Bank of N.Y. Mellon Trust Co., National Ass'n v. Telos CLO 1006-1 Ltd.

• Decision Date: 07 August 2017
• Docket Number: 16 Civ. 8963
• Parties: The BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, Solely as Trustee, Plaintiff, v. TELOS CLO 1006–1 LTD.; Telos CLO 2006–1, Inc. ; Telos Asset Management LLC ; Ellington Credit Opportunities, Ltd. ; Cede & Co. as Nominee for The Depository Trust Company; Goldman Sachs & Co.; Hare & Co.; LLC; Knotfloat Co. ; Mac & Co., LLC; BK Opportunities Fund SP; Tiptree Operating Company LLC; and John Does 1 Through 100, Defendants.
• Court: U.S. District Court — Southern District of New York

274 F.Supp.3d 191

The BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, Solely as Trustee, Plaintiff,

v.TELOS CLO 1006–1 LTD.; Telos CLO 2006–1, Inc. ; Telos Asset Management LLC ; Ellington Credit Opportunities, Ltd. ; Cede & Co. as Nominee for The Depository Trust Company; Goldman Sachs & Co.; Hare & Co.; LLC; Knotfloat Co. ; Mac & Co., LLC; BK Opportunities Fund SP; Tiptree Operating Company LLC; and John Does 1 Through 100, Defendants.

16 Civ. 8963

United States District Court, S.D. New York.

Signed August 7, 2017

Attorney for Plaintiff: LOCKE LORD BISSELL & LIDDELL LLP, 3 World Trade Financial Center, 20^th Floor, New York, NY 10281, By: Casey B. Howard, Esq.

Attorneys for Telos and Tiptree: WINSTON & STRAWN LLP, 200 Park Avenue, New York, NY 10166, By: Cristina I. Calvar, Esq., Ian C. Eisner, Esq., Richard W. Reinthaler, Esq.

Attorneys for Ellington and BK Opportunities: SCHINDLER COHEN & HOCHMAN LLP, 100 Wall Street, 15th Floor, New York, NY 10005, By: Lisa C. Cohen, Karen M. Steel.

OPINION

ROBERT W. SWEET, U.S.D.J.

Interpleader defendant Telos Asset Management LLC ("Telos" or "Collateral Manager") has moved pursuant to Rule 56 of the Federal Rules of Civil Procedure for summary judgment to dismiss the interpleader action brought by plaintiff, The Bank of New York Mellon Trust Company, National Association ("Plaintiff," "BNYM," or the "Trustee") and to grant its counterclaims for declaratory judgment. Based upon the conclusions set forth below, the motion of Telos is denied without prejudice to renew after further proceedings.

The instant motion raises the issue of the proper timing and procedure to resolve the dispute between the parties with respect to the performance of the Indenture, which establishes their rights and obligations. For the reasons set forth below, it is concluded that the most appropriate procedure to protect the rights of all the parties is the pending action, and the motion for summary judgment is deemed premature.

I. Prior Proceedings

On November 21, 2006, Telos CLO 2006–1 Ltd., as Issuer (the "Issuer"); Telos CLO 2006–1, Inc., as Co–Issuer (the "Co–Issuer", and together with the Issuer, the "Co–Issuers"); and BNYM, in its capacity as Trustee (the "Trustee") entered into an indenture (the "Indenture") in connection with a collateralized loan obligation ("CLO") transaction. Telos' Answer, Statement of Claim to the Funds, and Verified Counterclaims Against The Bank of New York Mellon Trust Company ("Telos Answer") ¶ 26. Pursuant to the terms of the Indenture, the Co–Issuers issued eight classes of Secured Notes. Telos' Statement of Material Facts in Support of Telos' Motion for Summary Judgment ("Telos Statement of Facts") ¶ 8. The Issuer also entered into a Subordinated Note Issuing and Paying Agency Agreement (the "Subordinated Note Agreement") with BNYM; pursuant to that agreement, the Issuer issued Subordinated Notes. Telos Answer ¶ 4.

Additionally, on the same date, the Issuer entered into a Collateral Management Agreement (the "CMA") with Telos (f/k/a Tricadia Loan Management LLC) in which Telos agreed to act as Collateral Manager for distributions made on Distribution Dates to subordinated noteholders. As Collateral Manager, Telos was to provide certain management services with respect to the CLO transaction. The management services include: "(i) identify[ing] and purchas[ing] Collateral on behalf of the [Issuer]; and (ii) retain[ing], sell[ing] or otherwise dispos[ing] of any Collateral Debt Obligation or other asset as required or permitted under the Indenture." Telos Statement of Facts ¶ 19.

By the terms of the Indenture and the CMA, on the Distribution Dates Telos is entitled to receive an Incentive Collateral Management Fee (the "ICM Fee"), subject to and in accordance with the payment priority, or "waterfall," provisions as set forth in Sections 11.1(a) and 11.2(a) of the Indenture. Telos Statement of Facts ¶¶ 18, 28. The waterfalls guide the order of payment, and therefore the amount of the ICM Fee is affected by which waterfall is applied: the "regular waterfall" or the "redemption waterfall." Telos Statement of Facts ¶¶ 28–29. Under a regular waterfall, the ICM Fee is higher, and the distributions to subordinated noteholders is lower.

