| Whitebox Convertible Arbitrage Partners, L.P. v Fairfax Fin. Holdings,Ltd. |
| 2010 NY Slip Op 03835 [73 AD3d 448] |
| May 6, 2010 |
| Appellate Division, First Department |
| Whitebox Convertible Arbitrage Partners, L.P., et al.,Respondents, v Fairfax Financial Holdings, Ltd., Appellant. |
—[*1] Anthony Ostlund Baer Louwagie & Ross, P.A., Minneapolis, Minnesota (John B. Orensteinof counsel), for respondents.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered October 29, 2008,which denied defendant's motion to dismiss the complaint, unanimously affirmed.
This is an action for breach of an indenture agreement, dated as of July 14, 2003. Plaintiffs(collectively, Whitebox) are approximately two thirds of the debenture holders. The onlycontested issue is the meaning of a single sentence, albeit an inordinately long one, in theindenture.
In July 2003, defendant Fairfax, a Canadian financial services holding company, issued $200million (U.S.) worth of 5% convertible senior debentures due July 15, 2023 (the notes). Theindenture governing the notes states that the notes are convertible into subordinate voting sharesof Fairfax (the shares) using a defined conversion rate (conversion rate) set forth in section 10.2of the indenture (initially 4.7057 shares per $1,000 [U.S.] note).
Section 10.3 of the indenture sets out formulas for conversion rate increases in the event of,inter alia, a stock dividend to shareholders (§ 10.3 [a]), issuance of rights or warrants(§ 10.3 [b]), a stock split (§ 10.3 [c]) or a cash dividend (§ 10.3 [f]).Concerning cash dividends, section 10.3 (f) provides for an adjustment to the conversion rate asfollows:
"(f) In case [Fairfax] shall, by dividend or otherwise, distribute to all holders of itsShares cash (regardless of whether such dividend or distribution is received and accepted by anyholder of outstanding shares) (excluding any dividend or distribution in connection with theliquidation, dissolution or winding up of the Company, whether voluntary or involuntary), to theextent that the aggregate amount of any such cash distributions and dividends in any12-month period exceeds, with respect to the period:
"(A) prior to July 15, 2008 Cdn$3.00 per Share (or if such distribution or dividend isdeclared in U.S. dollars, as determined using the noon buying rate in The City of New York forcable transfers in Canadian dollars as certified for customs purposes by the Federal ReserveBank of New York on the date such [*2]distribution or dividendis declared); or
"(B) on or after July 15, 2008, 4.0% of the Current Market Price (as defined in Section 10.3(g)) of the Shares,
"in each case as determined on the Record Date for such distribution or dividend,then, in such case, the Conversion Rate shall be increased so that the same shall equal therate determined by multiplying the Conversion Rate in effect on the applicable Record Date by afraction [specified in two clauses in the immediately following text], such adjustment to beeffective immediately prior to the opening of business on the day following the Record Date"(emphasis added).
Section 10.3 (g) (iii) of the indenture defines the "Record Date" with respect to cashdividends as "the date fixed for determination of shareholders entitled to receive such cash,securities or other property (whether such date is fixed by the Board of Directors or by statute,contract or otherwise)." Section 10.3 (i) provides that cash dividends (like other distributions) donot mandate an immediate increase in the conversion rate unless the increase would be at least1% of the existing conversion rate. If the required conversion rate is below this level, Fairfaxmay defer it, i.e., have it "carried forward and taken into account in any subsequent adjustment."
On January 4, 2007, Fairfax declared an annual dividend of $2.75 (U.S.) per share and arecord date of January 25, 2007. Fairfax distributed this dividend on February 8, 2007. OnJanuary 2, 2008, Fairfax declared an annual dividend of $5.00 (U.S.) per share and a record dateof January 14, 2008. Fairfax distributed this dividend on February 11, 2008. There is no disputethat, standing alone, neither dividend would require an immediate increase in the conversionrate. Thus, Fairfax could defer the increase under section 10.3 (i), unless it was required tocombine the two dividends because they fell within the same 12-month period. Whiteboxcontends that Fairfax was so required. Focusing on the language "in each case as determined onthe Record Date for such distribution or dividend" (emphasis added), Whitebox readssection 10.3 (f) of the indenture to measure the 12 months by the record dates of the dividends(i.e., January 25, 2007 and January 14, 2008). Fairfax takes the position, however, that thedistribution dates of the dividends (i.e., February 8, 2007 and February 11, 2008) determine the12-month period.
