Background
PennyMac issued preferred shares whose dividends floated with three-month LIBOR, the former interbank benchmark, and included a chain of fallback provisions if LIBOR disappeared. When LIBOR ceased publication, PennyMac used the contract’s third fallback, which effectively locked in the last published LIBOR-based rate rather than switching to SOFR, the replacement rate endorsed by federal law.
Investor Roberto Verthelyi brought a proposed class action under California’s Unfair Competition Law (UCL), arguing that the federal LIBOR Act required a floating SOFR-based rate and made PennyMac’s fixed-rate approach unlawful or unfair. The Central District of California declined to dismiss the claim, and the Ninth Circuit accepted an interlocutory appeal to resolve the controlling statutory issue.
The Court’s Holding
The Ninth Circuit reversed. The LIBOR Act supplies a definition of ‘benchmark replacement’ that does not require the replacement to float. A contract may specify a replacement through a formula or other method, and PennyMac’s fallback language could qualify even though its operation produced a fixed rate. Congress designed the statute to fill gaps in contracts that lacked a clear, workable substitute—not to rewrite valid private fallback provisions.
The panel also held that Verthelyi could not repackage his preferred SOFR outcome as an ‘unfair’ UCL claim. The Act expressly preempts state-law standards relating to selection or use of a benchmark replacement. California’s UCL safe-harbor doctrine also blocks liability where federal law affirmatively permits contracts with valid replacement provisions to operate according to their terms.
The decision does not resolve every contractual question. On remand, the parties may litigate whether PennyMac’s fallback is invalid for some other statutory reason, including whether it remains based on a LIBOR value or fails another requirement. The court decided only that being fixed rather than floating is not itself disqualifying.
Key Takeaways
- A LIBOR replacement under federal law need not be a floating rate.
- The LIBOR Act fills contractual gaps but generally preserves clearly defined, practicable private fallbacks.
- State-law UCL theories cannot be used to impose a different benchmark-selection rule where federal law preempts that field.
- The ruling leaves open challenges based on other features of a fallback clause, so contract-specific analysis remains essential.
Why It Matters
California financial institutions, investors, and transactional lawyers now have circuit-level guidance for legacy instruments that froze at the last LIBOR value. A fixed outcome may be economically surprising without being unlawful under the LIBOR Act.
Litigators should separate objections to the economic result from defects in the clause’s statutory mechanics. The panel foreclosed a categorical fixed-rate theory but expressly preserved narrower arguments for the district court.
Read the full opinion (PDF) · Court docket