PAUL A. ENGELMAYER, District Judge:
At issue in this interpleader action is whether Wells Fargo Bank, N.A. ("Wells Fargo"), the Trustee responsible for the assets held in a collateralized debt obligation ("CDO"), is obliged, under the terms of the indenture under which the
The Preferred Shareholders have approved a sale of certain collateral here, in response to a second offer. The decisive issue is whether the unusual first offer for that collateral was valid. To induce the Preferred Shareholders to approve the sale of particular collateral, the entity that made the first offer included, in addition to a $500,000 payment for the collateral, a separate $250,000 side payment to be kept by the Preferred Shareholders. The Noteholders describe this $250,000 side payment as a "bribe," and as upending the CDO's payout structure. They argue that the first offer was therefore invalid, and thus could not trigger the indenture provision that empowers the Preferred Shareholders to approve a second, superior offer. However, the second offeror disputes the point. It has demanded that Wells Fargo, as Trustee, approve its offer.
Wells Fargo brought this interpleader action to resolve this dispute. Several parties have now moved for judgment on the pleadings. For the reasons that follow, the Court holds that the first offer to buy the collateral was not valid, and that Wells Fargo therefore is not required (or authorized) to sell the collateral in question in response to the second offer.
The Tropic IV CDO (hereinafter, the "CDO") is a CDO issued by Tropic IV CDO Ltd. (the "Issuer") and Tropic IV CDO Corp. (together with the Issuer, the "Co-Issuers"). Compl. ¶ 1; Montrose Ans. ¶ 67. By a confidential offering circular dated November 12, 2004 (the "Offering Circular"), the Co-Issuers offered for sale a series of six classes of Notes with an aggregate principal balance of $318.5 million (the "Notes") to investors, `with the Notes to be secured by a portfolio of fixed income assets (the "Portfolio Collateral"). Indenture § 2.2; Waterfall Ms. ¶ 50. The Notes were issued pursuant to an indenture dated November 18, 2004 (the "Indenture") that granted Wells Fargo, as Trustee, a first priority security interest in all right, title, and interest in the Portfolio Collateral and other related assets. See Indenture, Granting Clause. Also on or
Wells Fargo has at all times acted as Trustee for the CDO. See Indenture; Compl. ¶ 18. In that capacity, Wells Fargo holds the Portfolio Collateral, collects the proceeds payable on the Portfolio Collateral, and distributes those proceeds to Noteholders pursuant to the priority of payments, or "waterfall," described in the Offering Circular and the Indenture. Compl. 18.
The Notes are divided into six different tranches, or risk classes. Indenture § 2.2; Waterfall Ans. ¶ 50. The Indenture affords holders of the senior tranches of notes, or "Class A" notes, the highest priority to receive (1) principal and interest from the Portfolio Collateral, (2) the proceeds from sales of the Portfolio Collateral, and (3) the greatest protections against losses. Waterfall Ans. ¶ 50. By contrast, the Preferred Shareholders have no security interest in the Portfolio Collateral and have the lowest priority interest in the Portfolio Collateral. Indenture §§ 11.1(c), (d). As Judge Nathan has aptly explained in a ruling in a case arising under the same indenture, Preferred Shareholders "hold only equity in the CDO, are at the bottom of the `waterfall' of payments, and thus are the first to bear any losses if the underlying assets fail to perform." Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Grp., Inc., No. 11 Civ. 5832(AJN), 2012 WL 3542196, at *1 (S.D.N.Y. Aug. 15, 2012).
In this case, it is alleged that the CDO's underlying assets have, catastrophically, failed to perform. Given the waterfall sequence under which investors are paid, the last-in-line Preferred Shareholders will therefore almost certainly never receive payouts. See, e.g., Montrose Ans. ¶ 95; Dkt. 100 ("4/24/2015 Tr."), 31 (the preferred shareholders "have ... no expectation of recovery from selling these assets"); id. 34 ("[T]hese preferred shareholders... have no stake in the Trust."); id. 39-40 (preferred shareholders are out of the money). Realistically, they therefore have no economic stake in the price at which assets of the CDO, if sold, are sold.
Under the Indenture, however, the Preferred Shareholders have authority, at least under certain circumstances, to approve the sale of portfolio collateral. Three Indenture provisions are relevant here.
First, and most relevant, § 12.2 addresses the circumstance in which a successive offer is made for collateral that is the subject of a pending offer:
Indenture § 12.2 (entitled "Sale of Portfolio Collateral Subject to Offer or Call"). In other words, two-thirds of the Preferred Shareholders may direct the Trustee to sell an item of portfolio collateral if there are two offers for that asset and they certify that the second offer is equal to or greater than the first offer. The Preferred Shareholders therefore approve the sale, and the Trustee executes it. Judge Nathan has held this provision unambiguous as a matter of law, see Hildene Capital Mgmt., 2012 WL 3542196, at *5-6, and this Court joins in that conclusion.
