In the Matter of the Trusts established under the Pooling and Servicing Agreements
Filing
284
OPINION AND ORDER: For the reasons detailed above, CWCs motion to dismiss the cross-claim filed by Appaloosa is GRANTED. The Clerk of Court is directed to terminate Docket Entry 244. The next pretrial conference in this matter will take place on Apr il 9, 2019, at 4:00 p.m. in Courtroom 618 of the Thurgood Marshall U.S. Courthouse, 40 Foley Square, New York, New York 10007. SO ORDERED. (Pretrial Conference set for 4/9/2019 at 04:00 PM in Courtroom 618, 40 Centre Street, New York, NY 10007 before Judge Katherine Polk Failla.) (Signed by Judge Katherine Polk Failla on 3/25/2019) (jca)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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
17 Civ. 1998 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
Broadly speaking, this action involves a dispute with CWCapital Asset
Management LLC (“CWC”) on one side, and Appaloosa Investment L.P.I. and
Palomino Master Ltd. (collectively, “Appaloosa”) on the other, 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”).
In Appaloosa’s view, a portion of the funds that are currently allocated to CWC
should instead be deposited into a Gain-on-Sale Reserve Account for the
benefit of Certificateholders. In March 2018, this Court denied CWC’s and
Appaloosa’s cross-motions for judgment on the pleadings, finding that the
governing agreements (and, in particular, the Pooling and Servicing Agreement
(“PSA”)) are ambiguous. Shortly thereafter, Appaloosa filed an Amended
Answer, in which it asserted a cross-claim against CWC. Before the Court is
CWC’s motion to dismiss the cross-claim for lack of standing. Here, unlike
those provisions discussed in the Court’s March 2018 Opinion and Order, the
relevant provisions of the PSA are unambiguous. For the reasons stated below,
the Court grants CWC’s motion.
BACKGROUND 1
The Court’s Opinion and Order of March 9, 2018, provides a thorough
review of the relevant facts of this case. See In re the Trusts Established under
the Pooling & Servicing Agreements, No. 17 Civ. 1998 (KPF), 2018 WL 1229702,
at *1 (S.D.N.Y. Mar. 9, 2018) (“PSA I”). As a result, this Court assumes the
parties’ familiarity with the underlying facts and will only discuss what is
necessary to resolve the instant motion.
On April 11, 2018, approximately one month after the Court denied the
parties’ cross-motions for judgment on the pleadings, the parties appeared
before the Court for a conference. (Am. Answer ¶ 205). During that
conference, Appaloosa stated its intention to assert a cross-claim against CWC.
(Id. at ¶ 206). In response, CWC expressed “disbelief that Appaloosa actually
had acquired over 25% of the Voting Rights,” as required for Certificateholders
1
This Opinion draws its facts from the well-pleaded allegations of Appaloosa’s Amended
Answer (“Am. Answer” (Dkt. #239)), and from the parties’ submissions in relation to the
instant motion. For ease of reference, the Court refers to the parties’ briefing as follows:
CWC’s Memorandum of Law in Support of the Motion to Dismiss as “CWC Br.” (Dkt.
#245); Appaloosa’s Memorandum of Law in Opposition to the Motion to Dismiss as
“Appaloosa Opp.” (Dkt. #257); and CWC’s Reply Memorandum of Law in Support of the
Motion to Dismiss as “CWC Reply” (Dkt. #261). Certain capitalized terms used in this
Opinion have the definitions specified for them in the PSA.
2
to bring any action under the PSA. (Id. at ¶ 207). That issue is at the heart of
the instant motion.
Generally speaking, only the Trustee is authorized to act on behalf of the
Trusts. However, individual Certificateholders are allowed to assert claims on
behalf of the Trusts so long as they comply with the No Action Clause in
Section 11.03(c) of the PSA, which requires, among other things, that
Certificateholders with at least 25% of the Voting Rights provide the Trustee
with a written notice of default and give the Trustee an opportunity to take the
action requested to address the default. (PSA § 11.03). 2
Several days prior to the conference with the Court, on April 6, 2018,
Appaloosa had sent CWC and the Trustee written notice of default. (Am.
