[00:00:01] Speaker 03:
May I reserve three minutes, please?

[00:00:04] Speaker 02:
Yes. I'll try to help you out, but please keep your eye on the clock as well.

[00:00:08] Speaker 03:
Okay, thank you.

[00:00:10] Speaker 03:
May it please the court, Stephen Farina on behalf of Appellant Penny Mac Mortgage Investment Trust.

[00:00:19] Speaker 03:
Under the LIBOR Act, contracts that have fallback provisions containing a benchmark replacement that is not based on LIBOR continue operating according to their terms. This is made clear in the express language of the statute. It's repeated in three different portions of the statute, and it is a principal purpose of the statute to preserve those contracts that are not broken and have within them a mechanism to set an interest rate or a dividend rate after the expiration of LIBOR.

[00:00:55] Speaker 03:
The contracts at issue here, the articles supplementary for the PennyMac preferred shares, contain fallback provisions with a benchmark that is not based on LIBOR. And there is no dispute that PennyMac has been applying those provisions in the article supplementary as written and that applying those provisions as written and untouched by the LIBOR Act, it yields a fixed rate, which was the rate that these securities paid for the first seven years of their existence.

[00:01:29] Speaker 03:
So PennyMac has complied and is complying with the LIBOR Act. PennyMac is complying with its article supplementary, and there is no basis for a claim under the UCL.

[00:01:42] Speaker 03:
So plaintiff contends that PennyMac's fallback provisions cannot be permitted to operate because a particular fixed rate can never, ever, ever, under any circumstances, even if agreed upon by the parties, be a benchmark replacement under the Act. That is their position, and it needs to be their position for it to be correct.

[00:02:05] Speaker 04:
Well... I don't see that last point.

[00:02:10] Speaker 04:
Your briefs are very interesting in terms of statutory construction, but my focus is less statutory and more on the contract. So let me start with a question. Is there any LIBOR Act case law that tells us when a replacement benchmark is, quote, clearly defined? Do you know of any case that's helped us, or is this an issue of first impression in the country?

[00:02:33] Speaker 03:
I do not know if it's an issue of first impression because that's not an issue that's been disputed.

[00:02:37] Speaker 04:
No, but is there any case law that has defined what the phrase clearly defined?

[00:02:44] Speaker 03:
There may be. I'm not aware.

[00:02:45] Speaker 04:
Okay. So I think, correct me if I'm wrong, we have investors who negotiated securities that contemplate going from fixed to floating. Okay. But the logic of your position is that they're never going to get to floating. They're actually going to get a permanently fixed. That's a little hard for me to reconcile. It all turns on what's the fallback that is giving them the opposite of what they negotiated. And in this contract, where do you see that fallback? If you apply the fallback in the waterfall, and this is not contested.

[00:03:15] Speaker 04:
I'm just asking you about a contract interpretation at the motion to dismiss stage.

[00:03:20] Speaker 03:
Yes.

[00:03:20] Speaker 04:
Am I right we're looking at 4G?

[00:03:22] Speaker 03:
Correct.

[00:03:23] Speaker 04:
And we're looking at the last sentence?

[00:03:24] Speaker 03:
It is the last sentence in the waterfall.

[00:03:27] Speaker 04:
You didn't put it in the brief much, but what's the prefatory language to the relevant portion of the last sentence? How does that last sentence start?

[00:03:35] Speaker 03:
All right.

[00:03:39] Speaker 03:
All right.

[00:03:44] Speaker 03:
If there was no such dividend period, meaning a dividend period where you have three-month LIBOR that applies, the dividend shall be calculated at the dividend rate in effect for the immediate preceding dividend period, which is the fixed rate period.

[00:03:59] Speaker 04:
Okay. And I thought the prefatory state, if no New York bank can make three quotes.

[00:04:06] Speaker 03:
That's earlier. There's actually multiple levels. There's multiple fallback provisions that you go through. And so there's the screen rate, and then there's polling, and then you revert back to the last LIBOR rate, which is what I just read. And there's no preceding LIBOR rate because of this situation, because LIBOR has never been used.

