In the Matter of the Trusts established under the Pooling and Servicing Agreements

Filing 195

OPINION AND ORDER re: 176 JOINT MOTION for Judgment on the Pleadings . filed by Federal Home Loan Mortgage Corporation, 169 FIRST MOTION for Judgment on the Pleadings . filed by Appaloosa Investment L.P.I. and Palomin o Master Ltd., 173 MOTION for Judgment on the Pleadings . filed by CWCapital Asset Management LLC. For the reasons referenced above, the parties' cross-motions for judgment on the pleadings are DENIED. The Clerk of Court is directed to terminate Docket Entries 169, 173, and 176. The parties are hereby ORDERED to file a Case Management Plan on or before March 30, 2018. (Signed by Judge Katherine Polk Failla on 3/9/2018) (kgo)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------- X
:
In the Matter of the Trusts Established
:
under the Pooling and Servicing Agreements :
relating to the Wachovia Bank Commercial :
Mortgage Trust Commercial Mortgage Pass- :
:
Through Certificates, Series 2007-C30;
COBALT CMBS Commercial Mortgage Trust :
2007-C2 Commercial Mortgage Pass:
:
Through Certificates, Series 2007-C2;
Wachovia Bank Commercial Mortgage Trust :
:
Commercial Mortgage Pass-Through
:
Certificates, Series 2007-C31; ML-CFC
:
Commercial Mortgage Trust 2007-5
:
Commercial Mortgage Pass-Through
:
Certificates, Series 2007-5; and ML-CFC
:
Commercial Mortgage Trust 2007-6
:
Commercial Mortgage Pass-Through
:
Certificates, Series 2007-6
:
-------------------------------------------------------- X

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: March 9, 2018
______________

17 Civ. 1998 (KPF)
OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:
This action involves a dispute over the distribution of approximately
$700 million in proceeds from the October 2015 sale of the Peter Cooper Village
and Stuyvesant Town property (“Stuy Town”). As it currently stands,
approximately $560 million of the disputed funds have been allocated to
CWCapital Asset Management LLC (“CWC” or the “Special Servicer”) in the form
of Penalty Interest; the remainder has been allocated to Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage
Association (“Fannie Mae,” and together with Freddie Mac, the “GovernmentSponsored Enterprises” or “GSEs”) in the form of Yield Maintenance Charges.
Appaloosa Investment L.P.I. and Palomino Master Ltd. (collectively,

“Appaloosa”) — investors in various trusts that held assets secured by a
mortgage on Stuy Town — contest the propriety of those allocations. In
Appaloosa’s view, the funds should not be paid to CWC and the GSEs; instead,
the disputed funds constitute Gain-on-Sale Proceeds that must be deposited
directly in a Gain-on-Sale Reserve Account for the benefit of certificateholders.
Before the Court are Appaloosa’s, CWC’s, and the GSEs’ cross-motions
for judgment on the pleadings. The moving parties all contend that the
governing agreements (and in particular the Pooling and Servicing Agreement
(or “PSA”)) are unambiguous, though they disagree on their meaning. In
Appaloosa’s view, the agreements preclude CWC from collecting Penalty
Interest and the GSEs from collecting Yield Maintenance Charges, and instead
require that the disputed funds be allocated to certificateholders as
Gain-on-Sale Proceeds. In CWC’s and the GSEs’ view, by contrast, the
agreements unambiguously establish their entitlement to Penalty Interest and
Yield Maintenance Charges.
Despite, or perhaps because of, the excellent briefing by the parties, the
Court can discern two reasonable interpretations of the relevant agreements.
For this reason, the parties’ cross-motions for judgment on the pleadings are
denied.

2

BACKGROUND 1
A.

Factual Background 2
1.

Commercial Mortgage-Backed Securitization

This case involves commercial mortgage-backed securities (“CMBS”). In
the type of CMBS transaction at issue, an entity (called the “Depositor”)
deposits a pool of mortgage loans backed by mortgages on commercial real
estate into a trust in exchange for certificates. (Pet. ¶ 19). The Depositor then
sells the certificates to various purchasers who are entitled to receive cash
flows from the trust assets. Pursuant to a Pooling and Servicing Agreement, a
Master Servicer and a Special Servicer are often appointed to service the loans.
(Id.). Here, CWC was appointed as Special Servicer, and in that capacity was
required, inter alia, to collect payments on the mortgage loans and to enforce
the terms of the loan. (Id. at ¶¶ 19, 28).

1

The facts set forth herein are taken from the Notice of Removal and the documents
attached thereto or incorporated by reference therein. (Dkt. #1).

2

For ease of reference, the Court refers to the Petition of U.S. Bank National Association,
as Trustee, filed in Minnesota state court on December 17, 2015, as “Pet.” (Dkt. #1,
Ex. A); the Notice of Removal to federal court, filed by Freddie Mac on July 22, 2016, as
“Not. Rem.” (Dkt. #1); the GSEs’ memorandum of law in support of their motion for
judgment on the pleadings as “GSE Br.” (Dkt. #176); CWC’s memorandum of law in
support of its motion for judgment on the pleadings as “CWC Br.” (Dkt. #173);
Appaloosa’s memorandum of law in support of its motion for judgment on the pleadings
as “Appaloosa Br.” (Dkt. #169); CWC’s opposition to Appaloosa’s motion for judgment
on the pleadings as “CWC Opp.” (Dkt. #184); Appaloosa’s opposition to CWC’s and the
GSEs’ motions for judgment on the pleadings as “Appaloosa Opp.” (Dkt. #182); and
Appaloosa’s reply in further support of its motion for judgment on the pleadings as
“Appaloosa Reply” (Dkt. #186). The Court refers to declarations in support of this
briefing and exhibits attached thereto by the name of the declarant and the exhibit
designation, e.g., “[ ] Decl., Ex. [ ].”

3

2.

Stuy Town and the C30 Trust

In November 2006, Tishman Speyer Properties (“Tishman”) and its
partner BlackRock Realty (“BlackRock”) purchased Stuy Town, one of New York
City’s largest residential complexes, for $5.4 billion. (Pet. ¶ 20). In connection
with that purchase, Tishman and BlackRock borrowed $3 billion under a
senior mortgage loan (the “Senior Loan”), which itself was split into six loans.
(Id. at ¶¶ 20-23). The six loans were sold to CMBS trusts (“Trusts,” or “Senior
Lender”), which in turn issued certificates to investors, including Appaloosa
and the GSEs. (Id.). One such trust (the “C30 Trust”) was charged with
administering the Senior Loan on behalf of the other Trusts in accordance with
the PSA. (Id. at ¶¶ 26-27). In late 2009, servicing of the loan secured by the
mortgage on Stuy Town was transferred to CWC, as Special Servicer for the
C30 Trust. (Id. at ¶ 3).
3.

