Vcg Spcl. Opportunities Master Fund v. Citibank

• Decision Date: 05 November 2008
• Docket Number: No. 08-CV-01563 (BSJ).,08-CV-01563 (BSJ).
• Citation: 594 F.Supp.2d 334
• Parties: VCG SPECIAL OPPORTUNITIES MASTER FUND LIMITED, Plaintiff, v. CITIBANK, N.A., Defendant. Citibank, N.A., Counterclaim-Plaintiff v. VCG Special Opportunities Master Fund Limited, Counterclaim-Defendant.
• Court: U.S. District Court — Southern District of New York

594 F.Supp.2d 334

VCG SPECIAL OPPORTUNITIES MASTER FUND LIMITED, Plaintiff, v. CITIBANK, N.A., Defendant.

Citibank, N.A., Counterclaim-Plaintiff v. VCG Special Opportunities Master Fund Limited, Counterclaim-Defendant.

No. 08-CV-01563 (BSJ).

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

November 5, 2008.

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Steven Glen Mintz, Terence William McCormick, Mintz & Gold LLP, New York City, NY, for Plaintiff/Counter Defendant.

Allan J. Arffa, Paul, Karen R. King, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant.

OPINION AND ORDER

BARBARA S. JONES, District Judge.

Defendant and Counterclaim-Plaintiff Citibank, N.A. ("Citibank") moves this Court for judgment on the pleadings, pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, dismissing the complaint of Plaintiff and Counterclaim-Defendant VCG Special Opportunities Master Fund Limited ("VCG") and entering judgment in its favor on its counterclaim. For the reasons that follow, Citibank's motion is GRANTED; thus, the request for a stay of discovery pending the resolution of the instant motion is DENIED as moot.

BACKGROUND¹

This action arises from a credit default swap (or "CDS") transaction between VCG and Citibank, by which VCG sold Citibank credit protection against the risk of a credit default by a collateralized debt obligation (or "CDO"). (Compl. ¶ 10.) In a typical CDS transaction of this kind, the "protection buyer" makes regular payments to a "protection seller," with "reference" to a specific credit obligation. (Citibank's Mem. Supp. J. on Pleadings ("Citibank's Mem.") at 1.) The credit obligation is generally referred to as the "reference obligation," and the issuer of that obligation is generally referred to as the "reference entity." (Id.) In return for receiving the protection buyer's payments, the protection seller agrees to undertake the credit exposure of the underlying reference obligation. (Compl. ¶ 11.)

The Parties' CDS Transaction

The primary contract documents governing the parties' rights and obligations under the CDS transaction are the 2002 version of the Master Agreement of the International Swap Dealers Association ("ISDA"), dated September 1, 2006 (the "ISDA Master Agreement"); the Schedule to the ISDA Master Agreement, dated September 1, 2006 (the "Schedule"); the 1994 ISDA Credit Support Annex, dated September 1, 2006 (the "Credit Support Annex"); and the Confirmation Letter by Citibank, dated July 5, 2007 (the "Confirmation Letter"). (Compl. ¶ 13.) The Confirmation Letter incorporates the 2003 ISDA Credit Derivatives Definitions and the ISDA Standard Terms Supplement for use with Credit Transactions on Collateralized Debt Obligation with Pay-As-You-Go or Physical Settlement (the "Standard Terms Supplement"). (Compl. ¶ 13.) In the event of any inconsistency between the Confirmation Letter and the ISDA Master Agreement, the terms of the Confirmation Letter control. (Compl. ¶ 14; Arffa Decl., Ex. 1 (ISDA Master Agreement), at 1.)

Pursuant to these documents (collectively, the "CDS Contract"), Citibank acted as the protection buyer in the parties' transaction. (Compl. ¶ 10.) Citibank agreed to make, for the term of the CDS Contract,² periodic "Fixed Payments" to VCG based on a fixed percentage of 5.50% per annum on an "Initial Face Amount" of the reference obligation, Class B Notes. The Class B Notes were issued by the reference entity, the Millstone III CDO Ltd. III-A (the "Millstone III CDO").³ (Compl. ¶ 12.)

VCG acted as the protection seller for the CDS transaction. As protection seller, VCG undertook the default risk of the reference obligation; that is, VCG agreed to pay Citibank a "Floating Payment" if certain credit events (or "Floating Amount Events") took place during the term of the CDS Contract. (Compl. ¶ 16.) VCG also agreed to deposit collateral at the time of the execution of the CDS Contract to secure Citibank against the risk that VCG would not be in a position to make the Floating Payments. (Compl. ¶ 15.) This collateral is called the "Independent Amount," the amount of which was specified in the Confirmation Letter. (Arffa Decl., Ex. 3 (Confirmation Letter), at 3.)

