Wilcox v. Lloyds TSB Bank, PLC et al

Filing 419

ORDER DENYING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT ON THEIR AND THE PUTATIVE CLASS'S CLAIM FOR BREACH OF CONTRACT ON COUNT I, DENYING PLAINTIFFS' REQUEST FOR DECLATORY RELIEF, GRANTING IN PART AND DENYING IN PART DEFENDANT& #039;S MOTION FOR SUMMARY JUDGMENT, AND SUA SPONTE GRANTING PARTIAL SUMMARY JUDGMENT TO PLAINTIFFS ON COUNT II re 249 , 251 - Signed by JUDGE ALAN C KAY on 2/11/2016. "For the foregoing reasons, the Court: (1) DEN IES Plaintiffs' Motion for Partial Summary Judgment on Their and the Putative Class's Claim for Breach of Contract on Count I; (2) GRANTS in part and DENIES in part Lloyds' Motion for Summary Judgment; (3) sua sponte GRANTS partial summary judgment to Plaintiffs on Count II, and (4) DENIES Plaintiffs' request for declaratory relief. Regarding its second and third holdings, the Court finds that the Cost of Funds provision in the facility agreements does n ot prescribe a specific methodology for calculating the Cost of Funds component of the IMS loans' interest rate; does not specifically require the Cost of Funds component to track 3-month LIBOR; and does not specifically require Lloyds to fund Plaintiffs' loans with short-term money. However, the agreements do allow Lloyds to pass on liquidity costs and liquidity requirements to borrowers. Additionally, the Cost of Funds provision does not specifically restrict Lloyds from altering i ts cost calculation. However, the Court also finds an implied term in the agreements which limits Lloyds' discretion to alter interest rates. That implied term requires Lloyds, when altering interest rates, to do so in a manner that comports wit h purely commercial considerations, including whether it is in financial difficulty because it is obliged to pay higher rates on interest to the money market; however, Lloyds must refrain from acting dishonestly, for an improper purpose, capriciously , or arbitrarily, or in a manner so unreasonable that no reasonable lender would do the same (the Nash standard). The Court otherwise DENIES both parties' motions for summary judgment, as issues of material fact regarding Lloyds 9; alleged breach of the express and implied terms of the facility agreements remain." (emt, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
___________________________________
)
BRADLEY WILLCOX, FRANK DOMINICK,
)
and MICHELE SHERIE DOMINICK,
)
)
Plaintiffs,
)
)
v.
) Civ. No. 13-00508 ACK-RLP
)
LLOYDS TSB BANK, PLC and DOES
)
1-15,
)
)
Defendants.
)
___________________________________)
ORDER DENYING PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT ON
THEIR AND THE PUTATIVE CLASS’S CLAIM FOR BREACH OF CONTRACT ON
COUNT I, DENYING PLAINTIFFS’ REQUEST FOR DECLATORY RELIEF,
GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT, AND SUA SPONTE GRANTING PARTIAL SUMMARY
JUDGMENT TO PLAINTIFFS ON COUNT II
For the reasons set forth below, the Court DENIES
Plaintiffs’ Motion for Partial Summary Judgment on Their and the
Putative Class’s Claim for Breach of Contract, ECF No. 251,
GRANTS in part and DENIES in part Defendant Lloyds TSB Bank
PLC’s Motion for Summary Judgment, ECF No. 249, and sua sponte
GRANTS partial summary judgment to Plaintiffs on Count II.

The

Court also DENIES Plaintiffs’ request for declaratory relief.
PROCEDURAL BACKGROUND
On September 13, 2013, Plaintiff Bradley Willcox filed
a Complaint on behalf of himself and a similarly situated class
against Defendant Lloyds TSB Bank, PLC, now known as Lloyds Bank
PLC (“Lloyds” or “Defendant”), in the Circuit Court of the First
- 1 -

Circuit, State of Hawaii.

Compl., ECF No. 1-2.

On October 7,

2013, Lloyds removed the case to federal court pursuant to the
Class Action Fairness Act, 28 U.S.C. § 1332.1

Notice of Removal,

ECF No. 1.
On December 3, 2013, Willcox filed a First Amended
Complaint, adding Frank Dominick as a named plaintiff.

The

First Amended Complaint brought a claim under the Hawaii Unfair
and Deceptive Trade Practices Act, H.R.S. §§ 480-2 and 481A3(a)(12), and requested declaratory relief pursuant to H.R.S.
§§ 632-1 et seq. and 28 U.S.C. §§ 2201 and 2202.

See First Am.

Compl. ¶¶ 61-77, ECF No. 25.
On December 17, 2013, Lloyds moved to dismiss the
First Amended Complaint.

Def. Lloyds’ Mot. to Dismiss the

Claims Asserted in the First Am. Compl., ECF No. 26.
10, 2014, the Court granted Lloyds’ motion.
Def.’s Mot. to Dismiss, ECF No. 49.

On June

Order Granting

The Court concluded that

the Hong Kong choice-of-law provision in the parties’
contractual agreements precluded the assertion of Hawaii and
U.S. statutory claims; accordingly, it dismissed the First
1

Class action suits involving similar loan products
and claims as those at issue in the instant case were filed
against Lloyds in federal district courts in California and
Washington: (1) Dugan v. Lloyds TSB Bank, Civ. No. 3:12-cv02549-WHA (N.D. Cal.); (2) Osmena v. Lloyds TSB Bank, Civ. No.
3:12-cv-02937-WHA (N.D. Cal.) (since consolidated with Dugan);
and (3) Washington Land Development, LLC v. Lloyds TSB Bank plc,
2:14-cv-00179-JCC (W.D. Wash.). Each of these cases has been
dismissed following settlement.
- 2 -

Amended Complaint in its entirety.

Id. at 46.

However, the

Court granted Willcox and Dominick leave to file a further
amended complaint.

Id.

On August 14, 2014, Willcox and Dominick filed a
Second Amended Complaint (“SAC”), bringing claims under Hong
Kong law for Breach of Contract (Count I), Breach of an Implied
Term Limiting Lloyds’ Discretion to Change the Interest Rate
(Count II), and declaratory relief (Count III).

See Second Am.

Compl. ¶¶ 54-78, ECF No. 61.
On September 19, 2014, Lloyds moved to dismiss the SAC
on grounds of forum non conveniens and failure to state a claim.
Def. Lloyds’ Mot. to Dismiss the Claims Asserted in the Second
Am. Compl., ECF No. 62.

On December 23, 2014, the Court issued

an Order Granting in Part and Denying in Part Defendant’s Motion
to Dismiss.

ECF No. 73.

The Court denied Lloyds’ motion to

dismiss for forum non conveniens and for failure to state a
claim as to Counts I and II of the SAC.

However, it granted

Lloyds’ motion as to Willcox and Dominick’s claim for
declaratory relief (Count III), noting that such relief was a
remedy (rather than an independent cause of action) and that the
Court could “provide any appropriate declaratory relief or
remedy” if it “ultimately rules that Plaintiffs prevail on their
contractual claims.”

Id. at 35-36.

- 3 -

On January 9, 2015, Lloyds moved to join Michele
Sherie Dominick, wife of named Plaintiff Frank Dominick, as a
party.

ECF No. 76.

Magistrate Judge Puglisi issued an Order

Granting Defendant Lloyds’ Motion to Join Michele Sherie
Dominick as a Party on March 16, 2015.

ECF No. 94.

That order

directed that an amended complaint naming Ms. Dominick as a
party to this action be filed by March 27, 2015.

Id. at 10.

Plaintiffs filed the operative Third Amended Complaint
(“TAC”) on March 27, 2015.

ECF No. 100.

The TAC names Frank

Dominick, Michele Sherie Dominick, and Bradley Willcox
(collectively, “Plaintiffs”) as class representatives and brings
claims for Breach of Contract (Count I) and Breach of an Implied
Term Limiting Lloyds’ Discretion to Change the Interest Rate
(Count II).

Id. ¶¶ 6-8, 55-72.

On July 15, 2015, Plaintiffs filed a Motion for Class
Certification pursuant to Federal Rule of Civil Procedure 23.
ECF No. 156.

After briefing and oral argument from the parties,

Magistrate Judge Puglisi issued his Findings and Recommendation
to Grant in Part and Deny in Part Plaintiffs’ Motion for Class
Certification (“F&R”) on November 12, 2015.

ECF No. 317.

The

F&R recommended: (1) certifying the instant case as a class
action, (2) appointing Willcox (but not the Dominicks) as class
representative, (3) appointing Alston Hunt Floyd & Ing and
Steptoe & Johnson LLP as class counsel, (4) directing the
- 4 -

parties to meet and confer regarding notice to class members,
(5) denying any remaining relief requested in Plaintiffs’ class
certification motion, and (6) defining the certified class as:
All persons and entities who entered prior
to August 2009 into an IMS [International
Mortgage System] loan with Lloyds that
contained
a
Hong
Kong
choice-of-law
provision and an interest rate provision
based upon Cost of Funds and who are, or
were at any time during entering into such
an IMS loan, residents or citizens of the
State of Hawaii, or owners of property in
Hawaii that was mortgaged to secure any such
IMS loan.
Id. at 31-32.

