Citibank, N.A. v. Barclays Bank, PLC

• Decision Date: 22 November 2013
• Docket Number: No. 13 Civ. 03063LGS.,13 Civ. 03063LGS.
• Citation: Citibank, N.A. v. Barclays Bank, PLC, 28 F.Supp.3d 174 (S.D. N.Y. 2013)
• Parties: CITIBANK, N.A., Plaintiff, v. BARCLAYS BANK, PLC, Defendant.
• Court: U.S. District Court — Southern District of New York

28 F.Supp.3d 174

CITIBANK, N.A., Plaintiff

v.BARCLAYS BANK, PLC, Defendant.

No. 13 Civ. 03063LGS.

United States District Court, S.D. New York.

Signed Nov. 22, 2013.

Gregory P. Joseph, Douglas J. Pepe, Jeffrey Harrison Zaiger, Pamela H. Jarvis, Sandra M. Lipsman, Joseph Hage Aaronson LLC, Mary Jane Lee, Office of the General Counsel, New York, NY, for Plaintiff.

Jonathan David Schiller, Boies Schiller & Flexner LLP, New York, NY, Abby Lauren Dennis, Hamish P.M. Hume, Boies, Schiller & Flexner LLP, Washington, DC, William Todd Thomas, Boies, Schiller & Flexner LLP, Fort Lauderdale, FL, for Defendant.

OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge:

This is an action for breach of contract by PlaintiffCitibank, N.A.(“Citibank”) against DefendantBarclays Bank, PLC(“Barclays”).The claim arises from a 2004 agreement between Citibank and Lehman Brothers, Inc.(“Lehman”), which provided that Citibank would clear Lehman's foreign exchange (“FX”) transactions through the Continuous Linked Settlement system (i.e., provide “CLS Services”), and two 2008 agreements between Citibank and Barclays, which provided that Barclays would indemnify Citibank for any losses incurred in providing CLS Services to Lehman from September 17 through September 19, 2008(“CLS Losses”), the tumultuous three days just after Lehman's parent company, Lehman Brothers Holdings, Inc.(“LBHI”), filed for bankruptcy protection and when Lehman was defaulting on its obligations, and Barclays was petitioning the Bankruptcy Court to approve its acquisition of Lehman's broker-dealer and investment banking assets.

Barclays moves for partial summary judgment seeking dismissal of Citibank's claims for funding losses in the form of interest and capital charges (“Funding Losses”).For purposes of this discussion, Funding Losses are distinct from principal losses, which are the direct losses Citibank incurred in performing CLS Services to Lehman from September 17 through September 19, 2008(“Principal Losses”).Citibank moves for partial summary judgment seeking an order that (1) Citibank is entitled to recover its Funding Losses in amounts to be proved and (2) Barclays is barred from contending that Lehman deposits held at Citibank provide a defense to Citibank's claims in this action.For the reasons discussed below, Barclays' motion is denied, and Citibank's motion is granted in part and denied in part.

In addition, the parties' briefs in connection with their cross-motions for summary judgment raise the issue of statutory prejudgment interest.Citibank asserts that statutory prejudgment interest should be recoverable from the date of its initial CLS Losses, while Barclays asserts that statutory prejudgment interest should not be recoverable before the date Citibank demanded payment from Barclays.Barclays also argues that New York's statute providing for 9% prejudgment interest is unconstitutional.For the reasons discussed below, the statute is constitutional, and Citibank may claim prejudgment interest from February 1, 2013, the date of its indemnification demand on Barclays.

I.Facts

The facts are taken from the parties' summary judgment papers and the exhibits attached thereto and are viewed in the light most favorable to the non-moving party.

A.The CLS Agreement

On October 28, 2004, Citibank and Lehman entered into an agreement that provides the terms under which Citibank would provide CLS Services to Lehman (the “CLS Agreement”).Under the CLS Agreement, Citibank agreed to settle FX transactions as Lehman's agent, and Lehman agreed to be liable for the settlements as the principal (Id. at § 1).The CLS Agreement acknowledges that by settling Lehman's FX transactions, Citibank assumed a credit exposure on Lehman's behalf.However, there is no provision in the CLS Agreement providing that Lehman would pay interest to Citibank.

Under the CLS Agreement, Lehman was required, on a daily basis, to repay fully all short balances, which consisted of the net funds paid by Citibank to settle Lehman's FX transactions.As well, Citibank had the right to withhold any positive long positions Lehman had in any currencies to the extent of any short balances owed.The CLS Agreement provided Citibank the right to terminate the arrangement immediately and without notice if, among other things, (1) Lehman failed to repay a short balance on time, (2) Lehman, its parent company or material subsidiary entered bankruptcy proceedings or (3) Lehman became unable to pay its debts as they came due.

