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Ge Funding Capital Market Services, Inc. v. Nebraska Investment Finance Authority

United States District Court, S.D. New York

July 6, 2017



          LORNA G. SCHOFIELD, District Judge

         Plaintiffs GE Funding Capital Market Services, Inc. and Trinity Funding Company, LLC (collectively, “GE”) bring this action against Defendant Nebraska Investment Finance Authority (“NIFA”) seeking declaratory and equitable relief and money damages arising from NIFA's alleged breach of several investment agreements (the “Investment Agreements”). Each of the Investment Agreements was established in connection with a certain series of bonds issued by NIFA and obligated GE to pay a fixed interest rate to NIFA on amounts under deposit. The present dispute turns on whether NIFA was entitled to interest payments following redemption of the bonds. The Court previously denied in substantial part NIFA's motion for judgment on the pleadings, concluding that the Investment Agreements are ambiguous on that point. See GE Funding Capital Mkt. Servs., Inc. v. Nebraska Inv. Fin. Auth., No. 15 Civ. 1069, 2016 WL 4784002, at *3 (S.D.N.Y. Sept. 14, 2016). NIFA now moves for partial summary judgment[1] on the ground that the record evidence is so one-sided in favor of its interpretation of the Investment Agreements that no reasonable jury could find for GE. For the following reasons, NIF A's motion is denied.

         I. BACKGROUND

         The following facts are taken from the parties' statements pursuant to Local Civil Rule 56.1, the Investment Agreements and indentures of trust attached to the Second Amended Complaint, and the parties' submissions on this motion. For the purposes of this motion, all factual disputes are resolved, and all reasonable inferences are drawn, in Plaintiffs' favor. See Wright v. N.Y. State Dep't of Corr., 831 F.3d 64, 71-72 (2d Cir. 2016).

         NIFA is an independent instrumentality established under the Nebraska Investment Finance Authority Act, Neb. Rev. Stat. §§ 58-201 to 58-272. NIFA's activities include providing sources of mortgage financing at reasonable rates to Nebraska residents of low and moderate income levels. NIFA issues bonds to fund these activities. The bond series relevant to this dispute were issued between 1994 and 2000 and are governed by a General Indenture of Trust (the “General Indenture”) and several series-specific supplemental indentures executed by NIFA and its Trustee -- initially Norwest Bank Minnesota, N.A. and now Wells Fargo Bank, N.A. (“Wells Fargo”). The General Indenture addresses, among other things, the general terms and provisions of security for the bonds, investment of bond proceeds and procedures for redeeming the bonds. The supplemental indentures contain terms specific to each bond series, such as maturity dates, interest rates, payment schedules and redemption provisions.

         The General Indenture created a system of “special Funds and Accounts” to hold the proceeds from the bonds. It established nine funds, each with a specific purpose. For example, the “Revenue Fund” was to hold “all Revenues derived from the Mortgage Loans (including Defaulted Mortgage Loans) and the Mortgage-Backed Securities.” Within each fund, the General Indenture provided for the creation of a separate account for each bond series. NIFA is required by statute to invest funds securing a bond issue in the manner permitted by the applicable indentures. See Neb. Rev. Stat. § 58-240(1). Here, the supplemental indentures direct Wells Fargo, as the Trustee, to invest monies in the funds and accounts in the Investment Agreements.

         The Investment Agreements are examples of Guaranteed Investment Contracts (“GICs”). A GIC is a specific type of investment contract that is competitively bid. State and municipal entities can invest the proceeds of tax-exempt bonds in GICs.

         When a municipal bond issuer, such as NIFA, seeks to enter into a GIC, it conducts a process in which potential GIC providers, such as GE, bid on the proposed GIC. As part of the bidding process, the issuer prepares bid documents containing details about the proposed GIC. The bid documents are reviewed by the issuer and the issuer's underwriters and counsel before they are circulated to potential providers. On the basis of the bid documents, providers decide whether to bid on the proposed GIC and, if so, what rate they will offer. At a certain time specified by the bid documents, the issuer analyzes the bids received and selects the highest qualifying bid as the winner. After the GIC provider with the winning bid is notified, it sends the first draft of the formal contract to the issuer. The contract would memorialize the pricing terms that had been set at the bid stage. It would be highly unusual for the parties to a GIC to negotiate its material terms after the municipal issuer has selected the winning bidder because such negotiation would defeat the purpose of a bid. The termination provision of a GIC is a material term that affects the rate that providers are willing to bid.

         In accordance with the process outlined above, NIFA circulated bid forms in advance of the execution of each of the Investment Agreements. The bid forms for five of the six Investment Agreements at issue provided that the agreement would terminate on a date certain or “upon earlier redemption or maturity of the Bonds.” These bid forms also stated that the resulting agreement “must conform to the term of the bid and the bidding specifications.” The bid form for the February 24, 2000, Investment Agreement did not provide for early termination upon bond redemption, but when returning the completed bid form to NIFA, GE representatives wrote at the top of the form, “Float fund is too long” and “Bid based on same terms conditions as our 2/22/96 Agrmt for their '96 A Bonds.” This bid form stated that the resulting agreement “must conform to the terms of the bidding specifications.” All six bid forms also state that NIFA “reserves the right to negotiate the terms of the Investment Agreement.”

         GE was the successful bidder and prepared the first draft of each of the Investment Agreements. Certain provisions in some of the Investment Agreements were negotiated by the parties, but GE denies that they negotiated the termination provisions. There is no documentary evidence, and no witness has any recollection, of such negotiations. Each executed Investment Agreement provides that it “shall terminate on the Termination Date” -- a date certain set forth in each agreement and ranging from March 2, 2026, to March 2, 2035 -- “unless earlier terminated in accordance with its terms.”

         According to Chris Patronis, a former GE employee who was involved in the bidding process, GE's subjective understanding at the time it submitted its bids was that the resulting Investment Agreements would terminate upon redemption of the bonds. GE priced its bids based on its internal estimates that redemption would occur in seven to twelve years, depending on the particular Investment Agreement, and the rates contained in the executed Investment Agreements are identical to the rates submitted in GE's bids. Patronis testified that if the termination provisions had changed from those in the bid form to provisions stating that the Investment Agreements would not terminate upon redemption of the bonds, GE would have changed its bids to a lower rate or not bid at all.

         Around the same time that the Investment Agreements were drafted and executed, GE entered into at least 1, 857 similar agreements with other parties. In 58 of those agreements, the parties included explicit language providing for termination upon bond redemption. The other 1, 799 agreements do not contain such language.

         NIFA redeemed the bonds on a rolling basis between 2005 and 2010. NIFA directed Wells Fargo to leave the Investment Agreements open after the final redemption of the related series of bonds and, at Wells Fargo's request, indemnified Wells Fargo from any liability that would result from that direction. In internal emails, NIFA officials acknowledged that GE might interpret the Investment Agreements as having terminated upon bond redemption but concluded that NIFA “ha[s] the right to continue the [Investment Agreements].” GE ultimately discovered that the bonds had been redeemed and commenced this lawsuit for declaratory relief and recovery of “the interest, profits or other comparable amounts paid by GE to NIFA” under the Investment Agreements.

         II. ...

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