Answer ¶ 175). “Specifically, among other things, Appaloosa informed CWC
that its failure to allocate approximately $764 million of the Stuy Town sale
proceeds as Gain-on-Sale Proceeds for deposit into the Stuy Town CMBS
Trusts’ respective Gain-on-Sale Reserve Accounts violated relevant portions …
of the PSA[.]” (Id. at ¶ 44). On May 5, 2018, after CWC failed to cure the
defaults of which it was notified, Appaloosa sent a written direction to the
Trustee that advised the Trustee of what it perceived to be a continuing default
and requested that the Trustee bring a direct action on behalf of the C30 Trust
against CWC. (Id. at ¶ 230). In that letter, Appaloosa also offered to provide a
reasonable indemnity to the Trustee, as required by the PSA. (Id.).
2
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. (See generally PSA).
3
On May 10, 2018, the Trustee responded to Appaloosa’s letter, indicating
that it did not intend to commence suit as directed. (Am. Answer ¶ 235).
Accordingly, Appaloosa sought the Court’s permission to amend its Answer to
assert a cross-claim against CWC. (Dkt. #231). The Court granted Appaloosa’s
request based “in large part on Appaloosa’s representations that [] it holds
sufficient voting rights to satisfy the no-action clauses in the pooling and
servicing agreements such that it may properly bring the contemplated crossclaim against CWC.” (Dkt. #236). As a result, Appaloosa filed its Amended
Answer on June 16, 2018. (Dkt. #239).
On August 1, 2018, CWC filed a motion to dismiss Appaloosa’s crossclaim. (Dkt. #244-46). Appaloosa filed its opposition on August 22, 2018 (Dkt.
#256-58), and the motion was fully briefed with the filing of CWC’s reply on
June 26, 2014 (Dkt. #261). The Court now considers the motion.
DISCUSSION
A.
Applicable Law
1.
Motions to Dismiss under Rule 12(b)(1)
CWC brings the present motion to dismiss pursuant to Rules 12(b)(1)
and 12(b)(6) of the Federal Rules of Civil Procedure. (Dkt. #244). “As the
Second Circuit has explained, however, standing challenges are jurisdictional
questions that are properly resolved under Rule 12(b)(1).” Platinum-Montaur
Life Scis. LLC v. Navidea Biopharmaceuticals, Inc., No. 17 Civ. 9591 (VEC), 2018
WL 5650006, at *2 (S.D.N.Y. Oct. 31, 2018) (citing All. for Envtl. Renewal, Inc.
v. Pyramid Crossgates Co., 436 F.3d 82, 89 n.6 (2d Cir. 2006) (“Although we
4
have noted that standing challenges have sometimes been brought under
Rule 12(b)(6), as well as Rule 12(b)(1), the proper procedural route is a motion
under Rule 12(b)(1).”)). “Because the Court has an independent obligation to
apply the correct legal standard[,]” it will construe CWC’s motion to dismiss as
one pursuant to Rule 12(b)(1). Id.
Rule 12(b)(1) permits a party to move to dismiss a complaint for “lack of
subject-matter jurisdiction.” Fed. R. Civ. P. 12(b)(1). “A case is properly
dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the
district court lacks the statutory or constitutional power to adjudicate it.”
Lyons v. Litton Loan Servicing LP, 158 F. Supp. 3d 211, 218 (S.D.N.Y. 2016)
(quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)).
