Wells Fargo Bank., N.A. v. Waterfall Asset Management LLC et al

Filing 69

MEMORANDUM OPINION AND ORDER re: 58 MOTION to Dismiss the Amended Interpleader Complaint filed by The Bank of New York Mellon. The law does not require allowing interpleader here, as the dispute goes beyond Wells Fargo's " ;single obligation" to distribute the res, and is instead predominated by issues as to Wells Fargo's potential obligations as Trustee. See Bradley v. Kochenash, 44 F.3d at 168 (2d Cir. 1995). Further, equity does not support granting th e relief sought by Wells Fargo, and the Court has grave policy concerns about the wisdom of extending interpleader to the extent requested. For all those reasons, interpleader is DENIED, BNYM's motion to dismiss is GRANTED and this case is dismissed. The Clerk of Court is directed to terminate this case. SO ORDERED. (Signed by Judge Gregory H. Woods on 3/12/2019) (anc) Transmission to Orders and Judgments Clerk for processing. Modified on 3/13/2019 (anc).

Case 1:18-cv-00295-GHW Document 69 Filed 03/13/19 Page 1 of 21

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------------------X
WELLS FARGO BANK, N.A., as Trustee,
:
:
Interpleader Plaintiff, :
:
:
:
-against:
:
WATERFALL ASSET MANAGEMENT, LLC,
:
THE BANK OF NEW YORK MELLON, and
:
CEDE & CO.,
:
:
Interpleader Defendants. :
------------------------------------------------------------------X

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 3/13/2019

1:18-cv-295-GHW
MEMORANDUM OPINION
AND ORDER

GREGORY H. WOODS, United States District Judge:
Interpleader Plaintiff Wells Fargo Bank, N.A. (“Wells Fargo”) seeks the Court’s assistance in
determining how to distribute certain funds it controls in its role as trustee of a collateralized debt
obligation (“CDO”). On one hand, the Bank of New York Mellon (“BNYM”), as party to an
interest rate swap agreement (the “Swap Agreement”) between itself and the issuer of the CDO,
claims that certain funds under Wells Fargo’s controls are owed to BNYM as payments owed
pursuant to the Swap Agreement (the “res”). On the other hand, Waterfall Asset Management, LLC
(“Waterfall”) contends that BNYM is misinterpreting the Swap Agreement, that it will bring suit
against Wells Fargo if Wells Fargo distributes the res to BNYM, and that BNYM is liable to the trust
for alleged overpayments made to BNYM pursuant to the Swap Agreement. To resolve these
competing claims, Wells Fargo served an interpleader complaint pursuant to Federal Rule of Civil
Procedure 22. BNYM moved to dismiss the complaint, arguing that interpleader was inappropriate
in this context. Wells Fargo and Waterfall opposed that motion, which is currently before the
Court.

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On the surface, this case bears many of the hallmarks of interpleader. However, in this case
Wells Fargo is not a disinterested party merely holding the res and seeking the Court’s assistance in
determining its distribution. Rather, issues of trust governance predominate over issues of res
distribution here. Further, pursuant to Waterfall’s competing theory for how the res should be
distributed, Wells Fargo may have further obligations and/or liabilities which extend beyond
distribution of the fund—indeed Wells Fargo’s failure to live up to its contractual obligations may
have been one of the root causes of the current dispute. Additionally, the extension of interpleader
into this fact pattern would set a precedent that essentially any question of trust governance is
subject to interpleader determination so long as any specter of litigation risk regarding trust assets
can be articulated by a weak-kneed trustee—undermining the principles of majority creditor control
that underpin many indentures of this type. As a result, neither law nor equity nor policy favor
Wells Fargo’s use of interpleader here. Accordingly, for the reasons that follow, BNYM’s motion to
dismiss is GRANTED, interpleader is DENIED, and this case is dismissed.
I.

BACKGROUND

A. Factual Background
1. The Contractual Context
The operative facts are not in dispute. In late 2004, Tropic CDO IV Corp. (“Tropic”),
brought to market a CDO governed by an indenture (the “Tropic CDO IV”). Amended Compl.
(“AC”) ¶ 1. This case stems from that indenture (the “Indenture”), which was executed among
Wells Fargo as Trustee, Tropic CDO IV Ltd., as Issuer, and Tropic, as Co-Issuer. AC at 1. The
Indenture establishes six classes of notes subject to various terms and conditions established in the
Indenture (the “Notes”). See, AC, Ex. A (ECF No. 53-1) (the “Indenture”), art. XI. “The Notes are
secured by a portfolio of fixed income assets (the ‘Portfolio Collateral’) owned by the Issuer.” AC
¶14.
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In its capacity as Trustee, Wells Fargo holds the Portfolio Collateral and “distributes
available proceeds (the ‘Available Adjusted Collections’) to Noteholders pursuant to Section 11.1 of
the Indenture,” otherwise known as the payment waterfall. AC ¶ 15. The payment waterfall is
structured so that “lower-tiered creditors receive principal and interest payments only after the
higher-tiered creditors are paid in full.” BNYM’s Br. (ECF No. 60) at 7 (citing AC ¶ 15, Indenture
§ 11.1). “Pursuant to the payment waterfall, the Indenture provides that senior Class A noteholders
receive periodic interest payments on certain payment dates. Once the Senior Class A noteholders
are paid in full, any remainder flows to the subordinated noteholders as per the priority of
payments.” Id. (citing AC ¶¶ 15-16, Indenture § 11.1) (internal citations omitted); see Indenture,
Preliminary Statement. Waterfall is the beneficial holder of certain junior subordinated notes.
AC ¶ 11. Defendant Cede & Co. (“Cede”) is the registered noteholder for certain Notes which it
holds for “ultimate benefit of others.” AC ¶ 13.1
On November 18, 2004,2 contemporaneously with the execution of the Indenture, the Issuer
entered into an interest-swap agreement with Tropic and the Bank of New York Mellon (“BNYM”).
AC ¶ 2; see AC, Ex. B, (ECF No. 53-2) (the “Swap Agreement”). Wells Fargo, as Trustee, “is the
Issuer’s assignee under the Swap Agreement, and is required under the Indenture to take all steps
necessary to enforce the Issuer’s rights under” the Swap Agreement. BNYM’s Br. ¶¶ 8-9 (citing AC
¶ 23, Indenture §§ 2.14, 5.12(a)(iii) and (v)).3 Periodic payments made to BNYM as the Swap
Counterparty are made prior to, and given priority over, any distribution of Available Adjusted