Lloyds filed objections to the F&R on November

25, 2015, ECF No. 332, to which Plaintiffs filed a Response on
December 9, 2015, ECF No. 335.

The parties also submitted

supplemental Reply and Sur-Reply briefs on December 17, 2015 and
December 28, 2015, respectively.

ECF Nos. 337, 340.

On January 8, 2016, the Court issued an Order Adopting
in Part, Rejecting in Part, and Modifying in Part the Findings
and Recommendations to Grant in Part and Deny in Part
Plaintiffs’ Motion for Class Certification.

ECF No. 366.

For

the reasons explained therein, the Court adopted the F&R over
Lloyds’ objections, except as to the class definition, which the
Court modified to include only plaintiffs of U.S. and Canadian
citizenship.

On January 22, 2016, pursuant to Federal Rule of

Civil Procedure 23(f), Lloyds filed with the Ninth Circuit a
Petition for Permission to Appeal the class certification Order.
- 5 -

ECF No. 397.2

Plaintiffs filed an Opposition to the Petition for

Permission to Appeal on February 1, 2016.

9th Cir., No. 16-

80009, ECF No. 4.
Meanwhile, on October 16, 2015, Plaintiffs and Lloyds
had filed the instant cross-motions for summary judgment.
Lloyds moves for summary judgment as to both of Plaintiffs’
Counts I and II.

See Def. Lloyds’ Mot. for Summ. J. (“Def.’s

MSJ”) at 4, ECF No. 249.

Plaintiffs move for summary judgment

only as to their Count I and request “immediate declaratory
relief” as to that claim.

Pls.’ Mot. for Partial Summ. J. on

Their and the Putative Class’s Claim for Breach of Contract
(“Pls.’ MSJ”) at 1, ECF No. 251.
On the same date, each party also filed a Concise
Statement of Facts in support of its motion.

See Def. Lloyds’

Separate and Concise Statement of Undisputed Facts in Supp. of
its Mot. for Summ. J. (“Def.’s CSF”), ECF No. 250; Concise

2

Rule 23(f) states, “A court of appeals may permit an appeal
from an order granting or denying class-action certification
under this rule if a petition for permission to appeal is filed
with the circuit clerk within 14 days after the order is
entered. An appeal does not stay proceedings in the district
court unless the district judge or the court of appeals so
orders.” On February 3, 2016, Lloyds filed with this Court a
Motion to Stay Proceedings Pending Resolution of Dispositive
Motions, Rule 23(f) Petition, and Any Resulting Appeal. ECF No.
402. Magistrate Judge Puglisi thereafter suspended the parties’
obligations to meet and confer regarding notice to potential
class members and to submit to the Court a proposed class notice
and distribution plan, until the Court issues a decision on the
pending Motion to Stay. ECF No. 405.
- 6 -

Statement of Facts in Supp. of Pls.’ MSJ (“Pls.’ CSF”), ECF No.
253.

In addition, each party filed a Notice of Intent to Rely

on Foreign Law pursuant to Federal Rule of Civil Procedure 44.1.
ECF Nos. 246, 247.3
On December 29, 2015, Plaintiffs filed an Opposition
to Lloyds’ summary judgment motion and a Concise Statement of
Facts in support thereof.

See Pls.’ Opp’n to Defs.’ MSJ (“Pls.’

Opp.”), ECF No. 347; Concise Statement of Facts in Supp. of
Pls.’ Opp. (“Pls.’ Opp. CSF”), ECF No. 349.

On the same date,

Lloyds also filed an Opposition to Plaintiffs’ summary judgment
motion and a Concise Statement of Facts in support thereof.

See

Def. Lloyds’ Mem. of Law in Opp’n to Pls.’ Mot. for Partial
Summ. J. (“Def.’s Opp.”), ECF No. 348; Def. Lloyds’ Separate and
Concise Counterstatement of Material Facts in Opp’n to Pls.’
Mot. for Partial Summ. J. (“Def.’s Opp. CSF”), ECF No. 350.
Also on that date, each side filed a Notice of Intent to Rely on

3

Lloyds’ Notice attaches a declaration of Judge Anselmo Reyes, a
Professor of Legal Practice at the University of Hong Kong and
former Judge of the High Court of Hong Kong. See Decl. of Prof.
Anselmo Reyes in Supp. of Lloyds Bank’s Mot. for Summ. J.
(“Reyes Decl.”) ¶¶ 1-2, ECF No. 246-1. Plaintiffs’ Notice
attaches a declaration of John Brewer, a barrister in the courts
of the Hong Kong Special Administrative Region. See Decl. of
John Brewer in Supp. of Pls.’ Mot. for Partial Summ. J. (“Brewer
Decl.”) ¶ 2, ECF No. 247-1.
The declarations of Reyes and Brewer in turn attach a
series of Hong Kong and United Kingdom legal authorities upon
which they rely.
- 7 -

Foreign Law pursuant to Federal Rule of Civil Procedure 44.1.
ECF Nos. 343, 345.4
On January 5, 2016, each party filed a Reply in
support of its summary judgment motion.

See Reply in Supp. of

Pls.’ MSJ (“Pls.’ Reply”), ECF No. 358; Def. Lloyds’ Reply Mem.
of Law in Supp. of Lloyds’ Mot. for Summ. J.(“Def.’s Reply”),
ECF No. 360.

Lloyds’ Reply was accompanied by a further Notice

of Intent to Rely on Foreign Law pursuant to Federal Rule of
Civil Procedure 44.1, filed on the same date.

ECF No. 356.5

The Court held a two-day hearing regarding the instant
motions on January 19-20, 2016.
FACTUAL BACKGROUND
The instant case involves the issuance by Lloyds of
certain dual currency loans (also referred to as International
Mortgage System (“IMS”) loans).

Dual currency loans are

mortgage loans with a currency switching feature that allows
borrowers to switch the currency of their loans between United
States dollars and other currencies.

See TAC ¶¶ 1-3, ECF No.

100.
4

Plaintiffs’ Notice attaches a further expert declaration from
Brewer. Decl. of John Brewer in Supp. of Pls.’ Opp. to Lloyds
Bank’s Mot for Summ. J. (“Brewer Opp. Decl.”), ECF No. 343-1.
Lloyds’ Notice attaches copies of Hong Kong and United Kingdom
legal authorities but no additional expert declaration.
5

Lloyds’ Notice refers to previously-filed copies of Hong Kong
and United Kingdom legal authorities but provides no additional
expert declaration.
- 8 -

Lloyds is organized under the laws of the United
Kingdom but maintains branches throughout the world, including a
Hong Kong branch from which it issued IMS loans to Plaintiffs.
See id. ¶¶ 1-3, 9.

Lloyds is a wholly-owned subsidiary of

Lloyds Banking Group, PLC (“LBG”).
I.

Id. ¶ 9.

The “Cost of Funds” Provision in Lloyds’ IMS
Loans

The IMS loans at issue in this case were made from
approximately 2005-2009 and secured by mortgages on real
property in Hawaii and California.

Id. ¶¶ 15, 21-22, 28-30.

The loans have an interest rate that is set at 1.5% above
Lloyds’ “Cost of Funds,” with the interest rate fixed for
successive three-month periods.

Id. ¶¶ 2, 16.

The “Cost of

Funds” is defined (with immaterial differences) in the loan
documents as:
[T]he cost (calculated to include the costs
of complying with liquidity and reserve
asset
requirements)
in
respect
of
any
currency expressed as a percentage rate of
funding for maintaining the Advance or
Advances in that currency as conclusively
nominated by the Bank from time to time.
Id. ¶ 2.

Interest payments on the loans are due, and the

interest rate recalculated, at the end of each three-month
period.

Id. ¶ 16.

As further discussed below, Plaintiffs’

claims for breach of contract (Count I) and breach of an implied
contractual term (Count II) allege that Lloyds impermissibly

- 9 -

included in its Cost of Funds calculation a charge that
constituted neither an actual cost to Lloyds in funding the
loans nor a liquidity requirement.
II.

Id. ¶¶ 55-72.

The Named Plaintiff’s Loans

Plaintiff Bradley Willcox is a resident of Hawaii who,
in 2007, took out approximately $1,284,500.00 in four IMS loans
from Lloyds, secured by four real properties located in
Honolulu, Hawaii.

Id. ¶¶ 6, 21-22.

Willcox took out the loans

in U.S. Dollars but chose to redenominate them to Japanese Yen
shortly after the transaction closed.

Id. ¶ 23.