The Second Circuit has drawn a distinction between two types of
Rule 12(b)(1) motions: (i) facial motions and (ii) fact-based motions. See Carter
v. HealthPort Technologies, LLC, 822 F.3d 47, 56-57 (2d Cir. 2016); see also
Katz v. Donna Karan Co., L.L.C., 872 F.3d 114, 119 (2d Cir. 2017). A facial
Rule 12(b)(1) motion is one “based solely on the allegations of the complaint or
the complaint and exhibits attached to it.” Carter, 822 F.3d at 56. A plaintiff
opposing such a motion bears “no evidentiary burden.” Id. Instead, to resolve
a facial Rule 12(b)(1) motion, a district court must “determine whether [the
complaint and its exhibits] allege[ ] facts that” establish subject matter
jurisdiction. Id. (quoting Amidax Trading Grp. v. S.W.I.F.T. SCRL, 671 F.3d
140, 145 (2d Cir. 2011) (per curiam)). And to make that determination, a court
must accept as true the complaint’s allegations “and draw[ ] all reasonable
5
inferences in favor of the plaintiff.” Id. at 57 (internal quotation marks and
citation omitted).
“Alternatively, a defendant is permitted to make a fact-based
Rule 12(b)(1) motion, proffering evidence beyond the complaint and its
exhibits.” Carter, 822 F.3d at 57. “In opposition to such a motion, [a plaintiff]
must ‘come forward with evidence of their own to controvert that presented by
the defendant,’ or may instead ‘rely on the allegations in the[ir p]leading if the
evidence proffered by the defendant is immaterial because it does not
contradict plausible allegations that are themselves sufficient to show
standing.’” Katz, 872 F.3d at 119 (internal citations and quotations omitted).
If a defendant supports his fact-based Rule 12(b)(1) motion with “material and
controverted” “extrinsic evidence,” a “district court will need to make findings of
fact in aid of its decision as to subject matter jurisdiction.” Carter, 822 F.3d at
57.
2.
Interpretation of the PSA
The Court’s standing inquiry turns on the interpretation of the PSA,
which requires the application of contract principles under New York law. In
interpreting the PSA, the Court’s primary objective “is to give effect to the intent
of the parties as revealed by the 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.”
6
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 to dismiss. See
Platinum-Montaur Life Scis. LLC, 2018 WL 5650006, at *5. However, where the
contract is ambiguous, courts generally find that the potential ambiguity is
sufficient to establish standing to proceed with the litigation. See Diverse
Partners, LP v. AgriBank, FCB, No. 16 Civ. 9526 (VEC), 2017 WL 4119649, at *6
(S.D.N.Y. Sept. 14, 2017). While the Second Circuit has not yet had occasion
to rule on the issue, the Third and Fifth Circuits have found standing on the
basis of ambiguity and allowed the case to proceed to discovery. See Baldwin
v. Univ. of Pittsburgh Med. Ctr., 636 F.3d 69, 77 (3d Cir. 2011); see also In re
MPF Holdings US LLC, 701 F.3d 449, 456 (5th Cir. 2012).
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
the particular trade or business.” Law Debenture Tr. Co. of N.Y. v. Maverick
7
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).
8
B.
Appaloosa Lacks Standing to File Its Cross-Claim
CWC mounts a facial challenge to Appaloosa’s standing to file its cross-
claim. Specifically, CWC argues that Appaloosa has not plausibly alleged
standing because it is not in compliance with the PSA’s No Action Clause, and,
thus, is unable to bring its cross-claim under the PSA. (CWC Br. 5-13). CWC’s
argument hinges on the textual interpretation of several provisions of the No
Action Clause, as well as a related section of the PSA specifying how Voting
Rights are calculated. (Id.). Each party argues that all relevant provisions are
unambiguous and should be interpreted in its favor. The Court begins by
addressing the No Action Clause Language, and then proceeds to determine the
proper method by which to calculate Appaloosa’s share of Voting Rights.
1.
