PennyMac Mortgage Investment Trust (PennyMac) has been granted permission by a California federal judge to pursue a fast-tracked appeal regarding a proposed class action. The case centers on allegations that PennyMac improperly imposed a lower fixed interest rate on preferred-stock dividends instead of a variable rate, asking the Ninth Circuit Court of Appeals to clarify whether the Libor Act prohibits such fixed rates.
In a recent ruling, U.S. District Judge Michael W. Fitzgerald acknowledged that the issue of whether fixed interest rates qualify as a “qualifying benchmark” under the Libor Act is pivotal to the outcome of the case. The case, which includes claims of violations of the Libor Act and California’s Unfair Competition Law (UCL), hinges on whether PennyMac’s decision to maintain fixed dividend rates after the phaseout of the Libor benchmark in June 2023 was legally sound.
The Libor Act, passed by Congress in 2022, was designed to protect against disruptions in the financial markets caused by the phaseout of the London Interbank Offered Rate (Libor). With Libor’s retirement, investor Roberto Verthelyi filed a class action against PennyMac and its manager, PNMAC Capital Management LLC, claiming that the decision to maintain fixed-rate dividends instead of transitioning to a floating rate, like the Secured Overnight Financing Rate (SOFR), violated the Libor Act. Verthelyi contends that the use of a fixed rate, which remains around 8%, instead of a floating rate that could exceed 11%, led to significant investor losses.
Following the judge’s decision to allow the appeal, PennyMac’s legal team plans to seek clarity from the Ninth Circuit on whether its fallback dividend rate meets the Libor Act’s requirements. The company also wants the court to determine whether Maryland law governs its charter document, which could affect the interpretation of the case.
Judge Fitzgerald’s ruling stays the litigation while the Ninth Circuit reviews the case. The parties have been instructed to provide updates every 90 days, with the first update due by August 4 or within 10 days of any Ninth Circuit ruling.
