Wells Fargo Bank, National Association v. Davidson Kempner Capital Management LLC et al

Filing 70

OPINION AND ORDER: For the foregoing reasons, Bedford's motion for judgment on the pleadings is DENIED. The DWS Parties' cross-motion for judgment on the pleadings is GRANTED. The Clerk of the Court is directed to close this motion (Docket No. 36) and this case. (Signed by Judge Shira A. Scheindlin on 5/9/2014) (tn)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

USDCSDNY
WELLS FARGO BANK, NATIONAL
ASSOCIATION, as trustee,

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DOC#: --~-~-DATE. Fll.JID: -

Interpleader Plaintiff,
- against DAVIDSON KEMPNER CAPITAL
MANAGEMENT LLC, WATERFALL
ASSET MANAGEMENT LLC, THE
NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY, STS
PARTNERS FUND, LP, BEDFORD
CMBS ACQUISITIONS LLC, CEDE &
CO., as holder of certain Certificates and
nominee name of The Depository Trust
Company, and DOES 1 through 50, holders
of beneficial interests in the Certificates,

OPINION AND ORDER
13 Civ. 5981 (SAS)

Interpleader Defendants.

-----------------------------------------------------)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.

BACKGROUND
Wells Fargo Bank, National Association ("Wells Fargo") instituted

this interpleader action to determine the proper disposition of certain pooled

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securities under its trusteeship. 1 The interpleader defendants are certificateholders
bound by the trust document (the "Pooling Agreement").2 Davidson Kempner
Capital Management LLC, Waterfall Asset Management LLC, and STS Partners
Fund, LP (together, the "DWS Parties") dispute Bedford CMBS Acquisitions
LLC's ("Bedford") right to purchase certain securities pursuant to the Pooling
Agreement.

A.

Factual Background
Bedford is currently the "Directing Securityholder," 3 a title given to

the majority holder of the most junior class that has an outstanding certificate
balance of at least twenty-five percent of the initial certificate balance. 4 Pursuant
to section 7.13 of the Pooling Agreement, the Directing Securityholder has an
assignable option to purchase a pooled security that has been deemed defaulted or
imminently defaulted. 5 The option price is either: "(i) if the Trustee has not yet

See Commercial Mortgage-Backed Securities Pass-Through
Certificates, Series 2006-RR2 Pooling Agreement ("Pooling Agreement"), Ex. 1 to
12/20/13 Declaration of Danielle C. Lesser, counsel for Bedford, in Support of
Bedford's Motion to Dismiss ("Lesser Deel."), § 2. 01.
2

See Second Amended Interpleader Complaint ("Compl.") iii! 5-10.

3

Id.

4

See Pooling Agreement § 1.01 (defining "Directing Securityholder").

5

See id. § 7.13.

ii 8.

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determined the Fair Value of the [defaulted security], the unpaid principal amount
thereof plus accrued and unpaid interest thereon," or "(ii) if the Trustee has made a
Fair Value determination, the Fair Value of the" defaulted security as determined
by the trustee in accordance with the procedures outlined in section 7 .13. 6
"If the Directing Securityholder has not provided notice to the Trustee
of its exercise of the Purchase Option within 10 Business Days of its receipt of
notice that a [certificate has become a defaulted security], the Purchase Option
calculated pursuant to clause (i) above will be deemed to be irrevocably
waived .... " 7 If a Directing Securityholder has received notice of the Fair Value
determination, but "does not provide notice to the Trustee of its exercise of the
Purchase Option within 10 Business Days of its receipt of the notice of the
determination of the Fair Value ... the Purchase Option will be deemed to be
irrevocably waived with respect to the [defaulted security]. " 8
In July 2013, the Directing Securityholder previous to Bedford
requested and received a Fair Value determination for certain defaulted securities. 9

6

Id.

7

Id.

8

Id.

9

See Compl.

if 15.
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The then Directing Securityholder exercised its purchase option as to twelve of
these securities, but did not exercise its option to purchase the remaining Securities
(the "Disputed Securities") within ten business days of receipt of the Fair Value
determination. ' 0
"On August 9, 2013, Bedford notified Wells Fargo that it had become
the Directing Securityholder." 11 Four days later, it requested a Fair Value
determination for the Disputed Securities. 12 "On August 20, 2013, Wells Fargo
provided Bedford with notice of the Fair Value of the Disputed [Securities]." 13
The next day, Bedford notified Wells Fargo that it intended to exercise its purchase
option with regard to the Disputed Securities. 14 Wells Fargo "acknowledged
receipt" of the purchase notice and "acknowledged the feasibility of a closing
schedule proposed by Bedford." 15 The DWS Parties and The Northwestern Mutual

IO

See id.