The No Action Clause
To review, the No Action Clause requires that prior to instituting an
action under the PSA, a Certificateholder must fulfill certain conditions. (PSA
§ 11.03). Specifically, the No Action Clause dictates that (i) a Certificateholder
must give the Trustee written notice of a continuing default under the PSA;
(ii) Certificateholders who own at least 25% of the Voting Rights must direct the
Trustee to institute an action and offer the Trustee a reasonable indemnity in
connection therewith; and (iii) the Trustee must fail to file suit within 60 days
of receiving the direction. (Id.). Only when those three conditions are met may
a Certificateholder initiate an action under the PSA. In full, the No Action
Clause states that:
No Certificateholder shall have any right by virtue of any
provision of this Agreement to institute any suit, action
9
or proceeding in equity or at law upon or under or with
respect to this Agreement or any Mortgage Loan, unless,
with respect to any suit, action or proceeding upon or
under or with respect to this Agreement, such Holder
previously shall have given to the Trustee a written
notice of default hereunder, and of the continuance
thereof, as hereinbefore provided, and unless also
(except in the case of a default by the Trustee) the
Holders of Certificates entitled to at least 25% of the
Voting Rights shall have made written request upon the
Trustee to institute such action, suit or proceeding in its
own name as Trustee hereunder and shall have offered
to the Trustee such reasonable indemnity as it may
require against the costs, expenses and liabilities to be
incurred therein or thereby, and the Trustee, for 60
days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute
any such action, suit or proceeding.
(PSA § 11.03 (emphasis added)).
In brief, CWC asserts that Appaloosa has not satisfied the No Action
Clause’s conditions, and therefore is barred from bringing its cross-claim.
(CWC Br. 2). Appaloosa disagrees for two reasons. (Appaloosa Opp. 8-16).
First, according to Appaloosa, the No Action Clause does not require
Certificateholders to hold 25% of Voting Rights at the time a suit is filed (id. at
13-16); and second, the Clause does not require every certificateholder who
provided written notice to the Trustee to be a named plaintiff in a subsequent
action (id. at 10-13). The Court agrees with Appaloosa’s analysis on both
points.
a.
The No Action Clause Does Not Require Holders of
Certificates to Hold 25% at the Time a Suit Is Filed
As its first line of argument, CWC asserts that Appaloosa’s cross-claim is
are barred because it did not have 25% of the Voting Rights on June 18, 2018,
10
when it filed its amended Order and Answer. (CWC Br. 6). However, the PSA
contains no such requirement. Instead, the No Action Clause states that the
Certificateholders must hold at least 25% of the Voting Rights when directing
the Trustee to initiate the action under its own name. (PSA § 11.03). At no
point does the No Action Clause indicate, as CWC claims, that the
Certificateholders must continue to hold at least 25% of the Voting Rights at
the time of filing.
New York law is clear that, when interpreting a PSA, courts should be
“extremely reluctant to interpret an agreement as impliedly stating something
which the parties have neglected to specifically include.” See ACE Sec. Corp. v.
DB Structured Prod., Inc., 25 N.Y.3d 581, 597 (2015) (internal citations and
quotations omitted). If these sophisticated parties, represented by counsel,
intended to make the bringing of a Certificateholder action conditioned upon
holding 25% of the Voting Rights at the time of filing, they easily could have
included a provision to that effect. See Fundamental Long Term Care Holdings,
LLC v. Cammeby’s Funding LLC, 20 N.Y.3d 438, 439 (2013). This Court
cannot, under the guise of interpretation, read in an additional term that
distorts the PSA’s meaning.
In its counterargument, CWC bypasses the language of the No Action
Clause, insisting instead that “New York courts interpreting identical no-action
clause language consistently require compliance with the no-action clause as of
the filing date and dismiss claims as a matter of law where certificate holders
have not so complied.” (CWC Br. 7). This argument is both distracting and
11
incorrect. First, neither party disputes that Appaloosa must be in compliance
with the No Action Clause as of the date of filing. What is in dispute is what
conditions a Certificateholder must satisfy in order to be in compliance.
