In re Nat'l Collegiate Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3

• Decision Date: 19 August 2020
• Docket Number: No. 18-3327, No. 18-3328,18-3327
• Parties: IN RE: NATIONAL COLLEGIATE STUDENT LOAN TRUSTS 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3 *Waterfall Asset Management, LLC, One William Street Capital Master Fund, Ltd., OWS Credit Opportunity I, LLC, OWS ABS Fund II, L.P. and OWS COF 1 Master, L.P., Appellants In re: National Collegiate Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3 U.S. Bank National Association, Indenture Trustee, Appellant *(Pursuant to Rule 12(a) Fed. R. App. P.)
• Court: U.S. Court of Appeals — Third Circuit

971 F.3d 433

IN RE: NATIONAL COLLEGIATE STUDENT LOAN TRUSTS 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3 *Waterfall Asset Management, LLC, One William Street Capital Master Fund, Ltd., OWS Credit Opportunity I, LLC, OWS ABS Fund II, L.P. and OWS COF 1 Master, L.P., Appellants In re: National Collegiate Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, 2005-3 U.S. Bank National Association, Indenture Trustee, Appellant *(Pursuant to Rule 12(a) Fed. R. App. P.)

No. 18-3327

No. 18-3328

United States Court of Appeals, Third Circuit.

Argued March 11, 2020

Opinion filed: August 19, 2020

Michael Hanin (Argued), Uri Itkin, Kasowitz Benson Torres, 1633 Broadway, 21st Floor, New York, NY 10019, Henry B. Brownstein, Kosowitz Ben Torres, 1399 New York Avenue, Suite 201, Washington, DC 20005, Andrew D. Cordo, Ashby & Geddes, P.A., 500 Delaware Avenue, 8th Floor, P.O. Box 1150, Wilmington, DE 19899, Counsel for Appellants, Waterfall Asset Management LLC, One William Street Capital Master Fund Ltd., OWS Credit Opportunity I LLC, OWS ABS Fund II LP, OWS COF I Master LP

Jeffrey T. Castellano, John W. Shaw, Shaw Keller, 1105 North Market Street, I.M. Pei Building, 12th Floor, Wilmington, DE 19801, Louis Chaiten, James R. Saywell, Jones Day, 901 Lakeside Avenue, North Point, Cleveland, OH 44114, Keith Kollmeyer, Matthew Martel (Argued), Anthony Masero, Joseph B. Sconyers, Jones Day, 100 High Street, Boston, MA 02110, Counsel for Appellant, US Bank NA, as Indenture Trustee

Daniel L. Berger, Charles T. Caliendo, James J. Sabella, Grant & Eisenhofer, 485 Lexington Avenue, 29th Floor, New York, NY 10017, Kimberly Evans (Argued), Michael T. Manuel, Grant & Eisenhofer, 123 Justison Street, 7th Floor, Wilmington, DE 19801, Counsel for Appellees

Before: McKEE, AMBRO, and PHIPPS, Circuit Judges

OPINION OF THE COURT

AMBRO, Circuit Judge Six Delaware statutory trusts (the "Trusts") acquired student loans, issued notes for those acquisitions, and pledged the student loans as collateral for the notes. This process, called a securitization, works well when the students do not default on their loans. When they do, a servicer of the loans attempts to collect. If that servicer comes up short, there is a problem. That is what occurred here. To remedy the problem and aid collection, an additional servicer was added by the owners of the Trusts. May this be done under the documents for the securitization and, if so, were the requirements in those documents followed? To flesh out this dispute, what follows is a Reader's Digest version followed by a more complete factual and procedural background.

Each Trust stems from a trust agreement (the "Trust Agreement") pursuant to the Delaware Statutory Trust Act. Del. Code Ann. tit. 12, § 3801(g). The Trusts issued notes (the "Notes") entitling their holders (the "Noteholders") to the income from the student loans purchased with Note proceeds. To secure the Notes, the Trusts pledged the student loans under a "Granting Clause" in documents called "Indentures" entered into with U.S. Bank National Association ("U.S. Bank"), as Indenture Trustee.

The Indentures also contain various protections for the benefit of the Indenture Trustee and the Noteholders, including a requirement that the Trusts obtain consent from the Indenture Trustee and the Noteholders to amend, supplement, or terminate the Indentures (the "Consent Clause").

The Trusts initially did not provide for servicing loans delinquent in their payments. They later entered into a "Special Servicing Agreement" to do so. U.S. Bank became both the Indenture Trustee and the "Special Servicer" under the Special Servicing Agreement. It is here our dispute begins.

U.S. Bank allegedly failed as the Special Servicer to collect hundreds of millions of dollars in delinquent loans. To mitigate losses, holders of the equity ownership interests in the Trusts (the "Owners") sought to hire an additional loan servicer, and ultimately entered into an agreement for Odyssey Education Resources, LLC ("Odyssey") to serve in that role (the "Odyssey Agreement"). Thereafter the Trusts submitted invoices from Odyssey for payment from the trust estate.