Second, § 10.3(d) addresses the circumstance in which an offer has been made, in the first instance, for collateral:
Indenture § 10.3(d). Judge Nathan considered this provision in Hildene. She held § 10.3(d) ambiguous as a matter of law, in that it can be read to confer power on the Preferred Shareholders either (1) to authorize a sale of collateral or (2) to veto such a sale, while noting that the provision's language is an unusual way to formulate either concept. See 2012 WL 3542196, at *5-6 & n. 5. In light of Judge Nathan's persuasive analysis in Hildene, it is not clear whether Preferred Shareholders have the authority to direct the sale of Portfolio Collateral in the context of a single purchase offer. But, because § 12.2 is unambiguous, Preferred Shareholders may authorize the sale of Portfolio Collateral by approving the second, if higher, of two such offers.
Third, § 8.1 provides that the Trustee and the Co-Issuers may, at any time, supplement and amend the Indenture to, inter alia, "cure any ambiguity, or to correct, modify or supplement any provision which is defective or inconsistent with any other provision" in the Indenture, so long as the amendment does not adversely and materially affect "the interests of any Noteholder." Indenture § 8.1(6). The Trustee and the Co-Issuers may similarly, at any time, supplement and amend the Indenture to "correct any manifest error." Id. § 8.1(8).
Significantly, at all relevant times, a single entity held more than two-thirds of the preferred shares: interpleader defendant Wrights Mill Holdings ("WMH"), which held 67.22% of the preferred shares. Compl. ¶ 6.
On July 25, 2014, Wells Fargo received a letter from Brogno, LLC ("Brogno") offering to buy an item of Portfolio Collateral ("the Security") for a purchase price of $500,000. The Security consists of $5 million of trust preferred securities.
Wells Fargo caused copies of the Brogno offer to be delivered to, among others, the Preferred Shareholders. Id. Two interpleader defendants then notified Wells Fargo that they objected to the offer. They claimed that acceptance of the offer would
In a letter dated October 14, 2014 — nine days before the expiration of Brogno's offer — WMH, citing § 12.2 of the Indenture, directed Wells Fargo to sell the Security to "Moishe Gubin or his designee" for $800,000. Dkt. 112, Ex. D. WMH's `letter represented that Gubin had stated that he wished to buy the Security for that price, and to settle the transaction by October 23, 2014. Id. WMH's letter did not state how it had become aware of Gubin's offer. Nor has WMH subsequently come forward with the writing in which Gubin had, purportedly, communicated his offer.
Two Noteholders or groups thereof — Waterfall Asset Management ("Waterfall") and the Montrose entities (hereinafter, "Montrose")
On December 11, 2014, Wells Fargo filed this interpleader action, seeking a resolution of its obligations and the various parties' rights to the disputed collateral. Id. ¶¶ 1, 41. Specifically, Wells Fargo seeks judicial guidance as to whether it is obligated and/or permitted to sell the assets to Gubin over the objection of the objecting Noteholders. Wells Fargo interpled 10 defendants: (1) Brogno, the putative first offeror; (2) Gubin, the putative second offeror; (3) WMH, the holder of 67.22% of the Preferred Shares; (4) Cede & Co., "the registered Noteholder of record of the Notes at issue" in this case, id. ¶ 15, and a self-proclaimed "nominal party" only, Cede Ans. ¶ 4; (5) Waterfall, which has a first-priority interest in the assets at issue in this case; and (6-10) Montrose, five senior Noteholders whose interests, like Waterfall's, are higher in priority than those of the Preferred Shareholders.
Of these various parties whom Wells Fargo interpled, two are now out of the case: WMH, which never appeared despite being served and which the Court has barred from further participation in this suit, Dkt. 104; and Brogno, whose offer expired and which the Court has dismissed, Dkt. 87. Further, defendant Cede & Co. is not participating in the present motions. As for Wells Fargo, it takes no position on the merits. See Compl. ¶ 43; Dkt. 153 ("6/19/2015 Tr."), at 60. That leaves three participating parties — Gubin, Montrose, and Waterfall — as the real parties in interest. Each filed counterclaims and crossclaims, seeking the following relief:
Thus, this is essentially a three-party dispute, though two parties (Montrose and Waterfall) take virtually identical positions.
On May 13, Montrose filed a motion for judgment on the pleadings, Dkt. 107, and a brief, Dkt. 108 ("Montrose Br."), and a declaration, Dkt. 109 ("Stanley Decl."), in support. The same day, Gubin filed a motion for" judgment on the pleadings, Dkt. 110, as well as a brief, Dkt. 111 ("Gubin Br."), and an affidavit, Dkt. 112 ("Scholnick Aff."), in support. On May 20, 2015, the Court issued an order soliciting letter briefs as to the interpretation and possible applicability of § 10.3(d) of the Indenture, Dkt. 117; on May 27, 2015, Gubin and Montrose both filed their letters. Dkt. 126 ("Gubin 10.3 Letter"), 139 ("Montrose 10.3 Letter"). On June 3, 2015, Montrose filed a brief opposing Gubin's motion. Dkt. 132 ("Montrose Opp. Br."). The same day, Waterfall also filed a brief opposing Gubin's motion, Dkt. 133 ("Waterfall Opp. Br."), along with a declaration, Dkt. 134 ("Hanin Decl."). The same day, Gubin filed a brief opposing Montrose's motion. Dkt. 135 ("Gubin Opp. Br.").
