Opinion
No. 00 Civ. 5863 (GBD).
February 18, 2005
MEMORANDUM OPINION AND ORDER
Plaintiffs bring suit alleging breach of contract and seeking indemnification from defendant credit derivative seller in connection with the default of a loan made to a Philippine development company. Defendant moved for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). Plaintiffs cross-moved for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, defendant's motion is denied and plaintiffs' motion is granted.
BACKGROUND
In 1999, Bear Stearns International Limited ("BSIL"), an investment company based in England, agreed to loan $9,307,000 to Ecobel Land Inc. ("Ecobel"), a Philippine land development company, for construction of a condominium complex in the Philippines. Pursuant to the loan agreement, Ecobel was obligated to repay $10 million to BSIL on March 7, 2000. Plaintiffs allege that in support of this agreement, Ecobel was to procure a surety bond to be issued by the Government Service Insurance System ("GSIS"), a Philippine government entity, guaranteeing payment to BSIL in the event of default by Ecobel. Plaintiffs allege that the surety bond was to be "guaranteed by the Government of the Republic of the Philippines" ("Philippines"). Complaint at 2, ¶ 10.
Although the surety bond named the Philippine Veterans Bank as the obligee, plaintiffs allege that the surety bond was to be transferred or reissued to BSIL. GSIS, however, never issued its bond naming BSIL as Obligee. Nor did the Philippine Veterans Bank ever assign or transfer its interest as Obligee to BSIL.
In a related but separate transaction, BSIL entered into a credit default swap agreement with plaintiff Aon Financial Products, Inc. ("AFP"), pursuant to which AFP promised to pay BSIL $10 million upon the occurrence of a "Credit Event." Defendant Aon Corporation ("Aon"), in turn, executed a guarantee for payment by AFP under the credit default swap. Plaintiffs, who are in the business of insuring risk, then entered into a credit default swap agreement with defendant Societe Generale ("Agreement"). Under the Agreement, Societe Generale agreed to indemnify and reimburse AFP $10 million upon the occurrence of a "Credit Event." The Agreement was executed on February 9, 1999 (the "Trade Date") and was scheduled to terminate on March 31, 2000 (the "Scheduled Termination Date"). The clear intent of the parties was that Societe Generale would guarantee payment to Aon and AFP on the condition that they become liable to BSIL upon the occurrence of a Credit Event.
Under the agreement between BSIL and AFP, only a Failure to Pay by the Reference Entity qualified as a Credit Event. See Plaintiffs' Facts, Exhibit B, ¶ 3. The Reference Entity is defined as the "Government Service Insurance System (GSIS) and any Successors and assigns." Id., ¶ 1.
Subject to the agreement between BSIL and plaintiffs Aon and AFP, two other agreements were executed in 1999: BSIL, AFP, and Aon entered into an assignment agreement with plaintiff URSA Minor Limited ("Ursa Minor"), a Cayman Islands company, pursuant to which Ursa Minor was assigned all of BSIL's rights under the credit default swap and the guarantee; Ursa Minor, in turn, assigned its rights by way of a security interest to Bankers Trustee Company Limited ("Bankers Trustee"), an English corporation.
Societe Generale, incorporated in France, is a multinational banking institution that provides retail banking, specialized financial services, global investment management, as well as corporate and investment banking.
Under the terms of the Agreement, the following Credit Events applied to this transaction: a Sovereign Event, a Cross Default, a Failure to Pay, a Repudiation or a Restructuring. See Agreement, Plaintiffs' Facts, Exhibit F, ¶ 3.
In March 2000, Ecobel failed to make payment when the loan came due. BSIL made a demand on GSIS, who denied liability under the surety bond. BSIL then made a demand on AFP, who disclaimed responsibility under its credit default swap agreement with BSIL. Despite their denial of liability and in order to protect their interests, Aon and AFP notified Societe Generale that their obligation would accrue if Aon and AFP's obligations to BSIL became due. See March 22, 2000 letter, Plaintiffs' Facts, Exhibit O.
