The opinion of the court was delivered by: Denise Cote, District Judge
The plaintiff in this action does not want to terminate its participation in this commercial endeavor prematurely and thereby risk a claim that it has breached its contractual obligations. As a result, it seeks a declaration that events triggering its right to terminate have already occurred. In the meantime, it has brought a motion for a preliminary injunction to prevent a distribution of proceeds to the other participants in the endeavor until it has had an opportunity to obtain both a declaration that it may terminate its participation in the endeavor and then a multi-million dollar payment it contends is now due upon the proper exercise of its termination rights.
Coöperatieve Centrale Raiffeisen-Boerenleenbank, B.A. ("Rabobank") filed this action on November 6, 2008, for a declaratory judgment and permanent injunction. This Opinion and Order addresses its motion for a preliminary injunction filed on November 13, 2008 against Brookville CDO I Ltd. ("Brookville") and its trustee Wells Fargo Bank, N.A. ("Wells Fargo") to prevent the monthly distribution of certain funds set to occur on December 10, 2008.*fn1 The motion was fully submitted on December 1.
At a December 1 conference with the Court, the hearing on plaintiff's preliminary injunction motion was set for December 8, 2008. With the parties' agreement, the affidavits submitted by the parties' witnesses with the motion papers constitute the direct testimony of the witnesses. On December 5, the parties agreed to waive cross-examination of the witnesses and to rely solely on the witness affidavits and documentary evidence that had been submitted to the Court. On December 8, the parties presented their oral arguments on the motion.
The plaintiff's sole witness is Sara C. Lee, the Managing Director and Head of U.S. Origination and Sales at Rabobank New York Branch. The defendants' witnesses are Steven H. Kasoff, a Senior Portfolio Manager of Elliott Management Corporation ("Elliott Management"), and Carol Tracey Gibson, a Vice President in the Asset Securitization Group of Wells Fargo.
On December 9, and Order informed the parties that the motion for a preliminary injunction was denied. The following constitutes this Court's findings of fact, set forth principally but not exclusively in the section titled Findings of Fact, and conclusions of law in support of that Order.
Formation and Purpose of Brookville
Merrill Lynch & Co. ("Merrill Lynch") formed Brookville in 2007 under the laws of the Cayman Islands as a special purpose vehicle known as a collateralized debt obligation or CDO. Brookville issues notes ("Notes") secured by pools of collateralized debt securities. The Notes are structured in layers or tranches that correspond to the noteholders' rights to receive payment. The cash flow generated by the collateral repays the noteholders, provides a return to equity holders, and pays fees related to its business.
Brookville makes its distributions once a month on the 10th day of the month or the next business day. Wells Fargo oversees this distribution by following a Priority of Payments provision or "waterfall" in the Indenture which established Brookville. Where there is a default on payments on the debt obligations which constitute the collateral, the waterfall provision determines which parties bear the impact of the shortfall.
There are actually three waterfall provisions, one each for interest proceeds, principal proceeds and liquidation proceeds.
The portfolio manager for the collateral ("Collateral Manager") may sell individual debt securities in the portfolio "at any time" it determines that the security has become a Credit Risk Security, as defined in the Indenture and its associated documents. Section 12.1 of the Terms Supplement to the Indenture provides that "the Issuer will not sell or otherwise dispose of any Collateral Debt Security; provided that the Issuer (upon the direction of the Collateral Manager to the Issuer and the Trustee)" may sell inter alia any "Defaulted Security" or "Credit Risk Security." This allows Brookville to obtain the best price for its collateral.
At the time Brookville was created, it entered into a Hedge Agreement with Rabobank to provide Brookville with a hedge against a change in interest rates. Rabobank is a banking association headquartered in The Netherlands. Rabobank also provided $8,551,000 that Brookville used to pay its initial expenses and to invest in its collateral.*fn2 The Hedge Agreement gives Rabobank a right to monthly payments from Brookville. Those payments are secured by Brookville's asset portfolio and cash flows. Under each of the three waterfalls, Rabobank ranks fourth in order of priority, but is senior to every tranche of Brookville noteholders. In the event Rabobank terminates the Hedge Agreement, it is entitled to a termination payment.
Rabobank's right to terminate the Hedge Agreement is contractually defined, and includes the right to terminate in the event of a defined default under the Indenture, followed by the acceleration of the Notes and the liquidation of any or all of the collateral. To terminate the Hedge Agreement, Rabobank must provide written notice of the termination and identify a date for the termination that is no later than twenty days from the notice or earlier than the day following the notice.
