
"To state a claim in federal court for breach of contract under
New York law, a complaint need only allege: (1) the existence of
an agreement, (2) adequate performance of the contract by the
plaintiff, (3) breach of contract by the defendant, and (4)
damages." Harsco Corp. v. Segui, 91 F. 3d 337, 348 (2d Cir.
1996). D. Aquila's Conduct Triggered Section 2.7(d)'s Mandatory
Under Section 2.7(d) of the Credit Agreement, mandatory
prepayment would not be triggered if Aquila took any of the
following steps by September 15, 2004 with respect to 80% of the
amount owed on the 6.875% Notes:*fn5 (1) consummating an
exchange offer, (2) consummating a tender offer, (3) consummating
a refinancing, (4) consummating some other retirement
transaction, (5) legally defeasing the obligation, or (6)
economically defeasing the obligation.
The Citadel Funds do not attempt to argue that by September 15,
2004, Aquila had consummated an exchange offer, tender offer,
refinancing, other retirement transaction, or had otherwise
legally defeased its obligation with respect to the 6.875% Senior
Notes. Rather, the Citadel Funds argue that Aquila's actions in
August 2004 i.e., the offerings of the common stock and the
PIES and the designation of the funds thereby raised for the
purpose of retiring the 6.875% Senior Notes constituted
economic defeasance of this obligation. The Citadel Funds assert
that as a result of this economic defeasance, the section 2.7(d)
Mandatory Prepay Provision was not triggered, and Aquila's
failure to pay the Section 2.7(a) Make Whole Premium therefore
constituted a breach of the Credit Agreement.
The Credit Agreement provided no express definition for the
terms "defease" or "economic defeasance." Therefore, it is
appropriate, pursuant to New York contract law, to consult
dictionaries and relevant treatises to ascertain the accepted
meaning of these terms. See, e.g., Mazzola v. County of
Suffolk, 143 A.D.2d 734, 734, 533 N.Y.S.2d 297, 297 (2d Dep't
1988) (consulting dictionary for meaning of "condemned" and
"condemnation"); R/S Assocs. v. New York Job Dev. Auth.,
98 N.Y.2d 29, 33, 744 N.Y.S.2d 358, 360, 771 N.E.2d 240, 242 (2002)
(relying on dictionary definition of "effective" in construing
the contractual phrase "effective cost of funds").
The term "defeasance" is defined as follows: "1. An annulment
or rendering void. 2. The voiding of a contract or deed. . . ."
The American Heritage Dictionary of The English Language 345
(1981). The term "defeance" connotes finality. One federal court,
analyzing a contract that established an employee stock option
plan "subject to defeasance" by a vote of the shareholders,
explained that the term "`defeasance' is derived from the past
participle of the French verb desfaire[,] which means to undo. It
is defined: 1. A rendering null and void. 2. A condition the
fulfillment of which avoids an instrument." Gruber v. Chesapeake & Ohio Ry. Co., 158 F. Supp. 593, 600 (N.D. Ohio
1958) (citing Webster's Collegiatge Dictionary (5th ed.)).
In the context of debtor/creditor law, the term "defeasance"
means "release from an obligation or debt." Jay Alix, Robert J.
Rock, Ted Stenger, Fin. Handbook for Bankr. Prof'ls (Glossary)
(2d ed. 1996). Such release from an obligation can take one of
two forms: either legal or in-substance. Att'y Handbook of
Acct., Auditing & Fin. Plan. § 5.04[e] (2004).
"Legal defeasance" describes the process whereby "the debtor is
legally released from being the primary obligor under the debt,
either judicially or by the debtor." Id. "In-substance
defeasance" describes the process whereby "the debtor irrevocably
places cash or other monetary assets in a trust to be used solely
for satisfying scheduled payments of both interest and principal
of a specific obligation. . . ." Id.; see also Alix, Rock,
Stenger, Fin. Handbook for Bankr. Prof's § 10.18 n. 1 (stating
that "[a] bond issuer is not legally defeased, i.e., released
from its obligations under the terms and conditions of the debt
agreement[,] unless the debt indenture contains specific
provisions for such eventuality. Bond issues which are
extinguished in the absence of such provisions are thus said to
be `in-substance defeased'"); Charles J. Woelfel, Encyclopedia
of Banking and Finances, 285 (10th ed. 1994). Based on the foregoing, it is reasonable to conclude that
although Section 2.7(d) uses slightly different terminology, the
two forms of defeasement contemplated therein are "legal" and
The complaint contains no allegation suggesting: (1) that
Aquila's obligation to the 6.875% Senior Note holders was
terminated (i.e., that the obligation was legally defeased) or
(2) that Aquila placed any assets into an irrevocable trust for
the sole purpose of repaying the 6.875% Senior Notes (i.e.,
that the obligation was in-substance defeased).
