In the Matter of the Trusts established under the Pooling and Servicing Agreements
Filing
412
OPINION AND ORDER re: 301 MOTION for Summary Judgment . filed by CWCapital Asset Management LLC, 311 MOTION in Limine of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association to Exclude E xpert Testimony From Ann Hambly, Michael Hartzmark, Ph.D., and Andrew Berman. filed by Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, 317 JOINT MOTION for Summary Judgment . filed by Federal Ho me Loan Mortgage Corporation, 324 MOTION in Limine to Exclude Expert Testimony From Ann Hambly, Michael Hartzmark, Ph.D., and Andrew Berman. filed by CWCapital Asset Management LLC, 327 MOTION in Limine to Exclude the Pro posed Testimony of Ronald F. Greenspan, Thomas F. Nealon III, and Brian Olasov. filed by Appaloosa Investment L.P.I. and Palomino Master Ltd., 322 MOTION for Summary Judgment . filed by Appaloosa Investment L.P.I. and Palomino Master Ltd. For the foregoing reasons, CWC's motion for summary judgment is GRANTED; the GSEs' motion for summary judgment is GRANTED; Appaloosa's motion for partial summary judgment is DENIED; CWC's and the GSEs' motions t o exclude are DENIED as moot; and Appaloosa's motion to exclude is DENIED insofar as the Court considered it above. The Clerk of Court is directed to terminate the motions at Docket Entries 301, 311, 317, 322, 324, and 327. The parties are directed to submit a joint letter on or before April 3, 2020, concerning next steps in this action. SO ORDERED. (Signed by Judge Katherine Polk Failla on 3/19/2020) (rro)
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:
When the owners of Peter Cooper Village and Stuyvesant Town
(collectively, “Stuy Town”) defaulted on their financing obligations in 2010, few
could have expected that the property would ultimately be sold at a substantial
profit just a few years later. This lack of clairvoyance is what the Court
presumed when it found ambiguities in the relevant agreements concerning the
treatment of sale proceeds, and these ambiguities in turn informed the Court’s
decision to deny the parties’ cross-motions for judgment on the pleadings. See
Matter of Pooling & Servicing Agreements, No. 17 Civ. 1998 (KPF), 2018 WL
1229702 (S.D.N.Y. Mar. 9, 2018) (“PSA I”). But now, after exhaustive discovery,
the evidence is in, and it points conclusively in one direction.
As it currently stands, approximately $614 million in disputed funds
have been allocated to CWCapital Asset Management LLC (“CWC”), which
served as the Special Servicer for the Stuy Town property, in the form of
Penalty Interest; and an additional $53 million has been allocated to the
Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal
National Mortgage Association (“Fannie Mae,” and together with Freddie Mac,
the “Government-Sponsored Enterprises” or “GSEs”) in the form of Yield
Maintenance. 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 those allocations. In Appaloosa’s view,
the disputed funds constitute Gain-on-Sale Proceeds that must be directly
deposited in a Gain-on-Sale Reserve Account for the benefit of
certificateholders like it.
The evidence disclosed after more than a year of discovery makes clear
that the funds in dispute are Penalty Interest and Yield Maintenance, and not
Gain-on-Sale Proceeds. This evidence includes analogous documents from
other transactions in the same shelf registration, the contemporaneous
understanding of those involved in the Stuy Town sale and related
transactions, the course of performance between and among the parties to the
relevant agreements, the custom and practice in the collateralized mortgagebacked securities (“CMBS”) industry, and related industry publications. And
while Appaloosa has done a commendable job in attempting to generate a
genuine dispute of fact for trial, its efforts have come up short. Its many
arguments are belied by the record and, at times, undercut by Appaloosa’s own
positions in this litigation. Accordingly, and for the many reasons detailed in
this Opinion, CWC’s and the GSEs’ motions for summary judgment are
2
granted; Appaloosa’s motion for partial summary judgment is denied;
Appaloosa’s motion to exclude CWC’s and the GSE’s expert testimony is denied
in part on the merits and denied in part as moot; and CWC’s and the GSEs’
motions to exclude Appaloosa’s expert testimony are denied as moot.
BACKGROUND 1
A.
Factual Background
1.
The 2006 Purchase of the Stuy Town Property
In November 2006, Tishman Speyer Properties and BlackRock Realty,
through affiliates (together, the “Borrower”), purchased Stuy Town, one of New
York’s largest residential complexes, for $5.4 billion. (CWC 56.1 C1). The
purchase of the property was financed by a senior mortgage loan in the
1
This Opinion draws on facts from CWC’s Responses and Counterstatements to
Appaloosa’s Statement of Additional Material Facts (“CWC 56.1” (Dkt. #388)); the GSEs’
Reply to Appaloosa’s Response to the GSEs’ Local Rule 56.1 Statement and Appaloosa’s
Statement of Additional Material Facts (“GSE 56.1” (Dkt. #369)); CWC’s and the GSEs’
Counterstatements to Appaloosa’s Rule 56.1 Statement of Undisputed Material Facts in
Support of Appaloosa’s Motion for Partial Summary Judgment (“Appaloosa 56.1” (Dkt.
#385)); Appaloosa’s Response to Responses and Counterstatements of CWC and the
GSEs to Rule 56.1 Statement of Undisputed Material Facts in Support of Motion for
Partial Summary Judgment (“Appaloosa Response 56.1” (Dkt. #405)); the exhibits
attached to the Declaration of Neil R. Lieberman in Support of the GSEs’ Motion for
Summary Judgment (“Lieberman Decl., Ex. []” (Dkt. #321)); the exhibits attached to the
Declaration of Colleen Mallon Casse in Support of CWC’s Motion for Summary
Judgment (“Casse Decl., Ex. []” (Dkt. #302-310, 312, 373-378)); and the exhibits
attached to the Declaration of Michael J. Hampson in Opposition to CWC’s Motion for
Summary Judgment (“Hampson Decl., Ex. []” (Dkt. #340, 396)).
For ease of reference, the Court refers to CWC’s memorandum of law in support of its
motion for summary judgment as “CWC SJ Br.” (Dkt. #315, 381); the GSEs’
memorandum of law in support of their motion for summary judgment as “GSE SJ Br.”
(Dkt. #318, 365); Appaloosa’s memorandum of law in support of its partial motion for
summary judgment as “Appaloosa SJ Br.” (Dkt. #326, 389); Appaloosa’s opposition to
CWC’s motion for summary judgment as “Appaloosa CWC SJ Opp.” (Dkt. #338, 394);
Appaloosa’s opposition to the GSEs’ motion for summary judgment as “Appaloosa GSE
SJ Opp.” (Dkt. #342, 398); CWC’s and the GSEs’ joint opposition to Appaloosa’s motion
for partial summary judgment as “CWC/GSE SJ Opp.” (Dkt. #334, 384); Appaloosa’s
memorandum of law in support of its motion to exclude as “Appaloosa MIL Br.” (Dkt.
#328, 392); and CWC’s and the GSEs’ memorandum of law in opposition to Appaloosa’s
motion to exclude as “CWC/GSE MIL Opp.” (Dkt #337, 386).
3
principal amount of $3 billion (the “PCV Loan”), and eleven tiers of mezzanine
loans in the aggregate principal amount of $1.4 billion. (Id. at C2). The PCV
Loan was evidenced by, among other things, an Amended and Restated Loan
and Security Agreement dated as of February 16, 2007 (the “Loan Agreement”),
and six promissory notes (collectively, the “Notes”), and was secured by, among
other things, a mortgage on Stuy Town. (Id. at C3). 2
The six Notes were sold to five CMBS trusts: (i) Note A-1 was securitized
into the Wachovia Bank Commercial Mortgage Trust Series 2007-C30 (the “C30
Trust”); (ii) Note A-2 was securitized into the COBALT CMBS Commercial
Mortgage Trust 2007-C2 (the “COBALT 2007-C2 Trust”); (iii) Notes A-3 and A-4
were securitized into the Wachovia Bank Commercial Mortgage Trust Series
2007-C31 (the “WBCMT C31 Trust”); (iv) Note A-5 was securitized into the MLCFC Commercial Mortgage Trust 2007-5 (the “ML-CFC 2007-5 Trust”); and
(v) Note A-6 was securitized into the ML-CFC Commercial Mortgage Trust
2007-6 (the “ML-CFC 2007-6 Trust,” and collectively with the C30 Trust, the
COBALT 2007-C2 Trust, the WBCMT C31 Trust, and the ML-CFC 2007-5
2
The PCV Loan was originally evidenced by six promissory notes each dated as of
November 17, 2006, and identified as Note A-1 from PCV Borrower to Wachovia Bank,
National Association (“Wachovia”) in the principal amount of $500,000,000.00; Note A-2
from PCV Borrower to Wachovia in the principal amount of $500,000,000.00; Note A-3
from PCV Borrower to Wachovia in the principal amount of $500,000,000.00; Note A-4
from PCV Borrower to Wachovia in the principal amount of $500,000,000.00; Note A-5
from PCV Borrower to Merrill Lynch Mortgage Lending, Inc. (“Merrill”) in the principal
amount of $500,000,000.00; and Note A-6 from PCV Borrower to Merrill in the principal
amount of $500,000,000.00 (collectively, the “Original Notes”). (GSE 56.1 G2). The
Original Notes were then amended and restated into six promissory notes, each dated
as of February 16, 2007, with Note A-1 being amended and restated into Amended Note
A-1, and so forth. (GSE 56.1 G4).
4
Trust, the “PCV Trusts”). (CWC 56.1 C4; GSE 56.1 G6). 3 The PCV Trusts were
securitization vehicles created to sell investment interests to finance the
acquisition of a pool of commercial mortgage loans held by each of them.
(Appaloosa 56.1 A4). Each of the PCV Trusts had its own pooling and servicing
agreement (or “PSA”), which governed the creation of the trust and laid out the
rights and obligations of the depositor, master servicer, special servicer, and
trustee over the pools of securitized mortgage loans in the trust.
2.
The Co-Lender Agreement
Although each of the PCV Trusts had its own PSA, the PCV Trusts also
entered into a Co-Lender Agreement to govern their rights and obligations
solely with respect to Stuy Town. (See Hampson Decl., Ex. E; CWC 56.1 A77).
The Co-Lender Agreement deemed the C30 Trust the “Lead Lender” on the PCV
Loan and granted it authority and responsibility to service and administer all of
the Notes. (CWC 56.1 C7; GSE 56.1 G7). In addition, the Master Servicer and
Special Servicer of the C30 Trust were granted the authority and responsibility
to administer all of the Notes consistent with terms of the Co-Lender
Agreement and C30 Trust’s PSA (the “C30 PSA”). (GSE 56.1 G8; see CWC 56.1
C7). 4
3
CMBS trusts are pooled investment vehicles comprised of numerous mortgage loans.
(CWC 56.1 A36).
4
A copy of the C30 PSA is attached to the Casse Declaration as Exhibit 28. (Casse Decl.,
Ex. 28).
5
3.
The WBCMT Trusts and Their Documentation
The C30 Trust was itself part of a shelf of 33 CMBS trusts (the “WBCMT
Trusts” or “WBCMT Shelf”), which were sequentially numbered C1 through C34
(with no C13), reflecting the chronological order of their formation by Wachovia
Bank Commercial Mortgage Securities, Inc. between 2002 and 2007. (CWC
56.1 C132). Each of the 33 WBCMT Trusts was governed by its own PSA. (Id.
at C143). However, each WBCMT Trust used the prior WBCMT Trust’s PSA as
a starting point. (Id.). For this reason, the PSAs governing the WBCMT Trusts
(the “WBCMT PSAs”) contain many largely verbatim provisions. (Id. at C158).
In particular, many of the provisions of the C30 PSA at issue in this case —
including the definitions of REO (“Real Estate Owned”) Property, REO Loan,
Penalty Interest, 5 Purchase Price, Liquidation Proceeds, Yield Maintenance
Charges, 6 and Principal Prepayment, as well as the payment-collection and
compensation provisions of § 3.02(b) and § 3.11 — appear largely verbatim in
the PSAs of the other 32 WBCMT Trusts. (Id. at C158; see Casse Decl., Ex. 73104). These provisions are implicated by the parties’ cross-motions, and they
are discussed in the remainder of this section. 7
5
Penalty Interest includes default interest. (CWC 56.1 C33). The Court refers to both as
Penalty Interest.
6
Although certain of the relevant documents refer to Yield Maintenance as “Yield
Maintenance Payments” or “Yield Maintenance Charges,” the Court refers to the term
simply as Yield Maintenance.
7
The Court cites to the C30 PSA in the following quotations. However, the Court has
reviewed all of the relevant provisions of the WBCMT PSAs to ensure that they are
materially identical. (See Casse Decl., Ex. 73-104).
The Court recognizes that the extended block quotations in this section can be tedious
for the reader, particularly a reader with only passing familiarity with the CMBS
6
a.
Section 1.01: Definitions
i.
Liquidation Proceeds
The WBCMT PSAs define 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[.]
(C30 PSA § 1.01).
ii.
Purchase Price
The WBCMT PSAs define 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 as described in Section
3.18(c), 3.18(d) or 3.18(e), or by the Depositor, the
Special
Servicer,
the
Majority
Subordinate
Certificateholder or the Master Servicer pursuant to
Section 9.01, a cash price equal to the outstanding
principal balance of such Mortgage Loan or REO Loan,
as of the date of 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 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
industry. The Court includes them in this Opinion because of their criticality to the
issues in dispute, and asks in advance for the reader’s indulgence.
7
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 related Intercreditor Agreement;
provided that the Purchase Price shall not be reduced
by any outstanding [Principal & Interest] Advance.
(C30 PSA § 1.01).
iii.
Penalty Interest
The WBCMT PSAs define 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.
(C30 PSA § 1.01). 8
iv.
REO Property
The WBCMT PSAs define REO Property as:
A Mortgaged Property acquired on behalf and in the
nature of the Trustee … for the benefit of the
Certificateholders (subject to the related Intercreditor
Agreement with respect to a Mortgaged Property
securing a Loan Pair) through foreclosure, acceptance
of a deed-in-lieu of foreclosure or otherwise in
accordance with applicable law in connection with the
default or imminent default of a Mortgage Loan.
(C30 PSA § 1.01).
8
Where the Court is referring to Penalty Interest as it is defined in the WBCMT PSAs, it
capitalizes the term. When the Court is referring generally to the concept of penalty
interest in the CMBS industry, it uses lowercase. The same is true for yield
maintenance, gain-on-sale proceeds, special servicer, and master servicer.
8
v.
REO Loan
The WBCMT PSAs define 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
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.
(C30 PSA § 1.01). The definition includes a list prioritizing the allocation of
funds collected in respect of an REO Loan, which list is sometimes referred to
as an “REO Loan Waterfall.”
vi.
Yield Maintenance
The WBCMT PSAs define Yield Maintenance, 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.
(C30 PSA § 1.01).
vii.
Principal Prepayment
The WBCMT PSAs define Principal Prepayment, in relevant part, as:
9
Any payment of principal made by the Mortgagor on a
Mortgage Loan or Companion Loan that is received in
advance of its scheduled Due Date; provided that it
shall not include a payment of principal that is
accompanied by an amount of interest representing
scheduled interest due on any date or dates in any
month or months subsequent to the month of
prepayment.
(C30 PSA § 1.01).
b.
Section 3.02: Collection of Mortgage Loan
Payments
The WBCMT PSAs also detail each Special Servicer’s obligation to collect
payments for various types of mortgages, including Mortgage Loans,
Companion Loans, and REO Loans (of which the Stuy Town mortgage became
one). On this point, Section 3.02(b) of the WBCMT PSAs states as follows:
All amounts collected in respect of any Mortgage Loan
or Companion Loan (other than the Non-Serviced
Companion Loan) in the form of payments from
Mortgagors, and/or guaranties, Liquidation Proceeds
(insofar as such Liquidation Proceeds are of the nature
described in clauses (i) through (iii) of the definition
thereof) or Insurance Proceeds shall be applied to either
amounts due and owing under the related Mortgage
Note and Mortgage (including, without limitation, for
principal and accrued and unpaid interest) in
accordance with the express provisions of the related
Mortgage Note and Mortgage (and, with respect to a
Loan Pair, the related Intercreditor Agreement) or, if
required pursuant to the express provisions of the
related Mortgage, or as determined by the Master
Servicer or Special Servicer in accordance with the
Servicing Standard, to the repair or restoration of the
related Mortgaged Property, and, in the absence of such
express provisions, shall be applied for purposes of this
Agreement: first, as a recovery of any related and
unreimbursed Advances plus unreimbursed interest
accrued thereon; second, as a recovery of
Nonrecoverable Advances, Unliquidated Advances and
Workout Delayed Reimbursement Amounts (including
10
interest on such Nonrecoverable Advances), that were
paid from collections on the Mortgage Loans (allocable
to principal) and resulted in principal from the Mortgage
Pool distributed to the Certificateholders being reduced
pursuant to Section 3.05(a) hereof; third, as a recovery
of accrued and unpaid interest at the related Mortgage
Rate on such Mortgage Loan, to the extent such
amounts have not been previously advanced, and
exclusive of any portion thereof that constitutes
Additional Interest; fourth, as a recovery of principal of
such Mortgage Loan then due and owing, to the extent
such amounts have not been previously advanced,
including, without limitation, by reason of acceleration
of the Mortgage Loan following a default thereunder;
fifth, in accordance with the normal servicing practices
of the Master Servicer or the Special Servicer, as a
recovery of any other amounts then due and owing
under such Mortgage Loan (other than Additional
Interest), including, without limitation, Prepayment
Premiums, Yield Maintenance Charges and Penalty
Interest; sixth, as a recovery of any remaining principal
of such Mortgage Loan to the extent of its entire
remaining unpaid principal balance; and seventh, with
respect to any ARD Loan after its Anticipated
Repayment Date, as a recovery of any unpaid Additional
Interest. All amounts collected on any Mortgage Loan
in the form of Liquidation Proceeds of the nature
described in clauses (iv) through (vi) of the definition
thereof shall be deemed to be applied: first, as a recovery
of any related and unreimbursed Advances plus interest
accrued thereon; second, as a recovery of accrued and
unpaid interest at the related Mortgage Rate on such
Mortgage Loan to but not including the Due Date in the
Collection Period of receipt, to the extent such amounts
have not been previously advanced, and exclusive of
any portion thereof that constitutes Additional Interest;
third, as a recovery of principal, to the extent such
amounts have not been previously advanced, of such
Mortgage Loan to the extent of its entire unpaid
principal balance; and fourth, with respect to any ARD
Loan after its Anticipated Repayment Date, as a
recovery of any unpaid Additional Interest. No such
amounts shall be applied to the items constituting
additional servicing compensation as described in the
first sentence of either Section 3.11(b) or 3.11(d) unless
11
and until all principal and interest then due and
payable on such Mortgage Loan has been collected.
Amounts collected on any REO Loan shall be deemed to
be applied in accordance with the definition thereof. The
provisions of this paragraph with respect to the
application of amounts collected on any Mortgage Loan
shall not alter in any way the right of the Master
Servicer, the Special Servicer or any other Person to
receive payments from the Certificate Account as set
forth in clauses (ii) through (xvi) of Section 3.05(a) from
amounts so applied.
(C30 PSA § 3.02(b)). For convenience, and in accordance with the terminology
used by CWC’s and the GSEs’ witnesses, the Court refers to the first payment
priority structure laid out in § 3.02(b) as a “waterfall.”
c.
Section 3.11: Servicing Compensation
Finally, the WBCMT PSAs specify certain forms of servicing
compensation due to the Special Servicer. Section 3.11(c) states, in part, as
follows:
As compensation for its activities hereunder, the Special
Servicer shall be entitled to receive the Special Servicing
Fee with respect to each Specially Serviced Mortgage
Loan and each REO Loan …. As further compensation
for its activities hereunder, the Special Servicer shall be
entitled to receive the Workout Fee with respect to each
Corrected Mortgage Loan, so long as such loan remains
a Corrected Mortgage Loan …. In addition, with respect
to each Specially Serviced Mortgage Loan and REO
Loan … the Special Servicer shall be entitled to the
Liquidation Fee ….
(C30 PSA § 3.11(c)). Section 3.11(d) states, in part, 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
12
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[.]
(C30 PSA § 3.11(d)).
d.
The 2003 Introduction of “Gain-on-Sale” Provisions to
the WBCMT Shelf
Certain definitions and provisions regarding the concept of “gain-on-sale”
were introduced into the WBCMT PSAs beginning with the C4 PSA in 2003.
(CWC 56.1 C157; see generally Casse Decl., Ex. 105 (C3 PSA/C4 PSA
blackline)). For starters, these later PSAs defined “Gain-on-Sale Proceeds” as
follows:
With respect to any Mortgage Loan, 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.
(C30 PSA § 1.01). A “Gain-on-Sale Reserve Account” was also introduced to
the WBCMT PSAs, defined as:
A segregated custodial account or accounts or
subaccount of the Distribution Account created and
maintained by the Paying Agent pursuant to Section
3.04(e) on behalf of the Trustee in trust for the
Certificateholders, which shall be entitled “Wells Fargo
Bank, N.A., as Trustee, in trust for the registered
holders of Wachovia Bank Commercial Mortgage Trust,
Commercial Mortgage Pass-Through Certificates, Series
2007-C30.” Any such account shall be an Eligible
Account or a subaccount of an Eligible Account.
13
(Id.).
And § 3.04(e) was added to require the Paying Agent — in this case, Wells
Fargo Bank, N.A. — to establish and maintain a Gain-on-Sale Reserve Account
on behalf of the Trustee for the benefit of certificateholders:
The Paying Agent, on behalf of the Trustee for the
benefit of the Certificateholders, shall establish (upon
notice from Special Servicer of an event occurring that
generates Gain-on-Sale Proceeds) and maintain the
Gain-on-Sale Reserve Account in the name of the Paying
Agent on behalf of the Trustee for the benefit of the
Certificateholders. The Gain-on-Sale Reserve Account
shall be maintained as a segregated account, separate
and apart from trust funds for mortgage pass-through
certificates of other series administered by the Paying
Agent and other accounts of the Paying Agent. Upon
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.
(C30 PSA § 3.04(e)). 9
These additions were included in the C30 PSA, which was signed by
Wachovia Commercial Mortgage Securities, Inc., as Depositor; Wachovia Bank,
N.A., as Master Servicer; Wells Fargo Bank, N.A. (“Wells Fargo”), as Trustee;
and CWC, as Special Servicer. (CWC 56.1 C12). In December 2008, Wells
Fargo acquired the Wachovia entities and succeeded to its role as Master
9
See also C30 PSA § 3.18(l):
The amount paid for ... REO Property ... purchased under this
Agreement 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).
14
Servicer for the C30 Trust. (Id. at C13). As a result of the Wachovia
acquisition, Wells Fargo was required to resign as Trustee. (Id. at C14).
Pursuant to a Trust Administration Agreement dated March 31, 2009 (the
“Trust Administration Agreement”), Bank of America, N.A. (“BofA”) was
appointed Trustee for the C30 Trust. (Id. at C15). Pursuant to the Trust
Administration Agreement, BofA appointed Wells Fargo as Paying Agent and
Trustee Agent, among other things. (Id. at C16). In December 2010, U.S. Bank
National Association (“U.S. Bank”) acquired BofA’s trust administration
business and succeeded to BofA’s role as Trustee for the C30 Trust. (Id. at
C18).
Wells Fargo, as Master Servicer for the C30 Trust, and CWC, as Special
Servicer for the C30 Trust, were responsible for administering Stuy Town on
behalf of all of the PCV Trusts. (CWC 56.1 C20). CWC was also delegated as
the Special Servicer in 7 of the 33 WBCMT PSAs, inclusive of the C30 PSA. (Id.
at C135). As such, CWC was a signatory to 7 of the 33 WBCMT PSAs.
4.
Securities Issued by the PCV Trusts
Each of the PCV Trusts issued securities, called certificates, for sale to
investors. (GSE 56.1 G12). More specifically, the PCV Trusts issued various
classes of certificates associated with varying levels of risk. (CWC 56.1 C5).
Significantly, certificateholders were not and are not parties to the
PSAs. 10 Rather, they are third-party beneficiaries, who invest on a take-it-or-
10
A New York State court has so found in the specific context of the C30 Trust. See
CWCapital Cobalt VR Ltd. v. CWCapital Investments LLC, Index No. 653277/2018 (N.Y.
Sup. Ct. Aug. 20, 2019), Dkt. No. 182 at 2 n.1, 12, 16 (concluding that CWCapital
15
leave-it basis. The certificates issued by the C30 Trust make clear that the
parties to the C30 PSA are Wachovia as Depositor, Wachovia Bank (now Wells
Fargo) as Master Servicer, CWC as Special Servicer, and Wells Fargo (now U.S.
Bank) as Trustee. (Hampson Decl., Ex. B at A-13-1-3). 11 These certificates
recite that they are “issued under and [are] subject to the terms, provisions and
conditions of the [PSA], to which [PSA] the Holder of [each] Certificate by virtue
of the acceptance hereof assents and by which such Holder is bound.” (Id.).
Appaloosa did not purchase certificates in the PCV Trusts at the time of
issuance in 2007. (See CWC 56.1 C60). Rather, it purchased certificates of
several different classes in the C30 Trust in the secondary market. (See id.;
Dkt. #239 at ¶ 17).
The GSEs are also certificateholders, though of a different class of
securities. The GSEs purchased Class A-1A Certificates, the most senior rated
Cobalt VR Ltd., an alleged certificateholder in the C30 Trust, “is not a party to [the C30]
PSA”). Numerous other court decisions have confirmed that certificateholders are not
parties to the governing PSA, but rather are third-party beneficiaries. See, e.g., MBIA v.
Nationstar Mortg., No. 18 Civ. 938 (VB), 2019 WL 357932, at *5 (S.D.N.Y. Jan. 29,
2019); Nat’l Credit v. U.S. Bank, No. 14 Civ. 9928 (KBF), 2015 WL 2359295, at *5
(S.D.N.Y. May 18, 2015); BNP Paribas v. Bank of N.Y., No. 11 Civ. 350 (PGG), 2012 WL
13059498 (S.D.N.Y. Mar. 28, 2012); Greenwich Fin. Servs. v. Countrywide, 654 F. Supp.
2d 192, 197 (S.D.N.Y. 2009); PIMCO v. Wells Fargo, No. 654743/2017 (N.Y. Sup. Ct.