[00:04:28] Speaker 04:
The parties here contemplated that LIBOR would go away. I thought that final sentence contemplates what the rest of 4G says, which is if you can't get a quote because computers are down or LIBOR wasn't conducted, if you can't find the banks... making the quotes, that's when you'll look before. But the condition precedent is still LIBOR quotes.

[00:04:50] Speaker 03:
Am I wrong? I think you are wrong, Your Honor.

[00:04:52] Speaker 02:
I mean, that is not even... Can I follow up with... I'm sorry, go ahead.

[00:04:56] Speaker 03:
I interrupted you. If you look at the provision, and we do lay this out in our brief, we walk through each of the fallback provisions, because you do need to go through each of them. And in their briefing, and their briefing below, they have acknowledged that the final...

[00:05:12] Speaker 03:
Fallback provision, which is what we're relying upon, yields a fixed rate. They've expressly conceded that.

[00:05:18] Speaker 04:
And I think it does too, but I think the final fallback was contemplating still a world of LIBOR.

[00:05:25] Speaker 04:
In other words, it's a legacy contract. It's still thinking all we expect to get is a floating rate. The whole thing we didn't want is a fixed rate forever. So it's very hard for me to see that it's clearly defined that this moved them out of the SOFR world. They had the prescience to think, if LIBOR's gone, okay, we'll never get our floating rate.

[00:05:48] Speaker 03:
What this provision does is it contemplates a world where LIBOR is not available. It doesn't say whether it's not available for a moment, a week, a year, or forever. And what the contract says is that if LIBOR is not available, You walk through the fallback provisions and you get to a fixed rate.

[00:06:07] Speaker 04:
And I'll study it closer. You've obviously lived it much more. I didn't read 4G to be clearly defined that it says in a world where LIBOR is gone. I read the 4G final fallback to be in a world where the banks don't give us quotes. We have a temporary fix.

[00:06:24] Speaker 03:
In a world where you cannot get a LIBOR quote. Okay, but that's still looking at LIBOR quotes. No, but if LIBOR isn't available, which is the case here, for any reason... Well, that's sort of where I really come down to wondering at a motion.

[00:06:39] Speaker 04:
Is it clearly defined for any reason? You've added that language. The parties didn't ever put that language in. They said if you can't get LIBOR quotes...

[00:06:49] Speaker 04:
Well, that's the whole 4G section. What's the title of 4G?

[00:06:54] Speaker 03:
Well, 4G doesn't have a title in it.

[00:06:57] Speaker 04:
But it's LIBOR. It's a world of LIBOR quotations. It's defining how you get the LIBOR quotation.

[00:07:03] Speaker 03:
LIBOR quotations are addressed in 4G because those are the first two of the mechanisms. You start with the screen rate, then you go to polling, and if polling is not available, you go to the immediately preceding LIBOR rate, and if that's not available, you go to the immediately preceding rate, which has to be the fixed rate. That's the only circumstance.

[00:07:24] Speaker 04:
Well, I agree they contemplated fixed rate, but what I'm having a real struggle with is that these parties that wanted a floating rate actually put in at the very bottom of that section an actual contemplation that they'd accept the fixed rate forever.

[00:07:40] Speaker 04:
I just have difficulty seeing that in the language.

[00:07:42] Speaker 03:
So I do not believe that it is necessary that the parties would have to have contemplated the specific circumstances in which a provision like this or a contingency in any contract would be triggered. They merely have to agree that if LIBOR is not available

[00:08:00] Speaker 04:
Even for a day or two?

[00:08:01] Speaker 03:
It doesn't matter. If it's not available, it doesn't limit it in the contract. It doesn't say if it's unavailable temporarily. It says if it's not available, if you go through the different mechanisms and you cannot get a LIBOR quote, you go to the last one, which everyone agrees points you to the fixed rate.

[00:08:19] Speaker 02:
Let me ask you a question because I'm looking at the same provision for G and that very last sentence, if you were then Three, New York, New York Bank selected the company quote rate. So I'm going to ask you a couple of questions pertaining to the very last sentence. Does that set forth one fallback or two? One fallback provision or two? Because it is one sentence with two clauses.