Thus, as of September 15, 2004, Aquila remained obligated to
repay the 6.875% Senior Notes according to their terms, the notes
were continuing to accrue interest, and the holders of those
notes remained exposed to the same risks as any of Aquila's
creditors. In short, Aquila failed to take any of the steps that
would have forestalled the triggering of Section 2.7(d)'s
mandatory prepayment provision.
The Citadel Funds' have argued that, pursuant to the terms of
Section 2.7(d), mandatory prepayment could be avoided merely by
contemplating, preparing for, or announcing an intended
defeasance. However, there is no mention of such preparatory
steps in the text of Section 2.7(d). Moreover, the Citadel Funds'
argument ignores the well established proposition that a
defeasance occurs when a debtor terminates its obligation to a creditor
not when the debtor forms an intention to do so. See, e.g.,
Desser v. Schatz, 182 A.D.2d 478, 480, 581 N.Y.S.2d 796, 797
(1st Dep't 1992) (explaining that a creditor "acquires a
defeasible title [to mortgages collateralizing debt], subject to
termination upon payment of the debt for which the mortgage was
assigned as security"); Bank of Tokyo Trust Co. v. Urban Food
Malls Ltd., 229 A.D.2d 14, 23, 650 N.Y.S.2d 654, 661 (1st Dep't
1996) (describing a pledgee's "defeasible title . . . [as being]
extinguished upon payment of the debt").
Contrary to the Citadel Funds' arguments, the August 18, 2004
prospectus supplements contain no statements that could be
interpreted to signify that in-substance defeasance of the 6.875%
Senior Notes had been affected. Rather, the supplements merely
state that "the pro forma balance sheet data gives effect to"
transactions including "[t]he repayment of the $150.0 million of
our 6.875% senior notes due October 1, 2004, from the proceeds of
the offerings." (Supplement to Prospectus Dated August 2, 2004 in
Connection with the Offering of 40,000,000 Shares of Aquila
Common Stock, at S-12; Supplement to Prospectus Dated August 2,
2004 in Connection with the Offering of 12,000,000 Premium Equity
Securities, at S-14).
The construction of the term economic "defeasance" here adopted
i.e., that it is synonymous with the term "in-substance defeasance" is buttressed by Aquila's conduct with respect to
the 7.00% Senior Notes. As revealed by the June 30, 2004 10-Q,
Aquila satisfied its Section 2.7(d) obligation with respect to
these notes on June 30, 2004 by irrevocable deposit of $258.8
million with the trustee for the 7.00% Senior Notes. In contrast,
in the case of the 6.875% Senior Notes at issue here, there is no
allegation that Aquila irrevocably transferred any funds by the
September 15, 2004 deadline set forth in Section 2.7(d).
Based on the foregoing, it is determined that Aquila's conduct
with respect to the 6.875% Senior Notes triggered Section
2.7(d)'s mandatory prepayment obligation.
E. The Required Lenders' Waiver Of The Section 2.7(d)
Mandatory Prepayment Was Not Effective
According to the Citadel Funds, the Required Lenders
effectively waived the Section 2.7(d) mandatory prepayment
obligation on September 14, 2004. This waiver, the Citadel Funds
argue, barred Aquila from availing itself of the Section 2.7(d)
According to Aquila, the Required Lenders had no right under
the Credit Agreement to waive the operation of Section 2.7(d).
According to Aquila, the Credit Agreement provided that unless a
retirement, refinancing or defeasance occurred with respect to
the 6.875% Senior Notes, the Loans would become due and payable without giving any discretion in the matter to the
Lenders. Aquila argues that pursuant to Sectión 9.1(a) of the
Credit Agreement, to the extent that either party wanted to avoid
a special mandatory prepayment under Section 2.7(d), that party's
recourse would have been to obtain the agreement of the other
party to amend the Credit Agreement in writing. Aquila further
argues that even if Section 2.7(d) was capable of being waived by
the Lenders under the Credit Agreement, any such waiver required
unanimity of the Lenders, and not just the two-thirds that
granted the waiver in this case.
The default provision in Section 7.1 of the Credit Agreement
illustrates that when the parties intended the lenders to have an
option as to whether to declare the Loans "due and payable," the
parties provided for that option with express contractual
language. To wit, Section 7.1(k) (B) provided that when a default
either or both of the following actions may be taken:
(i) with the consent of the Required Lenders, the
Administrative Agent may, by notice to the Borrower,
declare the Commitments to be terminated forthwith,
whereupon the Commitments shall immediately
terminate; and (ii) with the consent of the Required
Lenders, the Administrative Agent shall, by notice to
the Borrower, declare the Loans, LC Disbursements
hereunder and the Notes to be due and payable
forthwith, whereupon the same shall immediately
become due and payable.