II

Id.~

12

See id.

13

Id.~

14

See id.

15

Id.~

16.
~

17.

18.
~

19.

20.
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Life Insurance Company 16 subsequently informed Wells Fargo that they objected
to Bedford's purchase of the Disputed Securities on the ground that the previous
Directing Securityholder irrevocably waived the option to purchase these
securities. 17
Section 7.02 of the Pooling Agreement states, "No Certificateholder
shall have any right to ... control the operation and management of the Trust
Estate, or the obligations of the parties hereto .... " 18 It further states, "Except in
the case of an action, suit, or proceeding against the Trustee in respect of a breach
or alleged breach of its duties and responsibilities hereunder, no Certificateholder
shall have any right by virtue of any provisions of this Pooling Agreement to
institute any action, suit, or proceeding in equity or law upon or under or with
respect to this Pooling Agreement" unless the Certificateholder has given Wells
Fargo written notice, and the holders of two-thirds of the same certificate class

16

Although it has not submitted an amended answer, or supplemental
briefing, Northwestern has previously opposed Bedford's motion adopting the
DWS Parties' arguments. See Northwestem's Memorandum in Opposition to
Bedford's Motion for Judgment on the Pleadings.

if 21.

17

See Compl.

18

Pooling Agreement § 7.02.
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have also made written request on and offered to indemnify Wells Fargo. 19 It is
undisputed that these conditions were not met by the DWS Parties.

B.

Procedural History
Wells Fargo initiated this interpleader action, contending that the

Pooling Agreement is "ambiguous with respect to Bedford's right to exercise the
Purchase Option with respect to the Disputed [Securities]," 20 and claiming that it
cannot determine the proper disposition of the Disputed Securities "without hazard
to itself. " 21 This Court issued an opinion on March 6, 2014 granting Bedford's
motion for judgment on the pleadings on the ground that the previous Directing
Securityholder had not been issued a Fair Value Determination for the Disputed
Securities, and thus could not have waived an option to purchase those securities at
the Fair Value price. 22
On March 25, the Court granted the DWS Parties' motion for
reconsideration in light of newly produced evidence that a Fair Value
19

Id.

20

Id.

if 23.

21

Id.

if 1.

22

See Wells Fargo Bank, Nat'/ Ass 'n v. Davidson Kempner Capital
Mgmt. LLC, No. 13 Civ. 5981, 2014 WL 896741 (S.D.N.Y. Mar. 6, 2014) (the
"March 6 Opinion"). Familiarity with the March 6 Opinion is presumed for
purposes of this Motion.
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Determination was, in fact, issued to the previous Directing Securityholder. In its
Second Amended Complaint, Wells Fargo has asked the Court to: (1) order the
interpleader defendants to settle all claims regarding Bedford's rights to exercise
the Purchase Option in respect to the Disputed Securities; (2) restrain the
interpleader defendants from claiming any interest in the Disputed Securities, or
from bringing separate suit against Wells Fargo; and (3) to award Wells Fargo its
costs. Bedford and the DWS Parties bring cross motions for judgment on the
pleadings.

II.

APPLICABLE LAW

A.

LegalStandard
At any time after the pleadings are closed, but before trial commences,

a party may move for judgment on the pleadings under Rule 12( c). 23 "A grant of a
motion pursuant to Rule 12(c) is proper 'if, from the pleadings, the moving party is
entitled to judgment as a matter of law. "'24

23

See Fed. R. Civ. P. 12(c).

24

Dargahi v. Honda Lease Trust, 370 Fed. App'x 172, 174 (2d Cir.
2010) (quoting Burns Int'/ Sec. Servs., Inc. v. International Union, 47 F.3d 14, 16
(2d Cir. 1995) (per curiam)).
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"[T]he legal standards of review for motions to dismiss and motions
for judgment on the pleadings 'are indistinguishable. "' 25 "On a motion to dismiss
or for judgment on the pleadings [courts] 'must accept all allegations in the
complaint as true and draw all inferences in the non-moving party's favor. "' 26
Courts are not bound to accept as true legal conclusions couched as factual
allegations. 27 The court "may consider the facts alleged in the complaint,
documents attached to the complaint as exhibits, and documents incorporated by
reference in the complaint. " 28
B.