Cede made clear at the conference held on May 12, 2018 that they are “just . . . a nominal party” and that they do not
“take any position on the legal or factual issues that are before the Court.” May 12, 2018 Tr. 38:7-9.

1

The Amended Complaint consistently presents the dates of the events in question in the form of “on or about” the
date in question. In the interest of readability, and without prejudice to Wells Fargo, the Court takes the liberty of
presenting the facts with dates certain.
2

As discussed below, Wells Fargo’s rights and obligations as the Issuer’s Swap Agreement assignee were licensed back to
the Issuer, and there is a dispute as to whether that license was exclusive. See § I(d), below.

3

3

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Collections to Noteholders. Indenture § 11.1. Swap Termination Payments are made pari passu with
payments of Available Adjusted Collections to the most senior noteholders, and “are to be
requested on or as soon as reasonably practicable following the occurrence of an Early Termination
Date. AC ¶¶ 22; Indenture § 11.1; Swap Agreement § 6.
Pursuant to Section 5 of the Swap Agreement, the Swap may be terminated upon the
occurrence of a Termination Event or by one of several defined Events of Default,
which include a “failure of a party to make, when due, a payment under this
Agreement.” Swap Agreement § 5(a)(i). Pursuant to Part 1(n)(2) of the Schedule to
the Swap Agreement, an Additional Termination Event occurs when there is a
redemption of all or any portion of the Notes (the “Redemption Event”). If the
Additional Termination Event occurs “in connection with a partial redemption of
the Notes” the notional amount of the Swap must be reduced “to take into account
the economic effect of such Event” by an amount reflecting the product of the
Notional Amount thereof immediately prior to the Early Termination Date and a
fraction, the numerator being the principal amount of Notes being redeemed and the
denominator being the principal amount of Notes outstanding immediately prior to
the Redemption Event.
AC ¶¶ 20-21 (quoting Swap Agreement). “BNYM is the Calculation Agent under the Swap
Agreement.” AC ¶ 19.
“Pursuant to Section 6(a) and 6(b) of the Swap Agreement, following an Event of Default or
Termination Event, the other party may specify an Early Termination Date. Section 6(c)(ii) provides
that, ‘[u]pon the occurrence or effective designation of an Early Termination Date, no further
payments or deliveries . . . will be required to be made” and Section 6(d)(i) follows that “on or as
soon as reasonably practicable following the occurrence of an Early Termination Date, each party
will . . . provide to the other party a statement . . . specifying any amount payable under Section
6(e).’” AC ¶ 22 (quoting Swap Agreement).
2. Partial Redemptions of Notes Between 2008 and July 17, 2017
The Indenture requires “Overcollateralization”—that is “that collateral values exceed the
remaining principal on the notes principals on the notes with the exact amount of excess expressed a
percentage that varies by class of notes.” BNYM’s Br. at 8 (citing Indenture § 1.1). In the event of
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insufficient Overcollateralization, the Issuer is required to redeem all or a portion of the notes. AC
¶ 18; BNYM’s Br. at 8; Indenture § 9.2. As discussed above, Partial Redemption of the Notes
triggers an Additional Termination Event pursuant to Part 1(n)(2) of the Schedule to the Swap
Agreement—and the Additional Termination Event triggers, inter alia, a reduction in the notional
value of the Swap. AC ¶¶ 20-21.
“Beginning in 2008 and occurring on every Payment date up and including July 17, 2017, the
Tropic CDO IV periodically failed the Overcollaterization tests, and the Issuer periodically
redeemed a portion of the Notes” (the “Partial Redemptions”) AC ¶ 18; BNYM’s Br. at 12. The
Partial Redemptions should have triggered Redemption Events pursuant to the Swap Agreement—
which would ultimately lead to Swap termination payments to BNYM and corresponding reductions
of the notional value of the Swap. AC ¶ 20-21; Swap Agreement, Schedule 1 Part 1(n)(2). BNYM
was contractually owed, but did not receive, notification of the approximately thirty Partial
Redemptions at issue. Swap Agreement Schedule 1 Part 1(n)(1); BNYM’s Br. at 10, 14; see AC ¶ 24.
3. BNYM’s Response to the Undisclosed Partial Redemptions
On September 18, 2007, “the Issuer and Wells Fargo received from BNYM a Notice of a
Partial Termination of the Swap Agreement” as to “all outstanding Transactions” as defined in the
Swap Agreement. AC ¶24. BNYM informed the Issuer and Wells Fargo that that BNYM had
become aware of numerous “pre-maturity, partial redemptions” which had consequences under the
Swap Agreement. BNYM Br. at 12. BNYM noted that it was not provided with the “contractually
required notice” of those Partial Redemptions, nor were the applicable outcomes under the Swap
Agreement “triggered’ by those events. Id. As the Calculation Agent under the Swap Agreement,
BNYM determined that it was owed $3,166,500, and notified the Issuer and Wells Fargo to that
effect on or about October 6, 2018. AC ¶ 24-25.