Shortly thereafter, the world was struck by the 2008
financial crisis and the U.S. Dollar to Japanese Yen exchange
rate fell (i.e., the Yen grew stronger relative to the U.S.
Dollar), and Willcox’s quarterly interest payments “dramatically
increased” by 2012.

Id. ¶ 24.

Willcox alleges that this

increase was, in part, a result of Lloyds’ “arbitrary increases”
in its Cost of Funds.

Id. ¶ 25.

He further alleges that he is

not in arrears on his IMS loans and that Lloyds’ Cost of Funds
increases caused him to pay “substantially more” than he
otherwise would have over the course of his loans.

Id. ¶¶ 26-

27.
III. Allegations Regarding Lloyds’ Cost of Funds
Plaintiffs claim that, in or around 2009, Lloyds added
several new basis points to its Cost of Funds calculation in
- 10 -

order to reflect the imposition by its parent company, LBG, of a
“liquidity transfer pricing” (“LTP”) charge.

Id. ¶ 5.

According to Plaintiffs, the LTP charge added to the
Cost of Funds an amount “based not on the actual cost of funds
for the Loans, but for Lloyds’ parent’s significantly longerterm set of obligations.”

Id.

Plaintiffs argue that this

represented Lloyds’ attempt to pass on to borrowers “the cost of
funding Lloyds’ parent’s overhead and operations as a whole, not
just the cost of funding their own IMS Loans.”
original omitted).

Id. (emphasis in

Plaintiffs further observe that, during the

period when Lloyds was increasing its Cost of Funds, standard
interest rate indices such as the London Inter-Bank Offered Rate
(“LIBOR”) decreased.

Id.

¶ 4.

As noted above, Plaintiffs filed this putative class
action against Lloyds on September 13, 2013.

They allege that

Lloyds’ inclusion of the LTP charge in its Cost of Funds
constitutes a breach of the express terms of Plaintiffs’ loan
agreements and a breach of an implied term limiting Lloyds’
discretion to change Plaintiffs’ interest rates.

See id. ¶¶ 55-

72.
STANDARD
A party is entitled to summary judgment on any claim
or defense if it can be shown “that there is no genuine dispute
as to any material fact and the movant is entitled to judgment
- 11 -

as a matter of law.’”

Maxwell v. Cty. of San Diego, 697 F.3d

941, 947 (9th Cir. 2012) (quoting Fed. R. Civ. P. 56(a)).

A

party asserting that a fact cannot be or that it is genuinely
disputed must support the assertion by either “citing to
particular parts of materials in the record” or “showing that
the materials cited do not establish the absence or presence of
a genuine dispute, or that an adverse party cannot produce
admissible evidence to support the fact.”

Fed. R. Civ. P.

56(c)(1).
The movant has the burden of persuading the court as
to the absence of a genuine issue of material fact.
Baca, 596 F.3d 583, 587 (9th Cir. 2010).

Avalos v.

If the movant

satisfies its burden, the nonmovant must present evidence of a
“genuine issue for trial,” Fed. R. Civ. P. 56(e), that is
“significantly probative or more than merely colorable,”6 LVRC
Holdings LLC v. Brekka, 581 F.3d 1127, 1137 (9th Cir. 2009)
(citation omitted).

When evaluating a motion for summary

judgment, the court must “view the facts and draw reasonable
inferences in the light most favorable to the party opposing the

6

The Ninth Circuit has explained that “[l]egal memoranda and
oral argument, in the summary-judgment context, are not
evidence, and do not create issues of fact capable of defeating
an otherwise valid motion for summary judgment.” Flaherty v.
Warehousemen, Garage and Service Station Emp. Local Union No.
334, 574 F.2d 484, 486 n.2 (9th Cir. 1978); see also Barcamerica
Intern. USA Trust v. Tyfield Importers, 289 F.3d 589, 593 n.4
(9th Cir. 2002).
- 12 -

summary judgment motion.”
(2007).

Scott v. Harris, 550 U.S. 372, 378

If the nonmovant cannot produce sufficient evidence to

demonstrate that a triable issue of fact exists, the movant is
entitled to summary judgment as a matter of law.

Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
DISCUSSION
I.

BREACH OF CONTRACT (COUNT I)

Plaintiffs allege that Lloyds breached the IMS loan
agreements by arbitrarily adding to its Cost of Funds an LTP
charge issued to Lloyds by its parent company, LBG.
at 1-2; TAC ¶¶ 1, 55-64.

Pls.’ MSJ

For its part, Lloyds emphasizes that

”between 2009 and 2015, the element of the variable ‘Cost of
Funds’ component reflecting Lloyds Bank’s liquidity costs
changed six times, increasing three times and decreasing three
times.”

Def.’s MSJ at 2.

Further, it contends these

adjustments were implemented only after various committees
within Lloyds “carefully reviewed and formally approved” the
proposed changes.

Id.

Lloyds explains that “this careful,

considered process of reviewing and approving any adjustments to
the variable ‘Cost of Funds’ component does not constitute
‘arbitrary’ or ‘capricious’ behavior.”

Id. at 2-3.

The loans’ facility agreements contain a Hong Kong
choice of law provision, and this Court has previously concluded
that Hong Kong law governs Plaintiffs’ contractual claims.
- 13 -

Order Granting Def.’s Mot. to Dismiss at 34, ECF No. 49.

To

prevail on a breach of contract claim under Hong Kong law, a
plaintiff must establish (1) that there were express or implied
contractual terms requiring the defendant to act in some manner,
and (2) that the defendant has acted contrary to those express
or implied terms.

Hongkong Fir Shipping Co. Ltd. v. Kawasaki

Kisen Kaisha Ltd., [1962] 2 QB 26 (CA).
Under Hong Kong law, contractual language is
interpreted by “ascertain[ing] . . . the meaning which the
document would convey to a reasonable person having all the
background knowledge which would reasonably have been available
to the parties in the situation in which they were at the time
of the contract.”7

Investors Comp. Scheme Ltd. v. W. Bromwich

Bldg. Soc’y, [1998] 1 WLR 896, 9128; see also Jumbo King Ltd. v.

7

The parties agree that no issue exists with regard to what
instructions or oral representations Lloyds, its agents, or its
representatives may have given to individual class members
regarding the loan documents. See Pls.’ Mot. for Class
Certification at 17-18, ECF No. 156; Order Adopting in Part,
Rejecting in Part, and Modifying in Part the Findings and
Recommendations to Grant in Part and Deny in Part Pls.’ Mot. for
Class Certification at 16, ECF No. 366.
8

The Court notes that Investors Comp. is an English common law
case, and that both parties have previously recognized that the
body of Hong Kong law includes English common law. Decl. of
Paul Kwan submitted in opposition to Lloyds’ December 17, 2013
motion to dismiss, ECF. No. 37-3 at 2 (“Because of its historic
ties with England, the current legal framework of Hong Kong is
based on English common law and Hong Kong legislation.”); Decl.
of Anselmo Reyes submitted in support of Lloyds’ December 17,
- 14 -

Faithful Props. Ltd., (1999) 2 HKCFAR 279, 296 (finding that
interpretation of a document “is an attempt to discover what a
reasonable person would have understood the parties to mean,”
which “involves having regard, not merely to the individual
words they have used, but to the agreement as a whole, the
factual and legal background against which it was concluded and
the practical objects which it was intended to achieve”).
a. Whether the Cost of Funds Provision is
Ambiguous
Because the parties dispute the meaning of the Cost of
Funds provision contained in the facility agreements, the Court
must first determine whether that provision is ambiguous.
Whether a contractual term is ambiguous is a question of law for
the Court to decide.
Cir. 2004).

Miller v. U.S., 363 F.3d 999, 1003-04 (9th

In a contract case, summary judgment is only

appropriate where the contract provision at issue is
unambiguous.

Castaneda v. Dura-Vent Corp., 648 F.2d 612, 619

(9th Cir. 1981).

Conversely, where the contract term is

ambiguous, the parties’ intent becomes an issue of material fact
and summary judgment is inappropriate.

See id. at 619-20.

“Generally, language will be deemed ambiguous when it
is reasonably susceptible to more than one interpretation.”
ASARCO, LLC v. Union Pacific R. Co., 765 F.3d 999, 1009 (9th
2013 motion to dismiss, ECF. No. 38-1 at 4 (noting that “the
body of Hong Kong law” includes English common law).
- 15 -

Cir. 2014) (quoting 11 Richard A. Lord, Williston on Contracts
§ 32:2 (4th ed. 2014)).

However, “[t]he fact that the parties

dispute a contract’s meaning does not establish that the
contract is ambiguous.”

Klamath Water Users Protective

Association v. Patterson, 204 F.3d 1206, 1210 (9th Cir. 1999).
A dispute regarding a material fact necessary to interpret the
contract, on the other hand, may result in ambiguity.

Bower v.

