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Rj Capital, S.A v. Lexington Capital Funding Iii

July 28, 2011

RJ CAPITAL, S.A., PLAINTIFF,
v.
LEXINGTON CAPITAL FUNDING III, LTD., LEXINGTON CAPITAL FUNDING III, LLC, MERRILL LYNCH INTERNATIONAL, HARDING ADVISORY, LLC, AND THE BANK OF NEW YORK TRUST MELLON COMPANY, NATIONAL ASSOCIATION,
DEFENDANTS.



The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.:

MEMORANDUM OPINION & ORDER

Plaintiff RJ Capital, S.A. holds debt securities ("Notes") issued by Defendants Lexington Capital Funding III, Ltd. and Lexington Capital Funding III, LLC. Plaintiff obtained the Notes in exchange for a $112 million investment it made between April and November 2008. (Am. Cmplt. ¶ 8) The Notes are governed by an indenture agreement dated as of January 11, 2007 (the "Indenture"). (Id. at ¶ 5; Yoskowitz Aff., Ex. 2 (Indenture)) The signatories to the Indenture are the Lexington Capital defendants and Defendant The Bank of New York Trust Mellon Company ("BONY"), which agreed to serve as Indenture Trustee. (Yoskowitz Aff., Ex. 2 (Indenture))

In the Indenture, the Lexington Capital defendants agree to "duly and punctually pay all principal [and] interest] . . . in accordance with the Notes . . . and this Indenture." (Id. at ¶¶ 2, 6; Yoskowitz Aff., Ex. 2 (Indenture) at § 7.1) As trustee, BONY holds the collateral securing the Notes in trust, and its duties include serving as "Paying Agent for the payment of principal and interest on the Notes." (Id. at ¶ 11 (quoting Yoskowitz Aff., Ex. 2 (Indenture) at §7.2; see also Yoskowitz Aff., Ex. 2 (Indenture) at §§ 6.17, 10.2)

The Indenture provides for the appointment of Defendant Harding Advisory, LLC as Collateral Manager (Id. at ¶ 12; Yoskowitz Aff., Ex. 2 (Indenture) at 18), and simultaneous with entering into the Indenture, Defendant Lexington Capital Fund III, Ltd. entered into a Collateral Management Agreement ("CMA") with Harding. (Id.; Yoskowitz Aff., Ex. 3 (CMA)) Under the CMA, Harding agreed to, inter alia, "supervise and direct the Disposition and Acquisition of the Collateral Debt Securities. . . supervise and direct the investment of funds on deposit in the Accounts in Eligible Invesments . . . select all Collateral to be Acquired by the Issuer in accordance with the Eligibility Criteria," and to "monitor the Collateral . . . on an ongoing basis and assist the Trustee to provide to the Issuer [certain] reports, certificates, schedules, determinations, and other data. . . ." (Yoskowitz Aff., Ex. 3 (CMA) at § 2(b)-(e))

The gravamen of the Amended Complaint is that Defendants have misapplied certain provisions of the Indenture governing principal and interest payments, to the detriment of Plaintiff. (Am. Cmplt. ¶¶ 43-56)

The Amended Complaint asserts claims of (1) breach of contract against the Lexington Capital defendants and BONY; (2) breach of fiduciary duty against BONY; (3) tortious interference with contract against Harding; and (4) unjust enrichment, diversion, and breach of the implied covenant of good faith and fair dealing against all defendants. (Am. Cmplt. ¶¶ 65-103)

All three remaining defendants*fn1 have moved to dismiss, arguing that (1) this lawsuit is barred by the "Limitation on Suits" provision in the Indenture; (2) that Plaintiff's reading of certain payment provisions of the Indenture is not plausible; and (3) that, in any event, Plaintiff has failed to state a claim as to any cause of action.

For the reasons stated below, Lexington Capital Funding III, LLC and Harding's motions to dismiss will be granted in their entirety, and BONY's motion to dismiss will be granted in part and denied in part.

BACKGROUND

I.INDENTURE PROVISIONS CONCERNING CALCULATION OF PRINCIPAL AND INTEREST PAYMENTS

Section 10.7(b) of the Indenture provides that every quarter the Issuer -- Lexington Capital Funding III, Ltd. (Yoskowitz Aff., Ex. 2 (Indenture) at 1) -- must render an accounting, referred to as a "Note Valuation Report," to the note holders and other Indenture participants. (Am. Cmplt. ¶ 21; Yoskowitz Aff., Ex. 2 (Indenture) § 10.7(b)) The Note Valuation Report sets forth, inter alia, an accounting of the principal and interest payments -- the "Principal Proceeds Waterfall" and "Interest Proceeds Waterfall" payments -- to be disbursed to noteholders "on the next Distribution Date." (Id. at ¶¶ 21-22; Yoskowitz Aff., Ex. 2 (Indenture) § 11.1(a)(i)-(ii)) Under the Indenture, "[e]ach Note Valuation Report shall constitute instructions to the Trustee to withdraw on the related Distribution Date from the Payment Account and pay or transfer amounts set forth in such report in the manner specified, and in accordance with the Priority of Payments established in, Section 11.1(a) hereof." (Yoskowitz Aff., Ex. 2 (Indenture), § 10.7(b)(26)).