Dec. 5, 2017), Dkt. No. 65 at 19; LNR Partners v. C-III Asset Mgmt., No. 8472 (VCP),
2014 WL 1312033, at *12 (Del. Ch. Mar. 31, 2014); Walnut Place v. Countrywide, 35
Misc.3d 1207(A), at *1 n.2 (N.Y. Sup. Ct. Mar. 28, 2012), aff’d, 948 N.Y.S.2d 580 (1st
Dep’t 2012); Bankers v. Countrywide, No. 8:11 Civ. 1630-T-17, 2012 WL 2594341, at *2
(M.D. Fla. July 5, 2012); Sterling v. Countrywide, No. 11 Civ. 2012 (AJS), 2012 WL
2368821, at *3 (N.D. Ill. June 21, 2012).
11
The C30 Prospectus Supplement, described infra, similarly states that “[t]he trust fund
will be created on or about the closing date pursuant to a pooling and servicing
agreement, dated as of March 1, 2007, by and among the depositor, the master servicer,
the special servicer and the trustee.” (Casse Decl., Ex. 29 (“C30 Pro Supp”) at S-8).
Certificateholders like Appaloosa were not involved in negotiating or drafting the C30
PSA or the C30 Pro Supp. (CWC 56.1 C11).
16
certificates of the C30 Trust, at par value when they were first issued. (GSE
56.1 G15; CWC 56.1 C59). The Class A-1A Certificates were backed by “loan
group 2,” which included the Notes. (GSE 56.1 G16).
Among other things, each of the Notes prohibits the Borrower from
voluntarily prepaying the Notes from their inception date through the Lockout
Expiration Date (defined as the date three months prior to maturity, here,
September 8, 2016). (GSE 56.1 G18). For the Borrower to obtain the release of
collateral underlying the loan prior to the Lockout Expiration Date, it would
have to defease the loan by substituting direct non-callable, fixed-rate
obligations of the United States of America or other non-callable fixed-rate
“government securities.” (Id. at G18). In such a circumstance, Section 2.3(b)
of the Notes would come into play:
If, prior to the Lockout Expiration Date, the
indebtedness evidenced by this Note shall have been
declared due and payable by Lender … due to the
occurrence and continuance of an Event of Default by
Borrower, then, in addition to the indebtedness
evidenced by this Note being immediately due and
payable, there shall also then be immediately due and
payable a prepayment fee in an amount equal to the
Yield Maintenance Premium (as hereinafter defined)
based on the Debt then outstanding on the date of such
acceleration.
(Lieberman Decl., Ex. 2 at § 2.3(b) (emphasis added)). In other words, the
Borrower was prohibited under the Notes from voluntarily prepaying them at
any time prior to the three months before the Maturity Date, on pain of Yield
Maintenance that would become immediately due and payable. (GSE 56.1
G20).
17
5.
The C30 Pro Supp
In conjunction with the sale of the certificates in the C30 Trust,
Wachovia published a prospectus supplement (the “C30 Pro Supp”) on
March 14, 2007, that provided investors with additional information about the
offering. (Casse Decl., Ex. 29). The C30 Pro Supp disclosed that CWC was the
special servicer for the C30 Trust. (See C30 Pro Supp S-9). It explained to
investors that:
With respect to the Peter Cooper Village & Stuyvesant
Town Loan, the Master Servicer[, Wells Fargo,] and the
Special Servicer[, CWC,] will administer the Peter
Cooper Village & Stuyvesant Town Loan and the Peter
Cooper Village & Stuyvesant Town Pari Passu
Companion Loans pursuant to the Pooling and
Servicing Agreement and the Peter Cooper Village &
Stuyvesant Town Intercreditor Agreement for so long as
the Peter Cooper Village & Stuyvesant Town Loan is part
of the Trust Fund.
(Id. at S-104–S-05).
In a section titled “Fees and Expenses,” the C30 Pro Supp explained
certain fees to which the Special Servicer was entitled:
Certain fees and expenses are payable from amounts
received on the mortgage loans in the trust fund and are
generally distributed prior to any amounts being paid to
the holders of offered certificates.
The special servicer is entitled to the special servicing
fee [the “Special Servicing Fee”] which is payable
monthly on each mortgage loan that is a specially
serviced mortgage loan and each REO mortgage loan
from general collections on the mortgage loans. The
special servicing fee accrues at a rate equal to 0.25%
per annum and is computed on the basis of the same
principal amount respecting which any related interest
payment due on such specially serviced mortgage loan
or REO mortgage loan, as the case may be, is paid.
18
The special servicer is also entitled to a liquidation fee
[the “Liquidation Fee”] with respect to each specially
serviced mortgage loan that is generally an amount
equal to 1.00% of any whole or partial cash payments
of liquidation proceeds received in respect thereof or,
with respect to the Peter Cooper Village & Stuyvesant
Town mortgage loan, the lesser of (i) 0.50% of any whole
or partial cash payments of liquidation proceeds
received in respect thereof and (ii) $15,000,000;
provided, however, in no event will the liquidation fee be
payable to the extent a workout fee is payable
concerning the related cash payments.
The special servicer is also entitled to a workout fee [the
“Workout Fee”] with respect to each mortgage loan that
is no longer a specially serviced mortgage loan that is
generally equal to 1.00% of all payments of interest and
principal received on such mortgage loan for so long as
it remains a corrected mortgage loan or, with respect to
the Peter Cooper Village & Stuyvesant Town mortgage
loan, the lesser of (i) 0.50% of all payments of interest
and principal received on such mortgage loan for so long
as it remains a corrected mortgage loan, and
(ii) $15,000,000.…
The master servicer, special servicer, and trustee are
entitled to certain other additional fees and
reimbursement expenses. All fees and expenses will
generally be payable prior to distribution on the
certificates.
(C30 Pro Supp S-28–S-29). And in a later section, titled “Compensation and
Payment of Expenses,” the C30 Pro Supp adds:
The Master Servicer, the Special Servicer and the
Trustee will be entitled to payment of certain fees as
compensation for its services performed under the
Pooling and Servicing Agreement. Certain additional
fees and costs payable by the related Mortgagors are
allocable to the Master Servicer, the Special Servicer,
and the Trustee, but such amounts are not payable
from amounts that the Trust Fund is entitled to receive.
19
(Id. at S-171). 12
The C30 Pro Supp describes the Special Servicing Fee, Liquidation Fee,
and Workout Fee as the “principal compensation” to be paid to the Special
Servicer in respect of its special servicing activities. (C30 Pro Supp S-177).
But a few pages later, the C30 Pro Supp clarifies that:
As additional servicing compensation, the Master
Servicer and/or the Special Servicer is entitled to retain
all modification fees, assumption fees, defeasance fees,
assumption and other application fees, late payment
charges and default interest …. In addition, to the
extent the master servicer special servicer receives late
payment charges or default interest on a Mortgage Loan
for which interest on Advances or Additional Trust Fund
Expenses (other than Special Servicing Fees, Workout
Fees and/or Liquidation Fees) related to such Mortgage
Loan has been paid and not previously reimbursed to
the Trust Fund, such payment charges or default
interest will be used to reimburse the Trust Fund for
such payment of interest or Additional Trust Fund
Expenses.
(Id. at S-179).
On the specific topic of Yield Maintenance, the C30 Pro Supp provides:
12
In a chart that follows, the C30 Pro Supp indicates that the special servicer may be
entitled to “Additional Special Servicing Compensation” in the form of:
Late payment charges and default interest actually collected with
respect to any Mortgage Loan, but only to the extent such late
payment charges and default interest (a) accrued with respect to
that Mortgage Loan while it was specially serviced or after the
related mortgaged property became an REO Property; and (b) are
not otherwise allocable to pay the following items with respect to
the related Mortgage Loan or REO Property; (i) interest on advance,
or (ii) Additional Trust Fund Expenses (exclusive of special
servicing fees, liquidation fees and workout fees) currently payable
or previously paid with respect to the related Mortgage Loan,
Mortgaged Property or REO Property from collections on the
mortgage pool and not previously reimbursed.
(C30 Pro Supp S-174–S-75).
20
On each distribution date, any prepayment premium or
yield maintenance charge actually collected during the
related collection period on a mortgage loan included in
the trust fund will be distributed to the holders of each
class of offered certificates ….
(C30 Pro Supp S-30). A later section similarly defines Yield Maintenance as:
fees paid or payable, as the context requires, as a result
of a prepayment of principal on a Mortgage Loan, which
fees have been calculated (based on Scheduled
Payments on such Mortgage Loan) to compensate the
holder of the Mortgage for reinvestment losses based on
the value of a discount rate at or near the time of
prepayment ….
(Id. at S-215).
The C30 Pro Supp does not define “Gain-on-Sale” or “Gain-on-Sale
Proceeds,” though it does define a “Gain-on-Sale Reserve Account”:
The Trustee will establish and will maintain a “Gain-onSale Reserve Account” in the name of the Trustee for the
benefit of the Certificateholders. To the extent that
gains realized on sales of Mortgaged Properties, if any,
are not used to offset Realized Losses previously
allocated to the Certificates, such gains will be held and
applied to offset future Realized Losses, if any.
(C30 Pro Supp S-204).
6.
The Servicers and Their Respective Obligations
Under the C30 PSA and the Co-Lender Agreement, the Master Servicer
and Special Servicer are responsible for servicing and administering the PCV
Loan. (CWC 56.1 C19). Generally speaking, the Master Servicer, Wells Fargo,
services performing loans held by the C30 Trust, while the Special Servicer,
CWC, services non-performing loans. (Id. at C20). As explained above, Wells
21
Fargo and CWC are parties to the C30 PSA, along with the Depositor (also now
Wells Fargo) and Trustee (U.S. Bank). (Id. at C12-C18).
In addition to servicing non-performing loans, CWC is responsible for
allocating post-closing proceeds from the sale of an REO Property in
accordance with the terms of the C30 PSA, which includes responsibility for
calculating Gain-on-Sale Proceeds. (CWC 56.1 C21-C22). Following the sale of
REO property, CWC completes a realized loss report (“RLR”) to allocate REO
sale proceeds and then sends the RLR to the Master Servicer for review. (CWC
56.1 C23-C25). Wells Fargo, as Master Servicer, is then responsible for
forwarding the RLR to the Paying Agent and Trustee. (CWC 56.1 C27).
As explained above, § 3.11(c) of the C30 PSA provides for several forms of
Special Servicer compensation, including a Special Servicing Fee, a Workout
Fee, and a Liquidation Fee, while § 3.11(d) provides that:
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[.]
(C30 PSA § 3.11(d)).
22
7.
The Transfer of the PCV Loan to Special Servicing
Three years after the Stuy Town purchase, on November 6, 2009, the
PCV Loan was transferred to CWC for special servicing because of the risk of
imminent default. (CWC 56.1 C42; GSE 56.1 G21). Upon transfer to special
servicing, the PCV Loan became a “Specially Serviced Mortgage Loan” as
defined in the C30 PSA. (CWC 56.1 C43).
On January 8, 2010, the Borrower defaulted on the PCV Loan; CWC, on
behalf of the Senior Lender, provided written notice of the default. (CWC 56.1
C44). By letter dated January 29, 2010, CWC, on behalf of the Senior Lender,
accelerated the PCV Loan when the default was not cured. (Id. at C45).
Pursuant to the Notes, Yield Maintenance became due and payable when the
Borrower defaulted and the indebtedness on the Notes was declared due and
payable. (GSE 56.1 G24).
On February 16, 2010, CWC, on behalf of the Senior Lender, filed a
complaint in the United States District Court for the Southern District of New
York asserting a single count for foreclosure of Stuy Town. (CWC 56.1 C46;
Appaloosa 56.1 A9; see also Bank of Am., N.A. v. PCV St. Owner L.P., No. 10
Civ. 1178 (AKH) (S.D.N.Y.) (the “2010 Action”), Dkt. #1). On February 23,
2010, Appaloosa filed a motion to intervene. (2010 Action, Dkt. #16). The
court denied the motion on April 30, 2010. (Id., Dkt. #89). On June 21, 2010,
the court entered a Judgment of Foreclosure and Sale (the “Foreclosure
Judgment”), which, inter alia, authorized the foreclosure sale of Stuy Town,
appointed a referee to conduct the sale of the property, and calculated amounts
23
owed on the PCV Loan. (Id., Dkt. #92; see also CWC 56.1 C49; GSE 56.1
A178).
In the Foreclosure Judgment, the court computed that
$3,666,734,464.70 was owed on the Senior Loan, representing: (i) the unpaid
principal balance of $3 billion; (ii) interest of $48,225,000 through April 7,
2010; (iii) Penalty Interest of $22,500,000 through April 7, 2010; (iv) Penalty
Interest on unpaid interest of $220,423.67 through April 7, 2010; (v) per diem
interest on principal and unpaid interest of $11,916,443.70 between April 7,
2010, and April 22, 2010; (vi) Yield Maintenance of $622,110,023.31; and
(vii) other charges incurred under the loan documents of $956,427.96; from
which was subtracted (viii) $39,223,853.94 in cash flow from operations,
escrow balances, and interest reserves. (2010 Action, Dkt. #92). The court
further found that additional interest on the outstanding principal balance and
unpaid interest amounts would continue to run at a rate of 6.434%, and that
Penalty Interest on the outstanding principal balance and unpaid interest
amounts would continue to run at a rate of 3%, through the date of the
Foreclosure Judgment. (Id.). Thereafter, post-judgment interest would be
calculated at the federal rate, pursuant to 28 U.S.C. § 1961(a). (Id.).
Despite the entry of the Foreclosure Judgment, no foreclosure sale ever
took place. (CWC 56.1 C50). CWC effectively operated Stuy Town for the next
four years until, on June 3, 2014, the PCV Trusts took title to Stuy Town via a
deed in lieu of foreclosure. (CWC 56.1 C53; GSE 56.1 G31). The Deed In Lieu
of Foreclosure Agreement recites:
24
As this Deed is being executed and delivered in lieu of
foreclosure of the Mortgage (as defined below), the
Grantor hereby makes the following representations
and warranties: This Deed is an absolute conveyance
of the title to the above described property, in effect as
well as in form, and is not intended as a mortgage,
conveyance in trust or as a hypothecation of any kind
or character; that the conveyance herein is freely and
fairly made and not as a result of duress, force, undue
influence or threats of any kind; that the conveyance is
a bona fide and not given to hinder, delay or defraud the
rights of creditors or contravene the bankruptcy laws of
the United States or any other applicable laws; Grantor
further
acknowledges
that
there
is
nothing
unconscionable in this transaction; Grantor considers
this transaction to be fair and equitable based on
Grantor’s determination of the value and financial
condition of the Property; that the Grantor has no
option to purchase or any other right, title or interest in
or to the Property; and that the Property is encumbered
by that certain Mortgage, Security Agreement,
Assignment of Rents and Fixture Filing, dated as of
November 17, 2006, by PCV Borrower to Wachovia
Bank, National Association and Merrill Lynch Mortgage
Lender, Inc., and recorded in the Office of the City
Register of the City of New York on November 20, 2006
as CRFN 2006000643688 (as amended and assigned to
date, the “Mortgage”), the current mortgagee thereunder
being an affiliate of the Grantee.
IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT
THE PARTIES HEREIN DO NOT INTEND THAT
ACCEPTANCE OF THIS DEED IN LIEU OF
FORECLOSURE BE DEEMED TO CONSTITUTE A
MERGER OF THE MORTGAGE REFERRED TO IN THE
PRECEDING PARAGRAPH WITH THE FEE CONVEYED
HEREBY BUT THAT THE MORTGAGE SHALL REMAIN
AS A GOOD AND VALID MORTGAGE SEPARATE AND
APART FROM ANY OTHER INTEREST OF GRANTEE IN
FEE. FURTHER, THE TRANSFER CONTEMPLATED BY
THIS DEED SHALL NOT CONSTITUTE A FULL OR
PARTIAL SATISFACTION, WAIVER OR RELEASE OF
THE
INDEBTEDNESS
EVIDENCED
BY
ANY
INSTRUMENT
SECURED
BY
OR
MADE
IN
CONJUNCTION WITH THE MORTGAGE.
25
(Casse Decl., Ex. 39 at 2 (capitalization in original)). Further, the Agreement
explicitly states that the “indebtedness under the Notes and the lien of the
Mortgage shall not be extinguished as a result of the delivery of the Transfer
Documents.” (Casse Decl., Ex. 41 at 5). As a result of the deed in lieu of
foreclosure, Stuy Town became “REO Property,” and the PCV Loan became an
“REO Loan,” under the C30 PSA. (CWC 56.1 C54-C55).
8.
The Stuy Town Liquidation
On October 20, 2015, it was publicly announced that Blackstone LP
(“Blackstone”) and Ivanhoe Cambridge Inc. (“Ivanhoe”) had agreed to purchase
Stuy Town from the PCV Trusts for $5.4 billion. (Appaloosa 56.1 A16). On
December 18, 2015, the Property was sold to affiliates of Blackstone and
Ivanhoe for $5,309,381,250. (CWC 56.1 C58; Appaloosa 56.1 A17). The sale of
Stuy Town was treated as an REO Disposition by both Wells Fargo, as Master
Servicer, and CWC, as Special Servicer. (CWC 56.1 C69). 13
The Stuy Town sale was an REO Disposition that generated “Liquidation
Proceeds” within the meaning of C30 PSA. (CWC 56.1 C68-C69; GSE 56.1
G48). As Special Servicer, CWC was responsible for distributing those
proceeds in accordance with the C30 PSA. (CWC 56.1 C21). CWC distributed
the proceeds in accordance with the “waterfall” of payment priorities detailed in
§ 3.02(b) of the C30 PSA, see supra at 10-11, including allocating Yield
13
The C30 PSA defines “REO Disposition” as “The sale or other disposition of any REO
Property pursuant to Section 3.18(h).” (C30 PSA § 1.01).
26
Maintenance and Penalty Interest per the fifth step of the waterfall. (CWC 56.1
C67-C70; GSE 56.1 G49).
As is typical in the case of REO Dispositions, CWC completed an RLR
(the “Stuy Town RLR”), which reflected the allocation of the Stuy Town sale
proceeds as CWC believed they should be distributed under the PSA. (CWC
56.1 C24). The Stuy Town RLR reflects that CWC first calculated
$4,869,183,977.85 of “Net Proceeds Received on Liquidation” (or Liquidation
Proceeds), comprising $5,309,381,250.00 of sale proceeds, $84,898,759.76 of
amounts held in property-level suspense accounts, and a seller credit of
$24,694,052.26, less the costs associated with the sale (including broker fees
of $16,674,809.00 and litigation settlement costs of $533,115,654.07). (Id. at
C75). CWC then ran the Liquidation Proceeds through the payment priorities
waterfall set forth in § 3.02(b), with the cash applied sequentially to each step
until exhausted, resulting in $614,424,027.57 of Penalty Interest and
$156,797,854.44 of Yield Maintenance. (Id. at C77). 14 At the last step of the
waterfall, CWC calculated Gain-on-Sale Proceeds in the amount of
$49,672,388.15. (CWC 56.1 C78).
CWC’s calculations were ultimately approved by Wells Fargo, as Master
Servicer, and sent by Wells Fargo to the Paying Agent and Trustee, U.S. Bank.
14
From CWC’s calculation of $156,797,854.55 of Yield Maintenance generally due, the
Stuy Town RLR allocated $52,384,737.73 to the MLCFC 2007-5 Trust and the MLCFC
2007-6 Trust. (GSE 56.1 G57). The remaining Yield Maintenance figure of
$104,413,116.71 reflected charges due to the C30 Trust, the C31 Trust, and the
COBALT 2007-C2 Trust, and has been held in escrow pending the outcome of this
litigation. (GSE 56.1 G59; CWC 56.1 C80).
27
(CWC 56.1 C25, C27). Certificateholders, including Appaloosa and the GSEs,
had no involvement in allocating the proceeds resulting from the Stuy Town
sale. (Id. at C23).
B.
Procedural Background
1.
The Petition, Its Removal, and Its Transfer to the SDNY
On December 17, 2015, U.S. Bank, as Trustee of the C30 Trust, filed a
Petition for Instructions in the Administration of Certain Trusts in the District
Court for the Second Judicial District of Minnesota. (See Dkt. #1, Ex. A (the
“Petition”)). The Petition sought instructions on the proper construction of the
operative agreements at issue here, including the C30 PSA. (Id.). It framed the
first relevant question as:
whether — in connection with the sale of REO
Property — (i) Section 3.11(d) [of the C30 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 C30 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). It also listed a second issue relevant to the correct allocation of
the disputed funds, namely, the amount of Penalty Interest that had accrued
on the REO Loan. (Id. at ¶ 51).
On February 24, 2016, CWC moved to dismiss the Petition on
jurisdictional, mootness, and forum non conveniens grounds, which motion the
Minnesota state court denied. (Dkt. #1 ¶ 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
28
this Court, which United States District Judge Donovan W. Frank approved in
an Opinion and Order dated March 14, 2017. (Dkt. #53, 111). This case was
then assigned to this Court. 15
2.
The Cross-Motions for Judgment on the Pleadings
On June 30, 2017, shortly after the case was transferred, Appaloosa
moved, and CWC and the GSEs cross-moved, for judgment on the pleadings.
(See Dkt. #169-179). The parties offered competing interpretations of how the
proceeds from the Stuy Town liquidation of should be distributed under the
C30 PSA, and these interpretations are summarized here for completeness.
a.
CWC’s and GSEs’ Interpretation of the C30 PSA
To a large extent, CWC’s and the GSEs’ arguments regarding the
interpretation of the C30 PSA were coextensive. They pointed to subsections
(a) and (b) of § 3.02, which address the collection of REO Loan proceeds, and
argued specifically that the portion of § 3.02(b) that states that “[a]mounts
collected on any REO Loan shall be deemed to be applied in accordance with
the definition thereof” required CWC to run the Stuy Town sale proceeds
through the payment priorities waterfall contained in the definition of an REO
Loan:
15
At the time of the transfer, Interested Party Inessoft, LLC (“Inessoft”), moved to
intervene. (Dkt. #104-110). The motion was transferred to this Court, and Inessoft
filed an amended motion shortly thereafter. (Dkt. #126-127). The motion was denied
without prejudice during a telephonic conference held on May 31, 2017. (Dkt. #158).
Nearly a year later, in March 2018, Interested Party CWCapital Cobalt Vr Ltd. (“Cobalt”)
moved to intervene. (Dkt. #196-199). The motion was denied on May 23, 2018 (see
Dkt. #237 (transcript), 252 (order)), and the denial was subsequently upheld by the
Second Circuit, see CWCapital Cobalt Vr Ltd. v. U.S. Bank Nat’l Ass’n, 790 F. App’x 260
(2d Cir. 2019) (summary order).
29
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
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.
(C30 PSA § 1.01 (emphases added)). What is more, CWC and the GSEs
reasoned that the fourth step of the waterfall, by its terms, entitled CWC to
retain $600 million in Penalty Interest (pursuant to § 3.11(d)), and entitled the
GSEs to $157 million in Yield Maintenance (pursuant to § 2.3(b) of the Notes of
the Stuy Town Senior Loan).
CWC and the GSEs argued that the Gain-on-Sale Proceeds definition in
the C30 PSA, and the related references to gain-on-sale in the relevant
documents, did not affect the payment priorities for the liquidation of an REO
Loan. They explained that “gain-on-sale” was merely a catchall provision for
calculating fees after liquidation proceeds had been distributed in accordance
with the REO Loan Waterfall. According to CWC and the GSEs, to the extent
that Gain-on-Sale Proceeds resulted at all from the Stuy Town sale, they were
to be segregated and distributed as part of the “other amounts” category,
contained in the last clause of the last step of the REO Loan Waterfall.
Relatedly, CWC and the GSEs argued that the REO Loan Waterfall provision
30
could be harmonized with the definition of Gain-on-Sale Proceeds because
Penalty Interest and Yield Maintenance were both part of the “Liquidation
Expenses” that were subtracted from the Purchase Price before any Gain-onSale Proceeds could be calculated.
b.
Appaloosa’s Interpretation of the C30 PSA
Unsurprisingly, Appaloosa held a different view. To it, the starting point
for distribution of the Stuy Town liquidation proceeds was § 3.04(e) of the C30
PSA, which it interpreted to obligate CWC to calculate Gain-on-Sale Proceeds,
segregate those 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. In Appaloosa’s estimation, the REO Loan Waterfall
either had no application to the Stuy Town sale or should have been considered
only after the segregation of Gain-on-Sale Proceeds.
More broadly, Appaloosa contended that CWC was entitled to no Penalty
Interest, and the GSEs were entitled to no Yield Maintenance, because such
items were never recoverable in an REO Disposition. That contention rested on
two theories: (i) Penalty Interest and Yield Maintenance must be paid by the
borrower, and there is no borrower in an REO Loan setting; and (ii) the
definition of Gain-on-Sale Proceeds trumps the payment waterfalls set forth in
§ 3.02(b) and the definition of REO Loan. Because there was no carve-out for
Penalty Interest or Yield Maintenance in the Gain-on-Sale Proceeds definition
(i.e., neither the undefined term Liquidation Expenses nor the term Purchase
Price included Penalty Interest and Yield Maintenance), Appaloosa reasoned
31
that Penalty Interest and Yield Maintenance were simply not recoverable in this
setting.
c.
The Court’s Opinion
On March 9, 2018, this Court issued an order denying the cross-motions
for judgment on the pleadings. See PSA I, 2018 WL 1229702. It concluded
principally that the C30 PSA did not clearly and unambiguously establish
either: (i) that Penalty Interest and Yield Maintenance were allocated before
Gain-on-Sale Proceeds were distributed to certificateholders, as CWC and the
GSEs claimed; or (ii) that Gain-on-Sale Proceeds were allocated to
certificateholders prior to and separate from the payment, if any, of Penalty
Interest and Yield Maintenance, as Appaloosa claimed. Id. at *9.
The Court found the C30 PSA to be ambiguous as to the priority of
payments upon the sale of an REO Property for several reasons. PSA I, 2018
WL 1229702, at *9. First, the Court found it unclear whether the definition of
Gain-on-Sale Proceeds in § 1.01 of the C30 PSA allowed for Penalty Interest
and Yield Maintenance to be deducted as Liquidation Expenses. Id. Second,
the REO Loan Waterfall did not reference either Gain-on-Sale Proceeds or
Liquidation Proceeds, creating ambiguity regarding its application upon the
sale of an REO Property. Id. Third, the Court found that the tension between
§ 3.18(l), which governed the allocation of Gain-on-Sale Proceeds, and the REO
32
Loan Waterfall exacerbated the ambiguity surrounding the allocation of
proceeds from the sale of an REO Property. Id.
