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Citibank, N.A. v. Morgan Stanley & Co. International

October 8, 2010


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



In the wake of the economic turmoil that recently engulfed this nation and beyond, financial institutions are facing the consequences of the deals they struck and the risks they assumed in better times. The courts are being called upon to closely examine complex and lengthy contracts in order to ascertain who agreed to what and, more to the point, who owes money to whom. Here, the players are two of the most sophisticated financial institutions in the world - -Citibank, N.A. ("Citibank") and Morgan Stanley & Co. International, PLC ("MSIP"). The stakes are large - approximately $245 million.

In an opinion and order filed May 12, 2010 (the "May 12 Opinion"), I concluded that MSIP breached the unambiguous terms of a credit default swap agreement with Citibank.*fn1 Accordingly, I granted judgment on the pleadings to Citibank on its sole claim for breach of contract and dismissed MSIP's two mirror-image counterclaims. While that motion was pending, MSIP added two new counterclaims for reformation of the contract and equitable estoppel. Citibank now moves for judgment on the pleadings on these two remaining counterclaims, which were explicitly not addressed in the May 12 Opinion. For the reasons stated below, the motion is denied as to MSIP's counterclaim for reformation but granted as to the counterclaim for equitable estoppel.


A. Overview

The background of this case and the contracts at issue are fully set forth in the May 12 Opinion.*fn2 Suffice it to say that, in 2006, Capmark VI Ltd issued a collateralized debt obligation (the "Capmark VI CDO") - a security backed by mortgages and other assets. The Capmark VI CDO is governed primarily by a July 24, 2006 indenture (the "Indenture" or the "Capmark VI Indenture").

At the same time, Citibank agreed to provide up to $366 million in revolving credit to the Capmark VI CDO (the "Revolving Facility"). This credit agreement was memorialized on July 24, 2006 (the "Credit Agreement" or the "Capmark VI Credit Agreement"). The Credit Agreement was structured to accommodate syndication and, therefore, provides for Citibank to serve as "Administrative Agent" to act on behalf of the syndicate of lenders. The Credit Agreement was never syndicated, however, leaving Citibank as the sole lender to the Revolving Facility. As such, Citibank was the senior stakeholder in (that is, the "Controlling Class" of) the Capmark VI CDO at all relevant times. As a result, Citibank held certain rights under the Indenture, including the right to direct that the Collateral be liquidated if the value of those assets fell below Citibank's obligation under the Revolving Facility ($366 million).

Also at the same time, Citibank and MSIP entered into a credit default swap - an agreement that essentially transferred risk related to the Capmark VI CDO from Citibank to MSIP for three years (the "Swap Agreement" or the "Capmark VI Swap Agreement"). MSIP was paid $750,000 by Citibank in return for assuming this risk. The Swap Agreement consists of (1) a July 21, 2006 confirmation (the "Swap Confirmation" or the "Capmark VI Swap Confirmation") that incorporates (2) an International Swaps and Derivatives Association, Inc. ("ISDA") Master Agreement, as amended from time to time (the "ISDA Master Agreement"), and (3) 2003 ISDA Credit Derivatives Definitions (the "2003 ISDA Definitions").

In 2008, the value of the Capmark VI CDO collapsed. In March 2009, Citibank exercised its rights under the Indenture and directed that the Collateral be liquidated. Approximately $121 million was recouped from the sale, leaving a shortfall of $245,368,966.51.

In July 2009, Citibank attempted to collect the shortfall from MSIP. MSIP refused on the ground that Citibank breached Section 6(d) of the Swap Confirmation by ordering the liquidation without first obtaining MSIP's written consent. Section 6(d) of the Swap Confirmation provides certain rights to MSIP with respect to the Revolving Facility:

No amendment to, or waiver or consent of or with respect to, the Reference Obligation [the Revolving Facility] will be agreed or consented to by Buyer [Citibank] (or permitted by Buyer to be agreed or consented to) without the prior written consent of the Counterparty [MSIP].*fn3 Finally, I note that the ISDA Master Agreement contains an integration clause providing that "[t]his agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto."*fn4 The ISDA Master Agreement further provides that Citibank and MSIP are "not relying upon any representations (whether written or oral) of the other party other than the representations expressly set forth herein, in any Credit Support Document or in any Confirmation."*fn5 I shall refer to this latter clause as the "no-reliance clause."

