Hildene Opportunities Master Fund, Ltd. v. Arvest Bank

United States Court of Appeals
For the Eighth Circuit
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No. 17-1702
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Hildene Opportunities Master Fund, Ltd.
lllllllllllllllllllll Plaintiff - Appellant
v.
Arvest Bank, et al.
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Western District of Missouri - Kansas City
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Submitted: February 14, 2018
Filed: July 30, 2018
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Before LOKEN, BENTON, and ERICKSON, Circuit Judges.
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LOKEN, Circuit Judge.
In 2012, Arkansas-based Arvest Bank (Arvest) purchased assets and assumed
liabilities of Union Bank, a subsidiary of Bannister Bancshares, Inc. (Bannister), a
Missouri bank holding company. Hildene Opportunities Master Fund, Ltd. (Hildene),
a Cayman Islands-based hedge fund, sued Bannister and Arvest, alleging that the
transaction breached the “successor obligor” term of an indenture agreement (the
Indenture) between Bannister and U.S. Bank National Association as trustee (U.S.
Bank), and that Arvest tortiously interfered with the Indenture. Hildene appeals the
district court’s1 grant of summary judgment dismissing the tortious interference claim.
Reviewing the grant of summary judgment de novo, including the court’s
interpretation of state law, we conclude the asset purchase transaction did not violate
the Indenture and affirm. See HIP, Inc. v. Hormel Foods Corp., 888 F.3d 334, 338
(8th Cir. 2018) (standard of review).
I. Background
In 2003, by an Amended Declaration of Trust naming U.S. Bank as Trustee,
Bannister created a trust that issued 20,000 Floating Rate Capital Securities,
commonly known as trust preferred securities or “TruPS.” The trust sold the TruPS
debentures to Preferred Term Securities XII, Ltd. and Preferred Term Securities XII,
Inc. for $20 million under the terms of the Indenture, with U.S. Bank acting as
Indenture Trustee. After purchasing the TruPS debentures, the Preferred Term
Securities XII entities created a collateralized debt obligation, with Bank of New
York Mellon as trustee, and issued Senior Notes, some of which Hildene purchased.
Bannister’s purpose in declaring the trust and creating the Indenture was to
provide “Tier I Capital” for its subsidiary, Union Bank, whose shares constituted
most of Bannister’s assets. As one court has explained:
Between 2002 and 2007 . . . [m]any bank holding companies found
TruPS attractive because they seemingly combined the best features of
debt and equity: The bank holding company could deduct payments to
investors as interest expense yet treat the security as equity capital under
then-applicable banking regulations. To achieve this favorable duality,
the bank holding company does not issue TruPS directly. Rather, it
1
The Honorable Ortrie D. Smith, United States District Judge for the Western
District of Missouri.
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forms a wholly owned trust subsidiary that issues preferred equity
securities -- the TruPS -- to investors. . . . The bank holding company
makes payments of principal and interest on the notes, and the trust uses
the payments to redeem or pay dividends on the TruPS.
In re BankAtlantic Bancorp, Inc. Litig., 39 A.3d 824, 827 (Del. Ch. 2012). The
federal banking laws establish minimum capital requirements and capital adequacy
standards for banks insured by the Federal Deposit Insurance Corporation (FDIC).
See 12 C.F.R. § 324.1(a). In 2003, the components of Tier 1 Capital included
“common stockholders’ equity” and qualifying “perpetual preferred stock” subject
to strict limitations. 12 C.F.R. § 325, App. A § 1 (2003). The Federal Reserve Bank
applied this capital category to bank holding companies. See 12 C.F.R. § 225, App.
A § 1 (2003). Capital restrictions are intended to protect the FDIC trust fund, through
which the government absorbs losses of failed banks, as well as bank depositors and
creditors.