The Default and the Subsequent Sale of Stuy Town

On January 8, 2010, Tishman and BlackRock defaulted on their
mortgage. (Pet. ¶¶ 4, 29). CWC, on behalf of the C30 Trust, provided written
notice of the default to the borrowers by letter dated January 8, 2010; when
the default was not cured, CWC accelerated the loan by letter dated
January 29, 2010. (Id. at ¶ 29). On February 16, 2010, CWC commenced
foreclosure proceedings in this District, and on June 21, 2010, the Court
entered a Judgment of Foreclosure and Sale authorizing the Senior Lender to
sell the property at a foreclosure sale. (Id. at ¶¶ 30-31). However, no
foreclosure sale took place. Instead, on June 3, 2014, the Senior Lender
4

acquired title to the Property via a deed in lieu of foreclosure, at which point
Stuy Town became real-estate-owned property (“REO Property”) under the
terms of the PSA. (Id. at ¶¶ 33-34).
On December 18, 2015, Blackstone Group LP (“Blackstone”) and Ivanhoe
Cambridge Inc. (“Ivanhoe”) purchased Stuy Town for $5.3 billion. (Pet. ¶ 36;
Not. Rem. ¶ 2). The proceeds were expected to — and did — cover all of the
unpaid principal interest due on the Senior Loan at the time of the Foreclosure
Judgment ($3,666,734.70) by more than $1 billion. (Id. at ¶ 37). CWC claimed
approximately $560 million of the proceeds in Penalty Interest (id. at ¶ 7), and
the GSEs claimed Yield Maintenance Charges on the order of $100-$150
million (Rolnick Decl., Ex. J at 4; id., Ex. K at 7).
4.

Relevant Provisions of the Pooling and Servicing Agreement

The moving parties’ disputes implicate various definitions and provisions
within the PSA. The PSA governs, inter alia, the creation of the C30 Trust; the
transfer of mortgage loans into the Trust; the issuance of certificates; and the
duties, rights, and obligations of the various parties, including the Depositor,
Master Servicer, Special Servicer, and Trustee. (See generally PSA). It also
governs the allocation and distribution of proceeds from the sale of REO
Properties like Stuy Town. (Id.). The Court here reviews the provisions most
relevant to the pending motions.

5

a.

Section 1.01: Definitions
i.

Gain-on-Sale Proceeds

The PSA defines Gain-on-Sale Proceeds as “the excess of (i) Liquidation
Proceeds of the Mortgage Loan or related REO Property net of any related
Liquidation Expenses, 3 over (ii) the Purchase Price for such Mortgage Loan on
the date on which such Liquidation Proceeds were received.” (PSA § 1.01).
(A)

Liquidation Proceeds

The PSA defines Liquidation Proceeds, in relevant part, as:
All cash amounts … received by the Master Servicer or
the Special Servicer in connection with: … the
liquidation of a Mortgaged Property or other collateral
constituting security for a Defaulted Mortgage Loan,
through trustee’s sale, foreclosure sale, REO
Disposition or otherwise, exclusive of any portion
thereof required to be released to the related Mortgagor
in accordance with applicable law and the terms and
conditions of the related Mortgage Note and Mortgage[.]
(PSA § 1.01).
(B)

Purchase Price

The PSA defines Purchase Price, in relevant part, as:
With respect to any Mortgage Loan or REO Loan to be
purchased by a Mortgage Loan Seller pursuant to the
applicable Mortgage Loan Purchase Agreement, by the
Majority Subordinate Certificateholder, the Companion
Holder or the Special Servicer … or by the Depositor,
the Special Servicer, the Majority Subordinate
Certificateholder or the Master Servicer … , a cash price
equal to the outstanding principal balance of such
Mortgage Loan or REO Loan, as of the date of the
purchase, together with [i] all accrued and unpaid
interest on such Mortgage Loan or REO Loan at the
related Mortgage Rate to but not including the Due Date
3

The PSA does not define the term Liquidation Expenses.

6

in the Collection Period of purchase plus any accrued
interest on [Principal & Interest] Advances made with
respect to such Mortgage Loan, [ii] all related and
unreimbursed Servicing Advances plus any accrued
and unpaid interest thereon, [iii] any reasonable costs
and expenses, including, but not limited to, the cost of
any enforcement action, incurred by the Master
Servicer, the Special Servicer or the Trust Fund in
connection with any such purchase by a Mortgage Loan
Seller … and [iv] any other Additional Trust Fund
Expenses in respect of such Mortgage Loan … , or in the
case of any Loan Pair, the purchase price specified in
the Intercreditor Agreement; provided that the Purchase
Price shall not be reduced by any outstanding [Principal
& Interest] Advance.
(PSA § 1.01).
ii.

Penalty Interest

The PSA defines Penalty Interest as:
With respect to any Mortgage Loan or Companion Loan
(or successor REO Loan), any amounts collected
thereon, other than late payment charges, Additional
Interest, Prepayment Premiums or Yield Maintenance
Charges, that represent penalty interest (arising out of
a default) in excess of interest on the Stated Principal
Balance of such Mortgage Loan or Companion Loan (or
successor REO Loan) accrued at the related Mortgage
Rate.
(PSA § 1.01).
iii.

REO Loan

The PSA defines REO Loan as:
The Mortgage Loan deemed for purposes hereof to be
outstanding with respect to each REO Property to the
extent of the Trust Fund’s interest therein. …
Collections in respect of each REO Loan … shall be
treated: first, as a recovery of Nonrecoverable Advances
and Unliquidated Advances … with respect to such REO
Loan … ; second, as a recovery of accrued and unpaid
interest on such REO Loan at the related Mortgage Rate
7

to but not including the Due Date in the Collection
Period of receipt … ; third, as a recovery of principal of
such REO Loan to the extent of its entire unpaid
principal balance; and fourth, in accordance with the
normal servicing practices of the Master Servicer, as a
recovery of any other amounts due and owing in respect
of such REO Loan, including, without limitation,
(i) Yield Maintenance Charges, Prepayment Premiums
and Penalty Interest and (ii) Additional Interest and
other amounts, in that order.
(PSA § 1.01). The definition includes a list of priority for the allocation of funds
collected on the REO Loan (the “REO Loan Waterfall”).
iv.

Yield Maintenance Charges

The PSA defines Yield Maintenance Charge, in relevant part, as:
Payments paid or payable, as the context requires, on a
Mortgage Loan as the result of a Principal Prepayment
thereon, not otherwise due thereon in respect of
principal or interest, which have been calculated … to
compensate the holder for reinvestment losses based on
the value of an interest rate index at or near the time of
prepayment.
(PSA § 1.01).
b.

Section 3.02: Collection of Mortgage Loan Payments

The PSA details the Special Servicer’s (i.e., CWC’s) obligation to collect
payments for various types of mortgages, including Mortgage Loans,
Companion Loans, and REO Loans (of which the Stuy Town mortgage was one).
Section 3.02 includes a detailed waterfall for distribution of funds collected on
Mortgage Loans and Companion Loans. (PSA § 3.02(b)). For REO Loans, by
contrast, amounts collected are “deemed to be applied in accordance with the
definition thereof.” (Id.). In other words, for the allocation of funds collected on

8

an REO Loan, the PSA refers back to the waterfall contained within the REO
Loan definition.
c.