(Compl. Ex. A at 78.) Thus, pursuant to Section 7.1(k) (B), in the case of most types
of default, the Loans would only become due and payable if the
Required Lenders so elected. In contrast, under Section 2.7(d),
prepayment of the Loans was mandatory upon the occurrence of the
preconditions set forth therein. Under the occurrence of such
preconditions, the Loans became "due and payable" without any
action on the part of the lenders, and the lenders were not
provided any option to reject the special mandatory prepayment
and the accompanying 2% fee, as they were in the event of most
Furthermore, as a matter of contract law, the Required Lenders
could not have waived Section 2.7(d)'s mandatory prepayment
provision without Aquila's consent. It is well established that
although a party may waive a provision included in a contract for
that party's sole benefit, a party cannot waive a contractual
requirement that benefits both sides to the transaction. See
Praver v. Remsen Assocs., 150 A.D.2d 540, 541,
541 N.Y.S.2d 440, 441 (2d Dep't 1989) (refusing to give effect to purported
waiver of condition without seller's assent, because the
condition benefitted both purchaser and seller, even though
condition specified that it was "for the benefit of the
Purchaser"); Louis Bonavita & Sons, Inc. v. Quarry,
126 A.D.2d 707, 708, 511 N.Y.S.2d 120, 121 (2d Dep't 1987) (holding that
buyer could not waive condition intended to benefit both buyer
and seller); Poquott Dev. Corp. v. Johnson, 104 A.D. 2d 442,
443, 478 N.Y.S. 2d 960, 962 (2d Dep't 1984) (holding that condition for benefit of both parties "could not be waived
unless both parties agreed"); Oak Bee Corp. v. N.E. Blankman &
Co., 154 A.D.2d 3, 7, 551 N.Y.S.2d 559, 561 (2d Dep't 1990)
(holding that where a "condition has been inserted for the
benefit of both parties to the agreement, either party may
validly cancel the contract upon failure of the condition, and
the condition may be waived only by the mutual assent of both
parties"); 13 Williston on Contracts § 39:24 (4th ed.) (stating
that "waiver of contract requirements and conditions may not be
made unilaterally where the waiver would deprive the nonwaiving
party of a benefit under the provision in question.")
Section 2.7(d)'s mandatory prepayment provision provided
benefits to both parties. As described in their complaint, the
Citadel Funds received a degree of protection against the risk
that Aquila might default on the Senior Notes. As Aquila
explained in a press release issued on September 20, 2004, by
prepaying the Loans and entering into two new unsecured credit
facilities, Aquila took an "important step . . . to ensure the
company has sound liquidity while improving our capital
structure." (Compl. Ex. I.) As Section 2.7(d) permitted Aquila to
take this economically advantageous step, and because it provided
that Aquila would not be required to pay a Make-Whole Premium, it
conferred substantial benefits upon Aquila and could not be
waived unilaterally by the Required Lenders. Even if the Required Lenders had the authority to waive or
amend unilaterally Aquila's right to prepay the Loans under
Section 2.7(d), the waiver at issue here was invalid because it
was not based on the unanimous consent of all the lenders.
Although the Required Lenders had the authority to waive some of
Aquila's contractual obligations, Section 9.1(c) expressly carved
out an exception for any waiver that would "extend the date of
maturity" of any loan, "extend the scheduled date of any payment"
or "extend the expiration date of any Lender's Commitment[.]"
(Compl. Ex. A at 81.) In such cases, unanimous consent of all
affected lenders was required.
By operation of Section 2.7(d), because Aquila had not
refinanced, retired or otherwise defeased the 6.875% Senior Notes
by September 15, 2004, that date became the maturity date and
scheduled payment date for all remaining payments under the
Credit Agreement, including principal, interest and the 2%
prepayment fee. September 15, 2004 also became the expiration
date for all of the Lenders' commitments; Section 2.7(d)
expressly provided that in the event of a Special Mandatory
Prepayment, "the Lenders' . . . obligations hereunder to extend
any additional credit shall terminate in full." (Id. Ex. A at
The waiver sought to postpone the maturity date, scheduled
payment date and the termination date of the lenders' commitments
from September 15, 2004 to May 15, 2006, the original maturity date of the loans under the Credit Agreement. As a
result, Section 9.1 required that such "waiver" be approved by
all of the Landers.
