Lansuppe Feeder, LLC v. Wells Fargo Bank, National Association et al
Filing
141
MEMORANDUM OPINION AND ORDER re: 36 CROSS MOTION for Summary Judgment . filed by The First, A National Banking Association, Coastal Commerce Bank, Oxford University Bank, Copiah Bank, N.A., BankFirst Financial Services as Succe ssor-in-Interest to Newton County Bank, Guaranty Bank and Trust Company, Citizens Bank & Trust Company of Marks, PriorityOne Bank. For these reasons and those set forth in Lansuppe Feeder, LLC v. Wells Fargo Bank, NA ex rel. Soloso CDO 2005-1 Ltd., 2015 WL 6455274 (S.D.N.Y. Oct. 26, 2015), Lansuppe's motion for summary judgment is granted in full and Intervenors' cross-motion for summary judgment is denied. The Trustee is hereby authorized and directed to distribute the procee ds of the liquidation in accordance with the priority of payments waterfall provisions of the Indenture. The Intervenors are hereby directed to show cause by written submission, filed within fourteen (14) days of the date of this order, as to why th eir cross-claims for declaratory and injunctive relief and rescission of their purchases should not be dismissed in light of the determinations set forth in this Memorandum Opinion and Order. This Memorandum Opinion and Order resolves Docket Entry Numbers 3, 36, and 87. (As further set forth in this Order.) (Signed by Judge Laura Taylor Swain on 9/29/2016) (cf)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
LANSUPPE FEEDER, LLC,
Plaintiff,
-v-
No. 15-CV-7034-LTS
WELLS FARGO BANK, NA,
as trustee for Soloso CDO 2005-1 Ltd.
Defendant,
and
SOLOSO CDO 2005-1 LTD.,
Nominal Defendant,
and
OXFORD UNIVERSITY BANK; CITIZENS
BANK & TRUST COMPANY; COASTAL
COMMERCE BANK; GUARANTY BANK
AND TRUST COMPANY; BANKFIRST
FINANCIAL SERVICES; THE FIRST, A
NATIONAL BANKING ASSOCIATION;
COPIAH BANK, NATIONAL ASSOCIATION;
& PRIORITYONE BANK; BANK OF
MORTON; BANK OF KILMICHAEL; HOLMES
COUNTY BANK AND TRUST COMPANY;
FIRST COMMERCIAL BANK; and
FIRST STATE BANK;
Intervenors.
-------------------------------------------------------x
MEMORANDUM OPINION AND ORDER
This trust instruction proceeding, in which Plaintiff Lansuppe Feeder, LLC
(“Lansuppe” or “Plaintiff”), as the holder of more than two-thirds of a class of senior notes
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issued by Nominal Defendant Soloso CDO 2005-1 Ltd. (“Soloso” or the “Issuer”), an issuer of
collateralized debt obligations backed by investments in trust-preferred securities, seeks a court
order directing Soloso’s trustee, Defendant Wells Fargo Bank, NA (“Wells Fargo” or the
“Trustee”), to liquidate and distribute Soloso’s assets in accordance with certain provisions of
the relevant trust indenture. Intervenors, consisting of holders of junior notes, oppose
Lansuppe’s request for relief, contending among other things that Soloso is in violation of the
Investment Company Act of 1940 (the “ICA”), 15 U.S.C. § 80a et seq., and that all noteholders
are entitled to rescission of their investments or pro rata distribution of Soloso’s assets.