Section 3.04(e): Gain-on-Sale Reserve Account

Under Section 3.04(e) of the PSA, the paying agent — Wells Fargo Bank,
N.A. — is required to establish and maintain a Gain-on-Sale Reserve Account
on behalf of the Trustee for the benefit of the certificateholders. (PSA § 3.04(e)).
The provision further states that, “[u]pon the disposition of any REO Property
in accordance with Section 3.09 or Section 3.18, the Special Servicer will
calculate the Gain-on-Sale Proceeds, if any, realized in connection with such
sale and remit such funds to the Paying Agent for deposit into the Gain-on-Sale
Reserve Account.” (Id.).
d.

Section 3.11(d): Servicing Compensation

Section 3.11 of the PSA provides for several forms of compensation for
CWC. Subsection (d) reads as follows:
Additional servicing compensation in the form of: (i) all
late payment charges, Penalty Interest received on or
with respect to Specially Serviced Mortgage Loans
actually collected that, with respect to late payment
charges and penalty charges, accrued during the time
that the related Mortgage Loan was a Specially Serviced
Mortgage Loan, (ii) one hundred percent (100%) of any
assumption application fees and assumption fees with
respect to any Specially Serviced Mortgage Loan …, and
(iii) modification fees collected on all Mortgage Loans or
Companion Loans …, in each case to the extent actually
paid by the related Mortgagor, shall be retained by the
Special Servicer or promptly paid to the Special Servicer
by the Master Servicer and shall not be required to be
deposited in the Certificate Account[.]
(PSA § 3.11(d)).
9

e.

Section 3.18: Resolution of Defaulted Mortgage Loans
and REO Properties

Finally, Section 3.18 of the PSA sets forth conditions for the sale or
purchase of a Mortgage Loan or an REO Property. It states, in relevant part:
The amount paid for a Defaulted Mortgage Loan … or
related REO Property … purchased under this
Agreement shall be deposited into the Certificate
Account, or if applicable, applied in accordance with the
related Intercreditor Agreement (except that portion of
any purchase price constituting Gain-on-Sale Proceeds
which shall be deposited in the Gain-on-Sale Reserve
Account).
(PSA § 3.18(l)).
B.

Procedural Background
On December 17, 2015, Petitioner U.S. Bank National Association (“U.S.

Bank”) filed a Petition for Instructions in the Administration of Certain Trusts
in the District Court for the Second Judicial District of Minnesota. (See
generally Pet.). It sought instructions on the proper construction of the
operative agreements at issue here, including the PSA. (Id.). It framed the
relevant question as:
whether — in connection with the sale of REO
Property — (i) Section 3.11(d) [of the PSA] requires that
Penalty Interest be calculated and paid to the Special
Servicer before the calculations and actions under
Section 3.18(l) [of the PSA] are completed (as [CWC]
contends); or (ii) Section 3.18(l) alone controls the
allocation of sale proceeds from REO Property (as
Appaloosa contends).
(Id. at ¶ 50).
On February 24, 2016, CWC moved to dismiss the Petition on
jurisdictional, mootness, and forum non conveniens grounds, which motion the
10

Minnesota state court denied. (Not. Rem. ¶ 7). On July 22, 2016, Freddie Mac
removed the case to the United States District Court for the District of
Minnesota. (Dkt. #1). Freddie Mac thereafter moved to transfer the case to
this Court, which United States District Judge Donovan W. Frank approved in
an Opinion and Order dated March 14, 2017. (Dkt. #53, 111). 4
On June 30, 2017, Appaloosa moved, and CWC and the GSEs
cross-moved, for judgment on the pleadings. (Dkt. #169-179). Appaloosa
argued that the PSA unambiguously requires that all Gain-on-Sale Proceeds be
delivered to certificateholders prior to the payment of any Penalty Interest to
CWC or Yield Maintenance Charges to the GSEs. CWC and the GSEs, for their
part, claimed that the PSA unambiguously establishes that Penalty Interest
and Yield Maintenance Charges must be paid out before the transfer of
Gain-on-Sale Proceeds into the Gain-on-Sale Reserve Account. The parties
filed their opposition papers on August 4, 2017 (Dkt. #181-184), and their
replies on September 1, 2017 (Dkt. #185-188).

4

In his Opinion, Judge Frank commented in passing on the need vel non for witness
testimony in this case. He noted that, “[i]n this contract interpretation case, … the
Court doubts whether much, if any, witness testimony will be needed to interpret the
PSA and provide instruction to the Trustee in response to the Petition.” In the Matter of
the Trs. Established Under the Pooling and Servicing Agreements, 241 F. Supp. 3d 905,
928 (D. Minn. 2017). This Court understands Judge Frank’s comment to have been
made for the limited purpose of addressing one of the factors — convenience of potential
witnesses — relevant to Freddie Mac’s motion to transfer venue. For that reason, and
because the comment did not contain a specific holding as to the need for discovery in
this case, the Court does not consider Judge Frank’s comment to be law of the case on
that issue.

11

DISCUSSION
A.

Applicable Law
Courts apply the same procedure to evaluate motions for judgment on

the pleadings under Rule 12(c) as for motions to dismiss under Rule 12(b)(6).
Altman v. J.C. Christensen & Assoc’s, Inc., 786 F.3d 191, 193 (2d Cir. 2015);
Johnson v. Rowley, 569 F.3d 40, 43 (2d Cir. 2009). This procedure requires
courts to “draw all reasonable inferences in [the non-movant’s] favor, assume
all well-pleaded factual allegations to be true, and determine whether they
plausibly give rise to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648
F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted) (quoting Selevan
v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009)). The non-movant is
entitled to relief if he or she alleges “enough facts to state a claim to relief that
is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007);
see also In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (“While
Twombly does not require heightened fact pleadings of specifics, it does require
enough facts to nudge [the non-movant’s] claims across the line from
conceivable to plausible.” (internal quotation marks and citation omitted)).
Motions for judgment on the pleadings are “particularly appropriate in
breach of contract cases involving legal interpretations of the obligations of the
parties.” In re Trusteeships Created by Tropic CDO I Ltd., 92 F. Supp. 3d 163,
171 (S.D.N.Y. 2015) (quoting VoiceAge Corp. v. RealNetworks, Inc., 926 F. Supp.
2d 524, 529 (S.D.N.Y. 2013)). In interpreting a contract, the Court’s primary
objective “is to give effect to the intent of the parties as revealed by the
12

