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Colombia v. Bank of New York Mellon

United States District Court, Second Circuit

July 26, 2013




Plaintiff Banco de la Republica de Colombia ("Banco de Colombia"), the central bank of Colombia, engaged Defendant BNY Mellon Asset Servicing ("BNYMAS") to invest a portion of the nation's reserve funds held by the bank. The contract barred investments in issuers located in the Cayman Islands. Banco de Colombia filed this lawsuit to recover $20 million from BNYMAS for investing the reserve funds in an asset-poor special purpose entity incorporated in Delaware whose obligations were guaranteed by a company incorporated in the Cayman Islands. Banco de Colombia alleges that BNYMAS breached its contract with Banco de Colombia by making this investment and is responsible for the $20 million loss it suffered. Banco de Colombia alleges also that BNYMAS committed fraud when it repeatedly told Banco de Colombia that it was complying with the terms of the contract, and failed to disclose information that the entity and its guarantor were in bad financial condition and about to fail.

For the reasons stated in this opinion, I grant Banco de Colombia's motion for summary judgment as to BNYMAS's liability on the breach of contract and failure to disclose claims, but I deny Banco de Colombia's motion to the extent it seeks damages because of triable questions of fact. I also grant Defendants' motion for summary judgment dismissing the fraudulent misrepresentation and negligent misrepresentation claims.


As Colombia's central bank, Banco de Colombia administers the nation's international reserves, investing them within Colombia and abroad. For its foreign investments, Banco de Colombia contracts with external managers.

On June 22, 2005, Banco de Colombia and BNYMAS entered into an agreement engaging BNYMAS to act as an external investment manager for Banco de Colombia.[1] Under a Securities Loan Agreement (the "Agreement"), Banco de Colombia lent securities in the national reserves to other investors, against cash collateral securing the borrowers' obligations to return the securities. BNYMAS invested the cash collateral for Banco de Colombia to gain interest income for it, less a fee to BNYMAS, graduated in relation to the amount earned. See Def. Ex. 12 at 1029.[2]

Banco de Colombia's contract with BNYMAS gave BNYMAS investment discretion, subject to Investment Guidelines (the "Guidelines") that limited investments of the cash collateral to particular categories of instruments. The eligible investments were required to have a minimum credit rating. Section 3.7 of the Guidelines provided that "Eligible issuers, borrowers and repurchase agreement counterparties may not be located in... offshore financial centers...." Def. Ex. 12 at 1046. Section 3.7 included the Cayman Islands in a list of prohibited offshore financial centers.

Banco de Colombia also required BNYMAS to issue monthly certifications that the Guidelines were being followed. To comply, BNYMAS certified that: "Eligible issuers, borrowers and repurchase agreement counterparties are not located in any of the financial offshore centers cited in the investment guidelines." Pl. Ex. 14.

On April 30, 2007, BNYMAS invested $20 million of cash collateral given to Banco de Colombia by a borrower of its securities, in notes (the "Notes") payable October 30, 2008. The private placement memorandum for the investment indicated that the Notes were issued by Sigma Finance, Inc. ("SFI") and guaranteed by Sigma Finance Corp. ("SFC"). SFI was incorporated in Delaware and functioned as a special purpose entity, having as its "sole purpose, " according to the private placement memorandum in the files of BNYMAS, "the issuing and selling [of] debt securities as a nominee for [SFC]."[3] SFI was wholly-owned by SFC, and had no assets other than $1, 000 of paid-up capital given to it by SFC. Pl. Ex. 20 at 1, 5.

SFC was incorporated in the Cayman Islands. Its registered office was in George Town, the capital of the Cayman Islands. Its investment manager was a London company, Gordian Knot Limited. Id. at 6. BNYMAS made the investment pursuant to its investment discretion, without consulting Banco de Colombia and without providing BNYMAS with information on SFI and SFC. Nevertheless, some Banco de Colombia employees had limited knowledge of SFC, as at least two of the bank's employees knew it was located in an offshore financial center. See Def. Ex. 16 (attachment to August 1, 2007 email including SFC in a list of offshore financial center issuers); Pl. Ex. 12 (Jan. 21, 2003 spreadsheet entry describing SFC as located in an offshore financial center).

SFI and SFC functioned together as a structured investment vehicle ("SIV"). Like banks, SIVs made money in the margins between their borrowing costs and lending revenues. See King Cnty., Washington v. IKB Deutsche Industriebank AG , 863 F.Supp.2d 288, 292-93 (S.D.N.Y. 2012). At the time, many SIVs, like SFC, were incorporated in the Cayman Islands and managed from London. One management technique to increase profits was to borrow at short term, and lend at longer terms. Within months after BNYMAS purchased the Notes, however, the markets in which SIVs functioned began to falter. By October 2007, several major United States banks began raising funds to support SIVs in repaying debts. See Carrick Mollenkamp, et al., How London Created a Snarl in Global Markets, Wall Street J., Oct. 18, 2007, at A1.

