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Bank of New York v. First Millennium

May 9, 2007

THE BANK OF NEW YORK, IN ITS CAPACITY AS INDENTURE TRUSTEE OF THE NEXTCARD CREDIT CARD MASTER NOTE TRUST, INTERPLEADER PLAINTIFF,
v.
FIRST MILLENNIUM, INC., MILLENNIUM PARTNERS, L.P., RMK ADVANTAGE FUND, AND FEDERAL DEPOSIT INSURANCE CORPORATION, INTERPLEADER DEFENDANTS.



The opinion of the court was delivered by: Haight, Senior District Judge

MEMORANDUM OPINION AND ORDER

In this interpleader action, a group of investors and the Federal Deposit Insurance Corporation ("FDIC") assert competing claims to funds held by The Bank of New York ("BNY"). BNY holds those funds-which currently total about $90 million-in its role as trustee of the NextCard Credit Card Master Note Trust ("NextCard"), a trust that was established by NextBank, N.A. ("NextBank") as part of a securitization transaction. The investors, First Millennium, Inc., Millennium Partners, L.P., and RMK Advantage Fund, claim they are entitled to the funds because they hold asset-backed notes issued by NextCard that have matured and become due and payable, but have not been paid. The FDIC claims that it is entitled to funds held by BNY based on its rights as the receiver of NextBank.

The FDIC presently moves to transfer this action to the United States District Court for the District of Columbia. For the reasons set forth below, the FDIC's motion is denied.

I. BACKGROUND

A. The Securitization Transaction

This action has its genesis in a securitization transaction undertaken by NextBank, a national banking association that issued consumer credit cards. In basic terms, NextBank "created a trust, transferred its receivables to this trust, ordered the trust to sell notes to investors, and used the proceeds to pay merchants for charges by credit card holders"; the trust then used the receivables to repay the investors. Bank of New York v. FDIC, 453 F. Supp. 2d 82, 85-87 (D.D.C. 2006). This securitization transaction was executed through a master indenture agreement and related supplements (the "Indenture"). The Indenture established a trust, NextCard, which held NextBank's receivables. The trust sold asset-backed notes (the "Notes") to investors (the "Noteholders"), including First Millennium, Inc., Millennium Partners, L.P., and RMK Advantage Fund.*fn1 The trust offered four classes of notes (Classes A, B, C, D) with differing levels of risk-from Class A, the lowest risk, to Class D, the highest risk. Higher risk notes offered higher interest rates. BNY acts as Indenture Trustee of the trust and represents the interests of the Noteholders. The Indenture allows BNY to hold and control collateral funds from NextCard under certain circumstances.

On February 7, 2002, the FDIC was appointed as NextBank's receiver because "NextBank's undercapitalization and practice of extending credit to subprime borrowers had put the bank at risk for failure." Bank of New York v. FDIC, 453 F. Supp. 2d 82, 85 (D.D.C. 2006). The FDIC eventually closed the credit card accounts, and credit card holders paid down their existing balances.

Class A and B Noteholders were fully repaid principal and interest. Class C and D Noteholders continued to receive interest payments, but Class C Noteholders were repaid only half their principal and Class D Noteholders were not repaid any principal. Id. at 91. The current dispute involves Class C and Class D Noteholders' attempts to recover principal funds.

B. The D.C. Conversion Suit ("NextBank I")

After becoming NextBank's receiver, the FDIC opted to disregard an ipso facto clause in the Indenture (which triggered early amortization based on NextBank's receivership), and maintained that it was entitled to do so under the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"). The Noteholders contended that the FDIC had improperly deprived them of funds to which they were entitled. In October 2002, the Noteholders presented their claims to the FDIC under the administrative claims process required by FIRREA, and the FDIC largely denied those claims.

Subsequently, BNY commenced suit against the FDIC on June 5, 2003 in the United States District Court of the District of Columbia (the "D.C. Court"), seeking a judgment in favor of BNY (on behalf of the Noteholders) for conversion of funds.*fn2 That action involved several claims and counterclaims; however, Count Two was dismissed, and all other claims and counterclaims were resolved through settlement except for Count Six, a claim for conversion related to the FDIC's failure to recognize the ipso facto clause in the Indenture. On September 27, 2006, Judge Huvelle of the D.C. Court granted judgment on Count Six in favor of the FDIC, finding that the ipso facto clause was void and unenforceable under FIRREA. Bank of New York v. FDIC, 453 F. Supp. 2d 82 (D.D.C. 2006) ("NextBank I"). BNY appealed the judgment on October 27, 2006, and that appeal is currently pending before the D.C. Circuit.

C. The New York Interpleader Action

BNY commenced this interpleader action on November 16, 2006 after facing threats of litigation based on competing claims to funds it held. The Noteholders had instructed BNY to withhold certain funds from the FDIC, contending that those funds were the property of the Noteholders based on the early amortization of the Notes.*fn3 After BNY informed the FDIC of the Noteholders' instructions, the FDIC threatened to sue BNY if the funds were not remitted to the FDIC-as the FDIC contended was required under NextBank I. When informed of the FDIC's threat, the Noteholders stated that they would seek to hold BNY liable for any loss of funds if BNY complied with the FDIC's demand. As a result of these litigation threats based on competing claims to the funds, BNY commenced the present interpleader action in New York state court. On the following day, the FDIC filed an action in the D.C. Court ("NextBank II") alleging that the New York interpleader action was an improper attempt to relitigate issues that had already been decided in NextBank I, and seeking an injunction against such relitigation.*fn4

On or about November 20, 2006, the Noteholders filed a motion for summary judgment in the New York state court interpleader action. The FDIC then removed the interpleader action to federal court in the Southern District of New York on November 21, 2006. On December 7, 2006, this Court extended sine die the FDIC's time to oppose the Noteholders' motion and to move to dismiss or answer BNY's complaint. On December 21, 2006, this Court granted a limited stay of the interpleader action until Judge Huvelle's decision in NextBank II. This Court concluded that considerations related to the "proper and efficient and prompt administration of justice" justified a stay until Judge Huvelle determined whether claims in the interpleader action had already been decided by NextBank I.

D. The D.C. Injunction Action ("NextBank II")

As noted earlier, the FDIC filed an action in the D.C. Court on November 17, 2006 alleging that claims in the New York interpleader action had already been decided in NextBank I, and seeking ...


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