Applicable Law
Under New York law,"' [t]he initial interpretation of a contract is a

matter of law for the court to decide. '" 29 The court's '"fundamental objective' is to

25

LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475
(2d Cir. 2009) (quoting DeMuria v. Hawkes, 328 F.3d 704, 706 n.1 (2d Cir.
2003)).
26

Miller v. Wolpoff & Abramson, L.L.P., 321F.3d292, 300 (2d Cir.
2003) (quoting Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126
(2d Cir. 2001)).
27

See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
28

DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).

29

Yakin v. Tyler Hill Corp., 566 F.3d 72, 75 (2d Cir. 2009) (quoting
Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 4 72 F .3d
33, 42 (2d Cir. 2006)).

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determine the intent of the contracting parties 'as derived from the language
employed in the contract. "' 30 "Contractual rights may be waived if they are
knowingly, voluntarily and intentionally abandoned." 31 "Under New York law,
waiver of rights under a contract 'should not be lightly presumed. "'32
"An option contract is a promise which meets the requirements for the
formation of a contract and limits the promisor's power to revoke an offer." 33
"Once the optionee gives notice of his intent to exercise the option in accordance
with the agreement, the unilateral option agreement ripens into a fully enforceable
bilateral contract." 34 However, under New York law, strict adherence to the terms

3

°

Consolidated Edison, Inc. v. Northeast Util., 426 F.3d 524, 527 (2d
Cir. 2005) (quoting Abiele Contracting v. New York City Sch. Cons tr. Auth., 91
N.Y.2d 1, 9 (1997)).
31

Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt.,
L.P., 7 N.Y.3d 96, 104 (2006) (citing Nassau Trust Co. v Montrose Concrete
Prods. Corp., 56 N.Y.2d 175, 184 (1982)).
32

Globecon Group, LLC v. Hartford Fire Ins. Co., 434 F.3d 165, 176
(2d Cir. 2006) (quoting Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966
(1988)).
33

Restatement (Second) of Contracts § 25 ( 1981 ).

34

Kaplan v. Lippman, 75 N.Y.2d 320, 325 (1990) (citing Cochran v.
Taylor, 273 N.Y. 172, 183 (1937); Bullock v. Cutting, 140 N.Y.S. 686 (3d Dep't
1913).
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of an option is required, 35 and "a notice exercising an option is ineffective if it is
not given within the time specified." 36
III.

DISCUSSION
As discussed in the March 6 Opinion, and at the March 25 conference,

the Purchase Option for the Disputed Assets was waived by the previous Directing
Securityholder's failure to exercise its option to purchase within ten business days
of receiving a Fair Value determination. Therefore, under the terms of the Pooling
Agreement, Bedford had no valid purchase option as to the Disputed Securities.
The Court now considers two arguments not addressed in the March 6 Opinion.
First, Bedford argues that a binding contract exists because: ( 1)

Bedford complied with the procedures laid out in the Pooling Agreement; and (2)
Wells Fargo acknowledged receipt of Bedford's notice of intent to exercise the
purchase option at the Fair Value price. Wells Fargo disputes that a binding
agreement was created when it acknowledged receipt of notice. 37 The DWS Parties

35

See 15 Richard A. Lord, Williston on Contracts§ 46:12 (4th ed.

1990).
36

JN A. Realty Corp. v. Cross Bay Chelsea, Inc., 42 N.Y.2d 392, 396
( 1977) (citing Sy Jack Realty Co. v. Pergament Syosset Corp., 27 N.Y.2d 449
(1971)).
37

See Compl.

~

20.
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argue that no contract was created because the purchase option which Bedford
sought to exercise had already been waived.
Bedford believes that a binding bilateral contract for purchase of the
Disputed Securities exists because it adhered to all conditions precedent as outlined
in the Pooling Agreement when giving notice of its intent to exercise. Cases cited
by Bedford in support of this claim reiterate that "[a]n option is an irrevocable
offer to sell which becomes a binding contract of sale on acceptance by the
optionee." 38 Bedford's citation to this principle puts the cart before the horse by
presuming that a valid option exists. 39 Here, under the terms of the Pooling
Agreement, the previous Directing Securityholder irrevocably waived the option to
purchase the Disputed Securities by requesting and receiving a Fair Value
determination and then failing to exercise its option to purchase those securities

38

Texas Co. v. Z. & M Indep. Oil Co., 156 F.2d 862, 865 (2d Cir.