The Court has subject matter jurisdiction of this action pursuant to
12 U.S.C. § 632.
This Memorandum Opinion and Order addresses the issues outstanding with
respect to the parties’ cross-motions for summary judgment. The motion practice was
commenced in September 2015 by Order to Show Cause in connection with Lansuppe’s motion
seeking the relief described above. The Court thereafter granted a motion to intervene by certain
of the junior noteholders,1 and the Intervenors moved to dismiss or transfer the case to
Mississippi in deference to previously-commenced litigation and cross-moved for summary
judgment, seeking dismissal of Lansuppe’s claim and rescission of their investments or pro rata
distribution of the Soloso trust assets. (Docket Entry No. 36.) Following oral argument on
October 20, 2015, the Court denied the Intervenors’ motion for transfer or dismissal in favor of
1
See Lansuppe Feeder, LLC v. Wells Fargo Bank, NA ex rel. Soloso CDO 2005-1
Ltd., 2015 WL 6455274 (S.D.N.Y. Oct. 26, 2015). Additional junior noteholders
moved to intervene and joined with the original group in an answer, cross-claims,
and cross-motion practice, although the Court had never formally granted their
motion to intervene. The Court hereby grants their intervention motion, (Docket
Entry No. 87), nunc pro tunc.
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the Mississippi litigation and granted Lansuppe’s motion to the extent of authorizing the Trustee
to liquidate the Soloso trust assets and hold them pending further order of the Court. 2015 WL
6455274 (S.D.N.Y. Oct. 26, 2015). The Court reserved decision on the remaining aspects of the
pending motion practice.
The Court has reviewed thoroughly all of the parties’ submissions and arguments.
For the reasons explained below, the Court now grants summary judgment in Lansuppe’s favor
and denies the Intervenors’ cross-motion for summary judgment.
BACKGROUND2
Soloso is a trust. (See Compl. ¶¶ 1, 15.) It issued Notes pursuant to the terms of
an Indenture dated August 24, 2005. (See Pl. 56.1 St., Docket Entry No. 7, ¶ 1; see also
Declaration of a Representative of Lansuppe Feeder, LLC, Docket Entry No. 8, Ex. A (the
“Indenture”).) The Notes were co-issued by Soloso and Soloso CDO 2005-1 Corp. (“CoIssuer”). (Pl. 56.1 St. ¶ 1.) When the Notes were issued, they were initially purchased by Bear,
Stearns & Co. Inc. and SunTrust Capital Markets, Inc. (the “Initial Purchasers”), and the Initial
Purchasers were authorized to resell those assets pursuant to the Indenture. (See Indenture §§
1.1, 2.5(b)(ix).) The trust issued Notes in several tranches, and holders of the different tranches
2
The following facts are undisputed except as indicated. Facts recited as
undisputed are identified as such in the parties’ statements pursuant to S.D.N.Y.
Local Civil Rule 56.1 or drawn from evidence as to which there is no nonconclusory contrary factual proffer. Citations to the parties’ respective Local
Civil Rule 56.1 Statements, Docket Entry No. 7 (“Pl. 56.1 St.”), Docket Entry No.
35 (“Intervenors’ 56.1(b) St.”), or Docket Entry No. 55 (“Intervenors’ 56.1(a)
St.”), incorporate by reference the parties’ citations to underlying evidentiary
submissions. Facts drawn from the Complaint in this action (Docket Entry No. 1)
cited in this memorandum order and opinion are uncontested in the Intervenors’
Answer (Docket Entry No. 99) and are therefore deemed admitted.
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of Notes have varying rights with respect to rates of return on the Notes and repayment of
principal in the event of liquidation of the trust’s assets. (Compl. ¶¶ 15-17, 22.) Lansuppe holds
Class A-1 Notes, which have priority in payment of interest and principal, while the Intervenors
hold Notes that earn a higher rate of interest but have distribution rights that are junior to those
of the Class A-1 Notes, notably with respect to payment priority if the trust’s assets are
insufficient to pay interest and/or principal. (See id. ¶ 12; Pl. 56.1 St., Docket Entry No. 7, ¶ 7;
Intervenors’ 56.1(b) St., Docket Entry No. 35, ¶ 27.) The Intervenors purchased their respective
Notes either from the Initial Purchasers or on the secondary market; they did not purchase their
Notes from the Issuer or Co-Issuer. (See Intervenors’ 56.1(a) St., Docket Entry No. 55, ¶¶ 1-8.)