Second, neither of the two cases cited by CWC stands for the proposition
that a party would have to maintain a certain percentage of the Voting Rights
at the time of filing. (CWC Br. 7). In Greene v. New York United Hotels, the
First Department dismissed the action because Plaintiff, a bondholder who
held his securities subject to the conditions of an underlying trust agreement,
did not include in his complaint any “allegations showing compliance with
these provisions of the trust agreement.” 260 N.Y.S. 405, 407 (1st Dep’t 1932),
aff’d, 261 N.Y. 698 (1933). Similarly, in Greenwich Financial Services
Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp., the plaintiffs
argued that they were not bound by the procedural requirements of the No
Action Clause in its entirety. See Index No. 650474/08, 2010 WL 9525799, at
*2-4 (N.Y. Sup. Ct. Oct. 7, 2010). The court disagreed and dismissed the
complaint. See id. at *4. Neither case discusses whether parties must
maintain the requisite Voting Rights percentage at the time of filing, and, thus,
neither case is applicable to the issue at hand.
b.
The No-Action Clause Does Not Require Azteca to Be a
Party to the Cross-Claim
Next, CWC argues that a separate entity, Azteca Partners LLC (“Azteca”)
must be a named plaintiff in the instant action in order for Appaloosa to be in
compliance with the No Action Clause and for the cross-claim to move forward.
12
(CWC Br. 5). Additional background is needed to fully understand CWC’s
argument.
As previously discussed, on May 7, 2018, Appaloosa — in coordination
with another investment fund, Azteca — issued a direction to the Trustee to
initiate litigation on behalf of the C30 Trust against CWC. (Am. Answer ¶ 230;
Appaloosa Opp., Ex. A). 3 Per the No Action Clause, the written direction to the
Trustee must be made by Certificateholders who have at least 25% of the
Voting Rights. (PSA § 11.03). Appaloosa alleges that as of May 7, 2018, the
combined Voting Rights of Appaloosa and Azteca exceeded 25 percent. (Am.
Answer ¶¶ 178 n.1, 233-34).
CWC’s argument, which is based on a misinterpretation of the No Action
Clause, is simple: All Certificateholders constituting part of the 25% Voting
Rights block who provide written direction to the Trustee must be named
plaintiffs in the subsequent suit. (CWC Br. 5-6). Therefore, CWC asserts,
because Azteca is not named as a plaintiff and because Appaloosa does not
independently own 25% of the Voting Rights, the cross-claim must be
dismissed. (Id.).
Once again, CWC reads into the No Action Clause a requirement that is
not there. There is no requirement in the No Action Clause that a suit must be
instituted by all of the Certificateholders who made up the 25% Voting Rights
block. Instead, the language in the No Action Clause specifically moves from
3
The May 2, 2018 letter was signed by the investment advisor for Appaloosa Investment
L.P.I., Palomino Master Ltd., and Azteca Partners LLC. (Appaloosa Opp., Ex. A).
13
the singular to the plural: “No Certificateholder shall have any right … to
institute any suit,” unless, “such Holder previously shall have given the Trustee
a written notice of default hereunder, … and unless also … the Holders of
Certificates entitled to at least 25% of the Voting Rights shall have made
written request upon the Trustee to initiate such action.” (PSA § 11.03
(emphases added)). If the drafters of the PSA had intended to include a
requirement that all members of the 25% Voting Rights block be named as
plaintiffs, they would not have included the distinction between those Holders
of Certificates, plural, who must make the written request upon the Trustee,
and any Certificateholder, singular, who may initiate the approved, follow-on
suit.
Furthermore, the plain reading of the PSA is not incongruous with the
general purpose of No Action Clauses: to make it more difficult for individual
investors to bring suits that are either frivolous or otherwise not in the interest
of their fellow investors. See Quadrant Structured Prod. Co. v. Vertin, 23 N.Y.3d
549, 565 (2014). Allowing Certificateholders, who may individually have less
than 25% of the Voting Rights, to bring an action would not open the
floodgates to large numbers of frivolous claims. That is because individual
Certificateholders would still need to muster a similarly-minded group that, in
the aggregate, holds at least 25% of the Voting Rights to initiate the process
through written notification to the Trustee. Then, those individual investors
are only authorized to bring “such action, suit or proceeding” that was initiated
by the larger group. (PSA § 11.03). For that reason, in addition to the plain
14
language of the PSA, Azteca does not need to be a named plaintiff to this
action.