Bunker Hill Co., 725 F.2d 1221, 1223 (9th Cir. 1984).
Again, the bank’s Cost of Funds is defined in the
facility agreements as:
[T]he cost (calculated to include the costs
of complying with liquidity and reserve
asset
requirements)
in
respect
of
any
currency expressed as a percentage rate of
funding for maintaining the Advance or
Advances in that currency as conclusively
nominated by the Bank from time to time.
Plaintiffs first argue that the language used in the
parenthetical, “calculated to include the costs of complying
with liquidity . . . requirements,” (emphasis added), permits
Lloyds to include in the Cost of Funds calculation only those
charges that constitute “mandatory costs” imposed by regulatory
or supervisory bodies to which the bank is subject.
at 18.

Pls.’ MSJ

Plaintiffs contend that, had the agreements granted

Lloyds the absolute right to define what figures went into the
cost calculation, “it would have been entirely unnecessary to
then explicitly define ‘cost’ to include ‘liquidity and reserve
- 16 -

asset requirements.’”

Pls.’ Opp. at 30; see also Pls.’ Reply at

14 n.12 (“The only reasonable interpretation . . . is that the
express inclusion of two specific costs, ‘liquidity and reserve
asset requirements,’ would preclude other non-required costs
related to liquidity and reserve assets.”)

Because LBG’s LTP

charge reflected a liquidity “risk” that did not address a
mandatory requirement of a regulatory body, Plaintiff’s argue,
Lloyds voluntarily – and impermissibly – passed through the
charge to borrowers.

Pls.’ MSJ at 3-4, 19-20.

Lloyds counters that the plain language of the
provision simply defines the Cost of Funds to include the costs
of complying with liquidity requirements.

Def.’s Opp. at 17.

It argues that the language does not, as Plaintiffs contend,
single out liquidity requirements as the sole liquidity charge
that Lloyds may figure into its cost calculation.

Id. at 18.

Thus, Lloyds asserts, allocation of the LTP charge to borrowers,
whether or not that charge was comprised solely of liquidity
requirements, was appropriate.

Id.

The Court is not convinced that the language of the
Cost of Funds provision limits the cost calculation to liquidity
requirements, as Plaintiffs contend.

Courts will employ certain

canons of construction, such as ejusdem generis and noscitur a
sociis, to limit the meaning of a general term when a list of
specific terms is delineated within the text of a provision.
- 17 -

However, those canons do not apply here, where, as Lloyds
rightfully points out, “cost” is simply defined to include
liquidity requirements.

Indeed, while Plaintiffs contest the

propriety of certain other costs that were factored into the
Cost of Funds equation prior to 2009, namely, treasury
administration costs and the bid/offer spread, they do concede
that for over twenty years Lloyds had calculated its cost to
include more than just “liquidity and reserve asset
requirements.”

See Pls.’ MSJ at 4 n.4.

In fact, Plaintiffs and

Lloyds are in agreement that the Cost of Funds component always
included four elements:

(1) a liquidity charge; (2) a bid/offer

spread; (3) treasury administration costs; and (4) 3-month LIBOR
in the currency in which the loan is denominated.
4 n.4; Def.’s Opp at 10-11.

Pls.’ MSJ at

Thus, the limited construction

Plaintiffs give to the Cost of Funds provision is not borne out
by Lloyds’ historical practices pursuant to the facility
agreements.
Nor does Plaintiffs’ argument that explicit inclusion
of two specific factors precludes other costs related to those
factors persuade the Court.

Again, use of the word “include”

indicates that “cost” is meant to encompass a more expansive
list of factors, including standard, “non-required” liquidity
costs that Lloyds actually incurred.

This is also confirmed by

Lloyds’ historical practice, prior to implementation of the LTP
- 18 -

charge, in which it routinely passed on “non-required” liquidity
costs to borrowers.

See Dep. of Simon Cooper at 27:2-28:24, ECF

No. 350-13; see also Dep. of Robin Milne at 34:20-35:9, ECF No.
350-12.

In fact, Lloyds’ attorney argued at the hearing that if

Lloyds had passed on only liquidity requirements to borrowers,
it would have been funding the IMS loans at a loss – this is
something Lloyds would not have agreed to do, and such conduct
would have constituted an imprudent banking practice.
Transcript of Hearing at 32-33, Jan. 20, 2016; see also Nash, et
al. v. Paragon Fin. PLC, [2001] EWCA Civ. 1466, at ¶ 47 (15 Oct.
2001) (recognizing defendant bank’s need to take into account
“commercial considerations” in conducting business).
Plaintiffs and Lloyds next dispute the meaning of the
phrase “as conclusively nominated by the Bank from time to
time.”

Plaintiffs argue that the phrase refers to Lloyds’ right

to change the IMS loans’ currency – not the Cost of Funds
calculation for the loans.

Pls.’ MSJ at 22-23.

Plaintiffs

support this notion by drawing attention to the fact that no
other provision in the agreements outlines Lloyds’ “critical
right” to switch the currency of the loans; this, Plaintiffs
maintain, necessitates that the Cost of Funds definition provide
this entitlement.

Pls.’ Opp. at 32.

Plaintiffs also outline several textual arguments
which they assert support their reading of the provision.
- 19 -

Plaintiffs argue that since “nominate” means “to name,” the use
of this term in the Cost of Funds provision must be in reference
to Lloyds’ right to choose the currency of the loans, because
numerical interest rates are calculated.

Pls.’ Opp. at 29.

Plaintiffs also contend that the phrase “from time to time” is
used in connection with “currency” elsewhere in the agreements;
further, since the facility agreements already provide for
updated interest rates every three months, the use of the phrase
“from time to time,” if made in reference to the calculation of
“cost,” would be “mere surplusage.”

Id. at 31.

Lloyds responds that the phrase at issue appears in
the interest rate provision of the agreements under the heading
“Costs.”

Def.’s Opp. at 23.

It asserts, “The notion that a

clause governing currency switching would be hidden deep within
the interest rate provision, under the heading ‘Costs,’ is
commercially unreasonable and defies basic principles of
contract interpretation.”

Id.

Lloyds instead argues that this

language grants it the discretion to adjust the Cost of Funds
component “from time to time.”

Id. at 22; Def.’s MSJ at 22.

Lloyds also notes that the facility agreements decline to
prescribe a specific methodology for calculating the Cost of
Funds figure.

Def.’s MSJ at 12.

The Court again finds merit in Lloyds’ reading of the
contractual term.

To begin, the Court finds that, as Lloyds
- 20 -

correctly observes, the facility agreements do not require
Lloyds to determine the Cost of Funds figure using a specific
calculation.
Turning next to what the agreements do state, the
Court finds that the agreements refer to the right to change the
currency of the loans as belonging to the borrower.

For

example, the agreements state, “The Bank may (but is not obliged
to) permit the Borrower to switch the currency of the
loan . . . .”

Ex. 6 to Def.’s Opp. at 2, ECF No. 350-7

(emphasis added).

Additionally, in the acknowledgements section

included at the end of the agreement, the language states, “I
acknowledge that I am fully aware . . . my obligation is to make
payment to the Bank of principal and interest in the currency in
which the loan is denominated from time to time (this will be
different from the currency stated in the Facility Amount in
this letter if I exercise my option to borrow in a different
currency) . . . .”

Id. at 9 (emphasis added); see also id. (“I

acknowledge that I am fully aware . . . I have not been advised
by the Bank or any of its employees to borrow in a particular
currency and I do not expect to receive advice or guidance from
the Bank in regard to the risks mentioned herein at any time
during the loan term . . . .”).
In support of their contention that Lloyds was also
entitled to choose the currency of the loans, Plaintiffs point
- 21 -

to sections of the agreement stating that the borrower’s choice
of currency was subject to Lloyds’ approval.

See id. at 2 (“The

Bank may (but is not obliged to) permit the loan to be drawn
down in either Japanese Yen or United States Dollars.

The Bank

may (but is not obliged to) permit the Borrower to switch the
currency of the loan between the currencies specified
above . . . .”).

However, Lloyds’ right to approve such a

currency switch is very different from the right to choose the
currency of its own accord.

In fact, the currency-switching

feature of the IMS loans was partly what made them so appealing
to borrowers in the first place.

Language allowing the bank

broad discretion to unilaterally choose or switch the currency
would appear to undermine the important and attractive right in
the borrower to switch the currency of the loans.
Plaintiffs argue that because Lloyds possesses the
“critical right” to switch the IMS loans’ currency, this right
must be specifically provided for in the facility agreements;
however, because no other term in the agreements outlines this
right, it necessarily lies in the interest rate provision, under
the heading “Costs.”

But this argument merely begs the question

whether that right really is critical to Lloyds – indeed, the

- 22 -

agreements may not provide for the right because it is not in
fact critical.9
Finally, Plaintiffs offer several textual arguments in
support of their reading.