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On October 16, 2019, BNYM consented to a partial deferral ($145,755.99) of the sum owed,
so as to avoid an “Event of Default under § 5.1(a)(iii)(A) of the Indenture on the October [16,] 2017
Payment Date.” AC ¶¶ 27-29. However, the Issuer directed Wells Fargo to distribute only
$1,879,951.25 to BNYM. Id. ¶ 29. As a result of the payment to BNYM, junior note holders, such
as Waterfall, received no distribution on the October payment date. AC ¶ 30.
On October 17, 2017, the Issuer and Wells Fargo received a notice of non-payment from
BNYM, which notified them that if BNYM was not paid the outstanding balance of $1,140,792.76
plus accrued interest within three business days, an Event of Default would occur under the Swap
Agreement. AC ¶ 30. No payment was made, and on October 20, 2017, BNYM notified Wells
Fargo and the Issuer that an Event of Default had occurred and set October 24, 2017 as the Early
Termination Date for the Swap Agreement. AC ¶ 34. On October 24, 2017, BNYM notified Wells
Fargo and the Issuer that a Termination Amount of $5,622,500 as well as a Partial Redemption
Amount of $1,286,548.75 (totaling $6,909,048.75) was due to BNYM on January 15, 2018 (together,
the “res”). AC ¶ 36.
On October 17 and 20, 2018, Wells Fargo disseminated notices which provided the
noteholders with information regarding the communications from BNYM described above. AC
¶¶ 33, 36. On October 26, 2018, Waterfall requested a copy of the Swap Agreement, which the
Issuer directed Wells Fargo to provide to Waterfall, and other noteholders, shortly thereafter. AC
¶¶ 37, 38. Wells Fargo disseminated the Swap Agreement on October 27, 2018. Id.
On December 1, 2018, counsel for Waterfall wrote to Wells Fargo, contending that BNYM
had breached various provisions of the Swap Agreement, with the result that the Trust had overpaid
BNYM.4 AC ¶¶ 40-41. Waterfall asserted that Wells Fargo, as Trustee, has “an obligation to

4

The notional value of the Swap impacts the formula for calculating Swap Payments. AC ¶ 19.

