This post was originally scheduled for tomorrow. Since I view it as important to the owners of GJN, who were hosed by WFC, I elected to move it up a day, and move the other post to Tuesday which deals with the usual topics.
Added: See also subsequent post: Turkle Trust v. Wells Fargo
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Since I am working on other matters early this week, my post will be limited today to comparing the 2035 JPM TP language on the make whole payment and capital treatment event issues with the comparable language in other prospectuses for TPs redeemed by JPM on 7/12/2012. I will also summarize the main arguments for both sides.
Added: See also subsequent post: Turkle Trust v. Wells Fargo
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Since I am working on other matters early this week, my post will be limited today to comparing the 2035 JPM TP language on the make whole payment and capital treatment event issues with the comparable language in other prospectuses for TPs redeemed by JPM on 7/12/2012. I will also summarize the main arguments for both sides.
This topic may be of interest to just one daily reader of this blog.
I would first emphasize that the issues discussed herein are basic contract issues. The central issue does not involve the application of securities law. Instead, the issue is a simple legal one. What does the contract (prospectus) mean using standard contract rules of construction?
I would first emphasize that the issues discussed herein are basic contract issues. The central issue does not involve the application of securities law. Instead, the issue is a simple legal one. What does the contract (prospectus) mean using standard contract rules of construction?
I looked at some of the prospectuses for J P Morgan Chase Capital trust preferred securities that were redeemed at the same time as the underlying 2035 5.85% TP in GJN. J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities
The sole purpose was to determine whether there was similar time restrictions applicable to the capital treatment event exception to a make whole payment.
I did not look at all of the them. I am no more than an interested bystander on this issue, and it takes some time to find these prospectuses and to review them. I found one out of four with a similar issue to the 2035 TP but the principal amount was less than 1/5 of the $500M outstanding on the 2035 TP.
As previously noted, the make whole payment for the 5.85% J P Morgan Capital XVII Series Q, the underlying security in the GJN trust, runs to the maturity date, 8/1/2035. The capital treatment event exception has a 90 day time period attached to it. More On JPM Potential Liability for a Make Whole-Redemption 2035 TP; GJN-JPM-Make Whole Payment; GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur (language quoted in that post, see page A-5 of GJN Prospectus)
For comparison purposes, I took a snapshot of the make whole provision in the 2035 JPM TP and its language relating to the capital treatment event exception to a make whole payment:
Capital Treatment definition:
Bond owners argument: The Dodd-Frank law, signed by the President on July 20, 2010 mandated that JPM would have to phase out the use of trust preferred securities as Tier 1 equity capital. (www.paulhastings.com/.pdf; section 171 of the Dodd Frank law, docs.house.gov .pdf;
That law was the Capital Treatment Event within the meaning of the 2035 TP prospectus.
Using an objective standard, JPM or anyone else could have reasonably made that determination as of 7/21/2010.
Therefore, the ninety period for invoking a capital treatment time sensitive exception to a make whole payment expired in October 2010.
Any optional redemption after that expiration date would require the bond owners to be made whole with an optional redemption that did not fall under another exception, such as tax event. Since no other exception applied when JPM elected to redeem the 2035 TP, it owed the bond owners a make whole payment.
The bond owners would also utilize several rules of contract construction in support of their interpretation. Exceptions to general rules will be strictly construed. The general rule in this case was that JPM had to make the bond owners whole for an early redemption subject to narrow exceptions that were time sensitive. Another rule is that ambiguities in a contract are to be construed against the drafter. The 2035 TP was a JPM creation. It is also imperative to have contract clarity on the applicability of the make whole payment. Otherwise there will be continuous market confusion and disruption on the TP's price. This consideration would be particularly applicable in periods of abnormally low interest rates when investment grade bonds with make whole provisions are being priced in excess of par value, and frequently in a substantial amount.
While I am not doing any legal research on this issue, I found a synopsis of a decision by a federal court judge who held that WFC did not have to wait until the conclusion of the phase out period and could treat the signing of the Dodd-Frank law as a Capital Treatment Event. Court OKs Redemption of Trust Preferred Securities Due to Dodd-Frank (Call v. Wells Fargo & Company, No 11-CV-05215-CW; Turkle Trust v. Wells Fargo, No. 11-CV-06494-CW; Judge Claudia Wilson presiding) The redemptions occurred on 10/3/11. I do not know whether those TPs had a similar time period limitation. The issue appeared to be whether the company had to wait until the security could not be used as Tier 1 equity before invoking the Capital Treatment Event exception to the make whole payment. The phase out period will start 1/1/13 and end three years thereafter. This was the first argument that I developed on the issue. Item # 1 When Does a Capital Treatment Event Occur?
The Court held that WFC did not have to wait until the phase out period started or ended. A thumbnail discussion of the case can be found at Turkle Trust v. Wells Fargo. The decision was filed on 7/2/2012. I did find some indication that plaintiffs have appealed the dismissal of their complaint. I could not find a copy of the District Court decision. From the brief summary available to me, it does not appear to me that the plaintiffs are making the best possible arguments that involve basic contract construction, including the ones mentioned above. If that is the case, it needs to be corrected pronto. Of course, the Second Circuit is not bound by a decision in the Ninth Circuit.