First, Plaintiffs argue that because

“nominate” means to “name” or “designate,” use of this term is
made in reference to “currency” because a currency may be named.
Pls.’ Opp. at 29.

And while Plaintiffs argue that numerical

interest rates are calculated, it is also true that a bank may
“designate” the cost calculation it intends to employ.
Additionally, Plaintiffs argue that use of the phrase “from time
to time,” when made in reference to changes in cost, creates a
redundancy in the provision because the agreements state that
interest rates on the loans will be set every three months.
However, the Court does not find this reading to be problematic,
as the “from time to time” language simply appears to refer to
this event.

Ultimately, when reading the contract as a whole it

9

Plaintiffs point to certain “Frequently Asked Questions”
documents regarding the IMS loan product, which contain language
asserting Lloyds has the right to switch the currency of the
loans in certain circumstances. See Ex. 57 to Pls.’ MSJ at 8,
ECF No. 323-11 (“Please note that Lloyds TSB would always retain
the right to switch the currency of the loan to that of the
country of the property. We would not expect to exercise this
right unless any term or condition of the mortgage loan was
breached.”); Ex. 58 to Pls.’ MSJ at 19, ECF No. 323-12 (stating
the same). Again, however, the Court finds the facility
agreements nowhere include such a right on the part of Lloyds,
and as discussed above, such a right in Lloyds would distract
from this purpose and undermine borrowers’ right to determine
the loans’ currency.
- 23 -

is clear that Lloyds’ construction of the Cost of Funds
definition squares with the overall purpose of the facility
agreements.
Accordingly, the Court holds that the Cost of Funds
provision is not ambiguous, and that the plain meaning of the
provision permits Lloyds to include both liquidity costs and
liquidity and reserve asset requirements in its cost
calculation, as well as to alter this calculation “from time to
time.”
b. Whether Lloyds Breached the Express Terms of
the Cost of Funds Provision
Arguing that Lloyds violated the express terms of the
facility agreements, Plaintiffs contend that “[i]nterest rate
increases can . . . be based only on (1) a rise in Lloyds’
actual cost of funding Plaintiffs’ and the Class’s loans, and
(2) increases in applicable ‘mandatory costs,’ i.e., liquidity
or reserve asset requirements imposed and enforced by regulatory
authorities.”

Pls.’ MSJ at 2 (emphasis in original).

According

to Plaintiffs, the LTP charge represents neither an actual cost
to Lloyds in funding the loans nor a liquidity requirement.

Id.

Plaintiffs argue that Lloyds breached the facility
agreements because the LTP charge did not constitute an “actual
cost” of funding the IMS loans; rather, it represented the “cost
of funding Lloyds’ parent’s overhead and operations as a whole,”

- 24 -

making the loans “dramatically more profitable for Lloyds.”
¶ 5.

TAC

Plaintiffs further contend that the LTP charge was built

into the Cost of Funds component to address a “perceived risk”
of potential future costs due to concerns about liquidity issues
brought on by the global financial crisis.

Pls.’ MSJ at 26.

As

Lloyds explains, the onset of the financial crisis increased socalled “liquidity risks” – “the risk that lenders, by lending
out money for longer periods of times, will no longer have
sufficient liquid assets . . . available to pay depositors or
other short term creditors.”

Def.’s MSJ at 13.

This led to an

increase in the cost of borrowing money on a medium- or longterm basis, leading LBG to implement the LTP charge that Lloyds
subsequently passed on to borrowers.

Id. at 13-14.

As Plaintiffs argue, however, the IMS loans at issue
were funded with three-month money, rather than with the mediumand long-term funding that saw rising costs.
27; Exs. 30, 44, 46, 59, 62.

Pls.’ Opp. at 3,

According to Plaintiffs, because

the actual cost to Lloyds on the IMS loans was the cost to cover
interest for the three-month period, Lloyds had no right to
increase the Cost of Funds on the basis that its cost to
maintain those loans had risen, as it had for loan products
funded with medium- or long-term money.

Id. at 28; see also

Rebuttal Expert Report of Michael John Petley (“Petley
Rebuttal”), ECF No. 333-4 ¶¶ 4-5.
- 25 -

In fact, Plaintiffs claim that as Lloyds increased the
rates it charged borrowers by introducing the LTP charge, the
actual cost of borrowing to fund the IMS loans fell.
at 12-13; Pls.’ Opp. at 12.

Pls.’ MSJ

According to the TAC, “Lloyds

improperly increased its alleged ‘Cost of Funds’ during a time
when the index measuring the actual cost of funds to Lloyds in
Yen or Swiss Francs (for example, the London Inter-Bank Offered
Rate for Yen ‘LIBOR’), fell dramatically.”

TAC ¶ 4.

In

response, Lloyds asserts that the facility agreements do not
require the Cost of Funds component to track LIBOR or any other
reference index.

Def.’s MSJ at 11-12.

Additionally, Lloyds maintains that the IMS loans are
funded not with three-month money, but instead with a mix of
short-, medium-, and long-term funding.

Def.’s Opp. at 26, Exs.

1, 3, 10, 11, 17; see also Def.’s MSJ at 15 (“Lloyds Bank did
not treat Plaintiffs’ IMS loans . . . as 90-day obligations:
although Plaintiffs agreed to make interest payments to Lloyds
Bank every 90 days, they were not obligated to repay the
original principal balance until the contractual maturity date
(twenty-five years for Dr. Willcox . . . ).”); id. at 12 (“Nor
do the Facility Agreements require Lloyds Bank to fund
Plaintiffs’ 25 and 30 year mortgage loans with money borrowed on
a short-term basis . . . .”).

This is due to a proprietary

“centralized funding model” in which LBG requires Lloyds to
- 26 -

participate, and under which Lloyds obtains funding from LBG for
its various loan products.

Id. at 12-13; Def.’s Opp. at 6-7.

Lloyds asserts that this funding model allows it to avoid the
significant costs it would incur if it were instead required to
go out into the market and obtain funding for itself.

Id. at 7.

Lloyds states that this centralized funding model had already
been in place at the bank prior to 2009, when the LTP charge was
initially passed through to borrowers, Def.’s Reply at 5 n.3.
On the other hand, Plaintiffs argue that funding activities were
only centralized beginning in May 2009, leading to the improper
LTP charge to IMS borrowers, Pls.’ Opp. at 8-9.
There was much debate during the two-day hearing on
the instant motions regarding how Lloyds funds the IMS loans.
Lloyds’ attorney argued that funding a long-term obligation with
short-term money would not make sense from a business efficacy
standpoint.
2016.

See, e.g., Transcript of Hearing at 12, Jan. 19,

However, Plaintiffs’ attorney cited to multiple examples

of documentary evidence suggesting that Lloyds did just that.
See, e.g., id. at 66-67.

But in fact, the documentary evidence

the parties submitted in support of their positions does little
to elucidate how funding has actually operated.

On the one

hand, Lloyds presents evidence that seems to state that the
loans were funded with a mix of short-, medium-, and long-term
money.

For example, Lloyds cites a November 2012 email from a
- 27 -

Lloyds compliance and risk manager to the Hong Kong Monetary
Authority that describes the sources of funding upon which the
Cost of Funds calculation is based:
[Lloyds] sources its short term funding from
Customer deposits (Retail & Commercial),
Bank deposits, Certificates of Deposit and
Commercial paper, typically in Sterling, US
Dollars, Euros and Australian Dollars to
fund our asset portfolios . . . .
[Lloyds]
sources
its
medium/long
term
funding from Customer Deposits, Medium Term
Notes, Covered Bonds, Securitisation and
Subordinated Debt instruments, typically in
the same currencies as above . . . .

Ex. 17 to Def.’s Opp at 1, ECF No. 350-18.

Although it is

unclear from the face of the document whether the Lloyds
representative was speaking to how IMS loans were funded, Lloyds
cites this document in its Concise Counterstatement of Material
Facts for the proposition that “IMS loans are funded with a mix
of short-term, medium-term and long-term funds.”

Def.’s Opp.

CSF ¶ K.
Minutes from a LBG Pricing Committee meeting held in
July 2009 state, “IMS – cost of funds reprice[.]
the proposal:

Background to

Over the last 12 months there has been a

significant reduction in the availability of funding across the
world’s money markets, leading to an increased cost of funding
medium to long term mortgages and loans.

In response to this,

we are no longer able to hold off from passing these cost
- 28 -

increases to our customers and will therefore be revising our
own Cost of Funds rates.”

Ex. EE to Def.’s MSJ at 1, ECF No.