On June 12, 2015, Gubin moved to strike 10 exhibits in Waterfall's declaration, Dkt. 144, and filed a brief in support, Dkt. 145 ("Gubin Strike Br."). On June 16, 2015, Waterfall filed a brief in opposition to Gubin's motion to strike. Dkt. 148 ("Waterfall Strike Opp."). The same day, the Trustee filed a brief opposing one argument that Montrose made in opposing Gubin's motion for judgment on the pleadings. Dkt. 147 ("Trustee Br."). On June 19, 2015, the Court held extended argument. See 6/19/2015 Tr.
The Court first addresses Gubin's motion to strike 10 exhibits in Waterfall's declaration, and then analyzes Gubin's and Montrose's competing motions for judgment on the pleadings.
Attached to Waterfall's submissions in opposition to Gubin's motion for judgment on the pleadings were 12 exhibits. See Dkt. 133-34. These provide, Waterfall asserts, documentary support for its allegation that Gubin, Brogno, and WMH have improperly colluded to strip the CDO of value for their private benefit. Specifically, Waterfall alleges, Brogno and Gubin made successive, and plainly inadequate, offers to purchase the Security, and induced WMH by means of the promise of monetary payments, to approve Gubin's second offer. See, e.g., Waterfall Opp. Br. 8-9. Waterfall claims that there is "an elaborate network" of business and personal connections between Gubin, Brogno, and WMH. Id. at 9. It further asserts that material factual disputes remain as to "whether `Gubin or his designee' are, in fact, purchasers separate and apart from Brogno." Id. at 17. It argues that a valid " § 12.2 purchase" requires, inter alia, that the two offers have been from separate bidders. Id. at 19. Gubin counters that these 10 of these 12 exhibits should be stricken.
The 10 exhibits at issue in Waterfall's declaration are:
Hanin Deck, Exs. 3-12; see also Gubin Strike Br.
Under Federal Rule of Evidence 201, a court may take judicial notice, at "any stage of the proceeding," of any fact "that is not subject to reasonable dispute because" it "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R.Evid. 201(b)(2), (d). When considering a Rule 12(b)(6) or Rule 12(c) motion, the Court may take judicial notice of certain matters of public record without converting the motion into one for summary judgment. See, e.g., Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ("[C]ourts must consider the complaint in its entirety, as well as ... documents incorporated into the complaint by reference, and matters of which a court may take judicial notice."); Staehr v. Hartford Fin. Serv's Grp., Inc., 547 F.3d 406, 426 (2d Cir.2008) ("[M]atters judicially noticed by the District Court are not considered matters outside the pleadings.") (citing 5 Charles Alan Wright & Arthur R. Miller, Fed. Prac. & Pro. § 1366 & n. 33 (3d ed.2004)); Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir.1991) (court may "take judicial notice of the contents of relevant public disclosure documents ... as facts `capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned`).
Pursuant to Rule 201, courts have considered newspaper articles, documents publicly filed with the SEC or FINRA, documents filed with a Secretary of State, documents filed with governmental entities and available on their official websites, and information publicly announced on certain non-governmental websites, such as a party's official website. See, e.g., N.J. Carpenters Health. Fund v. Royal Bank of Scot. Group, PLC, 709 F.3d 109, 126-27 & n. 11 (2d Cir.2013) (newspaper articles); Forgione v. Gaglio, No. 13 Civ. 9061(KPF), 2015 WL 718270, at *17 (S.D.N.Y. Feb. 13, 2015) (FINRA filings); Chevron Corp. v. Salazar, 807 F.Supp.2d 189, 193 n. 5 (S.D.N.Y.2011) (merger agreement filed with Delaware Secretary of State); Am. Cas. Co. of Reading, PA. v. Lee Brands, Inc., No. 05 Civ. 6701(SCR), 2010 WL 743839, at *4 (S.D.N.Y. Mar. 3, 2010) (corporate certificate of dissolution filed with California Secretary of State); Doron Precision Sys., Inc. v. FAAC, Inc., 423 F.Supp.2d 173, 179 n. 8 (S.D.N.Y. 2006) ("For purposes of a 12(b)(6) motion to dismiss, a court may take judicial notice of information publicly announced on a party's website, as long as the website's authenticity is not in dispute and `it is capable of accurate and ready determination.`).