1946).
39

See Novello v. 215 Rockaway, LLC, No. 2426-07, 2008 WL 412625
(Sup. Ct. Nassau Cty. Feb. 5, 2008) ("[O]nce a tenant gives notice of intent to
exercise a purchase option in accordance with the lease, 'the unilateral option
agreement ripens into a fully enforceable bilateral contract."' (quoting Kaplan v.
Lippman, 75 N.Y.2d 320 ( 1990)) (emphasis added)). Other cases cited by Bedford
are simply inapposite. See Brainstorms Internet Mktg., Inc. v. USA Networks, Inc.,
775 N.Y.S.2d 844, 844 (2004) ("[Defendant], by sending e-mail to plaintiffs
setting closing date for its purchase of remaining [portion] of plaintiffs' business,
did, in fact, exercise purchase option accorded it in the parties' purchase agreement
pursuant to the agreement's terms.").
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within ten business days. Wells Fargo's receipt of notice of Bedford's intent to
exercise the purchase option could not create a binding contract where there was
no valid option to exercise. Bedford's strict adherence to the other conditions in
the Pooling Agreement did not give rise to a binding contract because the purchase
option as to the Disputed Securities had already been irrevocably waived.

Second, Bedford argues that Section 7.02 of the Pooling Agreement
bars the DWS parties from contesting the validity of the purchase option and
asserting their counterclaims. The DWS Parties argue that they have not
"instituted" an "action, suit, or proceeding," or asserted rights under the Pooling
Agreement to contest Bedford's purchase of the Disputed Assets, as they are
merely responding to Wells Fargo's interpleader action. 40 Because the language of
section 7.02 clearly contemplates "institut[ing]" an action, it cannot be construed to
preclude the DWS Parties from defending an interpleader action. Thus, the DWS
Parties' affirmative defenses and cross-motion for judgment on the pleadings are
not barred by section 7.02. 41

40

DWS Parties' Supplemental Memorandum of Law ("DWS Supp.
Mem.") at 2-3.
41

I need not reach the effect of section 7.02 on the DWS Parties' first
counterclaim, which is largely duplicative of its affirmative defenses. Nor need I
reach the second counterclaim, which was pled in the alternative.
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Finally, Wells Fargo's duties as trustee under the Pooling Agreement
include the administration of purchase options. Wells Fargo created this
controversy by taking steps that led Bedford to conclude that it had a valid
purchase option. Wells Fargo then chose to institute this interpleader action rather
than seeking to amend the Pooling Agreement to cure the perceived ambiguity. 42
Because Wells Fargo instituted this action, and the controversy arose from its
actions as trustee, Wells Fargo is not entitled to recover any fees or costs not
contemplated in the Pooling Agreement.

IV.

CONCLUSION
For the foregoing reasons, Bedford's motion for judgment on the

pleadings is DENIED. The DWS Parties' cross -motion for judgment on the
pleadings is GRANTED. The Clerk of the Court is directed to close this motion
(Docket No. 36) and this case.

Dated:

42

New York, New York
May 9, 2014

See Pooling Agreement§ 7.01.
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- Appearances For Interpleader Plaintiff, Wells
Fargo:

For Interpleader Defendant,
Bedford:

Carolyn Renee O'Leary, Esq.
Michael Edward Johnson, Esq.
Alston & Bird, LLP
90 Park A venue
New York, New York 10016
[phone]

Danielle C. Lesser, Esq.
Latisha V. Thompson, Esq.
Y. David Scharf, Esq.
Morrison Cohen, LLP
909 Third Avenue
New York, New York 10022
[phone]

For Interpleader Defendants, the
DWS Parties:

For Interpleader Defendant, Cede &
Co.:

Michael Andrew Hanin, Esq.
Henry Bowen Brownstein, Esq.
Thomas H. Golden, Esq.
Willkie Farr & Gallagher, LLP
1633 Broadway
New York, New York 10019
[phone]

Eric P. Heichel, Esq.
Eiseman, Levine, Lehrhaupt &
Kakoyiannis, P.C.
805 Third Avenue
New York, New York 10022
[phone]

For Interpleader Defendant,
Northwestern:
Vincent Bauer, Esq.
Law Offices of Vincent. E. Bauer
475 Park Avenue South
New York, New York 10016
[phone]

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