The Indenture provides that an “Event of Default” occurs if the periodic interest
amount due on the senior notes is not paid. (Indenture § 5.1(a)(iii)(A).) An Event of Default
arising from the failure to pay interest on the Class A-1 Notes occurred in April 2013 and
Lansuppe exercised its right to accelerate the payment of the aggregate principal amount of those
Notes following the default. (Compl. ¶ 2.) The Indenture permits two-thirds of the senior
noteholders (the “Requisite Noteholders”) to trigger liquidation following such an Event of
Default. (See Indenture §§ 1.1, 5.2(a), 5.4(a)(iv).) In such a liquidation, the Indenture provides,
Soloso’s assets would first be distributed to senior noteholder classes, and junior noteholder
classes would be paid only after the obligations to the senior classes are satisfied (the “Waterfall
Provision”). (See Indenture § 11.1.) On July 31, 2015, Lansuppe, as the Requisite Noteholders,
directed the Trustee to liquidate the Trust Estate pursuant to Section 5.4 of the Indenture. (Pl.
56.1 St., Docket Entry No. 7, ¶ 6.) It is undisputed that the trust’s assets are insufficient to
provide payment to the Intervenors if they are distributed in accordance with the Waterfall
Provision. (See Intervenors’ 56.1(b) St., Docket Entry No. 35, ¶ 27.)
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The ICA requires an “investment company” to register with the Securities and
Exchange Commission (the “SEC”) unless the entity qualifies for an exemption. See 15 U.S.C.
§ 80a-3. Soloso is not registered with the SEC under the ICA, as it relied on an exemption for
issuers whose securities are owned only by investors who are “qualified purchasers” within the
meaning of the ICA. 15 U.S.C. § 80a-3(c)(7A); (see also Affidavit of Andrew Dean in
Opposition to the Proposed Intervenors’ Motion to Stay, Oct. 13, 2015, Docket Entry No. 71, ¶
9). Some of the Intervenors are “Non-Qualified Purchasers” (“NQPs”) under the ICA, and
represent that they were not “qualified purchasers” at the time they purchased Soloso notes. In
support of those representations, the Intervenors have proffered affidavits reciting statutory
language (see Docket Entry Nos. 38-53); the evidentiary sufficiency of the affidavits is disputed
by Lansuppe and Soloso.
DISCUSSION
Legal Standard
A motion for summary judgment should be granted “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). A genuine dispute of material fact exists where “the
evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). By contrast, if “the record taken as
a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine
issue for trial,” and summary judgment is appropriate. Matsushita Elec. Indus. Co., Ltd. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The burden of demonstrating that no genuine dispute of material fact remains
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rests initially on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the
movant makes the requisite showing, the nonmoving party must present specific facts
demonstrating that there is a genuine issue for trial, which cannot be done merely through
“[c]onclusory allegations, conjecture, and speculation.” Niagara Mohawk Power Corp. v. Jones
Chem., Inc., 315 F.3d 171, 175 (2d Cir. 2003) (citations and internal quotation marks omitted).
In determining whether a genuine dispute of material fact exists, the Court draws all inferences
in favor of the nonmoving party. Scott v. Harris, 550 U.S. 372, 380 (2007). Where there are
cross-motions for summary judgment, “each party’s motion must be examined on its own merits,
and in each case all reasonable inferences must be drawn against the party whose motion is
under consideration.” Morales v. Quintel Entm’t, Inc., 249 F.3d 115, 121 (2d Cir. 2001)
(citation omitted).
“Under New York law, the initial interpretation of a contract is a matter of law for
the court to decide.” Int’l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d
Cir. 2002) (citing K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632, 637 (2d Cir.
1996)) (internal quotation marks and citation omitted). “Interpretation of indenture provisions is
a matter of basic contract law.” Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d
1039, 1049 (2d Cir. 1982). “In interpreting a contract under New York law, words and phrases
should be given their plain meaning, and the contract should be construed so as to give full
meaning and effect to all of its provisions.” Orange County Choppers, Inc. v. Olaes Enters., 497
F. Supp. 2d 541, 551 (S.D.N.Y. 2007) (citing LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital
Corp., 424 F.3d 195, 206 (2d Cir. 2005)) (ellipses, internal quotation marks, and citations
omitted). “Language that has a generally prevailing meaning should be interpreted in
accordance with that meaning.” Id. at 552 (citing Restatement 2d Contracts § 202).