language of their agreement.” Compagnie Financiere de CIC et de L’Union
Europeenne v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 232 F.3d 153, 157 (2d
Cir. 2000). “The words and phrases in a contract 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.” Chesapeake Energy Corp. v. Bank of N.Y. Mellon
Tr. Co., N.A., 773 F.3d 110, 114 (2d Cir. 2014) (internal quotation marks,
citation, and alterations omitted).
“When analyzing the meaning of a contractual provision, a threshold
question the Court [must] address is whether the contract is ambiguous.” U.S.
Bank, N.A. v. Triaxx Asset Mgmt. LLC, No. 16 Civ. 8507 (AJN), 2017 WL
3610584, at *7 (S.D.N.Y. July 26, 2017); see also Alexander & Alexander
Servs., Inc. v. These Certain Underwriters at Lloyd’s, London, England, 136 F.3d
82, 86 (2d Cir. 1998). If the contract is unambiguous, its meaning is a
question of law that the Court may decide on a motion for judgment on the
pleadings. Id. However, where the contract is ambiguous, “the Court must
examine extrinsic evidence of the parties’ intent — which means, in this
posture, that the Court would have to deny both cross-motions [for judgment
on the pleadings] and proceed to discovery.” Neopharm Ltd. v. Wyeth-Ayerst
Int’l LLC, 170 F. Supp. 3d 612, 615 (S.D.N.Y. 2016).
Ambiguity exists where a contract’s terms “could suggest more than one
meaning when viewed objectively by a reasonably intelligent person who has
examined the context of the entire integrated agreement and who is cognizant
of the customs, practices, usages[,] and terminology as generally understood in
13

the particular trade or business.” Law Debenture Tr. Co. of N.Y. v. Maverick
Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010) (internal quotation marks
omitted). By contrast, a contract “is unambiguous when [the contract
language] has ‘a definite and precise meaning, unattended by danger of
misconception in the purport of the [contract] itself, and concerning which
there is no reasonable basis for a difference of opinion.’” Revson v. Cinque &
Cinque, P.C., 221 F.3d 59, 66 (2d Cir. 2000) (quoting Hunt Ltd. v. Lifschultz
Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989)). “[W]hen the terms of a
written contract are clear and unambiguous, the intent of the parties must be
found within the four corners of the contract[.]” Howard v. Howard, 740
N.Y.S.2d 71, 71 (2d Dep’t 2002) (citations omitted).
New York courts emphasize that “[f]orm should not prevail over
substance and a sensible meaning of words should be sought.” Kass v. Kass,
91 N.Y.2d 554, 566 (1998) (quoting Atwater & Co. v. Panama R.R. Co., 246 N.Y.
519, 524 (1927)). And under New York law, a contract may not be found to be
ambiguous merely because litigants present alternative interpretations.
Maverick Tube Corp., 595 F.3d at 467. Rather, ambiguity requires that “the
provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have two or more different meanings.” Goldman Sachs
Grp., Inc. v. Almah LLC, 924 N.Y.S.2d 87, 90 (1st Dep’t 2011) (internal
quotation marks and citation omitted); see also Broder v. Cablevision Sys.
Corp., 418 F.3d 187, 197 (2d Cir. 2005).

14

B.

Analysis
1.

Overview

It is not undue flattery to note that the parties have articulated the
strongest and most cogent arguments for their respective positions, and the
Court takes this opportunity to thank all sides for the intellectual rigor evident
from their briefing. That said, as the remainder of this section evidences, even
the most well-thought-out arguments in this litigation leave key questions
unanswered and obvious elisions in logic. Each side has canons of
construction to cite, and cases to support the general propositions of contract
law they seek to advance. But neither side presents an interpretation of the
PSA and related contracts that addresses, much less harmonizes, all of the
provisions that are implicated by this case.
Broadly speaking, the parties’ arguments respond to the two questions
initially presented by the Trustee to the Minnesota state court. The Court
considers first the coextensive arguments of CWC and the GSEs. 5 The contract
analysis is easy, they say, with the key PSA provision being Section 3.02(a)-(b),
which addresses the collection of REO Loan proceeds, and Section 1.01, which
describes the REO Loan Waterfall. The occurrence of one or more events of
default led Stuy Town to become an REO property, and thus the proceeds of its
sale in 2015 must be allocated using the REO Loan Waterfall. What is more, it
is claimed, this history entitles CWC to special servicer compensation in the

5

The Court generally dispenses with pinpoint cites to the parties’ submissions, inasmuch
as certain arguments are made repeatedly throughout the supporting and opposing
briefs.

15

form of Penalty Interest pursuant to Section 3.11(d), and entitles the GSEs to
Yield Maintenance Charges pursuant to Section 2.3(b) of the Notes of the Stuy
Town Senior Loan — two items that are explicitly provided for in the fourth
step of the REO Loan Waterfall.
According to CWC and the GSEs, the PSA’s Gain-on-Sale Proceeds
provisions are merely a method of calculating fees. To the extent that
Gain-on-Sale Proceeds result at all from the Stuy Town transaction, they are to
be segregated and distributed as part of the “other amounts” category,
contained at the last clause of the last step of the REO Loan Waterfall. To
conclude otherwise, CWC and the GSEs argue, would impermissibly read out
multiple provisions of the PSA, while reading in language into REO sale
provisions that simply is not there. In the same vein, CWC and the GSEs
anticipate, and attempt to rebuff, other purported limitations on their recovery
advanced by Appaloosa, including arguments that Penalty Interest is limited to
funds paid directly by the Borrower; that CWC’s entitlement to Penalty Interest
ended with the entry of the Foreclosure Judgment in June 2010; or that Yield
Maintenance Charges can only be realized from funds paid by the Mortgagor.
While the arguments of CWC and the GSEs have the benefit of
harmonizing more (and kneecapping fewer) provisions of the PSA, they are not
fully satisfying. 6 First, and perhaps foremost, the arguments give too short a
shrift to the PSA’s provisions concerning Gain-on-Sale Proceeds. CWC
6

These arguments also appear to have been more consistent over the length of the
parties’ litigation efforts. (See CWC Reply 1 (describing manner in which Appaloosa’s
arguments regarding the import of the REO Loan Waterfall have evolved over time)).

16

suggests that the definition of Gain-on-Sale Proceeds is simply a “catchall”
definition, a method of calculating amounts that are eligible to be deposited in
the Gain-on-Sale Reserve Account. But this tautology does nothing to aid the
Court in ascertaining the manner in which Gain-on-Sale Proceeds are
calculated, or the timing and priority of these calculations. And while no one is
disputing the inattention of the PSA’s drafters in this area — for example, the
absence of a Gain-on-Sale Proceeds Waterfall, or the failure to include
Gain-on-Sale Proceeds in either of the REO and Mortgage Waterfalls — it
strikes the Court as curious that a term defined and referenced in several
places in the PSA would be shunted into an undefined category of “other
expenses” in the allocation priority.
CWC notes that proceeds remaining after the other categories listed in
the Waterfall were paid in full were “allocated as Gain-on-Sale Proceeds.”
(CWC Br. 22 (emphasis added)). That proves the Court’s point: If the
Gain-on-Sale Proceeds provisions specify a method of calculation, that method
should have been used to determine the amount of proceeds subject to this
definition. Indeed, neither side can explain satisfactorily the method of
calculating Gain-on-Sale Proceeds, largely because of the PSA’s failure to define
the term “Liquidation Expenses.” The Court says this not to fault the parties,
but to explain its hesitation in accepting CWC’s catchall-definition argument.
Additionally, because CWC has not rebutted at a more granular level
Appaloosa’s proffered mode of calculating Gain-on-Sale Proceeds, the Court is
left to contemplate a situation in which a substantial Gain-on-Sale Proceeds
17

figure, which in theory is to be placed in a segregated account, will never be
segregated and will never be attained. CWC and the GSEs have suggested that
the penalties and fees they seek should be considered part of “Liquidation
Expenses.” On this point, too, the Court is skeptical; while inclusion of these
figures would go a long way towards reconciling the parties’ positions, the
Court imagines that such inclusion would have been addressed in the
definitions section of the PSA.
The Court next turns to Appaloosa’s arguments, which are presented
with equal skill and confidence. Focusing in particular on Section 3.04(e) of
the PSA, Appaloosa posits that upon the sale of Stuy Town, CWC was obligated
under the PSA to calculate Gain-on-Sale Proceeds 7 — which it estimates to
exceed $600 million — segregate the proceeds in a separate account, and then
remit them to certificateholders in the C30 Trust to offset past and future
losses from other assets held by the Trust. Importantly for CWC and the GSEs,
Gain-on-Sale Proceeds as defined by Appaloosa includes neither Penalty
Interest nor Yield Maintenance Charges. Perhaps more importantly, Appaloosa