6

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enforce the Issuer’s rights under the Swap Agreement pursuant to Section 2.14 of the Indenture,
including challenging BNYM’s declaration of an Early Termination Date and Certain Termination
Amounts pursuant to Section 15.2(a)(iii), (v) of the Indenture.” AC ¶¶ 40-41. On December 29,
2018, Wells Fargo received a subsequent letter from Waterfall noting that Wells Fargo had taken no
steps to enforce the Swap Agreement against BNYM, and asserting that “‘[i]f the Trustee fails to act
to protect the Trust and enforce the Swap Agreement on or before January 10, 2018, Waterfall will
take all necessary actions to protect the Trust and enforce its rights under the Indenture, including
pursuing claims against the Trustee for, among other things, the irreparable and substantial harm
stemming from the Trustee’s continuing action.’” AC ¶ 42. Waterfall further asserted that “it has a
valid claim against the Trustee because, notwithstanding the No Action Clause in the Indenture,
there is a judicially created exception under New York law that permits a Noteholder to sue the
Trustee.” AC ¶ 42.
B. Waterfall’s Interpretation of the Swap Agreement
According to Waterfall, “it is the [T]rustee’s obligation to enforce the [T]rust’s right under
the Swap Agreement by pushing back against Bank Of New York and saying, the [T]rust does not
owe Bank of New York $7 million; to the contrary, Bank of New York owes the [t]rust several
hundred thousand dollars.” Tr. 24:6-10. Waterfall claims that “in its haste to recoup purported
losses, [BNYM] overlooked the obvious fact that over eight years, the Trustee overpaid [BNYM]—
based on a failure to reduce the Swap’s notional value—out of funds that would have (and should
have) been retained for the benefit of the Noteholders.” Waterfall’s Opp. (ECF No. 62) at 11.
Waterfall’s theory can be summarized as follows:
First, Waterfall contends that, pursuant to the Swap Agreement, whenever an Additional
Termination Event occurs, “the Issuer and [BNYM] must reduce the notional amount of the Swap
to ‘take into account the economic effect of such [Redemption] Event.” Id. (quoting Swap
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Agreement, Schedule, Part1(n)(2)); see AC ¶ 21. Waterfall further contends that “[t]he Early
Termination Date for the Redemption Event—i.e, the date on which the economic effect for which
the Redemption Event is be accounted—is ‘deemed to occur simultaneous with the redemption.’”
Id. (quoting Swap Agreement, Schedule, Part 1(n)(2) & (n)(6)) (emphasis in original). “On the Early
Termination Date: (i) any payments or deliveries as to the redeemed amount must cease; and (ii)
BNY[M] and the Issuer must calculate the amount due with respect to the Redemption Event ‘[o]n
or as soon a reasonably practicable . . .’” Waterfall’s Opp. at 11 (quoting Swap Agreement §§ 6(c)(ii)
and (d)(i)).
Therefore, according to Waterfall, BNYM is “foreclose[d] from seeking termination
payments in connection with its belated discovery of prior Redemption Events” because any
“relevant Early Termination Dates occurred simultaneous with the nearly 30 Redemption Events
occurring from 2008 to July 2017, and those prior Redemption Events should have “reduce[d] the
notional amount of the Swap” at the time those events occurred. Waterfall’s Opp. at 11.
Furthermore, Waterfall asserts that “the Trustee has an obligation to enforce the Issuer’s
rights under the Swap Agreement pursuant to Section 2.14 of the Indenture, including challenging
BNYM’s declaration of an Early Termination Date and certain Termination Amounts pursuant to
Section 15.2(a)(iii),(v) of the Indenture.” AC ¶ 41 (citing correspondence from Waterfall).
Therefore, according to Waterfall’s theory, Wells Fargo has a contractual obligation to
withhold the res from BNYM, and, beyond issue of distribution of the res, to seek “hundreds of
thousands of dollars” from BNYM on behalf of the Tropic CDO IV.
C. Waterfall’s Purported Capacity to Threaten Litigation Against Wells Fargo
It is undisputed that Waterfall is a junior noteholder that has not employed and is not
employing any contractual right to direct the Trustee. See Indenture, art. 1, §§ 1.1, 5.14 (“Requisite
Noteholders” may direct the Trustee); see also Tr. 22:8-10 (“we are not directing the Trustee”), 25:158

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16 (“There has been no formal direction as [R]equisite [N]oteholders of the trust to bring a
lawsuit.”) (both counsel for Waterfall); Waterfall’s Opp. at 8 n.4. Section 6.3 of the Indenture
further specifies that the Trustee is “under no obligation to exercise any of the rights or powers
vested in it by this Indenture at the request or direction of any of the Noteholders pursuant to this
Indenture unless such Noteholders have offered to the Trustee reasonable security or indemnity
against all costs, expenses and liabilities which might reasonably be incurred by it in compliance with
such request or direction.” Indenture § 6.13(e) (emphasis added). 5 There is no indication in the
record that Waterfall has provided Wells Fargo with any indemnity. Accordingly, the Court
concludes, and no party disputes, that the contractual provisions allowing for Noteholders, of any
designation, to direct the Trustee to take the actions demanded by this one junior noteholder have
not been engaged.
Nonetheless, Waterfall contends that if Wells Fargo does not “enforce the Issuer’s rights
under the Swap Agreement” then Waterfall will “pursue[] claims against the Trustee for, among
other things, the irreparable and substantial harm stemming from the Trustee’s continuing action.”
AC ¶¶ 41-42 (quoting correspondence from Waterfall).
The Indenture contains a no-action clause, which prohibits noteholder-suits without formal
demand that the Trustee “institute [p]roceedings.” Indenture § 5.9. However, Wells Fargo and
Waterfall both contend that the no-action clause poses no barrier to Waterfall’s potential suit:
[I]investors have been permitted to pursue breach on indenture claims against a
trustee without complying with the requirements of a no-action clause. Courts in
this district have refused to strictly enforce the terms of no-action clauses under
these circumstances because adherence to the typical demand requirement would be
“futile;” a trustee cannot be expected to sue itself.

The use of the phrase “any Noteholder” in § 6.13(e) of the Indenture is distinct from phrases such as “Majority
Noteholders” and “Requisite Noteholder[s]” used elsewhere in the indenture.” E.g. Indenture §§ 1.1, 5.14, 6.3(f).

