In an August 20, 2014 Commercial Division decision by Justice Sherwood, the court granted defendant and counterclaim plaintiff Credit Suisse’s motion for summary judgment, dismissing the claim against it. Credit Suisse sold plaintiff Sumitomo Mitsui Banking Corporation (“Sumitomo”) an interest in a syndicated bridge loan in 2006. It was restructured in May 2009. At the “heart” of the dispute in this case is the May 2009 transaction, and whether a distribution received by Credit Suisse was “secured debt” or “cash.”
In March 2006, various banks, including Credit Suisse and Sumitomo, provided nonparty Capmark with a $5.5 billion unsecured term loan and revolving credit, set to mature in March 2011, and a $5.25 billion bridge loan, set to mature in March 2009. Sumitomo did not originally participate in the bridge loan, but in March 2006 purchased from Credit Suisse a $200 million participation in the loan pursuant to a Participation Agreement. Under the Participation Agreement, Credit Suisse was to pay Sumitomo its pro rata share of any distribution it received under the bridge loan. These distributions would consist of “cash” and “non-cash” proceeds, and the Agreement provided for two different procedures for the two different distributions: Credit Suisse was obligated to distribute any “cash” distribution to Sumitomo within two business days of its receipt; it was obligated to distribute the “beneficial and record ownership of” any “non-cash” distribution “as soon as practicable.”
Capmark, the borrower, was “severely negatively impacted” by the 2008-2009 financial crisis, and negotiated with its lenders to restructure its bridge loan, which was due March 2009. Capmark threatened to file bankruptcy if the lenders did not agree to restructure the debt. The bridge loan lenders agreed, but only if Capmark gave them collateral to secure a “substantial portion” of the existing unsecured exposure. Capmark and the lenders eventually agreed that: (i) Capmark would make a “Cash Repayment” of $75 million; (ii) Capmark allowed the lenders to swap most of the outstanding bridge loan exposure (70%) for a new secured term loan; and (iii) the maturity of the bridge loan would be extended to March 2011. To obtain the securitization, the lenders advanced Capmark cash, secured by Capmark’s assets, to be used “solely” to make contemporaneous repayments of the existing bridge loan.
After the deal was reached and the transactions occurred, Credit Suisse transferred to Sumitomo its pro rata share of the Cash Repayment, and offered to transfer to Sumitomo its pro rata share of the new secured debt that was substituted for the unsecured bridge loan debt. Sumitomo refused to accept the latter, claiming that it was entitled to repayment in cash. Sumitomo brought this action and alleged that Credit Suisse breached the Participation Agreement. Credit Suisse counterclaimed for declaratory judgment that it fully performed under the agreement. Sumitomo’s principal argument was that the bridge loan was repaid in cash. Credit Suisse argued that the distribution was not a true “cash” payment—rather, it was secured debt—and that Sumitomo “was improperly seeking to elevate the form of the 2009 transaction over its economic substance.” Sumitomo argued that if the Court gave any credence to Credit Suisse’s argument, that it was entitled to discovery.
The parties cross-moved for summary judgment. Justice Yates denied both motions. The First Department affirmed, held it was the “the economic substance of a transaction that should determine the rights and obligations of the interested parties,” and remanded so that discovery could commence. Following discovery, the parties again cross-moved for summary judgment.
Justice Sherwood determined that “evidence of ‘economic substance’” consisted of “objective evidence of the parties’ intentions, as shown by their statements and conduct contemporaneous with the negotiation and execution of the May 2009 refinancing agreements, as well as industry custom and usage.” The court held discovery “yielded undisputed evidence that the economic substance” of the “May, 2009 restructuring was a substitution of secured debt for an equal amount of unsecured debt held by the very same lender parties.” The record showed:
- Capmark was in “dire financial situation” in 2009 and therefore refused to repay the bridge loan;
- Capmark threatened the lenders it would file for bankruptcy if they did not agree to restructure the loan;
- the lenders desired to improve their position by obtaining security for the bridge loan;
- no “new money” was loaned to Capmark;
- the debt was “shifted dollar-for-dollar” from unsecured to secured debt.
The court discussed how the relevant testimony and documentary evidence confirmed the “economic reality” that the distribution at issue was secured debt, not “cash,” as argued by Sumitomo.
Sumitomo Mitsui Banking Corp. v Credit Suisse, Sup Ct, New York County, August 20, 2014, Sherwood, J., Index No. 600898/2010.