U.S. Bank N.A. v. Triaxx Asset Mgmt. LLC

• Decision Date: 31 March 2021
• Docket Number: 18-CV-4044 (BCM)
• Parties: U.S. BANK NATIONAL ASSOCIATION, Interpleader Plaintiff, v. TRIAXX ASSET MANAGEMENT LLC, et al., Interpleader Defendants.
• Court: U.S. District Court — Southern District of New York

U.S. BANK NATIONAL ASSOCIATION, Interpleader Plaintiff, v. TRIAXX ASSET MANAGEMENT LLC, et al., Interpleader Defendants.

18-CV-4044 (BCM)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 31, 2021

OPINION AND ORDER

BARBARA MOSES, United States Magistrate Judge.

Plaintiff U.S. Bank National Association (U.S. Bank or Trustee), in its capacity as Trustee of three collateralized debt obligations (CDOs) known as Triaxx Prime CDO 2006-1 (Triaxx 2006-1), Triaxx Prime CDO 2006-2 (Triaxx 2006-2), and Triaxx Prime CDO 2007-1 (Triaxx 2007-1) (collectively the CDOs), brought this interpleader action to resolve a dispute which until recently pitted two of the CDOs' senior noteholders, Pacific Investment Management Company LLC (PIMCO) and Goldman Sachs & Company LLC (Goldman) (collectively the Noteholders) against the CDOs' Collateral Manager, Triaxx Asset Management LLC (TAM or Collateral Manager), and TAM's affiliate Phoenix Real Estate Solutions Ltd. (Phoenix), which the Collateral Manager engaged as an advisor and consultant, nominally on behalf of the issuers of the CDOs, Triaxx Prime CDO 2006-1, Ltd. (Triaxx 2006-1 Ltd.), Triaxx Prime CDO 2006-2, Ltd. (Triaxx 2006-2 Ltd.), and Triaxx Prime CDO 2007-1, Ltd. (Triaxx 2007-1 Ltd.) (collectively the Issuers).

The original dispute concerned how and by whom Phoenix should be paid for its services in support of the Collateral Manager's "activist litigation strategy," which - according to TAM - has resulted in recoveries of tens of millions of dollars (the Recoveries) for the CDOs through litigation settlements with various non-parties. In March 2018, TAM directed the Trustee to pay $18.25 million in "incentive fees" to Phoenix as administrative expenses. See Compl. (Dkt. No. 1) ¶¶ 26-28. Although TAM had previously directed (and the Trustee had previously paid, without controversy) various sums to Phoenix as administrative expenses, PIMCO objected to the payment of the substantial incentive fees in this manner, noting that the requested payments would reduce the funds potentially available to it and other noteholders out of the CDOs' collateral proceeds in accordance with the priority of payments waterfall (the Waterfall) set out in the indentures (Indentures) governing the CDOs, and arguing that TAM should pay Phoenix directly, out of its own fees. Id. ¶¶ 29-31. Declaring that it faced "irreconcilable demands" as to whether to pay the invoices reflecting the incentive fees (the Phoenix Invoices), the Trustee withheld the funds in dispute and asked the Court "for a judicial determination" as to whether the Phoenix Invoices constitute Other Administrative Expenses as that term is defined in the Indentures, and whether the Trustee was required to pay those invoices out of the CDO's collateral. Id. at 13 ¶ ii.

From that relatively modest beginning, this action rapidly expanded, ultimately becoming something of a four-ring circus as the interpleader defendants asserted various counterclaims and crossclaims, which in turn prompted the Trustee - as well as the crossclaim defendants - to amend, expand, or refine their own claims. Many of these claims, as discussed in more detail below, concern how and by whom the parties' legal fees in this action, as well as any potential judgment in this action, should be paid. In addition, as the pleadings developed, TAM and Phoenix (collectively the TAM Parties) asserted - based on certain "clarifications" to Phoenix's engagement letters that the Trustee and the Noteholders never previously saw - that Phoenix could be (and has been) paid outside of the Waterfall entirely, without notice to the Trustee, by taking its fees directly from the Recoveries "at the time such funds are disbursed." The Trusteeand the Noteholders cried foul, arguing that all funds generated by the collateral underlying the CDOs, including the Recoveries, are themselves Collateral, as that term is used in the Indentures, and must travel through the accounts controlled by the Trustee and be distributed in accordance with the Waterfall.

The Trustee now asserts three interpleader claims: as to the Phoenix Invoices, which the Trustee has not paid; as to the legal fees incurred by the TAM Parties and the Issuers herein (the Interpleader Legal Fees), which, to the extent those fees have been presented to it for payment, the Trustee likewise has not paid; and as to the indemnification of a potential future judgment against the TAM Parties or the Issuers (which the Trustee calls the Interpleader Judgment Fees). The Trustee also asserts non-interpleader claims for declaratory judgment, breach of contract, breach of the Uniform Commercial Code (UCC), and conversion against TAM and the Issuers. Additionally, it asserts claims for unjust enrichment and money had and received against Phoenix, seeking to recover, for the benefit of the CDOs, the funds that Phoenix has already received directly from the Recoveries. TAM and Phoenix assert declaratory judgment counterclaims against the Trustee and crossclaims against the Issuers on various contract and tort theories.¹ PIMCO, for its part, asserts three "affirmative claims to the res" seeking, in effect, to forbid the payment of the Phoenix Invoices, the Interpleader Legal Fees, or the InterpleaderJudgment Fees to the TAM Parties or the Issuers.² All parties have consented to the jurisdiction of the assigned Magistrate Judge to conduct all remaining proceedings in this action pursuant to 28 U.S.C. § 636(c).