Following the global financial crisis, Union Bank’s financial position
deteriorated. In June 2009, Bannister exercised its option under the Indenture to defer
paying interest on the TruPS debentures for five years. In October, the FDIC issued
an order directing Union Bank to cease and desist from operating with inadequate
capital, allowances for loan and lease losses, liquidity, and earnings. The Order
increased Union Bank’s minimum Tier 1 Capital requirement from 6% to 8% of total
assets, and prohibited Union Bank from paying cash dividends without FDIC
approval. In July 2010, Bannister agreed with the Federal Reserve Bank of Kansas
City that it would take steps to ensure that Union Bank complied with the FDIC
consent order, not make distributions on the TruPS debentures without the Reserve
Bank’s approval, and submit annual cash flow projections and quarterly progress
reports. As in BankAtlantic, the message of these regulatory actions seems clear:
“regulators wanted [Union Bank] to become part of a stronger, better-capitalized
franchise.” 39 A.3d at 834.
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In 2011, the First National Bank of Olathe, Kansas, failed, causing a substantial
loss to the FDIC. Because the Olathe bank was controlled by a holding company that
owned a majority interest in Bannister, the FDIC assessed a $120 million cross-
guaranty lien against Union Bank’s assets. See 12 U.S.C. § 1815(e). Working with
an investment bank, Bannister searched for a merger partner for Union Bank. Arvest
was looking to enter the Kansas City, Missouri, retail banking market, and Union
Bank operated branches in the Kansas City area. Though aware of Union Bank’s
financial condition, Arvest considered Union Bank an attractive acquisition because
of these branch locations. After lengthy negotiations, Arvest and Union Bank
executed an Asset Purchase Agreement in January 2012 in which Arvest agreed to
acquire substantially all of Union Bank’s assets, valued at $368 million; assume $407
million of Union Bank’s liabilities (primarily customer bank deposits); and pay Union
Bank $1 plus a contingent future payment based on the performance of the acquired
loan and real estate portfolios.2 Arvest conditioned the Asset Purchase Agreement
on the FDIC agreeing to waive its claim of cross guaranty liability against Union
Bank. Arvest did not agree to assume liabilities to the Indenture’s TruPS securities.
In February 2012, the Federal Reserve Bank of Kansas City advised Bannister
that Union Bank was “Significantly Undercapitalized and . . . in dire need of capital
resources,” and that Bannister “continues to be in Troubled Condition for supervisory
purposes.” The Reserve Bank asked Bannister to “keep us informed of your progress
with regard to these negotiations [with Arvest] and/or other recapitalization efforts.”
Reviewing Union Bank’s financials for the first quarter of 2012 after the Arvest
2
Though this looks to an outsider like Arvest paid too much for Union Bank’s
assets, looks can be deceiving. Core deposits provide low-cost financing, generate
fee income, and are viewed favorably by bank regulators; customers are reluctant to
transfer their accounts. “For all of these reasons, banks willingly pay a premium for
deposits, typically structured by having the acquiring institution assume a larger
quantum of deposits than the assets transferred.” BankAtlantic, 39 A.3d at 831.
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transaction closed, Hildene’s analyst opined, “this bank probably would not have
made it another quarter.”
Section 3.7 of the Indenture provided that Bannister may not “sell or convey
all or substantially all of its property to any other Person” unless it complied with
Article XI of the Indenture, including the “successor obligor” provision in § 11.1:
Nothing contained in this Indenture or in the Debentures shall prevent
. . . any sale, conveyance, transfer, or other disposition of the property
or capital stock of the Company . . . to any other Person . . . provided,
however, that the Company . . . agrees that, upon any such . . . sale,
conveyance, transfer or other disposition, the due and punctual payment
of the principal of . . . and interest on all of the Debentures . . . shall be
expressly assumed by supplemental indenture . . . by the entity which
shall have acquired such property or capital stock.
(Emphasis added.) The Indenture defined “Company” to mean “Bannister . . . and,
subject to the provisions of Article XI, shall include its successors and assigns.”
In March 2012, in response to a U.S. Bank inquiry, counsel for Bannister
advised that Article XI of the Indenture did not apply to the Arvest Asset Purchase
Agreement because Bannister was not selling any of its property, the outstanding
stock of Union Bank and “a small handful of immaterial assets. After the closing
contemplated by the Agreement [Bannister] will continue to hold exactly those same
assets.” The letter advised that Arvest will not assume Bannister’s obligations under
the Indenture because those obligations “are not obligations of Union [Bank and] do
not (and cannot) encumber Union [Bank]’s operations or assets.” The letter noted
that, because Union Bank’s cross guaranty liability to the FDIC far exceeded Union
Bank’s total capital, “[a]n assertion of cross guarantee liability by the FDIC would
result in the failure of Union.”