As to the seven documents retrieved from official government websites — to wit, the Illinois Secretary of State, the Indiana Secretary of State, Medicare.gov, and the Westchester County clerk — it is clearly proper to take judicial notice. Courts routinely take judicial notice of such governmental records. See, e.g., Lee Brands, Inc., 2010 WL 743839, at *4 (corporate certificate of dissolution filed with California Secretary of State); Salazar, 807 F.Supp.2d at 193 n. 5 (merger agreement filed with Delaware Secretary of State); Big E. Entrn't, Inc. v. Zomba Enters., Inc., 453 F.Supp.2d 788, 797 (S.D.N.Y.2006) (judicial notice of lack of a required filing with the New York Secretary of State), aff'd, 259 Fed.Appx. 413 (2d Cir.2008) (summary order); Coleman & Co. Sec. v. Giaquinto Family Trust, 236 F.Supp.2d 288, 308-09 (S.D.N.Y.2002) (records in SEC database). Accordingly, the Court denies Gubin's motion to strike as to these seven exhibits.
As to the remaining three documents: With respect to the LexisNexis
With respect to the final two documents — printouts from entities' websites — the case law applying Rule 201 states that, "[f]or purposes of a 12(b)(6) motion to dismiss, a court may take judicial notice of information publicly announced on a party's website, as long as the website's authenticity is not in dispute and `it is capable of accurate and ready determination.'" Doron Precision Sys., 423 F.Supp.2d at 179 n. 8; accord Sarl Louis Feraud Int'l v. Viewfinder Inc., 406 F.Supp.2d 274, 277 (S.D.N.Y.2005) ("[A]ll of the facts relevant to the resolution of the matter are contained either in the complaint, or in materials (such as the records of the French proceedings or the defendant's websites) that are either referred to in the complaint or of which the Court may take judicial notice."), vacated and remanded on other grounds, 489 F.3d 474 (2d Cir.2007). Here, Gubin does not actually dispute the factual material reflected in these websites. He simply would prefer that the Court not consider these materials.
As a result, given the case law and the lack of any concrete dispute as to the accuracy of the materials at issue, the Court denies Gubin's motion to strike in its entirety.
Rule 12(c) of the Federal Rules of Civil Procedure provides that "[a]fter the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings." A motion for judgment on the pleadings is governed by "the same standard" as a motion to dismiss under Rule 12(b)(6). Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir.2010) (quoting Johnson v. Rowley, 569 F.3d 40, 43 (2d Cir.2009) (per curiam)); accord L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 429 (2d Cir.2011). Thus, the Court accepts all of the non-movant's factual allegations as true and draws all reasonable inferences in the non-movant's favor. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
To survive a motion for judgment on the pleadings, a party must plead sufficient factual allegations "to state a claim for relief that is plausible on its face," id. at 570, 127 S.Ct. 1955, meaning that the complaint must include "factual content that
"On a 12(c) motion, the court considers the complaint, the answer, any written documents attached to them, and any matter of which the court can take judicial notice for the factual background of the case.'" L-7 Designs, Inc., 647 F.3d at 422 (quoting Roberts v. Babkiewicz, 582 F.3d 418, 419 (2d Cir.2009)). The Court may also review any document incorporated by reference in one of the pleadings. Sira v. Morton, 380 F.3d 57, 67 (2d Cir.2004). Finally, the Court may consider a document not specifically incorporated by reference but on which the complaint relies and which is integral to it. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002).
If the allegations of a pleading "are contradicted by documents made a part thereof, the document controls and the court need not accept as true the allegations of the [pleading]." Sazerac Co. v. Falk, 861 F.Supp. 253, 257 (S.D.N.Y.1994); accord Feick v. Fleener, 653 F.2d 69, 75 & n. 4 (2d Cir.1981). Thus, a motion for judgment on the pleadings "can be particularly appropriate in breach of contract cases involving legal interpretations of the obligations of the parties." VoiceAge Corp. v. RealNetworks, Inc., 926 F.Supp.2d 524, 529 (S.D.N.Y.2013).
Here, the Indenture is to be construed under New York law. See Indenture, § 13.10(a). Under New York law, the interpretation of an unambiguous contract is a question of law to be addressed by the Court. See Provident Loan Soc'y of N.Y. v. 190 E. 72nd St. Corp., 78 A.D.3d 501, 911 N.Y.S.2d 308, 309 (1st Dep't 2010); 805 Third Ave. Co. v. M.W. Realty Assocs., 58 N.Y.2d 447, 451, 461 N.Y.S.2d 778, 448 N.E.2d 445 (1983). So too is the determination whether a contract provision is ambiguous. Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 178 (2d Cir.2004) (citing W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990)). A contract is ambiguous only if "the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings." Goldman Sachs Grp., Inc. v. Almah, LLC, 85 A.D.3d 424, 924 N.Y.S.2d 87, 90 (1st Dep't 2011) (internal citation and quotation marks omitted); see also Broder v. Cablevision Sys. Corp., 418 F.3d 187, 197 (2d Cir.2005). A contract is not ambiguous simply because the parties ask the Court to construe it differently. See Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 467 (2d Cir.2010); Mt. Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347, 352, 645 N.Y.S.2d 433, 668 N.E.2d 404 (1996).