Now before the Court are four competing motions for judgment on the pleadings, pursuant to Fed. R. Civ. P. 12(c), brought by the TAM Parties (Dkt. No. 227); the Trustee (Dkt. No. 230); the Issuers (Dkt. No. 232); and PIMCO (Dkt. No. 234) with respect to some (but not all) of the parties' various claims, counterclaims, and crossclaims.³ For the reasons that follow:

(1) The Trustee's First Claim, for interpleader relief, will be dismissed insofar as it seeks relief concerning the Interpleader Judgment Fees, along with the corresponding portion of the Trustee's Second Claim, for a declaratory judgment, and PIMCO's Third Affirmative Claim to the Res.

(2) On its Second Claim, the Trustee is entitled to a limited declaratory judgment in its favor. The Recoveries are Collateral, as that term is used in the Indentures, and therefore must be disclosed to and turned over to the Trustee for deposit into the appropriate Account(s)established by the Trustee. It follows from this that neither the Issuers nor the Collateral Manager may pay Phoenix's fees directly from the Recoveries, outside of the Waterfall. The corresponding declaratory judgment counterclaims of TAM and Phoenix will be dismissed insofar as they seek a contrary declaration.

(3) The Trustee's Third, Fourth, and Fifth Claims for damages will be dismissed insofar as they are asserted against the Issuers, and its Fourth Claim will be dismissed as against the Collateral Manager as well.

Insofar as the parties seek judgment on the pleadings as to any other claims, counterclaims, or crossclaims, their respective motions will be denied.

I. BACKGROUND

Except where otherwise indicated, the following facts are taken from the parties' operative pleadings and from the Indentures and other contracts attached thereto, which set out the parties' respective rights and obligations. See L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011) (quoting Roberts v. Babkiewicz, 582 F.3d 418, 419 (2d Cir. 2009)) ("On a [Rule] 12(c) motion, the court considers the complaint, the answer, any written documents attached to them, and any matter of which the court can take judicial notice for the factual background of the case.") (internal quotation marks omitted). When considering these documents, "we employ the same standard applicable to Rule 12(b)(6) motions to dismiss, 'accept[ing] all factual allegations in the [C]omplaint as true and draw[ing] all reasonable inferences in [the nonmoving party's] favor.'" Vega v. Hempstead Union Free Sch. Dist., 801 F.3d 72, 78 (2d Cir. 2015) (quoting L-7 Designs, 647 F.3d at 429).

A. The Parties and the Governing Documents

Interpleader plaintiff U.S. Bank is a national banking association with headquarters in Cincinnati, Ohio. TAC ¶ 15. It serves as Trustee and Collateral Administrator for each of the three CDOs originally at issue in this action, under three substantially identical Indentures and Collateral Administration Agreements (CAAs) dated September 7, 2006 (governing Triaxx2006-1), December 14, 2006 (governing Triaxx 2006-2), and March 29, 2007 (governing Triaxx 2007-1). TAC at 1; id. ¶ 15.⁴

The Issuers are "exempted corporations" organized under the laws of the Cayman Islands, which PIMCO describes as "'shell' companies or special purpose vehicles that exist for the limited purpose of issuing CDO Notes." See TAC ¶¶ 17-19; Answer and Affirmative Defenses of Interpleader Defendants Triaxx Prime CDO 2006-1, Ltd., Triaxx Prime CDO 2006-2, Ltd., and Triaxx Prime CDO 2007-1, Ltd. (Issuer Ans.) (Dkt. No. 208) ¶¶ 17-19; Interpleader Defendant Pacific Investment Management Company LLC's Answer to Interpleader Plaintiff's Third Amended Complaint (PIMCO Ans.) (Dkt. No. 212) ¶ 141. Under the Indentures, the Issuers are not permitted to engage in any business "other than issuing and selling the Notes." Indentures (Ind.) § 7.12(a). To that end, the Issuers granted to the Trustee, "for the benefit and security of" the noteholders and other secured parties, a pool of Collateral Debt Securities consisting of Residential Mortgage-Backed Securities (RMBS), as well as certain other assets, such as Equity Securities and Eligible Investments (collectively the Collateral). Ind. at 1-2.⁵ Under the Granting Clause of each Indenture, the term Collateral includes all payments on or with respect to the Collateral Debt Securities and "all proceeds, accessions, profits, income benefits, substitutions and replacements, whether voluntary or involuntary, of and to" any...