The Court concluded that both sides presented reasonable arguments for
their construction of the C30 PSA, but that neither side had adequately
explained or harmonized the different provisions of the C30 PSA to permit the
Court to decide the issue as a matter of law. PSA I, 2018 WL 1229702, at *1114. Accordingly, the Court denied the motions. See id. at *14. 16
3.
Discovery and the Motion to Dismiss Appaloosa’s Cross-Claim
Following the denial of the cross-motions for judgment on the pleadings,
the Court held a conference on April 11, 2018, to discuss next steps in the
litigation. (Dkt. #220 (transcript)). At that conference, Appaloosa notified the
Court of its intention to submit an amended pleading asserting a crossclaim
against CWC. (Id. at 48). The Court also set a discovery schedule. (Id.). In the
following months, the Court resolved several discovery issues raised by the
parties. (See Dkt. #262, 275).
On June 4, 2018, the Court granted Appaloosa’s request to submit an
amended pleading (Dkt. #236), and on June 18, 2018, Appaloosa filed an
amended pleading asserting a cross-claim against CWC (Dkt. #239). CWC then
moved to dismiss the cross-claim, arguing that Appaloosa did not have
standing to bring the cross-claim, because it had not complied with the No
Action Clause in § 11.03(c) of the C30 PSA, which requires, inter alia, that
16
The Court did not reach the second question raised by the Petition, regarding the
proper calculation of penalty interest. See PSA I, 2018 WL 1229702, at *14 n.8
(S.D.N.Y. Mar. 9, 2018).
33
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. (Dkt. #244). On March 25, 2019, the
Court granted CWC’s motion and dismissed the cross-claim, concluding that
Appaloosa lacked sufficient voting rights to bring the suit. See In re the Trusts
Established Under the Pooling and Servicing Agreements, 375 F. Supp. 3d 441
(S.D.N.Y. 2019) (“PSA II”).
4.
The Instant Motions
On April 9, 2019, after about a year of discovery, the Court held a
conference to determine whether the parties intended to file summary
judgment motions or sought to proceed directly to a bench trial. (Dkt. #296
(transcript)). At that time, CWC and the GSEs indicated their intent to file
summary judgment motions; Appaloosa indicated its intent to file a motion for
partial summary judgment; and all three parties indicated their intent to file
motions to exclude the expert witnesses of the opposing side. At present, the
Court has before it the following motions:
•
CWC’s motion for summary judgment (see Dkt. #301310, 312, 315-316, 338-341, 357-359, 373-378, 381383, 387-388, 394-397);
•
The GSEs’ motion for summary judgment (see Dkt.
#317-321, 342-344, 353-355, 365-370, 398-400);
•
Appaloosa’s motion for partial summary judgment (see
Dkt. #322-323, 325-326, 334-335, 360-362, 384-385,
389-391, 404-406);
•
CWC’s motion to exclude the expert testimony of Ann
Hambly, Michael Hartzmark, Ph.D., and Andrew
34
Berman (see Dkt. #324, 329-330, 345, 356, 379-380,
401);
•
The GSEs’ motion to exclude the expert testimony of
Ann Hambly, Michael Hartzmark, Ph.D., and Andrew
Berman (see Dkt. #311, 313-314, 346-347, 352, 371372, 402-403); and
•
Appaloosa’s motion to exclude the expert testimony of
Ronald F. Greenspan, Thomas F. Nealon III, and Brian
Olasov (see Dkt. #327-328, 331, 336-337, 350-351,
386, 392-393, 407-408).
For ease of analysis, the Court addresses the parties’ summary judgment
motions, several arguments of which implicate the expert witness opinions
proffered by the parties, before specifically addressing the motions to exclude.
For the reasons explained below, the Court grants CWC’s and the GSEs’
motions for summary judgment, denies Appaloosa’s motion for partial
summary judgment, denies Appaloosa’s motion to exclude in part on the merits
and in part as moot, and denies as moot CWC’s and the GSEs’ motions to
exclude.
DISCUSSION
A.
The Court Grants CWC’s and the GSEs’ Motions for Summary
Judgment and Denies Appaloosa’s Motion for Partial Summary
Judgment
1.
Summary Judgment Under Fed. R. Civ. P. 56
Under Federal Rule of Civil Procedure 56(a), a “court shall grant
summary judgment if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.”
35
Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). 17 A
fact is “material” if it “might affect the outcome of the suit under the governing
law,” and is genuinely in dispute “if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986); see also Jeffreys v. City of New York, 426 F.3d
549, 553 (2d Cir. 2005). “The district court’s task on a summary judgment
motion — even in a nonjury case — is to determine whether genuine issues of
material fact exist for trial, not to make findings of fact.” O’Hara v. Nat’l Union
Fire Ins. Co. of Pittsburgh, PA, 642 F.3d 110, 116 (2d Cir. 2011).
The moving party bears the initial burden of demonstrating “the absence
of a genuine issue of material fact.” Celotex, 477 U.S. at 323. The movant may
discharge its burden by showing that the nonmoving party has “fail[ed] to make
a showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial.”
Celotex, 477 U.S. at 322; see also Selevan v. N.Y. Thruway Auth., 711 F.3d 253,
256 (2d Cir. 2013) (finding summary judgment appropriate where the nonmoving party failed to “come forth with evidence sufficient to permit a
17
The 2010 Amendments to the Federal Rules of Civil Procedure revised the summary
judgment standard from a genuine “issue” of material fact to a genuine “dispute” of
material fact. See Fed. R. Civ. P. 56, advisory comm. notes (2010 Amendments) (noting
that the amendment to “[s]ubdivision (a) … chang[es] only one word — genuine ‘issue’
becomes genuine ‘dispute.’ ‘Dispute better reflects the focus of a summary-judgment
determination.”). This Court uses the post-amendment standard, but continues to be
guided by pre-amendment Supreme Court and Second Circuit precedent that refers to
“genuine issues of material fact.”
36
reasonable juror to return a verdict in his or her favor on an essential element
of a claim” (internal quotation marks omitted)).
If the moving party meets this burden, the nonmoving party must “set
forth specific facts showing that there is a genuine issue for trial” using
affidavits or otherwise, and cannot rely on the “mere allegations or denials”
contained in the pleadings. Anderson, 477 U.S. at 248; see also Wright v.
Goord, 554 F.3d 255, 266 (2d Cir. 2009). In other words, the nonmoving party
“must do more than simply show that there is some metaphysical doubt as to
the material facts,” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 586 (1986), and cannot rely on “mere speculation or conjecture as to the
true nature of the facts to overcome a motion for summary judgment,” Knight v.
U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986).
“When ruling on a summary judgment motion, the district court must
construe the facts in the light most favorable to the non-moving party and
must resolve all ambiguities and draw all reasonable inferences against the
movant.” Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir.
2003). However, in considering “what may reasonably be inferred” from
witness testimony, the court should not accord the non-moving party the
benefit of “unreasonable inferences, or inferences at war with undisputed
facts.” Berk v. St. Vincent’s Hosp. & Med. Ctr., 380 F. Supp. 2d 334, 342
(S.D.N.Y. 2005) (quoting Cty. of Suffolk v. Long Island Lighting Co., 907 F.2d
1295, 1318 (2d Cir. 1990)).
37
“When interpreting a contract under New York law, our ‘primary objective
is to give effect to the intent of the parties as revealed by the language of their
agreement.’” Chesapeake Energy Corp. v. Bank of N.Y. Mellon Tr. Co., 773 F.3d
110, 113-14 (2d Cir. 2014) (internal citations omitted). Where, as here, a court
finds a contract ambiguous with respect to the question disputed by the
parties, the factfinder must “examine extrinsic evidence to determine the
contract’s effect.” Luitpold Pharm., Inc. v. Ed. Geistlich Sohne A.G. Fur
Chemische Industrie, 784 F.3d 78, 87-88 (2d Cir. 2015); accord In re Motors
Liquidation Co., 943 F.3d 125, 131 (2d Cir. 2019) (“If an ambiguity is found,
‘the court may accept any available extrinsic evidence to ascertain the meaning
intended by the parties during the formation of the contract.’” (quoting Int’l
Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002))).
This examination requires considering all “surrounding facts and
circumstances” to ascertain the intent of the contracting parties, U.S. Naval
Inst. v. Charter Commc’ns, Inc., 875 F.2d 1044, 1048 (2d Cir. 1989), including
any relevant course of performance, usage of trade, “as well as a party’s own
admissions, the party’s actions or statements from which knowledge or reason
to know may be inferred, and the usages and meanings of third persons with
which the party probably was familiar.” JA Apparel Corp. v. Abboud, 682 F.
Supp. 2d 294, 303 (S.D.N.Y. 2010). The factfinder should also consider “the
natural and ordinary usage” of the words of the governing documents,
Compagnie Financiere de CIC et de L’Union Europeenne v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 232 F.3d 153, 158 (2d Cir. 2000), in light of “the customs,
38
practices, usages and terminology as generally understood in the particular
trade or business,” International Multifoods Corp., 309 F.3d at 83.
Summary judgment should be granted if “the evidence presented about
the parties’ intended meaning is so one-sided that no reasonable person could
decide the contrary or if the non-moving party fails to point to any relevant
extrinsic evidence supporting that party’s interpretation of the language.”
Luitpold Pharm., Inc., 784 F.3d at 88 (citations and internal quotation marks
omitted); see also Compagnie Financiere de CIC et de L’Union Europeenne, 232
F.3d at 158, 161 (granting summary judgment on an ambiguous contract
where the extrinsic evidence was one-sided in favor of the appealing party);
Blum v. Spaha Cap. Mgmt., LLC, 44 F. Supp. 3d 482, 498 (S.D.N.Y. 2014)
(same); Faulkner v. Nat’l Geographic Soc., 452 F. Supp. 2d 369, 377, 382
(S.D.N.Y. 2006) (same). “Similarly, summary judgment may be granted despite
any ambiguities in the contract ‘where there is no extrinsic evidence that would
support a resolution of [the] ambiguities in favor of the nonmoving party’s
case.’” N.Y. Marine & Gen’l Ins. Co. v. Lafarge North Am., Inc., 599 F.3d 102,
115 (2d Cir. 2010) (quoting Topps Co. v. Cadbury Stani S.A.I.C., 526 F.3d 63,
68 (2d Cir. 2008)). The linchpin of a summary judgment determination is the
existence vel non of genuine disputes of material fact. See id.; AD/SAT, Div. of
Skylight, Inc. v. Associated Press, 181 F.3d 216, 226 (2d Cir. 1999).
2.
The Summary Judgment Motions Before the Court
To review, the Court has before it the parties’ competing summary
judgment motions; a voluminous summary judgment record; CWC’s and the
39
GSEs’ respective motions to exclude Appaloosa’s experts; and Appaloosa’s
motion to exclude CWC’s and the GSEs’ experts. The Court also has before it
the parties’ respective Daubert motions, which ask the Court to exclude certain
expert evidence from consideration at this stage. Therefore, where the Court
considers expert testimony in its analysis of the summary judgment motions, it
has made the antecedent determination that such evidence satisfies Federal
Rule of Evidence 702, as described infra. 18 Because the Court relies on CWC’s
experts, Greenspan and Nealon, in granting CWC’s and the GSEs’ summary
judgment motions, the Court provides a more robust Daubert analysis of their
opinions infra.
While it is true (as Appaloosa never ceases to mention) that the Court
previously found that certain conflicting provisions within the C30 PSA
rendered it ambiguous regarding the allocation of REO liquidation proceeds,
the Court now has before it a surfeit of extrinsic evidence regarding those
provisions. This evidence, which the Court will proceed to outline and analyze,
overwhelmingly favors CWC’s and the GSEs’ interpretation of the C30 PSA —
that Penalty Interest and Yield Maintenance are paid prior to Gain-on-Sale
18
At the summary judgment stage, it is appropriate for district courts to decide questions
regarding the admissibility of evidence. Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir.
1997). An expert’s opinions that are without factual basis and are based on speculation
or conjecture are inappropriate material for consideration on a motion for summary
judgment. Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 311 (2d Cir.
2008). In deciding whether certain expert opinions can be considered, the Court is
mindful of the fact that the Daubert “dynamic is slightly altered in a bench trial.”
Joseph S. v. Hogan, No. 06 Civ. 1042 (BMC) (SMG), 2011 WL 2848330, at *2-3 (E.D.N.Y.
July 15, 2011); Victoria’s Secret Stores Brand Mgmt., Inc. v. Sexy Hair Concepts, LLC,
No. 07 Civ. 5804 (GEL), 2009 WL 959775, at *6 n. 3 (S.D.N.Y. Apr. 8, 2009) (“[W]here a
bench trial is in prospect, resolving Daubert questions at a pretrial stage is generally
less efficient than simply hearing the evidence[.]”).
40
Proceeds. The Court has considered Appaloosa’s multifarious challenges to
CWC’s and the GSEs’ extrinsic evidence; it has also considered Appaloosa’s
extrinsic evidence offered in support of its arguments. Ultimately, however, the
Court concludes that Appaloosa’s challenges to CWC’s and the GSEs’ extrinsic
evidence are either immaterial or not germane to the issues before the Court,
and the limited extrinsic evidence Appaloosa offers is insufficient to defeat
CWC’s and the GSEs’ motions for summary judgment. See Eastman Kodak Co.
v. Asia Optical Co., 518 F. App’x 23, 24 (2d Cir. 2013) (summary order)
(rejecting the competing contractual interpretation because it was “at odds with
the record”). Because the evidence is “so one-sided that no reasonable person
could decide the contrary,” and because Appaloosa “fails to point to any
relevant extrinsic evidence supporting [its] interpretation of the language,”
Luitpold Pharmaceuticals, Inc., 784 F.3d at 88, CWC and the GSEs are entitled
to summary judgment and Appaloosa is not entitled to partial summary
judgment.
3.
The Parties’ Competing Views of the C30 PSA
A year of discovery has only succeeded in further entrenching the parties’
positions. CWC and the GSEs contend that the payment priorities contained in
§ 3.02(b) of the C30 PSA control the allocation of proceeds collected from the
sale of Stuy Town as an REO Property. (CWC 56.1 C66-C67). 19 According to
19
In its earlier motion for judgment on the pleadings, CWC argued primarily that § 3.02(b)
directed it to the definition of REO Loan, which contained the relevant waterfall
provision for the Stuy Town liquidation. (See Dkt. #175). Discovery revealed that
employees of CWC had actually utilized the waterfall provision of § 3.02(b), rather than
the REO Loan definition, and CWC now argues that the § 3.02(b) waterfall is the one
that is applicable. (See generally CWC SJ Br.). Because CWC argued in favor of
41
them, upon the disposition of Stuy Town, CWC worked collaboratively with
Wells Fargo to apply the cash proceeds from the sale in the order specified in
the § 3.02(b) waterfall. After satisfying each step in § 3.02(b), which included
the principal and interest due to the PCV Trusts on the Stuy Town Loan, $157
million in Yield Maintenance, and $614 million in Penalty Interest, CWC
calculated approximately $50 million that remained as Gain-on-Sale Proceeds
to be distributed to certificateholders.
CWC and the GSEs argue that the distribution of proceeds in this
manner is consistent with the text of the C30 PSA and the intent of its parties.
In broad strokes, CWC and the GSEs contend that the definition of “Gain-onSale Proceeds” and its related provisions were added to the C4 PSA in the
WBCMT shelf as a “catchall” provision designed to allocate, to the relevant
trust, the money that remained after all else had been paid. By way of
historical background, CWC explains that the definition of Gain-on-Sale
Proceeds and its related references in the WBCMT PSAs emerged in the late
applying the REO Loan definition in its motion for judgment on the pleadings,
Appaloosa argues that CWC’s change in position is prohibited under the law of the case
doctrine. (See Appaloosa CWC SJ Opp. 24-25). The Court will not preclude CWC from
making an argument, at the summary judgment stage, that is consistent with the
evidence that has been produced during discovery. Further, CWC’s motion for
judgment on the pleadings explicitly stated that
Although CWC[] followed the specific direction in Section 3.02(b) to
apply the amounts in accordance with the REO Waterfall set forth
in the definition of REO Loan, the result is the same under the
more general waterfall applicable to Liquidation Proceeds that is
set forth in Section 3.02(b). Both provisions required the payment
of Penalty Interest to the Special Servicer after all Advances (i.e.,
Trust fund expense), principal and interest are recovered.
(Dkt. #175 at 20). Accordingly, the Court considers CWC’s argument that the § 3.02(b)
waterfall applies to the Stuy Town liquidation proceeds.
42
1990s/early 2000s, so that certificateholders, and not the residual holder,
would benefit from those few occasions in which an REO liquidation yielded
excess funds. When the gain-on-sale provisions were introduced into the
WBCMT PSAs with the C4 PSA in 2003, the parties did not intend to disrupt
the REO waterfall payment system and priority already established under
existing PSAs and accepted servicing practice.
CWC and the GSEs offer both fact and expert witness testimony to this
effect. With respect to the former, both course of performance and industry
custom and practice evidence support their construction of § 3.02(b) and Gainon-Sale Proceeds. For example, CWC and the GSEs point to dozens of other
REO liquidations in the WBCMT Shelf that contain substantively identical
provisions to the C30 PSA, where the proceeds were distributed in the manner
that CWC and the GSEs argue should prevail here, with the gain-on-sale
provisions coming into play after only after the proceeds were run through the
§ 3.02(b) waterfall.
For its part, Appaloosa reiterates its Rule 12(c) position that following the
Stuy Town liquidation, the certificateholders’ entitlement to Gain-on-Sale
Proceeds took precedence over CWC’s entitlement to Penalty Interest and the
GSEs’ entitlement to Yield Maintenance. Appaloosa contends this is so
because § 3.04(e) of the C30 PSA and the definition of Gain-on-Sale Proceeds
takes precedence over the waterfall provisions of § 3.02(b). Accordingly,
Appaloosa contends that following the sale of REO Property, CWC was
obligated to calculate Gain-on-Sale Proceeds, segregate the proceeds in a
43
separate account, and then remit them to certificateholders in the PCV Trusts
to offset past and future losses from other assets held by the PCV Trusts.
As a counter-history, Appaloosa posits that the gain-on-sale concept was
developed to help certificateholders, who are the parties with money at risk,
offset losses in one part of the CMBS pool with gains realized on other assets in
the pool, thereby giving concrete effect to the diversification of the pool.
Appaloosa contends that the gain-on-sale provisions of the C30 PSA impose an
“unflinching obligation” on the Special Servicer, following the sale of REO
Property, to calculate Gain-on-Sale Proceeds in accordance with that definition
and remit them to the Paying Agent for deposit in the Gain-on-Sale Reserve
Account for reimbursement of Realized Losses incurred by certificateholders.
And it argues that the gain-on-sale provisions that were added to WBCMT PSAs
beginning in 2003 altered the application of other provisions of the WBCMT
PSAs (such as the REO Loan definition), even though the language of those
other provisions was left unchanged.
Separately, Appaloosa argues that CWC is entitled to no Penalty Interest
and the GSEs are entitled to no Yield Maintenance because the term
“Liquidation Proceeds” in the definition of Gain-on-Sale Proceeds — defined 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 — includes neither Penalty Interest nor Yield Maintenance as a
permitted Liquidation Expense. Taking this argument to its logical conclusion,
44
Appaloosa reasons that under the C30 PSA, Penalty Interest and Yield
Maintenance could never be paid from the sale of REO property. (CWC 56.1
C101; CWC 56.1 A161).
At the Rule 12(c) stage, the Court noted that neither side’s attempt to
harmonize the terms of the C30 PSA was fully satisfying. Even now, at the
close of discovery, the Court acknowledges that the extrinsic evidence offered
by the parties concerning the meaning of the C30 PSA and the intent of its
drafters, does not answer every possible question about the relationship among
the various provisions. That said, what is pellucidly clear to the Court is that
the § 3.02(b) waterfall provision — which entitles CWC to Penalty Interest and
the GSEs to Yield Maintenance — takes precedence over the Gain-on-Sale
Proceeds provisions of the C30 PSA; that CWC is entitled to the full amount of
Penalty Interest that it retained; that the GSEs are entitled to the amount of
Yield Maintenance that has been put aside for them in escrow; and that the
Court can therefore answer the questions raised by the Petition.
4.
Extrinsic Evidence Overwhelmingly Supports CWC’s and the
GSEs’ View that Penalty Interest and Yield Maintenance Are
Paid Prior to Gain-on-Sale Proceeds
To begin, CWC contends that “all of the extrinsic evidence illuminating
the parties’ intended meaning of the contract” — including course of
performance, testimony of the parties to the C30 PSA, disclosures in the C30
Pro Supp, custom and practice, industry publications, the evolution of the
gain-on-sale concept, and the drafting history of the C30 PSA — conclusively
resolves any ambiguities in the C30 PSA in favor of CWC’s interpretation. (See
45
CWC SJ Br. 9). The GSEs echo this sentiment and add that other evidence —
including the testimony of the parties to the transaction, industry participants
and experts, and various documents — conclusively supports their entitlement
to Yield Maintenance. The Court has conducted is own review of the evidence,
and in large part agrees with CWC and the GSEs, as detailed herein.
a.
The Parties’ Course of Performance Under the C30 PSA
and Other WBCMT PSAs Supports CWC’s and the GSEs’
Interpretation of the C30 PSA
Course of performance, sometimes referred to as “practical construction,”
is the best indication of what the parties intended a contract to mean. See
Lafarge, 599 F.3d at 119 (holding that under New York law, the conduct of
parties provides an important source for deriving their intent as to the meaning
of the contracts at issue). 20 Under New York law, “the practical interpretation
of a contract by the parties to it for any considerable period of time before it
comes to be the subject of controversy is deemed of great, if not controlling,
influence.” Federal Ins. Co. v. Americas Ins. Co., 691 N.Y.S.2d 508, 512 (1st
Dep’t 1999) (course of performance is the “most persuasive evidence of the
agreed intention of the parties” (internal quotation marks and citation
omitted)). The record evidence on the parties’ course of performance under the
C30 PSA, and under other WBCMT PSAs with identical provisions, indisputably
supports CWC’s and the GSEs’ view that Penalty Interest and Yield
Maintenance are paid before Gain-on-Sale Proceeds.
20
The C30 PSA is governed by New York law. (See C30 PSA § 11.04).
46
As detailed in the Background section, between 2002 and 2007,
Wachovia formed 33 CMBS trusts (designated as C1-C34, with no C13), that
were numbered sequentially in the order in which they were formed. (CWC
56.1 C132). Each of the WBCMT Trusts was administered by a PSA signed by
the relevant Master Servicer, Special Servicer, Depositor, and Trustee.
Moreover, each of the WBCMT Trusts used the prior WBCMT Trust’s PSA as a
template starting point. (Id. at C143). Accordingly, many of the material
provisions at issue in this case — including the definitions of REO Loan, REO
Property, Penalty Interest, Purchase Price, Liquidation Proceeds, Yield
Maintenance, and Principal Prepayment, as well as the collection and
compensation provisions in § 3.02(b) and § 3.11 — did not substantively
change from one WBCMT PSA to the next. (Id. at C158). However, while the
PSAs for WBCMT C1 through C3 do not contain any references to gain-on-sale,
the PSAs for WBCMT C4 through C34 contain a definition of Gain-on-Sale
Proceeds and related references.
CWC offers extrinsic evidence of custom and practice under the C30
PSA — and under the WBCMT Shelf more generally — through the expert
testimony of Ronald Greenspan, the global co-leader of the Real Estate and
Structured Finance Consulting Practice at FTI Consulting, Inc. (Casse Decl.,
Ex. 15 (“Greenspan Report”)). Greenspan reviewed all of the REO liquidations
from the WBCMT Shelf. (See Greenspan Report 20-22). His analysis revealed,
and discovery in this case confirms, four occasions (including Stuy Town)
where an REO Property held by the C30 Trust was sold for an amount
47
sufficient to pay Penalty Interest and/or Gain-on-Sale Proceeds after all other
amounts owing had been paid. (Id. at 20; CWC 56.1 C167). In the three other
occasions, viz., the liquidations of Entrata di Paradiso Apartments, the
Peachtree Dunwoody GSA Building, and the Lakeridge East Apartment
Complex, Penalty Interest was paid prior to, or to the exclusion of, any Gainon-Sale Proceeds. (Casse Decl., Ex. 107-110).
CWC also served as Special Servicer for 12 of the other 32 WBCMT Shelf
Trusts. (Greenspan Report 21). 21 These 12 trusts yielded 20 loans with REO
liquidation proceeds in excess of outstanding principal, non-penalty interest,
fees, and costs. (Id. at 21). For 16 of those 20 transactions, only Penalty
Interest was paid. (Id.). 22 For the other four, Penalty Interest and Gain-on21
At the time the WBCMT PSAs came into existence, CWC was a signatory and party to 7
of them. (See CWC 56.1 C135). At some point after the WBCMT PSAs came into
existence, CWC became special servicer for an additional 5 trusts. (Greenspan
Report 21).
22
See Casse Decl., Ex. 111 (CWC RLR for Lewisville Estates property from WBCMT C34
indicating a payment of $1.6 million in default interest); Ex. 112 (CWC RLR for Microtel
Inn property from WBCMT C23 indicating a payment of $300,000 in default interest);
Ex. 113 (CWC RLR for Perry Hills Estates Portfolio property from WBCMT C14
indicating a payment $167,000 in default interest); Ex. 115 (CWC RLR for Sterling
University Canyon property from WBCMT C20 indicating a payment of $371,000 in
default interest); Ex. 116 (CWC RLR for Summit Trails Apartment property from
WBCMT C32 indicating a payment of $2.3 million in default interest); Ex. 117 (CWC
RLR for The Landing property from WBCMT C23 indicating a payment of $927,000 in
default interest); Ex. 118 (CWC RLR for Villa Medici Apartments property from WBCMT
C23 indicating a payment of $108,000 in default interest); Ex. 119 (CWC RLR for
Wesley Paces Apartment Homes property from WBCMT C34 indicating a payment of
$3 million in default interest and $900,000 in yield maintenance); Ex. 120 (CWC RLR
for 990 Spring Garden Street property from WBCMT C23 indicating a payment of
$380,000 in default interest); Ex. 121 (CWC RLR for Candleglow Apartments property
from WBCMT C20 indicating a payment of $183,000 in default interest); Ex. 122 (CWC
RLR for 808 South Olive Street property from WBCMT C25 indicating a payment of
$751,000 in default interest and $601,000 in gain-on-sale proceeds); Ex. 123 (CWC
RLR for Chatham Wood Apartment Complex property from WBCMT C26 indicating a
payment of $862,000 in default interest and $644 in gain-on-sale proceeds); Ex. 124
(CWC RLR for Cornerstone Business Center property from WBCMT C28 indicating a
payment of $162,000 in default interest); Ex. 125 (CWC RLR for Essex Place
Apartments property from WBCMT C11 indicating a payment of $1.7 million in default
48
Sale Proceeds were paid. (Id.). As with the C30 Trust, there were multiple
occasions in which Wells Fargo as the Master Servicer for the WBCMT Trusts
shared in the Penalty Interest that was collected, including Summit Trails
Apartments (C32), 990 Spring Garden Street (C23), Microtel Inn (C23), The
Landing (C23), Villa Medici Apartments (C23), Charter Pointe Apartments
(C22), 808 South Olive Street and 801-807 South Hill Street (C25), Essex Place
Apartments (C11), Chatham Wood Apartment Complex (C26), Kedron Village
(C34), and Candleglow Apartments (C20)). (CWC 56.1 C171; see Casse Decl.,
Ex. 112, 116, 117, 118, 120, 122, 123, 125, 127, 128). Not once in any of
these WBCMT Shelf transactions was Gain-on-Sale Proceeds paid without a
corresponding payment of Penalty Interest.