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Arvest obtained approvals of the Asset Purchase Agreement by the Federal
Reserve Bank of St. Louis and the Arkansas State Bank Department; Union Bank
obtained approval by the Missouri Division of Finance; and the FDIC agreed to waive
its cross guaranty lien against Union Bank. The Agreement closed June 22, 2012,
protecting depositor accounts; Arvest hired most of Union Bank’s employees, and
Union Bank ceased operations. One month later, U.S. Bank issued a Notice of
Default advising investors that the transaction “constitutes the sale of substantially
all of the assets of the Company and that compliance with Article XI was required,”
but that no trust assets were “available to the Trustee for the taking of any actions in
connection with this Default.” Bannister filed Articles of Dissolution in 2013.
Hildene sued Bannister and Arvest, asserting breach of the successor obligor
requirement and tortious interference with contract by Arvest. The district court
dismissed the First Amended Complaint because Hildene failed to show it was a
third-party beneficiary to the Indenture or a real party in interest. Hildene received
an assignment of claims from U.S. Bank as Trustee and filed a Second Amended
Complaint. On cross-motions for summary judgment, the district court determined
that Hildene’s tortious interference claim was barred by the statute of limitations and
failed on the merits because Bannister did not breach the successor obligor provision
and Arvest did not use improper means in the transaction. The court granted partial
summary judgment on Hildene’s claim that Bannister breached the Indenture by
failing to pay interest. Only the grant of summary judgment dismissing Hildene’s
tortious interference claim is at issue on appeal.
II. Discussion
While the parties disagree whether Missouri or Arkansas law governs
Hildene’s tortious interference claim against Arvest, and whether Missouri and
Arkansas tortious interference law are equivalent in all respects, there is no question
that a viable claim of tortious interference under either State’s law requires proof of
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a breach of the underlying contract. See El Paso Prod. Co. v. Blanchard, 269 S.W.3d
362, 373-74 (Ark. 2007); Bishop & Assocs., LLC v. Ameren Corp., 520 S.W.3d 463,
472 (Mo. 2017). As we conclude that Bannister did not breach the Indenture’s
successor obligor provision, we need not decide which law applies. Phillips v. Marist
Soc’y of Wash. Province, 80 F.3d 274, 276 (8th Cir. 1996). The parties agree that,
by reason of the choice-of-law provision in § 14.5 of the Indenture, New York law
governs this breach of contract issue.
“Interpretation of indenture provisions is a matter of basic contract law.”
Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1049 (2d Cir.
1982), cert. denied, 460 U.S. 1012 (1983). New York law follows the familiar
principle that a contract that is “complete, clear and unambiguous on its face” will be
“enforced according to the plain meaning of its terms.” Cortlandt St. Recovery Corp.
v. Bonderman, 96 N.E.3d 191, 198 (N.Y. 2018) (quotation omitted). Bannister did
not sell its Union Bank stock (or any other asset) to Arvest, § 11.1 of the Indenture
limited the successor obligor provision to sales of substantially all the assets of the
“Company,” and the Indenture defined “Company” to mean Bannister and its
successors and assigns. Therefore, the district court concluded:
holding [that] Bannister breached the Successor Obligor Provision
would require rewriting the Bannister Indenture terms to include
“subsidiary” in the Successor Obligor Provision, contrary to the clause’s
language which does not include Bannister’s subsidiaries. Accordingly
. . . the Bannister Indenture’s Successor Obligor Provision was not
breached . . . because Bannister retained its Union Bank stock.
The district court’s reasoning was sound, for New York courts follow the well-
established principle that, “when a contract specifically defines a word that has
various possible meanings, [the court] looks to the plain meaning of that definition.”
Gateway Customer Sols., LLC v. GC Serv. Ltd. P’ship, 825 F.3d 502, 506 (8th Cir.
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2016); see Selective Ins. Co. of Am. v. Cty. of Rensselaer, 47 N.E.3d 458, 461-62
(N.Y. 2016).
