LIBOR
Verthelyi v. PennyMac Mortgage Investment Trust
Date: Aug. 19, 2026
Issue: Whether the district court erred in denying PennyMac’s motion to dismiss by concluding that a fixed dividend rate could not qualify as a valid “benchmark replacement” under the LIBOR Act.
Case Summary: A unanimous Ninth Circuit panel reversed a California federal court’s decision that refused to dismiss a lawsuit alleging PennyMac improperly kept fixed dividend rates after LIBOR ended.
As background, LIBOR set the global benchmark for interest rates by reflecting the rates at which major banks borrowed from each other. It guided pricing for loans, mortgages, and derivatives until regulators phased it out in 2023. The LIBOR Act, enacted on March 15, 2022, provides a uniform nationwide solution for transitioning legacy financial contracts away from the discontinued LIBOR.
In July 2025, Roberto Verthelyi sued PennyMac in a class action alleging it violated California’s UCL by keeping its Series A and Series B preferred shares at fixed dividend rates after LIBOR ended. PennyMac issued the shares in 2017 with fixed rates that were set to convert in 2024 to floating rates based on three-month LIBOR. After LIBOR ended in 2023, PennyMac applied a fallback provision in the governing Articles and announced the shares would remain at their original fixed rates. Verthelyi alleged this decision reduced the shares’ market value by about $40 million and violated the LIBOR Act because PennyMac should have used SOFR, which would have produced much higher dividend rates in 2024.
PennyMac moved to dismiss, arguing it complied with the LIBOR Act because the articles’ fallback provision allowed the shares to remain at fixed dividend rates. PennyMac also argued that Maryland law, not California’s UCL, governed the dispute under the Articles’ choice-of-law provision. Denying the motion, Judge Michael Fitzgerald of the Central District of California ruled that Verthelyi plausibly alleged a LIBOR Act violation and that California law applied. He explained that the LIBOR Act was ambiguous as to whether a fixed rate could replace LIBOR but concluded that the legislative history supported Verthelyi’s claim that Congress sought to prevent floating-rate instruments from converting to fixed rates.
On appeal, the Ninth Circuit panel reversed, ruling that PennyMac’s third fallback provision qualified as a valid “benchmark replacement” under the LIBOR Act, even though it resulted in a fixed dividend rate. The panel explained that Verthelyi’s claim under the “unlawful” prong of California’s UCL depended on showing that PennyMac violated the LIBOR Act. Under the LIBOR Act, SOFR replaces LIBOR only when a contract lacks an adequate fallback provision. Although the LIBOR Act invalidated PennyMac’s first two fallback provisions because they relied on interbank quotes or LIBOR values, the third fallback set dividends at the rate from the immediately preceding dividend period. The panel determined this fixed rate satisfied the statute’s definition of a “benchmark replacement,” which expressly includes a benchmark, interest rate, or dividend rate. Because the statute does not require a replacement rate to float, the panel concluded that PennyMac’s use of its fixed-rate fallback did not violate the LIBOR Act and thus could not support Verthelyi’s UCL claim.
The panel rejected Verthelyi’s arguments that the LIBOR Act’s definition of “benchmark replacement” excludes fixed rates. The panel explained the statute treats a “benchmark” as an index of rates, while the separate phrase “interest rate or dividend rate” can include either a fixed or floating rate. While Verthelyi contended that PennyMac’s fallback provisions were only temporary, the panel noted the LIBOR Act expressly permits a replacement to operate on a temporary, permanent, or indefinite basis. The panel also explained that the legislative history could not override the statute’s plain text and did not show that Congress intended to bar fixed-rate fallbacks. The panel concluded that the LIBOR Act fills gaps in contracts that lack a valid replacement rate but does not rewrite contracts that already contain an adequate fallback provision.
Finally, the panel rejected Verthelyi’s argument that he could still recover under the UCL’s “unfair” prong even if PennyMac did not violate the LIBOR Act. The panel concluded the LIBOR Act expressly preempts state-law claims that relate to the selection or use of a benchmark replacement, including Verthelyi’s claim that PennyMac should have used SOFR instead of the contractual fallback rate. The panel also ruled California’s UCL safe-harbor doctrine barred the claim because the LIBOR Act allows contracts with a valid replacement rate to operate according to their terms. Because Congress did not prohibit fixed rates from serving as benchmark replacements, the panel determined that Verthelyi could not use the UCL’s “unfair” prong to challenge PennyMac’s use of its fixed-rate fallback.
Bottom Line: The Ninth Circuit reversed and remanded, ruling that the LIBOR Act does not require a floating replacement rate and permits a contract’s fixed-rate fallback to serve as a valid benchmark replacement when LIBOR is unavailable.
Document: Opinion