Whitebox subsequently sued Fairfax for breach of the indenture for refusing to increase theconversion rate; it sought specific performance and declaratory relief. Fairfax moved to dismissfor failure to state a claim based on its interpretation of the language in the indenture. Inaddition, Fairfax argued that Whitebox failed to comply with certain conditions of the indenturebefore commencing suit. The motion court agreed with Whitebox, finding that the "[i]ndentureunambiguously states that the determination of whether the dividend exceeded Cdn$3.00 pershare in any twelve month period is 'as determined on the Record Date.' " Accordingly, themotion court denied Fairfax's motion to dismiss.
We affirm, but for a different reason—the language of section 10.3 (f) of the indentureis ambiguous. The opening language thereof, by using the words "distribute to allholders of its shares cash," is consistent with an intent to have the 12-month period measured bythe dates cash dividends and distributions are distributed, which is not, of course, the record date.Under that reading, because the dividends were distributed more than 12 monthsapart—and because the 2008 dividend did not itself exceed the amount set forth insubsection (A)—an increase in the [*3]conversion ratewould not be required. This reading gives meaning to the unambiguous word "distribute," thefirst verb used in this anfractuous sentence. A reading that focuses on the "distribut[ion]" of thecash is, at the least, reinforced by the word "such" in the words following closely on the heels ofthe verb (but after the successive parentheticals). Thus, the words "to the extent that theaggregate amount of any such cash distributions and dividends" refer back to the "distribute[d]"cash dividends or distributions described in the opening words of the sentence (rather than tothose described in the second parenthetical). Moreover, the indenture "reveals a logical reason"(W.W.W. Assoc. v Giancontieri, 77 NY2d 157, 163 [1990] [internal quotation marksomitted]) for the phrase upon which Whitebox pins its hopes, "in each case as determined on theRecord Date for such distribution or dividend." That is, any adjustment in the conversion rate isrequired "to be effective immediately prior to the opening of business on the day following theRecord Date" and the extent of the adjustment is based on the conversion rate and "CurrentMarket Price" on the record date.
By contrast, under Whitebox's reading, the word "distribute" is assigned a limited office,even if it is not rendered surplusage (cf.Beal Sav. Bank v Sommer, 8 NY3d 318, 324 [2007]). Under its reading, the wordserves only to reinforce what other provisions of the indenture make clear, i.e., that distributionof a cash dividend or other distribution is a necessary condition to an adjustment in theconversion rate on account of such a distribution. On the other hand, to the extent that is a flawin Whitebox's position, Fairfax's explanation for the words "in each case as determined on theRecord Date" appears to suffer from the same flaw.
With respect to the actual position in the sentence of the phrase "in any 12-month period,"we note that Fairfax's position surely would be strengthened if the sentence read "In case[Fairfax] shall, by dividend or otherwise, distribute in any 12-month period to all holders. . . ." The actual text, however, is not rendered ambiguous simply because it can beimproved. The extent to which, as a matter of grammar, the hypothetical variant and the actualtext can be distinguished is a nice question.
In the final analysis, we conclude that the sentence is ambiguous, i.e., reasonably susceptibleof two meanings (Riverside S. PlanningCorp. v CRP/Extell Riverside, L.P., 60 AD3d 61, 66 [2008], affd 13 NY3d 398[2009]), largely because it is not sufficiently clear whether the phrase "in each case asdetermined on the Record Date for such distribution or dividend" refers exclusively to the twoperiods defined in subsections (A) and (B), or refers back as well to what the sentence expresslydescribes as a "case," i.e., the "distribut[ion] to all holders of its shares" (cf. Matter of People v Applied Card Sys.,Inc., 11 NY3d 105, 127 [2008, Read, J., dissenting] [discussing "grammatical 'rule ofthe last antecedent,' " pursuant to which referential words, "where no contrary intention appears,refer solely to the last antecedent," but noting that "this rule is not an absolute and can assuredlybe overcome by other indicia of meaning"]).
Because the sentence is ambiguous, extrinsic evidence is admissible to resolve it (Enderv National Fire Ins. Co. of Hartford, 169 AD2d 420, 421 [1991]). As further proceedings arenecessary, we note that Whitebox is unpersuasive in seeking to buttress its reading by pointing toseemingly odd results that could follow from Fairfax's reading. We think it plain that apparentoddities can be conceived under both readings.
As for Fairfax's remaining arguments, we agree with the motion court that while Whiteboxbreached the "Limitation on Suits" provision of the indenture, the trustee explicitly waived itsright to rely on that provision as a bar to this action (see Excel Graphics Tech. v CFG/AGSCB 75 Ninth Ave., 1 AD3d65, 69 [2003], lv dismissed 2 NY3d 794 [2004]). The [*4]trustee chose, in its discretion, to comply with Whitebox's directionto waive the "Limitation on Suits" provision, as the indenture's "Control by Majority" provisionauthorizes. Concur—Andrias, J.P., Friedman, McGuire and Moskowitz, JJ.