Wells Fargo Bank, N.A. v. Wrights Mill Holdings, LLC
| Decision Date | 31 August 2015 |
| Docket Number | No. 14 Civ. 9783(PAE).,14 Civ. 9783(PAE). |
| Citation | 127 F.Supp.3d 156 |
| Parties | WELLS FARGO BANK, N.A., as Trustee, Plaintiff, v. WRIGHTS MILL HOLDINGS, LLC; Eton Park Capital Management ; Montrose Credit I, LLC; Montrose Credit II, LLC; Montrose Credit III, LLC; Montrose Credit IV, LLC; Waterfall Asset Management ; Moishe Gubin; and Cede & Co., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Michael Edward Johnson, Alston & Bird, LLP, New York, NY, Sheila Shah, Alston & Bird LLP, Los Angeles, CA, for Plaintiff.
Gregory P. Joseph, Christopher James Stanley, Honey L. Kober, Peter R. Jerdee, Joseph Hage Aaronson LLC, Michael Andrew Hanin, Kasowitz, Benson, Torres & Friedman, LLP, Thomas M. Crispi, Schiff Hardin.Com, Aimee Taub Bandler, The Depository Trust & Clearing Corporation, New York, NY, John N. Scholnick, Tal C. Chaiken, Schiff Hardin LLP, Chicago, IL, for Defendants.
At issue in this interpleader action is whether Wells Fargo Bank, N.A. ("Wells Fargo"), the Trustee responsible for the assets held in a collateralized debt obligation ("CDO"), is obliged, under the terms of the indenture under which the CDO was formed, to sell particular collateral. Under the relevant indenture provision, so long as there is a valid first offer to buy collateral of the CDO, the CDO's most junior stakeholders (the "Preferred Shareholders") are empowered to decide, by a two-thirds vote among them, whether to approve the sale of that collateral pursuant to a second and higher offer. The Preferred Shareholders have that authority even though they are, by now, all but certain to be unaffected by the sale of any asset: The CDO's value has dropped so precipitously from its inception that only the holders of top-priority security interests (the "Noteholders") are likely to recover any payouts.
The Preferred Shareholders have approved a sale of certain collateral here, in response to a second offer. The decisive issue is whether the unusual first offer for that collateral was valid. To induce the Preferred Shareholders to approve the sale of particular collateral, the entity that made the first offer included, in addition to a $500,000 payment for the collateral, a separate $250,000 side payment to be kept by the Preferred Shareholders. The Noteholders describe this $250,000 side payment as a "bribe," and as upending the CDO's payout structure. They argue that the first offer was therefore invalid, and thus could not trigger the indenture provision that empowers the Preferred Shareholders to approve a second, superior offer. However, the second offeror disputes the point. It has demanded that Wells Fargo, as Trustee, approve its offer.
Wells Fargo brought this interpleader action to resolve this dispute. Several parties have now moved for judgment on the pleadings. For the reasons that follow, the Court holds that the first offer to buy the collateral was not valid, and that Wells Fargo therefore is not required (or authorized) to sell the collateral in question in response to the second offer.
The Tropic IV CDO (hereinafter, the "CDO") is a CDO issued by Tropic IV CDO Ltd. (the "Issuer") and Tropic IV CDO Corp. (together with the Issuer, the "Co–Issuers"). Compl. ¶ 1; Montrose Ans. ¶ 67. By a confidential offering circular dated November 12, 2004 (the "Offering Circular"), the Co–Issuers offered for sale a series of six classes of Notes with an aggregate principal balance of $318.5 million (the "Notes") to investors, with the Notes to be secured by a portfolio of fixed income assets (the "Portfolio Collateral"). Indenture § 2.2; Waterfall Ans. ¶ 50. The Notes were issued pursuant to an indenture dated November 18, 2004 (the "Indenture") that granted Wells Fargo, as Trustee, a first priority security interest in all right, title, and interest in the Portfolio Collateral and other related assets. See Indenture, Granting Clause. Also on or about November 18, 2004, the Issuer issued 27 million Preferred Shares in the Issuer. Id. § 1.1.
Wells Fargo has at all times acted as Trustee for the CDO. See Indenture; Compl. ¶ 18. In that capacity, Wells Fargo holds the Portfolio Collateral, collects the proceeds payable on the Portfolio Collateral, and distributes those proceeds to Noteholders pursuant to the priority of payments, or "waterfall," described in the Offering Circular and the Indenture. Compl. 18.