Ellington Credit Opportunities, Ltd. ("Ellington") and BK Opportunities Fund SP ("BK") (collectively, the "Subordinate Noteholders") may also be entitled to a distribution on a given Distribution Date, which varies in size according to, among other things, the size of the ICM Fee on that Distribution Date. The distribution that the Subordinate Noteholders may be entitled to and the ICM Fee are inversely proportional. Telos Answer ¶¶ 4, 34.

On the October 11, 2016 Distribution Date, if the regular waterfall were applied, Telos would have been entitled to an ICM Fee of $2,362,097.49. Telos Answer ¶ 35; Telos Statement of Facts ¶ 42.

However, on October 11, 2016, the Trustee received correspondence from Ellington objecting to the ICM Fee and the recent sales of Collateral. Telos Answer ¶ 36; see Telos Statement of Facts ¶ 46. In that correspondence, Ellington stated that the decision to accelerate redemption of the Notes in the deal "may reflect bad faith on the part of the Trustee." Edrington Decl. ¶ 2, Ex. A.The Trustee subsequently received several directions from Telos demanding that the Trustee distribute the ICM Fees that Telos would have been paid pursuant to the regular waterfall. Telos Answer ¶ 37–38. In Telos' October 28, 2016 letter to the Trustee, Telos directed the Trustee to pay Telos the ICM Fees, alleged that the Trustee had violated the terms of the Indenture and related agreements, and "expressly reserve[d] all of their rights, including rights against the Trustee under the Indenture." Edrington Decl. ¶ 3, Ex. B; Telos Answer ¶ 38.

On November 1, 2016, the Trustee sent a letter to both Telos and Ellington through their respective counsel, notifying them that the Trustee had reviewed the correspondence from both parties and that the Trustee may file an interpleader action if the parties did not come to an agreement on or before November 15, 2016. Answer ¶ 39 (admitting this allegation from the Complaint). Further, in a subsequent November 2, 2016 letter to the Trustee, Telos requested the Trustee to "please immediately file an interpleader" in the event the Trustee was not willing to immediately distribute the ICM Fees to Telos. Edrington Decl. ¶ 4, Ex. C.

On November 17, 2016, the Trustee initiated this action by filing an interpleader complaint asserting that it faces competing demands to assets it holds in connection with the CLO transaction. See Complaint, Dkt. No. 1. In particular, the Complaint alleges that Telos directed the Trustee to pay it the ICM Fee for the October 11, 2016 Distribution Date (the "Disputed Funds") while Ellington requested the Trustee to withhold payment to Telos. The Trustee has no claim to any of the Disputed Funds. On or about January 11, 2017, a reserve was established with the expectation that this reserve could be used to pay for the Trustee's fees and costs incurred in this interpleader action. Edrington Decl. ¶ 5. The Trustee filed an Amended Interpleader Complaint on January 27, 2017, which, among other things, added BK as a party.

On February 19, 2017, BK and Ellington each filed substantially similar pleadings answering the Amended Interpleader Complaint and asserting cross-claims (the "Cross–Claims") against Telos, in which they allege that Telos committed fraud, breach of contract, gross negligence, and breach of fiduciary duty, and is thus not entitled to the Disputed Funds. Dkt. Nos. 64 & 65.

On that date, Telos also responded to the Amended Interpleader Complaint by filing an Answer, Statement of Claim to the Funds, and Verified Counterclaims (the "Counterclaims") against the Trustee, alleging that the Governing Documents¹ require that the Trustee pay Telos the ICM Fees regardless of BK and Ellington's claims that Telos engaged in various misconduct. Dkt. No. 66. Telos alleged that the Trustee's withholding of the Disputed Funds, and its corresponding filing of the interpleader action, was improper and in breach of the Indenture and seeks declaratory relief demanding that the Disputed Funds be paid and prohibiting the Trustee from paying its costs and fees out of the interpleaded funds.

Telos filed the instant motion for summary judgment seeking dismissal of the Trustee's Amended Interpleader Complaint and payment of the Disputed Funds on March 1, 2017. Dkt. Nos. 69–72. Telos has asserted that its motion applies only to the Trustee's claims and Telos' Counterclaims, and not to the Cross–Claims by Ellington and BK.

On March 27, 2017, BK and Ellington served Telos with document requests and interrogatories seeking discovery concerning, inter alia : Telos' interpretation of the Governing Documents, including the Optional Redemption and its impact on the amount of ICM Fees owed; liquidation of the assets underlying Telos CLO 2006–1; holding of these same assets in other CLO transactions it manages; communications with the Trustee, including with respect to the NOTE VALUATION REPORT and ICM Fees purportedly owed; and meetings and communications with the Subordinated Noteholders. See Steel Decl. ¶¶ 4–5, Exs. C & D.

The instant motion was heard and marked fully submitted on May 10, 2017.

II. The Facts

The facts have been set forth in the Telos Statement of Facts, Interpleader Plaintiff's Response and Counterstatement ("BNYM Counterstatement"), and Ellington Credit Opportunities Ltd. and BK Opportunities Fund Counterstatement of Material Facts ("Ellington and BK Counterstatement") pursuant to Local Rule 56.1, and are not in dispute except as noted below.

1. Telos is an asset manager focused on, among other things, senior secured corporate credit, primarily in the form of CLOs. Among other obligations, Telos manages Telos CLO 2006–1 Ltd., the Issuer. Telos Answer ¶ 2.

2. Interpleader plaintiff and ...