There are several documents that govern Brookeville's creation and operation. An Indenture and accompanying Terms Supplement were executed on April 26, 2007 among Brookville, a related entity, and Brookville's trustee Wells Fargo. There is also the Hedge Agreement of the same date between Rabobank and Brookville, which consists of a Master Agreement, its Schedule, and a Confirmation. The Indenture refers to Rabobank as the Hedge Counterparty and as a third-party beneficiary. The parties' arguments on this motion concentrate on two contractual provisions: one from the Terms Supplement to the Indenture which is entitled "Preservation of Collateral," and another from the Schedule to the Hedge Agreement which defines the "Additional Termination Event."
The relevant provision from the Indenture's Terms Supplement, Section 5.5(a), provides:
Section 5.5 -- Preservation of Collateral
(a) If an Event of Default shall have occurred and be continuing when any Class of Notes is Outstanding (or the Commitment Period Termination Date has not occurred), the Trustee shall not terminate any Hedge Agreement (unless the Issuer shall have entered into a replacement Hedge Agreement for a terminated Hedge Agreement pursuant to Section 16.1 hereof) and shall retain the Collateral securing the Notes intact, collect and cause the collection of the proceeds thereof and make and apply payments and deposits and maintain all accounts in respect of the Collateral and the Notes in accordance with the Priority of Payments and the provisions of Articles X, XII, and XIII unless the Notes have been declared immediately due and payable (and such declaration and its consequences have not been rescinded and annulled) and any of the following conditions are met:
(i) in the case of an Event of Default (other than as specified in clause (a)(i) of the definition thereof with respect to the Class A-1 Notes): (A) the Trustee determines that the anticipated proceeds of a sale or liquidation of the Collateral (after deducting the reasonable expenses of such sale or liquidation) would be sufficient to discharge in full the amounts then due and unpaid on the Notes for principal and interest (including the Deferred Interest Amounts, Defaulted Interest and interest on Defaulted Interest) and Commitment Fee and due and unpaid Administrative Expenses, and any accrued and unpaid amounts payable by the Issuer pursuant to each Hedge Agreement, including termination payments, if any (assuming, for this purpose, that each Hedge Agreement has been terminated by reason of the occurrence of an event of default or termination event with respect to the Issuer) in accordance with the Priority of Payments; or (B) a Special Majority of each Class of Notes voting as a separate Class and each Hedge Counterparty (unless no termination payment, including any accrued and unpaid amounts, would be owing by the Issuer to such Hedge Counterparty upon the termination thereof by reason of the occurrence of an event of default under any Hedge Agreement with respect to the Issuer), subject to the provisions of this Indenture, direct the sale and liquidation of the Collateral;
(ii) the Holders of at least 66 2/3% in Aggregate Outstanding Amount of each Class of Notes, voting as a separate Class and each Hedge Counterparty (unless no early termination payment, including any accrued and unpaid amounts, would be owing by the Issuer to such Hedge Counterparty upon the termination thereof by reason of an event of default or termination event under the relevant Hedge Agreement with respect to the Issuer), subject to the provisions hereof, direct the sale and liquidation of the Collateral;
(iii) a Majority of each Class of Notes (voting as a separate Class) direct the sale and liquidation of the Collateral if (A) an Event of Default has occurred and is continuing pursuant to Section 5.1(a) in respect of the Class A-1 Notes or (B) an Event of Default has occurred and is continuing pursuant to Sections 5.1(j) or (k.)
The Trustee shall give written notice of the retention of the Collateral to the Issuer with a copy to the Co-Issuer, the Hedge Counterparties, the Collateral Manager and the Holders of the Notes of the Controlling Class. So long as such Event of Default is continuing, any such retention pursuant to this Section may be rescinded at any time when any of the conditions specified above exists.
If any one of the applicable conditions above to the liquidation of the Collateral is satisfied, the Trustee will liquidate the Collateral and, on the sixth Business Day (the "Accelerated Maturity Date") following the Business Day (which shall be the Determination Date for such Accelerated Maturity Date) on which the Trustee notifies the Issuer, the Collateral Manager, each Hedge Counterparty and each Rating Agency that such liquidation has been completed, apply the proceeds of such liquidation in accordance with the Liquidation Waterfall. Notwithstanding the foregoing, in no event shall any application of the proceeds of any sale or liquidation of the Collateral following an Event of Default occur prior to the earlier of (x) the sixth Business Day after the date on which any of the conditions set forth above is satisfied and (y) the ...