The complaint alleges that lenders representing only two-thirds
of the Loans executed the waiver. Under the terms of Section
9.1(c), the waiver was an ineffective attempt to extend the
maturity date and repayment date of the Loans and the lenders'
commitments beyond the contractually specified and scheduled
prepayment date of September 15, 2004.
In its attempt to characterize Section 9.1(c) as a substantive
provision that expands the lenders' rights, the Citadel Funds
contend that Section 9.1(c) provided the lenders with the right
to waive any requirement that the contract imposed on Aquila.
However, Section 9.1(c) provided that 50% of the lenders may
waive any of the requirements of the Agreement. It did not
distinguish between waivers of the "requirements" imposed on
Aquila and those imposed on the lenders. Thus, if Citadel's
argument that Section 9.1(c) created substantive rights were
accepted, it would lead to the conclusion that the lenders had
the right to waive their own contractual obligations.
The more natural reading of Section 9.1(c) is that the section
defined the circumstances in which a majority, but less than all,
of the lenders could exercise the rights of waiver provided pursuant to the Credit Agreement. The section does not
create substantive rights.
In the alternative, the Citadel Funds argue that unanimous
lender approval of the waiver was not required because such
waiver did not extend the maturity date of the obligations under
the Credit Agreement beyond the original date of May 15, 2006.
However, Section 9.1(c) is not limited to extensions beyond the
original date of maturity. Rather, it states that unanimity among
the lenders is required to extend any "scheduled date of
maturity." By its operation, Section 2.7(d), in the absence of
the waiver, would have made September 15, 2004 the scheduled
maturity date. Therefore, unanimous consent from the lenders was
necessary to extend that maturity date.
The Citadel Funds also argue that Section 9.1(c) does not
require unanimous consent to extend a payment deadline or
maturity date, but only the consent of each lender affected by
the extension. This argument is undermined by Section 9.1 of the
Credit Agreement, which expressly provides that "[a]ny such
waiver and any such amendment, supplement or modification shall
apply equally to each of the Lenders. . . ." (Id. Ex. A at 81.)
The Citadel Funds' argument reads that language out of the Credit
Agreement altogether.*fn6 Finally, the Citadel Funds argue that Aquila cannot use the
unanimity requirement as a defense to the Citadel Funds' contract
claims because any such requirement would have been for the
protection of lenders who did not sign the waiver letter, and not
for the protection of the borrower. However, Section 9.1 requires
Aquila to deal with all of the lenders as a group. Here, it is
not disputed that approximately one-third of the lenders did not
grant the waiver. As a result, the waiver was without legal
effect and Aquila could not, consistent with the rights of the
non-consenting Lenders, have ignored the mandatory payment
requirements of Section 2.7(d).
Based on the foregoing, it is determined that the Required
Lenders' attempted waiver of the Section 2.7(d) mandatory
prepayment obligation was not effective.
F. No Claim Of Bad Faith Has Been Stated
The Citadel Funds also claim breach of the implied covenant of
good faith and fair dealing, contending that Aquila was
"required" to retire or defease the Senior Notes by September 15,
2004. Based on their assumption that such a contractual
obligation existed, the Citadel Funds conclude that Aquila's failure to pay
off the 6.875% Senior Notes in time to avoid a Special Mandatory
Prepayment is an act of bad faith, rather than the exercise of
Aquila's express contractual rights.
However, there was no affirmative requirement anywhere in the
Credit Agreement that Aquila retire, refinance or defease the
6.875% Senior Notes, or make any efforts to do so. Indeed,
repaying the Senior Notes on October 1, 2004, when they actually
were due, would have otherwise been expected. Given that the
decision whether to wait and pay the Senior Notes when they
became due was an option left available to Aquila under the
Credit Agreement, the Citadel Funds have no grounds to claim that
Aquila's decision to do so, thereby triggering Section 2.7(d),
was a breach of any express or implied provision of the Credit
Agreement, much less an act of bad faith.
Finally, the Citadel Funds do not and cannot respond to
Aquila's argument and authorities establishing that claims for
breach of the implied covenant of good faith and fair dealing are
routinely dismissed where the conduct at issue is also the
predicate for a claim that the defendant breached an express
contract. See, e.g., Concesionaria DHM, S.A. v. Int'l Fin.
Corp., 307 F. Supp. 2d 553, 564 (S.D.N.Y. 2004) (quoting TVT
Records v. Island Def Jam Music Group, 244 F. Supp. 2d 263, 277
(S.D.N.Y. 2003)). Conclusion
For the foregoing reasons, the action is dismissed in its
entirety, with prejudice. Furthermore, it is ordered that funds
held in escrow pending the disposition of this action be returned
to Aquila within five (5) days of entry of this opinion.
It is so ordered.