ANDREW J. PECK, United States Magistrate Judge:
Presently before the Court is: (1) an inquest as to the proper amount of the Termination Payment as of the Early Termination Date of November 9, 2009, including whether the Termination Payment is a payment to or due from interpleader defendant Natixis Financial Products LLC, and (2) interpleader defendant MBIA Insurance Corporation's motion in limine to exclude from consideration on the inquest the testimony of Natixis' expert Michael DiYanni. (Dkt. No. 96: Notice of Motion.) The parties have consented to my decision of these issues on a dispositive basis pursuant to 28 U.S.C. § 636(c). (Dkt. No. 89.) For the reasons set forth below, the Court finds that a Termination Payment of $10,538,773 is due from Natixis.
The underlying facts of this case are set forth in Judge Batts' decision on the summary judgment motions. (Dkt. No. 84: 3/28/12 Order.) The facts and procedural history relevant to the inquest are summarized below.
In May 2002, Solstice ABS CBO II, Ltd. ("Issuer") completed a collateralized debt obligation ("CDO") transaction ("Transaction"), governed by the Indenture. (3/28/12 Order at 1.) At the closing of the Transaction, the Issuer issued secured Class A-1 Notes, Class A-2 Notes (together with the Class A-1 Notes, "Class A Notes"), Class B Notes and Class C Notes, as well as two classes of equity securities. (3/28/12 Order at 2.) The holders of the secured notes "made loans to the Issuer for the face amount of the Notes in exchange for the Issuer's promise" to pay the principal at their maturity in 2038, in addition to periodic interest payments. (3/28/12 Order at 2.) The Issuer used the proceeds to acquire an asset portfolio of debt instruments ("Asset Portfolio"). (3/28/12 Order at 2.) As trustee, The Bank of New York Mellon Trust Company ("Trustee") is required to collect the proceeds from the Asset Portfolio and distribute them on the biannual payment dates in accordance with the Priority of Payments provision in Indenture § 11.1(a). (3/28/12 Order at 2-3; see Dkt. No. 97: Biron 7/2/12 Aff. Ex. 2: Indenture § 11.1(a).)
At the closing of the Transaction, the Issuer also entered into the Cashflow Swap Agreement ("CSA") with Natixis. (3/28/12 Order at 2-3.) The CSA consists of three integrated documents: the ISDA Master Agreement ("Master Agreement"), a Schedule thereto, and a Confirmation. (3/28/12 Order at 4; see generally Biron 7/2/12 Aff. Ex. 6: Confirmation; Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 4: Master Agmt.; Dugan 7/30/12 Aff. Ex. 5: Schedule.) The Master Agreement is a commonly used standardized contract for swap transactions. (See Dugan 7/30/12 Aff. Ex. 4: Master Agmt.; Biron 7/2/12 Aff. Ex. 6: Confirmation: "This Confirmation is subject to the 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc....") The Schedule sets forth amendments to the Master Agreement reflecting terms specifically negotiated by the parties. (See Dugan 7/30/12 Aff. Ex. 5: Schedule.) The Confirmation sets forth the transaction-specific terms of the CSA, detailing the payment obligations of the Issuer and Natixis. (3/28/12 Order at 7; see Biron 7/2/12 Aff. Ex. 6: Confirmation.) Under the CSA, Natixis agreed to advance
At the close of the Transaction, MBIA sold credit protection to the Class A-1 Note holders and agreed to purchase the Class A-1 Notes if the Issuer failed to make required payments. (3/28/12 Order at 3.) Pursuant to the swap transaction, MBIA was paid a fee of 0.085% per annum multiplied by the outstanding amount of the Class A-1 Notes ("MBIA Swap Fee") for agreeing to purchase the Class A-1 Notes if there was a payment default. (Dkt. No. 115: Sogol 12/3/12 Aff. Ex. 7: MBIA Confirmation at 2-3.) Through November 2009, MBIA received approximately $1.1 million in fees under the MBIA Swap. (Dkt. No. 115: Sloan Aff. ¶ 2.)
In October 2009, a § 5.1(j) Event of Default ("EOD") occurred because the "`Class A Overcollateralization Ratio on a Measurement Date was less than 101%,'" and on October 26, 2009, the Trustee issued a "Notice of Event of Default," as required under Indenture § 6.2. (3/28/12 Order at 5; see Biron 7/2/12 Aff. Ex. 2: Indenture §§ 5.1(j), 6.2.)
On November 4, 2009, Natixis issued an Early Termination Notice stating that an EOD constituted an Additional Termination Event under Part 1(j)(2)(c) of the Schedule, designating November 9, 2009 as the Early Termination Date pursuant to
On November 6, 2009, MBIA waived the EOD under Indenture § 5.1(j). (3/28/12 Order at 6.)
