On December 17, 2010, the Bank of New York Mellon Trust Company, National Association ("BNYM" or "Plaintiff"), in its capacity as indentured trustee to the holder of certain 4.375% junior subordinated deferrable interest debentures (the "Debentures"), filed a complaint (the "Complaint") in diversity for breach of contract and declaratory judgment against Santander Holdings USA, Inc. ("Santander" or "Defendant"). (See Compl., dated Dec. 17, 2010, ¶¶ 11, 41, 45.) BNYM alleges that Santander breached an indenture agreement entered into between BNYM's predecessor and Santander's predecessor, Sovereign Bancorp, Inc. ("Sovereign"), on September 1, 1999, and amended on February 26, 2004 (the "Indenture"), by "refus[ing] to pay [a] contractually-mandated Rate Increase" on the Debentures issued under the Indenture. (Compl. ¶ 3.)*fn1 BNYM alleges that the Indenture's "Change of Control" provision required Santander to pay the increased coupon rate to investors after Santander's parent, Banco Santander, acquired Sovereign on January 30, 2009 in exchange for American Depositary Shares ("ADSs") of Banco Santander. (Compl. ¶¶ 4, 29--30.) BNYM alleges that the only relevant exception to the "Change of Control" provision requiring increased interest applies to acquisitions of Sovereign in exchange for "common stock"-not ADSs. (Compl. ¶ 4.)
On June 27, 2011, BNYM filed a motion for summary judgment, arguing, among other things, that (1) "the clear terms of the Indenture establish that the drafters did not intend to include ADSs within the term common stock" in the Change of Control carveout; and (2) "there is no relevant industry custom and usage" that shows that the terms "common stock" and "ADS" are equivalent. (Pl.'s Mem. of Law in Supp. of Its Mot. for Summ. J., dated June 27, 2011 ("Pl. Mem."), at 10, 16.)
On July 29, 2011, Santander filed an opposition to BNYM's motion and also cross-moved for summary judgment, arguing, among other things, that (1) "the Indenture does not suggest that the parties intended to exclude ADSs from the phrase 'common stock'"; and (2) "evidence of industry usage and course of dealing demonstrates that there was no 'change of control' under the Indenture." (Def.'s Mem of Law in Opp. to Pl.'s Mot. for Summ. J. and in Supp. of Its Cross-Mot. for Summ. J., dated July 29, 2011 ("Def. Mem."), at 6, 9.)
On August 19, 2011, BNYM filed a reply and opposition. (See Pl.'s Mem. of Law in Opp. to Def.'s Mot. for Summ. J. and in Further Supp. of Its Mot. for Summ. J., dated Aug. 19, 2011 ("Pl. Reply").) On September 9, 2011, Santander filed a surreply. (See Def.'s Surreply in Further Opp. to Pl.'s Mot. for Summ. J. and in Further Support of Its Cross-Mot. for Summ. J., dated Sept. 9, 2011 ("Def. Surreply").)
On June 27, 2011, at a conference before the Court, the parties waived their right to a trial of this matter and agreed that the Court's determination of their cross-motions would be dispositive. (See Minute Entry, dated June 7, 2011); Acuff--Rose Music, Inc. v. Jostens, Inc., 155 F.3d 140, 142--43 (2d Cir.1998). The Court heard oral argument on December 9, 2011. (See Hr'g Tr., dated Dec. 9, 2011 ("Oral Arg. Tr.").)
The following facts are undisputed.
Section 2.04 of the Indenture provides in relevant part that "[e]ach Debenture will bear interest at a rate per annum of 4.375%," except that:
(h) In the event of a Change of Control, the Coupon Rate will be reset to . . . the greater of (i) 7.410% per annum and (ii) the rate determined by a reference agent selected by [Sovereign] as the market yield at that time for a non-convertible trust preferred security representing subordinated debt of the surviving entity . . . . (Decl. of David B. Hennes, dated June 27, 2011 ("Hennes Decl."), Ex. D, § 2.04(h).) Section 1.01 of the Indenture defines a "Change of Control" as, among other things, the following:
(x) Any Person acquires a beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchase, merger or other acquisition transactions of shares of [Sovereign's] capital stock entitling that Person to exercise 50% or more of the total voting power of all shares of [Sovereign's] capital stock entitled to vote generally in elections of directors . . . ;
(z) The consolidation or merger of [Sovereign] with or into any other Person, any merger of another Person into [Sovereign], or any conveyance, transfer, sale, lease or other disposition of all or substantially all of [Sovereign's] properties and assets to another Person . . . . (Hennes Decl., Ex. D, § 1.01.) But, a Change of Control "shall not be deemed to have occurred if" [a]t least 90% of the consideration in the transaction or transactions otherwise constituting a Change of Control consists of shares of common stock traded or to be traded immediately following such event on a national securities exchange or the Nasdaq National Market and, as a result of such transaction or transactions, the Trust PIERS become convertible solely into such common stock and any rights attached thereto. (Hennes Decl., Ex. D, § 1.01.) The Indenture does not contain the term "ADSs" in the Change of Control carveout or anywhere else. (See Hennes Decl., Exs. C, D.)
On January 30, 2009, Banco Santander and Sovereign consummated a merger in which Banco Santander acquired "the 75.65% of Sovereign's common stock that it did not already own," for a total of 100 percent ownership, in exchange for Banco Santander ADSs. (Pl.'s Response to Def.'s Local Civ. R. 56.1 Statement of Undisputed Material Facts, dated Aug. 19, 2011 ("Pl. 56.1 Response"), ¶¶ 13, 14; Def.'s Response to Pl.'s Local Civ. R. 56.1 Statement of Undisputed Material Facts, dated July 29, 2011 ("Def. 56.1 Response"), ¶ 14.) Pursuant to a warrant agreement entered into by Sovereign and BNYM on February 26, 2004 and amended on January 30, 2009 ("Warrant Agreement"), the Trust PIERS became convertible into Banco Santander ADSs. (See Decl. of Kevin M. Ashby, dated July 29, 2011 ("Ashby Decl."), Ex. C, § 4.02(a)--(b), Ex. D.) After the acquisition, a Trust PIERS holder asked Santander "why the Distribution Rate of the Trust PIERS had not been increased." (Def. 56.1 Response ¶ 25.) By letters dated March 27, 2009 and April 1, 2009, Santander responded that it did "not believe a 'Change of Control' occurred under the terms of the Debentures and therefore no step-up in the interest rate is required" because it believed that ADSs and common stock are "fundamental[ly] equivalent." (Hennes Decl., Exs. J, K.)
For the reasons set forth below, BNYM's motion for summary judgment is granted, and Santander's cross-motion ...