29910; see also Decl. of Richard Drean,11 Ex. 1 to Def.’s Opp.
¶ 10, ECF No. 350-2 (“LBG responded to the global financial
crisis by strengthening its funding from longer-term
sources . . . . As a result, [Lloyds’] IMS Loans . . . are
funded by a mix of funding, including short-term, medium-term
and long-term.”).
Plaintiffs submit documents that seem to state that
Lloyds funded its IMS loan products with short-term money only.
For instance, an April 2010 presentation given to Lloyds’
executive committee summarizes a proposal that was made to
Lloyds’ Treasury and Trading group to fund the IMS loan
portfolio with longer-term money.
ECF No. 391-14.

Ex. 61 to Pls.’ Opp. at 17,

The presentation explains, “The key financial

risk in the current funding structure is the short term funding
of the long term mortgage book . . . . IMS have identified it
would be possible to mitigate this risk by funding up to 35% of
the book at 12 month+ funding . . . .”

Id.

It further states,

10

The portions of sealed documents to which this Order cites are
unsealed to the extent necessary to present the factual findings
on which this Order is based. The Court notes that these
portions contain very similar information to what has already
been filed elsewhere on the public docket or publicized in open
court.
11

Richard Drean was Lloyds’ Rule 30(b)(6) designee for Cost of
Fund issues in the Dugan case.
- 29 -

“[Treasury and Trading] have declined IMS’s proposal to extend
their funding profile as there were other elements of the Group
balance sheet that are easier to fund at a longer
maturity . . . .”

Id.12

A Treasury and Trading presentation from September
2009 states, “[Lloyds] can only fund these asset positions [i.e.
multi-currency mortgages] by funding each quarterly roll for 3
months.

Group is therfore [sic] forced to short fund 100% of

these assets in 3m tenor, whilst group policy is to fund 35% of
all assets with over one year money.

[Lloyds] can never match

fund these mortgages to maturity . . . .”
at 2, ECF No. 280.

Ex. 46 to Pls.’ MSJ

Other Lloyds documents similarly imply that

the IMS loans were funded with short-term money.

See, e.g., Ex.

26 to Pls.’ MSJ at 2, ECF No. 268 (“IMS lends in 10 currencies
with switching options available to most customers[.]

The

majority of the funding is supplied by Treasury & Trading (T&T)
at 3 month LIBOR.”); Ex. 62 to Pls.’ Opp. at 3, ECF No. 367
(“The book is currently funded on a rolling 3 month LIBOR basis
(for each currency) with LTP separately applied to ensure that
the funding cost incurred by the business reflects the predicted
behavioural maturity of the lending.
12

On this basis IRB is not

The foregoing appears to indicate further inconsistencies in
the evidence, since Lloyds and Plaintiffs, to some extent, both
seem to concur that IMS loans were funded through LBG’s
centralized funding model from at least 2009. Pls.’ MSJ at 8-9;
Def.’s MSJ at 12-13.
- 30 -

incurring a financial risk of the breakage costs that might be
incurred if matched (behavioural) term funding was in place and
a customer then chose to switch currencies.”).
Expert reports submitted by the parties likewise fail
to clarify the issue.

Plaintiffs’ expert contends, “There can

be no misunderstanding about the word ‘cost’ and given it is
unequivocally clear from the plethora of [Lloyds’] internal Cost
of Funds discussion papers and e-mails, the methodology for
funding the IMS loan portfolio was to source funds using the 3
month London Inter-bank market, as I would have expected and as
is the market convention for 3 month tenures in foreign currency
loan facilities.”

Petley Rebuttal ¶ 5.

Lloyds’ expert counters

that “[t]he IMS Loans included an absolute maturity of between 7
and 30 years with an average maturity behavior of 5.5
years . . . . As such, the long-term nature of the funding
requirement would not be consistent with a 90 day LIBOR
maturity.”

Belanger Report ¶ 47.
Relatedly, as discussed above, the parties dispute

whether Lloyds obtained its funding from LBG under a centralized
funding model prior to implementation of the LTP charge in 2009.
If it did, as Lloyds contends, the LTP charge arguably
represented “a more sophisticated methodology for allocating
pre-existing liquidity costs which had always been incurred by
LBG in obtaining funds.”

Def.’s Opp. at 10.
- 31 -

If the centralized

model was a novel approach established in 2009 when the LTP
charge was introduced, as Plaintiffs assert, the more relevant
question becomes whether it was appropriate for Lloyds to
restructure the manner in which it obtained funding for its IMS
loans.

Pls.’ MSJ at 8-9.
Here again, the record is rife with inconsistencies.

Stuart Cheetham, former CEO of Lloyds’ Hong Kong branch states,
“[T]he Hong Kong branch, to the best of my knowledge and in my
time there, did not purchase funding itself . . . . [T]hat
activity was centralized into our, certainly latterly, into the
Group Corporate Treasury function.”
11:1-5, ECF No. 350-11.

Dep. of Stuart Cheetham at

Importantly, it is unclear from the

portions of deposition testimony the parties submitted when and
how long Cheetham was at the Hong Kong branch.
Plaintiffs cite to deposition testimony of Andrew
Hutchinson, the sole deponent from LBG, as supporting their
contention that funding for the IMS loans was decentralized
prior to 2009:
Q: Has [LBG] always managed its funding on
a
centralized
model
like
you’ve
just
described?
A:
No.
Historically, it was a lot more
decentralized.
Q:
When did the model go from being more
decentralized
to
the
centralized
model
that’s in place now?

- 32 -

A:

In the beginning of May 2009.

Dep. of Andrew Hutchinson at 11:2-9, ECF No. 253-25.

Lloyds

counters that Hutchinson’s use of the phrase “more centralized”
does not indicate that LBG did not employ a centralized model at
all prior to 2009, see Def.’s Reply at 5 n.3.

Yet even Lloyds’

own expert cites this testimony for the proposition that “[t]o
price its liquidity risk, Lloyds Banking Group moved from a
decentralized model to a more centralized model in May 2009,”
Belanger Report ¶ 39.
The parties also dispute whether the LTP charge was
implemented in response to regulatory requirements or
recommendations.

While the Court has determined that the Cost

of Funds provision does not restrict the cost calculation to
liquidity and reserve asset requirements, whether Lloyds acted
in response to regulatory requirements or recommendations will
bear on whether implementation of the LTP charge was
appropriate.

Lloyds contends that the LTP charge was

implemented in response to regulations recommending, and later
requiring, financial institutions to introduce funds transfer
pricing in order to address heightened liquidity risks during
the global financial crisis.13

Def.’s MSJ at 12-14; Belanger

13

Lloyds cites to a February 2008 publication by the Basel
Committee on Banking Supervision, which states, “Recent events
highlighted the importance of close coordination between
treasury functions and business lines to ensure a full
- 33 -

Report ¶ 18(c) (“[D]uring the relevant time period, banks were
required to abide by regulatory standards requiring that they
establish centralized funding desks and incorporate liquidity
costs in product pricing, both of which requirements were
implemented by Lloyds Banking Group and its subsidiaries,
including Lloyds TSB.”).
As Plaintiffs point out, however, the regulations upon
which Lloyds claims it relied were issued subsequent to the LTP
charge and Cost of Funds increases.

Pls.’ Opp. at 3.

Further,

Plaintiffs contend that several of these regulations neither
addressed product pricing nor required additional liquidity
premiums to be charged to borrowers.

Id. at 24.

Plaintiffs

argue that others were merely precatory or forward-looking.
at 24-25.

Id.

Lloyds addresses Plaintiffs’ points by claiming LBG

had worked in coordination with the United Kingdom’s Financial
Services Authority to implement funds transfer pricing changes

appreciation of potential contingent liquidity risks.” Sullivan
Decl. Ex. Z at 12, ECF No. 250-27. It also cites a 2009
regulation of the Financial Conduct Authority, a financial
regulatory body located in the United Kingdom, as well as a July
2010 letter the U.K. Financial Services Authority sent to the
treasurers of all major U.K. banks, requiring them to implement
mandatory “funds transfer pricing” systems. Def.’s MSJ at 14
n.5.
- 34 -

in anticipation of what the bank knew would eventually become a
regulatory requirement.14

Def.’s Opp. at 20 n.5.

Such inconsistencies and incomplete and conflicting
information regarding the type of funding Lloyds used for the
IMS loans, the manner in which that funding was obtained, and
the reasons behind implementation of the LTP charge present
material questions of fact that prevent this Court from granting
either party’s motion for summary judgment on these issues.15
For example, prior to 2009, was Lloyds itself funding
Plaintiffs’ IMS loans with 90-day money it obtained on the
market; and if so, should Lloyds have kept utilizing such shortterm funding notwithstanding the financial crisis commencing in
2008?

Relatedly, if Lloyds was funding the IMS loans itself

prior to 2009, was it appropriate to change the funding to LBG’s
centralized funding model?