7

Appaloosa explains the calculation process as follows:
Gain-on-Sale Proceeds are defined in Section 1.01 of the PSA as
the excess of (i) the “Liquidation Proceeds” net of any “Liquidation
Expenses” over (ii) the “Purchase Price.” “Liquidation Proceeds” are
the proceeds received in connection with the liquidation of a
mortgaged property, “Liquidation Expenses” are the actual
out-of-pocket expenses incurred by the C30 Trust in liquidating
the mortgaged property, and the “Purchase Price” is generally equal
to the outstanding principal balance of the mortgage loan, plus any
accrued but unpaid interest on the mortgage loan, plus any
servicing advances that have been made on the mortgage loan and
are still owed to the Master Servicer or Special Servicer.
(Appaloosa Br. 8 (internal citations omitted)).

18

contends that the REO Loan Waterfall either has no application to the Stuy
Town sale, or is considered only after the segregation of the Gain-on-Sale
Proceeds. (Compare Appaloosa Br. 23 (arguing that the REO Loan Waterfall
“works differently where funds ‘collected’ while the loan is being serviced are
involved, rather than proceeds of a sale that constitute Gain-on-Sale
Proceeds”), with Appaloosa Opp. 1-2 (“[CWC’s and the GSEs’] strained
interpretation of the PSA rests almost entirely on a ‘waterfall’ contained in the
contract’s definition of ‘REO Loan’ that, in actuality, is completely irrelevant. …
[T]he Gain-on-Sale Proceeds are required to be calculated and segregated in a
separate account before the balance of sale proceeds passes through the REO
Loan waterfall[.]”)).
With respect to the individual fees claimed by its adversaries, Appaloosa
explains that neither is implicated by the Stuy Town sale. In particular, it
contends that CWC is not entitled to Penalty Interest because the language in
Section 3.11(d) requiring the proceeds to be “actually collected” means that the
proceeds must be paid by the Borrower. As a fallback position, Appaloosa
argues that any entitlement by CWC to Penalty Interest ended on June 21,
2010, when a judgment of foreclosure was entered against the Stuy Town
Senior Loan. For similar reasons, Appaloosa argues that the GSEs are not
entitled to Yield Maintenance Charges, which, as it construes Section 2.3(b) of
the Notes of the Stuy Town Senior Loan, can only be assessed on principal
payments made by the Mortgagor. (See, e.g., Appaloosa Br. 31 (“Because there
was no Principal Prepayment for Stuy Town, there are no Yield Maintenance
19

Charges. And, since the Fees claimed by the GSEs are not Yield Maintenance
Charges as that term is defined in the PSA, the GSEs are not entitled to
receive them under the waterfalls in the definition of REO Loan and
Section 4.01(b) of the PSA, which means the central basis for their objection
falls apart.” (emphasis in original))). At base, claims Appaloosa, “once Gain-onSale Proceeds have been calculated in accordance with the PSA, the respective
amounts attributable to Penalty Interest, Yield Maintenance Charges and
Prepayment Premiums for the particular sale of REO Property at issue will all
equal zero.” (Appaloosa Opp. 12).
Appaloosa’s contract construction has the advantage of addressing,
head-on, the Gain-on-Sale provisions that have caused such consternation to
its adversaries. But in other respects, Appaloosa offers a whack-a-mole
interpretation of the PSA that is too disjointed to be useful to the Court. For
starters, accepting Appaloosa’s construction of the PSA would severely restrict
(and potentially vitiate) multiple provisions, in derogation of canons of
construction and New York law. Appaloosa’s construction seemingly overlooks
or misinterprets provisions: Its reading of the REO Loan Waterfall provisions,
for example, is refuted by the existence of separate Mortgage Loan waterfall
and REO Revenue provisions. The Court is also struck by certain logical
contortions in which Appaloosa engages in order to argue for the invalidation of
Penalty Interest and Yield Maintenance Charges in this case. Finally, the
Court is concerned that Appaloosa is ascribing undue significance to

20

Gain-on-Sale Proceeds — a term that is at best partly defined, and whose
actual role in the PSA currently eludes the Court.
And therein lies the problem: No matter how well-presented the parties’
arguments, they do not adequately address the Gain-on-Sale provisions.
Indeed, to the Court, attempting to understand Gain-on-Sale Proceeds on this
record recalls the parable of the blind men and the elephant, in which
incomplete perspectives result in incorrect interpretations. See MASNAWI OF
JALALUDDIN RUMI. The Gain-on-Sale provisions are in the PSA, and presumably
serve some function, but their utility (or superfluity) in this setting cannot be
resolved on the documents currently before the Court. As set forth in the
remainder of this Opinion, both sides have advanced reasonable arguments for
their constructions of the PSA. For this reason, the Court cannot grant any
party’s motion for judgment on the pleadings.
2.

Relevant Provisions in the PSA Are Ambiguous

As noted, the present dispute revolves around the allocation of proceeds
from the sale of an REO Property. The first issue before the Court is whether
the PSA clearly and unambiguously establishes, as CWC and the GSEs claim,
that Penalty Interest and Yield Maintenance Charges are to be allocated before
the Gain-on-Sale Proceeds are distributed to certificateholders; or, as
Appaloosa contends, that the Gain-on-Sale Proceeds are allocated to
certificateholders prior to and separate from the payment, if any, of Penalty
Interest and Yield Maintenance Charges.

21

The Court finds that the PSA is ambiguous as to the priority of payments
upon the sale of an REO Property. First, it is unclear whether the definition of
Gain-on-Sale Proceeds in Section 1.01 of the PSA allows for Penalty Interest
and Yield Maintenance Payments to be deducted as Liquidation Expenses.
Second, the REO Loan Waterfall does not reference either Gain-on-Sale
Proceeds or Liquidation Proceeds, creating ambiguity regarding its application
upon the sale of an REO Property. Third, the tension between Section 3.18(l),
which governs the allocation of Gain-on-Sale Proceeds, and the REO Loan
Waterfall exacerbates the ambiguity surrounding the allocation of proceeds
from the sale of an REO Property.
a.