On November 9, 2009, a Distribution Date, the Issuer had insufficient funds to pay interest payments on the Class A and B Notes. (Dkt. No. 115: MBIA Supp. Opp. Br. at 9-10; Sogol 12/3/12 Aff. Ex. 17: 11/9/19 Note Valuation Report.) Because the Issuer did not pay the interest due on Class A and B Notes, MBIA was required to purchase the Class A-1 Notes for their outstanding face amount, approximately $82.8 million. (Dugan 11/19/12 Aff. Ex. 15: 11/25/09 Credit Event Notice; MBIA Supp. Opp. Br. at 10; Sogol 12/3/12 Aff. Ex. 13: North Dep. at 214-15; Sogol 12/3/12 Aff. Ex. 18: 11/9/09 Email.) MBIA now holds the Class A-1 Notes and is a third party beneficiary of the CSA. (3/28/12 Order at 3-5, 10.)
On November 12, 2009, the Trustee commenced this interpleader action, and in March 2011, various parties cross-moved for summary judgment. (3/28/12 Order at 1-2.) Judge Batts held that the Cashflow Swap terminated on November 9, 2009 but that Natixis' proposed Termination Payment of $2.2 million from MBIA to Natixis was not proper. (3/28/12 Order at 16, 21-22.)
Specifically, Judge Batts held that:
(3/28/12 Order at 12.)
With respect to Natixis' Termination Payment calculation, Judge Batts held:
(3/28/12 Order at 13-15, citations omitted.)
Judge Batts further explained how to calculate the Termination Payment:
(3/28/12 Order at 17, citation omitted.) Judge Batts clarified that "[t]here can simply be no question that Natixis was required to account for the value of the Cash Flow Swap through its scheduled end, but failed to do so." (3/28/12 Order at 17-18 n. 3.)
(Dkt. No. 89: § 636(c) Consent.)
After the motion was fully briefed, the Court requested supplemental briefing and scheduled oral argument "to aid the Court in understanding the transactions at issue, specifically the factual basis for the assumptions used by Natixis' expert Michael DiYanni and MBIA's expert Dr. Peter Niculescu to calculate the Early Termination Payment." (Dkt. No. 112: 11/9/12 Order; see also 11/20/12 Conf. Tr.; Natixis Supp. Letter Br.; MBIA Supp. Opp. Br.; Dkt. No. 116: Natixis Supp. Reply Br.)
Michael DiYanni is a Senior Vice President at Moelis & Company, an investment banking firm. (Dkt. No. 97: Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 4 & App'x 10: DiYanni CV.) DiYanni has an M.S. in Finance and Economics from the London School of Economics and a B.A. in Economics from Yale University. (DiYanni Report at 4-5 & App'x 10: DiYanni CV.) DiYanni's professional experience in this area began in 2001, and he has "structured, traded, and advised clients on a wide variety of securitization and fixed income instruments" including "synthetic CDOs, single name and portfolio credit derivatives, financial guarantee insurance products, interest rate swaps, repackagings, and SPV issued notes." (DiYanni Report at 4-6.) While working at J.P. Morgan and Citigroup, "DiYanni structured synthetic RMBS [Residential Mortgage-Backed Securities] transactions, priced RMBS, and supervised the determination of assumptions used to determine the cash flows from RMBS." (Dkt. No. 100: Natixis Opp. Br. at 28; see Dkt. No. 100: DiYanni Aff. ¶¶ 5-6; Biron 7/2/12 Aff. Ex. 10: DiYanni Dep. at 90-92, 97.) DiYanni has advised a client "`on substantially all of [the client's] credit default swap portfolio,' which included RMBS." (Natixis Opp. Br. at 28; DiYanni Aff. ¶ 6; Biron 7/2/12 Aff. Ex. 10: DiYanni Dep. at 90.)
In general, DiYanni calculated the Termination Payment as of November 9, 2009, used "a discount rate of LIBOR + 200bps," and assumed that "the `Hedge Agreement' between Solstice and Rabobank had not been terminated for the purpose of the Termination Payment calculation." (DiYanni Report at 15, 18.) DiYanni set forth three Termination Payment calculations based on different assumptions. (DiYanni Report at 11-14.)
In Model A, DiYanni assumed "the satisfaction of conditions precedent to the payment obligations of each of Natixis and Solstice, and that the future payment obligations of both parties ... [were] met," i.e., that the Issuer would be obligated to make payments to Natixis on certain future Distribution Dates even if the Interest and Principal Proceeds were not available to do so under the Priority of Payments. (DiYanni Report at 11-12, 19-21.) DiYanni opined that:
(DiYanni Report at 21-22.) DiYanni further assumed that the CSA would end in May 2018, when Solstice would have no substantive cash-flowing assets with which to repay any further advances, interest, or fees. (DiYanni Report at 38-43.) DiYanni's Model A calculated a Termination Payment of $2,543,335 due to Natixis from the Issuer. (DiYanni Report at 11-12, 31.) DiYanni opined that Model A "is an appropriate model to use to determine the proper amount of the Termination Payment." (DiYanni Report at 8.)
In Model B, DiYanni assumed:
(DiYanni Report at 12-13, 32.) The additional EOD "result in a new Cashflow Swap Cancellation Event as early as November 2, 2009 and the suspension of all of Natixis' future payment obligations as of that date." (DiYanni Report at 12.) DiYanni's Model B calculated a Termination Payment of $2,950,570 due to Natixis from the Issuer. (DiYanni Supp. Report at 2.)