This dispute is the subject of the court's opinion in Ursa Minor Ltd. v. Aon Financial Products, Inc., 2000 WL 1010278 (S.D.N.Y. July 21, 2000), aff'd 7 Fed.Appx. 129 (2d Cir. 2001). In Ursa Minor, "AFP stated that it would not render payment under the Credit Default Swap because its obligations require a valid `Reference Obligation, a valid bond, in order to be effective. Because GSIS claimed that there was no valid Reference Obligation, AFP claimed that it did not have to pay." Id. at *6 (internal quotations omitted). Aon also refused to pay, claiming that AFP had not defaulted on a Credit Event, and there is no obligation under Aon's guarantee if there is not such a default. After dispositive motions were filed, the district court found a failure to pay occurred and that AFP and Aon were liable under their Credit Default Swap and Guarantee, jointly and severally, for $10 million, to plaintiff Ursa Minor, BSIL's successor-in-interest.
In the present case, AFP and Aon seek reimbursement and indemnification from defendant Societe Generale for $10 million pursuant to the credit default swap agreement between plaintiffs and defendant. Plaintiffs contend that because the court found in Ursa Minor Ltd. that a "credit event" occurred triggering Aon and AFP's liability in that case, this Court must find that a credit event occurred in this case triggering Societe Generale's liability. Plaintiffs contend that "both agreements [between AFP/Aon and Ursa Minor and between AFP/Aon and Societe Generale] relied upon the same underlying documents and security." Complaint at 7, ¶ 39. Likewise, plaintiffs' breach of contract claim is premised on Societe Generale's failure "to acknowledge the occurrence of a valid credit event." Id. at 8, ¶ 43.
Defendant Societe Generale moved for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). Societe Generale argues that plaintiffs' reliance on the previous finding in Ursa Minor, Ltd. that a credit event occurred has neither a collateral estoppel nor res judicata effect in the present action before this Court. Moreover, Societe Generale contends that a Credit Event under the AFP/Societe Generale Agreement requires an act or failure to act by the Republic of the Philippines, and that plaintiffs' complaint fails to sufficiently allege that such an act by the Republic of the Philippines occurred while that agreement was in effect. Defendant further argues that even if a Credit Event occurred, the Event occurred after the Scheduled Termination Date and therefore cannot trigger their liability. Plaintiffs cross moved for summary judgment pursuant to Fed.R.Civ.P. 56. Defendant's motion for judgment on the pleadings is denied. Plaintiffs' motion for summary judgment is granted.
BREACH OF CONTRACT
The principal dispute between the parties concerns whether a "Credit Event" occurred under the Agreement. Defendant maintains that plaintiffs's reliance on Ursa Minor Ltd. v. Aon Financial Products, Inc. is misplaced and that plaintiffs' complaint has not sufficiently alleged that a credit event occurred. Plaintiffs argue that not only have they sufficiently alleged the occurrence of a credit event, but that the facts before this Court prove, as a matter of law, that a credit event occurred while the agreement was in effect, entitling them to summary judgment on their claims.
In evaluating a motion for judgment on the pleadings, this Court accepts the allegations in the complaint as true and will construe them in the light most favorable to the non-movant. See King v. Am. Airlines, Inc., 284 F.3d 352, 355 (2d Cir. 2002). All reasonable inferences will be drawn in favor of that party. See Patel v. Searles, 305 F.3d 130, 134-35 (2d Cir. 2002). "A complaint will only be dismissed if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. at 135 (internal quotations omitted), quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
It is undisputed that the credit default swap agreement ("Agreement") between the parties obligates Societe Generale to pay AFP $10,000,000 upon receipt of notice that a Credit Event has occurred. The Agreement is valid and binding between the parties. There is no claim that plaintiffs breached their obligations under the Agreement. It is further uncontested that plaintiffs have not received any payment under the terms of the Agreement from GSIS, the Republic of the Philippines, or Societe Generale, despite demands of payment from each of these parties. It is further undisputed that plaintiffs have suffered damages as a result of their obligation to pay under the BSIL/AON Agreement.
The uncontroverted evidence shows that GSIS denied any liability pursuant to the surety bond. See Letter from GSIS to BSIL dated March 15, 2000, Plaintiffs' Facts, Exhibit M. Furthermore, plaintiffs notified defendant Societe Generale of GSIS' default on March 22, 2000. See id., Exhibit O. On April 3, 2000, Aon sent a Notice and Demand on the Government of the Republic of the Philippines. See id., Exhibit Q. Plaintiffs served defendant Societe Generale with a further Notice of a Credit Event and Demand for Payment on April 5, 2000. See id., Exhibits S. Defendant Societe Generale rejected these demands by letter dated April 7, 2000. See id., Exhibit T. On April 14, 2000, the Republic of the Philippines denied AFP's demand. See id., Exhibit U.