On appeal, Hildene ignores the district court’s reasoning. Rather, relying on
the general purpose of successor obligor provisions as discussed in Sharon Steel, 691
F.2d at 1050, and in BankAtlantic, 39 A.3d at 838, Hildene argues “[i]t would be
absurd for Section 11.1 to be interpreted in a manner that excluded Union Bank’s
assets in a situation where Bannister’s only material assets were those assets and
some now-worthless stock.” But Sharon Steel involved the sale of its assets by the
company that had sold subordinated debentures subject to the indenture, and
BankAtlantic involved a bank holding company’s sale of its stock in the debenture-
funded bank subsidiary. In both cases, the transactions fell within the plain meaning
of the successor obligor provision, and the fighting issue was whether the debenture
issuer sold substantially all of its assets. 691 F.2d at 1049-51; 39 A.3d at 838-43.
In addition to arguing that we should simply ignore the plain meaning of the
Indenture’s definition of “Company,” which we may not do, Hildene is wrong to
suggest that “it would be absurd” for § 11.1 to apply to a sale by Bannister of stock
in its Union Bank subsidiary, but not to a sale by Union Bank of substantially all its
assets. As the above summarized facts of this case demonstrate, banks are heavily
regulated, and distressed banks are subject to drastic regulatory remedies intended to
protect depositors, creditors, and the FDIC trust fund. It is not absurd to assume that
the sophisticated attorneys and bankers who drafted the Bannister Declaration of
Trust and Indenture intentionally declined to give the TruPS investors -- who were
being put in the mix to provide Union Bank equity capital, not as bank creditors -- the
ability to block the sale of a distressed subsidiary bank’s assets by enforcing a parent-
company indenture provision that would make the bank’s assets unmarketable. Nor
is it absurd to suspect that bank regulators, exercising either the Federal Reserve
Bank’s authority over bank holding companies, or the FDIC’s authority over Union
Bank’s capital structure, would not approve a holding company transaction designed
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to augment Union Bank’s Tier 1 Capital that imposed this restriction on the sale of
a distressed bank’s assets. Cf. Fed. Res. Bd. Press Release, 1996 WL 601940
(F.R.B.) (Oct. 21, 1996).
There is further support for our conclusion that the plain meaning of the
Indenture definition of “Company” should be enforced. Successor obligor provisions
are so common in indenture agreements that the American Bar Foundation’s
Commentaries on Model Debenture Indenture Provisions have long included model
provisions and commentary. Section 11.1 of the Indenture is almost identical to the
successor obligor provision in BankAtlantic, 39 A.3d at 828-29, and incorporates the
substance of section 8-1 of the Commentaries (1971). Section 10-13 of the
Commentaries notes that “[i]ndenture provisions which are made applicable to the
consolidated activities of the Company and certain of its subsidiaries would usually
include provisions which restrict the consolidation or merger of such subsidiaries and
the disposition of their assets as an entirety or substantially as an entirety.” Sample
Covenant 5 is a model provision limiting mergers and sales of assets by the
“Company’s” subsidiaries.
Covenant 5 to Section 10-13 of the Commentaries establishes that the drafters
of the Bannister Indenture surely knew of this alternative. See Quadrant Structured
Prods. Co., Ltd. v. Vertin, 16 N.E.3d 1165, 1176, 1178 (N.Y. 2014) (sophisticated
parties are “well aware of these commentaries”); Bonderman, 96 N.E.3d at 202. (“If
the parties to the indenture intended [a particular limitation] the signatories to the
indenture could have easily said so.”). Likewise, other courts have described the
Commentaries as “powerful evidence of the established commercial expectations of
practitioners and market participants,” BankAtlantic, 39 A.3d at 837 (quotation
omitted), and as “specialized dictionaries” in interpreting an indenture, Matter of
Envirodyne Indus., Inc., 29 F.3d 301, 304-305 (7th Cir. 1994).
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Hildene was not a party to the Declaration of Trust and Indenture. It proffered
no extrinsic evidence supporting the notion that the drafters did not intend to limit the
definition of the word “Company,” and therefore the reach of § 11.1, to Bannister but
not its subsidiaries. Under New York indenture law, it could have done so. See Bank
of N.Y. Trust Co. v. Franklin Advisers, Inc., 726 F.3d 269, 276 (2d Cir. 2013).