In Model C, which DiYanni calls the "`Niculescu Approach,'" DiYanni assumed the same cashflow projections as Model A but also assumed that "Solstice's projected inability to fulfill its future payment obligations [was] a factor in the calculation of the Termination Payment." (DiYanni Report at 13, 37-58.) DiYanni opined, however, that this further assumption was not consistent "with market practice for closing out derivatives transactions." (DiYanni Report at 13.) Contrary to Model A, Model C "is performed assuming [DiYanni's] projection of what Solstice would pay, based on Solstice's available future funds (as opposed to what Solstice should pay, contingent or otherwise, as in Model A)." (DiYanni Report at 37.) DiYanni's opinion is that "this approach runs contrary to [his] commercial understanding of the language in the ISDA Master Agreement." (DiYanni Report at 37.) DiYanni valued the CSA through May 2018 (when the last meaningful reimbursement payment from Solstice would be received) and alternatively through May 2020 (when the remaining principal payments to be received by the Issuer would be less than $1 million). (DiYanni Report at 38-39.) DiYanni's Model C calculated a Termination Payment due from Natixis to the Issuer of $2,259,785 and $10,538,773 when valued through May 2018 and May 2020, respectively. (DiYanni Report at 39-40, 59-61 & App'x 1, 4.)
Dr. Peter Niculescu is a Partner at Capital Market Risk Advisors ("CMRA"), a risk management firm, where he heads Fixed Income Advisory. (Dkt. No. 97:
Dr. Niculescu was "instructed to assume and [has] assumed that the claim will end when the principal balance outstanding of non-defaulted and currently paying securities reaches a $1 million threshold[, which] is projected to happen in November, 2023." (Biron 7/2/12 Aff. Ex. 4: Niculescu Supp. Report at 2.) In his Amended Expert Report, Dr. Niculescu opined:
(Niculescu Am. Report at 5, fn. in original.)
Dr. Niculescu also submitted a Reply Report to DiYanni's Report in which Dr. Niculescu adopted DiYanni's discount rate of LIBOR +200 bps. (Biron 7/2/12 Aff. Ex. 5: Niculescu Reply Report at 3.) Dr. Niculescu used two end dates in his calculations: "November 9, 2023 (when, based on [his] cash-flow projections, [he] estimate[d] that the principal balance outstanding on non-defaulted and currently paying securities in the Solstice II collateral pool is less than $1 million) and May 9, 2038 (the Scheduled Maturity of the Class A Notes)." (Niculescu Reply Report at 12-13.) Using a discount rate of LIBOR +200 bps, Dr. Niculescu calculated that the Termination Payment would be $18,976,084 or $46,615,103 due to the Issuer from Natixis with end dates of November 2023 or May 2038, respectively. (Niculescu Reply Report at 4.)
"[T]he proponent of expert testimony has the burden of establishing by a
Fed.R.Evid. 702.
"The trial court acts as a gatekeeper with respect to expert testimony, properly admitting only such testimony as would help the jury understand the evidence or determine a fact at issue." Hickey v. City of N.Y., 173 Fed.Appx. 893, 894 (2d Cir.2006) (citing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. at 592-93, 113 S.Ct. at 2796-97).
"In evaluating the admissibility of expert testimony, [the Second Circuit] requires the exclusion of testimony which states a legal conclusion." United States v. Duncan, 42 F.3d 97, 101 (2d Cir.1994).
With respect to reliability, the Court must decide "whether this particular expert [has] sufficient specialized knowledge to assist the [trier of fact] `in deciding the particular issues in the case.'" Kumho Tire Co. v. Carmichael, 526 U.S. at 156, 119 S.Ct. at 1178.
With respect to relevance, "Rule 702 further requires that the evidence or testimony `assist the trier of fact to understand the evidence or to determine a fact in issue.' This condition goes primarily to relevance. `Expert testimony which does not relate to any issue in the case is not relevant and, ergo, non-helpful.'" Daubert v. Merrell Dow Pharm., Inc., 509 U.S. at 591, 113 S.Ct. at 2795.
"It is well-established that `the trial judge has broad discretion in the matter of the admission or exclusion of expert evidence, and his action is to be sustained unless manifestly erroneous.'" Boucher v. U.S. Suzuki Motor Corp., 73 F.3d at 21 (quoting Salem v. U.S. Lines Co., 370 U.S. 31, 35, 82 S.Ct. 1119, 1122, 8 L.Ed.2d 313 (1962)).
The CSA is governed by New York law. (See Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 5: Schedule at 9 ("Governing Law. This Agreement and each Confirmation shall be construed in accordance with, and this Agreement, each Confirmation and all matters arising out of or relating in any way whatsoever (whether in contract, tort or otherwise) to this Agreement or any Confirmation shall be governed by, the law of the State of New York.").)