B. Proceedings in this Court

In September 2009, Citibank filed suit in this Court against MSIP for breach of contract. MSIP asserted two mirror-image counterclaims. In January 2010, Citibank moved for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), and dismissal under Rule 12(b)(6) of MSIP's counterclaims. MSIP also moved for judgment on the pleadings on its counterclaims, arguing that Citibank agreed to transfer all of its voting rights - including Controlling Class rights - to MSIP through Section 6(d) of the Swap Confirmation. The motion was fully briefed on March 12, 2010.

On April 5, 2010, MSIP filed, with Citibank's consent and leave of the Court, an Amended Answer and Counterclaims. As is relevant here, MSIP added a third counterclaim for reformation and a fourth counterclaim asserting equitable estoppel.

On May 12, 2010, I granted judgment on the pleadings to Citibank on its claim, dismissed MSIP's first and second counterclaims, and denied MSIP's motion to the contrary. I held that the contractual documents were unambiguous.

Citibank's issuance of a direction under the Indenture did not implicate MSIP's consent rights under Section 6(d) of the Swap Confirmation. Therefore, Citibank was permitted to direct the liquidation of the Capmark VI CDO without acquiring MSIP's prior written consent. MSIP's attempt to introduce ambiguity where there is none cannot prevent this result.*fn6 I rejected MSIP's strained reading of the contractual documents that (1) Citibank, as sole lender to the Revolving Facility, authorized itself, as Administrative Agent of the (unrealized) syndicate of lenders, to direct that the Collateral be liquidated, and (2) when Citibank provided such authorization to itself, Citibank effected a consent that triggered MSIP's rights under Section 6(d) of the Swap Confirmation.

Because Citibank was always the sole Lender to the Revolving Facility, Citibank was always the only principal for which it was acting as Administrative Agent. Thus, under the circumstances, Citibank was simultaneously sole Lender, Controlling Class, and Administrative Agent. As such, MSIP's admission that Citibank directed the liquidation as Administrative Agent is tantamount to an admission that Citibank did nothing but issue a direction, which is fatal to MSIP's position.*fn7 I also rejected MSIP's attempt to read "direction" (in the Indenture) to fall within the definition of "consent" (in the Swap Confirmation) by way of "authorization" (in the Credit Agreement). Among other things, I observed that the contractual documents repeatedly and explicitly distinguish between the concepts of consent and direction, and that those words have different meanings. "If these highly sophisticated parties truly intended 'consent' to include 'direction' via 'authorization'..., they could and would have so provided. To merge these terms as if they were one would render meaningless the distinction between them."*fn8 In short, I held that the term "consent" in Section 6(d) of the Swap Confirmation did not capture the "direction" Citibank issued under the Indenture.

C. MSIP's Counterclaims for Reformation and Equitable Estoppel

The May 12 Opinion explicitly did not address MSIP's newly-added counterclaims for reformation and equitable estoppel.*fn9 I will now summarize the allegations that form the basis of these claims. As for reformation, MSIP alleges:

During the negotiation of the Capmark VI Swap, Citibank and MSIP expressly agreed that Citibank would obtain MSIP's consent prior to exercising any Controlling Class rights under the Capmark VI Indenture during the term of the Capmark VI Swap. This agreement was reconfirmed in communications between the lead negotiators for Citibank and MSIP following the execution of the Capmark VI Swap.

To the extent that the written terms of the Capmark VI Swap fail to reflect the agreement reached between Citibank and MSIP, that failure was on account of either mutual mistake by the parties, or unilateral mistake by MSIP and improper conduct by Citibank in seeking to conceal the mistake through ...

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