I would certainly agree with Judge Wilson that WFC could make that reasonable determination at the moment President Obama signed the bill in July 2010. That can be turned against WFC if there is a 90 day limit limit for redemption. If those TPs had a time limitation, the Court would be rendering that time limitation meaningless by giving WFC in effect an unlimited time to make that reasonable determination after 7/21/2010. That interpretation excises the time limit out of the contract and renders it meaningless. That time limit has an important purpose and should not be deleted by a court to arrive at a particular result.
The make whole provision is extremely important to bond owners. Its presence would have allowed WFC to receive a lower long term interest rate. If there was no make whole provision, or a make whole whose life was limited to a few years after issuance, then WFC would have had to pay a higher interest rate.
The object of that time limitation was to create certainty in the application of the make whole provision. After 90 days, buyers and sellers should be able to trade that bond with certainty that it would be subject to a make whole payment for an optional redemption. Since anyone could have made a reasonable determination that WFC and JPM would have to phase out the use of TPs as Tier 1 equity capital as of 7/21/2010, it is irrelevant when they actually made that decision.
(while I only have a synopsis of the decision, it would be a mistake for plaintiffs to rely on the implied obligation for good faith on this particular issue unless they first lose all of their contract interpretation arguments, including the best ones which apparently are not being made by them)
JPM: In the contract language that we wrote, it clearly states that we can continually make a reasonable determination based on anything that comes down the pike relating to the use of the TP as Tier 1 Capital. Federal Reserve Proposes Revised Bank Capital Rules — The Harvard Law School Any proposed regulation or law, and any regulation or law, that allows for such reasonable determination starts the 90 period running again and again. It does not matter that everything since the passage of Dodd-Frank is mere window dressing on the use of those TP's as Tier 1 equity capital. And, it does not matter that the Federal Reserve would just be implementing the law as enacted by Congress on this issue. In addition, the time period runs from the time JPM makes that reasonable determination, not when anyone could have made that determination. JPM made its determination in mid-June 2012. JPM could have based that June 2012 reasonable determination based on nothing more than the Dodd-Frank bill enacted into law 7/21/10.
For comparison purposes, I took a snapshot of the make whole provision in the 2035 JPM TP and its language relating to the capital treatment event exception to a make whole payment:
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| GJN Prospectus at page A-5/Last Paragraph is the Critical One on TIME issue |
Bond owners argument: The Dodd-Frank law, signed by the President on July 20, 2010 mandated that JPM would have to phase out the use of trust preferred securities as Tier 1 equity capital. (www.paulhastings.com/.pdf; section 171 of the Dodd Frank law, docs.house.gov .pdf;
That law was the Capital Treatment Event within the meaning of the 2035 TP prospectus.
Using an objective standard, JPM or anyone else could have reasonably made that determination as of 7/21/2010.
Therefore, the ninety period for invoking a capital treatment time sensitive exception to a make whole payment expired in October 2010.
Any optional redemption after that expiration date would require the bond owners to be made whole with an optional redemption that did not fall under another exception, such as tax event. Since no other exception applied when JPM elected to redeem the 2035 TP, it owed the bond owners a make whole payment.
The bond owners would also utilize several rules of contract construction in support of their interpretation. Exceptions to general rules will be strictly construed. The general rule in this case was that JPM had to make the bond owners whole for an early redemption subject to narrow exceptions that were time sensitive. Another rule is that ambiguities in a contract are to be construed against the drafter. The 2035 TP was a JPM creation. It is also imperative to have contract clarity on the applicability of the make whole payment. Otherwise there will be continuous market confusion and disruption on the TP's price. This consideration would be particularly applicable in periods of abnormally low interest rates when investment grade bonds with make whole provisions are being priced in excess of par value, and frequently in a substantial amount.
While I am not doing any legal research on this issue, I found a synopsis of a decision by a federal court judge who held that WFC did not have to wait until the conclusion of the phase out period and could treat the signing of the Dodd-Frank law as a Capital Treatment Event. Court OKs Redemption of Trust Preferred Securities Due to Dodd-Frank (Call v. Wells Fargo & Company, No 11-CV-05215-CW; Turkle Trust v. Wells Fargo, No. 11-CV-06494-CW; Judge Claudia Wilson presiding) The redemptions occurred on 10/3/11. I do not know whether those TPs had a similar time period limitation. The issue appeared to be whether the company had to wait until the security could not be used as Tier 1 equity before invoking the Capital Treatment Event exception to the make whole payment. The phase out period will start 1/1/13 and end three years thereafter. This was the first argument that I developed on the issue. Item # 1 When Does a Capital Treatment Event Occur?
The Court held that WFC did not have to wait until the phase out period started or ended. A thumbnail discussion of the case can be found at Turkle Trust v. Wells Fargo. The decision was filed on 7/2/2012. I did find some indication that plaintiffs have appealed the dismissal of their complaint. I could not find a copy of the District Court decision. From the brief summary available to me, it does not appear to me that the plaintiffs are making the best possible arguments that involve basic contract construction, including the ones mentioned above. If that is the case, it needs to be corrected pronto. Of course, the Second Circuit is not bound by a decision in the Ninth Circuit.
