Opinion
Civil Action No. 02-11285-GAO
August 14, 2002
MEMORANDUM AND ORDER
The plaintiffs, two mutual funds and a mutual fund management company (collectively referred to herein as "Fidelity"), have brought suit against Toronto Dominion (Texas), Inc. and TD Securities (USA), Inc. (collectively "Toronto Dominion") claiming that the defendants have unlawfully tried to prevent Fidelity from selling certain syndicated loans. Under the pertinent Credit and Guarantee Agreement ("Credit Agreement"), Toronto Dominion serves as administrative agent for the loans. The plaintiffs seek a preliminary injunction which would restrain Toronto Dominion from refusing to perform the administrative duties necessary to Fidelity's sale of the loans. After hearing, the motion for a preliminary injunction is denied for the following reasons.
A. Factual Background
Pursuant to the Credit Agreement involved here, a group of banks (the "Lenders") extended up to $1 billion in credit to XO Communications, Inc. ("XO") (formerly known as NEXTLINK Communications, Inc.) in February 2000. Toronto Dominion, one of the original Lenders, was designated as the Lenders' Administrative Agent under the Credit Agreement.
The loans made under the Credit Agreement were assignable, and Fidelity, not among the original Lenders, purchased loans worth about $64,500,000. As a consequence of the purchase of a share of the loans, Fidelity received the rights and obligations of a "Lender" under the Credit Agreement and other related documents.
By late 2001, XO had become a "troubled" company in search of capital. A proposed equity investment structured by an investment banking firm in early 2002 was not successfully negotiated. A different proposal was then made by High River Limited Partnership ("High River"), controlled by investor Carl Icahn. Although the proposal was purportedly acceptable to XO's bondholders (which included High River and/or Icahn), it was not well received by a Lenders' Sub-Committee chaired by Toronto Dominion. Since that time, the Lenders, as holders of XO's senior secured debt, have been jockeying for advantage with the company's bondholders, including Icahn and his interests. Icahn, for example, has been attempting to acquire a sufficient amount of loans under the Credit Agreement to have the ability, as a Lender, to block certain actions desired to be taken by other Lenders, especially in the course of an XO bankruptcy proceeding, which was anticipated in May and subsequently was initiated.
On June 11 and 12, 2002, Fidelity agreed to sell $45,650,000 of the loans it was holding to Credit Suisse First Boston ("Credit Suisse"). It was widely known that Credit Suisse was acting as an intermediary, purchasing the loans in order to resell them to High River. Under the Credit Agreement, an assignment of loans by a Lender such as Fidelity has to be processed through the Administrative Agent, Toronto Dominion. See Van Duzer Aff. Ex. A, § 10.6(c). When Fidelity forwarded the documentation regarding its transaction with Credit Suisse to Toronto Dominion, Toronto Dominion informed Fidelity that the Credit Agreement had been just amended to require the approval of Lenders representing more than 50% of the outstanding loans for the sale or assignment of any loans through September 15, 2002 (the "Amendment"). Since Fidelity's proposed sale of the loans to Credit Suisse had not been so approved, Toronto Dominion initially refused to process the sale, but ultimately relented.
According to Toronto Dominion, the amendment in issue was purportedly adopted by vote of the requisite number of Lenders as of June 11, 2002. Fidelity did not have notice of the amendment until June 13, after it had agreed to the sale of the loans to Credit Suisse.
On June 17, 2002, XO filed a bankruptcy petition in the Southern District of New York. The struggle between High River and the Lenders currently is centered around a reorganization plan for XO. The Lenders have proposed a reorganization plan to protect their interests as senior secured creditors. High River is sponsoring an alternate plan that would be more favorable to the bondholders, whose interests are junior to those of the secured creditors. Fidelity now seeks to sell an additional approximately $18 million in loans which apparently are the balance of the XO loans originally acquired by Fidelity. Since Fidelity has not obtained the consent of a majority of the Lenders as called for by the Amendment, Toronto Dominion, as Administrative Agent for the Lenders, has refused to process the proposed transaction. As a result, Fidelity brought this action and seeks an injunction preventing Toronto Dominion from failing to process the proposed sale of the loans.
In addition to the $18 million in loans, Fidelity apparently also holds about $143 million in XO bonds.
