How PennyMac's frozen 8% dividend survived a shareholder's challenge
A federal appeals court ruled that a fixed rate can replace London Inter-Bank Offered Rate (LIBOR), reversing lower-court decision in a shareholder suit against PennyMac.
The Ninth Circuit's decision, handed down August 19, 2026, is the first time any court has interpreted the 2022 Adjustable Interest Rate (LIBOR) Act, the law Congress passed to steer the market off a benchmark that once governed trillions of dollars in contracts.
The dispute traces back to 2017, when PennyMac Mortgage Investment Trust, a real estate investment trust run by PNMAC Capital Management, sold two sets of preferred shares. Holders first earned a fixed dividend - 8.125% a year on the Series A shares, 8% on the Series B. Starting in 2024, those payouts were supposed to convert to floating rates pegged to three-month LIBOR plus a set margin.
Then LIBOR went away in 2023, a year ahead of that scheduled switch. PennyMac's charter documents listed three fallback options for a world without LIBOR. The company reached for the third, which pays the dividend at the rate in effect for the prior period. That locked the shares at their original fixed rates.
In August 2023, PennyMac announced the shares would stay at those fixed rates in perpetuity. A shareholder sued under California's Unfair Competition Law, arguing the company should have shifted the shares onto SOFR, the Federal Reserve's chosen LIBOR replacement. According to the filing, SOFR-based dividends would have run about 11.19% on the Series A shares and 11.35% on the Series B by March 24, 2024, far above the frozen 8.125% and 8%. The filing says the freeze helped drive the shares from $25 down to $22.77 and $22.40 - a $40 million hit to market value.
A district judge let the case proceed. The appeals court disagreed. Its answer turned on one phrase: the LIBOR Act defines a "benchmark replacement" as "a benchmark, or an interest rate or dividend rate." A fixed dividend rate, the court said, plainly fits. There is no rule that the replacement has to float. The Act, the panel wrote, closes gaps in contracts; it does not rewrite valid ones.
The court also rejected the shareholder's backup argument that the freeze was simply "unfair," pointing to the statute's preemption of conflicting state law and a safe harbor for conduct the law permits.
The ruling stops short of ending the case. Because the appeal came up mid-case, the judges sent it back so both sides can press any other arguments about whether PennyMac's use of the fallback breaks the LIBOR Act.