B. Lehman's Default and Barclays' Request

On September 15, 2008, LBHI filed for bankruptcy protection.The same day, Citibank terminated the CLS Agreement.However, later that day, Citibank agreed to provide CLS Services to Lehman on September 16, 2008, because Lehman provided a $1 billion cash deposit as security (the “$1 Billion Deposit”) and gave Citibank the right to set off the $1 Billion Deposit against any of Lehman's obligations under the CLS Agreement.

On September 16, 2008, Citibank agreed to provide CLS Services to Lehman for one additional day, September 17, 2008.Also on September 16, 2008, Barclays signed an agreement to purchase Lehman's United States broker-dealer and investment banking assets.

On September 17, 2008, LBHI moved the Bankruptcy Court to approve Barclays' acquisition.Also on September 17, 2008, Citibank again terminated the CLS Agreement.However, on the same day, at Barclays' request, Citibank agreed to withdraw its termination of the CLS Agreement and continue to provide CLS Services to Lehman because Barclays agreed to provide Citibank with $700 million in cash collateral (the “$700 Million Collateral”) and enter into an indemnification agreement (the “Pledge Agreement”).

C.The Pledge Agreement

The Pledge Agreement of September 17, 2008, is governed by New York law and documents Barclays' pledge of the $700 Million Collateral.In section 2, the Pledge Agreement “secures the payment of” Barclays' and Lehman's obligations to Citibank in connection with Citibank's continuing to provide CLS Services on and after September 17, 2008:

(i) all obligations of [Barclays] and [Lehman] now or hereafter existing under and in connection with the Services, including, without limitation, whether for payment of any overdrafts, principal, interest, fees, expenses or otherwise, (ii) all obligations of [Barclays] and [Lehman] now or hereafter existing under each agreement of [Barclays] with respect to the Services (each a “Service Agreement”) and (iii) all obligations of [Barclays] and [Lehman] now or hereafter existing under this Agreement (all such obligations of [Barclays] being collectively the “Obligations”).

The Preliminary Statement within the Pledge Agreement defines Services as follows:

[Citibank] may from time to time in its sole discretion make available to [Barclays] and to [Lehman] certain cash management services which require the extension of credit by [Citibank] including, but not limited to, one or more of the following services: CLS Services, and daylight overdraft lines and temporary overdraft lines in connection with the provision of CLS Services (collectively, the “Services”).

Section 18 of the Pledge Agreement provides that “[a]ll rights of [Citibank], all security interests hereunder and all obligations of [Barclays] hereunder are unconditional and absolute and independent and separate from ... any other security for or guaranty of the Obligations, whether executed by [Barclays] or any other person or entity.”

Section 18 also states that “the obligations of [Barclays] hereunder shall not be released, discharged or otherwise affected or impaired by,” among other things:

(v) the existence of any claim, set-off or other right which [Barclays] or [Lehman] may have at any time against [Citibank], or any other person or entity, whether in connection herewith or any unrelated transaction ...

(vii) any failure by [Citibank] ... (B) to give notice of the existence, creation or incurrence by [Barclays] or [Lehman] of any new or additional indebtedness or obligation under or with respect to Obligations ... or (E) to proceed with due diligence in the collection, protection or realization upon any collateral securing the Obligations...

(xi) any other act or omission to act or delay of any kind by [Citibank] or any other person or entity or any other circumstances whatsoever which might, but for the provisions of this clause, constitute a legal or equitable discharge of [Barclays'] obligations hereunder

Additionally, the Pledge Agreement contains a “no waiver” clause on the part of Citibank, which states:

No failure or delay on the part of [Citibank] to exercise, no course of dealing with respect to, and no delay in exercising, any right, power or privilege under this Agreement or any Service Agreement or any other document or agreement contemplated hereby or thereby and no course of dealing between [Citibank] and [Barclays] or [Lehman] shall operate as a waiver thereof....

D. Citibank's Unwinding of Lehman's FX Positions

From September 17 through 19, 2008, Citibank continued to provide CLS Services to Lehman.On September 19, 2008, Citibank again terminated the CLS Agreement, set off the $1 Billion Deposit (the “$1 Billion Setoff”) and began to unwind Lehman's FX positions.Also on September 19, 2008, the Securities Investor Protection Corporation placed Lehman in liquidation.On the same day, the Bankruptcy Court heard LBHI's motion to approve Barclays' acquisition of Lehman's broker-dealer and investment banking assets.

On September 20, 2008, the Bankruptcy Court approved Barclays' acquisition, and on September 22, 2008, the transaction closed.The acquisition resulted in £2,262 million (approximately $4 billion at September 2008 exchange rates) in gains to Barclays.On September 23, 2008, Citibank informed Barclays that Citibank had “determined that it likely holds substantial ‘Obligations,’ as Section 2 of the [Pledge] Agreement defines that term, secured by the [$700...