I would certainly agree with Judge Wilson that WFC could make that reasonable determination at the moment President Obama signed the bill in July 2010. That can be turned against WFC if there is a 90 day limit limit for redemption. If those TPs had a time limitation, the Court would be rendering that time limitation meaningless by giving WFC in effect an unlimited time to make that reasonable determination after 7/21/2010. That interpretation excises the time limit out of the contract and renders it meaningless. That time limit has an important purpose and should not be deleted by a court to arrive at a particular result.
The make whole provision is extremely important to bond owners. Its presence would have allowed WFC to receive a lower long term interest rate. If there was no make whole provision, or a make whole whose life was limited to a few years after issuance, then WFC would have had to pay a higher interest rate.
The object of that time limitation was to create certainty in the application of the make whole provision. After 90 days, buyers and sellers should be able to trade that bond with certainty that it would be subject to a make whole payment for an optional redemption. Since anyone could have made a reasonable determination that WFC and JPM would have to phase out the use of TPs as Tier 1 equity capital as of 7/21/2010, it is irrelevant when they actually made that decision.
(while I only have a synopsis of the decision, it would be a mistake for plaintiffs to rely on the implied obligation for good faith on this particular issue unless they first lose all of their contract interpretation arguments, including the best ones which apparently are not being made by them)
JPM: In the contract language that we wrote, it clearly states that we can continually make a reasonable determination based on anything that comes down the pike relating to the use of the TP as Tier 1 Capital. Federal Reserve Proposes Revised Bank Capital Rules — The Harvard Law School Any proposed regulation or law, and any regulation or law, that allows for such reasonable determination starts the 90 period running again and again. It does not matter that everything since the passage of Dodd-Frank is mere window dressing on the use of those TP's as Tier 1 equity capital. And, it does not matter that the Federal Reserve would just be implementing the law as enacted by Congress on this issue. In addition, the time period runs from the time JPM makes that reasonable determination, not when anyone could have made that determination. JPM made its determination in mid-June 2012. JPM could have based that June 2012 reasonable determination based on nothing more than the Dodd-Frank bill enacted into law 7/21/10.
While I am not predicting the outcome, this issue lends itself to a summary judgment for one side or the other. I am not representing anyone on this matter. I have no financial stake in the outcome one way or the other. I have been called a "mad dog lawyer" for even suggesting the possibility of this legal remedy for the GJN owners. For the former owners of the $500 million of 2035 TPs, a win on this issue would result in a gigantic payday and the GJN owners could be made whole. I am doing what I can to help those folks free of charge of course. That included contacting Floyd Norris at the NYT. NYTimes.com
Since the make whole payment could easily be calculated by anyone with the appropriate software, the amount is a liquidated sum entitled to enhancement by prejudgment interest. The make whole payment could be calculated to the penny as of the July 12th redemption date.
It would not surprise me to learn that a make whole payment for the 2035 JPM TP would be over a $100 million more than JPM actually paid to those bond owners. I have never seen such a simple case with so much money at stake.
Since the make whole payment could easily be calculated by anyone with the appropriate software, the amount is a liquidated sum entitled to enhancement by prejudgment interest. The make whole payment could be calculated to the penny as of the July 12th redemption date.
It would not surprise me to learn that a make whole payment for the 2035 JPM TP would be over a $100 million more than JPM actually paid to those bond owners. I have never seen such a simple case with so much money at stake.
JPM TP prospectuses, which are still outstanding, can be found at JPM's website: Fixed Income Information
While searching for prospectus, I found some JPM TPs with no time limitation that were not subject to the 7/12/2012 redemption notice. Prospectus Supplement at S-35; At some point, JPM may have just deleted that restriction. This would be a topic that needs follow up.
1. J P Morgan XXVII (7%): Prospectus Supplement
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| Redemption Within 90 Days of Capital Treatment Event Page S-18 |
Conclusion: As previously argued, the capital treatment event period started on July 21, 2010, when the President signed the Dodd-Frank bill, and consequently the ninety days has expired under this argument. However, the make whole payment period ends 12/22/2014, rendering it a relatively small sum compared to the 2035 TP which runs to 8/1/2035.
2. J. P. Morgan Chase Capital XXVI (8% Fixed-Floating): Prospectus Supplement
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| Redemption at Anytime after Capital Treatment Event Page S-39 |
Conclusion: With no time restriction, the redemption at par value plus accrued interest was proper. IN any event the make whole payment period is cut off at 5/15/13.
3. J. P. Morgan Chase Capital XXVIII (Fixed to Floating): Prospectus at stifel.com .pdf
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| Redemption Within 90 Days |
Conclusion: Same as # 1 above. However, the make whole payment period ends on 12/22/2014.
4. J.P. Morgan Chase Capital XV (5.875%): Prospectus Supplement
This one will be the same as the 2035 Prospectus:
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| 90 Day Restriction/Make Whole Runs to 2035 Maturity |
The principal amount outstanding on this one was $92,939,000.
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