The Notes are divided into six different tranches, or risk classes. Indenture § 2.2; Waterfall Ans. ¶ 50. The Indenture affords holders of the senior tranches of notes, or "Class A" notes, the highest priority to receive (1) principal and interest from the Portfolio Collateral, (2) the proceeds from sales of the Portfolio Collateral, and (3) the greatest protections against losses. Waterfall Ans. ¶ 50. By contrast, the Preferred Shareholders have no security interest in the Portfolio Collateral and have the lowest priority interest in the Portfolio Collateral. Indenture §§ 11.1(c), (d). As Judge Nathan has aptly explained in a ruling in a case arising under the same indenture, Preferred Shareholders "hold only equity in the CDO, are at the bottom of the ‘waterfall’ of payments, and thus are the first to bear any losses if the underlying assets fail to perform." Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Grp., Inc., No. 11 Civ. 5832(AJN), 2012 WL 3542196, at *1 (S.D.N.Y. Aug. 15, 2012).
In this case, it is alleged that the CDO's underlying assets have, catastrophically, failed to perform. Given the waterfall sequence under which investors are paid, the last-in-line Preferred Shareholders will therefore almost certainly never receive payouts. See, e.g., Montrose Ans. ¶ 95; Dkt. 100 ("4/24/2015 Tr."), 31 (the preferred shareholders "have ... no expectation of recovery from selling these assets"); id. 34 (); id. 39–40 (). Realistically, they therefore have no economic stake in the price at which assets of the CDO, if sold, are sold.
Under the Indenture, however, the Preferred Shareholders have authority, at least under certain circumstances, to approve the sale of portfolio collateral. Three Indenture provisions are relevant here.
First, and most relevant, § 12.2 addresses the circumstance in which a successive offer is made for collateral that is the subject of a pending offer:
Holders representing at least 66–2/3% of the Preferred Shares may direct the Trustee to sell an item of Portfolio Collateral that is the subject of an Offer or call for redemption, if, together with its direction to sell such security, such Holders certify to the Trustee that the sales price for such Security is equal to or greater than the price available pursuant to such Offer or call ....
Indenture § 12.2 (). In other words, two-thirds of the Preferred Shareholders may direct the Trustee to sell an item of portfolio collateral if there are two offers for that asset and they certify that the second offer is equal to or greater than the first offer. The Preferred Shareholders therefore approve the sale, and the Trustee executes it. Judge Nathan has held this provision unambiguous as a matter of law, see Hildene Capital Mgmt., 2012 WL 3542196, at *5–6, and this Court joins in that conclusion.
Second, § 10.3(d) addresses the circumstance in which an offer has been made, in the first instance, for collateral:
The Trustee on behalf of the Issuer shall notify the Holders of the Preferred Shares of any Portfolio Collateral that is subject to an Offer. If no Event of Default has occurred and is continuing and subject to the provisions of Article XII hereof, the Holders representing at least 66–2/3% of the Preferred Shares may direct the Trustee to release from the lien of this Indenture such Portfolio Collateral in accordance with the terms of the Offer in each case against receipt of payment therefor.
Indenture § 10.3(d). Judge Nathan considered this provision in Hildene. She held § 10.3(d) ambiguous as a matter of law, in that it can be read to confer power on the Preferred Shareholders either (1) to authorize a sale of collateral or (2) to veto such a sale, while noting that the provision's language is an unusual way to formulate either concept. See 2012 WL 3542196, at *5–6 & n. 5. In light of Judge Nathan's persuasive analysis in Hildene, it is not clear whether Preferred Shareholders have the authority to direct the sale of Portfolio Collateral in the context of a single purchase offer. But, because § 12.2 is unambiguous, Preferred Shareholders may authorize the sale of Portfolio Collateral by approving the second, if higher, of two such offers.
Third, § 8.1 provides that the Trustee and the Co–Issuers may, at any time, supplement and amend the Indenture to, inter alia, "cure any ambiguity, or to correct, modify or supplement any provision which is defective or inconsistent with any other provision" in the Indenture, so long as the amendment does not adversely and materially affect "the interests of any Noteholder." Indenture § 8.1(6). The Trustee and the Co–Issuers may similarly, at any time, supplement and amend the Indenture to "correct any manifest error." Id. § 8.1(8).
Significantly, at all relevant times, a single entity held more than two-thirds of the preferred shares: interpleader defendant Wrights Mill Holdings ("WMH"), which held 67.22% of the preferred shares. Compl. ¶ 6.
On July 25, 2014, Wells Fargo received a letter from Brogno, LLC ("Brogno") offering to buy an item of Portfolio Collateral ("the Security") for a purchase price of $500,000. The Security consists of $5 million of trust preferred securities.2 See Dkt. 134, Ex. 2. At the same time, Brogno offered a "consent payment" of up to $250,000—which the Court refers to here as a "side payment"—to those Preferred...
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