The PSA’s Definition of Gain-on-Sale Proceeds Is
Ambiguous

Ambiguity emerges, in the first instance, from the very definition of
Gain-on-Sale Proceeds. The PSA defines Gain-on-Sale Proceeds as “the excess
of (i) Liquidation Proceeds of the Mortgage Loan or related REO Property net of
any related Liquidation Expenses, over (ii) the Purchase Price for such
Mortgage Loan on the date on which such Liquidation Proceeds were received.”
(PSA § 1.01). The PSA separately defines all of the capitalized terms within the
Gain-on-Sale Proceeds definition except the term Liquidation Expenses.
Without that definition, the calculation of Gain-on-Sale Proceeds — which is
central to the parties’ dispute — is necessarily rendered ambiguous.
Appaloosa argues that “the ordinary meaning of the term ‘Liquidation
Expenses’ is limited to actual out-of-pocket expenses, such as appraisal and
attorneys’ fees, incurred in connection with ‘liquidating’ or selling the
22

property.” (Appaloosa Br. 15). In its view, the definition of Gain-on-Sale
Proceeds unambiguously excludes Penalty Interest and Yield Maintenance
Charges from the relevant calculus. Yet the term Liquidation Expenses itself
does not demand such a limited reading, and Appaloosa has failed to persuade
the Court — either with reference to other contractual provisions or with
evidence of customary use — to adopt such a narrow reading. Instead, the
Court is left unable to determine whether the parties intended for Gain-on-Sale
Proceeds to be calculated independently of Penalty Interest and Yield
Maintenance Charges.
That ambiguity is relevant to the parties’ present dispute. If Liquidation
Expenses were read to include Penalty Interest and Yield Maintenance
Charges, there would be no question that CWC and the GSEs would be entitled
to Penalty Interest and Yield Maintenance Charges before any Gain-on-Sale
Proceeds would be distributed to certificateholders. If, by contrast, Liquidation
Expenses were read more narrowly so as to exclude Penalty Interest and Yield
Maintenance Charges, the proper allocation of the disputed funds becomes less
clear. If Gain-on-Sale Proceeds may be calculated independently from Penalty
Interest and Yield Maintenance Charges, the question becomes one of priority,
i.e., whether the PSA unambiguously establishes that payment of Penalty
Interest and Yield Maintenance Charges takes precedence over the distribution
of Gain-on-Sale Proceeds. The Court now turns its attention to that very
question.

23

b.

The PSA Is Ambiguous as to the Priority, If Any,
Accorded to Gain-on-Sale Proceeds

The ambiguity surrounding the distribution of Gain-on-Sale Proceeds
extends to the priority, if any, to be accorded to Gain-on-Sale Proceeds. To be
sure, the PSA instructs the Paying Agent to place Gain-on-Sale Proceeds into a
separate account for the benefit of the certificateholders. Section 3.04(e) states
that the Paying Agent “shall establish … [a] Gain-on-Sale Reserve Account …
[that] shall be maintained as a segregated account[.]” (PSA § 3.04(e)). Upon
the disposition of any REO Property, CWC was required to “calculate the
Gain-on-Sale Proceeds, if any, … and remit such funds to the Paying Agent for
deposit into the Gain-on-Sale Reserve Account.” (Id.). And, in Section 3.18(l),
the PSA notes that “[t]he amount paid for a … REO Property … shall be
deposited into the Certificate Account … (except that portion of any purchase
price constituting Gain-on-Sale Proceeds which shall be deposited in the
Gain-on-Sale Reserve Account).” (PSA § 3.18(l)).
Absent from these provisions is any discussion of the timing of the
remittance of Gain-on-Sale Proceeds into the dedicated account, or the priority
accorded to Gain-on-Sale Proceeds relative to Penalty Interest and Yield
Maintenance Charges. Though the PSA specifies that Gain-on-Sale Proceeds
must be segregated from other funds and placed in the Gain-on-Sale Reserve
Account, it is unclear whether the parties intended for these provisions to
require Gain-on-Sale Proceeds to be calculated and deposited in the dedicated
account before the payment of Yield Maintenance Charges or Penalty Interest.
It is also unclear whether funds that have been deposited into the Gain-on-Sale
24

Reserve Account could be used to cover Yield Maintenance Charges or Penalty
Interest before distribution to certificateholders. For this reason, the Court
cannot find as a matter of law — as Appaloosa urges the Court to do — that
upon the sale of an REO Property, Gain-on-Sale Proceeds immediately must be
deposited into the Gain-on-Sale Reserve Account for the exclusive benefit of
certificateholders.
c.

The PSA Is Ambiguous as to Whether the REO Loan
Waterfall Applies to Gain-on-Sale Proceeds

Nor can the Court hold as a matter of law — as CWC and the GSEs
argue — that Penalty Interest and Yield Maintenance Charges receive priority
over Gain-on-Sale Proceeds. To be sure, the PSA contains an REO Loan
Waterfall. Yet the PSA’s plain language is ambiguous as to whether and how
that waterfall was meant to apply in the context of the sale of an REO Property.
Section 3.02(b) of the PSA states that “[a]mounts collected on an REO Loan
shall be deemed to be applied in accordance with the definition thereof.” (PSA
§ 3.02(b)). The definition of REO Loan, in turn, states that “[c]ollections in
respect of each REO Loan” are to be distributed as follows:
[F]irst, as a recovery of Nonrecoverable Advances and
Unliquidated Advances … with respect to such REO
Loan … ; second, as a recovery of accrued and unpaid
interest on such REO Loan at the related Mortgage Rate
to but not including the Due Date in the Collection
Period of receipt … ; third, as a recovery of principal of
such REO Loan to the extent of its entire unpaid
principal balance; and fourth, in accordance with the
normal servicing practices of the Master Servicer, as a
recovery of any other amounts due and owing in respect
of such REO Loan, including, without limitation,
(i) Yield Maintenance Charges, Prepayment Premiums
25

and Penalty Interest and (ii) Additional Interest and
other amounts, in that order.
(Id. at § 1.01).
What remains unclear is whether this waterfall applies to REO sales that
result in Gain-on-Sale Proceeds. The waterfall does not specifically mention
Gain-on-Sale Proceeds or Liquidation Proceeds. The absence of reference to
Gain-on-Sale Proceeds is conspicuous in light of the special treatment
elsewhere accorded to Gain-on-Sale Proceeds. (See PSA §§ 3.04(e), 3.18(l)).
The failure to reference Liquidation Proceeds is equally noteworthy given that,
in another waterfall contained in a different PSA provision, the parties explicitly
reference Liquidation Proceeds. Indeed, in Section 3.02(b), which governs
allocation of funds collected from Mortgage Loans and Companion Loans, the
relevant waterfall covers “[a]ll amounts collected … in the form of payments
from Mortgagors, and/or guaranties, Liquidation Proceeds … or Insurance
Proceeds[.]” (PSA § 3.02(b)). The fact that the REO Loan Waterfall does not
reference Liquidation Proceeds or Gain-on-Sale Proceeds makes its application
to the sale of REO Properties ambiguous.
That ambiguity is exacerbated by the fact that “other amounts” appears
at the end of a list that includes Yield Maintenance Charges, Prepayment
Premiums, Penalty Interest, and Additional Interest. Those payments are
arguably of a different kind than Gain-on-Sale Proceeds, as they accrue in the
absence of Liquidation Proceeds. The incongruity between the items listed in
the fourth step of the waterfall and Gain-on-Sale Proceeds, and the waterfall’s
lack of mention of Gain-on-Sale Proceeds or Liquidation Proceeds, precludes
26

this Court from finding as a matter of law that “other amounts” was intended
to cover Gain-on-Sale Proceeds.
3.