[00:08:45] Speaker 03:
They're separated by a comma. And where I began was, if such dividend...

[00:08:51] Speaker 03:
If there was no such dividend period, meaning a dividend period where you were applying.

[00:08:55] Speaker 02:
Right, you're reading it as two. It is two.

[00:08:57] Speaker 03:
But is there ambiguity here? No. Those are two different occurrences.

[00:09:03] Speaker 02:
I'm trying to think of the context. This is in a world where the contracts were negotiated well before the. the LIBOR Act came out, and I don't know that the parties anticipated that there would be legislation that would then nullify one of the contract provisions. So what I'm wondering is that whether there is a plausible reading by which the rate is tied to or still when you read this particular provision. No, and no one... Because if there's ambiguity, then we have to then go to whether which law applies and whether it's construed against the drafter, right?

[00:09:36] Speaker 03:
The parties haven't... No one's argued that.

[00:09:39] Speaker 02:
Oh, no, I understand that.

[00:09:40] Speaker 03:
They conceded that this language directs you to a fixed rate.

[00:09:45] Speaker 02:
I got you, I got you. If we agree that their interpretation is...

[00:09:49] Speaker 02:
countertextual, I still struggle with whether there's ambiguity here and whether eventually this actually sets forth just one fallback provision that somehow still tied in some way to the LIBOR rate, which would then be nullified under the LIBOR Act. That's my question. I'm laying it on the table.

[00:10:12] Speaker 03:
That is not how I read it, and no one has argued that.

[00:10:16] Speaker 04:
When I asked you, could you read the prefatory sentence, I should have it in front of me, the prefatory clause, it is the clause that she's describing, and you didn't read it.

[00:10:27] Speaker 04:
It starts with whether or not banks can give quotes. There is no last sentence.

[00:10:34] Speaker 03:
Well, there are multiple fallback provisions within that sentence.

[00:10:39] Speaker 03:
And what I thought you were asking is the fallback provision that the parties agree is operative and is subject to the argument that is not permissible under the LIBOR Act. There are multiple fallback provisions in that one sentence.

[00:10:56] Speaker 04:
So how can we say it's clearly defined? It looks like the condition precedent is an inability to get daily quotes. And you're saying, no, the statute requires clearly defined and practicable fallback.

[00:11:10] Speaker 04:
And the position has to be these investors that clearly everyone agrees wanted fixed to floating. They never get floating. And instead, we're going to say you're going to get instead forever fixed. So we have to find out where is that clearly defined fallback. And we're struggling with the sentence that you're pointing to. You're saying the final clause is disassociated with the first clause.

[00:11:31] Speaker 03:
It's not disassociated with the first clause. The first clause is basically what it says is if LIBOR is not available, if you can't get LIBOR quotes.

[00:11:39] Speaker 04:
If you can't get quotes, isn't that the same phrase? We're going back and forth, but am I right or am I wrong? The beginning of the sentence is talking about banks getting LIBOR quotes.

[00:11:49] Speaker 03:
Yes, but you can't get LIBOR quotes if LIBOR is not available. So this is the provision that is operative if LIBOR is not available. If LIBOR is not available, you can't get the quotes.

[00:12:04] Speaker 04:
Congress is saying legacy contracts where they were never thinking of anything other than LIBOR. Then they're going to get SOFR. And here, it looks to me, the final sentence that you're pointing to is still utterly in the world of LIBOR.

[00:12:17] Speaker 03:
So, Your Honor, respectfully, I do not agree that that was what Congress was thinking about. Congress was thinking about agreements that would not work without LIBOR because there was no fallback provision in the agreement other than LIBOR.

[00:12:30] Speaker 02:
And my issue is what is that fallback, right? Because if there's no quotes, then you fall to the three-month LIBOR, the preceding period, and if the preceding period's rates are somehow still associated with LIBOR, then that's a problem.

[00:12:43] Speaker 03:
But they're not. And that is exactly what the last clause says.

[00:12:49] Speaker 03:
The last clause is for circumstances... Assuming that that's a separate fallback.

[00:12:54] Speaker 02:
That doesn't refer in any way to LIBOR.

