607 F.3d 905 (2nd Cir. 2010), 09-1628-cv, Bank of New York v. First Millennium, Inc.
|Citation:||607 F.3d 905|
|Opinion Judge:||GERARD E. LYNCH, Circuit Judge:|
|Party Name:||THE BANK OF NEW YORK, in its capacity as Indenture Trustee for the NextCard Credit Card Master Note Trust, Interpleader Plaintiff-Counter Claimant Defendant-Appellee, v. FIRST MILLENNIUM, INC., MILLENNIUM PARTNERS, L.P., RMK ADVANTAGE INCOME FUND, Interpleader Defendants-Appellees, and FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Recei|
|Attorney:||SCOTT H. CHRISTENSEN, Hughes Hubbard & Reed LLP, Washington, D.C. (George A. Davidson, Hughes Hubbard & Reed LLP, New York, N.Y. and Colleen J. Boles, Lawrence H. Richmond, and Jaclyn C. Taner, Federal Deposit Insurance Corporation, Arlington, VA, on the brief) for Interpleader Defendant-Counter ...|
|Judge Panel:||Before: LYNCH and CHIN, Circuit Judges. [*]|
|Case Date:||June 01, 2010|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued March 4, 2010.
As Amended June 14, 2010.
[Copyrighted Material Omitted]
Interpleader defendant--counter claimant--appellant, the Federal Deposit Insurance Corporation, appeals from orders of the United States District Court for the Southern District of New York (Haight, J.) (1) denying a motion to transfer the action to the United States District Court for the District of Columbia (entered on May 10, 2007), (2) enjoining interpleader plaintiff--counter claimant defendant--appellee, The Bank of New York, from making distributions of the interpleader funds (entered on July 5, 2007), (3) dismissing its counterclaims against interpleader plaintiff--counter claimant defendant--appellee, The Bank of New York (entered on March 31, 2008), and (4) denying its motion for summary judgment and granting summary judgment to Interpleader Defendants--Appellees, First Millennium, Inc., Millennium Partners, L.P., and RMK Advantage Income Fund (entered on February 24, 2009).
In this interpleader action, the parties assert competing claims to the dregs of a failed securitization of credit card debt. Appellant, the Federal Deposit Insurance Corporation (the " FDIC" ), as well as appellees, First Millennium, Inc., Millennium Partners, L.P. (together, " Millennium" ) and RMK Advantage Income Fund (" RMK" ), seek distribution of the funds
held by the interpleader plaintiff, the Bank of New York (" BNY" ), as trustee for the NextCard Credit Card Master Note Trust (" the trust" ). The FDIC argues that it is entitled to the funds as the receiver for NextBank, N.A., (" NextBank" ) a now-defunct internet-only bank, which established the trust in order to generate money to lend to credit card holders. Millennium and RMK claim that they are entitled to the funds as owners of notes issued by the trust.
BNY initiated this interpleader action in New York state court. The FDIC removed it to the United States District Court for the Southern District of New York (Haight, J.). In a series of rulings, the district court denied the FDIC's motion to transfer the action to the United States District Court for the District of Columbia, enjoined BNY from making distributions from the interpleader funds, dismissed the FDIC's counterclaims against BNY, and, lastly, denied the FDIC's motion for summary judgment and granted summary judgment to Millennium and RMK. The district court then ordered BNY to begin distributing the trust corpus, giving preference to satisfying the claims of Millennium and RMK. The FDIC now appeals the decisions of the district court. We affirm.
I. The Securitization Transaction
In 1999, NextBank, an internet-only bank, began to issue consumer credit cards to sub-prime borrowers who applied over the internet. The business grew, and by February 2002, NextBank had 1.2 million cardholders. Rather than borrow money directly to lend to consumers, NextBank entered into a securitization transaction to generate funds. It established a trust at BNY and sold its credit card receivables - the rights to be paid interest and principal for purchases on the cards - to the trust, using the proceeds to finance cardholders' purchases. BNY then issued notes backed by the cash flows generated from the receivables to investors. This transaction generated approximately $ 1.7 billion and provided funding for most of the credit cards issued by NextBank.
The trust issued two series of notes, the 2000-1 Series and the 2001-1 Series, which came due, respectively, in December 2006 and April 2007. These notes were issued in four classes (A, B, C and D), which paid different rates of interest and carried differing levels of risk. The class A notes were the least risky, since they carried the right to first repayment from the trust corpus. Accordingly, the class A notes paid the lowest rate of interest. The class B notes both carried more risk - since their holders had rights to repayment subordinate to the class A noteholders' - and paid a slightly higher rate of interest. The classes C and D notes were successively both riskier and higher paying. However, as protection for the holders of these riskier C and D notes, certain money from their initial purchase of the notes was set aside in a " spread account" to be used to fund interest and principal payments on the notes should the money generated by the receivables prove insufficient. Over the life of the trust, the amount of money in the spread account was adjusted on a regular basis according to a formula.
The securitization was executed through a set of documents that included a master indenture and various indenture supplements. As is customary, some terms of the noteholders' investments were also laid out on the notes themselves. Additionally, all potential purchasers of the notes received copies of offering memoranda that described the terms of the notes and the risks associated with investing in them.
Under the transaction documents, the trust owned the credit card receivables. Cardholders' payments of fees and interest (or, as they are described in the deal documents, " finance charges" ) were used to make interest payments on the notes. Money not used to make interest payments was divided into two pots, labeled " collateral" and the " transferor interest." The collateral was intended for the eventual repayment of the principal of the notes (although during an initial " revolving period" it was used to fund new loans to credit card holders.) The transferor interest, on the other hand, was intended to fund regular payments to NextBank as the creator of the trust. The trust documents provided that at the termination of the trust, any money left over after all the trust's obligations had been satisfied in full was to be distributed to NextBank.
In the event that cardholders defaulted on their card payments, the defaulted amount was charged off against the assets in the trust labeled the " invested amount," which was defined as the sum of the collateral and the spread account. In effect, if cardholders failed to repay their loans, the reduction was accounted for in the trust by reducing the funds labeled collateral rather than those labeled transferor interest. This accounting provision proved significant when large numbers of the sub-prime borrowers with whom NextBank did business eventually defaulted.
II. NextBank's Receivership
In 2001, the FDIC determined that NextBank's undercapitalization and practice of extending credit to subprime borrowers had endangered its ability to continue operating. In 2002, after the Comptroller of the Currency discovered that NextBank's accounting was improper, it appointed the FDIC as the bank's receiver. As receiver, the FDIC succeeded to " all [NextBank's] rights, titles, powers, and privileges," 12 U.S.C. § 1821(d)(2)(A)(I), while continuing to operate the bank. The FDIC allowed the credit card accounts to remain open while it sought a buyer for NextBank's assets. Eventually, however, when no buyer materialized, the FDIC closed the credit card accounts. The cardholders were then unable to make new charges on their cards, but remained responsible for paying off their balances.
Funds from the trust were distributed to the classes A and B noteholders, who were fully repaid the principal and interest due on their notes. Class C noteholders received partial repayment of the principal and interest owed to them. Class D noteholders received some interest payments, but their investment principal was not repaid. The FDIC continued to receive payments of transferor interest from the trust until such payments were stopped in connection with this interpleader action.
As things stand now, cardholders have defaulted on their loans in large number and charge-offs have reduced the collateral in the trust to zero. Furthermore, the funds in the spread account have now been distributed to the class C noteholders, by an order of the district court not challenged in this appeal, with the result that the entire trust corpus consists of funds labeled " transferor...
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