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Citibank, N.A. v. Morgan Stanley & Co. Int'l

May 25, 2011


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



This case arises out of a dispute over a credit default swap ("CDS") agreement between two of the most sophisticated financial institutions in the world -- Citibank, N.A. ("Citibank") and Morgan Stanley & Co. International, PLC ("MSIP"). In an opinion and order dated May 12, 2010 (the "May 12 Opinion"), I concluded that MSIP breached the unambiguous terms of that agreement.*fn1 Accordingly, I granted judgment on the pleadins to Citibank on its sole claim for breach of contract and dismissed MSIP's two mirror-image counterclaims. In a subsequent opinion and order dated October 8, 2010 (the "October 8 Opinion"), I addressed Citibank's motion for judgment on the pleadings on MSIP's two remaining counterclaims -- equitable estoppel and reformation -- granting the motion as to the counterclaim for equitable estoppel but denying it as to the counterclaim for reformation.*fn2 Now before the Court are cross-motions for summary judgment on MSIP's counterclaim for reformation. For the reasons that follow, MSIP's motion is denied and Citibank's motion is granted.


A. The Agreements

In 2006, Capmark VI Ltd. ("Capmark") issued a collateralized debt obligation (the "Capmark CDO") -- an asset-backed security ("ABS") backed by mortgages and other assets (the "Collateral"). The Capmark CDO is governed primarily by a July 24, 2006 indenture (the "Indenture").*fn3

Citibank provided $366 million in revolving credit to the Capmark CDO (the "Revolving Facility") that was memorialized by a Credit Agreement ("Credit Agreement" or "Capmark Credit Agreement") dated July 24, 2006 among Capmark as Issuer, Citibank as Lender, and Citibank as Administrative Agent.*fn4

Citibank was the senior stakeholder -- that is, the "Controlling Class" -- in the Capmark CDO at all relevant times.*fn5 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).*fn6

The Capmark CDO experienced an event of default in August of 2008.*fn7 In March of 2009, after the value of the Capmark CDO had collapsed, Citibank exercised its rights under the Indenture and directed that the Collateral be liquidated.*fn8 Approximately $121 million was recouped from the sale, leaving Citibank with a shortfall of $245,368,966.51.*fn9

Meanwhile, three days before the Capmark Credit Agreement was executed, Citibank had purchased credit protection on the Revolving Facility from MSIP via a credit default swap, memorialized by a letter of confirmation dated July 21, 2006 between MSIP and Citibank (the "Capmark Swap Agreement" or the "Capmark CDS Confirmation").*fn10 Under the terms of that agreement, the occurrence of any of four defined "Credit Events" occurring on the "Reference Entity" (the Capmark CDO) -- including a "Failure to Pay Principal" credit event -- obligated MSIP to pay Citibank any losses that it (Citibank) sustained under the Revolving Facility.*fn11 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."*fn12 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"*fn13 (the "no-reliance clause").

When the Collateral was liquidated in full on July 13, 2009 (pursuant to Citibank's directive), the $245,368,966.51 amount outstanding on the Revolving Facility triggered a Failure to Pay Principal Credit Event under the Swap Agreement, obligating MSIP to pay Citibank the $245,368,966.51 shortfall.*fn14 I have already held that, under the unambiguous terms of section 6(d) of the Swap Agreement (discussed further below), "Citibank's issuance of a direction under the Indenture did not implicate MSIP's consent rights under Section 6(d) of the Swap Confirmation."*fn15 In other words, MSIP's consent was not required in order for Citibank to direct liquidation of the Collateral -- the liquidation that triggered the Credit Event obligating MSIP to pay Citibank $245,368,966.51. The question now before the Court is whether -- notwithstanding the unambiguous language of section 6(d) -- the parties "mutually intended to transfer to [MSIP] all voting rights -- including Controlling Class rights -- associated with the Capmark Credit Agreement"*fn16 such that Citibank's liquidation of the Capmark CDO constituted a breach of the Capmark Swap Agreement, excusing MSIP from paying Citibank the $245,368,996.51 shortfall.