[00:12:56] Speaker 03:
It does not.

[00:12:57] Speaker 02:
It's a bit confusing, though, the way this is written. You'll have to concede that, right? It's not a model of clarity.

[00:13:03] Speaker 03:
Morgan Stanley has one that says if LIBOR is...

[00:13:07] Speaker 03:
Words to the effect, if LIBOR is not available, you go back to the initial rate. And that would have been more clear. But that is the effect of this.

[00:13:15] Speaker 03:
If you walk through each of the different fallback provisions, and we do this in our brief, you first look for all the different LIBOR references. If those are unavailable, then you apply the preceding LIBOR three-month rate. If there's no preceding LIBOR three-month rate, because LIBOR wasn't available, then you apply the rate in effect in the immediately preceding dividend period, which is the fixed rate.

[00:13:42] Speaker 04:
But the Morgan Stanley example, you're right. If it's unavailable, then you're adhering to party agreement. Congress said we're not going to displace. I agree with your argument on the statute that way.

[00:13:54] Speaker 04:
But if instead the parties never contemplate LIBOR's unavailable, they think maybe quotations from banks would be unavailable for a day or two, why isn't that smack in the world of what Congress is trying to protect? These investors get what they negotiated. All they're going to do is get SOFR. They just get another floating rate. We all know that is what they wanted. But that's not what the instrument requires.

[00:14:16] Speaker 03:
Okay. And I do not see that there's a difference. If you cannot get LIBOR quotes...

[00:14:24] Speaker 03:
If you can't get LIBOR quotes, you apply the fallback provisions, and you do them in order. And you get to the last one, and everyone agrees, if you read the last one, it sends you back to the initial rate of 8%.

[00:14:36] Speaker 04:
But the statute says it's got to be clearly defined. We're having a lot of difficulty. It just perhaps suggests it's not clearly defined.

[00:14:42] Speaker 03:
The plaintiff thought it was clear that it sends you back to a fixed rate. We're about to talk to them, and I've taken up your bubble gum.

[00:14:48] Speaker 02:
I know you wanted to save some time, so I'll give you three minutes back.

[00:14:51] Speaker 03:
Okay, thank you. I didn't even get to the statutory interpretation issues. Look, I... Obviously, no contract is perfect, but the language does say what it says. Thank you.

[00:15:12] Speaker 04:
When I was a young attorney, I was told the phrase... Pigs get fat, hogs get slaughtered. And that's relevant because almost all of your briefs said there can never be a fixed rate. Congress, we know from the legislative history there can never be a fixed rate. And so opposing counsel is struggling here because your position was a statutory one, and my questions at least have been contractual. So did you preserve the contractual argument, accepting that we disagree with you statutorily, that parties could negotiate into a fixed rate.

[00:15:46] Speaker 04:
Did Congress left that up to you? How do you respond to that?

[00:15:51] Speaker 00:
May it please the court, Catherine Pratsinakis of Dilworth Paxson on behalf of Appellee.

[00:16:01] Speaker 00:
It's clear that Congress was looking to resolve legacy contracts that really had no clearly defined fallback for when LIBOR permanently ceases to exist. And the way that we believe the act gives the parties that freedom to contract and potentially include a fixed rate fallback is actually the opt-out provision in 5804

[00:16:34] Speaker 04:
Okay, so I think your beginning is sort of your effort to answer that, yes, they could potentially include it.

[00:16:41] Speaker 04:
I didn't really read that in your brief.

[00:16:43] Speaker 00:
So, sure. 5803F is...

[00:16:46] Speaker 00:
where I want to direct the court. It's not in the briefing, but it really goes to the question or the concern raised by my friend that Congress did not want to interfere with parties' freedom to contract. You're back in the statutory interpretation, Landon? I'm back in the statute. Let me go to the articles. But at some point you're going to have to address the waiver.

[00:17:04] Speaker 01:
I think there's a reason you're back in the statute, right? Because as I understood the district court, the opinion in the district court and all the briefing here, everybody agrees that what that last provision does is take you back to the only other rate that could possibly exist here, which is the fixed rate. And the question is, is the fixed rate something that the statute permits? And when you go to the statute and you just read it, it's really hard to see how it doesn't fit exactly what we're talking about here when it talks about a benchmark comma or an interest rate or a dividend rate.

