In re Trusteeships Created by Tropic Cdo I Ltd.
| Decision Date | 13 March 2015 |
| Docket Number | No. 13 Civ. 8428NRB.,13 Civ. 8428NRB. |
| Citation | 92 F.Supp.3d 163 |
| Parties | In the Matter of THE TRUSTEESHIPS CREATED BY TROPIC CDO I LTD. and Tropic CDO I Corp. ; Tropic CDO II Ltd. and Tropic CDO II Corp.; Tropic CDO III Ltd. and Tropic CDO III Corp.; Tropic CDO IV Ltd. and Tropic CDO IV Corp. ; Soloso CDO 2005–1 Ltd. and Soloso CDO 2005–1 Corp. ; and Soloso CDO 2007–1 Ltd. and Soloso CDO 2007–1 Corp. |
| Court | U.S. District Court — Southern District of New York |
Michael E. Johnson, Esq., Carolyn R. O'Leary, Esq., Alston & Bird LLP, New York, NY, for Wells Fargo Bank, N.A.
Lisa C. Cohen, Esq., Richard J. Bettan, Esq., Schindler Cohen & Hochman LLP, New York, NY, for HRUN LLC.
Jonathan E. Pickhardt, Esq., Andrew S. Corkhill, Esq., Blair Adams, Esq., New York, NY, for Zions Bancorporation.
The three parties to this consolidated action call upon the Court to interpret provisions in the trust indentures that govern six collateralized debt obligations (“CDOs”). One interpretation is jointly advanced by the CDOs' trustee, Wells Fargo Bank, N.A. (“Wells Fargo” or the “Trustee”), and by HRUN LLC (“HRUN”), a noteholder in three of the CDOs; a contrary interpretation is advanced by Zions Bancorporation (“Zions”), a noteholder in at least three of the CDOs that alleges that it has received insufficient distributions from the Trustee with respect to one of the CDOs as a result of the Trustee's application of its misinterpretation of the relevant indentures. Each party, arguing that the contested terms of the indentures are unambiguous as a matter of law, moves for judgment on the pleadings. For the reasons that follow, the Zions motion is granted in part and denied in part, and the Wells Fargo and HRUN motions are denied.
The parties agree that their motions turn on the interpretation of the CDO indentures annexed to the pleadings, the contents of which are not in dispute. Although the six indentures are not identical, the parties further agree that the differences among them are immaterial for present purposes. We follow the lead of the Trustee and Zions in focusing on the terms of the April 23, 2003 indenture for the “Tropic I” CDO, which we shall call the “Indenture.”2
The parties' dispute centers on a subordination feature, known as the “Senior Overcollateralization Test,” which is found in the indentures governing the six CDOs involved in this litigation. As discussed in greater detail in Part I.B below, Zions, which owns $78 million in junior notes issued by Tropic I, contends that in 2011–2012 the Trustee, misinterpreting the Senior Overcollateralization Test, paid Tropic I's senior noteholders approximately $5 million in distributions that should have been paid to Zions instead. The Trustee, joined by HRUN (a noteholder in three of the CDOs, but not Tropic I), defends the amounts it distributed on the basis of its “dynamic” interpretation of the Senior Overcollateralization Test.
In the CDO transactions, special purpose vehicles called issuers issued notes to investors. The proceeds of the issuance were used to acquire portfolios of collateral, such that returns on the collateral are to be used to make interest and principal payments to the noteholders. Zions Br. at 2–3; Trustee Br. at 1. The notes were issued in classes of various seniority; in general, more senior notes had a lower interest rate but a higher priority of payment than more junior notes. Trustee Br. at 1; Zions Br. at 3. Pursuant to the indentures, the Trustee is responsible for making quarterly payments to noteholders, to the extent that funds are available. The order and priority of payments to the various classes of noteholders is established by a mechanism known to the parties as a “payment waterfall” or “waterfall.”
At certain steps in the waterfall, tests including the so-called “Interest Coverage Tests” and “Overcollateralization Tests” can affect the amounts to be paid to different classes of noteholders.
The Senior Overcollateralization Test, which is the subject of the instant dispute, is one of the Overcollateralization Tests. It is undisputed that the purpose of the Senior Overcollateralization Test is to protect senior noteholders against the risk of default from a decline in the value of the CDO's collateral, and that it serves that purpose by requiring the Trustee to redeem a quantity of senior notes when the ratio of the value of collateral to the value of outstanding senior notes falls below a constant ratio defined by the CDO's indenture. See Trustee Br. 20; HRUN Br. 8; Zions Ans. ¶ 17.
Section 11.1 of the Indenture, which is entitled “Disbursements of Monies from Collection Account,” specifies the steps of the payment waterfall. Section 11.1 provides, in relevant part:
Indenture § 11.1, at 84–77 (emphasis added). The parties' dispute turns on the meaning of the phrase “an O/C Redemption in the amount, if any, required to be paid in order to satisfy the Senior Overcollateralization Test” in Section 11.1(c)(i)THIRD. If too much money is paid to holders of Class A–1L, A–2L, and A–3L Notes (the “Senior Class A Noteholders” or “Senior Noteholders”) pursuant to Section 11.1(c)(i)THIRD (and pursuant to Section 11.1(c)(ii)FIRST, which incorporates Section 11.1(c)(i)THIRD by reference), then not enough may be available to make payments to more junior noteholders.
Other provisions of the Indenture are relevant to this dispute. Section 9.2, which is entitled “Mandatory Redemption,” provides, in relevant part:
If either the Interest Coverage Tests or the Overcollateralization Tests are not satisfied as of any applicable Calculation Date ..., all or a portion of the Notes shall be redeemed ... by the Issuer, in the order set forth in Section 11.1 hereof, on the Payment Date immediately following such Calculation Date ... in an amount sufficient such that the Interest Coverage Tests and the Overcollateralization Tests are satisfied.... The amount of any Mandatory Redemption hereunder shall be determined in accordance with the provisions of Section 11.2 hereof.
Indenture § 9.2, at 73. Section 11.2, in turn, which is entitled “Mandatory Redemptions with Respect to Overcollateralization Tests and Interest Coverage Tests and Rating Confirmation Failure,” provides in relevant part:
On any Payment Date with respect to which an Overcollateralization Test or an Interest Coverage Test (as calculated in the Note Valuation Report for the Calculation Date immediately preceding such Payment Date) would not be met (but for this Section 11.2) ..., the Issuer shall redeem the Notes ... in the order described in Section 11.1 hereof pursuant to Section 9.2 hereof, and the Trustee shall pay to the Holders thereof (to be applied against the principal amount thereof) from the available amount in the Collection Account and pursuant to the applicable provisions of Section 11.1 hereof, an aggregate amount necessary to cause each of the Overcollateralization Tests and each of the Interest Coverage Tests to be met ....
Indenture § 11.2, at 88 (emphases added).
The Indenture's definitions of several terms, as set out in Section 1.1 (“Definitions”), are also particularly relevant. The “Senior Overcollateralization Test” is defined as:
With respect to any date of determination, a test met when the Senior Overcollateralization Ratio is at least equal to 106% relating to such date of determination.
Indenture § 1.1, at 21.3 The “Senior Overcollateralization Ratio” is defined in relevant part as:
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