Next, if Plaintiffs’ IMS loans were

funded through LBG’s centralized funding model prior to 2009,
was the LTP charge added in 2009 simply a different methodology
14

Lloyds also argues that the centralized funding model employed
by LBG allowed Lloyds to “avoid the significant costs that would
accrue if it were required to obtain its own funding in the
market.” Def.’s Opp at 7. Their argument is essentially that
use of the centralized funding model was a cost-effective method
that allowed the bank to save funding costs, which offset the
LTP charge passed through to borrowers. Yet as Plaintiffs’
attorney pointed out during the hearing, there is no specific
evidence in the record that supports this contention.
Transcript of Hearing at 113-114, Jan. 19, 2016.
15

As noted above, the Court has made certain findings regarding
the Cost of Fund provision terms.
- 35 -

appropriately applied to the computation of the Cost of Funds?
Additionally, was the LTP charge implemented in response to
regulatory requirements or recommendations?

Also, while the LTP

charge represented an actual cost to Lloyds, was it appropriate
to pass that cost on to Plaintiffs as an actual cost in funding
the IMS loans?

And how was the LTP charge computed?16

Because the parties present conflicting evidence
regarding the specifics of Lloyds’ centralized funding process,
the money used to fund the IMS loans, and details regarding the
LTP charge, the Court DENIES Plaintiffs’ motion for summary
judgment, and GRANTS in part and DENIES in part Lloyds’ motion
for summary judgment as to Count I.
The Court makes the following findings as a matter of
law, and GRANTS partial summary judgment in favor of Lloyds with
respect to these findings.17

First, the Court finds that the

facility agreements do not prescribe a specific methodology for
calculating the Cost of Funds component of the IMS loans’

16

The Court notes that the organization most knowledgeable
regarding some of these discrepancies - Lloyds’ parent, LBG has not been joined as a party to this lawsuit, nor has any
discovery been obtained from LBG apart from the voluntary
deposition of Andrew Hutchinson. See Dep. of Andrew Hutchinson
at 95:25-96:4.
17

A trial court may reduce the scope of the issues where
appropriate. See Fed. R. Civ. P. 56(g) (“If the court does not
grant all the relief requested by the motion, it may enter an
order stating any material fact . . . that is not genuinely in
dispute and treating the fact as established in the case.”).
- 36 -

interest rate; do not specifically require the Cost of Funds
component to track 3-month LIBOR; and do not specifically
require Lloyds to fund Plaintiffs’ loans with short-term money.
The Court also finds that the LTP charge was clearly an actual
cost to Lloyds imposed on it by LBG (but finds there is a
material issue of fact whether it was appropriate to pass on the
LTP costs to Plaintiffs’ IMS loans).

Furthermore, the Cost of

Funds provision allows Lloyds to include in its Cost of Funds
calculation both liquidity costs and liquidity requirements, and
does not specifically restrict Lloyds from altering the manner
in which it calculates cost for purposes of determining the
interest rate on the loans.

The Court further concludes as a

matter of law that Lloyds has some degree of discretion with
respect to the foregoing findings, which will be discussed
infra.
The Court otherwise DENIES Lloyds’ Motion for Summary
Judgment.
II.

BREACH OF AN IMPLIED TERM LIMITING LLOYDS’
DISCRETION TO CHANGE THE INTEREST RATE (COUNT II)

Plaintiffs also allege that Lloyds breached an implied
duty to act honestly and in good faith by increasing the IMS
loans’ interest rates via the LTP charge.

TAC 1 ¶¶ 65-72.

Lloyds moves for summary judgment as to this cause of action,
asserting that Hong Kong law does not provide for any implied

- 37 -

terms in the instant scenario, and that even assuming, arguendo,
that the facility agreements did contain an implied term, Lloyds
did not violate the term by acting irrationally or perversely.
Def.’s MSJ at 24.
a. Existence of an Implied Term
Hong Kong law, which follows English common law,18 does
not require a court to read into every contract an implied term
requiring parties to act in good faith.

Greenclose Ltd. v.

Nat’l Westminster Bank, [2014] EWHC 1156 (Ch Div. 14 Apr. 2014),
at ¶ 150 (“[T]here is no general doctrine of good faith in
English contract law.”).

Instead, when a commercial contract

permits one party to exercise discretion as to a contractual
term, “[w]hether a term constraining the exercise of that
discretion is to be implied depends upon the relevant factual
circumstances.”

Pac. Long Distance Tel. Corp. v. New World

Telecomms., Ltd., [2012] HCA 1688/2006 at ¶ 38, ECF No. 246-6.
Such a term must be “necessary to give business efficacy to the
contract.”

Societe Generale Bank & Trust v. Panjwani,

(unreported, 2010) HCA 725/2009, per Leggat LJ, § 27 (citing BP
Refinery (Westernport) Pty Limited v. Shire of Hastings, (1977)
180 CLR 266, ¶¶ 40-43, 50, ECF No. 67-6), ECF No. 67-7.
In Pacific Long Distance, a contractual provision
granted defendant, a telephone service provider, discretion to
18

See footnote 6 supra.
- 38 -

“revise the Agreement and/or introduce additional terms and
conditions from time to time.”

Id. at ¶ 32.

The defendant

availed itself of this provision by significantly raising
certain telephone rates.

Id. at ¶¶ 32-33.

While the provision

contained no explicit limit on the defendant’s discretion to set
rates, the Hong Kong court nevertheless found that the company
had breached “an implied term that the rights set out in that
clause should be exercised on a commercial footing, reflecting
market rates for the provision of such services, but not for any
collateral purpose.”

Id. at 48, 51.

In arguing that no term should be implied restricting
its discretion to change interest rates, Lloyds asserts that
Hong Kong courts are reluctant to imply such terms into
contracts between sophisticated parties.

Def.’s MSJ at 25.

In

support of this claim, Lloyds cites to Greenclose, which states,
“So far as the ‘Good Faith’ condition is concerned, there is no
general doctrine of good faith in English contract law and such
a term is unlikely to arise by way of necessary implication in a
contract between two sophisticated commercial parties
negotiating at arms’ length.”

[2014] EQHC 1156 at ¶ 150.

On the other hand, Plaintiffs argue that
sophistication is only one of many potential factors a court may
consider in determining whether to imply a term into a contract.
Pls.’ Opp. at 33; see Pac. Long Distance, HCA 1688/2006 at ¶ 48
- 39 -

(reading an implied term into the parties’ contract without
considering their sophistication).

HCA 1688/2006, ¶ 48.

In

fact, Plaintiffs assert that Hong Kong courts have actually
implied “a duty to act honestly and fairly” into banking
services agreements involving sophisticated parties due to the
“banker/customer relationship.”

DBS (Hong Kong) v. San-Hot

Industrial Co., HCA 279/2008, ¶ 213; see also Brewer Opp. Decl.
at ¶¶ 35-36, ECF No. 343-1.
Lloyds argues that Willcox is “an experienced real
estate investor, having purchased at least five luxury
condominiums or residential real estate properties in
Hawaii . . . and employing a property manager to oversee his
real estate holdings.”

Def.’s MSJ at 26.

Yet regardless of

whether Willcox was a “sophisticated” investor, the case law
suggests that sophisticated parties may still benefit from the
incorporation of implied terms into commercial contracts.

Given

this, Willcox’s “sophistication” is not determinative of the
issue.
In arguing against an implied term, Lloyds also
maintains that the facility agreements were negotiable, given
that Plaintiffs had the option to choose the “currency or
currencies of the loan, whether to make payments on an interest
only or principal and interest basis, and the contractual
maturity of the loan.”

Def.’s Reply at 14-15 n.11.
- 40 -

However,

these are not the significant terms at issue in this case.
Importantly, the parties did not negotiate at arms’ length the
Cost of Funds provision, which is the subject matter of this
litigation.

In fact, the IMS loans belonging to the entire

class are based on facility agreements that contain a Cost of
Funds term that is substantially the same in each of the
respective contracts.

See, e.g., Def.’s CSF ¶ 20 (“The six

facility agreements executed by Plaintiffs contain an identical
provision prescribing the interest rate to be charged to their
IMS loans.”) (emphasis added).

That Plaintiffs have leeway to

make decisions regarding terms (such as currency, principal and
interest payments, and maturity of the loan) for which the
contract specifically provides a choice to the borrower is a
different matter from Plaintiffs’ ability to negotiate the
entirety of the contract at arms’ length, and again, these are
not the key terms at issue here.

In practice, the facility

agreements appear more akin to form contracts that Lloyds
entered into with each of the IMS borrowers in the class.
For the foregoing reasons, the Court sua sponte
concludes as a matter of law that an implied term in the
facility agreements limited Lloyds’ exercise of the discretion
afforded it by the Cost of Funds provision.

The Court notes

that the Ninth Circuit has “long recognized that, where the
party moving for summary judgment has had a full and fair
- 41 -

opportunity to prove its case, but has not succeeded in doing
so, a court may enter summary judgment sua sponte for the
nonmoving party.”
2014).