[00:17:37] Speaker 01:
So it's complicated scheme and a complicated definition area, but how does it not just fit right within what the statute's saying?

[00:17:44] Speaker 00:
Okay, well, would you like me to address the contractual concerns first?

[00:17:50] Speaker 04:
At some point, but why don't you start with Judge Press's question?

[00:17:52] Speaker 00:
I could start with Judge Press's question.

[00:17:57] Speaker 00:
Our contention is that the LIBOR Act tells us in several places that a fixed rate cannot serve as a benchmark replacement. We have a definition for benchmark replacement.

[00:18:06] Speaker 01:
No fixed rate. No fixed rate can ever serve.

[00:18:09] Speaker 00:
That a fixed rate cannot serve as a benchmark replacement for a legacy contract that did not contemplate the permanent cessation of LIBOR.

[00:18:18] Speaker 01:
I don't think the statute talks about the permanent, you know, just basically we have a situation where LIBOR is gone. So I don't think the statute is telling us that we have to know that the contractual parties here assume that, particular circumstance. The contract just has to provide a fallback that meets the term benchmark replacement, right?

[00:18:40] Speaker 00:
Sure. So 5801 does say that, but they use the phrase replacement benchmark rate when LIBOR is discontinued. Second, I want to draw your attention to Section 5804, which describes the replacement, an appropriate replacement, as being reasonable, comparable, or analogous rate, index, or term based on methodology similar or comparable to LIBOR, with historical fluctuations substantially similar to LIBOR. We also have examples that Congress provided in Section 5803 of benchmark replacement.

[00:19:15] Speaker 00:
Congress points to SOFR, the federal funds rate, and the prime rate, which are all floating rates.

[00:19:23] Speaker 00:
In other words.

[00:19:25] Speaker 01:
These are talking about what SOFR should look like as compared to LIBOR. That's not the question here, right? The question is whether the contract meets one of the provisions for a permitted legacy contract under the term benchmark replacement.

[00:19:42] Speaker 00:
So we read 5804A a little broader than that.

[00:19:47] Speaker 00:
5804A does speak to the board-selected benchmark replacement.

[00:19:52] Speaker 00:
as well as any benchmark replacement conforming change. And that phrase ties back to the determining person. So if a contract doesn't have a workable fallback provision and it doesn't designate a determining person to select the appropriate benchmark replacement, then we end up in the world of requiring the adoption.

[00:20:14] Speaker 01:
I mean, I don't think Section 5804 was discussed at all in any of the briefing. It's certainly not yours.

[00:20:25] Speaker 00:
So apologies if it wasn't expressly made clear in the briefing.

[00:20:30] Speaker 00:
It occurred to us really from the reply brief that we needed to dig in a little more because we saw the act as being very clear.

[00:20:39] Speaker 00:
We saw if you read the whole text of this statute, you cannot discern that interest rate or dividend rate can mean a fixed rate.

[00:20:52] Speaker 00:
It's called the Adjustable Rate Interest Act. It's called, you know, it calls for, it tells you what Congress is looking for as a benchmark replacement in 5804. And it gives you examples in 5803. I think it's plainly clear.

[00:21:07] Speaker 04:
Where in the legislative record, even if we're going to look at it, does it show Congress wanted to displace informed, highly counseled? Let's say you've got Morgan Stanley. And at the end they say, you know, we can imagine LIBOR may turn out to be a corrupt system. So if that happens, we'll take a fixed rate. Congress meant to say that can't be done?

[00:21:27] Speaker 00:
Certainly. And LIBOR Act provides the ability of private parties to opt out.

[00:21:34] Speaker 00:
It does say you could opt out. It has to be expressly stated.

[00:21:39] Speaker 00:
And to an earlier question raised about the circumstances when the articles were adopted and commenced selling the PennyMac floating rates securities. No one knew that LIBOR was going to cease to exist. At that point in time, the UK Financial Conduct Authority hadn't raised the concern or provided an end date for LIBOR.

