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Hildene Opportunities Master Fund, Ltd. v. Arvest Bank

United States Court of Appeals, Eighth Circuit

July 30, 2018

Hildene Opportunities Master Fund, Ltd. Plaintiff- Appellant
Arvest Bank, et al. Defendants - Appellees

          Submitted: February 14, 2018.

          Appeal from United States District Court for the Western District of Missouri - Kansas City.

          Before LOKEN, BENTON, and ERICKSON, Circuit Judges.

          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's[1] 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 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.

         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 Under capitalized 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 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 ...

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