In determining the meaning of a contract, the Court "look[s] to all corners of the document rather than view sentences or clauses in isolation." Int'l Klafter Co. v. Cont'l Cas. Co., 869 F.2d 96, 99 (2d Cir.1989) (citation and internal quotation marks omitted); see also Kass v. Kass, 91 N.Y.2d 554, 566, 673 N.Y.S.2d 350,
The Court first addresses whether Gubin has standing to enforce the Indenture, because Montrose argues that Gubin does not, being "a Stranger to the contract" who has "no rights under the Indenture and no standing to enforce it." Montrose Br. 11. The Court then considers, on the merits, the cross-motions for judgment on the pleadings.
Under both federal and New York state law, challenges to standing must be raised in a party's answer or pre-answer motion to dismiss. Montrose did not do so here. Specifically, Montrose filed its Answer to Gubin's Crossclaims in March 2015 without asserting that Gubin lacked standing. See Dkt. 44, ¶¶ 50-51. Nor did Montrose raise standing during the April 24, 2015 pre-trial conference: On the contrary, Montrose's counsel — contrary to its present claim that WMH's default precludes Gubin from seeking an interpretation of the Indenture — asserted that Montrose has "no view on the existing default" as to WMH. 4/24/2015 Tr., 72.
By failing to plead the defense of standing and by making such an argument only after Gubin moved for judgment on the pleadings, Montrose thereby waived any argument that the Indenture's terms prevent Gubin from seeking an interpretation of the Indenture. As the Second Circuit held in a similar matter:
Allan Applestein TTEE FBO D.C.A. v. Province of Buenos Aires, 415 F.3d 242, 245 (2d Cir.2005) (quoting 5A Wright' & Miller, Fed. Prac. & Pro. § 1295 (3d ed.2004)); accord Wells Fargo Bank Minn., Nat'l Ass'n v. Mastropaolo, 42 A.D.3d 239, 837 N.Y.S.2d 247, 248 (2d Dep't 2007) (defense of lack of standing "is waived if not raised in an answer or in a pre-answer motion to dismiss the complaint"); Wells Fargo Bank, N.A. v. Erobobo, 127 A.D.3d 1176, 1177-78, 9 N.Y.S.3d 312 (2d Dep't 2015) (same) (collecting cases).
In any event, even if Gubin's standing were subject to a timely and meritorious challenge, the Court would still reach the merits. This interpleader action was brought by Wells Fargo, the indenture trustee, not Gubin. Wells Fargo did so to clarify its obligations, in the face of the contrary claims with which it was presented as to whether or not it is obliged (or permitted) under the Indenture to sell the Security in response to Gubin's offer. Whether or not Gubin affirmatively moved for relief in this proceeding, Wells Fargo would still need resolution as to its obligations. The Court therefore proceeds to the merits of this dispute.
The parties' cross-motions are largely, but not completely, mirror images. Gubin seeks (1) a declaration that § 12.2 of the Indenture authorizes WMH to direct
To the extent that the parties' cross-motions address whether Wells Fargo has the duty or the power under § 12.2 to sell the Security to Gubin in light of the successive Brogno and Gubin purchase offers, the cross-motions are thus integrally interwoven. They are properly examined together. And because the Court resolves that question in the negative based on undisputed facts, there is no occasion to consider Montrose's separate arguments towards the same end.
Specifically, as explained below, the Court holds that Brogno's initial offer was on its face not a valid offer within the meaning of § 12.2, containing as it did an overt side payment to the Preferred Shareholders to induce these shareholders to approve of a sale of CDO collateral. That offer by nature invited and induced the Preferred Shareholders to disregard their duties of good faith and fair dealing. And any construction of § 12.2 — such as that propounded by Gubin — under which an offer embedding such a side payment to the decisionmaker would qualify as a valid first offer triggering § 12.2's successive-offer authority would therefore be commercially unreasonable.
Analysis begins with the Indenture's text. Section 12.2 provides that two-thirds of the Preferred Shareholders "may direct the Trustee to sell an item of Portfolio Collateral that is the subject of an Offer" if, together with their directive, the Preferred Shareholders "certify to the Trustee that the sales price for such Security is equal to or greater than the price available pursuant to such Offer." Thus, provided there is a pending "Offer" for a security, two-thirds of the Preferred Shareholders may direct the Trustee to sell that security if (1) there is then a second offer for that asset, and (2) the Preferred Shareholders certify that "the sales price" of the second offer is equal to or greater than the price available in the first offer.