Banco de Colombia became concerned about the safety of the national reserves entrusted to it. On January 24, 2008, Banco de Colombia amended the Guidelines to forbid purchases of "securities issued or backed by Structured Investment Vehicles." Def. Ex. 12 at 1060. On March 19, 2008, Banco de Colombia instructed BNYMAS not to make new investments on Banco de Colombia's behalf, for it would no longer lend its securities, and to sell all investments with more than 60 days to maturity if that could be done without incurring financial loss. Pl. Ex. 47. Since the investment in SFC already showed a loss, it was not sold. Banco de Colombia instructed BNYMAS to provide market prices of affected securities weekly to enable Banco de Colombia to "determine the best course of action." Def. Ex. 12 at 1063.

On April 4, 2008, Moody's downgraded SFC's and SFI's credit rating. The next day, a Banco de Colombia official asked BNYMAS for a "full report from you regarding this issuer, as well as the expectations going forward." Pl. Ex. 51. A BNYMAS official responded three days later by explaining that the downgrade was "not based on the underlying quality of [SFC's] collateral." Id . He said that SFC bad no direct exposure to investments in subprime mortgages which had been damaging the economy, was "favourably structured, " and had reduced its lending, thereby "enhancing the position of the senior note holders." Id . The following month, BNYMAS assured Banco de Colombia that "Sigma continues to function and pay maturities as and when they become due. They have a solid underlying asset base valued at 95, and despite the reduction in prices seen, we have seen recent issues mature at par." Pl. Ex. 60.

At the same time, internally, BNYMAS officials expressed a more dire view of SFC's financial affairs. In a January 31, 2008 email, a BNYMAS official wanted a meeting to discuss a "siv called sigma which we believe may be moving closer to a default because of current market conditions and the difficulty it is currently experiencing in funding itself." Pl. Ex. 37. On February 1, 2008, a BNYMAS official emailed his colleague saying "I NEED TO KNOW EVERYTHING ABOUT SIGMA" and asked to get a sense of "who else buys sigma and may be stuck with this mess with us." Pl. Ex. 40. On February 17, 2008, that same official commented that "if we could just find somebody to nationalize sigma, our lives would be a heck of a lot better." Pl. Ex. 41. A March 2008 draft BNYMAS memo concluded that "the SIGMA structured investment vehicle is expected to be in default...." Pl. Ex. 46. At the beginning of April, a BNYMAS official told a colleague that "Sigma called to tell us that essentially, things are getting worse for them, not better, with the passage of time. They can not access funding, and maturities continue to drain liquidity." Pl. Ex. 48. At that time, BNYMAS's securities lending division had "significant concerns that Sigma will fail in Q3 or Q4." Pl. Ex. 52. BNYMAS employees also discussed SFC with other investors in the troubled company. One of those investors was "more pessimistic than we [BNYMAS] are regarding Sigma's life expectancy. They don't expect them to survive through 6/30/08." Pl. Ex. 53. Another investor told BNYMAS that it viewed SFC "as having little or no chance of survival (leaning towards no chance)." Pl. Ex. 58.

Given their conclusion that there was a high possibility that SFC would default, BNYMAS personnel strategies as how best to deal with their clients invested in SFC. In a January 31, 2008 email, a BNYMAS employee told his colleagues that with regards to SFC, "we're entering a very unusual period and we need to restrain our traditional response to heroically support our clients, until we better understand the implications of that support." Pl. Ex. 37. In a May 15, 2008 email, a BNYMAS official suggested, with the exception of two clients in the United Kingdom, that BNYMAS not disclose their concerns to clients who were invested in SFC. That official noted that most of their clients had only a "tiny" exposure to SFC. He indicated that: "We believe that the situation is gradually improving and if left to maturity in all likelihood no loss will be incurred." Pl. Ex. 59. He also worried that giving all of their clients a full briefing on SFC's poor financial state would be "more likely to create the problem we are trying to avoid (i.e. it becomes a self-fulfilling prophesy)." Id.