LNR Partners, Inc. (“LNR”), Torchlight Loan Services, LLC (“Torchlight”),
and Situs Holdings LLC (“Situs”) were the Special Servicers for many of the
other trusts in the WBCMT Shelf. Indeed, LNR is one of the largest special
servicers in the industry. (CWC 56.1 C137). LNR, Torchlight, and Situs
distributed Penalty Interest in the context of REO liquidations in WBCMT Shelf
transactions in the precise manner that CWC espouses here. (Greenspan
Report 21-22). There were nine occasions where LNR, as Special Servicer, sold
interest); Ex. 126 (CWC RLR for Fountain Village Apartments property from WBCMT
C16 indicating a payment of $206,000 in default interest); Ex. 127 (CWC RLR for
Kedron Village – Phase II property from WBCMT C34 indicating a payment of $4 million
in default interest); Ex. 128 (CWC RLR for Charter Pointe Apartments property from
WBCMT C22 indicating a payment of $4 million in default interest); Ex. 129 (CWC RLR
for Lake Sweetwater Apartments property from WBCMT C22 indicating a payment of $2
million in default interest); Ex. 130 (CWC RLR for Brookside West property from
WBCMT C25 indicating a payment of $726,000 in default interest).
49
an REO Property held by a WBCMT Trust for an amount sufficient to pay
Penalty Interest and/or Gain-on-Sale Proceeds after all other amounts owing
had been paid. (Id. at 22). On all nine occasions, Penalty Interest was paid
prior to, or to the exclusion of, Gain-on-Sale Proceeds. (Id.). 23 There were
three occasions where Torchlight, a Special Servicer, sold an REO Property
held by a WBCMT Trust for an amount sufficient to pay Penalty Interest and/or
Gain-on-Sale Proceeds after all other amounts owing had been paid. (Id.). On
all three occasions, Penalty Interest was paid prior to, or to the exclusion of,
any Gain-on-Sale Proceeds. (Id.). 24 There was one occasion where Situs, as
Special Servicer, sold an REO Property held by a WBCMT Trust for an amount
sufficient to pay Penalty Interest and/or Gain-on-Sale Proceeds after all other
amounts owing had been paid. (Id.). On that occasion, Situs paid Penalty
23
See Casse Decl., Ex. 131 (LNR RLR for “Various” property from WBCMT C29 indicating
a payment of $146,000 in default interest); Ex. 132 (LNR RLR for Grandeville on Saxon
property from WBCMT C24 indicating a payment of $207,000 in default interest and
$240,000 in yield maintenance); Ex. 133 (LNR RLR for 200 South Tryon property from
WBCMT C31 indicating a payment of $3.4 million in default interest and $573,000 in
gain-on-sale proceeds); Ex. 134 (LNR RLR for Eastern Marketplace Office property from
WBCMT C1 indicating a payment of $233,000 in default interest); Ex. 135 (LNR RLR for
Maple Village Apartments property from WBCMT C31 indicating a payment of $3.6
million in default interest and $210,000 in yield maintenance); Ex. 136 (LNR RLR for
Parkway 400 property from WBCMT C31 indicating a payment of $1.8 million in default
interest); Ex. 137 (LNR RLR for Pocalla Springs Apartments property from WBCMT C3
indicating a payment of $1.1 million in default interest); Ex. 138 (LNR RLR for South
Shades Crest Station property from WBCMT C9 indicating a payment of $321,000 in
default interest); Ex. 139 (LNR RLR for Stonehue Retail Center property from WBCMT
C27 indicating a payment of $12,000 in default interest).
24
See Casse Decl., Ex. 140 (Torchlight RLR for Century Hills Apartment property from
WBCMT C33 indicating a payment of $1.3 million in default interest and $1.3 million in
yield maintenance); Ex. 141 (Torchlight RLR for Public Retail Store property from
WBCMT C33 indicating a payment of $86,000 in default interest); Ex. 142 (Torchlight
RLR for Shiloh Square Shopping Center property from WBCMT C8 indicating a payment
of $398,000 in default interest).
50
Interest to the exclusion of any Gain-on-Sale proceeds. (Id.). 25 In none of
these REO sales arising from the WBCMT Shelf was Gain-on-Sale Proceeds
paid to the exclusion of Penalty Interest, as Appaloosa contends it should be.
Besides being Special Servicer for 15 of the 33 WBCMT Trusts, LNR was
also a party to the C3 and C5 PSAs, which were executed months apart on
either side of the C4 PSA. (CWC 56.1 C139). Significantly, LNR distributed
proceeds from the sale of REO Properties in the same manner before and after
the Gain-on-Sale Proceeds definition was introduced into the WBCMT Trusts in
the C4 PSA. (Greenspan Report 22). 26 In other words, the inclusion of the
Gain-on-Sale Proceeds definition had no impact on the manner in which LNR
ascertained Penalty Interest in REO liquidations. (See id.).
The RLRs for these REO liquidations also support the GSEs’ view that
Yield Maintenance is due and owing to them under the C30 PSA. In five REO
dispositions from the WBCMT Shelf that occurred prior to the maturity date of
the relevant promissory note and generated sufficient proceeds, three different
Special Servicers — CWC, Torchlight, and LNR — paid Yield Maintenance.
(GSE 56.1 G87). 27
25
See Casse Decl., Ex. 143 (Situs RLR for The Fairways Apartments 1 property from
WBCMT Trust C29 indicating a payment of $2.8 million in default interest).
26
Compare Casse Decl., Ex. 134 (LNR REO liquidation from the C1 Trust), and Ex. 137
(LNR REO liquidation from the C3 Trust), with Ex. 131 (LNR REO liquidation from the
C29 Trust), Ex. 132 (LNR REO liquidation from the C24 Trust), Ex. 133 (LNR REO
liquidation from the C31 Trust); Ex. 135 (LNR REO liquidation from the C31 Trust),
Ex. 136 (LNR REO liquidation from the C31 Trust), Ex. 138 (LNR REO liquidation from
the C9 Trust), and Ex. 139 (LNR REO liquidation from the C27 Trust).
27
See Casse Decl., Ex. 119 (CWC REO liquidation from C34 Trust indicating $900,000 in
yield maintenance); Ex. 125 (CWC REO liquidation from C26 Trust indicating $263,000
prepayment penalty); Ex. 132 (LNR REO liquidation from C24 Trust indicating
$240,000 in yield maintenance); Ex. 135 (LNR REO liquidation from C31 Trust
51
This data demonstrates a uniform pattern on the part of the parties to
the WBCMT PSAs of distributing REO proceeds in a manner consistent with
CWC’s and the GSEs’ proposed distribution of the Stuy Town liquidation
proceeds. CWC’s distribution of Penalty Interest prior to Gain-on-Sale
Proceeds is consistent with how CWC has performed in distributing REO
liquidation proceeds under the WBCMT Shelf. Further, CWC’s distribution is
consistent with how other special servicers in the industry have allocated
proceeds from the sale of REO Properties in the WBCMT Shelf.
Appaloosa contends that CWC’s course of performance evidence fails on
several fronts. First, Appaloosa explains that “[i]n order to establish a course of
performance, ‘there must have been conduct by the one party expressly or
inferentially claiming as of right under the doubtful provision, coupled with
knowledge thereof and acquiescence therein, express or implied, by the other.’”
(Appaloosa CWC SJ Opp. 15 (quoting Continental Cas. Co. v. Rapid-Am. Corp.,
80 N.Y.2d 640, 651 (1993))). Put somewhat differently, according to Appaloosa,
CWC has not actually introduced evidence of a course of performance because
it has “failed to establish as a matter of law that Certificateholders knew about
or acquiesced to the transactions on which CWC is relying to constitute the
supposed course of performance.” (Id.). Perhaps more troublingly, Appaloosa
indicating $210,000 in yield maintenance); Ex. 140 (Torchlight REO liquidation from
C33 Trust indicating $1.3 million in yield maintenance).
52
accuses CWC and the other special servicers of surreptitiously skimming
money from the sale of REO properties for their own benefit. (Id. at 16). 28
As the Court explained above, Appaloosa and other certificateholders in
the C30 PSA were not parties to the C30 PSA or involved in its negotiation.
And, as is obvious, the point of proffering course of performance evidence is to
reveal the intent of the parties to the contract. See, e.g., Fed. Ins. Co., 691
N.Y.S.2d at 512 (“[T]he parties’ course of performance under the contract is
considered to be the ‘most persuasive evidence of the agreed intention of the
parties.’”). 29 The relevance of this evidence is that each of the parties to each of
the WBCMT PSAs — Servicer, Depositor, and Trustee — repeatedly and
consistently acted in accordance with CWC’s proffered interpretation of the C30
PSA.
28
Appaloosa’s repeated suggestions of coordinated nefarious activity by special servicers,
including references to them as a “cabal,” are unsubstantiated by the record, and
disregarded by the Court.
29
See also In re Prudential Lines Inc., 158 F.3d 65, 79 (2d Cir. 1998) (“[A]lthough the [nonparty] Claimants attempt to introduce their interpretation as one plausible reading of
the policy, this cannot be said to be the expectation or intention of the contract
parties…. [A]lthough the contract language is less than clear, it has been illumined by
conduct on the part of the signatories that reflects an understanding incompatible with
the position urged in this case by the Claimants, who are strangers to the contract.”);
Royal Park v. Deutsche Bank, No. 14 Civ. 4394 (AJN) (BCM), 2016 WL 4613390, at *12
n.11 (S.D.N.Y. Aug. 31, 2016) (“The historical opinion of a non-party to a contract (even
if the non-party becomes a third party beneficiary) can neither alter the contractual
terms nor assist the Court in interpreting them.”); MBL Contracting v. King World, 98 F.
Supp. 2d 492, 497 (S.D.N.Y. 2000) (observing that where two contracting parties have a
common understanding of what is meant by an agreement, the understanding of a
third-party beneficiary to that agreement does not control its meaning); AQ Asset Mgmt.
v. Levine, 974 N.Y.S.2d 332, 340 (1st Dep’t 2013) (granting summary judgment: “At
bottom, [plaintiffs] seek to enforce their own interpretation of an agreement to which
they were not parties …. To permit the unraveling of the transaction would be to ignore
the plain language of the SPA and also the notion that parties are free to contract as
they wish and that courts should enforce those contracts as written”).
53
Thus, while the Court takes Appaloosa’s point — that to the extent
Appaloosa did not know how Special Servicers were interpreting the WBCMT
PSAs, they could not have explicitly or implicitly consented to CWC’s
interpretation of the C30 PSA — the point does not devalue CWC’s evidence.
To the extent CWC’s evidence shows that numerous Special Servicers were all
interpreting the same WBCMT PSA language in the same way — to distribute
Penalty Interest and Yield Maintenance prior to Gain-on-Sale Proceeds — these
data points are highly relevant to the instant cross-motions.
Second, Appaloosa claims that there were too few transactions to
constitute a course of performance under the law. Appaloosa points to the fact
that of the four liquidations in the C30 Trust, one of them was the Stuy Town
transaction itself and two post-dated the Stuy Town sale. Appaloosa argues
that only prior transactions can be considered in evaluating a course of
performance. (See Appaloosa CWC SJ Opp. 17 (citing Nat’l Liability & Fire Ins.
Co. v. Mediterranean Shipping Co., S.A., No. 09 Civ. 6516 (WHP), 2011 WL
723604, at *3 (S.D.N.Y. Feb. 22, 2011))). Accordingly, Appaloosa argues that
the one transaction between the time the C30 Trust went into effect in 2007
and the sale of Stuy Town in 2015 is insufficient to constitute a course of
performance.
Appaloosa is of course correct that one transaction does not a course of
performance make. However, there have been a total of 36 REO liquidations
from the WBCMT Shelf that generated proceeds in excess of outstanding
principal, non-penalty interest, fees, and costs. The proceeds from every one of
54
those liquidations (16 serviced by CWC and 20 by other Special Servicers) have
been distributed in accordance with CWC’s and the GSEs’ interpretation of the
C30 PSA.
Appaloosa’s remaining response to this evidence is that these other
transactions cannot qualify as evidence of a course of performance because
some of the WBCMT PSAs do not contain any gain-on-sale provisions
whatsoever. But that is exactly CWC’s and the GSEs’ point: The introduction
of the gain-on-sale references beginning with the C4 PSA had no impact on
how the WBCMT Special Servicers — including LNR, which serviced REO
properties that were liquidated from the WBCMT C1 and C3 Trusts as well as
subsequent WBCMT Trusts — distributed liquidation proceeds. In sum, CWC’s
course of performance evidence puts the lie to Appaloosa’s assertion that the
gain-on-sale additions to the C4 PSA “imposed an unflinching obligation on the
Special Servicer, following the sale of a REO Property, to calculate Gain-on-Sale
Proceeds in accordance with that definition and remit them to the Paying Agent
for deposit in the Gain-on-Sale Reserve Account.” (Appaloosa CWC SJ
Opp. 24).
b.
CMBS Industry Custom and Practice Supports CWC’s and
the GSEs’ Interpretation of the C30 PSA
Also under New York law, where a contract is ambiguous, industry
custom and practice may be considered as an interpretive aid. See StoltNielsen SA v. AnimalFeeds Intern. Corp., 548 F.3d 85, 99 (2d Cir. 2008) (noting
that New York state law follows a “custom and practice” canon of construction
where the terms of a contract are ambiguous); accord Evans v. Famous Music
55
Corp., 1 N.Y.3d 452 (2004). That said, courts must approach such evidence
with care. “Under New York law, custom and usage evidence must establish
that the omitted term is ‘fixed and invariable’ in the industry in question.”
British Intern. Ins. Co. Ltd. v. Seguros La Republica, S.A., 342 F.3d 78, 84 (2d
Cir. 2003) (citation omitted). Here, that high bar has been met: CWC and the
GSEs have established, through record evidence, that it is a fixed and
invariable custom and practice in the CMBS industry to pay penalty interest
and yield maintenance prior to gain-on-sale proceeds.
CWC again provides support through expert witness Ronald Greenspan,
who surveyed the universe of 116,649 CMBS loans that originated between
1990 and 2009, and that are colloquially referred to as “CMBS 1.0.”
(Greenspan Report 16-17). Of those 116,639 CMBS loans, Greenspan found
249 instances of REO liquidations in which sufficient funds were recovered to
pay penalty interest and/or gain-on-sale proceeds. (Id.). He found that in
99.2% of such REO liquidations (247 of 249), penalty interest was paid prior to,
or to the exclusion of, any gain-on-sale proceeds. (Id.). These 249 loans
represented a cross-section of the CMBS industry; they were issued by 35
different issuers and serviced by 7 different special servicers, including LNR, CIII Asset Management, LLC (“C-III”), Torchlight, Berkadia Commercial Mortgage,
Midland Loan Services, Situs, and CWC. (Id. at 17).
With respect to the GSEs’ related claim for Yield Maintenance, the RLRs
and promissory notes produced in this litigation indicate that, in at least 45
REO dispositions that occurred prior to the maturity date of the relevant
56
promissory note and that generated sufficient proceeds, the special servicer
paid yield maintenance. (GSE 56.1 G84). 30 This data provides compelling
evidence of a custom and practice in the CMBS industry for special servicers to
make distributions of penalty interest and yield maintenance prior to the
payment of gain-on-sale proceeds. 31
This empirical data is further supported by the expert opinions of
Thomas F. Nealon III, another expert witness proffered by CWC, who was Vice
Chairman and Director of Legal Affairs at LNR for over 25 years. (CWC 56.1
C136). While at LNR, Nealon reviewed and negotiated PSAs on behalf of LNR in
its capacities as a special servicer and as an investor. (Id. at C138). Nealon
has also been significantly involved in the Commercial Real Estate Finance
Council (“CREFC”), the independent standard-setting governing body for the
CMBS industry, serving as Chair of the Servicers Forum and as a member of
the CREFC Board of Governors and Policy Committee. (Casse Decl., Ex. 14
(“Nealon Report”) 2-3).
Importantly, during his lengthy tenure at LNR, Nealon reviewed and
approved the allocation of REO liquidation proceeds on numerous occasions.
(Nealon Report 11). Based on his experience in allocating proceeds collected
30
See Casse Decl., Ex. 119, 123, 132, 135, 140, 148, 160, 163, 164, 173, 178, 185, 216,
219, 222, 233, 234, 237, 239, 240, 243, 250, 253, 257, 260, 261, 264, 269, 270, 271,
272, 283, 285, 289, 290, 298, 300, 305, 307, 344, 346, 349, 351, 355, 356.
31
Greenspan found only two occasions where gain-on-sale proceeds were paid prior, or to
the exclusion of, penalty interest. (See Greenspan Report 17 n.22). Neither asset was
liquidated out of a WBCMT PSA. Both were specially serviced by C-III. (See id.). In 39
other instances, however, C-III distributed proceeds in the manner CWCAM seeks to do
here, and the other special servicers have done so consistently. (See id.).
57
from an REO property sale and his understanding of how other special
servicers allocated such proceeds, Nealon opines that it is the custom and
practice in the CMBS industry to require that amounts collected from the sale
of an REO property in excess of outstanding principal, contract interest, and
costs be paid to the special servicer as penalty interest before any gain-on-sale
proceeds or excess liquidation proceeds are realized. (Id. at 11-12). Indeed,
Nealon never, in his 25-year career at LNR, witnessed REO proceeds being
allocated in the manner Appaloosa contends. (Id. at 10-13, 15-21). 32 Instead,
CWC’s distribution of Penalty Interest on the Stuy Town Loan is, in Nealon’s
experience, consistent with normal servicing practices and industry custom
and practice. (Id. at 18-19). 33
Appaloosa attempts to contest CWC’s and the GSEs’ evidence of industry
custom and practice through the competing expert opinions of Ann Hambly.
Hambly has 35 years of experience in commercial real estate servicing and has
been the CEO of many large servicing organizations in the industry. (See
Hampson Decl., Ex. N (“Hambly Report”) 3). She has also served on the boards
of many commercial real estate trade associations, including the just-
32
As explained infra, Appaloosa is not meaningfully able to dispute Nealon’s opinions.
See Jobim v. Songs of Universal, 732 F. Supp. 2d 407, 417 (S.D.N.Y. 2010) (granting
summary judgment, construing ambiguous contract based in part on unrebutted expert
testimony of industry custom); Toto v. Sony Music Entm’t, 60 F. Supp. 3d 407, 416-17
(S.D.N.Y. 2014) (granting summary judgment based on unrebutted testimony of
executive as to the industry custom and usage of disputed contract term).
33
Nealon offered an example: In December 2013, LNR distributed proceeds collected from
the sale of an REO property called Astor Crowne Plaza. (Nealon Report 12). There, LNR
paid all amounts due and owing as set forth in the relevant PSA waterfall and collected
roughly $18 million in penalty interest on a loan with an unpaid balance of roughly $73
million before passing along roughly $10 million as gain-on-sale proceeds. (Id.).
58
mentioned CREFC. (Id.). Between the mid-1980s and 2005, Hambly was
responsible for the commercial real estate servicing groups of numerous banks
and institutions, including Bank of America, GE Capital, Bank of New York,
Nomura Capital, and Prudential. (Id.). In her roles as the head of various
CMBS servicing shops, during the years 1995 to 2005, she negotiated and
executed approximately 50 PSAs and over 100 servicing agreements. (Id. at 4).
In 2005, Hambly created 1st Service Solutions, Inc. (“1SS”) to assist borrowers
in negotiating and resolving CMBS-related issues. (Id.). Since 2005, 1SS has
assisted borrowers in connection with over 1,000 non-performing CMBS loans,
totaling over $10 billion in principal, including by negotiating loan restructures
with special servicers. (Id.).
Hambly does not so much seek to contest CWC’s expert witness evidence
as to downplay it. In particular, Hambly contends that because the
information necessary to uncover that special servicers were paying penalty
interest and yield maintenance before gain-on-sale proceeds was neither
publicly available nor discernable from the information distributed to investors,
no industry custom and practice existed. Her contention dovetails with
Appaloosa’s earlier arguments concerning CWC’s course of performance
evidence, arguing here that an industry custom and practice cannot exist if the
certificateholders are unable to discern its existence. But for similar reasons,
this argument fails.
59
To establish an industry custom and practice, the proponent must
demonstrate a “general, uniform and unvarying” practice. Law Debenture Trust
Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010). Further,
[a] custom, in order to become a part of a contract, must
be so far established and so far known to the parties,
that it must be supposed that their contract was made
in reference to it. For this purpose the custom must be
established, and not casual, uniform and not varying,
general and not personal, and known to the parties.
Id. (emphases added). CWC has demonstrated as much. Further, joining the
chorus of courts on the issue, the Court finds that the certificateholders were
not parties to the C30 PSA. See, e.g., CWCapital Cobalt Vr v. CWCapital Invs.,
Index No. 653277/2018 (N.Y. Sup.), Dkt. No. 182 at 2 n.1, 12, 16. In
consequence, whether the certificateholders were aware that special servicers
collected penalty interest from REO sales is irrelevant, because any such
awareness would reveal nothing about the intent of the parties to the C30 PSA.
Appaloosa is thus incorrect in claiming that its own lack of knowledge, or
investors’ general lack of knowledge, precludes the existence of a custom and
practice in the CMBS industry.
When CWC’s custom and practice evidence is properly contextualized,
Appaloosa has no response. Appaloosa does not dispute that in 247
instances — over 99% of the time — when the sale of an REO property from
any CMBS 1.0 trust governed by any PSA resulted in proceeds sufficient to pay
penalty interest and/or gain-on-sale proceeds, penalty interest was paid prior
to, or to the exclusion of, gain-on-sale proceeds. It does not contest the factual
60
accuracy of Greenspan’s data, and Hambly does not present competing data.
Accordingly, despite Appaloosa’s contention, there are no “competing expert
opinions” to be resolved at trial: Hambly acknowledged the accuracy of
Greenspan’s empirical analysis at her deposition, and conceded that in
reviewing the RLRs she had come to the same conclusion (i.e., that they reflect
the payment of penalty interest ahead of gain-on-sale proceeds). (Hambly
Dep. 46-48, 70-71, 61, 157, 180-81). In other words, Hambly agrees with
Greenspan’s findings, but considers them to be irrelevant. (CWC 56.1 C189).
This misperception on her part does not create a genuine dispute of fact. See
Tiffany & Co. v. Costco Wholesale Corp., 127 F. Supp. 3d 241, 250-51 (S.D.N.Y.
2015) (finding that defendant’s “proffer [was] insufficient to raise an issue of
material fact,” where its expert’s assertions “consist[ed] only of his own
competing beliefs as to what would make for an appropriate survey” and did
not rebut the findings of plaintiff’s expert).
c.
Nealon’s Testimony Supports CWC’s and the GSEs’ View
of the Addition of “Gain-on-Sale” Language to the PSAs
Thomas Nealon also provides helpful firsthand corroboration for CWC’s
and the GSEs’ “catchall” theory of gain-on-sale. He explains that in the early
2000s, a few liquidations occurred that generated excess liquidation proceeds;
under the applicable terms of the PSAs in effect at the time, any such amounts
were a windfall distributed to the residual holder for that trust — typically, the
depositor or an affiliate of the depositor. (Nealon Report 13). As it happened,
however, the residual holder was usually limited in role to making tax and
regulatory filings necessitated by the structure of CMBS transactions. (Id. at
61
14). Residual holders were not intended to be economic participants in the
CMBS pools. (Id.). According to Nealon, this discovery — and the related
concern that funds derived from a trust asset were going to a party not actively
involved with the operation of the trust — precipitated the inclusion of gain-onsale provisions. (Id.).
Nealon explains that the gain-on-sale or excess liquidation proceeds
concept was engrafted onto existing PSA templates years after the initial
versions of these templates had been drafted. (Nealon Report 14). In most
cases, these PSAs had gone through multiple versions and revisions by the
time that these concepts were added. (Id.). Since the likelihood of obtaining a
gain-on-sale seemed minimal at best, little time was devoted to the drafting and
incorporation of these new concepts into existing PSA forms. (Id.). Indeed, the
concepts were added without due attention to the provisions and definitions
already in use in existing PSAs. (Id.). In short, the challenge of drafting
appropriate terminology associated with this new (and concededly rare) concept
resulted in a lack of precision in its incorporation. (Id.).
Of note, Nealon confirms that the concept of a gain on an REO
disposition was not designed to disrupt the payment system and priority
already established under existing PSAs and accepted servicing practice.
(Nealon Report 15). And as discussed above, this concept was added to the
standard PSAs many years after the CMBS industry was launched. (Id.). Its
sole purpose was to serve as a net to capture any amounts that might be
produced in the case of a disposition of a specially serviced mortgage loan or
62
REO property that was in excess of all sums that were due and owing under
the PSAs to the trust and due and owing to trust representatives, in those rare
cases when such a situation might occur. (Id.).
d.
The Testimony of the Deal Parties Supports CWC’s and
the GSEs’ Interpretation of the C30 PSA
During discovery, the parties obtained testimony from representatives of
CWC, Wells Fargo, and Appaloosa, including current and former employees of
parties to the C30 PSA. This testimony is of a piece with the evidence just
outlined, and it further corroborates the interpretations of the C30 PSA
proffered by CWC and the GSEs. 34
i.
The CWC Witnesses
Kathleen Olin, a former employee of CWC, is the Managing Director of
Industry Initiatives for CREFC. (GSE 56.1 G39, G62). CREFC’s membership
touts over 300 companies, including over 10,000 individuals affiliated with
those member companies. (Id. at G39). Members include representatives from
CMBS master servicers, special servicers, and investors, among others. (Id.).
