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Bank of New York v. First Millennium

April 8, 2008


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


In this interpleader action, several groups 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 in its role as Indenture 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. (together, "Millennium"), and RMK Advantage Fund ("RMK")-claim they are entitled to the funds because they hold notes issued by NextCard that have matured and become due and payable, but have not been fully paid. The FDIC claims that it is entitled to funds held by BNY based on its rights as the receiver of NextBank. In addition, the FDIC has asserted certain counterclaims against BNY. Those counterclaims are the subject of two present motions: BNY's motion for judgment on the pleadings and the FDIC's motion for summary judgment. This Opinion resolves those motions.


A. The Securitization Transaction

1. Basic Structure

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 receivables to repay the investors. Bank of New York v. FDIC, 453 F. Supp. 2d 82, 85-87 (D.D.C. 2006) ("NextBank I"). This securitization transaction was executed through a set of documents, including the Master Indenture, Indenture Supplements, and the Transfer and Servicing Agreement. Under these documents, NextBank (as "Transferor") transferred its receivables to NextCard, a Delaware statutory business trust. The trust (also referred to as the "Issuer") sold asset-backed notes (the "Notes") to investors (the "Noteholders"). In 2000 and 2001, the Issuer issued two series of notes: the 2000-1 Series Notes and the 2001-1 Series Notes. Each series included 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. Lower risk notes had higher priority of repayment, while higher risk notes offered higher interest rates. The Noteholders' loans were secured by collateral. BNY acts as Indenture Trustee of the trust, and represents the interests of the Noteholders in that capacity.

Under the transaction, the NextCard trust owned the credit card "receivables"-meaning the amounts owed by borrowers to pay off their NextBank credit card bills. Under the transaction documents, certain of these collections were allocated and distributed to Noteholders as payments of interest and principal. In addition, NextBank was entitled to receive distributions of Transferor Interest from the collections.

B. Subsequent Developments

Unfortunately, the transaction did not proceed as the participants had hoped. 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." NextBank I, 453 F. Supp. 2d at 85. The FDIC eventually closed the credit card accounts, and credit card holders paid down their existing balances. Class A and Class B Noteholders were fully repaid principal and interest. Class C and Class D Noteholders continued to receive interest payments; but due to substantial charge-offs, Class C Noteholders were repaid only about half their principal and Class D Noteholders were not repaid any principal. NextBank I, 453 F. Supp. 2d at 91. The amount of unpaid initial principal on the Series 2000-1 and Series 2001-1 Class C Notes is about $70 million, and on the Series 2000-1 and Series 2001-1 Class D Notes is $42 million-for a total unpaid initial principal of about $112 million.

C. Procedural History

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

After becoming NextBank's receiver in 2002, the FDIC opted to disregard an ipso facto clause in the Indenture (which would have 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. After administrative claims to the FDIC were largely denied, 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 (on behalf of the Noteholders) for conversion of funds. That action involved several claims and counterclaims; however, Count Two (for Transferor Interest) was dismissed, and all other claims (including Count Three for Transferor Interest) and counterclaims were resolved through a July 27, 2005 settlement agreement 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.*fn1 NextBank I, 453 F. Supp. 2d 82. BNY appealed the judgment.

2. The New York Interpleader Action

BNY, facing threats of litigation based on competing claims to the funds it held, commenced this interpleader action on November 16, 2006 in New York state court. As the D.C. Circuit described: "[T]he noteholders directed the Bank of New York (1) to exercise control over the receivables to repay the Notes and (2) to sue the trust for amounts outstanding on the Notes. The noteholders threatened to sue the Bank of New York if it did not comply. In turn, citing the district court's decision [NextBank I], the FDIC threatened to sue the Bank of New York if it did comply. The Bank of New York filed an interpleader action in New York state court seeking resolution of the conflicting claims to the receivables." Bank of New York v. FDIC, 508 F.3d 1, 4 (D.C. Cir. 2007). On the following day, the FDIC filed an action in the D.C. ...

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