The parties dispute whether the Trusts had the right to enter the Odyssey Agreement and whether that Agreement conflicts with the "Basic Documents," meaning the Indentures, the Trust Agreements, along with the Servicing Agreements, and other related agreements. On cross-motions for summary judgment, the District Court held that: (1) the Trusts did not violate the Granting Clause by hiring Odyssey and retaining the right to hire a new servicer; (2) the Trusts were not required to obtain consent to hire Odyssey because the Odyssey Agreement did not waive, amend, modify, supplement, or terminate any of the terms of the Basic Documents; (3) Odyssey's invoices were accordingly payable; and (4) the question whether the Odyssey Agreement was the result of improper self-dealing was irrelevant. U.S. Nat'l Bank Ass'n v. Nat'l Collegiate Student Loan Tr. 2003-1 , No. 16-cv-341, 2018 WL 4462369 (D. Del. Sept. 18, 2018).

We affirm in part and reverse in part. We agree that the Granting Clause does not bar the Trusts from appointing an additional servicer, yet we also hold that several provisions of the Odyssey Agreement violate the Granting Clause by impermissibly transferring to the Owners of the Trusts rights reserved for the Indenture Trustee. We also part with the District Court and hold that the Odyssey Agreement supplements and modifies several provisions of the Basic Documents, thus requiring consents not obtained from the Indenture Trustee. Accordingly, the Odyssey Agreement is invalid, and we remand to the District Court to determine whether the Odyssey invoices are nonetheless payable (which may include a re-look at the self-dealing issue).

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Creation, Structure, and Basic Documents of the Trusts

The Trusts (National Collegiate Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, and 2005-3) were created between 2003 and 2005. Their purpose was to acquire student loans by issuing notes and executing indentures, to provide for administration of the Trusts and servicing of the student loans, and to enter into other necessary agreements to achieve the foregoing. Trust Agreement ("TA") § 2.03(a), J.A. 267–68.

The Trust Agreements appointed an owner trustee (the "Owner Trustee") to act for and manage the affairs of each Trust. The Owner Trustee in turn appointed an administrator (the "Administrator") to aid it in discharging its duties and to take certain actions under an administration agreement (the "Administration Agreement"). GSS Data Services Inc. ("GSS") initially served as Administrator. J.A. 148–49.

To fund the acquisition of the student loans, the Trusts issued Notes to the Noteholders. The Notes are backed by the loans and are paid through principal and interest payments received from the student loan borrowers.

Appellants are the Noteholders,¹ and U.S. Bank, which serves as the current Indenture Trustee for the Trusts (together "Appellants"). The Indentures are governed by New York law. See Indenture § 11.13, J.A. 384.

The Administration Agreements were entered into on various dates by and among each of the Trusts, Wilmington Trust Company ("Wilmington Trust") as Owner Trustee, U.S. Bank as Indenture Trustee, The National Collegiate Funding LLC as the Depositor, and First Marblehead Data Services, Inc. ("First Marblehead Data") as Administrator under each Administration Agreement.

Under the Indentures, the Trusts granted all of the right, title, and interest in and to, among other things, the student loans held by the Trusts, the related agreements, funds and accounts, and all related present and future claims related thereto (collectively, the "Indenture Trust Estate") to the Indenture Trustee for the benefit of the Noteholders.

The Granting Clause, under which the Trusts grant their interest in the student loans to the Indenture Trustee, provides in relevant part:

The Issuer [i.e ., the Trust] hereby Grants² to the Indenture Trustee at the Closing Date with respect to the Initial Financed Student Loans, and as of each Subsequent Transfer Date with respect to Subsequent Loans acquired as of such date, as trustee for the benefit of the holders of the Notes, all the Issuer's right, title and interest in and to the following:

(a) the Student Loans, and all obligations of the Obligors thereunder including all moneys paid thereunder on or after the Cutoff Date ...;

(b) all Servicing Agreements and all Student Loan Purchase Agreements, including the right of the Issuer to cause the Sellers to repurchase[,] or the Servicer to purchase, Student Loans from the Issuer under circumstances described therein;....

Indenture at 1–2, J.A. 317–18. It is "absolute." Indenture § 3.07(f), J.A. 336.

To protect the Noteholders’ interests, the Indentures include "Issuer Separateness Covenants" that impose on the Trusts obligations to "maintain an arm's length relationship with ... any of the [Trusts’] Affiliates." Indenture § 3.23(l), J.A. 346. So long as the Notes are outstanding, the Trusts must "avoid the appearance [ ] of conducting business on behalf of any Owner or any Affiliate of an Owner." TA § 2.03(b)(iv), J.A. 268. In addition, the Indentures require the consent of Noteholders and the Indenture Trustee in order to "waive, amend, modify, supplement or terminate" any of the Basic Documents. Indenture §§ 3.07(c), (f), J.A. 336–37.

B. Special Loan Servicing Agreements

At the Trusts’ inception, the Pennsylvania Higher Education Assistance Agency ("PA Education Agency") acted as the sole Servicer for each Trust pursuant to a servicing agreement (the "PA Education Agency Servicing Agreement"). Under it, the PA Education Agency serviced performing, or up-to-date, student loans and could purchase those loans out of the Trusts but only for "an amount equal to the principal balance and accrued and unpaid...