From approximately 2006 through 2012, Olin served as Chair of CREFC’s
Investor Reporting Package (“IRP”) Committee, which she described as a
representative group of investors, servicers, trustees, certificate administrators,
underwriters, and rating agencies that serves to promote best practices in
34
Appaloosa accuses CWC of grossly mischaracterizing the deposition testimony on which
it relies. (See Appaloosa CWC SJ Opp. 18-20). The Court does not blindly accept
CWC’s (or any party’s) summaries of the relevant testimony. The Court has reviewed
the depositions of each fact witness in this case and relies on its own reading of the
testimony in this Opinion.
63
CMBS reporting. (Id. at G63, G68-G70). Olin has also served as a Governor on
CREFC’s Board of Directors, Chair of CREFC’s Servicers’ Forum, and Secretary
on CREFC’s Executive Committee. (Id. at G63).
Olin, who testified as a former employee of CWC, worked in special
servicing from 1996 until 2018, at which time she left CWC to work for CREFC
as the Managing Director for Industry Initiatives. (CWC 56.1 C160). At CWC,
Olin was responsible for, among other things, investor reporting and industry
relations. (Id. at C161). Olin’s role at CWC included reviewing PSAs when
CWC was appointed special servicer. (CWC 56.1 C162; Casse Decl., Ex. 4
(“Olin Dep.”) 35:24-36:10). At times, Olin signed PSAs on behalf of CWC,
including the WBCMT C28 PSA. (CWC 56.1 C163).
Olin was not involved in drafting the C30 PSA. (Olin Dep. 41:3-10).
However, Olin reviewed those portions of the C30 PSA that addressed special
servicing fees when CWC was appointed Special Servicer for the C30 Trust. (Id.
at 42:21-44:2). At her deposition, Olin testified about emails she exchanged in
July 2008 with colleagues at CWC regarding the WBCMT C34 PSA. (See id. at
50:17-53:24). On July 9, 2008, Olin received an email in which she was asked,
“[i]n this PSA, do either of you know what would happen[] to the sale of REO
that creates an excess over the loan exposure? Who would be the beneficiary?”
(Casse Decl., Ex. 457). Olin responded, “Are you also saying there would be an
excess over and above the [yield maintenance] that would have been due on the
loan? And all former late fees and default interest? That’s usually the first
64
stop.” (Id.). When Olin was asked what she meant by her response, she
explained:
I meant that generally speaking when you have an asset
that is sold for an excess, which in this case would be
REO, that you would pay everything that is due on the
loan including yield maintenance and late fees and
default interest first, before we can even talk about
whether there is an excess.
(Olin Dep. 53:2-8). When asked whether she had ever seen a PSA that
provided to the contrary, she responded, “I can’t think of a single PSA I have
read where it is written differently.” (Id. at 53:19-24).
David Iannarone, CWC’s corporate designee, negotiated and signed the
C30 PSA on CWC’s behalf. (CWC 56.1 C133; Casse Decl., Ex. 2 (“Iannarone
Dep.”) 24:9-25:16). Iannarone has worked in special servicing since the
inception of CMBS in the early 1990s, and currently serves as CWC’s CEO.
(CWC 56.1 C134). CWC was a party to 7 of the 33 WBCMT PSAs, including the
C30 PSA, and Iannarone signed 6 of them on behalf of CWC. (Id. at C135).
Iannarone explained that each PSA was not “negotiated” in the true
sense of the word, but rather evolved from the prior PSA in that shelf.
(Iannarone Dep. 25:1-26:18). If any substantive changes were made to the C29
PSA template when the parties were drafting the C30 PSA, those changes
would have been highlighted and brought to the parties’ attention. (Id. at
27:14-23). For example, Iannarone recalled that the $15 million cap on the
liquidation fee for Stuy Town was a material change that was brought to his
attention. (Id. at 27:24-29:4). He recalled no other substantive changes being
made to the C30 PSA. (Id. at 33:5-12).
65
Iannarone also testified that CWC does not have a policy addressing the
circumstances in which penalty interest gets paid from the sale proceeds of
REO properties, because the distribution of proceeds is done according to the
particular loan documents and PSA. (Iannarone Dep. 143:3-10). His
understanding of “gain-on-sale” is that the provision is a “catchall” designed to
capture excess proceeds after everything that was due and owing on a loan had
been paid. (Id. at 38:15-40:13). Conversely, Iannarone stated that gain-onsale provisions were not designed to change the waterfall provisions of PSAs.
(Id. at 41:20-42:13).
According to Iannarone, it was common knowledge when the C30 PSA
was negotiated that the Special Servicer was entitled to Penalty Interest.
(Iannarone Dep. 58:2-8). He sourced this knowledge to: (i) the fact that special
servicers in the industry were in fact collecting penalty interest; (ii) his
conversations with special servicers; (iii) contemporaneous publications
indicating that special servicers collected penalty interest; and (iv) the fact that
special servicers sometimes shared penalty interest with the controlling class of
certificateholders. (Id. at 58:9-18).
Michiko Shimizu was the third CWC witness with firsthand knowledge of
relevant events. Shimizu was and remains the individual at CWC responsible
for calculating realized losses/gains sustained by trusts serviced by CWC,
completing RLRs, and applying proceeds recovered from, inter alia, REO sales.
(CWC 56.1 C63; GSE 56.1 G46). She has worked in special servicing for her
entire career, since 2000, and the allocation of sale proceeds and concomitant
66
preparation of RLRs have been part of her role since 2006 or 2007. (CWC 65.1
C64). At her deposition in December 2018, Shimizu testified that she was
finalizing RLRs for 50 assets in that month alone. (Id. at C65).
Shimizu prepared the RLR for the Stuy Town sale. (Casse Decl., Ex. 3
(“Shimizu Dep.”) 21:14-22:8). She explained that CWC applied the proceeds of
the Stuy Town sale using the waterfall provision in § 3.02(b), and that it was
only after the proceeds from the sale had run through that waterfall that
remaining proceeds would be designated Gain-on-Sale Proceeds:
The 3.02(b) clearly includes [yield] maintenance as
payable on the liquidation proceeds. And also the same
goes to [penalty] interest, too.
And in an REO collection, there is a definition under
REO loan what the waterfall will be.
If you narrow it down to collection of REO — collections
made on REO, then you go through the waterfall.
It is very clear that yield maintenance is something that
would be payable. The same for [penalty] interest.
[Penalty] interest is included in the waterfall.
(Shimizu Dep. 162:24-163:16; see also id. at 46:6-47:25, 36:20-38:5, 51:852:1, 99:8-100:6).
ii.
The Wells Fargo Witnesses
Similar sentiments were expressed by the Wells Fargo witnesses. Leslie
Hayton testified as the corporate designee for Wells Fargo in its capacities as
Master Servicer and Paying Agent of the C30 Trust. (CWC 56.1 C96). Hayton
is currently a Managing Director at Wells Fargo and has worked there (or its
predecessor Wachovia) for 15 years. (Id.). She is responsible for, among other
67
things, investor reporting and account reconciliations. (Id.). Like Olin, Hayton
also served as CREFC’s IRP Committee Chair. (GSE 56.1 G40). Hayton
testified that, with respect to the calculation of Penalty Interest, Wells Fargo, as
Master Servicer, took direction from CWC, as Special Servicer; as such, Wells
Fargo did not independently verify CWC’s claimed entitlement to Penalty
Interest. (See Casse Decl., Ex. 5 (“Hayton Dep.”) 24:23-25:17, 38:2-8, 48:1349:9, 61:19-24). 35 However, Hayton testified that Wells Fargo did calculate the
Yield Maintenance due to the GSEs in accordance with the C30 PSA and the
loan documents. (Hayton Dep. 118:6-129:2, 132:25-133:6).
Looking back at her (and Wells Fargo’s) experiences in the CMBS
industry, Hayton responded to questioning by CWC’s counsel as follows:
BY MR. CROSS:
Q. Appaloosa’s taken the position that whenever
liquidation proceeds are sufficient to recoup all
amounts listed within the definition of purchase price,
that all other amounts available for distribution are
required to be deposited into the gain-on-sale account
so that there can never be a recovery of default interest
or yield maintenance.
Has Wells ever seen this
application applied to a liquidation — to liquidation
proceeds received on account of any loans in the C30
trust?
…
A. No, I’m thinking. No, we have never seen that.
Q. Have you seen it with any other trust?
35
This testimony was corroborated by that of Ross Romano, who is responsible for
investor reporting, including for the C30 Trust, at Wells Fargo. (See Casse Decl., Ex. 7
(“Romano Dep.”) 15:7-16:17, 119:19-120:5, 130:5-132:14).
68
A. Not that I’m aware of.
Q. Do you believe that Wells Fargo complied with all of
its obligations under the C30 PSA in connection with
the distribution of liquidation proceeds from the
Stuyvesant Town sale?
A. Yes.
Q. How long have you been at Wells Fargo?
A. 15 years.
Q. Is there anything unusual in your experience about
a special servicer collecting default interest in the
proceeds in an REO disposition?
…
A. In general, if there are proceeds available to pay
default interest on a specially serviced loan, we will see
the special servicer collect those.
(Hayton Dep. 109:21-111:7).
Ross Romano, who is responsible for investor reporting at Wells Fargo,
also testified to having “seen many cases where the special [servicer] has
collected [penalty] interest” from the proceeds of an REO disposition. (Romano
Dep. 196:23-197:7).
iii.
Appaloosa’s Witness
Appaloosa was not a party to any WBCMT PSA negotiation. However,
when its designee requested information from parties who were, he received
materials that supported CWC’s and the GSEs’ claims.
James Bolin, the portfolio manager for credit products and CMBS at
Appaloosa, testified as its corporate representative. (Casse Decl., Ex. 1 (“Bolin
Dep.”) 14:20-17:4). Around the time of the Stuy Town sale, in October or
69
November 2015, Bolin had a conversation with George Carleton, a senior
executive at C-III, regarding how the § 3.02(b) waterfall provision allocated
Gain-on-Sale Proceeds to certificateholders. (Bolin Dep. 42:21-45:5). As an
outgrowth of that conversation, Carleton sent Bolin an email in which he
(Carleton) stated:
Jim, attached are a couple Realized Loss spreadsheet
example[s] where there were excess proceeds which
went to the trust through the waterfall. I can go over
these with you are your convenience.
(Bolin Dep. 42:3-43:23 (emphasis added); Casse Decl., Ex. 453).
Carleton also forwarded an email he had received from Michael J. Lylle at
C-III Capital Partners that stated:
George — Please see attached for 2 examples of REO
sales that resulted in “Gain on REO Sale Proceeds”
within Trusts Wells Fargo was the Trustee.
(Casse Decl., Ex. 453). Two RLRs were attached to the email, both of which
showed gain-on-sale proceeds being distributed after penalty interest. The first
RLR concerned the Courtyard Norwich REO sale, and reflected over $200,000
in penalty interest being paid to C-III. (Id.; see also Bolin Dep. 46:19-49:13).
The second RLR concerned the Flextronics REO sale, and reflected $565,000 in
penalty interest being paid to C-III. (Id.; see also Bolin Dep. 49:24-50:22).
Bolin made other key concessions at his deposition. He explained that
Appaloosa did not participate in the drafting of the C30 PSA, and that it had no
knowledge of the meaning and intent of the C30 PSA beyond the words on the
page. (Bolin Dep. 68:9-69:13, 162:25-163:21). Bolin also conceded that
Appaloosa was relying solely on the words of the C30 PSA and the C30 Pro
70
Supp, and not any “collateral facts or information,” to support its belief that a
special servicer could not recover penalty interest from the sale of REO
property. (Id. at 162:25-163:21). Bolin acknowledged that he could not point
to a single industry publication that agreed with Appaloosa’s position on the
C30 PSA, nor could he point to any examples of REO loan dispositions in
which the proceeds had been distributed in accordance with the methodology
now advanced by Appaloosa. (Id. at 205:16-23, 215:12-216:14). And when
asked whether “Appaloosa [was] in possession of any industry documents
showing a calculation of a determination that’s consistent with the position
that it’s advancing in this case,” Bolin responded that he was “not aware of any
such document.” (Id. at 53:16-54:2).
e.
Industry Publications Support CWC’s and the GSEs’
Interpretation of the C30 PSA
Finally, in the weeks preceding the sale of the Stuy Town, analysts in the
CMBS industry consistently reported that Penalty Interest and Yield
Maintenance would be paid out when the sale proceeds flowed through the
waterfall. (CWC 56.1 C190). See Axiom Inv. Advisors v. Deutsche Bank, No. 15
Civ. 9945 (LGS), 2018 WL 4253152, at *7 (S.D.N.Y. Sept. 6, 2018) (citing
industry publications as extrinsic evidence of custom and practice).
For example, Barclays reported in an October 20, 2015 article that:
The payoff should be enough to repay all advances,
ASER, and principal on the outstanding $3bn loan in
WBCMT 2007-C30 ($1.5bn), MLCFC 2007-5 ($800mn),
CWCI 2007-C2 ($250mn), WBCMT 2007-C31 ($248mn)
and MLCFC 2007-6 ($202mn). After this, the loan is
likely to pay a yield maintenance penalty due on the
loan, which is applied since the loan can no longer be
71
defeased and was first mentioned in foreclosure
proceedings on the loan. After this, the proceeds should
repay delinquent interest to CWCapital as an incentive,
which has been accruing at 3% since the loan first
became delinquent. Next, the proceeds should repay all
special servicing fees paid on the loan and potential
reimbursing some other small fees.
Finally, the
proceeds are then applied to the REO gain-on-sale
provisions in CMBS, which dictate that the proceeds are
used to recoup losses previously taken on the trusts.
(Casse Decl., Ex. 436; CWC 56.1 C192).
That same day, an affiliate of the Master Servicer for the C30 Trust, Wells
Fargo Securities, offered an identical understanding of the contemplated
disposition of the sale proceeds:
CWCapital is preparing to sell Stuyvesant Town and
Peter Cooper Village to Blackstone and Ivanhoe
Cambridge for $5.3 billion according to media reports.
The sale would include an agreement with the city to
preserve 5,000 units under rent control for twenty
years, while rent deregulation will be slowed on another
1,400 units, according to reports.
Official
announcements are expected this morning. As part of
the deal, New York City is expected to provide
Blackstone with $144 million in financing and waive the
$75 million in recording tax.
CMBS investors in the deals will be watching for terms
of a settlement with Centerbridge Partners LP, which
would reduce available distributions to the trusts. As
of this morning the next hearing in that case is
scheduled for November 16. Default interest under the
loan documents will likely also reduce proceeds
available to the trusts. Under the CMBS pooling and
servicing agreement, the special servicer is generally
entitled to “penalty interest”. In WBCMT 2007-C30, for
example, the discussion on Servicing Compensation
under §3.11(d) specifies that, for specially serviced
loans, penalty interest — the interest in excess of the
mortgage rate that accrues due to default — is payable
to the special servicer. After these considerations, and
a potential yield maintenance penalty, the gain-on-sale
72
mechanism may come into play as we outlined in the
Sept. 22 CMBS Brief. The gain-on-sale reserve is a deal
feature that traps excess liquidation proceeds for
reimbursement of prior realized losses.
(Casse Decl., Ex. 437). 36
36
Appaloosa claims that industry reports regarding the Stuy Town sale did not uniformly
forecast that penalty interest and yield maintenance would be paid before gain-on-sale
proceeds, citing a September 22, 2015 Wells Fargo Securities report, written by the
same analysts as the October 20, 2015 report quoted in the text. (See CWC 56.1 C190).
The earlier report reads in relevant part:
Stuytown: The Excess Proceeds Question
What happens when an REO property generates sales proceeds
above the loan balance? With a potential settlement and sale on
the horizon for the Peter Cooper Village & Stuyvesant Town loan,
an uncommon deal feature comes into play. In broad strokes, here
are our thoughts on how sale proceeds would flow through the
deals: First, as is typical, liquidation proceeds, after expenses and
the special servicer’s fee, will go to reimburse outstanding servicer
advances, interest on advances, and then ASERs. These items
amount to more than $850mm (Exhibit 1). Second, liquidation
proceeds would go to pay principal up to the original loan balance—
directly benefiting the A1A classes, but also translating to a
substantial build in credit enhancement for other classes in the
deals.
Sales proceeds remaining after this are labeled “gain-on-sale
proceeds” under the relevant pooling and servicing agreements and
are to be deposited into a gain-on-sale reserve account. (The Cobalt
deal uses the terms “excess liquidation proceeds” and “excess
liquidation proceeds account.”) Funds in this reserve account are
used to reimburse prior realized losses and remaining interest
shortfalls (See, WBCMT 2007-C30 PSA §4.01(l)). To be clear,
distributions from the gain-on-sale reserve account do not go to
amortize class principal balances and instead only reimburse prior
losses and interest shortfalls. Any proceeds remaining after prior
realized losses and outstanding interest shortfalls have been paid
back would be held in reserve to offset future losses and shortfalls.
As a practical matter, the property would need to sell for well more
than $3.9 billion before the gain-on-sale reserve comes into play,
given the outstanding advances, advance interest, ASERs, 1%
special servicing fee, and future expenses. Additionally, the terms
of any settlement with Centerbridge may come into play. Then
again, in 2014 Bloomberg reported that Fortress Investment Group
LLC was soliciting financing for a $4.7 billion offer for the property,
a price at which the treatment of excess sales proceeds is not an
esoteric question.
(Casse Decl., Ex. 446). A review of the substance of the two articles makes clear,
however, that the later article clarified the opinions of the earlier one. In particular, in
the October 20, 2015 article, the authors explained that the Gain-on-Sale provisions
73
An October 21, 2015 Morgan Stanley Research report entitled
“Stuyvesant Town Deal Ushers New Era of Core-Plus Real Estate,” applied
those concepts to the contemplated Stuy Town sale proceeds:
We think the $3b of CMBS backing the property will
receive full payoffs.
We also expect significant
reimbursement of outstanding interest shortfalls on
bonds, payment of yield maintenance, and payment of
default interest to the special servicer that has been
accruing since 2010 and gain on sale payments to
junior bonds that had previously realized losses.
(Lieberman Decl., Ex. 38, 39).
Finally, analysts at Credit Suisse reported that:
before the remaining proceeds [of the Stuy Town sale]
are used to reimburse tranches for previously realized
losses, there can be both prepayment penalties and,
very importantly in this case, default interest …. While
it is fairly uncommon to see payments of prepayment
penalties and default interest, as most liquidated loans
do not generate enough sales proceeds to cover these,
they are far from unheard of. In fact, we have even seen
an example just this month, where a $16.0 million loan
generated over $4.0 million in default interest.
(Casse Decl., Ex. 442).
It is also notable that a December 19, 2013 Morgan Stanley Research
Report, which was issued well before the Stuy Town sale, advised its readers
that:
Investors are discovering the nuances of CMBS cash
flow waterfalls written into pooling and servicing
agreements (“PSAs”). We review the application of loan
discussed in the September 22, 2015 article might come into play, if at all, only after
Penalty Interest was paid to the special servicer. (Casse Decl., Ex. 437). As noted,
Appaloosa’s corporate representative Bolin could not “point [] to a single industry
publication that has agreed with Appaloosa’s position.” And among Appaloosa’s expert
witnesses, neither Ann Hambly (see Hambly Dep. 196:12-17) nor Andrew Berman (see
Berman Dep. 198:4-13) could identify any such publication.
74
liquidation proceeds with a specific focus on five
provisions that may not be well understood, including
providing specific loan examples for each .…
Yield Maintenance
Definition and Mechanics
This is an uncommon payment that typically occurs
when an REO asset is liquidated for more than the
original loan balance. If there are excess proceeds after
payment of the loan balance in full, then yield
maintenance is still owed on the loan after it becomes
REO. Such payments typically flow through to senior
bond holders. We note that the special servicer may
have the right to waive yield maintenance, but in our
experience they typically do not given their fiduciary
responsibility to maximize value to the trust ….
Default Interest & Late Charges
Definition and Mechanics
If excess proceeds remain after the payment of yield
maintenance, then there is a pro-rata payment of default
interest and late charges to the special servicer.
Late charges are just what they sound like — charges
that accrue for the loan being delinquent.
Defaulted interest is far more interesting, in our
opinion. This is a fee owed from when a loan first
becomes delinquent and when the loan becomes REO.
One could think of this as incentive for the special
servicer to maximize the value of an REO property.
Defaulted interest is only disclosed in each individual
loan document (which are private documents and
therefore not available to most investors), but it is our
understanding that the fee is typically 3-5% of the loan
balance per annum. This fee is in addition to the 25
bps special servicing fee and the 1% REO liquidation fee
….
Gain on Sale
Definition and Mechanics
75
Finally, at the very bottom of the waterfall is a concept
known as gain on sale. If there are any excess
liquidation proceeds after the payment of all of the line
items outlined above, it is used to reimburse prior writedowns. Again, the bond would receive a cash payment
equal to the amount of the write-down reimbursement.
Note that there are nuances across PSAs where gain on
sale proceeds are applied similar to ASER
reimbursements, whereby the payment is made to
bonds in order of seniority to 1) current interest,
2) cumulative interest shortfalls and 3) only then to
write-down reimbursement amounts.
(Lieberman Decl., Ex. 37 (emphases added)).
5.
Appaloosa’s Extrinsic Evidence Is Insufficient to Generate a
Genuine Dispute of Material Fact Concerning the Proper
Interpretation of the C30 PSA
The extrinsic evidence just outlined by the Court is powerful, if not
conclusive. Appaloosa contends, however, that it also has extrinsic evidence
supporting its interpretation of the C30 PSA, that Gain-on-Sale Proceeds take
precedence over the waterfall provisions of § 3.02(b). As detailed in this
section, a review of Appaloosa’s extrinsic evidence reveals that it is either
irrelevant to the issues before the Court or insufficient to create a genuine
dispute of material fact.
a.
Appaloosa Errs in Claiming That Penalty Interest Is Not a
Liquidation Expense
Appaloosa’s first category of extrinsic evidence regards the definition of
Gain-on-Sale Proceeds in the C30 PSA. Picking up on an ambiguity in that
definition that the Court noted at the Rule 12(c) stage, Appaloosa contends that
the term “Liquidation Expenses” in the definition of Gain-on-Sale Proceeds
does not include Penalty Interest or Yield Maintenance. (Appaloosa CWC SJ
76
Opp. 7-9). To review, the term “Liquidation Expenses,” while capitalized in the
C30 PSA, is not a defined term. Neither side has provided any explanation,
other than oversight, for why such term was left undefined. But in support of
its view that “Liquidation Expenses” excludes Penalty Interest and Yield
Maintenance, Appaloosa proffers expert opinions from Ann Hambly.
Hambly reasons, based both on her own industry experience and upon
her review of 94 PSAs drafted by the same law firm that drafted the C30 PSA
(Cadwalader Wickersham & Taft), that the term “Liquidation Expenses” means
the “customary, reasonable, out-of-pocket costs associated with the liquidation
of the property,” such as brokerage commissions, legal fees, and conveyance
taxes. (Hambly Report 15). According to Hambly, the out-of-pocket costs
incurred in liquidating a property do not include accrued and unpaid penalty
interest; as such, the definition of Liquidation Expenses in the C30 PSA does
not include Penalty Interest. (Id.). Citing Hambly’s experience in the CMBS
industry, Appaloosa argues that it is reasonable to conclude that the parties to
the C30 PSA intended Liquidation Expenses to have the meaning Hambly
ascribes to it. (Appaloosa CWC SJ Opp. 8).
Not so. Quite to the contrary, Hambly’s opinion on the definition of
“Liquidation Expenses” does not even generate a genuine dispute of material
fact, because the Court’s decision here has focused on the interplay and
relative priorities of provisions in the C30 PSA, and not merely on the definition
of Gain-on-Sale-Proceeds. First, taken as true, Hambly’s opinion does not help
the Court decide, in the first instance, whether CWC is obligated to apply the
77
waterfall provision of § 3.02(b) or the Gain-on-Sale provision of § 3.04(e) to the
proceeds of the Stuy Town sale. That is, Hambly’s opinion would only be
helpful if Appaloosa had established the antecedent proposition that the gainon-sale provision of the C30 PSA takes precedence over the § 3.02(b) waterfall
provision. But while Hambly provides opinions on the meaning of “Liquidation
Expenses” and the existence (or not) of a custom and practice in the industry,
she offers no opinion on the Gain-on-Sale, Penalty Interest, and Yield
Maintenance provisions in the C30 PSA. More fundamentally, Appaloosa has
provided the Court with no other evidence sufficient to generate a triable issue
on the question before the Court regarding the relative priorities of Gain-onSale Proceeds, Penalty Interest, and Yield Maintenance.
Second, to the extent Hambly contends that Penalty Interest and Yield
Maintenance must be specifically included within the definition of Liquidation
Expenses in order for those amounts to be paid on the sale of an REO property,
her contention is disproved by abundant empirical evidence. Hambly supports
her opinion with a review of 94 sample PSAs from the same time frame and the
same law firm as the C30 PSA. (Hambly Report 20, Ex. D). She observes that
the definition of “Liquidation Expenses” consistently included “customary,
reasonable, out-of-pocket costs associated with the liquidation of the property.”
(Id. at 20). From this, she reasons that there must have been a “scriveners’
error in the drafting of the [C30] PSA by not including [such] definition of
Liquidation Expenses.” (Id.).
78
But Ronald Greenspan reviewed the same 94 PSAs, and the operation of
those PSAs stands in stark contrast to Hambly’s musings. (See Casse Decl.,
Ex. 20 (“Greenspan Rebuttal”) 6). Greenspan identified 88 REO liquidations
arising out of loans in those 94 trusts. (Id.). Of those 88 REO liquidations,
none paid gain-on-sale or excess liquidation proceeds to the exclusion of
penalty interest; 40 paid penalty interest only (no gain-on-sale or excess
liquidation proceeds were paid); 16 paid penalty interest and gain-on-sale; and
for the remaining 32, either an RLR was not available from the special servicer
or neither penalty interest nor gain-on-sale was distributed. (Id.). 37
Third, Hambly’s opinion on Liquidation Expenses is also refuted by
Greenspan’s industry-wide empirical analysis. The 249 instances where REO
liquidations proceeds were greater than outstanding principal, non-penalty
interest, costs, and fees came from 158 different trusts. (Greenspan
Rebuttal 5). Greenspan reviewed the PSAs for those 158 trusts and found that
104 of the 158 PSAs included a definition of “Liquidation Expenses.” (Id.).