5

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Wells Fargo’s Opp. (ECF No. 63) at 15 (quoting Ellington Credit Fund Ltd. v. Select Portfolio Servicing
Inc., 837 F. Supp 2d 162, 186 (S.D.N.Y. 2011) (citing Blackrock Core Bond Portfolio v. U.S. Bank N.A.,
165 F. Supp 3d 80, 92 (S.D.N.Y. 2016)).
BNYM contends that Waterfall’s suit would be frivolous, but does not challenge Wells
Fargo’s and Waterfall’s invocation of case law regarding the no-action clause.
D. The Disputed Extent of Wells Fargo’s Rights and Obligations Pursuant to the Swap
Agreement Prior to an Event of Default
The parties dispute whether the Issuer and Wells Fargo, as the Trustee, had “coextensive”
rights and obligations pursuant to the Swap Agreement between 2008-2017. Tr. at 16:2-5.
Article XV, § 15.2 of the Indenture vests “all of the Issuer’s estate, right tile and interest in,
to and under the Swap Agreement” in Wells Fargo. However, that section goes on to provide that
“so long as no Event of Default has occurred and is continuing hereunder, the Trustee hereby
grants the Issuer a license to exercise all of the Issuer’s rights pursuant to the Swap Agreement,
without notice to or the consent of the Trustee” and that “[t]he Trustee shall have no liability with
respect to any act or failure to act by the Issuer under the Swap Agreement (provided that this
sentence shall not limit or relieve the Trustee from any responsibility it may have under this
Indenture upon the occurrence of an during the connivance of any Event of Default hereunder
. . . .” That language begs the question, is the license granted to the Issuer by Wells Fargo
exclusive?
On this point, Wells Fargo and Waterfall differ. “The [T]rustee takes the position that prior
to an [E]vent of [D]efault, under [§]15.2 the [I]ssuer is tasked with making those determinations
[regarding the Swap Agreement]. Waterfall has taken the position that there may be coextensive
obligations.” Tr. at 16:2-5 (counsel for Wells Fargo).
It is undisputed that no Event of Default occurred during or prior to the 2008-2017 Partial
Redemptions—with the corollary that the Issuer’s license had not been revoked pursuant to § 15.2
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of the Indenture. It is also undisputed that BNYM did not receive notifications contractually
required by the Swap Agreement—which is the root cause of the dispute before the Court.
Accordingly, the dispute as to whether Wells Fargo had a “coextensive” obligation to issue such
notifications looms large—and begs the question as to whether Wells Fargo shares any liability to
which the Issuer may be exposed as the result of the failure to provide BNYM with the contractually
required notifications of the Partial Redemptions at issue here. Wells Fargo has a clear interest in
the determination of that issue, which again goes beyond the distribution of the res.
E. Relevant Procedural History
On July 12, 2018, Wells Fargo served its amended-interpleader complaint pursuant to
Federal Rule of Civil Procedure 22. The pertinent parts of Wells Fargo’s prayer for relief are
reproduced below:
(i) To order the Interpleader Defendants to interplead and to settle all claims related
to the that portion of the Available Adjusted Collections that are the subject of this
dispute among themselves and any other persons who claim or may claim an interest,
beneficial or legal, in such assets;
(ii) To restrain Interpleader Defendants and all claiming through or acting with them,
or claiming any interest in the Available Adjusted Collections, from commencing or
prosecuting any separate proceeding against Wells Fargo concerning or relating to
the issues in this action[.]
(emphasis added). The Court highlights the fact that the relief requested in not merely that
the Court resolve competing claims as to the res—but also all issues concerning or related to
the case as a whole.
Before the Court is BNYM’s motion to dismiss the amended-interpleader complaint.
(ECF No. 58). By September 6, 2018 the motion was fully briefed. Waterfall and Wells Fargo
oppose the motion to dismiss; Cede takes no position as to the motion.

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II.

STANDARD
“Under Rule 22, interpleader is proper if the party requesting it is or may be exposed to

double or multiple liability. Rooted in equity, interpleader is a handy tool to protect a stakeholder
from multiple liability and the vexation of defending multiple claims to the same fund. Accordingly,
what triggers interpleader is a real and reasonable fear of double liability or vexatious, conflicting
claims . . . .” Washington Elec. Co-op., Inc. v. Paterson, Walke & Pratt, P.C., 985 F.2d 677, 679 (2d Cir.
1993) (internal citations, quotations, and quotations marks omitted).
“‘A prerequisite for permitting interpleader is that two or more claimants must be adverse
to each other.’” Bradley v. Kochenash, 44 F.3d 166, 168 (2d Cir. 1995) (quoting Wright & Miller,
§ 1705 When Interpleader Is Appropriate—Adverse Claimants Required, 7 Fed. Prac. & Proc. Civ.
(3d ed.) (“Wright & Miller”)). “Thus, the protection against double or multiple liability provided by
Rule 22 is protection only against double or multiple liability that is unjustifiable because the plaintiff has
but a single obligation.” Id. (emphasis added) (internal quotation marks omitted).
“To determine whether an interpleader action is appropriate, therefore, a court must assess
whether the stakeholder ‘legitimately fear[s] multiple [liability] directed against a single fund,
regardless of the merits of the competing claims.’” Fid. Brokerage Servs., LLC v. Bank of China, 192 F.
Supp. 2d 173, 178 (S.D.N.Y. 2002) (quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Clemente, 98cv-756, 2001 WL 11070, at *5 (S.D.N.Y. Jan. 4, 2001). In applying this test, a court need not analyze
the merits of the claims because “[t]he stakeholder should not be obliged at its peril to determine
which of two claimants has the better claim.” Id. (quoting John Hancock Mutual Life Ins. Co. v. Kraft,
200 F.2d 952, 954 (2d Cir.1953). Interpleader may be invoked due to the “the possibility of
prospective claims.” Id.; 6247 Atlas Corp. v. Marine Ins. Co., No. 2A/C, 155 F.R.D. 454, 463
(S.D.N.Y. 1994) (“the case law consistently supports the notion that interpleader may be utilized
even if some of the alleged claims have not yet been asserted”). The party seeking interpleader relief
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bears the burden of establishing that [its] requirements are satisfied. Great Wall De Venezuela C.A. v.
Interaudi Bank, 117 F. Supp. 3d 474, 482 (S.D.N.Y. 2015)
Interpleader is “a remedial device to be liberally construed. 6247 Atlas Corp., 155 F.R.D. at
461 (quoting State Farm & Casualty Co. v. Tashire, 386 U.S. 523, 533 (1967). “‘Thus, the trend, both
with regard to statutory revision and judicial interpretation, has been directed toward increasing the
availability of interpleader and eliminating those technical restraints on the device that are not
founded on adequate policy considerations.’” Id. (quoting 7 Charles A. Wright et al., Federal
Practice and Procedure § 1704 at 500–501 (2d ed. 1986) (footnote omitted in original). However,
“federal interpleader was not intended to serve the function of a bill of peace.” Tashire, 386 U.S. at
537 (internal quotation marks omitted).
III.