BNYMAS, however, did offer some of its clients a solution to reduce their exposure to SFC. BNYMAS proposed asset swaps to several clients by which SFC would buy back the notes it had issued in exchange for other assets held by SFC. In undertaking an asset swap, BNYMAS clients essentially agreed to accept an immediate loss in exchange for a better likelihood that they would not lose all their money in a particular investment. Pl. Ex. 57. In April 2008, BNYMAS proposed asset swaps to two of its clients: SAMA, the central bank of Saudi Arabia, and IPERS, Iowa's pension fund. Pl. Ex. 52, 55. BNYMAS told IPERS on April 17, 2008 that an asset swap was a "particularly desirable option for senior note holders whose maturity is beyond the second quarter of this year as Sigma's liquidity is less certain beyond that point...." Pl. Ex. 55. On May 29, 2008, BNYMAS wrote to Wisconsin's Investment Board, asking for a waiver of a provision in their guidelines in order to undertake an asset swap. BNYMAS explained to the Wisconsin fund: "Based upon our continuing consideration of the recent market events and the liquidity challenges and related financial difficulties Sigma is experiencing, and with no certainty of relief being realized in the near term, we believe there is a significant likelihood that Sigma will not be able to continue to meet its commitments in respect of the Sigma Notes in the medium term." Pl. Ex. 61.

At a later date, BNYMAS also proposed an asset swap to Banco de Colombia. On June 23, 2008, a BNYMAS official emailed a representative of Banco de Colombia and stated that, although "Sigma's pricing has strengthened over the last two months, " Banco de Colombia should consider an asset swap. Pl. Ex. 63. Banco de Colombia responded: "We are almost sure that we can't do any kind of swap" but asked for BNYMAS "to send us more information about this proposal." Id . A week later, Banco de Colombia told BNYMAS that it did not want to undertake a swap. Pl. Ex. 32. Despite declining to participate in the swap, Banco de Colombia remained concerned about SFC. A Banco de Colombia representative emailed BNYMAS on July 28, 2008 for updates on SFC and "comments that you consider relevant regarding our investments." Pl. Ex. 63. Banco de Colombia emailed BNYMAS again on August 26, 2008, questioning "why although the maturity date is quite close the price remains under pressure." Pl. Ex. 65. BNYMAS responded that "Sigma has not defaulted on any of its interest payments, and there has been a great deal of issues successfully reaching maturity over the passed [sic] months, " that the low price of the Notes was a "hangover' from the downgrade of Sigma several months ago, " and that "[a]cross the board the BNY Mellon stance remains the same with regards to this issue, we will continue to hold to maturity and currently see no reason to deviate from that position." Id.

A month later, on September 30, 2008, SFI defaulted on the Notes, and SFC defaulted on its guarantee. Both filed for the protection of liquidation proceedings in the United Kingdom. Banco de Colombia's $20 million investment became nearly worthless.

Banco de Colombia filed this action against Defendants on April 21, 2009 in New York State Supreme Court. Defendants removed the case to federal court on January 25, 2010. With discovery complete, both parties moved for summary judgment on December 27, 2012.


Summary judgment is appropriate where there exists no genuine issue of material fact and, based on undisputed facts, the moving party is entitled to judgment as a matter of law. D'Amico v. City of New York , 132 F.3d 145, 149 (2d Cir. 1998). An issue of fact is genuine if the evidence is such that the jury could return a verdict for the nonmoving party. Allianz Insurance Co. v. Lerner , 416 F.3d 109, 113 (2d Cir. 2005). An issue of fact is material if it might affect the outcome of the suit under the governing law. Id . The court must "resolve all ambiguities, and credit all factual inferences that could rationally be drawn, in favor of the party opposing summary judgment." Roe v. City of Waterbury , 542 F.3d 31, 35 (2d Cir. 2008) (citations omitted). However, "[m]ere speculation and conjecture is insufficient to preclude the granting of the motion." Harlen Assocs. v. Village of Mineola , 273 F.3d 494, 499 (2d Cir. 2001).

In contract cases, where the language at issue is unambiguous, interpreting the contract is a question of law for the court. JA Apparel Corp. v. Abboud , 568 F.3d 390, 397 (2d Cir. 2009). It is the court's role to determine whether contractual language is ambiguous. Sayers v. Rochester Tel. Corn. Supplemental Mgmt. Pension Plan , 7 F.3d 1091, 1094 (2d Cir. 1993). "Language whose meaning is otherwise plain does not become ambiguous merely because the parties urge different interpretations in the litigation." Hunt Ltd. v. Lifschultz Fast Freight, Inc. , 889 F.2d 1274, 1277 (2d Cir.1989). Instead, "[a]mbiguous language is language that is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'" JA Apparel Corp. , 568 F.3d at 396-97 (citations omitted).


A. Breach of Contract Claim

Banco de Colombia contends that BNYMAS breached the Agreement and, specifically, Section 3.7 of the Guidelines incorporated into the Agreement, by investing collateral in Notes and Guaranties in the Sigma Structured Investment Vehicle. Section 3.7 prohibited investments in "issuers" "located in" the Cayman Islands and that included, Banco de Colombia contends, investments where the real party in interest, the guarantor, is a company located in the Cayman Islands. BNYMAS. in ...

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