The issue is whether a purchase offer such as Brogno's, given the side payment to the Preferred Shareholders embedded in it, qualifies as an "Offer." The Court first considers the definition of "Offer" in the Indenture. The Indenture defines "an Offer," in relevant part, as follows: "With respect to any security, ... any offer by ... any ... person made to all of the holders of such class of security to purchase or otherwise acquire all such securities." Indenture, § 1.1.
Black's Law Dictionary defines "offer" as "to present for acceptance or rejection," see http://thelawdictionary.org/offer/; Merriam-Webster's Dictionary defines "offer" as "the act of giving someone the opportunity to accept something" and "a presenting of something for acceptance," see http://www.merriam-webster.com/inter?dest=/dictionary/offer (both websites were last visited August 31, 2015). Thus, the term "offer" necessarily implies something that is capable of being accepted. The case law is in accord. Cf, e.g., Grp. One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1048 (Fed.Cir.2001) (holding that, in determining whether correspondence was an "offer" sufficient to satisfy phrase "subject of a commercial offer for sale," "Only an offer ... which the other party could make into a binding contract by simple acceptance (assuming consideration), constitutes an offer for sale"), cert. denied, 534 U.S. 1127, 122 S.Ct. 1063, 151 L.Ed.2d 967 (2002); Elite Licensing, Inc. v. Thomas Plastics, Inc., 250 F.Supp.2d 372, 389 n. 20 (S.D.N.Y.2003) (same).
The key question, then, is whether an offer like Brogno's was capable of acceptance. Did the fact that Brogno's offer embedded a side payment intended to induce approval from the entity empowered to authorize the sale of CDO portfolio collateral make the offer invalid?
The Court holds that Brogno's offer was invalid and not capable of acceptance. Simply put, the Preferred Shareholders could not approve Brogno's offer because accepting a side payment to exercise their authority to decide whether to approve a sale would blatantly breach their implied duty of good faith and fair dealing, owed to the other stakeholders in the CDO. Under New York law, "[i]mplicit in every contract is a covenant of good faith and fair dealing" that "embraces' a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Legend Autorama, Ltd. v. Audi of Am., Inc., 100 A.D.3d 714, 716, 954 N.Y.S.2d 141 (2d Dep't 2012) (citations and internal quotation marks omitted). "Even if a party is not in breach of its express contractual obligations, it may be in breach of the implied duty of good faith and fair dealing... when it exercises a contractual right as part of a scheme to realize gains that the contract implicitly denies or to deprive the other party of the fruit (or benefit) of its bargain." Elmhurst Dairy, Inc. v. Bartlett Dairy, Inc., 97 A.D.3d 781, 784, 949 N.Y.S.2d 115 (2d Dep't 2012) (citations and internal quotation marks omitted). And where "a contract confers decisionmaking power on a single party, the resulting discretion is nevertheless subject to an obligation that it be exercised in good faith." Travellers Int'l, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1575 (2d Cir.1994); accord Carvel Corp. v. Diversified Mgmt. Grp., Inc., 930 F.2d 228, 231 (2d Cir.1991) (contractual discretion did not relieve plaintiff of its duty to act in good faith); see also Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 303, 765 N.Y.S.2d 575 (1st Dep't 2003)
These principles apply straightforwardly in this case. Section 12.2 "confers decisionmaking power on a single party," the Preferred Shareholders, but their "discretion is nevertheless subject to an obligation that it be exercised in good faith." Travellers Int'l, A.G., 41 F.3d at 1575. For the Preferred Shareholders to accept $250,000 for approving a sale would flout their duty to the other stakeholders in the CDO to make a good-faith decision, on the merits, as to whether to sell particular collateral at a particular price. The point is illustrated by assuming a "low-ball" purchase offer for particular CDO collateral that a neutral decisionmaker would have no reason to accept. But for the side offer, the Preferred Shareholders would presumably not accept such an offer. But a large side payment like Brogno's, which rewards approval of an offer but not its disapproval, profoundly realigns the Preferred Shareholders' incentives. It gives the Preferred Shareholders the proverbial 250,000 reasons to approve a sale, even if on the merits the price offered by Brogno were objectively unreasonably low.
While a side payment to the decisionmaker as to CDO asset sales would be problematic under any circumstances, it is particularly so under these. The Preferred Shareholders, all agree, have no realistic prospect of realizing any recovery from the CDO.. They therefore have no "skin in the game." Where once their status as the entities on the lowest level of the payment waterfall made them effective virtual representatives for the other stakeholders, because they had an obvious interest in insisting on a fair sales price for CDO collateral, the Preferred Shareholders no longer have any economic stake in that price. The only force impelling them to drive a hard bargain with a would-be buyer such as Brogno is their implied duty of good faith and dealing. But if the buyer were permitted to offer a $250,000 side payment contingent on acceptance of his purchase offer, that impulse to insist on a fair price might well be overcome by monetary self-interest.
