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Banco Espirito Santo, S.A., et al v. Concessionaria Do Rodoanel Oeste S.A

September 18, 2012


The opinion of the court was delivered by: Renwick, J.

Banco Espirito Santo, S.A. v Concessionaria Do Rodoanel Oeste S.A.

Appellate Division, First Department

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on September 18, 2012

Peter Tom,J.P. Richard T. Andrias David Friedman Karla Moskowitz Dianne T. Renwick, JJ. Index 652013/11

Defendant appeals from the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered on or about March 9, 2012, which denied its motion for summary judgment dismissing the complaint.


Plaintiffs, multinational financial institutions and "hedge providers," commenced this breach of contract action when defendant decided to pay off $895 million in loans before their maturity, concomitantly triggering its right to prematurely terminate the interest rate swaps it had entered into with plaintiffs. An interest rate swap is a liquid financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate or vice versa. The central dispute in this appeal is whether the interest rate swap agreements required defendant to pay plaintiffs an early termination fee, referred to in the interest swap agreements as a "Close Out Amount," for terminating the swaps prior to their maturity. Plaintiffs argue that the different punctuation of the term "Close Out Amount" in the swap agreements ("Close-out Amount" versus "Close Out Amount") creates an ambiguity as to the meaning of the term. We hold that the different punctuation of the term does not alter the manifest intention of the parties as gathered from the language employed in the agreement, which unambiguously provides that neither party owes any "Close Out Amount" upon voluntary prepayment of the loans.

Defendant Concessionaria Do Rodoanel Oeste S.A. (Rodoanel), part of a large private infrastructure company, was upgrading and operating a toll road in Sao Paolo, Brazil. In 2009, Rodoanel entered into $895 million in loans and derivative interest-rate swaps to finance the project. Rodoanel was the "borrower" and non party banks Inter-American Development Bank and Japan Bank for International Cooperation were the "Senior Lenders." Plaintiffs Banco Espirito Santo, S.A., Caiza Banco de Investimento, S.A. and Credit Agricole Corporate Investment Bank (plaintiffs), the "hedge providers," entered into separate interest rate swaps agreements with Rodoanel.

The $895 million senior loans at issue here were governed by certain agreements between Rodoanel and the senior lenders, primarily the Common Terms Agreement (Senior Lender CTA) which is governed by New York law. The senior loans imposed a floating rate of interest. To protect the senior lenders and Rodoanel from the risk of the latter defaulting on loan payments caused by sudden spikes in interest rates, however, the Senior Lender CTA required Rodoanel to enter into derivative interest rate swap transactions *fn1 . On December 3, 2009, Rodoanel entered into three such substantively identical transactions with plaintiff, which are all large and sophisticated multinational financial institutions and "hedge providers."*fn2 The practical effect of these derivative swap transactions was to convert Rodoanel's payment obligations under its loan with the senior lenders from a floating rate to a fixed rate.

These interest rate swap transactions were each governed by a 2002 Master Agreement published by the International Swaps and Derivatives Association (ISDA)*fn3 , with one agreement between Rodoanel and each plaintiff bank. These forms are called ISDA Master Agreements, which are used in many thousands of interest rate swap transactions each year (see Thrifty Oil Co. v Bank of America Nat. Trust & Sav. Assn. 322 F3d 1039, 1042-1043 [9th Cir 2003]). Each ISDA Master Agreement is executed together with a schedule (ISDA Schedule,) which serves the purpose of customizing the parties' contractual arrangement by reflecting any deviations from the standard language of the Master Agreement, as well as any specific terms that have been negotiated by the parties (id. at 1043).*fn4

The ISDA Master Agreements at issue here are governed by New York law and provide for disputes to be resolved by New York courts. Each ISDA Master Agreement executed by Rodoanel and each plaintiff bank states in its introduction that "this 2002 Master Agreement . . . includes the schedule (ISDA Schedule) and the documents and other confirming evidence . . . exchanged between the parties or otherwise effective for the purpose of confirming or evidencing th[eir] Transactions."

It appears that after the swap agreements were executed, the pertinent floating interest rate dropped precipitously, making the interest rate swap agreements very favorable to plaintiffs. Accordingly, on February 11, 2011, Rodoanel gave notice of its intention to prepay the senior loans, and on May 16, 2011 prepaid them. Section 2 of the Senior Lender CTA sets forth Rodoanel's rights and obligations with respect to prepayment of the senior loans. In particular, Section 2.8 gives Rodoanel the right to prepay the senior loans, and provides that, in such case, "[n]o prepayment penalties or premiums shall ...

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