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Lansuppe’s Motion for Summary Judgment - Liquidation of the Trust
There is no dispute that Lansuppe constitutes the Requisite Noteholders under the
Indenture, that Lansuppe gave the Trustee the required notice and instruction regarding the
liquidation of the Trust’s assets following the Event of Default in April 2013 in accordance with
the Indenture and that, if the Trustee distributed the liquidated assets in accordance with the
Indenture, the Waterfall Provision would apply and the Intervenors and other junior noteholders
would not receive any distribution of assets.
The Intervenors argue, however, that the Court should preclude distribution in
accordance with the Indenture because certain Intervenors are NQPs and Soloso is therefore in
violation of the registration requirements of the ICA. The Intervenors assert that they are
entitled to a declaration that the Indenture and its Waterfall Provision are void under Section
47(b) of the ICA because Soloso is in violation of Sections 7 and 8 of the ICA, which generally
require the registration of investment companies and prohibit sales of interests to NQPs.3
Section 47(b) of the ICA reads as follows:
(1) A contract that is made, or whose performance involves, a violation of
this title [15 U.S.C. §§ 80a-1 et seq.], or of any rule, regulation, or order
thereunder, is unenforceable by either party (or by a nonparty to the contract
who acquired a right under the contract with knowledge of the facts by
reason of which the making or performance violated or would violate any
provision of this title . . . or of any rule, regulation, or order thereunder)
unless a court finds that under the circumstances enforcement would produce
a more equitable result than nonenforcement and would not be inconsistent
with the purposes of this title . . .
3
The Intervenors have abandoned certain of their other arguments, including a
contract-based argument that liquidation requires the consent of 100% of the
noteholders.
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(2) To the extent that a contract described in paragraph (1) has been
performed, a court may not deny rescission at the instance of any party unless
such court finds that under the circumstances the denial of rescission would
produce a more equitable result than its grant and would not be inconsistent
with the purposes of this title . . ..
15 U.S.C.S. § 80a-46(b) (LexisNexis 2010). Assuming solely for the purposes of this analysis
that the Intervenors’ contention that NQPs are among their ranks is true, the Court turns to the
threshold question of whether Congress has empowered the Intervenors, as private parties, to sue
under Section 47(b).
The law is unsettled among lower courts as to whether Section 47(b) authorizes a
private right of action for the invalidation of a contract that is allegedly violative of the ICA. In
Alexander v. Sandoval, a case involving the question of “whether there is a private cause of
action to enforce” Title VI of the Civil Rights Act of 1964, 532 U.S. 275, 278-79 (2001), the
Supreme Court strictly limited the ability of federal courts to imply a private right of action from
a federal statute and held that “private rights of action to enforce federal law must be created by
Congress,” stating that “[t]he judicial task is to interpret the statute Congress has passed to
determine whether it displays an intent to create not just a private right but also a private
remedy,” id. at 286 (internal citations omitted). “Statutory intent . . . is determinative,” and,
“[w]ithout it, a cause of action does not exist and courts may not create one, no matter how
desirable that might be as a policy matter, or how compatible with the statute.” Id. at 286-87.
Since Sandoval, the Second Circuit has applied four factors in analyzing whether
a private right of action exists under certain sections of the federal securities laws, including the
ICA. First, the court determines whether the clause contains an explicit private right of action on
its face. See Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 116 (2d Cir. 2007). Second, the
court examines whether the act expressly provides one method to enforce a substantive rule,
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such as providing the Securities and Exchange Commission (the “SEC”) with the ability to
conduct investigations and bring civil suits for injunctions and penalties “for enforcement of all
ICA provisions,” a statutory feature suggesting that Congress intended to preclude other
methods. See id. Third, the Court considers whether a statute “‘explicit[ly]’” provides “‘a
private right of action to enforce one section of [the] statute,’” a feature that “‘suggests that
omission of any explicit private right to enforce other sections was intentional.’” Id. (quoting
Olmsted v. Pruco Life Ins. Co., 283 F.3d 429, 433 (2d Cir. 2002)). Finally, the Court determines
whether there is an “absence of ‘rights-creating language,’” which “indicates a lack of
congressional intent to create private rights of action.” Id. (quoting Olmsted, 284 F.3d at 435).