[00:22:03] Speaker 04:
So is your position your clients only thought they were going to go from fixed to floating? and they were going to get floating. The last thing they ever imagined would be they'd be stuck in the fixed land.

[00:22:14] Speaker 00:
Correct.

[00:22:14] Speaker 04:
But what we do, let's say you're wrong about the statute, and therefore we're looking at whether, in fact, they actually did contract clearly and practicably that they would settle back with their permanent fixed one. They're pointing to the final clause of 4G. Do you want to comment on that?

[00:22:32] Speaker 00:
Yes, 4G is a very narrow provision that all ties to LIBOR.

[00:22:40] Speaker 02:
Well, they're saying that there's a third fallback, the final fallback, right? And that stays because that only references the fixed rate. So how many fallback provisions do you read in this last sentence?

[00:22:53] Speaker 00:
So I see a waterfall for when LIBOR is not accessible, not for when LIBOR is extinct.

[00:23:02] Speaker 00:
And so it defines the entire section is really about, if you go to the first sentence, it's about the term three-month LIBOR and how to calculate the three-month LIBOR and what steps to take. If the screen is unavailable at 11 a.m. London time, we will go to this next step. Following that step, a different polling event occurs. And so what's that last step? So the last step is if polling is unavailable from the New York banks, then if you're in the floating rate period, you use the last LIBOR.

[00:23:38] Speaker 00:
If you're not yet in the floating rate period because it's the dividend period immediately before, then you revert back to...

[00:23:48] Speaker 00:
the rate that it was in the prior period, which had to be the fixed rate. But its purpose was so narrow.

[00:23:56] Speaker 02:
And was that rate in any way based on LIBOR?

[00:24:00] Speaker 00:
So that rate is not based on LIBOR because it doesn't look at the benchmark, but the entire provision is about finding the appropriate three-month LIBOR rate.

[00:24:12] Speaker 04:
Did you finish your sentence? The purpose was, you were going to say?

[00:24:14] Speaker 00:
So the purpose is actually extremely narrow. It looks at a point in time on March 14th for Series A and June 14th for Series B of 2024. If you're starting to float on the day that you're supposed to start to float and you don't have a LIBOR rate because the screen is inaccessible, You don't have a prior LIBOR rate to lean on because you're just now commencing the floating period. And so it was constructed just for that very narrow situation where LIBOR was unavailable on a certain inaccessible, inaccessible, not extinct on this day.

[00:24:53] Speaker 00:
And there was polling was unavailable on this day. And because of where you are in the date of the determination not having yet

[00:25:04] Speaker 04:
commenced you know actual floating uh then you know then you have to revert back to the fixed rate but this i understand these points it's what i thought it's very sparingly touched on in your brief maybe because it's too complex financially but you do mention it you say oh this is temporary it's when the screens are down when it doesn't it's touched on but well

[00:25:28] Speaker 00:
Well, the complaint gives it quite a bit of consideration in our allegations. We really talk about the purpose of the act, how this is a legacy contract that was contemplated by the act to continue as a floating rate instrument because that was the intention here.

[00:25:45] Speaker 04:
So I just – the question of clearly defined, and I put a lot of weight on that. It seems Congress – wanted all these floating legacy contracts to go to SOFR. That just seems fair.

[00:25:56] Speaker 04:
Unless it is clearly defined, like the Morgan Stanley or whoever it was, that really were clear. If this is gone, we'll take this. But what about practicable? In other words, could your clients still redeem their shares if they never got into a floating period? Or do we have a huge practicability problem? It was mentioned in your brief.

[00:26:21] Speaker 04:
How do they redeem the shares if they never got into a floating period at all?

[00:26:25] Speaker 00:
So the redemption is triggered by PennyMac's decision to redeem. There is no opportunity for an investor to say, this is not what I signed up for, other than just selling them in the open market and secondary market. And here, as we described, the secondary market for these shares floating rate notes took a hit when people realized they're no longer floating and they're not tracking so far.