This Court finds, independently, but consistent with, the court's determination in Ursa Minor Ltd. v. AON Financial Products, Inc., that a Credit Event occurred. In fact, even under defendant's analysis, both GSIS and the Republic of the Philippines both independently refused demand for payment. Upon plaintiff's notification that a Credit Event occurred, Societe Generale's denial of liability and failure to pay would be a breach of its contract. See National Market Share, Inc. v. Sterling Nat. Bank, 392 F.3d 520, 525 (2d Cir. 2004) (finding that to establish a prima facie case for breach of contract, a plaintiff must plead and prove: (1) the existence of a contract; (2) a breach of that contract; and (3) damages resulting from the breach) (citation omitted). Judgment on the pleadings in plaintiffs' favor is therefore inappropriate.
Plaintiffs have moved for summary judgment on the issue of Societe Generale's liability, claiming that Societe Generale breached the Agreement when it failed to pay after demand was made. Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Nebraska v. Wyoming, 507 U.S. 584, 590, 113 S.Ct. 1689, 1694, 123 L.Ed.2d 317 (1993). The burden of demonstrating that no factual dispute exists is on the moving party. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met this burden, the nonmoving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). In deciding a motion for summary judgment, a court must resolve all ambiguities and draw all reasonable inferences in favor of the party opposing the motion. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.3d.2d 202 (1986). Summary judgment should be granted only when no reasonable trier of fact could find in favor of the nonmoving party. See Gallo v. Prudential Residential Services, Ltd., 22 F.3d 1219, 1224 (2d Cir. 1994).
A. Occurrence of a Credit Event
The Credit Default Swap Agreement between the parties obligates Societe Generale to pay AFP $10,000,000 upon receipt of notice that a Credit Event has occurred. Under the Agreement, the various Credit Events that trigger Societe Generale's liability include: a Sovereign Event; a Cross Default; a Failure to Pay; a Repudiation; and a Restructuring. See Agreement, Plaintiffs' Facts, Exhibit F, ¶ 7. Defendant contends that a Credit Event has not occurred because plaintiffs have failed to show that the Reference Entity, i.e., the Republic of the Philippines, defaulted on an obligation. Defendant further argues that even if the Republic of the Philippines defaulted on its obligation, the default occurred subsequent to the Scheduled Termination Date, thereby nullifying Societe Generale's liability.
Although plaintiff has alleged the occurrence of the following types of Credit Events: a Sovereign Event; a Failure to Pay; and a Repudiation, the principal dispute between the parties involves whether a Sovereign Event has occurred.
A plain reading of the Agreement shows that a Credit Event occurred once GSIS denied liability and refused to pay. It is undisputed that on March 15, 2000, GSIS indicated their refusal to pay, stating that "[GSIS] is not inclined to admit liability to [BSIL]." As an agency of the Republic of the Philippines, GSIS' refusal constituted a Sovereign Event under this Agreement.
Under the Philippine Administrative Code, GSIS, undisputably a Philippine Government Financial Institution, is an agency of the Government of the Philippines. The Administrative Code defines an agency as "any of the various units of the Government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein." Furthermore, an instrumentality is defined as
any agency of the National Government, not integrated within the departmental framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations.
Plaintiffs' Facts, Exhibit H.
The clear and express terms of the Agreement provide that a Sovereign Event is
a condition which is created by or results from any act or failure to act by or results from any act or failure to act by the government of the Reference Entity or any agency or regulatory authority thereof, including the central bank of the Reference Entity, that has the effect of declaring a moratorium (whether de facto or dejure) on, or causing a failure to honour any obligation relating to, or cancelling or generally causing material changes to the terms and conditions of, any obligations issued by the government of the Reference Entity or the central bank of the Reference Entity."
Under the Agreement, the Reference Entity is defined as the Republic of the Philippines. Furthermore, a Failure to Pay is defined as "the failure by the Reference Entity to make, when due, any payments equal to or exceeding the Payment Requirement (if any) under any Obligations." Agreement, Plaintiffs' Facts, Exhibit F, ¶ 7. A Repudiation occurs when "the Reference Entity disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, any Obligation in any material respect." Id.