"Under New York law `the initial interpretation of a contract is a matter of law for the court to decide.' Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous." Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir. 1998) (citations omitted); accord, e.g., W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 443, 566 N.E.2d 639 (1990) ("Whether or not a writing is ambiguous is a question of law to be resolved by the courts."); Sutton v. E. River Sav. Bank, 55 N.Y.2d 550, 554, 450 N.Y.S.2d 460, 462, 435 N.E.2d 1075 (1982) ("[T]he threshold decision on whether a writing is ambiguous is the exclusive province of the court.").
"It is axiomatic that where the language of a contract is unambiguous, the
"Contract language is not ambiguous if it has `a definite and precise meaning... concerning which there is no reasonable basis for a difference of opinion.'" Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir.1989) (quoting Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 355, 413 N.Y.S.2d 352, 355, 385 N.E.2d 1280 (1978)).
Clear contractual language does not become ambiguous simply because the parties to the litigation argue different interpretations. E.g., Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456, 460, 161 N.Y.S.2d 90, 93, 141 N.E.2d 590 (1957) ("Mere assertion by one that contract language means something to him, where it is otherwise clear, unequivocal and understandable when read in connection with the whole contract, is not in and of itself enough to raise a triable issue of fact."); Slattery Skanska Inc. v. Am. Home Assurance Co., 67 A.D.3d 1, 14, 885 N.Y.S.2d 264, 274 (1st Dep't 2009) ("That one party to the agreement may attach a particular, subjective meaning to a term that differs from the term's plain meaning does not render the term ambiguous."); Moore v. Kopel, 237 A.D.2d 124, 125, 653 N.Y.S.2d 927, 929 (1st Dep't 1997) ("[A] contract is not rendered ambiguous just because one of the parties attaches a different, subjective meaning to one of its terms.").
In seeking to exclude DiYanni's expert report, MBIA argues that "DiYanni does not have sufficient expertise to offer an opinion regarding future RMBS cash flows as of the Early Termination Date." (Dkt. No. 97: MBIA Br. at 20.) While Dr. Niculescu and DiYanni "generally agree on the assumptions that should be used in estimating future cash flows from the types of debt instruments in the Asset Portfolio," they do not agree on the "assumptions that should be used with respect to RMBS." (MBIA Br. at 20; compare Dkt. No. 97: Biron 7/2/12 Aff. Ex. 3: Niculescu Am. Report at 34-35, and Biron 7/2/12 Aff. Ex. 5: Niculescu Reply Report at 8-11; with Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 43-56.) As further evidence of DiYanni's lack of specialized
Natixis responds that "DiYanni has extensive experience with estimating future cash flows from RMBS" and "[i]t is entirely appropriate for Mr. DiYanni to rely on his colleagues." (Dkt. No. 100: Natixis Opp. Br. at 28-29.)
The Court agrees that DiYanni has sufficient experience in dealing with RMBS to offer an opinion regarding future RMBS cash flows as it relates to the Early Termination Payment. While working at J.P. Morgan and Citigroup, "DiYanni structured synthetic RMBS transactions, priced RMBS, and supervised the determination of assumptions used to determine the cash flows from RMBS." (See page 636 above.) DiYanni also advised a client "`on substantially all of [the client's] credit default swap portfolio,' which included RMBS." (See page 636 above.) DiYanni appropriately relied on the data and research of his colleagues with respect to the RMBS assumptions, as he explained:
(Dkt. No. 100: DiYanni Aff. ¶ 7; see also Biron 7/2/12 Aff. Ex. 10: DiYanni Dep. at 272; Natixis Opp. Br. at 28.)
An expert is permitted to rely on assistance from others who work with him. See, e.g., Bd. of Trs. of AFTRA Ret. Fund v. JPMorgan Chase Bank, N.A., 09 Civ. 0686, 2011 WL 6288415 at *10 (S.D.N.Y. Dec. 15, 2011) ("Despite plaintiffs' characterizations, the work done by [third-party economic research and consulting firm hired by defendant], a firm with which [defendant's expert] is affiliated, falls within the permissible scope of research and data collection done by third-party assistants to experts. The [consulting firm] gathered data and provided research under [defendant's expert's] supervision. [Defendant's expert] testified that she used the [consulting firm] to gather data because of the subscriptions they have — `so under my supervision and describing to them what I wanted and needed, they certainly provided me with that data.' ... There is nothing improper about an expert relying on third-parties for data collection." (fns. omitted)); see also, e.g., Gussack Realty Co. v. Xerox Corp., 224 F.3d 85, 94-95 (2d Cir.2000) ("[A]n expert may rely on data that she did not personally collect. The Federal Rules of Evidence specifically provide that an expert may rely on facts or data `perceived by or made known to the expert at or before the hearing.' The expert need not have conducted her own tests." (citation omitted)); Northbrook NY, LLC v. Lewis & Clinch, Inc., No. 09-CV-0792, 2012 WL 4338740 at *6 (N.D.N.Y. Sept. 20, 2012) ("Second, generally, extrapolation is an acceptable method that ... experts ... use in making their conclusions. In addition, although Plaintiff argues to the contrary, the data from which an expert extrapolates need not be collected by the expert in order to be credible." (citations & fn. omitted)); Cedar Petrochemicals, Inc. v. Dongbu Hannong Chem. Co., 769 F.Supp.2d 269, 284 (S.D.N.Y.2011) (finding expert opinion to be based on sufficient data where "experts
Given DiYanni's educational and professional experience, the dearth of legal authority regarding the calculation of termination payments, the fact that the Court is the trier of fact, and the broad discretion of the trial judge in the admission and exclusion of expert evidence, DiYanni's testimony will not be excluded on the basis that he does not have sufficient specialized knowledge involving RMBS cash flows.
