What the Ninth Circuit Didn't Rule in the PennyMac Case

The Ninth Circuit issued a ruling on Aug. 19 in the litigation over PennyMac Mortgage Investment Trust's (PMT) preferred shares. The court held that a fixed dividend rate is not automatically prohibited by the LIBOR Act. That is the argument PennyMac won.

What the court left undecided is the more consequential question for PMT-A (PMT.PR.A) and PMT-B (PMT.PR.B) holders. The Ninth Circuit did not rule that PennyMac's treatment of the preferred shares complied with the LIBOR Act. It did not rule that PennyMac correctly applied the contractual fallback provisions. The panel sent the case back to the district court for further arguments.

The plaintiff's lawyer argued that a fixed dividend rate is categorically impermissible under the LIBOR Act. The Ninth Circuit rejected that argument. But the court explicitly declined to rule on whether PennyMac's fixed rate was acceptable, whether PennyMac violated the LIBOR Act, or whether the fixed-rate dividend constitutes "a clearly defined or practicable benchmark rate." Those questions remain open.

What the contract says

The core dispute centers on the waterfall of fallback provisions in the preferred share terms. The LIBOR Act struck out the second fallback clause. The remaining text, after removing the stricken language, reads: "For each dividend period during the floating rate period, if there was no such dividend period, the dividend shall be calculated at the dividend rate in effect for the immediately preceding dividend period."

The term "floating rate period" is defined in the contract as the period from June 15, 2024 and thereafter. Multiple dividend periods have occurred since that date. Under a literal reading of the surviving text, the condition "if there was no such dividend period" is not met, meaning the fallback to the preceding dividend rate would not trigger.

PennyMac's lawyer, Steven Farina, argued that "such dividend period" should be interpreted as a dividend period where three-month LIBOR applies. The Ninth Circuit did not adopt that reading. The court noted that the second fallback was "disregarded as if not included" under the LIBOR Act, and left open whether PennyMac's application of the third fallback violates the statute.

The plaintiff's path forward

The plaintiff's lawyer, Catherine Pratsinakis, can reframe the case around the contractual wording. The judges on the panel signaled during oral arguments that they wanted her to attack the contract language directly. She declined to do so at the time. The remand gives her that opportunity.

The strongest argument available to preferred shareholders is that the plain text of the contract, after applying the LIBOR Act, does not support PennyMac's fixed-rate dividend. The floating rate period is defined by time, not by the rate actually paid. A dividend period does not become a floating rate period because the dividend floats, the contract states the opposite.

What the ruling means for the stock

PMT-A and PMT-B shares initially fell over 1% on the ruling before recovering to roughly flat on the day. The market appears to have concluded that the Ninth Circuit's narrow decision does not resolve the case against PennyMac.

PennyMac discussed the litigation in its 2025 annual report on pages 27 and F-56. The company has not commented on the Aug. 19 ruling.

The district court will now hear arguments on whether PennyMac's application of the third fallback provision violates the LIBOR Act. If the plaintiff pursues the contractual wording argument, the case could turn on whether "such dividend period" can be read as anything other than a dividend period during the floating rate period. The contract's definitions support the plaintiff's position.

Disclosure: The author holds long positions in PMT.PR.A and PMT.PR.B.