Agreement, Plaintiffs' Facts, Exhibit F, ¶ 7. The Agreement further provides that
[w]hen determining the existence or occurrence of any Credit Event, the determination shall be made without regard to: (a) any lack or alleged lack of authority or capacity of the Reference Entity to enter into any Obligation, (b) any actual or alleged unenforceability, illegality, impossibility or invalidity with respect to any Obligation, (c) the failure of the Reference Entity to make any payment or to perform any obligation as a result of compliance with any applicable law, order, regulation, decree or notice, however described, or the promulgation of, or any change in, the interpretation by any court, tribunal, regulatory authority or similar administrative or judicial body with competent or apparent jurisdiction. . . .Id., ¶ 3.
Defendant argues that plaintiffs "have not alleged and cannot allege that there has been a default on any obligation of the Republic of the Philippines or that any such obligation has been materially altered or modified." Defendant's Reply Brief in Further Support of their Motion for Judgment on the Pleadings at 1-2. Contrary to defendant's argument, a Sovereign Event is not solely defined as the Republic of the Philippines' refusal to pay. A plain reading of the Agreement lists four conditions that constitute a Sovereign Event:
(1) a condition . . . that has the effect of declaring a moratorium (whether de facto or dejure) on . . . any obligation relating to . . . the government of the Reference Entity. . . .";
(2) a condition . . . that has the effect of . . . causing a failure to honour any obligation relating to . . . the government of the Reference Entity. . . .";
(3) a condition . . . that has the effect of cancelling . . . any obligations issued by the government of the Reference Entity. . . .";
(4) a condition . . . that has the effect of . . . generally causing material changes to the terms and conditions of, any obligations issued by the government of the Reference Entity. . . ."
Agreement, Plaintiffs' Facts, Exhibit F, ¶ 7. The second example above requires only that GSIS' act have the effect of causing a failure to honour an obligation relating to the Philippine government. GSIS' denial of liability constituted such an act.
Indeed, the only reference obligation issued was the surety bond issued by GSIS. The Republic of the Philippines, which was not a signatory to the surety bond or any of the underlying agreements, serves only as the guarantor of GSIS's obligation under Philippine law. Although the Agreement broadly defines the Republic of the Philippines' commitment as "any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) for the payment or repayment of money," this obligation is not independent of its guarantee of GSIS' obligation. Agreement, ¶ 3. This simply means that if GSIS can't pay, it was expected by the parties that the Republic of the Philippines might step in and fulfill GSIS' obligation. It does not establish a separate independent obligation. As a result, the parties could not have reasonably expected that the Republic of the Philippines would step in and fulfill an obligation which GSIS refuses to honor or disclaims liability for. It is no surprise, therefore, that once GSIS, an agency of the Philippine government, disclaimed liability, the Republic of the Philippines also disclaimed liability.
The Surety Bond entered into by GSIS is guaranteed by the Republic of the Philippines. Section 9 of RA 656, as amended by the Presidential Decree No. 245 provides that "the Government of the Republic of the Philippines hereby guarantees the fulfillment of the obligations of the Fund when and as they shall become due." Declaration of Cesar L. Villanueva at 13, ¶ 10.
Although a Credit Event occurred once GSIS refused to pay, Societe Generale need not pay unless and until plaintiffs sought and were refused payment by the Republic of the Philippines as the guarantor of the GSIS obligation. It is undisputed that on April 3, 2000, plaintiffs sent a Notice and Demand on the Government of the Republic of the Philippines informing them that "demand was made on the GSIS to comply with its obligations" pursuant to the surety bond. The letter reiterated that "the Government of the Republic of the Philippines guarantees the fulfillment of obligations of the GSIS under RA 656" and that "[b]y virtue of the said statutory mandate, we hereby notify the Government of the Republic of the Philippines of the fact of refusal of the GSIS to pay." The letter then clearly makes "a formal demand on the Government of the Republic of the Philippines to acknowledge and honor its guaranty obligation." Id., Exhibits Q and R. On April 14, 2000, the Assistant Secretary of the Department of Finance of the Republic of the Philippines responded,
GSIS has denied the validity of the claim. GSIS likewise denied any such liability under the foregoing surety bond. Aon Financial based its demand against the Republic of the Philippines on a supposed guarantee by the Republic of the Philippines under R.A. 656, as amended. We categorically state that such guarantee does not exist. We thus regret to inform you that Aon Financial's demand is hereby denied.
Plaintiffs' Facts, Exhibit T.