Significantly, in every one of those 104 PSAs, the Liquidation Expenses
definition was silent as to whether penalty interest was included as a
liquidation expense. (Id.). Yet in every single one of these 104 trusts, penalty
37
Hambly also ignored the fact that many participants in the CMBS industry, including
Wells Fargo and U.S. Bank, include penalty interest as a liquidation expense on their
RLRs. (See CWC 56.1 C129, C122 (Wells Fargo reporting penalty interest as part of
“Fees, Advances, and Expenses” column of its distribution date statements, including
for the PCV Loan), C123 (U.S. Bank reporting penalty interest in the “Liquidation
Expenses” column of its distribution date statements, including for the PCV Loan)).
Indeed, Hambly herself admitted that penalty interest “is most often lumped into
liquidation expenses” in distribution date statements. (Hambly Dep. 62; CWC 56.1
C124).
79
interest was distributed to the special servicer when REO proceeds were
generated in excess of principal, interest, fees, and costs. (Id.). So while both
Hambly and Greenspan have proffered expert opinions that speak to the
construction of “Liquidation Expenses,” it is Greenspan’s that have the record
support.
b.
Appaloosa Misreads the Co-Lender Agreement
Appaloosa’s second source of extrinsic evidence is the Co-Lender
Agreement, which was entered into by each of the five PCV Trusts to facilitate
the administration of the Stuy Town loan. As noted, the Co-Lender Agreement
recognizes that the Master Servicer and Special Servicer for the C30 Trust are
responsible for servicing the PCV Loan.
Section 2(d) of the Co-Lender Agreement states, in relevant part:
In addition, in the event that the related Loan becomes
a Specially Serviced Mortgage Loan, the related CoLender shall pay to the Special Servicer under the
Pooling Agreement a fee to be paid in accordance with
this Agreement and the Pooling Agreement (the “Special
Servicing Fee”) equal to the product of 0.25% per
annum and the related Note principal balance on which
interest accrues. If the Loan becomes a Specially
Serviced Mortgage Loan and the Special Servicer
obtains a full or partial payment of any liquidation
proceeds, the Special Servicer shall be entitled to a fee
(the “Liquidation Fee”) set forth in the Pooling
Agreement, such Liquidation Fee not to exceed the
lesser of (i) the product of 0.50% per annum and the
related liquidation proceeds or payments, and
(ii) $15,000,000. If the Loan becomes a “Corrected
Mortgage Loan” (as defined in the Pooling Agreement),
the Special Servicer shall be entitled to a fee (the
“Workout Fee”) set forth in the Pooling Agreement, such
Workout Fee not to exceed the lesser of (i) 0.50% of all
payments of interest and principal received on such
Mortgage Loan for so long as it remains a Corrected
80
Mortgage Loan and (ii) $15,000,000. The Servicing Fee
and the Special Servicing Fee shall accrue on the same
basis as the related interest payment on such Note is
computed. All of the Loans shall be considered a
Specially Serviced Mortgage Loan if Loan A-1 is
determined to be a Specially Serviced Mortgage Loan
under the Pooling Agreement. Lead Lender agrees to
cause all of the Loans to be specially serviced and the
Special Servicer agrees to specially service all of the
Loans for the benefit of each Co-Lender in accordance
with the terms and provisions set forth in the Pooling
Agreement whenever Loan A-1 is a Specially Serviced
Mortgage Loan.
Whenever Loan A-1 becomes a
Specially Serviced Mortgage Loan, any “Workout Fee” or
“Liquidation Fee” (each as defined in the Pooling
Agreement) payable to the Special Servicer under the
Pooling Agreement shall be allocated pro rata between
the proceeds of Loan A-1, Loan A-2, Loan A-3, Loan A4, Loan A-5 and Loan A-6 payable to the holders of Note
A-1, Note A-2, Note A-3, Note A-4, Note A-5, and Note
A-6, respectively.
(Hampson Decl., Ex. E (“Co-Lender Agreement”) § 2(d)).
Appaloosa contends that this section of the Co-Lender Agreement limits
CWC’s compensation to Stuy Town to: (i) a Special Servicing Fee based on a
percentage of the loan amount; (ii) if Stuy Town is liquidated, a Liquidation Fee
capped at $15 million; and (iii) if CWC turns the Stuy Town loan into a
performing loan again, a Workout Fee capped at $15 million. (Appaloosa CWC
SJ Opp. 9). More to the present point, Appaloosa argues that the
Co-Lender Agreement’s specific incorporation of some
parts of the C30 PSA’s Special Servicer compensation
scheme, but its omission of other parts of that
compensation scheme (such as penalty interest), as well
as the cap it placed on the Liquidation Fee and Workout
Fee, indicates a clear intent to limit CWC’s
compensation in connection with its administration of
Stuy Town.
81
(Id.). Appaloosa argues additionally from § 3.01(a) of the C30 PSA that in the
event of a conflict between the PSA and the Co-Lender Agreement, the CoLender Agreement controls. Since the Co-Lender Agreement discusses three
types of Special Servicer compensation (none of which is Penalty Interest), and
since the Co-Lender Agreement controls over the C30 PSA, Appaloosa
concludes that CWC cannot rely on § 3.11(d) of the C30 PSA to retain any
Penalty Interest in connection with Stuy Town.
The Court discerns no conflict between the C30 PSA and the Co-Lender
Agreement. Section 2(d) of the Co-Lender Agreement explicates that the three
different types of special servicer fees — the Special Servicing Fee, Liquidation
Fee, and Workout Fee payable under § 3.11(c) of the C30 PSA — are to be split
pro rata amongst the lenders. With respect to those forms of special servicer
compensation, the Co-Lender Agreement contains the same percentages and
caps as the C30 PSA. The Co-Lender Agreement does not discuss, let alone
prohibit, additional servicing compensation payable under § 3.11(d) of the C30
PSA, such as Penalty Interest, late fees, assumption fees, and/or modification
fees. As it happens, the Co-Lender Agreement also does not address Gain-onSale Proceeds, but that does not mean that it conflicts with the C30 PSA or
forecloses the payment of Gain-on-Sale Proceeds, as Appaloosa’s argument
would suggest.
As but one more nail in the coffin of the Co-Lender Agreement evidence,
Appaloosa’s contention that it limits Special Servicer compensation to the
Special Servicer Fee, Liquidation Fee, and Workout Fee is entirely inconsistent
82
with Appaloosa’s concession that under some circumstances, CWC would be
entitled to Penalty Interest under the C30 PSA. Appaloosa’s attempt to leverage
the Co-Lender Agreement proves too much, and does not generate a triable
dispute of fact.
c.
The Expert Opinions of Dr. Hartzmark Do Not Generate
a Genuine Dispute of Material Fact Regarding the
Interpretation of the C30 PSA
Appaloosa’s third source of extrinsic evidence is the expert testimony of
Dr. Michael L. Hartzmark, the President of Hartzmark Economics Litigation
Practice LLC, a consulting firm that specializes in the application of economics
and finance to legal, commercial and regulatory issues. (Hampson Decl., Ex. H
(“Hartzmark Report”) 6). Hartzmark holds a Ph.D. in economics from the
University of Chicago and has taught economics and financial economics at
both Chicago and the University of Michigan. (Id. at 7). He also has practical
experience in the securities industry from serving as a Financial Advisor at
Fahnestock & Co., Inc., and has held Series 7 and 63 registered representative
licenses. (Id.).
Hartzmark was tasked by Appaloosa with determining “whether
fundamental economic principles and data analyses can be applied in this
matter to assist the Court in its interpretation of the Governing Agreements
concerning the distribution of proceeds from the liquidation of the Stuy Town
Property.” (Hartzmark Report 1). He answers in the affirmative, concluding
that “the application of economic principles to the investor-special servicer
relationship demonstrates that it would be highly unlikely that the intent of the
83
parties to a CMBS transaction would be to offer extraordinary payouts to
special servicers at the expense of investors, especially when those investors
have realized losses.” (Id. at 52).
While Hartzmark’s expertise in the field of economics cannot be gainsaid,
the opinions he proffers do not aid the Court in resolving the present dispute.
Hartzmark uses economic principles to superimpose a normative theory onto
the C30 PSA in an attempt to explain many of its provisions. His exercise is
that of an economist attempting to design the most economically efficient PSA
possible. But Hartzmark’s post hoc analyses as to what would make a
hypothetical contract economically efficient would not be helpful to the trier of
fact, both because his factual premises are faulty and because his overarching
analytical framework is legally irrelevant.
Proceeding in reverse order, the Court concludes that Hartzmark’s
opinions are legally irrelevant because he offers only abstract theoretical
opinions that are untethered to the actual evidence in this case. Hartzmark
ignores the actual terms of the C30 PSA and instead postulates what he
believes would have been a more efficient structure. He couches his
commentary in terms of the “intention” of the parties, but he has no actual
knowledge of their intent. See Lippe v. Bairnco Corp., 288 B.R. 678, 692
(S.D.N.Y. 2003) (excluding expert’s opinion because it failed to account for or
consider the real world market realities of a business and therefore
“amount[ed] to no more than theoretical speculation”), aff’d, 99 F. App’x 274
(2d Cir. 2004) (summary order); Buckley v. Deloitte, 888 F. Supp. 2d 404, 414
84
(2002) (excluding opinion because it was not based on actual facts or data:
“there is simply too great an analytical gap between the data and the opinion
proffered”). 38
The Court’s role here is to ascertain whether the record permits it to
determine, as a matter of law, the intent of the parties to the C30 PSA, and not
to determine what outcome is most economically efficient. See Reach Music
Publ’g, Inc. v. Warner Chappell Music, Inc., 988 F. Supp. 2d 395, 401 (S.D.N.Y.
2013) (cautioning that expert opinion must “have a valid connection to the
pertinent inquiry”); see also Fleisher v. Phoenix Life Ins. Co., 18 F. Supp. 3d
456, 474 (S.D.N.Y. 2014) (rejecting argument that contract should be
construed based on “what makes more economic sense,” because the “case
does not raise issues of sound economics, but of contract construction”); Glob.
38
Hartzmark has no specialized knowledge or expertise in the CMBS industry writ large.
Specifically, he has no experience in, and has never analyzed, the CMBS industry
outside of serving as an expert witness in this case, and as an academic. He has never
worked for a financial institution with any involvement in the CMBS industry. (See
Hartzmark Report, App’x B). He has never invested in CMBS. (See Casse Decl., Ex. 12
(“Hartzmark Dep.”) 15-16). He did not survey any CMBS market participants as part of
his analysis; indeed, the only CMBS investor to which Hartzmark spoke was Appaloosa.
(See id. at 96-97). And he did not review the deposition transcripts of any of the parties
to the C30 PSA or any other witnesses deposed in this case. (See id. at 11:15-24;
Hartzmark Report, App’x A).
Further deficiencies were identified during Hartzmark’s deposition:
•
Prior to this case, Hartzmark had never seen a realized loss
form for a CMBS. (Hartzmark Dep. 25:14-19).
•
He could not recall reviewing a CMBS pooling and servicing
agreement prior to this case. (Id. at 27:10-20).
•
He had no familiarity with the CMBS compensation system
for special servicers prior to this case. (Id. at 28:1-5).
•
He had no familiarity with the terms “gain-on-sale” and
“liquidation expenses” as used in CMBS PSAs. (Id. at
28:10-22).
85
Reinsurance Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508, 519 (2017)
(rejecting court’s use of “notions of economic efficiency” to interpret the
meaning of a contract); see generally MASTR Adjustable Rate Mortgs. Tr. 2006OA2 v. UBS, No. 12 Civ. 7322 (PKC), 2015 WL 797972, at *4 (S.D.N.Y. Feb. 25,
2015) (noting that court does not have the prerogative to override the
contracting parties’ intent “in order to provide an efficient and economical
remedy,” and, “[w]hen it comes to … contracts among sophisticated parties,
predictable outcomes in accordance with the expressed intentions of the
contracting parties is justice and fairness”). 39
39
In LaSalle Bank v. Nomura Asset Capital Corp., 424 F.3d 195, 206 n.9 (2d Cir. 2005),
the Second Circuit rejected the argument that a contract should be interpreted based
on what arrangement was most ideal for CMBS investors. See also IBM v. United
Microelectronics, 764 F. App’x 9, 13 (2d Cir. 2019) (summary order) (“UMC contends
that we should nevertheless imply a condition precedent because the contract would
otherwise render what UMC calls the ‘absurd result’ of giving IBM a ‘windfall’ of millions
of dollars for licenses UMC never received.… But, by the plain language of the
Amended Agreement, UMC took on the risk that it would be unable (or unwilling) to
establish a subsidiary and named facility by December 31, 2015. To infer a condition
that shifts that risk, absent explicit language would be to impermissibly rewrite the
parties’ bargain.”); Wastemasters, Inc. v. Diversified Inv’rs Servs., 159 F.3d 76, 79 (2d
Cir. 1998); Blackrock Core Bond Portfolio v. U.S. Bank, 165 F. Supp. 3d 80, 97 (S.D.N.Y.
2016).
Other jurisdictions have concluded similarly. See, e.g., Interstate Fire & Cas. Co. v.
Dickerson, No. 11 Civ. 7130 (RSL), 2012 WL 3865122, at *2 n.3 (W.D. Wash. Aug. 31,
2012) (“The Court’s task is to … discern the intent of the parties if an ambiguity exists,
not to figure out what interpretation makes economic sense ….”); Laplace v. Laplace,
No. 03 Civ. 4291 (JAG), 2006 WL 83110, at *6 (D.N.J. Jan. 12, 2006) (observing that
when interpreting a contract, “the Court may not delete contractual provisions” or
interpose “a strained construction,” even if the result would be “economically more
efficient”); Blue Cross & Blue Shield v. Am. Exp., No. 99 Civ. 6679 (MFK), 2005 WL
2171192, at *5 (N.D. Ill. Sept. 6, 2005) (rejecting economic professor’s application of
economic theory to construe contract because opinion improperly focused on the future
economic consequences of a contract, which is irrelevant to the parties’ intent), vacated
on other grounds, 467 F.3d 634 (7th Cir. 2006); Sae Biang Optical v. Kenmark Optical,
No. 3:05 Civ. 168 (JDM), 2008 WL 170069, at *6 (W.D. Ky. Jan. 17, 2008) (“commercial
entities … are entitled to bargain for any rational result, even if that result may not be
the most … economically efficient for the average contracting party”); 11 WILLISTON ON
CONTRACTS § 31:5 (4th ed.) (“the question whether a bargain is … economically
efficient … is not ordinarily a legitimate subject of judicial inquiry”).
86
But even if the Court were inclined to consider the economic principles
underlying the C30 PSA, the factual premises underlying Hartzmark’s opinions
are flawed. His theories “about the economic result that rational economic
actors would reach in [PSA] negotiations” (Appaloosa MIL Br. 13) proceed from
the premise of all actors being at the negotiating table to represent their own
interests. However, Hartzmark did not know whether the certificateholders
were parties to the PSA (Hartzmark Dep. 130:22-131:9), nor did he “have an
understanding of whether the investors were at the [PSA negotiating] table or
not” (id. at 131:13-19). Hartzmark has no evidentiary support for the idea that
certificateholders had any negotiating power with respect to the C30 PSA, or
any PSA. (Cf. id. at 133:18-136:6 (acknowledging that authority on whom he
relies stated that the “investor is the only party who is not a party to the
PSA”). 40 To the contrary, Ann Hambly testified explicitly that investors do not
negotiate PSAs (see Hambly Dep. 278:2-14), and Appaloosa acknowledges as
much (see CWC 56.1 C11). Because certificateholders have no role in
negotiating PSAs, Hartzmark’s opinions about the “result” they would achieve
in a negotiation is irrelevant to how the C30 PSA should be interpreted.
Moreover, as CWC observed (see CWC MIL Br. 6), Hartzmark’s theory
presupposes that all certificateholders have the same interests, which the
40
And the Court is not at all persuaded by Appaloosa’s explanation that “Dr. Hartzmark’s
theory depends on Certificateholders being principals in a CMBS trust as economists
understand that term, not on whether they are parties to the PSA as a legal matter.”
(Appaloosa CWC MIL Opp. 13).
87
alignment of parties in the instant case would seem to refute. For all of these
reasons, Hartzmark’s opinions do not create a genuine dispute of material fact.
d.
C-III’s Allocation Practice Accords with CWC’s and the
GSEs’ Interpretation of the C30 PSA
Appaloosa contends that, despite CWC’s “bravado” that all special
servicers interpret “gain-on-sale” identically, that is not true. However, it is
only able to point to a single example that supports its view that Gain-on-Sale
proceeds takes priority over Penalty Interest. (See Appaloosa CWC SJ Opp. 1314). Appaloosa has identified one instance in which C-III allocated $78,725 as
gain-on-sale and did not retain penalty interest. (See id.). 41 CWC rejoins that
this was a mistake on the part of C-III, and an immaterial one at that,
inasmuch as a C-III affiliate held the Class G certificates that received the
$78,725. (CWC SJ Br. 19-20).
Extensive record evidence demonstrates that this single transaction was
an aberration from C-III’s practice. In 39 other REO sales, C-III distributed
penalty interest prior to or to the exclusion of gain-on-sale. (See Greenspan
Report 17 n.22). Two of those sales were out of trusts within the same series
as the JPM 2005-LDP3 trust (which held the REO sale to which Appaloosa
points) and thus had essentially verbatim PSA provisions. (Casse Decl.,
Ex. 209, 214; CWC 56.1 A138).
41
As noted supra at n.31, Greenspan disclosed two occasions in which gain-on-sale
proceeds were paid prior to, or to the exclusion of, penalty interest. (See Greenspan
Report 17 n.22). Neither asset was liquidated out of a WBCMT PSA. (See id.). Both
were specially serviced by C-III. (See id.).
88
Further, and as noted above, prior to the Stuy Town sale, Appaloosa’s
James Bolin reached out to a senior executive at C-III, George Carleton, for
examples of instances in which there had been sufficient funds to pay the trust
in full. Bolin received two RLRs, both of which evidenced C-III collecting
penalty interest ahead of gain-on-sale. 42 Thus, a single instance of paying
gain-on-sale before penalty interest is not enough to generate a genuine
dispute of material fact as to the uniformity of industry custom and practice.
See Nora Beverages v. Perrier Grp. of Am., 269 F.3d 114, 124 (2d Cir. 2001)
(holding, in a trademark infringement action, that district court did not err in
finding that “two anecdotes of confusion over the entire course of competition
constituted de minimis evidence insufficient to raise triable issues”); In re
Optical Disk, 2017 WL 6451711, at *4 (granting summary judgment, despite
expert identifying one contrary example, finding “this lone example is
insufficient to raise a genuine issue of material fact”).
42
Discovery also showed that C-III entered into fee-sharing agreements with other
servicers that expressly provided for the allocation of penalty interest anticipated from
REO sales — something Appaloosa contends could never occur. (See Casse Decl.,
Ex. 423-428; 430; CWC 56.1 C101). Appaloosa’s own expert, Andrew Berman, who
worked for a (non-servicer) affiliate of C-III, (i) testified that C-III collected (and collects)
penalty interest as fees; (ii) entered into fee-sharing agreements that allocated penalty
interest; and (iii) when shown C-III’s RLRs reflecting the collection of penalty on REO
sales, refused to say that C-III had acted improperly. (Casse Decl., Ex. 13 at 37, 38-39,
131-59).
Separately, Appaloosa claims that after it filed its papers in this case, Carleton told
Appaloosa that C-III agreed with Appaloosa’s interpretation of the C30 PSA because it
was consistent with C-III’s understanding and practice. (Appaloosa CWC SJ Opp. 14).
The only evidence Appaloosa cites in support of such a statement is Bolin’s deposition
testimony regarding a phone call he allegedly had with Carleton. (CWC 56.1 A145).
This is inadmissible hearsay. See Fed. R. Evid. 801(c). Appaloosa provides no
admissible evidence on this point, despite abundant opportunities to do so.
89
e.
The C30 Pro Supp Is Neutral
Somewhat curiously, both Appaloosa and CWC source their divergent
contract interpretations to the C30 Pro Supp. See Wells Fargo v. ESM Fund I,
LP, 785 F. Supp. 2d 188, 195 (S.D.N.Y. 2011) (recognizing that the Prospectus
Supplement, filed with the SEC, is “important” and “persuasive evidence” of the
intent of the PSA), aff’d sub nom. Wells Fargo v. Fin. Sec. Assur. Inc., 504 F.
App’x 38 (2d Cir. 2012) (summary order). The C30 Pro Supp states that “[t]he
principal compensation to be paid to the Special Servicer in respect of its
special servicing activities is the Special Servicing Fee (together with the Master
Servicing Fee, the ‘Servicing Fees’) and, under the circumstances described in
this prospectus supplement, Liquidation Fees and Workout fees.” (C30 Pro
Supp S-177). It goes on to explain that “[a]s additional servicing compensation,
the Master Servicer and/or the Special Servicer is entitled to retain all
modification fees, assumption fees, defeasance fees, assumption and other
application fees, late payment charges and [penalty] interest … and
Prepayment Interest Excesses collected from borrowers on Mortgage Loans.”
(Id. at S-179).
In a theme that is echoed in several of its arguments, Appaloosa
contends that it would be an absurd result for CWC to retain $614 million in
Penalty Interest because that is more than 10 times the $60 million it was
entitled to receive as its “principal compensation.” (Appaloosa CWC SJ
Opp. 20). CWC contends, conversely, that the Pro Supp’s disclosure regarding
Penalty Interest is consistent with § 3.11(d), which provides that the Special
90
Servicer is entitled to receive as additional compensation “all late payment
charges [and] Penalty Interest received on or with respect to Specially Serviced
Mortgage Loans actually collected that, with respect to late payment charges,
accrued during the time that the Mortgage Loan was a Specially Serviced
Mortgage Loan.” (C30 PSA § 3.11(d); see CWC SJ Br. 14).
The Court concludes that the language of the C30 Pro Supp, and any
disclosures it provided to investors in the C30 Trust, do not move the needle in
favor of either side’s interpretation of the C30 PSA. That the C30 Pro Supp
describes certain forms of servicing compensation as the “principal”
compensation does not mean that the Special Servicer would never be entitled
to Penalty Interest. Indeed, every specially-serviced loan will yield a Special
Servicing Fee, Liquidation Fee, and Workout Fee (assuming any of those events
occur), whereas in the history of CMBS 1.0, only 247 REO loans have resulted
in penalty interest being paid to the special servicer. Clearly, then, for the
overwhelming majority of specially-serviced loans, the “principal compensation”
for the special servicer will be these other fees. That being said, the fact that
the C30 Pro Supp discloses that in certain instances the Special Servicer may
be entitled to Penalty Interest does not, in and of itself, mean that CWC is
clearly entitled to such compensation here. The C30 Pro Supp evidence is
neutral.
The Court has reviewed Appaloosa’s extrinsic evidence with care, and in
its most favorable light. However, like Appaloosa’s challenges to CWC’s and the
GSEs’ extrinsic evidence, Appaloosa’s evidence is plainly insufficient to create a
91
genuine dispute of material fact concerning the proper interpretation of the
C30 PSA.
6.
The Court Rejects Appaloosa’s Argument That Yield
Maintenance Is Not Owed to the GSEs Because the Borrower
Did Not Make a Principal Prepayment
Both in its opposition to the GSEs’ motion for summary judgment, and in
its own motion for partial summary judgment, Appaloosa argues that
regardless of whether a yield maintenance premium was due to the Trust
under the Stuy Town Notes, no Yield Maintenance is payable to
certificateholders under the C30 PSA because the borrower never made a
Principal Prepayment. In this regard, Appaloosa posits that under the C30
PSA, “Yield Maintenance” is defined as amounts “paid or payable, as the
context requires, on a Mortgage Loan as the result of a Principal Prepayment
thereon[,]” while “Principal Prepayment” is limited to the “payment of principal
made by the Mortgagor on a Mortgage Loan or Companion Loan that is received
in advance of its scheduled Due Date.” (C30 PSA § 1.01 (emphasis added)).
Here, because the liquidation proceeds from the Stuy Town sale came from a
third party — rather than “the Mortgagor” (i.e., the Borrower) — the PSA does
not recognize any Yield Maintenance. Appaloosa’s argument distills to the
following syllogism: The C30 PSA requires that Yield Maintenance can only be
recovered when the Borrower makes a Principal Prepayment; in an REO
92
liquidation, the Trust sells the REO property to a third party; therefore, in an
REO liquidation there will never be Yield Maintenance. 43
Appaloosa made this same argument at the Rule 12(c) stage. At that
time, the Court concluded that the “made by the Mortgagor” clause was
ambiguous because it conflicted with other clauses in the C30 PSA — like
§ 3.02(b)’s waterfall provision and the REO Loan Waterfall — that clearly
contemplate payment of Yield Maintenance from REO dispositions, where the
payment never comes from “the Mortgagor.” See PSA I, 2018 WL 1229702, at
*9. The GSEs argue that the Court’s ruling established the law of the case, and
that Appaloosa cannot now, at the summary judgment stage, rely on language
the Court already found ambiguous at the Rule 12(c) stage. While the Court
does not preclude consideration of Appaloosa’s argument as law of the case, it
finds the “made by the Mortgagor” language to be ambiguous for the same
reasons as before.
43
Appaloosa suggests that there are circumstances under which there could be a
Principal Prepayment “made by the Mortgagor” on an REO Loan. For example, if a
borrower defaults on the loan, resulting in an acceleration of the outstanding principal
and accrual of Yield Maintenance, and the trust forecloses and conducts a sheriff’s sale,
the property may be located in a state that gives the mortgagor the right to redeem the
property after such a sale. In this situation, Appaloosa explains, the redemption results
in a Principal Prepayment paid by the borrower, which gives rise to Yield Maintenance.
However, Appaloosa fails to explain where in this line of reasoning the property at issue
becomes REO Property or the loan becomes an REO Loan. As such, this hypothetical
scenario does not aid the Court in harmonizing the provisions of the C30 PSA regarding
payment of Yield Maintenance on an REO Loan. Further, Appaloosa has, in other
places, conceded that its position in this litigation would preclude the payment of Yield
Maintenance from the sale of an REO property in all circumstances. (See GSE 56.1
G88 (responding “Undisputed” to the statement “Appaloosa’s position in this litigation
would preclude the payment of Yield Maintenance from the sale of an REO property in
all circumstances.”)).
93
That tangential bit of ambiguity, however, does not create an issue for
trial. With discovery now concluded, the Court has a wealth of extrinsic
evidence that supports the GSEs’ argument. See generally Luitpold Pharm.,
Inc., 784 F.3d at 87-88. Among other things, the GSEs identified five
transactions (handled by three different special servicers) from the same shelf
(and using the same language) as the C30 PSA, including the “made by the
Mortgagor” language that Appaloosa argues is controlling, all of which
produced the same yield maintenance payments the GSEs seek here.