“More specifically, ‘statutes that focus on the person regulated rather than the individuals
protected create no implication of an intent to confer rights on a particular class of persons.’” Id.
(quoting Sandoval, 532 U.S. at 289) (internal brackets omitted).
Since Sandoval, most lower courts that have examined whether Section 47(b)
creates a private right of action have found that no such right exists. See Smith v. Oppenheimer
Funds Distributor, Inc., 824 F. Supp. 2d 511, 517-21 (S.D.N.Y. 2011). The Intervenors here rely
on a number of cases decided before Sandoval and the Second Circuit’s rulings in Olmsted and
Bellikoff. (See Reply Memorandum of Law in Support of the Intervenors’ Cross-Motion for
Summary Judgment, Docket Entry No. 118, at p. 13 (citing Blatt v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 916 F.Supp. 1343, 1349-50 (D.N.J. 1996); Krome v. Merrill Lynch Co.,
637 F. Supp. 910, 918 (S.D.N.Y. 1986), opinion vacated in part on other grounds, 110 F.R.D.
693; Carr v. Equistar Offshore, Ltd., 1995 WL 562178, *14 (S.D.N.Y. 1995); Avnet, Inc. v.
Scope Industries, 499 F.Supp. 1121, 1127 (S.D.N.Y. 1980); Cogan v. Johnston, 162 F. Supp 907,
909 (S.D.N.Y. 1958)).) Those cases are unpersuasive in light of Sandoval and its Second Circuit
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progeny.
Analysis of the Intervenors’ claim under the Second Circuit’s Bellikoff factors
points clearly to the conclusion that the Intervenors have no private right of action under Section
47(b) of the ICA. First, Section 47(b) does not explicitly provide for any such private right of
action on its face. See 15 U.S.C. § 80a-46(b). Second, as the Second Circuit recognized in
Bellikoff, the ICA expressly provides a comprehensive method to enforce the statute: “[Section]
42 of the ICA explicitly provides for enforcement of all ICA provisions by the SEC through
investigations and civil suits for injunctions and penalties.” 481 F.3d at 116 (emphasis in
original) (citing 15 U.S.C. §80a-41). By authorizing the SEC to conduct investigations and bring
civil suits for injunctions and penalties “for enforcement of all ICA provisions,” including
Sections 7, 8, and 47(b), Congress indicated that it intended to preclude other enforcement
methods, such as creating an independent private right of action under Section 47(b). See id.
Third, as the Second Circuit found in Bellikoff, “[Section] 35(b) of the ICA creates a private
right of action for investors in regulated investment companies for the breach of fiduciary
duties,” and “[t]hus, it seems apparent that Congress’s omission of an explicit private right of
action in [the ICA sections at issue in Bellikoff] as intentional.” Id. The explicit creation of a
private right of action in Section 35(b) of the ICA similarly suggests that Congress’s omission of
an explicit private right of action from Section 47(b) was intentional. Finally, this Court
concludes that there is “no implication of an intent to confer rights” on the Intervenors as a
protected “particular class of persons.” This conclusion follows from the ICA’s absence of
rights-creating language and its focus on regulated entities, “‘rather than the individuals
protected’” by the statute. See id. (quoting Sandoval, 532 U.S. at 289).
Even if Section 47(b) did provide Intervenors with an independent private right of
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action, however, denial of their requested relief would be appropriate under the provisions of
Section 47(b) that require the consideration of equitable principles in determining whether to
deny enforcement or grant a request for rescission of a contract. Both enforcing the Indenture by
ordering the distribution of the liquidation proceeds under the Indenture’s Waterfall Provision
and denying Intervenors’ request for rescission of their purchase through pro rata distribution of
the Issuer’s assets would produce more equitable results than the Intervenors’ requested relief;
neither result would be inconsistent with the purposes of the ICA.