Citibank Demands Additional Credit Support

Apart from the Independent Amount, some CDS transactions allow the protection buyer to demand additional collateral (or "variation margin") based upon a downward movement in the daily "markto-market value" of the underlying reference obligation.⁴ (Compl. ¶ 18.) The parties disagree on whether the CDS Contract allowed Citibank to demand variation margin from VCG. (Compl. ¶ 17.) The record reflects, however, that on August 1, 2007, Citibank demanded additional collateral from VCG. (Compl. ¶ 20.) Citibank demanded additional collateral from VCG three more times over the weeks that followed. (Compl. ¶ 20.) VCG alleges that while it delivered the sums requested, it nonetheless questioned Citibank's evaluation of the credit risk of the Class B Notes. (Compl. ¶ 25.) Further, VCG maintains that it delivered the sums out of fear that Citibank might seize upon VCG's refusal to post variation margin as a reason to declare a technical default and seize VCG's collateral. (Compl. ¶ 26.)

Declaration of a Floating Amount Event

Pursuant to the Standard Terms Supplement, the Floating Amount Events included a "Failure to Pay Principal," an "Interest Shortfall," or a "Writedown," each with respect to the reference obligation. (Arffa Decl., Ex. 4 (Standard Terms Supplement), at 7.) On January 9, 2008, Citibank sent VCG a "Floating Amount Event Notice," stating in relevant part:

This letter is notice to you that an Implied Writedown has occurred with respect to the Reference Obligation on or about January 4, 2008. The Implied Writedown Amount in respect of such Floating Amount Event is USD 10,000,000.00 (the "Floating Amount").

(Compl. ¶ 35.) In other words, Citibank informed VCG that the Floating Payment Amount was due on the ground that an Implied Writedown had taken place. (Compl. ¶ 36.)

According to the definition of "Implied Writedown Amount" provided in the Standard Terms Supplement,

"Implied Writedown Amount" means, (i) if the Underlying Instruments do not provide for writedowns, applied losses, principal deficiencies or realized losses as described in (i) of the definition of "Writedown" to occur in respect of the Reference Obligation, on any Reference Obligation Payment Date, an amount determined by the Calculation Agent [Citibank] equal to the excess, if any, of the Current Period Implied Writedown Amount over the Previous Period Implied Writedown Amount, in each case in respect of the Reference Obligation Calculation Period to which such Reference Obligation Payment Date relates, and (ii) in any other case, zero.

(Compl. ¶ 38; Arffa Decl., Ex. 4 (Standard Terms Supplement), at 19 (emphasis added).) "Writedown," in turn, is defined in relevant part as the occurrence at any time on or after the Effective Date of:

(i) (A) a writedown or applied loss (however, described in the Underlying Instruments) resulting in a reduction in the Outstanding Principal Amount (other than as a result of a scheduled or unscheduled payment of principal); or

(B) the attribution of a principal deficiency or realized loss (however described in the Underlying Instruments) to the Reference Obligation resulting in a reduction or subordination of the current interest payable on the Reference Obligation; ...

(iii) if Implied Writedown is applicable and the Underlying Instruments do not provide for writedowns, applied losses, principal deficiencies, or realized losses as described in (i) above to occur in respect of the Reference Obligation, an Implied Writedown Amount being determined in respect of the Reference Obligation by the Calculation Agent.

(Compl. ¶ 39; Arffa Decl., Ex. 4, at 23 (emphasis added).)

As reflected in the Confirmation Letter, an "Implied Writedown" was "Applicable" to this CDS transaction. (Arffa Decl., Ex. 3, at 2.) The parties disagree, however, on whether the Implied Writedown provision in the CDS Contract was exercised properly. This requires an initial determination of whether the Underlying Instruments to the Class B Notes provide for writedowns. If so, the Implied Writedown Amount is zero; if not, Citibank, as Calculation Agent, could determine an Implied Writedown Amount.

DISCUSSION

I. Standard of Review

Judgment on the pleadings "is appropriate where material facts are undisputed and where a judgment on the merits is possible merely by considering the contents of the pleadings." Sellers v. M.C. Floor Crafters Inc., 842 F.2d 639, 642 (2d Cir.1988). "In deciding a Rule 12(c) motion, we apply the same standard as that applicable to a motion under Rule 12(b)(6) ... accept[ing] the allegations contained in the complaint as true, and draw[ing] all reasonable inferences in favor of the non-movant." Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir.1994). When analyzing a Rule 12(c) motion, the Court considers "the pleadings and exhibits attached thereto, statements or documents incorporated by reference in the pleadings, matters subject to judicial notice, and documents submitted by the moving party, so long as such documents either are in the possession of the party opposing the motion or were relied upon by that party in its pleadings." Prentice v. Apfel, 11 F.Supp.2d 420, 424 (S.D.N.Y. 1998) (citing Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993)). A court should dispose of the claims on the pleadings "if, from the pleadings, the moving party is entitled to judgment as a matter of law." Burns Int'l Sec. Servs., Inc. v. Int'l Union, United Plant Guard Workers of Am., 47 F.3d 14, 16 (2d Cir. 1995).

II. The Parties' Arguments

The gravamen of VCG's complaint is that Citibank improperly demanded from VCG additional collateral beyond the Independent Amount, and improperly declared a Floating Amount Event. (Comp...