B. Standard for Issuing a Preliminary Injunction
The four-part preliminary injunction test is well known. The court must weigh: "(1) the likelihood of the movant's success on the merits; (2) the potential for irreparable harm to the movant; (3) a balancing of the relevant equities, i.e., the hardship to the nonmovant if the restrainer issues as contrasted with the hardship to the movant if interim relief is withheld . . .; and (4) the effect on the public interest of a grant or denial of the injunction." Gately v. Massachusetts, 2 F.3d 1221, 1224 (1st Cir. 1993) (citation and internal quotations omitted). The First Circuit has also repeatedly held that the "sine qua non of the preliminary injunction standard is whether the plaintiffs are likely to succeed on the merits." Id. at 1225 (citation and internal quotations omitted).
C. Likelihood of Success on the Merits of the Claims
The following survey of Fidelity's claims shows that Fidelity does not have a reasonable likelihood of success on the merits of the claims set forth in the complaint.
1. Claims Pertaining to the Credit Agreement
Before the adoption of the Amendment in June 2002, a Lender had the right to sell loans and to transfer its corresponding rights under the Credit Agreement. In section 10.6(c), the Credit Agreement provides: "Each Lender shall have the right at any time to sell, assign or transfer all or a portion of its rights and obligations under this Agreement, including, without limitation, all or a portion of its Commitment or Loans owing to it. . . ."
But the Credit Agreement also contains a mechanism by which the Lenders can amend the Agreement's terms. For most purposes, the Credit Agreement can be amended with the consent of the "Requisite Lenders." Credit Agreement, Section 10.5(a). The term "Requisite Lenders" is defined as:
one or more Lenders having or holding Tranche A Term Loan Exposure, Tranche B Term Loan Exposure, Revolving Credit Exposure, New Term Loan Exposure for a Series and/or New Revolving Loan Exposure for a Series representing more than 50% of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders, (ii) the aggregate Tranche B Term Loan Exposure of all Lenders, (iii) the aggregate Revolving Credit Exposure of all Lenders, (iv) the aggregate New Term Loan Exposure of all Lenders for such Series and (iv) [sic] the aggregate New Revolving Loan Exposure of all Lenders for such Series.
Section 1.1. In other words, usually an amendment requires approval by the holders of more than 50% of the aggregate loan "exposure" under the various classes of loans.
There are certain matters that cannot be changed by a simple majority in interest. Section 10.5(b) of the Credit Agreement sets forth nine enumerated matters that may only be amended by written consent of all of the Lenders. Amendment of the assignment provisions of the Credit Agreement is not one of the matters requiring unanimous consent. Rather, it appears that the assignment provision, as all unenumerated matters, may be amended by consent of a majority of interest among the Lenders. Fidelity's arguments that the "tenor" of Section 10.5(b) leads to the conclusion that an amendment imposing temporary limitation on free assignment must also require unanimous consent of the Lenders is not persuasive. The nine enumerated kinds of amendments in Section 10.5(b) appear to be exclusive. They are not merely examples of the kinds of amendments that require consent from all Lenders; they are the only kinds that require such consent. Because the June 2002 Amendment was adopted by the Requisite Lenders as provided in Section 10.5(a), it was a valid amendment of the assignment provisions of the Credit Agreement. It follows that Toronto Dominion did not breach any obligation it had as Administrative Agent by insisting on Fidelity's compliance with the Amendment.
Fidelity also argues that as a result of the responsibilities Toronto Dominion assumed under the Credit Agreement, Toronto Dominion had a fiduciary duty to the other Lenders which it violated when it impeded Fidelity's ability to sell XO loans. However, the Credit Agreement expressly provides that its terms do not impose any fiduciary obligations on Toronto Dominion. Specifically, Section 9.2 states that Toronto Dominion does not have "by reason hereof or any of the other Credit Documents, a fiduciary relationship in respect of any Lender; and nothing herein or any of the other Credit Documents, expressed or implied, is intended to or shall be so construed as to impose upon [Toronto Dominion] any obligations in respect hereof or any of the other Credit Documents except as expressly set forth herein or therein." Fidelity cannot viably argue that Toronto Dominion owed, much less breached, any fiduciary duties to the Lenders as a consequence of its role under the Credit Agreement.
Similarly, Fidelity's claim that Toronto Dominion violated the covenant of good faith and fair dealing implied in all contracts under New York law is without apparent merit. See Van Valkenburgh, Nooger Neville, Inc. v. Hayden Publ'g Co., 281 N.E.2d 142, 144 (N.Y. 1972). The covenant of good faith and fair dealing requires that neither party to a contract "shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933). However, this covenant cannot be used to imply terms into a contract that "would be inconsistent with other terms of the contractual relationship." Murphy v. American Home Prods. Corp., 448 N.E.2d 86, 91 (N.Y. 1983). As discussed above, the Credit Agreement spelled out how a valid amendment could be adopted by the Requisite Lenders. The June 2002 Amendment followed these procedures, and the covenant of good faith and fair dealing cannot be used to imply additional procedures or rights not provided for in the contract.