And the need for the decisionmaker to be conflict-free and rigorously independent is particularly acute given the relative illiquidity of, and the complex and subjective valuation process as to, many CDO assets. Whether the sales price for particular CDO collateral is fair may not be apparent on its face — the decisionmaker may need to take account of complex factors and perhaps obtain expert guidance (e.g., as to the relevant real-estate market) before making that assessment. Unlike in liquid markets involving transparent sales of like commodities, the CDO's other stakeholders will not necessarily know that the price approved by the Preferred Shareholders was reasonable. This magnifies the potential for abuse — for approval by the Preferred Shareholders of a sale at an unreasonably low price — where these shareholders are monetarily incented to approve a sale.
The side payment embedded in Brogno's offer therefore cannot be squared with the Preferred Shareholders' duty of fair dealing and duty to exercise their discretion in good faith. Therefore, Brogno's offer could not have been accepted, and did not constitute an "Offer" within the meaning of § 12.2.
In any event, apart from the Court's construction of the term "Offer," to construe § 12.2 to recognize as a qualifying first offer an offer embedding a side payment to the decisionmaker would yield a commercially unreasonable interpretation. That is because doing so would upend the payment structure of the CDO, by steering a portion of the buyer's aggregate payout to the entities at the bottom of the payment waterfall, entities that otherwise stand, under the Indenture, to recover no money. The Preferred Shareholders have neither a security interest nor, by now, a realistic beneficial interest in the CDO's collateral. For them to receive $250,000 of the buyer's aggregate purchase price would subvert the Indenture provisions that give the Noteholders categorical priority over the Preferred Shareholders with respect to the fruits of collateral sales. Section 5.10 — entitled "Unconditional Rights of Noteholders to Receive Principal and Interest" — grants Noteholders the "absolute and unconditional" right to receive the benefits of the Portfolio Collateral "[n]otwithstanding any other provision in this Indenture" and subject to the priority rights of other Notes in the waterfall. Indenture § 5.10(a)-(f); see also id. § 10.3(e)(i) ("[T]he Trustee shall credit all proceeds received by it from the disposition of Portfolio Collateral to the Collection Account," which is then applied to the waterfall.); § 10.2; § 11.1. And the Indenture's opening clause declares that "[a]ll representations, warranties, covenants and agreements made by the Co-Issuers herein are for the benefit and security of the Noteholders and the Trustee." Indenture, Preliminary Statement. An offer term that steers part of the purchase price to the lower echelons of the payment waterfall would contravene these terms. No rational investor would have acquired the CDO's secured notes had it understood that the CDO's junior equity holders' authority under § 12.2 gave them the ability, effectively, to flip the sequence of CDO beneficiaries, so as to enrich themselves personally, and denude the CDO of value.
It is black-letter law that courts must reject interpretations of agreement provisions that are commercially unreasonable or illogical. See, e.g., Katel Ltd. Liab. Co. v. AT & T Corp., 607 F.3d 60, 65 (2d Cir.2010) ("declin[ing] to endorse" "interpretation of the Agreement [that] leads to an illogical result"); Cole v. Macklowe, 99 A.D.3d 595, 596, 953 N.Y.S.2d 21 (1st Dep't 2012) ("[It is a] well settled principle that a contract should not be interpreted to produce an absurd result, one that is commercially unreasonable, or one that is contrary to the intent of the parties."), aff'd, 125 A.D.3d 44,
Such is the case here. The "business purposes sought to be achieved" through this CDO as reflected in the Indenture, Newmont Mines Ltd., 784 F.2d at 135, were to benefit first the highest priority investors, see Indenture §§ 5.10; 10.3(e)(i); 11.1, not to enrich the lowest priority investors at their expense. Gubin's reading of § 12.2 would permit this result and thereby turn the Indenture on its head. Indeed, at argument, strikingly, Gubin asserted that the Preferred Shareholders had authority under § 12.2 to direct the Trustee to accept a successor offer for CDO that paid the Noteholders only $1, but gave the decision-making Preferred Shareholders a resort island. See 6/19/2015 Tr., 10-11. That proposition is absurd.
Gubin makes two contrary arguments. Neither is unpersuasive.
First, he argues, Brogno's side-payment is permissible because the Indenture's definition of Offer "does not prohibit (or even mention) a consent payment." Gubin Br. 15. Gubin argues that it is improper to impute terms of limitation to § 12.2, i.e., to read the term "Offer" to mean "valid offer" or "bona fide offer." Id. at 14. But, as noted, the term "Offer" as defined in the Indenture incorporates the customary meaning of an "offer," meaning one capable of acceptance, and for the reasons stated, Brogno's was not. By Gubin's logic, an offer to the Preferred Shareholders accompanied by a gun to their heads — such that their acceptance would be a product of duress — would also be permissible because the term "offer" in § 12.2 is unconditional and does not expressly exclude that scenario, either. Simply put, that an offer is capable of acceptance — that it is valid — is implicit in the term "Offer" as used in § 12.2. It was not necessary that the parties to the Indenture enumerate every specific ground on which an offer might be invalid (e.g., fraud, duress, mistake, misrepresentation, lack of capacity).