DISCUSSION
A. Wells Fargo has not satisfied the preconditions for interpleader.
Wells Fargo may not invoke interpleader here, because it is not at risk of multiple vexatious

litigation as to a single fund, when it only owes a “single obligation.” Bradley v. Kochenash, 44 F.3d
166, 168 (2d Cir. 1995); see Tashire, 386 U.S. at 537 (“[F]ederal interpleader was not intended to serve
the function of a bill of peace.”) (internal quotation marks omitted). At issue in this case is not
merely the res which is under Wells Fargo’s control in its role as Trustee, but also the scope and
impact of Wells Fargo’s potential “coextensive” obligations pursuant to the Swap Agreement, Wells
Fargo’s potential obligation to bring suit against BNYM for breach of the Swap Agreement, and
BNYM’s potential liability to the Trust in the event of such a suit. If the issues related to the res held
by Wells Fargo were disentangled from the remaining issues, then interpleader as to the distribution
of the res might be appropriate. However, as that is not Wells Fargo’s demand here, interpleader is
inappropriate.

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Wells Fargo has plausibly alleged that it faces the risk of two potential suits as to the
distribution of the res—one by BNYM for the sums BNYM claims are owed it under the Swap
Agreement, and one by Waterfall for allegedly failing to enforce the Issuer’s rights under the Swap
Agreement, as required by the Indenture. The potential suit by BNYM is the type of litigation threat
typical in the interpleader context—BNYM merely seeks distribution of the res held by Wells Fargo
in which Wells Fargo has disclaimed an interest. See, e.g. BNYM Trust Co., N.A. v. Telos CLO 1006-1
ltd., 274 F. Supp. 3d 191, 213 (S.D.N.Y. 2017) (“Trustee is a disinterested stakeholder” who
“brought this interpleader action to preserve the funds for the benefit of the successful claimant.”).
However, the potential claims by Waterfall implicate concerns beyond the “single fund” held by
Wells Fargo, and demonstrate that Wells Fargo has an interest in, and is seeking relief through, this
litigation beyond the distribution of the res.
As described above, Waterfall’s legal theory is that the prior and undisclosed Partial
Redemptions which triggered the September 2017 Partial Termination also should have triggered
reductions in the notional value of the Swap at the time those events occurred. Such reductions
never took place, and so, according to Waterfall, BNYM was not entitled to invoke a Partial
Termination of the Swap Agreement, as the contractual preconditions had not been met—with the
consequence that BNYM is not entitled to the res as Termination Payments. Waterfall further
contends that BNYM owes the trust “hundreds of thousands of dollars” because the notional value
of the Swap, which determines the amounts paid to BNYM out of the trust, has been artificially
inflated for years.
Waterfall’s theory as to why Wells Fargo should not distribute the res cannot be disentangled
from its theory as to why Wells Fargo is obligated to bring action against BNYM. At base, Waterfall
contends that BNYM was not entitled to invoke Partial Termination in the first instance, because
the notional swap value of the Swap was not reduced “simultaneously” with prior Partial
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Redemptions, as allegedly required by the Swap Agreement. For the same reasons, Waterfall
contends that BNYM is liable to the trust for its failure to reduce the notional swap value.
Waterfall’s Opp. 5-6. Those claims cannot be disentangled—they are both the logical ramifications
of Waterfall’s interpretation of the Swap Agreement.
Additionally, Waterfall’s position as to Wells Fargo’s “coextensive” Swap Agreement
obligations has broad potential ramifications which cascade beyond the issue of distribution of the
res held by Wells Fargo. The Indenture grants Wells Fargo all of the “Issuer’s estate, right, title and
interest in, to and under the Swap Agreement,” which, according to Waterfall’s theory, indicates that
Wells Fargo inherited all of the Issuers rights and obligations—presumably including the obligation
to issue notices of Partial Redemption. Indenture, Article XV, § 15.2 Section 15.2 of the Indenture
also provides for a license of those same rights to be provided to the Issuer—which is rescinded by
an Event of Default. Id. Wells Fargo contends that, prior to an event of Default, the license is
exclusive, meaning the rights and obligations of the Issuer under the Swap Agreement rested with
the Issuer. Tr 16:2-5. Waterfall, however, contends that the license was not exclusive, and that
Wells Fargo had “coextensive” rights and obligations with the Issuer prior to the Event of Default.
Id. Therefore, under Waterfall’s theory, Wells Fargo may be subject to liability not just for its
distribution of, or failure to distribute, the res, but also for mal or misfeasance as a result of its failure
to exercise its “coextensive” rights and obligations under the Swap Agreement.
The root cause of the current dispute is that, pursuant to the Swap Agreement, the Issuer
was required to notify BNYM of Partial Redemptions of the Notes. However, despite
approximately thirty “periodic” Partial Redemptions between 2008 and 2017, BNYM never received
the contractually required notification of the Partial Terminations. AC ¶¶ 2, 18, 24. According to
Wells Fargo’s contractual interpretation, that failure lies with the Issuer. However, under Waterfall’s
position, that fault would lie “coextensive[ly]” with the Issuer and Wells Fargo—which, if true,
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could expose Wells Fargo to additional liability—unrelated to the distribution of, or failure to
distribute, the res.
Therefore, this case is not merely about the distribution of a single fund held by Wells Fargo
as Trustee. Rather, this is a litigation also concerning at least (1) the governance of the Indenture—