The Parties’ Competing Interpretations Are Reasonable

Having found the relevant contractual provisions to be ambiguous, the
Court returns to the parties’ competing interpretations. The Court’s inquiry
here is limited: It assesses only the reasonableness of the moving parties’
interpretations. That binary analysis ends with a finding (or not) of
reasonableness.
a.

CWC’s and the GSEs’ Interpretation of the Relevant
Provisions Is Reasonable

CWC and the GSEs advance a cogent interpretation of the PSA. They
begin by noting that, under Section 3.02(b), “[a]mounts collected on any REO
Loan shall be deemed to be applied in accordance with the definition thereof.”
(CWC Br. 19 (quoting PSA § 3.02(b)); GSE Br. 11 (quoting same)). They then
point to the REO Loan Waterfall that calls for funds to be distributed, first, as a
recovery of Nonrecoverable Advances and Unliquidated Advances; second, as a
recovery of accrued and unpaid interest; third, as a recovery of principal; and
fourth, as a recovery of “any other amounts due and owing in respect of such
REO Loan, including, without limitation, (i) Yield Maintenance Charges,
Prepayment Premiums[,] and Penalty Interest and (ii) Additional Interest and
other amounts, in that order.” (CWC Br. 20 (quoting PSA § 1.01); GSE Br. 11
(quoting same)). In their view, Section 3.02(b) and the definition of REO Loan
in Section 1.01 establish that Yield Maintenance Charges and Penalty Interest
receive priority over Gain-on-Sale Proceeds. (CWC Br. 20 (“[U]ntil every
27

category listed in the REO [Loan] Waterfall gets paid, no gain can be realized
and made available for deposit into the Gain-on-Sale Reserve Account.”); GSE
Br. 11-12 (“Section 3.02(b) of the C30 PSA, coupled with the definition of REO
Loan, required that proceeds from the sale [of Stuy Town] be allocated to Yield
Maintenance Charges prior to any allocation to Gain-on-Sale.”)).
CWC and the GSEs assert that their rights to Penalty Interest and Yield
Maintenance Charges are unequivocal under the terms of the PSA. CWC notes
that, under Section 3.11(d) of the PSA, CWC is entitled to receive as additional
servicing compensation “all late payment charges [and] Penalty Interest
received on or with respect to Specially Serviced Mortgage Loans actually
collected,” and that Penalty Interest “shall be retained by the Special Servicer
or promptly paid to the Special Servicer by the Master Servicer and shall not be
required to be deposited into the Certificate Account.” (CWC 22-23 (quoting
PSA § 3.11(d)) (emphasis omitted)). The GSEs, for their part, point to the PSA’s
definition of Yield Maintenance Charges and to Section 2.3(b) of the Notes,
which “provides that, if the borrower defaults and the Senior Note is
accelerated and declared due and payable, an additional prepayment fee, called
a Yield Maintenance Premium, shall become due and payable in an amount
calculated pursuant to a formula described therein.” (GSE Br. 9 (citing Notes
§ 2.3(b))).
CWC’s and the GSEs’ reading of the contractual provisions is reasonable,
and Appaloosa’s claims to the contrary do not detract from that conclusion.
Appaloosa claims, for example, that CWC’s and the GSEs’ reliance on the REO
28

Loan Waterfall renders their interpretation unreasonable. (Appaloosa Opp. 12). Yet the REO Loan Waterfall, by its terms, applies to “[c]ollections in respect
of each REO Loan.” (PSA § 1.01). “Collections in respect of each REO Loan”
may quite reasonably be read to encompass proceeds from the sale of an REO
Property. Appaloosa next suggests that interpreting the reference to “other
amounts” in the REO Loan Waterfall so as to include Gain-on-Sale Proceeds
would “fundamentally misread the [text].” (Appaloosa Opp. 8). Not so.
Although this Court has found the phrase “other amounts” to be ambiguous, it
does not follow that CWC’s and the GSEs’ interpretation of the REO Loan
Waterfall is unreasonable. “Other amounts” may reasonably be read to cover
all REO Loan payments other than those specifically mentioned in the REO
Loan Waterfall. That includes Gain-on-Sale Proceeds.
Finally, Appaloosa contends that “[t]he interpretation advanced by CWC
and the GSEs … creates undoubted contractual surplusage by reading out of
the PSA virtually the entire definition of Gain-on-Sale Proceeds that
comprehensively governs the calculation of those amounts.” (Appaloosa
Opp. 2). Appaloosa again misses the mark. CWC’s and the GSEs’
interpretation does not ignore the definition of Gain-on-Sale Proceeds. It
merely places those proceeds below Penalty Interest and Yield Maintenance
Charges in the priority schedule. Indeed, CWC and the GSEs concede that
Gain-on-Sale Proceeds might be payable to certificateholders upon the sale of
an REO Property; they simply note that, under the REO Loan Waterfall, any

29

such payments may only occur after Penalty Interest and Yield Maintenance
Charges have been allocated. (CWC Br. 20; GSE Br. 11-12).
b.

Appaloosa’s Interpretation of the Relevant Provisions Is
Reasonable

The Court similarly finds Appaloosa’s interpretation of the PSA to be
reasonable. Appaloosa claims that, under the terms of the PSA, Gain-on-Sale
Proceeds are not covered by the REO Loan Waterfall, but instead must be
segregated and placed into a Gain-on-Sale Reserve Account, for the benefit of
certificateholders, upon the sale of an REO Property. Appaloosa’s
interpretation finds support in the express terms of the contract.
The Court begins, as does Appaloosa, with the provisions that deal
exclusively with Gain-on-Sale Proceeds. Under Section 3.04(e), the Paying
Agent is required to segregate Gain-on-Sale Proceeds from all other funds
following the sale of an REO Property. (PSA § 3.04(e)). That obligation is
reinforced by Section 3.18(l), according to which the “portion of any purchase
price constituting Gain-on-Sale Proceeds … shall be deposited in the
Gain-on-Sale Reserve Account.” (Id. at § 3.18(l)). Based on these provisions,
Appaloosa reasonably claims that “when the Special Servicer sold Stuy
Town … , it was required to determine whether any Gain-on-Sale Proceeds …
were realized from the sale and remit them to the Paying Agent to be deposited
into the Trusts’ Gain-on-Sale Reserve Accounts.” (Appaloosa Br. 14). As
Appaloosa notes, that obligation “is express and unconditional.” (Id. at 15).
Appaloosa then argues that Gain-on-Sale Proceeds are calculated
independently from Penalty Interest and Yield Maintenance Payments. It
30

