On July 18, 2015, Justice Bransten of the New York County Commercial Division issued a decision in One William St. Capital Management, LP v. Education Loan Trust IV, 2015 NY Slip Op. 31364(U), holding that the seller of securities in a repurchase agreement lacked standing to bring a claim to recover payments due under those securities.
In One William St. Capital Management, the plaintiff/petitioner brought a special proceeding “for: (a) the payment of overdue principal and interest on $10 million of notes issued by [the] respondent . . . ; (b) an accounting; (c) a determination of the petitioner’s rights under a trust . . . ; and, alternatively, (d) for damages.” The respondent moved for summary judgment dismissing the petition arguing that the petitioner lacked of standing because after the petitioner purchased the notes that were the subject of the action it entered into a repurchase transaction under which it sold the notes subject to an agreement to buy them back in the future. The court granted the motion, explaining:
In general a repurchase agreement involves two separate but related transactions: (1) a sale of assets by the ‘repo seller’ in exchange for cash; and (2) an agreement by the repo seller to repurchase them or their equivalent for a specified price in the future.
Repurchase transactions have been described as hybrid transactions because, on the one hand, they involve a sale of a security, while on the other, the ultimate goal of the seller may be a temporary exchange of a security for cash. Thus, the seller may intend the transaction to ultimately function as financing for its purchase of the security. Ultimately, however, a repurchase agreement differs from a loan because, unlike a lender taking collateral for a secured loan, a repo buyer takes title to the securities received and can trade, sell or pledge them.
A repurchase agreement is also critically different from a secured loan because the assets subject to the repurchase agreement are held by the repo buyer and are assets available for satisfaction of its debts and thus could be seized by its creditors. . . . [T]he secured lender holds pledged collateral for security and may not sell it in the absence of a default, whereas a repurchase buyer takes title to and is free to deal the collateral.
Under New York law the objective intention of the parties, as reflected in their contract language, dictates whether a repurchase agreement is a purchase-and-sale transaction or a collateralized loan. The mere presence of secured loan characteristics in repurchase agreements is not enough to negate the parties’ voluntary decision to structure the transactions as purchases and sales.
(Internal quotations and citations omitted). The court went on to hold that the repurchase agreement at issue in this action “constituted a sale, not a loan, and” thus the petitioner lacked standing to bring a claim based on the notes, which it no longer owned.