Background
PennyMac Mortgage Investment Trust issued Series A and Series B preferred shares whose dividend rates were scheduled to change in 2024 from fixed rates to floating rates based on three-month U.S.-dollar LIBOR. The governing Articles Supplementary contained three cascading fallback provisions if LIBOR became unavailable. After LIBOR was discontinued in 2023, PennyMac applied the third fallback, which calculated dividends using the rate in effect for the immediately preceding dividend period. Because the shares had not yet entered their floating-rate period, that provision resulted in continuing fixed annual rates of 8.125% for Series A and 8% for Series B.
Shareholder Roberto Verthelyi brought a putative class action under California’s Unfair Competition Law, alleging that PennyMac’s use of fixed rates was unlawful and unfair because the federal Adjustable Interest Rate (LIBOR) Act required SOFR-based replacement rates. The district court denied PennyMac’s Rule 12(b)(6) motion, finding ambiguity in the Act and relying on legislative history. It certified an interlocutory appeal, and the Ninth Circuit granted permission to appeal.
The Court’s Holding
The Ninth Circuit held that a fixed interest or dividend rate can qualify as a “benchmark replacement” under the LIBOR Act. The statutory definition covers “a benchmark, or an interest rate or dividend rate,” and does not require the replacement to be a floating rate. PennyMac’s third fallback—using the dividend rate from the immediately preceding period—therefore was not inadequate merely because it resolved to a fixed rate. On that theory, PennyMac’s conduct was not “unlawful” under the UCL.
The court also rejected relief under the UCL’s “unfair” prong. A state-law claim asserting that PennyMac should have used SOFR instead of a contractually specified replacement relates to the selection or use of a benchmark replacement and is expressly preempted by the LIBOR Act. California’s UCL safe-harbor doctrine also barred treating as unfair conduct that the federal statute permits.
The panel reversed the order denying PennyMac’s motion to dismiss on the fixed-rate ground and remanded, but it did not direct dismissal of the action. Because the appeal was interlocutory, the court left open whether PennyMac’s application of the third fallback violated the LIBOR Act for some other reason, including whether the provision improperly references a replacement based on a LIBOR value. The panel did not reach PennyMac’s Maryland choice-of-law argument.
Key Takeaways
- A “benchmark replacement” under the LIBOR Act may be a fixed interest or dividend rate; it need not be a floating index such as SOFR.
- The Act generally allows contracts containing valid replacement provisions to operate according to their terms rather than automatically substituting SOFR.
- The ruling resolves only the fixed-rate theory and permits the parties to raise other arguments on remand about whether PennyMac’s third fallback complies with the Act.
Why It Matters
The decision provides the Ninth Circuit’s first interpretation of the LIBOR Act and clarifies that the statute does not automatically convert every legacy LIBOR instrument to a SOFR-based floating rate. Contractual fallback provisions may remain effective even when they produce a permanent fixed rate.
The opinion also limits efforts to use state unfair-competition law to impose a different benchmark replacement from one permitted by federal law. Its narrow remand, however, leaves unresolved whether PennyMac’s particular fallback is invalid on grounds other than its fixed-rate character.