In Model A, DiYanni assumed "that Natixis would be required to advance funds to Solstice II to make up for interest shortfalls to the Class A and B Notes, and also that Solstice II would be required to repay those advances with interest and to pay Natixis its fee," i.e., that the Issuer would be obligated to make payments to Natixis on certain future Distribution Dates even if the Interest and Principal Proceeds were not available to do so under the Priority of Payments. (Dkt. No. 100: Natixis Opp. Br. at 11-12.) Natixis asserts that "the availability of sufficient Principal and Interest Proceeds on any given Distribution Date is a condition precedent to Solstice II making a payment on a specific date, the satisfaction of which should be assumed for purposes of calculating a Termination Payment." (Natixis Opp. Br. at 16, citation omitted.) Natixis argues that the "phrase `provided that' in a contract signifies that what precedes that phrase is conditioned on the occurrence of a future event." (Natixis Opp. Br. at 17, citing cases.) Because the "Reimbursement Payments" clauses of the Confirmation use the phrase "provided ... that" (Dkt. No. 97: Biron 7/2/12 Aff. Ex. 6: Confirmation at 2-4), Natixis asserts that the "availability of funds to pay Natixis is therefore a condition precedent to Solstice II's having to pay Natixis on any particular Distribution Date." (Natixis Opp. Br. at 18.)
MBIA contends that DiYanni's Model A calculation should be excluded because the underlying assumption — that the Issuer would make payments to Natixis even if Interest and Principal proceeds were not available — contradicts both Judge Batts' summary judgment Order and the Confirmation. (Dkt. No. 97: MBIA Br. at 17; see also Dkt. No. 104: MBIA Reply Br. at 4-8; Dkt. No. 110: MBIA Surreply Br. at 1-2.)
In the Summary Judgment Order, Judge Batts concluded that:
(See page 635 above, emphasis added.) The Confirmation reads:
(Biron 7/2/12 Aff. Ex. 6: Confirmation at 3.)
Natixis' strained construction that the Issuer's Reimbursement Payment is a condition precedent is unconvincing. The relevant conditions precedent are in § 2(a) of the Master Agreement. Section 2(a)(iii) of the Master Agreement provides:
(Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 2(a)(iii), emphasis added.) The conditions precedent are explicitly identified in the Master Agreement as conditions precedent, e.g., "the condition precedent that."
The Court will not read a condition precedent into a contract where it is not clear that the parties intended to create such a condition. See, e.g., Israel v. Chabra, 537 F.3d 86, 93 (2d Cir.2008) ("New York courts are cautious when interpreting a contractual clause as a condition precedent, and they will `interpret doubtful language as embodying a promise or constructive condition rather than an express condition,'...."); Sciascia v. Rochdale Vill., Inc., 851 F.Supp.2d 460, 477-78 (E.D.N.Y.2012) ("To conclude, absent from the 2005 CBA, relevant side letters, [memorandum of agreement], and 2008 CBA are any terms or phrases even suggesting the possibility of a condition precedent to the Defendant's contribution obligations, let alone language `clearly imposing' such a condition.").
Moreover, Judge Batts held that "[p]ayments under Section 2(a)(i) and the Confirmation, however, are subject to the condition precedent set forth in Section 2(a)(iii)," (Dkt. No. 84: 3/28/12 Order at 13), thus, identifying the specific conditions precedent that Natixis must account for in its Termination Payment calculation. Judge Batts further held that "Natixis was required to assume ... that the obligations between Natixis and the Issuer would continue as set forth in the Confirmation" (see page 635 above), and the Confirmation clearly states that the Issuer will only make reimbursement payments "to the extent that Interest Proceeds or Principal Proceeds are available in accordance with the Priority of Payments" (see page 646 above). The purpose of the CSA
Accordingly, DiYanni's Model A Termination Payment calculation is excluded because it rests on the faulty assumption that the Issuer would be required to pay Reimbursement Payments even when there were no Interest and Principle Proceeds available in accordance with the Priority of Payments.
In Model B, DiYanni assumed that:
(Dkt. No. 100: Natixis Opp. Br. at 13, citation omitted.) Natixis asserts that there was another § 5.1(j) EOD on November 2, 2009, "the next Measurement Date under the Indenture, [because] the overcollateralization ratio again was below 101 percent," and a § 5.1(a) EOD on November 9, 2009, when "Solstice II did not pay interest owed to the Class A and Class B Noteholders." (Dkt. No. 97: Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 33-35; Natixis Supp. Letter Br. at 5-6.)