B. Capmark Swap Negotiations; June 22, 2006 Emails

In the parties' negotiations over the terms of the Capmark Swap Agreement, John Costango (Citibank) was the banker with "primary responsibility with respect to the day-to-day negotiations with Morgan Stanley."*fn17 For MSIP, George Wilkinson "worked with the business unit within [Citibank's Global Proprietary Credit Group] to negotiate and execute CDS documents,"*fn18 including the Capmark Swap Agreement. However, other Citibank agents -- including Adam Bentch, Steven Kolyer,*fn19 and Don Bendernagel (attorneys in Citibank's derivatives legal group*fn20 ); Grant Buerstetta (an attorney with Citibank's outside counsel, Clifford Chance); William Aprigliano (Citibank's "regulatory capital" corporate representative*fn21 ); and Nestor Dominguez (who "ultimately . . . said, okay, do the trade"*fn22 ) were involved in drafting, reviewing, or approving the Capmark Swap Agreement.*fn23 Kevin Starrett signed the Capmark Swap Agreement on Citibank's behalf and said "done" on the phone.*fn24

On June 22, 2006, a month before the Capmark CDS Confirmation was signed, Wilkinson (MSIP) sent an email to Costango (Citibank) setting forth "[s]ome additional comments on the CDS doc."*fn25 The first item read:

(i) As discussed, we should include language in the doc stating that no amendment, waiver, consent, etc. will be made or given by Citi under the Loan Agreement without the prior written consent of MS (i.e., Citi passes along to MS all voting rights it has under the Loan Agreement to MS).*fn26

Fourteen minutes later, Costango (Citibank) wrote that he would "not be able to focus on these comments in full tonight, but . . . will give you my quick thoughts before I head out today."*fn27 Forty minutes later, Costango responded by inserting his "preliminary comments in CAPS" into the text of Wilkinson's email.*fn28 He typed the words "OK"*fn29 under Wilkinson's first "comment" regarding "voting rights" quoted above.

Wilkinson (MSIP) testified that "when [he and Costango (Citibank)] discussed the topics of the passage of voting rights from Citi to Morgan Stanley in respect of this transaction, John Costango was in agreement that the rights that Citi had as a lender under the loan facility would pass to Morgan Stanley for so long as Morgan Stanley was on risk."*fn30 Wilkinson also testified that he had the same "conversations" concerning voting rights in the Capmark transaction with Michael Edman, Ross Feldman, Erick May, and Joseph Naggar -- other MSIP employees -- prior to the close of the transaction.*fn31 Costango testified that he has no recollection of any discussion with Wilkinson concerning voting rights prior to his receipt of the June 22 Email.*fn32 Nor did any other MSIP employee testify to remembering a conversation with Citibank or with Wilkinson concerning the passage of rights.*fn33

On June 25, 2006, Costango forwarded Wilkinson's June 22 Email both to Citibank's in-house counsel and to Clifford Chance.*fn34 Five days later, Costango forwarded Wilkinson a revised draft Capmark CDS Confirmation prepared by Clifford Chance, with the caveat that he "received this from outside counsel but our internal counsel has not yet reviewed thoroughly."*fn35 The attached draft confirmation included a new section "6(d)" entitled "Reference Obligation Amendments" -- added as a consequence of Wilkinson's June 22 Email*fn36 -- that read:

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].*fn37

Citibank's in-house counsel on the Capmark transaction authorized the inclusion of the language in section 6(d).*fn38

2. The Tallships Swap

Citibank provided a revolving credit facility to another CDO, the Tallships Funding, Ltd. CDO ("Tallships"), memorialized by a Revolving Credit Agreement (the "Tallships Credit Agreement").*fn39 Citibank purchased credit protection on the Tallships Credit Agreement from Morgan Stanley Capital Services Inc. ("MSCS"), memorialized by a letter of confirmation dated December 14, 2006 between MSCS and Citibank (the "Tallships Swap Agreement").*fn40 Unlike the Capmark Swap Agreement, the Tallships Swap Agreement effectively gave MSCS the ability to direct (in certain circumstances) Citibank's exercise of Controlling Class rights.*fn41

The Tallships Swap shared certain similarities with the Capmark Swap. First, under both agreements, Citibank paid 7 basis points per annum of notional exposure for approximately three years' credit protection.*fn42 Second, both swaps were "non-coterminous," meaning the maturity date of the swaps (three years) did not match the maturity date of the underlying Reference Obligations.*fn43 Third, Citibank claimed "regulatory capital" ("reg cap")*fn44 relief in respect of both Capmark and Tallships.*fn45 Fourth, while both the Capmark Credit Agreement and the Tallships Credit Agreement provided Citibank with the option of syndicating the revolving facilities, neither was ever syndicated (or intended to ...

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