[00:26:50] Speaker 01:
The issue to me is that, you know, you seem to be asking us to just revise the agreement because if it was going to be thought of, you know, if LIBOR is unavailable, there's other floating rates one could have that you could define a floating rate. And that's not what the contract does. The contract sends you back to the rate that was in effect, which we all know what it was. It was a fixed rate. And so the question we're asking really is a statutory one, which is, is that something that's permitted under the statute? And I think that's where you have to persuade in saying, well, no, actually, if you look at this definition of benchmark replacement, it really has to mean a floating rate.

[00:27:31] Speaker 01:
And that's where I have difficulty just reading it, where the way it's structured and written, it seems like that's not what it's saying.

[00:27:40] Speaker 00:
Well, the use of the word benchmark within the sentence, a benchmark comma or an interest rate or dividend rate, if we were to adopt, my friends, interpretation that interest rate and dividend rate should be read broadly to include both benchmark rates and fixed rates, then that term benchmark in that sentence would be meaningless or superfluous.

[00:28:07] Speaker 01:
How is that the case?

[00:28:08] Speaker 00:
Because a interest rate could be benchmarked or not. But here it's saying benchmark, and we believe the better reading of that is that- Well, the benchmark is defined above, right?

[00:28:22] Speaker 00:
So a benchmark requires an index. A fixed rate is not a benchmark rate. It can never be a benchmark rate. It has none of the attributes of SOFR. It also doesn't have the attributes that are demanded by the articles in 4A, which require a floating rate note. So the subsection 4G, again, limited purpose that doesn't undercut or outweigh the obligation here that there be a floating rate. This was precisely why the LIBOR Act was created, to address legacy contracts that hadn't really contemplated the permanent cessation of LIBOR.

[00:29:01] Speaker 01:
You're reading a lot into the statute, right? The big problem was just there's contracts that are based on LIBOR and LIBOR is gone. What is the interest rate going to be in those contracts?

[00:29:13] Speaker 01:
you want to add on to that and we want the interest rate to be SOFR. And that's true with respect to contracts that don't have an interest, that rely on LIBOR in any way. But if we have a contract that does not rely on LIBOR in any way, I think it's quite a bit to say what Congress was doing here was actually trying to change the interest rates that people had agreed to.

[00:29:36] Speaker 00:
Right, here they agree to a floating rate note that was based on LIBOR. And when LIBOR became permanently extinct, there was no workable benchmark replacement that would enable the continuation of this contract the way the parties contemplated.

[00:29:53] Speaker 00:
And just, and I don't know if, we thought the text was pretty clear that a fixed rate would not fit. It's unadjustable. It's nowhere in the whole text of this statute does it give the impression that a fixed rate is appropriate, whereas it gives multiple pieces of evidence throughout the statute that an adjustable rate is appropriate. A fixed rate is not a benchmark rate, and if we read or interest rate or dividend rate so broadly as to allow fixed rates, then we're undercutting the entire purpose of...

[00:30:32] Speaker 00:
the statute, which was to prevent.

[00:30:35] Speaker 01:
Yeah, I think that's the debate, right? I mean, one purpose of the statute, one could say, is to change all rates to SOFR rates. Another purpose of the statute, a more narrow purpose, could be to probably provide a replacement for LIBOR rates and to allow certain kinds of permissible fallback rates. And it seems like the way the statute's structured is really more of the latter.

[00:30:59] Speaker 00:
So if we don't, if you don't see the, if the whole tax canon doesn't say to you all with provisions five, you know, the definition of benchmark, the examples given in 5803 and the attributes set forth in 5804 plus the provision in the act that allows people to opt out. So you have the right to contract to opt out.

[00:31:26] Speaker 00:
and pursue your fixed rate. Here we're talking about investors who the entire basis of this investment decision was a floating rate. And that goes for Morgan Stanley investors as well.

[00:31:41] Speaker 00:
In this marketplace, there's a sense of competition that's protected by having this sort of consistency. And when you have a fixed rate note that's supposed to float... the expectation is that it's not going to revert back to its initial dividend rate. And so here, Congress needs all that.

[00:31:59] Speaker 01:
But there's a provision in the contract that does revert back.

[00:32:02] Speaker 00:
Yeah.