Section 3.10 of the Indenture expressly provided that Bannister “shall not cause or
permit any Subsidiary” to issue “Additional Junior Indebtedness,” further evidence
that the failure to include sales of a subsidiary’s assets in § 11.1 was intentional. On
this summary judgment record, we reject Hildene’s speculation as to what was absurd
and affirm the district court’s interpretation of the plain meaning of the term
“Company” in § 11.1.
Hildene further argues that Bannister breached the successor obligor provision
because the assets Union Bank sold to Arvest were Bannister’s “property” under
§ 11.1 of the Indenture. In the district court, Arvest argued that it purchased assets
and assumed liabilities directly from Union Bank and therefore the transaction “did
not involve the sale or conveyance of any of Bannister’s property.” Relying heavily
on BankAtlantic’s discussion of the purpose of successor obligor provisions, Hildene
responded that it would not “make sense” for the parties to allow Bannister to
“transfer all the value of its ‘property’” and still maintain its obligation to TruPS
creditors. Thus, the argument pressed on appeal was neither made to nor addressed
by the district court.
Even if preserved for appeal, the argument again runs afoul of the Indenture’s
plain language. Construing the term “property or capital stock of the Company” in
§ 11.1 as meaning property directly owned by Bannister (whether assets or liabilities)
is consistent with the well-established principle that parent companies do not own the
assets of their subsidiaries. See Dole Food Co. v. Patrickson, 538 U.S. 468, 475
(2003); JPMorgan Chase Bank, N.A. v. Malarkey, 884 N.Y.S.2d 787, 790 (N.Y. App.
2009). The model successor obligor provision in section 8-1 of the Commentaries
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limits the debenture-issuing Company’s freedom to “transfer its properties and assets
substantially as an entirety to any Person.” Covenant 5 in section 10-13 limits the
Company’s freedom to “permit any Subsidiary to . . . transfer its properties as an
entirety or substantially as an entirety.” Drafting a provision that applies a successor
obligor provision to a third party who is acquiring no assets or liabilities directly from
the debenture-issuing obligor would be no simple matter (Covenant 5 imposes no
successor obligation on a third party purchaser). We conclude that the plain meaning
of the word “property” in this context is property directly owned by Bannister, the
“company” that signed the Indenture. Bannister’s “property and capital stock” does
not include assets of Bannister subsidiaries. Hildene cites no contrary authority.
Hildene argues that because the Union Bank shares were the majority of
Bannister’s assets, the parties could not have intended to allow Union Bank to
transfer its assets unfettered by the successor obligor provision. Hildene describes
the sale of Union Bank assets as “sleight of hand” and “trickery” designed to avoid
the result in BankAtlantic, where the bank holding company’s agreement to sell its
stock in the bank subsidiary was enjoined as contrary to the successor obligor
provision. But as a matter of corporate law, there is a well-recognized difference
between a parent company’s interest in the stock and the assets of its subsidiary.
Union Bank was in dire financial straits at the time of the transaction. Had the
FDIC enforced its powerful cross guaranty lien, the interests of TruPS equity
investors, including investors like Hildene whose Senior Notes had no greater
priority, would almost surely have been wiped out. See 12 U.S.C.
§ 1815(e)(2)(C)(i)(I). The plain language of the successor obligor provision as
drafted did not apply to the Arvest/Union Bank transaction, a sale that recapitalized
a distressed bank, protected Union Bank’s depositors and employees, and was
approved by state and federal bank regulators. Despite advance knowledge of the
transaction, U.S. Bank as Trustee did not seek an injunction, as the TruPS investors
did in BankAtlantic, 39 A.3d at 843. Rather, U.S. Bank declared a default after the
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transaction closed and advised that it would not pursue a remedy, leaving
sophisticated investors like Hildene to make a silk purse out of this sow’s ear. In
these circumstances, there was no sleight of hand or trickery. We conclude the
district court did not err in dismissing Hildene’s tortious interference claim against
Arvest because Bannister did not breach the Indenture’s successor obligor provision.3
The judgment of the district court is affirmed.
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3
Based on this conclusion, we need not address the district court’s rulings that
Hildene’s tortious interference claim was barred by the statute of limitations, and that
Hildene failed to prove the improper-means element of that claim.
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