MBIA contends that there was no separate § 5.1(j) EOD on November 2, 2009, only a continuation of the October 26, 2009 EOD. (Dkt. No. 115: MBIA Supp. Opp. Br. at 23-25.) MBIA asserts that there was no § 5.1(a) EOD on November 9, 2009, because a § 5.1(a) EOD occurs upon "`a default in the payment of interest ... in each case which default continues for a period of three Business Days'" and the required three Business Days had not run. (MBIA Supp. Opp. Br. at 27.)
The Indenture states that a § 5.1(j) EOD occurs if "the Class A Overcollateralization Ratio on any Measurement Date is less than 101%." (Biron 7/2/12 Aff. Ex. 2: Indenture § 5.1(j).) Where the Class A Overcollateralization Ratio is less than 101% on two subsequent Measurement Dates, the Indenture does not make clear whether that is a continuation of the prior EOD or constitutes an additional EOD. The Indenture distinguishes between the "occurrence" and "continuation" of an EOD (see Biron 7/2/12 Aff. Ex. 2: Indenture § 5.1 ("that an Event of Default shall have occurred and be continuing"), § 5.2(a) ("If an Event of Default occurs and is continuing"), § 5.3 ("If an Event of Default occurs and is continuing"), § 5.4(a) ("If an Event of Default shall have occurred and be continuing"), § 5.5(a) ("If an Event of Default shall have occurred and be continuing")), as well as between the "cure" and "waiver" of an EOD (see Biron 7/2/12 Aff. Ex. 2: Indenture § 6.2 ("unless such Default shall have been cured or waived"), § 13.1(a)-(e) ("If any Event of Default has not been cured or waived"), § 15.1 ("as such Event of Default is cured or waived")).
"In interpreting a contract under New York law, `words and phrases ... should be given their plain meaning,' and
A § 5.1(a) EOD occurs upon "a default in the payment of any interest ... in each case which default continues for a period of three Business Days." (Biron 7/2/12 Aff. Ex. 2: Indenture § 5.1(a).) While a default in the payment of interest did occur on November 9, 2009, a § 5.1(a) EOD would not have occurred unless and until the default in the payment of interest continued for three Business Days. Thus, there was no § 5.1(a) EOD on November 9, 2009.
Moreover, MBIA correctly asserts that DiYanni's assumption for Model B that "a Cashflow Swap Cancellation Event was continuing on Early Termination Date" is contrary to Judge Batts Order. (Dkt. No. 97: MBIA Br. at 18; see Dkt. No. 84: 3/28/12 Order at 17 (No "Cashflow Swap Cancellation Event was continuing on" the Early Termination Date.).)
"Where the record indicates ... that [the expert's] analysis rests on faulty assumptions, the trial court has discretion to exclude his proffered testimony for lack of probative value." (See cases cited on page 640 & n. 16 above.) DiYanni's Model B Termination Payment calculation must be excluded because it rests on the faulty assumption that there was an EOD continuing on November 9, 2009. See, e.g., Lightfoot v. Union Carbide Corp., No. 98-7166, 175 F.3d 1008 (table), 1999 WL 110424 at *2 (2d Cir. Mar. 1, 1999) (expert
Accordingly, DiYanni's Model B Termination Payment calculation is excluded because it rests on a faulty assumption.
In Model C, DiYanni assumed that "Natixis must include in its calculation Natixis' future contingent payments but only those future payments that Solstice II could make until its assets stopped generating cash sufficient to meet its payment obligations." (Dkt. No. 100: Natixis Opp. Br. at 13.) Thus, DiYanni valued the CSA through May 2018 (when the last meaningful reimbursement payment from Solstice would be received) and alternatively through May 2020 (when the remaining principal payments to be received by the Issuer would be less than $1 million). (Dkt. No. 97: Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 38-42.) Natixis argues that this assumption is in accordance with Judge Batts' Order because she ordered that the parties must account for future contingent payments through the "scheduled end," not through "2038." (Dkt. No. 108: Natixis Surreply Br. at 3.) "[T]he Notes may cease to be Outstanding if they are canceled, which, in turn, could happen for a variety of reasons, including the liquidation of the Solstice II SPV." (Natixis Opp. Br. at 21, citation omitted; see Biron 7/2/12 Aff. Ex. 2: Indenture § 1.1.) DiYanni opined "that it would be commercially reasonable to assume that the Swap would terminate in May 2018, after which point Solstice II would have de minimis collateral-generated cash flows, and would be unable to make the payments required by the Indenture `waterfall.'" (Natixis Opp. Br. at 21.) Natixis further asserts that MBIA's own expert Dr. Niculescu "opined that it would be commercially reasonable to assume that the Cashflow Swap Agreement would terminate, not in May 2038, but when the assets remaining in Solstice II were `de minimis.'" (Natixis Opp. Br. at 22; see Biron 7/2/12 Aff. Ex. 3: Niculescu Am. Report at 5, 25; Biron 7/2/12 Aff. Ex. 4: Niculescu Supp. Report at 2.)