Appaloosa does not contest this fact. In addition to those five, the GSEs point
to twelve other properties, governed by agreements with materially identical
terms to those on which Appaloosa relies in the C30 PSA, all of which
generated yield maintenance charges as a result of an REO disposition.
(Lieberman Decl. ¶¶ 3-10 & Ex. 46-52).
The GSEs also point to Karen Olin’s testimony that yield maintenance is
payable from an REO Loan (see GSE 56.1 G64), and Leslie Hayton’s testimony
that for purposes of a yield maintenance calculation in the context of an REO
disposition, Wells Fargo uses the sale date as the “prepayment date” (see
Hayton Dep. 131:5-132:12). Indeed, Appaloosa’s own corporate representative
testified that proceeds collected from a foreclosure sale that are used to satisfy
the judgment amount would constitute a “payment made by the borrower.”
(GSE 56.1 G26 (citing Bolin Dep. 274:4-75:19)). Appaloosa is unable to contest
this evidence with any substantive fact evidence supporting its interpretation of
the C30 PSA, much less evidence sufficient to create a triable issue of fact.
94
7.
The Court Finds No Genuine Dispute of Fact over the Amount
of Penalty Interest to Which CWC Is Entitled
Having resolved the question of whether CWC is entitled to Penalty
Interest, the Court proceeds to consider how much Penalty Interest CWC is
entitled to retain. In its moving papers, CWC claims that it is entitled to the
full amount of Penalty Interest that it collected, $614,424,027.57, which it
calculated as interest accrued on the PCV Loan at the rate of 3% from the date
of the Borrower’s default on January 8, 2010, until Stuy Town was liquidated
on December 18, 2015. (See CWC SJ Br. 22). Appaloosa disputes that
amount, arguing that: (i) the Foreclosure Judgment cut off the accrual of
Penalty Interest; (ii) Penalty Interest does not accrue on an REO Loan; and
(iii) Penalty Interest must be used to offset interest on advances. (See
Appaloosa CWC SJ Opp. 26-27; see generally Appaloosa SJ Br.). The Court
addresses, and rejects, these arguments in the remainder of this section.
a.
The Foreclosure Judgment Did Not Cut Off the Accrual
of Penalty Interest
Appaloosa focuses first on the Foreclosure Judgment, which specified
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 federal rate. (Appaloosa CWC SJ Opp. 26). 44 It contends that
CWC ignored the Foreclosure Judgment when allocating the Stuy Town sale
44
The Foreclosure Judgment indicated that CWC was entitled to approximately $38.2
million in Penalty Interest as of the date of entry. (See 2010 Action, Dkt. #92 at 3-4
¶ 6).
95
proceeds, because it calculated Penalty Interest past the date of the
Foreclosure Judgment and in contravention of its terms. (Id.).
Appaloosa is wrong. The Foreclosure Judgment merely set forth the
terms of how a foreclosure sale could occur and calculated the amounts due
and owing from the Borrower at the time it was entered, on June 21, 2010.
(See 2010 Action, Dkt. #92 at 3-4 ¶ 6). It is undisputed that no foreclosure
sale took place. (CWC 56.1 C49-50).
In this setting, § 18.20 of the Loan Agreement comes into play:
In case Lender shall have proceeded to enforce any right
under this Loan Agreement or the Mortgage by
foreclosure sale, entry or otherwise, and such
proceedings shall have been discontinued or abandoned
for any reason or shall have been determined adversely,
then, in every such case, Borrower and Lender shall be
restored to their former positions and rights hereunder
with respect to the Property subject to the lien hereof
and the lien of the Mortgage.
(Loan Agreement § 18.20 (emphasis added)). Pursuant to the plain language of
the Loan Agreement, if a foreclosure sale is discontinued or abandoned, the
parties are restored to their prior positions. Appaloosa protests that the
foreclosure sale was not “abandoned,” but rather “adjourned sine die,” and that
the Foreclosure Judgment was thus never vacated. This argument is too clever
by half; the foreclosure sale was plainly “discontinued or abandoned” when the
Lender took title to the property via a deed in lieu of foreclosure. 45
45
Discovery confirmed that the Foreclosure Judgment had no impact on how the C30
Trust calculated interest that was owing on the PCV Loan or distributions to
certificateholders. (CWC 56.1 C206). Even James Bolin acknowledged that interest
payments on Appaloosa’s certificates were not impacted by the Foreclosure Judgment.
(See Bolin Dep. 89-95; CWC 56.1 C208). This confirms that the Foreclosure Judgment
96
The Court also recalls the testimony of Michiko Shimizu that at no point
in her career did the terms of a foreclosure judgment affect the accrual of
penalty interest on an REO disposition. (Shimizu Dep. 201:24-202:5). Thomas
Nealon similarly explained that when he was at LNR, he personally oversaw
hundreds of judicial foreclosures, none of which changed the determination of
the trust’s accrual of interest and amounts payable to certificateholders and
trust parties. (Nealon Report 25). Finally, Ronald Greenspan reviewed 26
transactions in which CWC utilized the contract and penalty interest rates set
forth in the loan agreements in the face of a foreclosure judgment that imposed
a different statutory interest rate after entry. (Greenspan Report 30). Given
this evidence, the Court easily concludes as a matter of law that the
Foreclosure Judgment did not cut off the accrual of penalty interest.
b.
Penalty Interest Continues to Accrue on an REO Loan
Appaloosa next argues that once the C30 Trust took the title to the
property through a deed in lieu of foreclosure, and the PCV Loan became an
REO Loan, Penalty Interest stopped accruing because the C30 PSA does not
permit the accrual of Penalty Interest on an REO Loan. (Appaloosa CWC SJ
Opp. 26-27). Again, the Court concludes otherwise.
The C30 PSA defines an REO Loan as “[t]he Mortgage Loan deemed for
purposes hereof to be outstanding,” which is further
was discontinued or abandoned. It also renders inapposite Appaloosa’s citation to
SDF9 COBK LLC v. AF & NR LLC, No. 12 Civ. 3078 (ENV) (RML), 2014 EL 4244296
(E.D.N.Y. Aug. 26, 2014), where the court held that penalty interest accrued at the
statutory interest rate following the entry of a foreclosure judgment. Id. at *2.
97
deemed to provide for Periodic Payments of principal
and/or interest equal to its Assumed Scheduled
Payment and otherwise to have the same terms and
conditions as its predecessor Mortgage Loan (such
terms and conditions to be applied without regard to the
default on such predecessor Mortgage Loan and the
acquisition of the related REO Property as part of the
Trust Fund).
(C30 PSA § 1.01). With little explanation and even less evidentiary support,
Appaloosa claims that the language in the definition of REO Loan stating that
“(such terms and conditions to be applied without regard to the default on such
predecessor Mortgage Loan … )” indicates that Penalty Interest does not accrue
on an REO Loan. (See Appaloosa CWC SJ Opp. 26-27). In point of fact, this
language does not indicate that Penalty Interest stops accruing in an REO
Loan. Rather, it merely indicates that, with respect to an REO Loan, the Trusts
should continue to receive payments of principal and interest under the same
terms and conditions as under the predecessor Mortgage Loan.
Other provisions of the C30 PSA confirm the Court’s reading of this
provision. First, both the definition of REO Loan and § 3.02(b) explicitly
anticipate that REO liquidation proceeds will be used to pay Penalty Interest.
Second, the definition of Penalty Interest itself includes interest that accrues on
an REO Loan. In fact, Penalty Interest is explicitly defined with respect to REO
Loans. (See C30 PSA § 1.01). Third, the C30 PSA is clear where it intends to
cap or stop from accruing a form of servicing compensation. For example,
§ 3.11(c) provides that the Workout Fee “will cease to be payable … if the
related Mortgaged Property becomes an REO Property.” (C30 PSA § 3.11(c); see
98
also C30 PSA § 3.11(c)-(d) (providing explicit cap on Workout Fee and
Liquidation Fee payable on the PCV Loan, with no corresponding cap on
penalty interest)). The absence of a similar provision precluding the accrual of
Penalty Interest on an REO Loan is thus telling. And the C30 Pro Supp
specifically provides that the Special Servicer is entitled to additional servicing
compensation in the form of Penalty Interest that accrues “after the related
mortgaged property became an REO Property.” (C30 Pro Supp S-175).
Still further confirmation can be found in the parties’ course of
performance evidence. Ronald Greenspan analyzed 24 REO Loans serviced by
CWC that were liquidated out of the WBCMT Trusts, all of which contain
virtually identical language concerning the accrual of Penalty Interest.
(Greenspan Report 28). Of these 24 WBCMT loans, 23 (96%) either accrued
Penalty Interest past the REO title acquisition date or stopped accruing Penalty
Interest prior to the REO title acquisition date solely because the trust had
insufficient funds to pay Penalty Interest in full. (Id.). Separately, LNR and
Torchlight liquidated a combined 12 REO properties out of WBCMT Trusts that
accrued Penalty Interest. (Id.). Out of LNR’s 9 REO loans, 8 (89%) accrued
Penalty Interest beyond the REO title acquisition date, while all 3 of the
Torchlight loans (100%) accrued Penalty Interest beyond the REO title
acquisition date. (Id.).
c.
Penalty Interest Need Not Be Used to Offset Interest on
Advances or Additional Trust Fund Expenses
Appaloosa further claims that, under the C30 PSA, CWC was required to
apply Penalty Interest to reimburse the PCV Trusts for $67 million in Interest
99
on Advances (“IOA”) and certain Additional Trust Fund Expenses (“ATFE”).
Specifically, Appaloosa claims that CWC breached § 3.05(a)(ix) and § 3.11(d) of
the C30 PSA. Section 3.05, titled “Permitted Withdrawals from the Certificate
Account, Distribution Account, Interest Reserve Account, Additional Interest
Account, Gain-on-Sale Reserve Account, Companion Distribution Account,
Floating Rate Account and Interest Shortfall Account,” states, in relevant part:
(a) The Master Servicer may, from time to time, make
withdrawals from the Certificate Account for any of the
following purposes … : …
(ix) at such time as it reimburses the Trustee, itself, the
Special Servicer … for any unreimbursed Advance
(including any Advance that constitutes a WorkoutDelayed Reimbursement Amount) pursuant to clause
(ii), (vii) or (viii) above, to pay the Trustee, itself, the
Special Servicer … any interest accrued and payable
thereon in accordance with Section 3.03(d) or 4.03(d) …
provided that the Trustee’s, the Master Servicer’s, [and]
the Special Servicer’s, rights to payment pursuant to
this clause (ix) with respect to interest on any Advance
shall be satisfied (A) subject to and in accordance with
the terms of the Intercreditor Agreement with respect to
the related Loan Pair, first out of late payment charges
and Penalty Interest collected on or in respect of the
related Mortgage Loan (and if the Advance was made
with respect to a Co-Lender Loan, out of such amounts
collected on or in respect of the related Companion
Loan(s)) and REO Loan, during the Collection Period in
which such Advance is reimbursed (the use of such late
payment charges and Penalty Interest to be allocated
between the Master Servicer and the Special Servicer on
a pro rata basis based on the amount of late payment
charges and Penalty Interest that the Master Servicer
and the Special Servicer have received as additional
servicing compensation during such period), and (B) to
the extent that the late payment charges and Penalty
Interest described in the immediately preceding clause
(A) are insufficient, but only at the same time or after
such Advance has been reimbursed, out of general
collections on the Mortgage Loans, Companion Loans
100
and any REO Properties on deposit in the Certificate
Account;
(C30 PSA § 3.05(a)(ix)). Appaloosa claims that § 3.05(a)(ix) sets forth a clear
and unambiguous rule as to the source of funds that may be used for the
reimbursement of IOA: IOA is to be paid first out of any Penalty Interest
received during the Collection Period in which the Advance is reimbursed, and
other funds may be used to reimburse interest on advances only if the Penalty
Interest received during the relevant Collection Period is insufficient to cover
the outstanding obligation.
Appaloosa finds support for this interpretation in § 3.11(d), which states,
in relevant part, that:
To the extent the Master Servicer or the Special Servicer
receives late payment charges or Penalty Interest on a
Mortgage Loan for which interest on Advances or
Additional Trust Fund Expenses (other than Special
Servicing Fees, Workout Fees and/or Liquidation Fees)
related to such Mortgage Loan and not previously
reimbursed to the Trust Fund, the Special Servicer shall
transfer to the Master Servicer for deposit in the
Certificate Account … an amount equal to the lesser of
(i) the amount of late payment charges or Penalty
Interest received on such Mortgage Loan or (ii) the sum
of the amount of interest paid to the Master Servicer on
Advances related to such Mortgage Loan incurred since
the Closing Date for which the Trust Fund has not been
previously reimbursed and the amount of Additional
Trust Fund Expenses (other than Special Servicing
Fees, Workout Fees and/or Liquidation Fees) related to
such Mortgage Loan incurred since the Closing Date
and not previously reimbursed to the Trust Fund. To
the extent that the Special Servicer is not entitled to late
payment charges or Penalty Interest pursuant to the
immediately preceding sentence, the Special Servicer
shall promptly transfer such late payment charges and
Penalty Interest to the Master Servicer who shall deposit
101
such late payment charges and Penalty Interest in the
Certificate Account.
(C30 PSA § 3.11(d)). Appaloosa argues that, collectively, these provisions
(i) required CWC to reimburse IOA and ATFE (other than its Special Servicing,
Workout, and Liquidation Fees) out of any Penalty Interest received on the Stuy
Town Senior Loan, and (ii) precluded what CWC did here, which was to keep all
of the Penalty Interest while using other portions of the Stuy Town sale
proceeds to pay IOA and ATFE.
CWC counters that the plain language of the C30 PSA provides that, if
there are sufficient funds to repay IOA and ATFE in full, then no deductions
are made to Penalty Interest. Because (i) there were sufficient proceeds to
reimburse IOA and ATFE from amounts that were held in Stuy Town propertylevel suspense and cash management accounts at the time of the sale, and
(ii) CWC in fact reimbursed the PCV Trusts for such amounts, it was not
required to deposit any Penalty Interest in the Certificate Account. CWC
sources its interpretation to § 3.11(d), which states that “[t]o the extent” IOA
and/or ATFE have “not been previously reimbursed,” “the Special Servicer shall
promptly transfer such … Penalty Interest to the Master Servicer who shall
deposit such … Penalty Interest into the Certificate Account.” (C30 PSA
§ 3.11(d)). Otherwise, Penalty Interest is “retained by the Special Servicer …
and shall not be required to be deposited into the Certificate Account.” (Id.).
CWC also points to § 3.04(a), which requires the Master Servicer to
establish and maintain a Certificate Account held on behalf of the Trustee for
the benefit of the certificateholders. Section 3.04(a) states that
102
“[n]otwithstanding the foregoing, … amounts that the Master Servicer and
Special Servicer are entitled to retain as additional servicing compensation
pursuant to Sections 3.11(b) and 3.11(d), need not be deposited by the Master
Servicer in the Certificate Account.” (C30 PSA § 3.04(a)).
At base, CWC argues that § 3.05(a)(ix) is irrelevant to the question before
the Court. The Court agrees. Appaloosa’s argument that CWC must use
Penalty Interest to pay IOA and ATFE relies on the assumption that all of the
Stuy Town proceeds were deposited into the Certificate Account, and that the
Master Servicer would be withdrawing proceeds from the Certificate Account to
pay IOA and ATFE. But, as CWC notes, § 3.11(d) and § 3.04(a) expressly
provide that Penalty Interest need not be deposited into the Certificate Account,
but rather may be retained by the Special Servicer. Funds otherwise payable
to the Special Servicer as Penalty Interest are only deposited into the Certificate
Account to the extent that they are needed to pay IOA and ATFE when a
shortfall exists. Because IOA and ATFE were satisfied before CWC retained
Penalty Interest, the Master Servicer did not need to make a permitted
withdrawal pursuant to § 3.05(a)(ix) in order to reimburse the Trust for such
expenses. More to the present motions, CWC was not required to reimburse
IOA and ATFE expenses from the Penalty Interest it retained from the sale of
Stuy Town.
In sum, the Court recognizes the stringent standards of Rule 56,
particularly in the area of the interpretation of ambiguous contract provisions.
The fact remains, however, that “the extrinsic evidence is so one-sided that no
103
reasonable factfinder could decide contrary to [the] interpretation” offered by
CWC and the GSEs. SCS Commc’ns Inc. v. Herrick Co., 360 F.3d 329, 342 (2d
Cir. 2004) (quotation marks omitted). Summary judgment in their favor is thus
warranted. Further, given this resolution, the Court denies the motion for
partial summary judgment filed by Appaloosa. Appaloosa’s arguments in that
motion, regarding CWC’s purported failure to reimburse IOA and ATFE
expenses and the GSEs’ purported disentitlement to Yield Maintenance, have
been addressed and rejected in the context of resolving CWC’s and the GSEs’
motions.
B.
The Court Denies Appaloosa’s Motion to Exclude CWC’s and the
GSEs’ Expert Testimony
As evidenced by the preceding disquisition, the Court has evaluated all of
the expert testimony presented to it for consideration. It has made implicitly
(and will now make explicitly) certain findings about the reliability and
helpfulness of this testimony under the Federal Rules of Evidence. While the
Court in this section addresses Appaloosa’s motion to exclude the expert
witnesses proffered by CWC and the GSEs, it begins with a broader point that
applies to the resolution of each of the motions to exclude: Because these
motions arise in the context of an anticipated bench trial, the Court has erred
on the side of inclusion, considering certain of Appaloosa’s expert reports
despite arguable issues regarding their evidentiary or doctrinal foundations.
See Joseph S. v. Hogan, No. 06 Civ. 1042 (BMC) (SMG), 2011 WL 2848330, at
*3 (E.D.N.Y. July 15, 2011) (“It follows then that in a bench trial, the risk is
with exclusion of expert testimony rather than with its admission — it is
104
exclusion that has the potential for an indelible impact on the record; if the
appellate court disagrees that the expert’s testimony was unreliable, a review
for harmless error will be thwarted.”). That said, and as the remainder of this
Opinion explains, consideration is not the same as agreement, and nonpreclusion is not the same as adoption.
1.
Applicable Law
a.
The Court’s Role as Gatekeeper
The Supreme Court has tasked district courts with a “gatekeeping” role
with respect to expert opinion testimony. Daubert v. Merrell Dow Pharm., 509
U.S. 579, 597 (1993) (holding that it is the district court’s responsibility to
ensure that an expert’s testimony “both rests on a reliable foundation and is
relevant to the task at hand”). This “gatekeeping” function applies whether the
expert testimony is based on scientific, or on technical or “other specialized”
knowledge. Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 141 (1999). “It is
well-established that the trial judge has broad discretion in the matter of the
admission or exclusion of expert evidence[.]” Boucher v. United Suzuki Motor
Corp., 73 F.3d 18, 21 (2d Cir. 1996) (citation and quotation marks omitted).
Federal Rule of Evidence 702 grants an expert witness testimonial
latitude unavailable to other witnesses, as follows:
A witness who is qualified as an expert by knowledge,
skill, experience, training, or education may testify in
the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact to
understand the evidence or to determine a fact in
issue;
105
(b) the testimony is based on sufficient facts or
data;
(c) the testimony is the product of reliable
principles and methods; and
(d) the expert has reliably applied the principles
and methods to the facts of the case.
Fed. R. Evid. 702. A court’s inquiry thus focuses on three issues: (i) whether
the witness is qualified to be an expert; (ii) whether the opinion is based upon
reliable data and methodology; and (iii) whether the expert’s testimony on a
particular issue will assist the trier of fact. Nimely v. City of New York, 414
F.3d 381, 396-97 (2d Cir. 2005). “[T]he proponent of expert testimony has the
burden of establishing by a preponderance of the evidence that the
admissibility requirements of Rule 702 are satisfied[.]” United States v.
Williams, 506 F.3d 151, 160 (2d Cir. 2007).
i.
Qualifications of Expert Witnesses
Witnesses may be qualified as experts if they possess specialized
knowledge, skill, experience, or education. See Fed. R. Evid. 702. In keeping
with the “liberal thrust” of the Federal Rules and their “general approach of
relaxing the traditional barriers to ‘opinion’ testimony,” Daubert, 509 U.S. at
588-89, the standard for qualifying expert witnesses is liberal. Assertions that
the witness lacks particular educational or other experiential background, “go
to the weight, not the admissibility, of [the] testimony.” McCullock v. H.B. Fuller
Co., 61 F.3d 1038, 1044 (2d Cir. 1995). If the expert has educational and
experiential qualifications in a general field closely related to the subject matter
in question, the court will not exclude the testimony solely on the ground that
106
the witness lacks expertise in the specialized areas that are directly pertinent.
See, e.g., Stagl v. Delta Air Lines, Inc., 117 F.3d 76, 80 (2d Cir. 1997) (expert
witness qualified when experience, knowledge, or training related to general
area, not to specific question before trier of fact).
ii.
Reliability of Expert Testimony
Once a court has determined that a witness is qualified as an expert, it
must ensure that the expert’s testimony both “rests on a reliable foundation
and is relevant to the task at hand.” Daubert, 509 U.S. at 597. 46 In order to be
admissible, “[a]n expert opinion requires some explanation as to how the expert
came to his conclusion and what methodologies or evidence substantiate that
conclusion.” Riegel v. Medtronic, Inc., 451 F.3d 104, 127 (2d Cir. 2006), aff’d
on other grounds, 552 U.S. 312 (2008).
Rule 702 requires that “expert testimony rest on ‘knowledge,’ a term that
‘connotes more than subjective belief or unsupported speculation.’” In re
Rezulin Prod. Liab. Litig., 309 F. Supp. 2d 531, 543 (S.D.N.Y. 2004) (quoting
Daubert, 509 U.S. at 590); see also In re Zyprexa Prod. Liab. Litig., 489 F. Supp.
2d 230, 284 (E.D.N.Y. 2007) (finding that “[s]ubjective methodology, as well as
46
In Daubert v. Merrell Dow Pharmaceuticals, the Supreme Court identified factors that
may bear upon the reliability of proposed scientific testimony, including: (i) whether the
theory or technique can be, and has been, tested; (ii) whether it has been subjected to
peer review and publication; (iii) the known or potential error rate of the technique;
(iv) the existence and maintenance of standards controlling the technique’s operation;
and (v) whether the technique or theory has gained widespread acceptance in the
relevant scientific community. 509 U.S. 579, 593-94 (1993) (noting that these factors
do not constitute “a definitive checklist or test”). In Kumho Tire Co. Ltd. v. Carmichael,
the Supreme Court held that a court may apply the Daubert factors, as appropriate, in
cases dealing with technical or “other specialized,” but non-scientific, testimony. 526
U.S. 137, 141 (1999).
107
testimony that is insufficiently connected to the facts of the case,” can serve as
“grounds for rejection of expert testimony”). “[A] trial judge should exclude
expert testimony if it is speculative or conjectural or based on assumptions
that are so unrealistic and contradictory as to suggest bad faith.” Zerega Ave.
Realty Corp. v. Hornbeck Offshore Transp., LLC, 571 F.3d 206, 213-14 (2d Cir.
2009) (citation and quotation marks omitted). “[O]ther contentions that the
assumptions are unfounded go to the weight, not the admissibility, of the
testimony.” Id. (alteration in original) (citation omitted).
“A minor flaw in an expert’s reasoning or a slight modification of an
otherwise reliable method” does not itself require exclusion; exclusion is only
warranted “if the flaw is large enough that the expert lacks good grounds for
his or her conclusions.” Amorgianos v. Nat’l R.R. Passenger Corp., 303 F.3d
256, 267 (2d Cir. 2002) (citation and quotation marks omitted). This is
because “our adversary system provides the necessary tools for challenging
reliable, albeit debatable, expert testimony.” Id. “Vigorous cross-examination,
presentation of contrary evidence, and careful instruction on the burden of
proof are the traditional and appropriate means of attacking shaky but
admissible evidence.” Id. (quoting Daubert, 509 U.S. at 596).
While a district court has “broad latitude” in deciding both “how to
determine reliability” and in reaching “its ultimate reliability determination,” it
may not abandon its “gatekeeping function.” Williams, 506 F.3d at 160-61
(citation omitted). “[N]othing in either Daubert or the Federal Rules of Evidence
requires a district court to admit opinion evidence that is connected to existing
108
data only by the ipse dixit of the expert.” Kumho Tire, 526 U.S. at 157 (citation
omitted). Thus, “when an expert opinion is based on data, a methodology, or
studies that are simply inadequate to support the conclusions reached,
Daubert and Rule 702 mandate the exclusion of that unreliable opinion
testimony.” Ruggiero v. Warner-Lambert Co., 424 F.3d 249, 255 (2d Cir. 2005)
(citation omitted).
iii.
Helpfulness or Relevance of Testimony
Given the comparatively low bars for qualification and reliability, and the
absence of concerns of jury confusion, the Court finds here that the expert
witnesses proffered by each of the parties are qualified, and that their
methodologies are reliable. The issue on which the Court focuses is whether
the proposed expert testimony “will help the trier of fact to understand the
evidence or to determine a fact in issue.” Fed. R. Evid. 702. This inquiry looks
primarily to whether the testimony is relevant. See In re Zyprexa Prod. Liab.
Litig., 489 F. Supp. 2d at 283. Under the Federal Rules of Evidence, evidence
is relevant if it has a “tendency to make a fact more or less probable than it
would be without the evidence.” Fed. R. Evid. 401; see also Daubert, 509 U.S.
at 591-92 (“Rule 702’s ‘helpfulness’ standard requires a valid scientific
connection to the pertinent inquiry as a precondition to admissibility.”).
A court should not admit expert testimony that is “directed solely to lay
matters which a jury is capable of understanding and deciding without the
expert’s help.” United States v. Mulder, 273 F.3d 91, 101 (2d Cir. 2001)
(quoting United States v. Castillo, 924 F.2d 1227, 1232 (2d Cir. 1991)); see also
109
Atlantic Specialty Ins. v. AE Outfitters Retail Co., 970 F. Supp. 2d 278, 291-92
(S.D.N.Y. 2013) (excluding expert’s “opinion on the extent of fire damage
resulting from [fire department’s] response time,” where expert’s opinion was
essentially that “a fire causes increasing damage the longer it burns,” because
“a lay person is entirely capable of reaching this conclusion without the help of
an expert”).
Expert testimony must also adhere to the other Federal Rules of
Evidence, including Rule 403, which provides that relevant evidence may still
be excluded “if its probative value is substantially outweighed by a danger of
one or more of the following: unfair prejudice, confusing the issues, misleading
the jury, undue delay, wasting time, or needlessly presenting cumulative
evidence.” Fed. R. Evid. 403.