There is, furthermore, no dispute that Societe Generale was notified in writing of GSIS' denial of liability and refusal to pay before the Scheduled Termination Date of March 31, 2000 (the date on which protection ends). On March 22, 2000, AFP informed Societe Generale by letter that "GSIS has declined to make payment for reasons set forth in their correspondence" and that "BSIL has made demand on [AFP] to pay pursuant to a Credit Default Swap agreement."
The letter outlined AFP's position:
The current controversy is indeed unfortunate since, as a preliminary matter, it appears GSIS had and has an obligation to pay BSIL. Ultimately, GSIS should pay. But, they have not paid, which has set up the current chain of events in motion. . . .
Recognizing this matter is not likely to settle itself, in an effort to get a resolution, we have this day filed suit in Chicago seeking a declaration of the rights and obligations of all relevant parties. In order to preserve our rights under AFP — Societe Generale agreement, we felt compelled to name you in the litigation; however, recognize our alignment of interests. If our position is upheld, you will not have to pay us. If we lose, you will owe us. . . .
In this vein, the AFS-Societe Generale [Agreement] contains several procedural requirements which must be met for presentment to you on our agreement, such as presenting a claim to the Government of the Philippines and producing "Publicly available information." Out of an abundance of caution we are initiating those steps as part of our notification to you, but in light of our position there is no obligation on the underlying matter, we would like to discuss with you whether we could dispense with those prerequisites.
Plaintiffs' Facts, Exhibit O. This letter is sufficient to find that Aon and AFP timely delivered a Credit Event Notice under the Agreement. Societe Generale was thereafter kept informed of plaintiff's efforts to obtain payment from the Republic of the Philippines.
On April 5, 2000, Aon indicated to Societe Generale that "[d]emand has been made on the Philippine government." However, it is uncontested that no response had yet been received from the Philippine government. Plaintiffs' Facts, Exhibit S. Societe Generale responded to plaintiffs' request on April 7, 2000.
I should say at the outset that we do not accept that your letter constitutes a valid Credit Event Notice for the purposes of the above-referenced Credit Default Swap. You do not specify the Credit Event upon which Aon purports to rely or describe in reasonable detail facts that you assert constituted a Credit Event arising on or before 31 March, 2000. . . . You say that `Demand has been made upon the Philippine Government' but you do not provide a copy of that demand, or tell us what response has been made to it. . . . In (sic) the circumstances, I cannot therefore confirm Societe Generale's acknowledgment of its obligations pursuant to the subject agreement.Id., Exhibit T.
A Credit Event Notice "means an irrevocable notice (which may be oral, including by telephone) to the parties and the Calculation Agent that describes the occurrence of a Credit Event on or after the Effective Date and on or prior to the Scheduled Termination Date. Any notice given orally, including by telephone, will be effective when actually received by the intented recipient." Agreement, ¶ 7(b).
This Court finds, as a matter of law, that GSIS' denial of liability is a valid Sovereign Event under the Agreement. Notice of this Sovereign Event triggered Societe Generale's liability prior to the Scheduled Termination Date. Plaintiffs' motion for summary judgment is therefore granted.
B. Indemnification
The Master Agreement between the parties expressly provides that Societe Generale will indemnify AFP for its costs of pursuing Societe Generale if a valid Credit Event has occurred and if Societe Generale has refused to honor its obligations to pay AFP. See Master Agreement, Plaintiffs' Statement of Material Facts Pursuant to Local Rule 56.1(a) in Support of their Motion for Summary Judgment ("Plaintiffs' Facts"), Exhibit F, ¶ 11. Although the Master Agreement does not give plaintiffs a right to indemnification simply because they were found liable to BSIL, the indemnification provision in the Master Agreement between the parties clearly provides a right to indemnification by the defaulting party. Plaintiffs have sufficiently alleged a cause of action for indemnification. Moreover, as this Court has found that a credit event has occurred, Societe Generale's refusal to honor its obligations to pay AFP makes it the defaulting party owing indemnification. Therefore; summary judgment must also be granted on plaintiffs' indemnification claim.
"A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees . . . incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party. . . ." Plaintiffs' Facts, Exhibit F, Master Agreement, ¶ 11.
CONCLUSION
For the reasons stated above, defendant's motion for judgment on the pleadings is denied. Plaintiffs' motion for summary judgment is granted.SO ORDERED.