In Dr. Niculescu's Amended and Supplemental Reports, MBIA "instructed [him] to assume and [he has] assumed that the claim will end when the principal balance outstanding of non-defaulted and currently paying securities reaches a $1 million threshold." (See page 638 above.) Dr. Niculescu stated:
(See pages 637-38 above, fn. in original.) As recently as April 12, 2012, MBIA requested that the Court rely on the expert reports previously submitted by the parties in connection with the summary judgment motions (see Dkt. No. 106: 4/12/12 Conf. Tr. at 5), thus, relying on the 2023 calculations in Dr. Niculescu's Amended and Supplemental Reports (see pages 637-38 above).
The Court can hardly find that the assumption underlying DiYanni's Model C Termination Payment calculation — i.e., the "scheduled end" of the CSA when Solstice's assets were de minimis — is faulty or unreasonable when it uses a similar assumption for May 2018 and the very same assumption for May 2020 that MBIA's expert Dr. Niculescu used in his Termination Payment calculations. Accordingly, DiYanni's Model C Termination Payment calculation is admissible.
The Court will now determine whether to utilize DiYanni's Model C Termination Payment calculation or Dr. Niculescu's Termination Payment calculation.
The Termination Payment calculations that survived the motion in limine are Natixis' DiYanni Model C Termination Payment calculations of $2,259,785 and $10,538,773 due from Natixis to the Issuer when valued through May 2018 and May 2020, respectively, and MBIA's Dr. Niculescu calculations of $19,187,364 or $47,059,041 due from Natixis to the Issuer with end dates of November 2023 or May 2038, respectively. (See pages 637-38, 638 n. 6 above.)
Natixis claims that as the Non-Affected Party in relation to the Additional Termination Event it is "the sole determining party for purposes of calculating a Termination Payment" and "its Termination Payment should be affirmed if it is reasonable and offered in good faith." (Dkt. No. 100: Natixis Opp. Br. at 14.) Natixis asserts that "MBIA's proposed Termination Payment is contrary to ... the Cashflow Swap Agreement, [and] is based on flawed assumptions," i.e., "the incorrect assumptions that Natixis had not properly terminated the Cashflow Swap Agreement, that Natixis was the defaulting party, and that Solstice II was therefore the determining party for purposes of calculating the Termination
MBIA contends that the Non-Affected Party is not the only party who can calculate the Termination Payment, Dr. Niculescu did not assume that Natixis was the Defaulting Party, and Dr. Niculescu's 2038 Termination Payment calculation is reasonable and should be adopted. (Dkt. No. 97: MBIA Br. at 11; Dkt. No. 104: MBIA Reply Br. at 12-15.)
Pursuant to Part 1(j)(2) of the Schedule, Natixis is the Non-Affected Party in connection with the Additional Termination Event. (See Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 5(b)(v) ("If any `Additional Termination Event' is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation)."); Dugan 7/30/12 Aff. Ex. 5: Schedule Part 1(j)(2) ("Party B [Solstice] will be the sole Affected Party in connection with this Additional Termination Event.").) For purposes of calculating an Early Termination Payment, Affected Party is synonymous with Defaulting Party, and Non-Affected Party is synonymous with Non-Defaulting Party. (See Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 6(e)(ii)(1) ("references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively").) The Non-Affected Party should calculate the Termination Payment. (See Dugan 7/30/12 Aff. Ex. 9: Anthony C. Gooch & Linda B. Klein, Documentation for Derivatives: Annotated Sample Agreements & Confirmations for Swaps & Other Over-the-Counter Transactions 90 (3d ed. 1993) ("When there is only one Affected Party, the justification for allowing only the non-Affected Party to calculate the Settlement Amount is that a considerable distortion could occur if the Affected Party did the calculation....").)
Dr. Niculescu, however, testified at his deposition that he performed his calculations with the assumption that Natixis was the Defaulting Party. (See Dugan 7/30/12 Aff. Ex. 6: Niculescu Dep. at 80 ("[M]y understanding for the purposes of doing my analysis is that MBIA maintains that Natixis is the defaulting party.").)
(Dkt. No. 97: Biron 7/2/12 Aff. Ex. 5: Niculescu Reply Report at 11-12; see also Dkt. No. 104: Niculescu Aff. ¶¶ 6-8 (stating that he "assumed that Natixis was the determining party").) It is not clear what assumptions Dr. Niculescu made with respect to who was the Non-Affected Party and who was the Affected Party, and how such assumptions affected his Termination Payment calculations.
Even if the Court were to look to extrinsic evidence to determine whether the CSA was only a liquidity enhancement vehicle or also a credit enhancement vehicle, the evidence that Natixis relies on is not dispositive. With respect to the internal MBIA documents that use the term liquidity, Natixis selectively quoted helpful language and omitted language that would support credit enhancement. (See Dkt. No. 115: MBIA Supp. Opp. Br. at 13, citing Dugan 11/19/12 Aff. & Exhibits thereto.) Indeed, in context, it is clear that the focus was on liquidity because the credit issue was viewed at the time as basically risk free — until later, when the market collapsed.