[00:32:05] Speaker 00:
The court affirmed the district court's ruling that it was not clear and that 4A is actually abundantly clear that PennyMac is to pay a floating rate note starting on a specific date forward. The provision at 4G was really intended for the narrowest of purposes and had the Financial Conduct Authority just decided to, well, let me just, you know, permanently cease LIBOR a year later, then this whole piece would be rendered obsolete.

[00:32:39] Speaker 00:
So, in other words, it's the random timing of when LIBOR ceased publication that this provision even ever takes effect, because it would never get to this stage if the discontinuation of LIBOR took place after that initial first rate, first floating dividend rate period took effect. Thank you, counsel.

[00:33:15] Speaker 03:
All right, I'm going to go back to the issue that we were discussing. If you look at the statute, and we have it in the back of our brief, 12 U.S.C. 5802, Section 3, the definition of benchmark replacement. So this is the definition of benchmark replacement in the statute, and I'm going to skip... the beginning part that we've all briefed about a benchmark replacement being a benchmark or an interest rate or a dividend rate but then if you continue it goes on to say whether on a temporary permanent or indefinite basis under or with respect to the LIBOR contract so it is talking about benchmark rates that are used to replace LIBOR whether on a temporary permanent or indefinite basis I don't think there's anything in 4G that suggests that it is limited to circumstances when LIBOR is temporarily unavailable.

[00:34:08] Speaker 03:
It doesn't say that. It says if you can't get a quote, that's what it says. You couldn't get a quote. If you apply the provision as written, you revert back to the fixed rate. Council conceives that yet again.

[00:34:22] Speaker 03:
So if you look at This definition of benchmark replacement, it says that a viable benchmark replacement, so long as it otherwise complies with the Act, is a permissible fallback provision regardless of whether that benchmark replacement was temporary, permanent, or indefinite. So regardless of whether you read 4G as temporary, permanent, or indefinite, under the LIBOR Act, it is a benchmark replacement.

[00:34:52] Speaker 03:
And it is a benchmark replacement that still exists and should be applied as PennyMac has done it. And there's nothing in the LIBOR Act that precludes PennyMac or mandates.

[00:35:02] Speaker 04:
I think that's a good argument. And I agree that they didn't brief this extensively. So I had thought about that. I'm focused less on temporary than on what does the phrase clearly define mean? And doesn't it mean that investors get what they negotiated for unless they clearly stated that they would accept a fixed instead of floating rate?

[00:35:20] Speaker 03:
They negotiated for 4G, and the parties all agree what 4G says. And what you're referring to is in the purpose section of the statute.

[00:35:30] Speaker 04:
Well, no, I am focused on 4G. I hope that wasn't me. I apologize. I thought this phone was off. 4G doesn't seem to be a clearly defined, to me, acceptance of a fixed rate forever.

[00:35:46] Speaker 04:
In other words, it's all about how do the banks get quotes, and it's an access point.

[00:35:52] Speaker 03:
Well, it's the acceptance of a fixed rate if LIBOR is not available. If LIBOR is not available, that's where I have a little struggle. Well, but LIBOR was not available, and they applied it. And again, counsel... has agreed that that's how you interpret 4G. They don't like it. They think 4G should be voided under the LIBOR Act, but the plaintiff in the case has said that that's how you interpret the provision.

[00:36:20] Speaker 04:
And this is a motion to dismiss, and both parties agree it's a pure question of law, right?

[00:36:23] Speaker 03:
Sure, and we're going with the allegations on their complaint.

[00:36:28] Speaker 04:
And there's no place law, again, that you know of that explains why Congress wanted to clearly define fallback.

[00:36:34] Speaker 03:
Well, it's in the purpose section. If you look at the operative provision that tells you, like, when you void the fallbacks, it just says if there doesn't exist a specific fallback provision. That's what it says.

[00:36:44] Speaker 02:
All right. Thank you very much, counsel, to both sides for your very helpful arguments in this interesting case.

[00:36:51] Speaker 00:
Thank you.

[00:36:51] Speaker 02:
The matter is submitted, and court is adjourned.

[00:37:07] Speaker 02:
This court for this session stands adjourned.