2.
The PSA’s Language Regarding the Method of Calculation for
Voting Rights Is Unambiguous
Having determined that the language of the No Action Clause is
unambiguous, the Court turns to the methodology by which Voting Rights are
calculated under the PSA. To review, according to the plain reading of the No
Action Clause, if Appaloosa and Azteca had a combined 25% of the Voting
Rights as of May 7, 2018, Appaloosa will have sufficiently alleged standing to
bring its cross-claim.
Voting Rights are defined in the PSA as “[t]he portion of the voting rights
of all of the Certificates which is allocated to any Certificate.” (PSA § 1.01).
Pursuant to that definition, Voting Rights are calculated as a fraction:
the numerator of which is equal to the aggregate
Certificate Balance of the related Class of Certificates
(adjusted as provided in the immediately succeeding
provisos) and the denominator of which is equal to the
aggregate Certificate Balances of all Classes of
Certificates referenced above, determined as of the
Distribution Date immediately preceding such time);
provided that solely for the purpose of determining the
Voting Rights of the Classes of Sequential Pay
Certificates, the aggregate Appraisal Reduction Amount
(determined as set forth herein) shall be treated as
Realized Losses with respect to the calculation of the
Certificate Principal Balances thereof; provided, further,
however, the aggregate Appraisal Reduction Amount
shall not reduce the Class Principal Balance of any
Class for purposes of determining the Controlling Class,
the Controlling Class Representative or the Majority
Subordinate Certificateholder.
(Id. (emphases added)).
15
CWC and Appaloosa dispute whether both the numerator and the
denominator in the Voting Rights fraction should be adjusted by the Appraisal
Reduction Amount (“ARA”). The ARA itself “reflects a comparison of the
appraisal value to the overall loan exposure (including not only the unpaid
principal balance, but also unpaid interest, unpaid fees and expenses,
advances, and other amounts).” (CWC Br. 11 (citing PSA § 1.01)). CWC argues
the ARA should be applied only to the numerator; Appaloosa believes it should
adjust both the numerator and denominator.
Determining whether the ARA should be applied to the denominator, in
addition to the numerator, again requires application of familiar contract
principles. To review, under New York law, “a written agreement that is
complete, clear, and unambiguous on its face must be enforced according to
the plain meaning of its terms” because “[t]he best evidence of what parties to a
written agreement intend is what they say in their writing.” Ellington v. EMI
Music, Inc., 24 N.Y.3d 239, 244-45 (2014). Here, the language of the PSA
unambiguously indicates that the ARA should only be applied to the
numerator.
In the PSA’s definition of Voting Rights, the word “numerator” — but not
“denominator” — is followed by the following parenthetical: “(adjusted as
provided in the immediately succeeding provisos).” (PSA § 1.01). The proviso
itself reads, “solely for the purpose of determining the Voting Rights of the
Classes of Sequential Pay Certificates, the aggregate Appraisal Reduction
Amount … shall be treated as Realized Losses with respect to the calculation of
16
the Certificate Principal Balances thereof.” (Id.). CWC argues, and the Court
agrees, that “[t]his is a clear reference to the numerator, which represents the
Voting Rights allocated to a certain Class; whereas the denominator represents
the aggregate principal balance of all Classes.” (CWC Br. 9).
In addition, the unambiguous language in the PSA is reinforced by the
Prospectus Supplement. The Second Circuit held in Wells Fargo Bank, N.A. v.
Financial Security Assurance Inc., that this Court may — and in fact,
should — consider the Prospectus Supplement during the course of a plain
reading interpretation of the PSA:
As an initial matter, we reject [the defendant’s]
argument that the district court erred in considering, in
interpreting the PSA, the Prospectus Supplement and
other transaction documents related to the PSA. Under
New York law, which governs the PSA, the district court
properly considered all writings forming part of a single
transaction, see This Is Me, Inc. v. Taylor, 157 F.3d 139,
143 (2d Cir. 1998), as [the defendant] itself asked the
district court to do below.