First, it is particularly significant to an equitable analysis that neither the Issuer
nor the Class A-1 noteholders, nor any other party to this action, sold the relevant Notes to the
junior noteholder Intervenors. Ordering the pro rata distribution of the Soloso trust liquidation
proceeds, as the Intervenors request, would thus be a misplaced remedy. Pro rata distribution of
the trust’s assets would not affect nor penalize the sellers who allegedly triggered the ICA
violation by selling the Notes to NQPs. Nor would it penalize the NQPs whose purchases
allegedly triggered the alleged violation of the ICA; if anything, the NQPs would receive a larger
distribution of proceeds than they would have been entitled to claim under a distribution
pursuant to the Waterfall Provision. Indeed, a pro rata distribution would principally harm the
senior noteholders, including Lansuppe, which purchased notes providing for a lower rate of
return during the life of the trust but a more secure right to payment in the event that the trust is
not, as here, able to fulfill all of its obligations. Ordering the distribution of the liquidation
proceeds pursuant to the Waterfall Provision of the Indenture, by contrast, honors the senior
noteholders’ legitimate investment choices and the junior noteholders’ legitimate contractual
expectations, and thus produces a more equitable result.
Second, ordering the distribution of the liquidation proceeds pursuant to the
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Waterfall Provision would be consistent with the purposes of the ICA. “[T]he ICA was enacted
for the benefit of investors,” and “in enacting the ICA, ‘Congress intended to provide a
comprehensive regulatory scheme to correct and prevent certain abusive practices in the
management of investment companies for the protection of persons who put up money to be
invested by such companies on their behalf.’” Reeves v. Continental Equities Corp., 912 F.2d
37, 41-42 (2d Cir. 1990) (quoting Herpich v. Wallace, 430 F.2d 792, 816 (5th Cir. 1970))
(emphasis in original). There is no allegation here of internal fund mismanagement or abusive
practices committed by Soloso or any other party to this litigation. Enforcing the Indenture and
the distribution of liquidation proceeds in accordance with the priority of payments waterfall
protects the contractual rights of Soloso’s investors, which is consistent with the purpose of the
statute. The Court thus concludes that the equitable relief provisions set forth in Section 47(b) of
the ICA do not bar the liquidation of the Trust Estate and distribution of the corpus in
accordance with the procedures and priorities established under the Indenture, and that denial of
rescission is the more equitable result.
Because there is no private right of action under Section 47(b), the terms and
effect of the Indenture are undisputed, and equitable considerations in any event warrant the
enforcement of the stated terms of the parties’ investment contracts, Lansuppe is entitled as a
matter of law to its requested relief. The Intervenors’ contrary arguments, and thus their crossmotion, are meritless. In light of the foregoing determinations, it is unnecessary to address the
parties’ statute of limitations and other additional arguments.
CONCLUSION
For these reasons and those set forth in Lansuppe Feeder, LLC v. Wells Fargo
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Bank, NA ex rel. Soloso CDO 2005-1 Ltd., 2015 WL 6455274 (S.D.N.Y. Oct. 26, 2015),
Lansuppe’s motion for summary judgment is granted in full and Intervenors’ cross-motion for
summary judgment is denied. The Trustee is hereby authorized and directed to distribute the
proceeds of the liquidation in accordance with the priority of payments waterfall provisions of
the Indenture.
The Intervenors are hereby directed to show cause by written submission, filed
within fourteen (14) days of the date of this order, as to why their cross-claims for declaratory
and injunctive relief and rescission of their purchases should not be dismissed in light of the
determinations set forth in this Memorandum Opinion and Order.
This Memorandum Opinion and Order resolves Docket Entry Numbers 3, 36, and
87.
SO ORDERED.
Dated: New York, New York
September 29, 2016
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge
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