whether a single junior noteholder can require the Trustee to act without instruction from the
Requisite Noteholders or an indemnity; and (2) Wells Fargo’s obligations as Trustee—which may
include an obligation to bring suit against BNYM and may have included an obligation to issue
notices regarding the 2008-2017 Partial Redemptions—and potential liability for any failure to meet
those obligations.
Presumably recognizing the breadth of the potential issues raised here, and its interest in
those issues, Wells Fargo has, in pertinent part, requested that the Court “restrain Interpleader
Defendants . . . from commencing or prosecuting any separate proceeding against Wells Fargo
concerning or relating to the issues in this action.” AC, Plea for Relief (emphasis added). Similar requests
for relief are not uncommon in the interpleader context, but here, this request is not mere
boilerplate. Instead, it is an express request to grant Wells Fargo a “bill of peace” for all potential
issues in the case, and all of its potential liability with respect to them. If it were not, Wells Fargo
would have requested a freeze on other litigation regarding the “assets” not the “issues.” Id. (emphasis
added). Assuming, arguendo, that Waterfall’s position as to the Swap Agreement and the Indenture is
correct, if the Court granted Wells Fargo’s requested “interpleader” relief here, it would
inappropriately provide Wells Fargo with a procedural shield against its own potential mal or
misfeasance. Nor can the Court determine how to distribute the res held by Wells Fargo without
deciding the other entangled aspects of this litigation—which are questions as to Wells Fargo’s
obligations as Trustee. The Court declines to permit Wells Fargo to cower behind federal
interpleader when the potentially serious issues as to Wells Fargo’s governance of the trust
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potentially predominate this litigation. See Wright & Miller, § 1704 (“If the court determines that a
single action would not settle all the claims that are outstanding among the parties. . . then it may
decide to deny the motion to interplead.”); Nat’l Sur. Corp. v. Globe Indem. Co., 331 F. Supp. 208, 210
(E.D. Pa. 1971) (“this Court will not grant interpleader where it feels no good will flow from the
order.”).
For all these reasons, the Court finds that the scope of this litigation goes well beyond the
distribution of the res held by Wells Fargo, that Wells Fargo may owe multiple obligations beyond
distribution of the res, that resolving the distribution of the res would require the Court to determine
the nature and scope of those obligations, and that it would be inappropriate to provide Well’s
Fargo with a “bill of peace” against its own potential mal or misfeasance—with the corollary that
interpleader is inappropriate here as a matter of law.
B. Neither Equity nor Policy Supports Wells Fargo’s Use of Interpleader
Additionally, the Court has grave concerns regarding Wells Fargo’s motivations for seeking
interpleader, and the policy ramifications of granting interpleader in a case such as this. While
interpleader is “to be liberally construed,” 6247 Atlas Corp., 155 F.R.D. at 461, “the availability of
[interpleader] jurisdiction, however, [does] not require its exercise.” Truck-A-Tune, Inc. v. Re, 23 F.3d
60, 63 (2d Cir. 1994) (discussing rule interpleader). “Interpleader is an equitable proceeding” and the
Court “has discretion” in determining whether the “equities . . . warrant further federal court
adjudication.” Id.; see Fed. R. Civ. Pro. 22(a) (“Persons with claims that may expose a plaintiff to
double or multiple liability may be joined as defendants and required to interplead.”) (emphasis
added). “[F]ederal interpleader was not intended to serve the function of a bill of peace.” Tashire,
386 U.S. at 537 (internal quotation marks omitted).
By seeking to “restrain [the] Interpleader Defendants . . . from commencing or prosecuting
any separate proceeding against Wells Fargo concerning or relating to the issues in this action,”
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Wells Fargo is, in essence, asking for a bill of peace not just for any suit related to the distribution of
the fund, but also to any potential suit by Waterfall or other noteholders regarding Wells Fargo’s
alleged failure to comply with its obligations as Trustee. AC, Plea for Relief. Interpleader is an
appropriate vehicle for determining which, amongst adverse parties, is entitled to a disputed res—it is
not a blanket “bill of peace” for trustees who, while disinterested in the distribution of the res, seek
to interpose the aegis of interpleader between themselves and inextricably intertwined issues of their
own potential mis or malfeasance. See Tashire, 386 U.S. at 537.
This concern is magnified by the possibility that Wells Fargo had coextensive Swap
Agreement rights and obligations with the Issuer, as Waterfall has contended, in which case Wells
Fargo may have additional liability for its failure to provide contractual notifications to BNYM,
and/or to reduce the notional value of the Swap, when Partial Redemptions occurred.6 Wells
Fargo’s invocation of interpleader, if permitted, could sweep those potential claims in to a federal
courthouse where they otherwise might not lie. More troubling still, if Wells Fargo had a
coextensive obligation to notify BNYM of the 2008-2017 Partial Redemptions, and failed to do so,
then, far from being disinterested, Wells Fargo may have had an active hand in creating the events
which led to BNYM’s demand for payment, and ultimately this dispute.
Accordingly, equity weighs against permitting Wells Fargo to acquire a “bill of peace” as to
its contractual obligations and liabilities through use of interpleader. This concern is magnified by
the fact that Waterfall’s competing legal theory, without which there would be no justification for
interpleader, tends to implicate Wells Fargo.