504 F. App’x 38, 40 (2d Cir. 2012) (summary order).
In this case, the language in the Prospectus Supplement directly tracks
the language of the PSA, and affirms the Court’s plain reading of the
agreement:
a fraction, the numerator of which is equal to the
aggregate Certificate Balance of such Class of
Certificates (as adjusted by treating any Appraisal
Reduction Amount as a Realized Loss solely for the
purposes of adjusting Voting Rights) and the
denominator of which is equal to the aggregate
Certificate Balances of all Classes of Sequential Pay
Certificates, determined as of the Distribution Date
immediately preceding such time[]
17
(Prospectus Supplement S-230 (emphasis added)). The Prospectus Supplement
is equally clear: the numerator of the Voting Rights fraction, but not the
denominator, shall be adjusted by the ARA.
The omission of the parenthetical after “denominator” in both the PSA
and Prospectus Supplement was deliberate. See Quadrant Structured Prod. Co.,
23 N.Y.3d at 560 (“Even where there is ambiguity, if parties to a contract omit
terms … the inescapable conclusion is that the parties intended the
omission.”). The Second Circuit has held that “the presence of a phrase
applicable to one factor makes clear that the phrase’s omission elsewhere was
deliberate.” United States v. Zukerman, 897 F.3d 423, 431 (2d Cir. 2018), cert.
denied, 2019 WL 887697 (Feb. 25, 2019) (internal quotations and citations
omitted). Here, these experienced and sophisticated entities, represented by
counsel, included the parenthetical to modify “numerator,” but deliberately
omitted the same parenthetical following “denominator.” The Court cannot
find, given the plain language of the PSA, that they intended otherwise.
Appaloosa encourages the Court to depart from the plain reading of the
PSA by arguing that applying the ARA only to the numerator is untenable
because it “results in entire provisions of the PSA being rendered meaningless.”
(Appaloosa Opp. 19). CWC’s interpretation, Appaloosa asserts, creates the
possibility that if enough ARA were recognized by the Trust, then no investor
could obtain 25% of Voting Rights, which in turn would result in
Certificateholders being unable to exercise numerous rights. (Id. at 20). Those
rights that require Certificateholders to own a certain minimum percentage of
18
Voting Rights include the rights to remove the Trustee and amend the PSA. (Id.
at 19).
Of course, when construing a contract, surplusage is a result to be
avoided. See Westview Assocs. v. Guar. Nat’l Ins. Co., 95 N.Y.2d 334, 339
(2000). However, Appaloosa cannot avoid the provision’s plain meaning by
“attempting to create an irrational conflict between two provisions[.]” See G &
B Photography, Inc. v. Greenberg, 619 N.Y.S.2d 294, 296 (2d Dep’t 1994). In
response to Appaloosa’s argument, CWC notes that the ARA has never been
this high, even during the last decade’s real estate crisis. (CWC Br. 9).
Furthermore, as CWC explains, even if the ARA were that high, appraisal
reduction is a dynamic process, and the scenario proffered by Appaloosa, in
addition to being unrealistic, “is simply not sustainable.” (Id.).
Each side argues that its interpretation of the PSA, as CWC puts it,
“makes perfect commercial sense.” (CWC Br. 10). But the Court is not allowed
to deviate from the plain meaning of the PSA. Even accepting Appaloosa’s
argument that extreme circumstances can be imagined in which the plain
language of the PDA renders some clauses meaningless, the Court must
recognize that “the canon against surplusage is not absolute.” Marx v. Gen.
Revenue Corp., 568 U.S. 371, 372 (2013). “[T]he canon assists only where a
competing interpretation give effect to every clause and word” of the statute.