Second, Gubin relies upon an Indenture provision (§ 6.1(a)(1)) that provides that, with certain exceptions, "no implied covenants or obligations shall be read into this Indenture against the Trustee." But this provision is inapposite. It applies to the Trustee, and reflects longstanding New York law that limits the Trustee's duties to those specified in the Indenture. See, e.g., Meckel v. Cont'l Resources Co., 758 F.2d 811, 816 (2d Cir. 1985). This limitation is specific to the
In sum, the requirements of § 12.2 were not met here because Brogno's offer, with its embedded side payment, was not one that the Preferred Shareholders could accept, consistent with their duties, and thus did not qualify as an "Offer." As a result, at the time that Gubin offered $800,000, the Security was not "the subject of an Offer." The Preferred Shareholders' direction to the Trustee to sell the Security pursuant to § 12.2 was, therefore, invalid. Gubin's motion for judgment on the pleadings therefore must be denied, and Montrose's motions for judgment on the pleadings must be granted.
Because the undisputed facts establish that the Trustee was not required or empowered under § 12.2 to sell the Security in response to Gubin's offer, there is no need to proceed to discovery. Waterfall, for example, makes various factual allegations, to the effect that Brogno and Gubin are affiliated, and/or that there has been improper collusion between them and the Preferred Shareholders. But such facts, even if established, could do no more than provide an alternative basis on which to hold that Gubin's offer did not satisfy § 12.2.
Nor is there any need to address Montrose's request for reformation of the Indenture. Montrose pled reformation as an alternative, and secondary, cause of action. Montrose Ans. ¶ 57. Primarily, Montrose sought a declaration that the Trustee lacks authority to consummate a sale of the Security to Gubin under § 12.2 "because ... there is no extant offer to purchase the Portfolio Collateral which could conceivably form the basis for any sale of the Portfolio Collateral under Section 12.2 of the Indenture." Id. The Court has granted this relief. This moots any request for reformation.
And the Court's decision creates no evident need for reformation of the Indenture. The decision today is instead a product of case-specific facts, to wit, the problematic nature of Brogno's idiosyncratic offer. The Court's decision ought not present any impediment to the Trustee's practical ability in the future to sell collateral under § 12.2. To be sure, at argument, counsel stated that in light of the ruling in Hildene that § 10.3 is ambiguous, it is unclear what authorization would suffice under § 10.3 to permit the Trustee to sell collateral in response to a first offer. But this Court has not found any such ambiguity in § 12.2, which, as Judge Nathan recognized, is differently worded from § 10.3. This Court has instead held that because Brogno's flawed offer was not an "Offer" within the meaning of § 12.2, Gubin's ensuing offer" was not a follow-on to a
The mechanism provided by § 12.2 permitting a sale of collateral hi response to the second of two offers therefore remains intact and uncompromised. Although this mechanism — requiring as it does two offers before a sale can be approved — may not be an optimal means for selling CDO collateral, no party has argued to the Court there is no means consistent with the Indenture by which CDO collateral can be sold. Further, as counsel have argued, it is possible that other provisions in the Indenture may provide separate bases for authorizing a sale. See, e.g., Indenture §§ 5.14, 10.3(d), 12.3(b). Such questions are beyond the scope of this decision. And in the event that the Trustee were to conclude that the Indenture as construed does not leave a workable means for selling portfolio collateral, the Indenture provides procedural solutions. The Indenture can be supplemented or amended by the Trustee and the Co-Issuers in certain circumstances, see, e.g., Indenture §§ 8.1(6), 8.1(8), or reformed. And to the extent there is ambiguity, the Trustee can seek clarification from a court through a trust instruction proceeding. See, e.g., In re Trusteeship Created by Am. Home Mortgage Inv. Trust 2005-2, No. 14 Civ. 2494(AKH), 2014 WL 3858506, at *12 (S.D.N.Y. July 24, 2014) ("Trust instruction proceedings are a well-established procedure by which trustees (and other affected parties) can seek judicial guidance from the court about how to resolve immediate and difficult issues of interpretation of governing documents.") (citing Mosser v. Darrow, 341 U.S. 267, 274, 71 S.Ct. 680, 95 L.Ed. 927 (1951)).
For the foregoing reasons, the Court denies Gubin's motion for judgment on the pleadings, and grants Montrose's motion for a judgment on the pleadings, to the extent that Montrose seeks a declaration that the Trustee lacks authority, under the Indenture, to sell the Security to Gubin as directed by WMH on October 14, 2014. The Court also denies Gubin's motion to strike exhibits attached to Waterfall's submissions. Because the Court's resolution of these motions leaves no live controversy, the Court denies all other requests for relief as moot. The Clerk of Court is respectfully directed to terminate all pending motions, and to close this case.
SO ORDERED.
Indenture, § 1.1.