2.
Application of the Federal Rules of Evidence to Greenspan’s
and Nealon’s Expert Opinions
Appaloosa seeks to exclude the entirety of Greenspan’s, Nealon’s, and
Olasov’s opinions. The Court addresses this motion, however, only insofar as it
pertains to expert opinions on which CWC and the GSEs actually relied in their
summary judgment motions, and that the Court actually considered in
granting them. In particular, the Court relied on limited portions of
Greenspan’s and Nealon’s opinions, and did not rely on Olasov’s opinions at
all, in deciding the motions for summary judgment. 47 In so doing, it found
47
The GSEs expressly disclaim reliance on Olasov’s opinions in moving for summary
judgment. (See GSEs SJ Br. 20 n.6). Accordingly, the Court does not consider the
Olasov-focused opposition arguments offered by the GSEs or CWC to Appaloosa’s
motion to exclude.
110
those opinions to be helpful on the issues for which they were offered. The
Court accepted those opinions over Appaloosa’s objections, and it now explains
why. 48
a.
Greenspan’s Empirical Study
Appaloosa begins by attacking the methodology of Greenspan’s empirical
study, which it claims is fundamentally unreliable because Greenspan: (i) used
a database, Intex Solutions, Inc. (“Intex”), that contains incomplete data;
(ii) used non-public sources, such as RLRs, to supplement the information he
obtained from Intex; (iii) relied on information provided to him from CWC;
(iv) selectively chose to remove certain data from his dataset; and (v) inflated
his dataset by including Stuy Town. (See Appaloosa MIL Br. 8-13). Appaloosa
also observes that while Greenspan claimed to have considered only loans that
resulted in proceeds sufficient to repay outstanding principal, non-penalty
interest, fees, and costs, his dataset includes several loans in which penalty
interest was paid, but the relevant trust realized a loss. (See id. at 14-15).
The Court has closely reviewed Greenspan’s expert report and the
methodology described therein. Greenspan used Intex, he explained, because
it maintains a comprehensive database of CMBS issuances and related activity
from the earliest days of the CMBS industry, January 1990, to the present.
48
For avoidance of doubt, the Court has examined the expert witness materials on which
it has not relied, which materials include portions of Greenspan’s and Nealon’s reports
and deposition testimony and the entirety of Olasov’s report and deposition testimony,
in order to determine whether these materials generate a genuine dispute of fact
sufficient to preclude summary judgment in favor of CWC and the GSEs. It found no
such dispute.
111
(Greenspan Report 34 & n.47). 49 Greenspan sorted this database to identify
the CMBS loans that eventuated in REO property and whether the disposition
of the property potentially generated proceeds that could be used to pay
penalty interest and/or gain-on-sale proceeds. (Id.). The queries that he ran to
identify these loans resulted in 395 loans that potentially satisfied all criteria.
(Id.). He then requested, from the applicable special servicer, the RLRs and
posting instructions for each of those 395 loans, in order to determine which
loans produced proceeds in excess of outstanding principal, non-penalty
interest, fees, and costs, and if so, to understand how the special servicer
applied and distributed proceeds from the liquidation of REO property. (Id.).
In Appendix A, Greenspan explained the precise series of queries he
conducted of the Intex database to identify CMBS loans that satisfied the
following criteria:
(i)
(ii)
the special servicer ultimately gained title to and sold
the real estate which served as collateral for the CMBS
loan (i.e., the loan turned into an REO), and
(iii)
49
denominated in United States dollars and issued
between 1990 and 2008 (the end of the 1.0 cycle),
the REO disposition potentially resulted in sale
proceeds that exceeded outstanding principal,
nondefault interest, fees and costs.
Appaloosa attacks Greenspan’s reliance on Intex because it is an incomplete data
source. (Appaloosa MIL Br. 9). But Greenspan never contended that Intex is a perfect
data source, and he therefore culled data from Intex through multiple methods and
relied on documents subpoenaed from special servicers to supplement the information
he obtained through Intex. (See Greenspan Report, App’x A).
112
(Greenspan Report 35). Applying this first filter (Tier I) resulted in 116,649
loans. (Id. at 36).
Greenspan then applied a second set of filters (Tier II) to identify which of
the 116,649 loans involved liquidation of REO property, the proceeds of which
potentially exceeded outstanding principal, non-penalty interest, fees, and
costs owed on the REO loan:
(i)
Included loans that were identified by Intex as real
estate owned;
(ii)
Excluded loans with a “current loan balance” greater
than $0; and
(iii)
Excluded loans with a cumulative liquidated loss
greater than 2%.
(Greenspan Report 37). In so doing, Greenspan narrowed the Tier I population
to 475 loans. (Id. at 38).
This dataset was further refined by applying Tier III calculations to
identify, more precisely, REO dispositions generating liquidation proceeds
exceeding outstanding principal, non-penalty interest, fees, and costs.
(Greenspan Report 38). Using loan-specific data available on Intex, Greenspan
created loan-by-loan calculations to identify instances of possible default
interest and/or gain-on-sale distributions. (Id.). Loans that met at least one of
the following four criteria were included in the final set of loans for which
Greenspan requested RLRs from the special servicers:
(i)
A loan where Greenspan identified a penalty interest
and/or gain-on-sale “Gap” using the Intex data;
(ii)
If the available cash at (or after) liquidation was greater
than the amount shown in the “Current Balance” data
113
field in the month prior to liquidation, the loan was
included in the potential data set because such excess
could have been on account of a distribution of penalty
interest and/or gain-on-sale (since they are not
separately reported by Intex).
(iii)
If the Intex data field “Loss After Payoff” reported a
negative number this indicated that additional proceeds
were received after the date of liquidation and therefore
may have been applied to penalty interest and/or gainon-sale.
(iv)
If the cumulative loss in the most recent reported month
(generally a date post liquidation) is less than $0 (a
“negative” loss is positive and therefore indicates
liquidation proceeds in excess of outstanding principal,
non-default interest, fees and costs) then the
cumulative cash inflows exceeded the cumulative cash
out flows generated by the operation and/or sale of the
asset and therefore the loan was included in the
potential data set.
(Greenspan Report 38-41). By applying the Tier III criteria, Greenspan
narrowed down the 475 loans identified by the Tier I and Tier II filters to 314
loans with potential payment of penalty interest and/or gain-on-sale proceeds.
(Id. at 41).
Greenspan instructed his staff to perform an additional review of the
116,649 loans to ensure that the filters that he applied did not miss relevant
loans. (Greenspan Report 41). First, to ensure that the Tier I filters did not
exclude relevant loans, Greenspan’s staff reviewed the 116,649 loans and
found 282 loans that did not have data populated in the Intex “REO Date” field,
but that did have data captured in the “REO Comment” field. (Id.). Greenspan
found that 20 of these loans may have been REOs. (Id.). His staff obtained
and reviewed remittance reports for these 20 loans and then concluded that 7
114
potentially included payments of penalty interest and/or gain-on-sale proceeds.
(Id.). Accordingly, Greenspan added these 7 loans to the list of loans for which
he requested RLRs and posting instructions. (Id.).
Greenspan then conducted a separate analysis of the 161 loans that had
been filtered out by the Tier II and Tier III filter criteria. (Greenspan Report 42).
He observed that the Intex “Net Proceeds Received on Liquidation” data field
was not populated for 123 of the 161 loans, and therefore that these 123 loans
would not have been identified by application of the Tier III filters. (Id.). He
reviewed the remittance reports for these 123 loans to identify any signs of
penalty interest or gain-on-sale distributions by looking at comments and
notes on the status of the REOs, changes in balances and payoff amounts, as
well as classifications in the remittance reports. (Id.). Greenspan and his staff
determined that 66 of the 123 loans showed signs of possible penalty interest
and/or gain-on-sale payments, and that 8 of the 123 loans had no remittance
reports available, for a total of 74 loans. (Id.). He therefore added these 74
loans to the 314 loans derived from application of his Tier III filters and the 7
additional loans derived from his cross-check of the Tier I filters, to arrive at a
total of 395 loans (out of 116,649) where liquidation proceeds potentially
exceeded outstanding principal, non-penalty interest, fees, and costs due and
from which penalty interest and/or gain-on-sale might have been paid. (Id. at
42-43).
Out of this total, 119 loans were specially serviced by CWC and 276 by
other special servicers. (Greenspan Report 43). Greenspan requested that
115
CWC’s counsel obtain the RLRs for these 395 loans. (Id.). CWC collected the
RLRs for the 119 REO Loans that it specially serviced. (Id.). For the remaining
276 loans, CWC’s counsel issued subpoenas requesting RLRs and supporting
documents to the special servicers where they could be identified. (Id.). With
respect to 54 of the 276 loans, either information was insufficient to identify
the special servicer or the special servicer responded that the loan was not in
fact REO. (Id.). This left a total of 222 loans, serviced by special servicers
other than CWC, with potential penalty interest and/or gain-on-sale. (Id.).
CWC’s Counsel received 188 (84.7%) responses to the subpoenas. (Id.).
Greenspan explained that the special servicers from which counsel subpoenaed
documents provided one additional relevant loan that was not requested, but
which they believed generated REO sale proceeds in excess of outstanding
principal, non-penalty interests, fees, and costs, and two additional relevant
loans that were related to one of the loans requested, bringing the total number
of loans for which documents were received to 191 loans. (Id.).
With respect to the 119 CWC loans, CWC informed Greenspan that 37 of
the loans were not REO or did not pay penalty interest or gain-on-sale.
(Greenspan Report 43). Greenspan confirmed that these loans did not in fact
have liquidation proceeds in excess of outstanding principal, non-penalty
interest, fees, and costs. (Id.). For the remaining 82 loans, CWC provided the
requested data and provided data on 19 additional loans that it believed
eventuated in an REO disposition with proceeds in excess of outstanding
principal, non-penalty interest, fees, and costs. (Id. at 44).
116
Greenspan then determined that 249 of the 292 loans for which he had
obtained RLRs were in fact REO Loans in which penalty interest and/or gainon-sale was in fact paid. (Greenspan Dep. 109:13-112:21). Greenspan
reviewed these 249 RLRs and determined that in 99.2% of REO sales, penalty
interest was paid to the special servicer. (Greenspan Report 17, 43).
As the Court outlined above, Appendix A to Greenspan’s expert report
provides a detailed description of the sources on which he relied and the
methodology he used to collect his dataset. (Greenspan Report, App’x A).
Appaloosa’s challenges to Greenspan’s methodology go to the weight to be
afforded to, rather than the admissibility of, Greenspan’s empirical analysis.
See, e.g., Tiffany & Co., 127 F. Supp. 3d at 250-51 (holding that defendant’s
attacks on methodology of survey went to weight, not admissibility, of
testimony, and attacks were insufficient to raise an issue of material fact on
summary judgment where defendant did not offer any evidence that
affirmatively disputed the findings of plaintiff’s expert); accord Schering Corp. v.
Pfizer, 189 F.3d 218, 228 (2d Cir. 1999); In re Scotts EZ Seed, No. 12 Civ. 4727
(VB), 2017 WL 3396433, at *8 (S.D.N.Y. Aug. 8, 2017).
All of the materials on which Greenspan relied were produced to
Appaloosa during fact discovery, prior to the delivery of Greenspan’s report.
(Greenspan Report 7). Appaloosa concedes that one could replicate
Greenspan’s analysis by following the methodology he outlines in Appendix A.
See Nat’l Envelope Corp. v. Am. Pad & Paper Co., No. 06 Civ. 12988 (SHS)
(RLE), 2009 WL 5173920, at *6 (S.D.N.Y. Dec. 30, 2009) (Daubert “only asks
117
whether the methodology can be or has been tested, and here [expert] has
shown that, at the very least, this methodology can be tested.”). Appaloosa’s
rebuttal experts chose not to do as much. Notably, for all of Appaloosa’s
critique of Greenspan’s methodology, it does not identify a single loan that
should have been included in Greenspan’s analysis but was not.
The Court also rejects Appaloosa’s contention that Greenspan’s empirical
study must be excluded because CWC somehow manipulated Greenspan’s
survey. That CWC provided Greenspan with information regarding certain
loans for which it was special servicer does not make Greenspan’s analysis
fundamentally unreliable. CWC merely provided Greenspan with information
that he independently verified. See Lee Valley Tools v. Indus. Blade Co., 288
F.R.D. 254, 267 (W.D.N.Y. 2013) (rejecting argument that expert’s opinions
were unreliable: defendant “has not demonstrated that [expert] relied upon
unverified information provided by [plaintiff] or that the financial summaries
were inaccurate, incomplete or inherently unreliable”).
Separately, Appaloosa contends that Greenspan’s empirical study must
be excluded because certain of the loans he included in his analysis reflected a
realized loss passed on to the relevant trust that, under Greenspan’s theories,
should not have occurred. In particular, Appaloosa points to 23 loans from
Greenspan’s sample in which penalty interest was paid, but a realized loss was
passed on to the trust. (See Appaloosa MIL Br.14-15). From this, Appaloosa
argues that Greenspan’s conclusions are contradicted by the data on which he
relies. (See id. at 15).
118
After reviewing the detailed analysis of Greenspan’s methodology, the
Court agrees with CWC that Appaloosa’s argument is a red herring. Greenspan
explained at his deposition and noted in his report that CMBS liquidation fees
are customarily netted from the aggregate trust recovery, such that a full
recovery of a specially serviced loan often equals 99% (since the trust paid a
1% liquidation fee) and therefore the trust recognizes a nominal “loss” even
though the trust is paid everything it is entitled to be paid. (See CWC/GSE
Appaloosa MIL Opp. 11). This is precisely why Greenspan’s filter of Intex data
included REO loans with a cumulative loss of 2% rather than 0%. (See
Greenspan Report 37). Despite Appaloosa’s attempt to identify a contradiction
in Greenspan’s survey, Greenspan explicitly stated that “[b]ecause some special
servicers include their fees in the calculation of cumulative liquidated loss
percentage there could be instances where a loan was paid in full but because
the servicer fees are included in the cumulative loss percentage calculation,
this data field might indicate a cumulative liquidated loss somewhat greater
than 0%.” (Id. at 37 n.50). Therefore, the Court observes no inconsistencies
between Greenspan’s dataset and the conclusions he draws from same.
Appaloosa has not come close to showing that Greenspan’s empirical
analysis is unreliable enough to merit exclusion. See Amorgianos, 303 F.3d at
267 (“A minor flaw in an expert’s reasoning or a slight modification of an
otherwise reliable method will not render an expert’s opinion per se
inadmissible. The judge should only exclude he evidence if the flaw is large
119
enough that the expert lacks ‘good grounds’ for his or her conclusion.” (internal
quotation marks omitted)).
Appaloosa’s remaining challenges to Greenspan’s opinions can be swiftly
rejected. Appaloosa contends that Greenspan’s study of industry custom and
practice is not relevant to any issue before the Court because Greenspan’s use
of the term “industry custom and practice” differs materially from the legal
definition of that term. (See Appaloosa MIL Br. 16-17). The Court, however,
does not rely on Greenspan’s definition of “industry custom and practice,” but
rather analyzes the data provided by Greenspan to determine for itself whether
such data meets the legal standard of an industry custom and practice. Other
challenges are simply irrelevant: The Court has not considered Greenspan’s
opinions about the intent of the parties to the C30 PSA or his understanding of
the definition of “Purchase Price.” (See id. at 17). And, further, the Court need
not decide whether Greenspan is qualified to offer a rebuttal opinion of
Hartzmark because the Court has not relied on Greenspan’s rebuttal opinion of
Hartzmark. (See id. at 18-19).
b.
Nealon’s Expert Opinions
The Court relied on two of the expert opinions offered by Nealon: (i) that
it is the custom and practice in the CMBS industry that amounts collected
from an REO sale are allocated to default interest before gain-on-sale is
realized (see supra at 57-59); and (ii) that the gain-on-sale concept was not
designed to disrupt the payment system and priority established under existing
PSAs and accepted servicing practices (see supra at 62-63). The Court found
120
the first opinion, concerning custom and practice, to be reliable and helpful
based on:
(i)
Nealon’s knowledge of and familiarity with the
fundamental priority structure established by payment
waterfalls that are contained in virtually all PSAs for
CMBS 1.0 deals (Nealon Report 10-11);
(ii)
His experience in allocating REO sale proceeds, for
example, in connection with the Astor Crowne Plaza
sale (id. at 11-12);
(iii)
Nealon’s discussions with asset managers at LNR where
only after all sums deemed owing on the corresponding
loan, including penalty interest, had been paid in full
did a discussion of gain-on-sale take place (see id. at
11);
(iv)
His knowledge of and familiarity with how other special
servicers in the CMBS industry — such as C-III,
CWCAM, and Midland — allocated REO sale proceeds,
which was consistent with LNR’s application of such
proceeds (id. at 2, 12); and
(v)
The fact that never over the course of his 25 plus years
in special servicing did he see a “gain” of any kind
recognized before all amounts due and owing on the
subject loan, including penalty interest, had been paid
in full (id. at 12).
The Court found the second opinion, concerning the design of the gainon-sale concept, to be reliable and helpful based on those five facts as well as
five additional facts:
(i)
Nealon’s recollection of when the gain-on-sale concept
was first discussed and incorporated into PSAs, and the
impetus for it — the uncertainty of where the excess
funds (money that was left over after all amounts owing
to the trust and trust parties, including penalty interest,
was paid in full) should go, and the industry’s view that
it should not be distributed to the trust’s residual holder
(a shell entity) but rather to certificateholders (Nealon
Report 13-14);
121
(ii)
His regular and continuous discussions with the
Cadwalader firm that drafted the vast majority of
WBCMT PSAs (including C4 and C30), which
discussions confirmed that Nealon’s understanding was
correct (Nealon Dep. 195-205; CWC 56.1 C141, C154C155);
(iii)
Nealon’s negotiation, review, and application of
hundreds of PSAs, including the C3 and C5 PSAs,
which were drafted within months of the C4 PSA
(Nealon Report 1; CWC 56.1 C138-C139);
(iv)
His knowledge of and familiarity with how LNR, as well
as other special servicers and master servicers, applied
proceeds from the sale of REO properties when the
applicable PSAs contained “Gain-on-Sale Proceeds” and
the related gain-on-sale references (Nealon Report 12);
and
(v)
The absence of changes made to the fundamental
payment priority structure/waterfall in PSAs after
“Gain-on-Sale Proceeds” and related gain-on-sale
references were added (id. at 14-15).
Appaloosa advances three arguments to exclude Nealon’s expert
opinions, none of which succeeds. First, Appaloosa contends that Nealon
speculates about the contracting parties’ intent in drafting the C30 PSA. (See
Appaloosa MIL Br. 21). The Court disagrees with this characterization of
Nealon’s expert report. Nealon does not opine specifically on the intent of the
parties to the C30 PSA. Rather, his report communicates observations he
made about the introduction of the concept of gain-on-sale in the CMBS
industry and the general history and purpose of the concept — on which topics
Nealon is qualified to speak. He was actively involved in special servicing when
the gain-on-sale concept was first introduced, and he negotiated, reviewed, and
122
applied hundreds of PSAs over the course of his career at LNR, including PSAs
from the WBCMT Shelf.
The cases Appaloosa cites in which an expert testifies about a party’s
motive, intent, or state of mind are irrelevant here (see Appaloosa MIL Br. 20),
because Nealon provides permissible opinions regarding the concept of gainon-sale obtained from his firsthand observations. See, e.g., Liberty Media Corp.
v. Vivendi Universal, 874 F. Supp. 2d 169, 176 (S.D.N.Y. 2012) (concluding that
industry expert could opine on purpose of a particular type of contractual
clause in the industry); NIC Holding Corp. v. Lukoil Pan Americas, No. 05 Civ.
9372 (LAK) (FM), 2007 WL 1467424, at *2-4 (S.D.N.Y. May 16, 2007)
(considering expert opinions as to how a particular contractual clause is
typically understood in an industry); Media Sport & Arts v. Kinney Shoe Corp.,
No. 95 Civ. 3901 (PKL), 1999 WL 946354, at *3 (S.D.N.Y. Oct. 19, 1999)
(finding that industry expert could opine on whether actions of a party to a
transaction conform with industry custom and practice).
Second, Appaloosa claims that Nealon’s industry custom and practice
opinion is unreliable because Nealon did not provide specific examples, did not
tie his own conduct to specific contractual language, and did not demonstrate
why the actions he took or understandings he developed at LNR were
consistent with the rest of the industry. (Appaloosa MIL Br. 23). But these
challenges to the reliability of Nealon’s opinions are actually attacks on the
weight that should be afforded to them, and not their admissibility. As an
initial matter, Nealon is entitled to rely on his 25 years at LNR to provide an
123
opinion on industry custom and practice. See SR Int’l Bus. Ins. v. World Trade
Ctr. Props., 467 F.3d 107, 132 (2d Cir. 2006) (upholding introduction of
expert’s opinions on industry custom and practice as reliable, where expert had
over 30 years of experience in the relevant industry; was familiar with practices
in the industry, including those at issue; and, through his experience, was able
to identify an industry practice); Pension Comm. of Univ. of Montreal v. Banc of
Am. Sec. LLC, 691 F. Supp. 2d 448, 464-65 (S.D.N.Y. 2010) (noting that
expert’s description of his job experience and communications with others as
part of his job “provides a sufficient link between his experience and his
opinions to satisfy the reliability requirement of Rule 702”). And, in any event,
Appaloosa’s attacks on Nealon’s opinions are factually incorrect: (i) Nealon
provides an example to support his custom and practice opinion, in the form of
the Astor Crowne Plaza sale; (ii) he ties his opinions to the language of the
WBCMT PSAs for which LNR was special servicer; and (iii) he explains that his
actions at LNR were consistent with other special servicers’ actions based on
discussions he had with them and his observations of the industry.
Third, and finally, Appaloosa contends that Nealon’s opinions should be
excluded because he is not impartial. Appaloosa explains that as an expert for
CWC, Nealon is effectively defending positions he took and decisions he made
as an employee of LNR, for which LNR could be exposed to liability if Nealon is
wrong. (Appaloosa MIL Br. 26-27). Accordingly, Appaloosa contends that
Nealon has a “particular reputational and potentially pecuniary interest in
seeing Appaloosa’s reading of the contract be rejected by the Court.” (Id. at
124
27). CWC responds that Nealon retired from LNR in early 2018 before he was
engaged as an expert in this case, and that since his retirement he has had no
involvement or affiliation with LNR. (CWC/GSE MIL Opp. 27).
Having been provided with nothing more than speculation that Nealon
“must be biased” due to reputational concerns, the Court agrees with CWC that
Appaloosa’s claim of bias goes to the weight, rather than admissibility of his
opinions. See, e.g., Int’l Cards Co. v. MasterCard Int’l, No. 13 Civ. 2576 (LGS),
2016 WL 7009016, at *8 (S.D.N.Y. Nov. 29, 2016) (“[T]he mere fact that [the
expert] is an employee of a party “does not automatically disqualify him from
rendering expert testimony.”); Tedone v. H.J. Heinz Co., 686 F. Supp. 2d 300,
311 (S.D.N.Y. 2009) (holding that the fact that an expert was an employee for
one of the defendants for over 30 years and an interested party was not
disqualifying); Knowledge Based Techs. v. Int’l Bus. Machines, No. 96 Civ. 9461
(JSR), 1998 WL 164791, at *1 (S.D.N.Y. Apr. 8, 1998) (“[C]ourts routinely
permit expert testimony by parties, employees, and others with financial and
other plain interests in the outcome of the litigation”). Appaloosa does not cite
any relevant authority to the contrary.
The Court need not consider the remainder of Appaloosa’s challenges to
Nealon’s opinions, as it has already found admissible the opinions that it relies
upon in granting summary judgment to CWC and the GSEs. Appaloosa’s
motion to exclude is thus denied in part and denied as moot.
125
C.
The Court Denies as Moot CWC’s and the GSEs’ Motions to Exclude
Appaloosa’s Expert Witnesses
CWC and the GSEs have also moved to exclude the expert testimony
offered by Appaloosa’s witnesses, Ann Hambly, Michael Hartzmark, and
Andrew Berman, on various grounds. (See generally CWC/GSE MIL Br.). As
with the prior motion to exclude, the Court accepts, for purposes of resolving
the motion, that these three witnesses are qualified as experts in their field,
and that their methodologies are sufficiently reliable. But even more than with
the prior motion, the Court has focused on issue of helpfulness, which it
considers — in the context of summary judgment motions preparatory to a
bench trial — to be a largely academic exercise. Particularly as to Hartzmark
and Berman, the Court equivocated whether even to accept the opinions, since
such acceptance would imply a determination of helpfulness. Ultimately,
however, the Court admitted each of the opinions, considered them with care,
and found them insufficient to raise a genuine dispute of material fact that
could forestall summary judgment in favor of CWC and the GSEs.
The Court has outlined several deficiencies in these expert reports in this
Opinion. Dr. Hartzmark’s economics “think piece” was, in the Court’s
estimation, too attenuated from the contract interpretation issues at hand to be
useful, and far outweighed by contemporaneous and other empirical evidence.
(See supra at 84-85). The Court also discounted Hambly’s claim of “scrivener’s
error” in the definition of “Liquidation Expenses” because she disregarded
several key pieces of evidence — including the practical operation of the 94
PSAs that Hambly reviewed and the industry practice (which Hambly
126
acknowledged) of lumping penalty interest in with liquidation expenses. (See
supra at 77-78). And the Court ascribed little significance to Berman’s
testimony, other than his recollection of C-III collecting and sharing penalty
interest in REO liquidations. (See supra at 89). But that is because the
majority of Berman’s opinions offered in rebuttal to Thomas Nealon comprised
naked attempts at contract interpretation coupled with vague incantations of
“training and experience.”
Ultimately, Appaloosa’s expert opinions were insufficient to stave off
summary judgment. But they were considered, and carefully so. For this
reason, the Court denies as moot the motions to exclude filed by CWC and the
GSEs.
CONCLUSION
For the foregoing reasons, CWC’s motion for summary judgment is
GRANTED; the GSEs’ motion for summary judgment is GRANTED; Appaloosa’s
motion for partial summary judgment is DENIED; CWC’s and the GSEs’
motions to exclude are DENIED as moot; and Appaloosa’s motion to exclude is
DENIED insofar as the Court considered it above.
The Clerk of Court is directed to terminate the motions at Docket Entries
301, 311, 317, 322, 324, and 327. The parties are directed to submit a joint
letter on or before April 3, 2020, concerning next steps in this action.
SO ORDERED.
Dated:
March 19, 2020
New York, New York
__________________________________
KATHERINE POLK FAILLA
United States District Judge
127
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?