Id. Here, in order to accept Appaloosa’s reading, the Court would have to
divest the entire parenthetical of meaning, or write in a second parenthetical.
However, under New York law, courts may not excise terms under the guise of
19
interpreting the writing. See Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1
N.Y.3d 470, 475 (2004).
In addition, “adopting the plain meaning of statutory language with the
result that some language is superfluous is preferable to adopting an
ambiguous meaning where there is no surplusage.” All. for Open Soc’y Int’l,
Inc. v. U.S. Agency for Int’l Dev., 430 F. Supp. 2d 222, 246-47 (S.D.N.Y. 2006)
(citing Lamie v. U.S. Tr., 540 U.S. 526, 536 (2004)), aff’d, 651 F.3d 218 (2d Cir.
2011). The Court cannot ignore or alter the plain language of the PSA, which
language unambiguously provides a method to calculate Voting Rights.
3.
Appaloosa Did Not Have 25% of the Voting Rights on
May 7, 2018
Calculating the relevant Voting Rights shares as prescribed above, the
Court finds that Appaloosa’s and Azteca’s combined holdings did not reach
25% as of May 7, 2018, the date on which Appaloosa sent a written direction to
the Trustee to initiate the action. In point of fact, Appaloosa and Azteca owned
14.96% of Voting Rights in the C30 Trust as of May 7, 2018. (CWC Br. 7 n.4).
However, Appaloosa makes one last-ditch effort to obtain standing and asks
the Court to calculate its Voting Rights share using the March — as opposed to
the April — ARA. (See Appaloosa Opp. 15). According to Appaloosa, in April
2018, just six days after Appaloosa announced its intention to assert a direct
claim against CWC, the ARA for the C30 trust was suspiciously raised by 54
percent. (Id.). For its part, CWC rejects Appaloosa’s insinuation that it had
any part in manipulating the ARA as “simply made up.” (CWC Br. 11-12).
Regardless, the Court need not decide the issue at this juncture. Even if the
20
Court were to disregard the April ARA and use the March ARA in its
calculations, Appaloosa and Azteca would still only have 23.1% of Voting
Rights. (Id. at 13). 4 For that reason, Appaloosa does not have standing to
bring its cross-claim. 5
CONCLUSION
For the reasons detailed above, CWC’s motion to dismiss the cross-claim
filed by Appaloosa is GRANTED. The Clerk of Court is directed to terminate
Docket Entry 244. The next pretrial conference in this matter will take place
on April 9, 2019, at 4:00 p.m. in Courtroom 618 of the Thurgood Marshall U.S.
Courthouse, 40 Foley Square, New York, New York 10007.
SO ORDERED.
Dated:
March 25, 2019
New York, New York
__________________________________
KATHERINE POLK FAILLA
United States District Judge
4
Appaloosa disputes this calculation only to the extent that it believes the ARA should be
applied to both the numerator and denominator of the Voting Rights fraction. (See
Appaloosa Opp. 16 n.4). As previously discussed, applying a different methodology
would cut against the plain language of the PSA.
5
The Court declines to address the remaining two issues mentioned in CWC’s motion to
dismiss as moot. First, Appaloosa argues that it is entitled to damages on behalf of the
other four Trusts, other than the C30 Trust. (Am. Answer ¶ 253). In support of its
argument, Appaloosa contends that it only needs to hold 25% of Voting Rights in the
C30 Trust to recover amounts allegedly owed to all five Trusts under the Co-Lender
Agreement. (Id. at ¶¶ 188-90). Because this Court finds that Appaloosa did not hold a
25% Voting Rights share as of May 7, 2018 — and Appaloosa does not argue that it
satisfied the preconditions on Certificateholder actions contained in the PSAs governing
the other four Trusts — the issue is moot. Second, CWC asks the Court to strike
Appaloosa’s demand for a jury trial on its cross-claim. (CWC Br. 15-18). Because
Appaloosa’s request for a jury trial is limited to its cross-claim, no issues remain for
jury determination.
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