points to the definition of Gain-on-Sale Proceeds, which states that
Gain-on-Sale Proceeds are “the excess of (i) Liquidation Proceeds of the
Mortgage Loan or related REO Property net of any related Liquidation
Expenses, over (ii) the Purchase Price for such Mortgage Loan on the date on
which such Liquidation Proceeds were received.” (PSA § 1.01). Appaloosa
reasonably claims that, because Liquidation Expenses typically refers only to
expenses incurred to effectuate the liquidation of property, it does not refer to
Penalty Interest or Yield Maintenance Charges. It follows, in light of
Sections 3.04(e) and 3.18(l), that CWC “must segregate, and the Paying Agent
must deposit into the … Gain-on-Sale Reserve Accounts, the cash received
from the sale of Stuy Town less out-of-pocket expenses incurred … [and] less
the ‘Purchase Price’ of the Senior Loan.” (Appaloosa Br. 15). Appaloosa
reasonably concludes that, “upon the sale of Stuy Town, the default interest
claimed by CWC [and the Yield Maintenance Charges claimed by the GSEs are]
not deducted from the Liquidation Proceeds for purposes of calculating the
Gain-on-Sale Proceeds.” (Id. at 19). CWC and the GSEs were therefore “not
entitled to divert any portion of those proceeds[.]” (Id.). Although the Court
need not, in this posture, decide whether Liquidation Expenses should be read
to exclude Penalty Interest or Yield Maintenance Charges, the Court does find
that such a reading is reasonable, and that Appaloosa’s arguments stemming
therefrom are similarly reasonable.
Finally, Appaloosa interprets the PSA to require that Gain-on-Sale
Proceeds be deposited directly into the Gain-on-Sale Reserve Account, before
31

any amounts are deducted for other payments under the REO Loan Waterfall.
It again points to Sections 3.04(e) and 3.18(l). This Court has already
explained that these provisions do not unambiguously establish Gain-on-Sale
Proceeds’ priority over Penalty Interest and Yield Maintenance Charges. But
Appaloosa’s reading, if not entirely persuasive, is reasonable. That is
particularly so given the REO Loan Waterfall’s lack of clarity as to whether it
applies to Gain-on-Sale Proceeds.
CWC’s and the GSEs’ arguments to the contrary fall short. They claim
that Appaloosa’s interpretation of the PSA renders moot Sections 3.04(a) and
3.05(a), which allow the Master Servicer to deposit all Liquidation Proceeds into
the Certificate Account and to withdraw Penalty Interest from the Certificate
Account following the sale of REO Property. Yet, as Appaloosa notes in its
reply brief, under Appaloosa’s interpretation of the PSA, “[b]oth provisions still
serve important purposes under the contract.” (Appaloosa Reply 6). The
provisions’ application is merely “curtailed by the more specific terms of
Sections 3.04(e) and 3.18(l) when Gain-on-Sale Proceeds have been realized
from the sale of an REO Property.” (Id.). Appaloosa’s interpretation of the PSA
limits the application of Sections 3.04(a) and 3.05(a), but it does not render
those sections superfluous.
CWC and the GSEs further claim that, under Appaloosa’s interpretation,
the definition of Gain-on-Sale Proceeds supplants the REO Loan Waterfall.
This, they claim, is unreasonable, and the Court must “reject Appaloosa’s
attempt to replace the operative REO Loan Waterfall with the definition of
32

Gain-on-Sale Proceeds.” (CWC Opp. 7). To support their claim, they point to
Bank of New York Trust v. Franklin Advisers, Inc., which held that “to construe
the Indenture to give a reasonable and effective meaning to all its terms
precludes a finding that § 9.1(e) [relied on by the shareholders] constitutes the
entire distribution plan for an Optional Redemption.” (CWC Opp. 7 (quoting
Franklin Advisors, 674 F. Supp. 2d 458, 465 (S.D.N.Y. 2009))). But what CWC
and the GSEs either fail to appreciate or simply fail to mention is that Franklin
Advisors was decided on a motion for summary judgment after the court found,
at the motion to dismiss stage, that at least one of the contract’s terms was
ambiguous. This Court has already found that the REO Loan Waterfall’s
application to Gain-on-Sale Proceeds is ambiguous. The Court therefore
cannot find that Appaloosa’s interpretation of the contract is unreasonable
because it reads the REO Loan Waterfall so as not to apply to Gain-on-Sale
Proceeds. The REO Loan Waterfall references neither Gain-on-Sale Proceeds
nor Liquidation Proceeds. While that does not mean that the Waterfall does
not apply to such funds, it does create space for Appaloosa to advance a
reasonable interpretation to the contrary.
This Court stated, in an unrelated matter, that “[i]t is a ‘cardinal
principal of contract construction[ ] that a document should be read to give
effect to all its provisions and to render them consistent with each other.’” Pig
Newton, Inc. v. Bds. of Dirs. of Motion Picture Indus. Pension Plan, 95 F. Supp.
3d 366, 382 (S.D.N.Y. 2015) (quoting Mastrobuono v. Shearson Lehman Hutton,
Inc., 514 U.S. 52, 63 (1995); citing Weeks Marine, Inc. v. Am. S.S. Owners Mut.
33

Prot. & Indem. Ass’n, Inc., 511 F. App’x 78, 80 (2d Cir. 2013) (summary order)).
Though Appaloosa’s reading of the PSA limits the reach of the REO Loan
Waterfall and Sections 3.04(a) and 3.05(a), it does not render any of the
provisions entirely superfluous. And the interpretation that it advances — that
Gain-on-Sale Proceeds are dealt with separately from other funds upon the sale
of an REO Property — can be read consistently with the other contractual
provisions. The Court therefore cannot find that Appaloosa’s interpretation is
unreasonable as a matter of law. 8
CONCLUSION
For the reasons referenced above, the parties’ cross-motions for
judgment on the pleadings are DENIED. The Clerk of Court is directed to
terminate Docket Entries 169, 173, and 176. The parties are hereby
ORDERED to file a Case Management Plan on or before March 30, 2018.
SO ORDERED.
Dated:

8

March 9, 2018
New York, New York

__________________________________
KATHERINE POLK FAILLA
United States District Judge

In their briefs, the parties address a secondary issue concerning the effect, if any, of the
Foreclosure Judgment on the accrual of Penalty Interest. Appaloosa claims that the
Foreclosure Judgment “expressly mandated that [Penalty Interest] would stop running
as of June 21, 2010, the date judgment was entered, and that post-judgment interest
would accrue thereafter at the legal rate.” (Appaloosa Br. 25). CWC rejects this claim,
arguing that the Foreclosure Judgment had no effect on the calculation of Penalty
Interest under the terms of the PSA. (See CWC Br. 32-35). Because the Court has
found Appaloosa’s interpretation of the PSA (under which CWC may not be entitled to
any Penalty Interest) to be reasonable, the Court declines at this juncture to reach the
secondary issue of the proper calculation of Penalty Interest.

34