Albino v. Baca, 747 F.3d 1162, 1176 (9th Cir.

This authority is made explicit in Rule 56, which

states, “After giving notice and a reasonable time to respond,
the court may . . . grant summary judgment for a
nonmovant . . . .”

Fed. R. Civ. P. 56(f).

The Ninth Circuit has expounded on Rule 56’s notice
requirement, stating, “Before sua sponte summary judgment
against a party is proper, that party ‘must be given reasonable
notice that the sufficiency of his or her claim will be in
issue:

Reasonable notice implies adequate time to develop the

facts on which the litigant will depend to oppose summary
judgment.’”

Albino, 747 F.3d at 1176 (quoting Buckingham v.

United States, 998 F.2d 735, 742 (9th Cir. 1993)).

In

concluding that a moving party had sufficient notice for
purposes of Rule 56, the Albino court found that party to have
had a “full opportunity” to gather evidence supporting its
claim, and that as the movant for summary judgment, it was on
notice of the need to come forward with all of the evidence in
support of its motion.

Id. at 1177.

This Court similarly finds that Lloyds, as the movant
for summary judgment as to Count II, had both a “full and fair
opportunity,” and indeed the incentive, to come forward with all
- 42 -

of the evidence in support of its motion.

Plaintiffs’ arguments

regarding the implied term having been fully set forth in both
the TAC and Plaintiffs’ Opposition Brief, Lloyds “had an
adequate opportunity to show that there is a genuine issue and
that [its] opponent is not entitled to judgment as a matter of
law.”

Kassbaum v. Steppenwolf Productions, Inc., 236 F.3d 487,

494 (9th Cir. 2000).

The record is therefore sufficiently

developed to permit this Court to consider summary judgment on
Count II, and when viewing the evidence in the light most
favorable to Lloyds, the Court finds it appropriate to grant
partial summary judgment in favor of Plaintiffs.
For the foregoing reasons, the Court sua sponte GRANTS
partial summary judgment to Plaintiffs on Count II.
b. Standard Limiting the Exercise of Discretion
Under the Implied Term
The Court next determines what the implied term shall
require.

At the hearing, Lloyds’ attorney stated that both

parties agreed that Nash was instructive regarding the standard
in limiting the exercise of a lender’s discretion under the
implied term.

Transcript of Hearing at 34, Jan. 20, 2016.

Plaintiffs’ attorney separately stated that Nash controlled this
issue.

Transcript of Hearing at 118, Jan. 19, 2016.

Moreover,

both parties cite to Nash in their briefs as laying out the
appropriate standard.

Def.’s MSJ at 30; Pls.’ Opp. at 36.

- 43 -

Nevertheless, the parties dispute what the standard actually
states.
Because both parties agree that Nash is authoritative,
the Court looks to that case as providing the implied term’s
standard in limiting the exercise of a lender’s discretion to
set interest rates.

In Nash, plaintiffs and defendant lender

entered into mortgage agreements that contained variable
interest clauses, with interest to “be charged at such rate as
the Company shall from time to time apply.”
1466, at ¶¶ 1, 8.

[2001] EWCA Civ.

When defendant lender invoked this clause in

raising rates, plaintiffs alleged that the lender had breached
the mortgage agreements by “fix[ing] the rates of interest
(a) without reference to prevailing market rates, and/or
(b) taking into account an irrelevant consideration, namely its
own financial difficulties.”

Id. ¶¶ 14, 45.

Addressing plaintiff’s arguments, the Nash court found
that a lender’s raising interest rates in response to financial
difficulties did not constitute a breach of the implied term.
Id. ¶ 46.

The court explained, “If a lender is in financial

difficulty . . . because it is obliged to pay higher rates on
interest to the money market, then it is likely to have to pass
those increased costs on to its borrowers.

If in such

circumstances the rate of interest charged to a borrower is
increased, it is impossible to say that the discretion to set
- 44 -

the rate of interest is being exercised for an improper purpose,
capriciously, arbitrarily or in a way in which no reasonable
lender would reasonably do.”

Id.

Thus, recognizing that a lender must take into account
“purely commercial considerations,” such as financial
difficulty, in setting rates, the court found that an implied
term in the mortgage agreements prevented defendant lender from
exercising this discretion “dishonestly, for an improper
purpose, capriciously or arbitrarily,” or “in a way which is so
unreasonable that it can be said of it that no reasonable lender
would take that course if placed in that situation.”

Id. ¶¶ 32,

36, 41-42, 46-47.
The Court therefore finds that, when exercising its
discretion to change interest rates, Lloyds must do so in a
manner that comports with “purely commercial considerations,”
including whether it “is in financial difficulty because it is
obliged to pay higher rates on interest to the money market”;
however, Lloyds must refrain from acting “dishonestly, for an
improper purpose, capriciously, or arbitrarily,” or in a manner
so unreasonable that no reasonable lender would do the same
(hereinafter referred to as the “Nash standard”).

- 45 -

c. Whether Lloyds Breached the Implied Term
Limiting its Discretion to Change Rates
According to the Nash standard, whether Lloyds
breached an implied term limiting its discretion to change
interest rates depends in part on whether LBG’s LTP charge to
Lloyds bank was an appropriate cost to pass on to Plaintiffs – a
question as to which issues of material fact remain, as
discussed above.

The Court reiterates some of the questions

that bear on this issue, as non-exclusive examples:
(1) whether, prior to 2009, Lloyds was itself funding
Plaintiffs’ IMS loans with 90-day money, and if so, whether it
should have continued utilizing such short-term funding; (2) if
Lloyds was funding the IMS loans itself prior to 2009, whether
it was appropriate to change the funding to LBG’s centralized
funding model and to pass on to Plaintiffs the LTP charge;
(3) whether, prior to 2009, Plaintiffs’ loans were funded
through LBG’s centralized funding model, and if so, whether it
was appropriate to implement the LTP charge and to pass it on to
Plaintiffs; and (4) whether Lloyds appropriately acted pursuant
to regulatory requirements or recommendations.
In sum, various questions of material fact preclude
this Court from granting summary judgment in favor of either
party on the issue whether Lloyds breached an implied term

- 46 -

limiting its discretion to adjust interest rates, as determined
by the Nash standard.
For the reasons set forth above, the Court DENIES
Lloyds’ motion for summary judgment on Count II.
III. PLAINTIFFS’ REQUEST FOR DECLARATORY RELIEF
Because issues of material fact remain as to whether
Lloyds breached the facility agreements by passing on the LTP
charge to borrowers, the Court DENIES Plaintiffs’ request for
declaratory relief.
CONCLUSION
For the foregoing reasons, the Court:

(1) DENIES

Plaintiffs’ Motion for Partial Summary Judgment on Their and the
Putative Class’s Claim for Breach of Contract on Count I;
(2) GRANTS in part and DENIES in part Lloyds’ Motion for Summary
Judgment; (3) sua sponte GRANTS partial summary judgment to
Plaintiffs on Count II, and (4) DENIES Plaintiffs’ request for
declaratory relief.
Regarding its second and third holdings, the Court
finds that the Cost of Funds provision in the facility
agreements does not prescribe a specific methodology for
calculating the Cost of Funds component of the IMS loans’
interest rate; does not specifically require the Cost of Funds
component to track 3-month LIBOR; and does not specifically
require Lloyds to fund Plaintiffs’ loans with short-term money.
- 47 -

However, the agreements do allow Lloyds to pass on liquidity
costs and liquidity requirements to borrowers.

Additionally,

the Cost of Funds provision does not specifically restrict
Lloyds from altering its cost calculation.

However, the Court

also finds an implied term in the agreements which limits
Lloyds’ discretion to alter interest rates.

That implied term

requires Lloyds, when altering interest rates, to do so in a
manner that comports with purely commercial considerations,
including whether it is in financial difficulty because it is
obliged to pay higher rates on interest to the money market;
however, Lloyds must refrain from acting dishonestly, for an
improper purpose, capriciously, or arbitrarily, or in a manner
so unreasonable that no reasonable lender would do the same (the
Nash standard).
The Court otherwise DENIES both parties’ motions for
summary judgment, as issues of material fact regarding Lloyds’
alleged breach of the express and implied terms of the facility
agreements remain.

- 48 -

IT IS SO ORDERED.
DATED:

Honolulu, Hawai’i, February 11, 2016.

________________________________
Alan C. Kay
Sr. United States District Judge

Willcox v. Lloyds TSB Bank, PLC, et al., Civ. No. 13-00508 ACK-RLP, Order
Denying Plaintiffs’ Motion for Partial Summary Judgment on Their and the
Putative Class’s Claim for Breach of Contract on Count I, Denying Plaintiffs’
Request for Declaratory Relief, Granting in Part and Denying in Part
Defendant’s Motion for Summary Judgment, and Sua Sponte Granting Partial
Summary Judgment to Plaintiffs on Count II.

- 49 -