The Court is especially concerned that it is Waterfall’s theory that tends to implicate Wells Fargo, given that without
Waterfall’s threat of litigation, there would be no basis for interpleader.

6

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Additionally, the Court has policy concerns regarding the wisdom of allowing interpleader in
a case such as this. Indeed, if interpleader is appropriate here, it is difficult to imagine any dispute as
to an indenture in which interpleader would not be appropriate.
Counsel for Waterfall admitted at the May 12, 2018 initial pre-trial conference that this is
case is “a departure from the classic interpleader,” and the Court considers that view to be an
understatement. Tr. at 24:17-18. Here, a junior noteholder, who does not even claim to have the
contractual right to direct the Trustee, has threatened suit against the Trustee, despite the no-action
clause in the indenture, in order to compel the Trustee to take a position under the Swap
Agreement, which the junior note holder is not a party to nor had even read prior to the events
immediately preceding this litigation. If that is the basis for interpleader, then the mere specter of
litigation by any noteholder, no matter how junior, as to any contract which with potential impact on
the value of the trust, no matter how remote the junior noteholder’s connection to that contract may
be, is cause for the Trustee to cower behind interpleader, rather than govern the trust as it is
contractually obligated (and paid) to do. And while interpleader has been liberalized, the
“liberalization of interpleader is aimed at eliminating those technical restraints on the device that are
not founded on adequate policy considerations.’” 6247 Atlas Corp., 155 F.R.D. at 461. The restraint
imposed by the Court today is grounded in law, equity, and sound policy—federal interpleader is not
a universal liability shield, nor a federal subsidy for the business of indenture trustees. Even
liberalized, the scope of interpleader has limits and is not a “universal bill of peace.” Tashire, 386
U.S. at 537 (1967).
The outlier status of the facts presented in this litigation, and the gravity of the policy
considerations at issue, are brought into clear relief when this case is compared to a similar case in
which interpleader was granted in the Indenture context. In BNYM Trust Co., N.A., v. Telos CLO
1006-1 Ltd., BNYM, the trustee in that litigation, utilized interpleader to determine the distribution
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of a contested fee potentially owed the collateral agent or a junior noteholder. 274 F. Supp. 3d 191
(S.D.N.Y. 2017). At base, and unlike in this litigation, in Telos interpleader was appropriate because
the distribution of the single fund at issue would resolve the dispute amongst the litigants. Id. at
213. Additionally, the facts of the Telos mitigated against the policy considerations raised here in two
important ways. First, the dispute involved determining which of two potentially applicable
payment waterfalls established under the governing indenture was applicable. Id. at 210. In other
words, the dispute in the Telos-case was grounded in the indenture at issue itself, rather than ancillary
agreements without direct connection to the junior noteholder threatening litigation, as is the case
here. Second, Telos, as collateral agent, requested that the Trustee invoke interpleader, which at
least in part mitigates the Court’s concerns regarding Wells Fargo’s motivations for seeking
interpleader in the present case. Finally, the Telos court held the “Trustee [was] a disinterested
stakeholder” in that case. Id. at 213. The Court cannot say the same here, as under several of the
posited interpretations of the Indenture and the Swap Agreement, Wells Fargo has obligations and
liabilities beyond the distribution of the res.
IV.

CONCLUSION
The law does not require allowing interpleader here, as the dispute goes beyond Wells

Fargo’s “single obligation” to distribute the res, and is instead predominated by issues as to Wells
Fargo’s potential obligations as Trustee. See Bradley v. Kochenash, 44 F.3d at 168 (2d Cir. 1995).
Further, equity does not support granting the relief sought by Wells Fargo, and the Court has grave
policy concerns about the wisdom of extending interpleader to the extent requested. For all those
reasons, interpleader is DENIED, BNYM’s motion to dismiss is GRANTED and this case is
dismissed.

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The Clerk of Court is directed to terminate this case.
SO ORDERED.

Dated: March 12, 2019
New York, New York

___________________________
GREGORY H. WOODS
United States District Judge

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