Section 10.14 of the Credit Agreement establishes that New York law governs the rights and obligations of the parties.
2. New York State Law Claims
Fidelity also argues that the Amendment violates various New York state law doctrines. First, Fidelity argues that Toronto Dominion incurred a fiduciary duty toward the Lenders independent of the obligations directly imposed by the Credit Agreement. Fidelity's argument is that Toronto Dominion assumed a fiduciary relationship with the Lenders when it "voluntarily inserted itself into the XO reorganization process and assumed a position of control over XO." Fidelity's Reply Mem. Supp. their Mot. for Prelim. Inj. at 15-16. Fidelity has no case law to support its contention that a creditor in a bankruptcy case, even a powerful creditor, has a fiduciary duty towards other creditors. See also Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 158 (2d Cir. 1995) (generally, arm's length transactions between sophisticated financial institutions do not give rise to fiduciary duties).
But even assuming, dubitante, that Toronto Dominion had such an obligation, it does not appear to have been violated here. Toronto Dominion did not unilaterally impose the June 2002 Amendment on the other Lenders. Though it may have exercised some leadership among the class of Lenders, it was represented at the hearing that Toronto Dominion itself owns only about 6% of the outstanding XO loans, so it needed the agreement of Lenders holding at least another 44% of the remaining loans to approve the Amendment. Moreover, if the adoption of the Amendment was legitimate under the Credit Agreement, it could hardly have been a breach of any fiduciary duty to have sponsored or supported it.
Fidelity also contends that the Amendment is invalid under New York law as an unreasonable restraint on the alienation of personal property. Fidelity points in support of this argument to Rafe v. Hindin, 29 A.D.2d 481, 484 (N.Y.App.Div. 1968), where the court noted that "the right of transfer is a right of property, and if another has the arbitrary power to forbid a transfer of property by the owner that amounts to annihilation of property." Put another way, a contract provision cannot allow one party to forbid another party from assigning its property rights. Id.
Assuming in Fidelity's favor that this principle pertains to restrictions imposed on the sale or assignment of syndicated loans, the argument is nonetheless unconvincing. First of all, the rule invoked by Fidelity does not hold that any restriction on transfer is invalid, but only an unreasonable restriction. See, e.g. Wildenstein Co. v. Wallis, 595 N.E.2d 828, 832 (N.Y. 1992); Allen v. Biltmore Tissue Corp., 141 N.E.2d 812, 815 (N.Y. 1957). The reasonableness of a restriction on assignment must be evaluated "in the context of all the facts." Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1526, 1534 (S.D.N.Y. 1989). A showing that the restriction will diminish the price at which property can be sold, by itself, also is not enough to establish that the restriction is unreasonable. See Allen, 141 N.E.2d at 817 ("the validity of the restriction on transfer does not rest on any abstract notion of intrinsic fairness of price. To be invalid, more than mere disparity between option price and current value . . . must be shown.").
In the particular circumstances of this case, Fidelity has not shown that the Amendment imposed an unreasonable restraint on the resale of loans by a Lender. It seems clear enough, as Fidelity contends, that a, if not the, purpose of the Amendment was to prevent Icahn and/or High River from buying up loans and thus improving their leverage in the XO bankruptcy. But that very proposition undercuts Fidelity's argument that the restriction was unreasonable. While absolute restrictions on the transfer of property might be invalid, see Rafe, 29 A.D.2d at 484, less sweeping restrictions are not necessarily so. See Allen, 141 N.E.2d at 816. According to Fidelity, Toronto Dominion's objection is not so much to a sale of the loans, but rather to a sale to Icahn. If so, it is far from foregone that Fidelity would be unable to get approval of the Requisite Lenders to any and all proposed sales. The restriction on transfer — obtaining the approval of a majority of the Lenders — thus does not appear to be a global one, but rather a focused one. Moreover, the reasonableness of the restriction has to be evaluated in context. Prior approval of transfers by a majority of Lenders may make some tactical sense for Lenders as a class in the context of the XO bankruptcy. Some Lenders, like Fidelity, may have other interests at stake, such as their bond holdings. But those who do not may find it desirable to promote Lender solidarity in the face of the variety of remedies and uncertainty of outcomes posed by the bankruptcy. By adopting the Amendment as permitted by the Credit Agreement, Toronto Dominion and its allies among the Lenders were legitimately trying to maximize their ability to protect their interests as Lenders in the bankruptcy. Finally, the restriction imposed by the Amendment is temporally limited, another factor pointing against a conclusion that the restriction is unreasonable. See Allen, 141 N.E.2d at 816.