With respect to the fee level associated with the CSA, DiYanni stated that the "fee level associated with the Cash-flow Swap (0.065% per annum) is further evidence... that the role envisioned for the Cash-flow Swap provider was limited to liquidity provision." (Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 10, 41.) DiYanni later testified that the fee would be approximately 0.215% for liquidity and credit support of the interest payments, and approximately 0.453% for credit protection to both interest and principal. (Biron 7/2/12 Aff. Ex. 10: DiYanni Dep. at 145-47.) While it is clear that the CSA provided liquidity enhancement to the interest and the MBIA Swap provided credit protection to the principal, it is disputed as to who provided credit protection to the interest. The MBIA Swap Fee was 0.085%, nowhere near the fee levels put forth by DiYanni for credit protection. (See page 633 above.) Moreover, the MBIA Swap Fee (0.085%) is relatively similar to the CSA Fee (0.065%), as are the actual fees received through November 2009. (See pages 632-33, 633 above.) The extrinsic evidence Natixis relies on hardly establishes that the purpose of the CSA was to provide only liquidity support to the interest.
The key difference between DiYanni's Model C and Dr. Niculescu's calculation is the assumption of when the Cash Flow Swap would end. (See, e.g., MBIA Reply Br. at 10-11 ("The difference between Dr. Niculescu's calculation and Mr. DiYanni's Model C calculation is driven by the following different assumptions: (i) Dr. Niculescu valued the Cashflow Swap through its scheduled end which, based on his projection, is May 2038, and (ii) Mr. DiYanni incorrectly failed to value the Cashflow Swap through its scheduled end....").) The Court, however, rejects MBIA's assumption that the Early Termination Payment must be valued through May 2038, the legal maturity of the Notes. While Judge Batts held that "Natixis was required to account for the value of the Cash Flow Swap through its scheduled end" (see page 635 above), she did not hold that it must be valued through May 2038 or the Notes' legal maturity. MBIA asserts that the CSA's scheduled end is when the Notes "`cease to be Outstanding,'" and the Notes will cease to be outstanding at their legal maturity in May 2038 or when they are paid off in full. (See page 651 above.) Natixis contends that the "Notes
Moreover, both DiYanni and Dr. Niculescu opined that it would be commercially reasonable to assume that the Swap would terminate when Solstice would have de minimis cash flows. (Compare Biron 7/2/12 Aff. Ex. 3: Niculescu Am. Report at 3 ("In making projections of future cash flows, various assumptions were made that I believe to be reasonable about future performance of assets and about the functioning of Solstice II."), Biron 7/2/12 Aff. Ex. 4: Niculescu Supp. Report at 2 ("In my earlier report, I proposed that Solstice II would reasonably end when all possible future cash had been received from the securities that underlay the structure and I projected that to happen in May 2023."), and Dugan 7/30/12 Aff. Ex. 6: Niculescu Dep. at 173-74 ("Yes, that is, I think, one very reasonable date [i.e., 2023] that one can consider. There may be other dates, but I thought that was one very reasonable date.... At that point, the projections show that there will be only one million dollars of principal balance left outstanding on the assets that underlie the Solstice II transaction. That strikes as a de minimis number.... And, therefore, I was asked to make the assumption, which I thought was a reasonable assumption, that the valuation should be cut off at the time that the projected principal balance declined below a million dollars."), with Biron 7/2/12 Aff. Ex. 8: DiYanni Report at 39 ("In my opinion it is not reasonable to expect that the Cash-flow Swap would continue beyond the first date of May 2018 presented below. I have also provided calculations to a second (or alternative) date of May 2020.").)
The Court adopts Natixis' May 2020 Model C Termination Payment calculation, which is very similar to Dr. Niculescu's calculation. Both DiYanni and Dr. Niculescu performed their calculations as of November 9, 2009 (see pages 636-37, 638 above), used a discount rate of LIBOR +200 bps (see pages 636-37, 638 above), and assumed that the Rabobank Hedge Agreement had not terminated (see pages 636-37, 638 n. 6 above). In addition, DiYanni and Dr. Niculescu both used an end date when the principal balance outstanding on non-defaulted and currently paying securities in the Asset Portfolio would be less than $1 million, 2020 and 2023 respectively. (See pages 637-38 above.) While DiYanni's and Dr. Niculescu's calculations vary, the Court adopts DiYanni's calculation because Natixis is the Non-Affected Party.
For the reasons discussed above, the Court finds that a Termination Payment of $10,538,773 is due from Natixis. The Clerk of Court shall enter judgment in coordination with this Opinion and Judge Batts' ruling on the summary judgment motion.
(Biron 7/2/12 Aff. Ex. 2: Indenture § 6.2.)
(3/28/12 Order at 6-7, quoting Dugan 7/30/12 Aff. Ex. 4: Master Agmt. § 6(c)(ii).) If "`a Cashflow Swap Cancellation Event has occurred and is continuing,' the amount of Natixis' required payment to the Issuer on that date is zero." (3/28/12 Order at 7, quoting Biron 7/2/12 Aff. Ex. 6: Confirmation at 2.)
(Dkt. No. 100: Dugan 7/30/12 Aff. Ex. 6: Niculescu Dep. at 173-74.)
(See also Dugan 7/30/12 Aff. Ex. 6: Niculescu Dep. at 117-18.)