Fidelity's argument that the Amendment to the Credit Agreement is invalid under Section 9-408 of the New York Uniform Commercial Code ("UCC") is tortured and wholly unpersuasive. Section 9-408 pertains to a creditor's ability to obtain a security interest in a debtor's assets; it is inapplicable to the sale of loans from one creditor to another.
3. Delaware and Massachusetts State Law Claims
Fidelity also argues that the June 2002 Amendment violated Delaware securities law. This argument fails in the first place because Delaware law does not govern the parties, the Credit Agreement, or any of their transactions. The only connection between this matter and Delaware law that Fidelity relies on is that XO is a Delaware corporation. In any event, the substantive claims are defective for the same reason they are so under New York law.
Finally, Fidelity's complaint also alleges a violation of Massachusetts General Laws chapter 93A for unfair and deceptive acts or practices. Chapter 93A allows a plaintiff to sue a defendant for unfair and deceptive acts which occurred "primarily and substantially" in Massachusetts. Mass. Gen. Laws ch. 93A, § 11. Fidelity has failed to show that Toronto Dominion engaged in any acts that could be considered unfair or deceptive, and none of the actions on which Fidelity bases its claims against Toronto Dominion occurred in this Commonwealth.
D. No Irreparable Harm to Fidelity
Fidelity has not shown that it will suffer immediate, irreparable harm if this preliminary injunction is not granted. See Town of Burlington v. Dep't of Educ. of Mass., 655 F.2d 428, 432 (1st Cir. 1981) (party seeking preliminary injunction must show danger of immediate, irreparable injury). Fidelity makes generalized assertions that a number of harms will result if its motion is denied, including that the value of the XO loans it holds will decline, that its reputation may be harmed, that it may lose mutual fund customers, and that Fidelity fund managers will be unable to fulfill their fiduciary duties to Fidelity's customers. However, Fidelity has not offered any specific evidence or quantification of these harms, and relies rather on intuitions and predictions about what will occur if the preliminary injunction is not granted. These speculative injuries do not adequately demonstrate that Fidelity is likely to suffer irreparable harm if it does not receive immediate injunctive relief.
Fidelity tries to excuse this dearth of evidence of harm by pointing out that this Court denied its motion to take certain depositions in advance of the preliminary injunction hearing. However, the evidence of what harms Fidelity will suffer if it cannot sell its XO loans should be largely within Fidelity's reach without discovery.
Indeed, from the information presently in the record, it is not possible to tell whether or to what extent the value of Fidelity's loans will be impaired by XO's bankruptcy. However, in the future it will certainly be possible for a court to assess any loss to Fidelity, such as, for example, by comparing what Fidelity could have sold the loans for pre-bankruptcy and what they were worth after a plan of reorganization was adopted. When monetary damages can serve as an adequate remedy later on, a preliminary injunction usually is inappropriate. See Auburn News Co. v. Providence Journal Co., 659 F.2d 273, 277 (1st Cir. 1981) (where monetary damages would be an adequate remedy, preliminary injunction was not warranted).
E. Balancing of Harms to the Parties and to Public Interest
The third and fourth prongs of the standard for preliminary injunctive relief do not tip the scale in favor of Fidelity. Without a preliminary injunction ordering Toronto Dominion to allow Fidelity to sell its loans, Fidelity may have to hold onto the loans until XO has a plan of reorganization. However, as noted, it is not clear how serious a harm this will inflict on Fidelity. On the other hand, if the injunction is granted, Toronto Dominion and the other Lenders may be harmed in their ability to protect their interests in the bankruptcy. These potential harms are similar on both sides, it is not possible to say that the balance tips Fidelity's way.
The effect of a grant or denial of a preliminary injunction on the public interest is likewise difficult to discern, and this last factor does not support the grant of an injunction.
F. Conclusion
Fidelity has not shown either a likelihood of success on the merits or a threat of irreparable harm which would justify a preliminary injunction. An examination of the potential harms to the parties and to the public interest also do not shift the equities in Fidelity's favor.
Fidelity's motion for a preliminary injunction is DENIED.
It is SO ORDERED.