Under the Indenture, the Principal Proceeds and Interest Proceeds Waterfall payments are to be calculated only "after applying funds in the Accounts in accordance with the Account Payment Priority [provision of the Indenture]." (Yoskowitz Aff., Ex. 2 (Indenture) § 11.1(a)(i), (ii)) For example, with respect to Principal Proceeds Waterfall payments, the Indenture provides:

On each Distribution Date (other than a Redemption Date, the Stated Maturity or the Accelerated Maturity Date), after applying funds in the Accounts in accordance with the Account Payment Priority, Principal Proceeds, and, to the extent described in the Sequential Payment Priority and the Modified Sequential Payment Priority, the CDS Reserve Account Excess Withdrawal Amount with respect to the related Due Period[,] will be distributed in order of priority (the "Principal Proceeds Waterfall") . . . (Yoskowitz Aff., Ex. 2 (Indenture) § 11.1(a)(ii)) (emphasis added).*fn2

"Account Payment Priority" is addressed in Section 11.1(m), which provides: Before requesting a Class A-1 Funding under the Class A-1 Swap to fund a Permitted Use, the Trustee shall apply all funds, securities and other property standing to the credit of the Accounts specified below in the order of seniority specified below in order to pay as and when due and payable each of the obligations of the Issuer listed below (the "Account Payment Priority") . . . (Yoskowitz Aff., Ex. 2 (Indenture) § 11.1(m)) (emphasis added).

The Trustee is responsible for making payments to noteholders in accordance with these procedures:

Notwithstanding any other provisions in this Indenture, but subject to the other clauses of this Article XI and Section 13.1 hereof, on each Distribution Date, the Trustee shall disburse amounts transferred to the Payment Account from the [Interest and Principal] Collection Accounts pursuant to Section 10.2 hereof as follows and for application by the Trustee in accordance with the following priorities. . . . (Fioravanti Aff., Ex. B (Indenture) at § 11.1(a))

II.THE PAYMENT DISPUTE

The Amended Complaint alleges that on or about January 12, 2009, and April 14, 2009, Lexington Capital Funding III, Ltd., the Issuer, disseminated Note Valuation Reports showing quarterly distributions. Those reports reflected Principal Proceeds Waterfall and Interest Proceeds Waterfall payments, allegedly calculated in accordance with §§ 11.1(a)(i) and (ii) of the Indenture, without application of the Account Payment Priority set forth in § 11.1(m). The Amended Complaint asserts that the non-application of the Account Payment Priority in § 11.1(m) in connection with the January and April 2009 principal and interest payments "was consistent with past practice." (Am. Cmplt. ¶¶ 38-39, 43-44, 47) The Trustee deposited payments into Plaintiff's bank account reflecting those calculations, in accordance with § 10.7(b) of the Indenture. (Am. Cmplt. ¶ 39)

Lexington Capital Funding III, Ltd. later revised the January 12 and April 14, 2009 Note Valuation Reports, however, and issued revised Note Valuation Reports for these Distribution Dates. (Am. Cmplt. ¶ 39-40) The Revised Note Valuation Reports "altered the Priority of Payments calculation to the detriment of Plaintiff." (Id. at ¶ 40) In particular, Plaintiff alleges that in issuing the Revised Note Valuation Reports, Defendants "improperly applied Section 11.1(m) and the inapplicable 'Account Payment Priority,' which provision relates exclusively to a different scenario involving a certain request for a 'Class A-1 Funding,' which, according to the Trustee, did not occur with respect to the January and April Distribution Dates."*fn3 (Id. at ¶ 43)

Plaintiff further alleges that Defendants applied the "Account Payment Priority" provision only "with respect to the calculation of principal proceeds, not interest. With regard to interest, the Interest Proceeds Waterfall calculation was oddly preserved." (Id. at ¶ 45) Application of the "Account Payment Priority" provision to the calculation of Plaintiff's Principal Proceeds Waterfall payment resulted in "substantially lower distributions for each of the January 12, 2009 and April 14, 2009 Distribution Dates," however, and led the Trustee to "withdr[a]w funds from Plaintiff's bank account in an amount of approximately five hundred thousand dollars ($500,000)." (Id. at 41)

Plaintiff alleges that it "issued written notice to the Trustee, on or about September 14, 2009 and October 5, 2009, demanding payment of the . . . distributions." (Am. Cmplt. ¶ 48) "Defendants refused and failed to return to Plaintiff the funds the Trustee withdrew from Plaintiff's bank account pursuant to the Revised Valuation Reports," however. (Id. at ¶ 48)

This action followed.

DISCUSSION

In deciding a motion brought under Fed. R. Civ. P. 12(b)(6), a court must accept all of the complaint's factual allegations as true and draw all reasonable inferences in the plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). However, a court need not accept as true "[l]egal conclusions, deductions or opinions couched as factual allegations." In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007).

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, -- U.S. --, 129 S. Ct. 1937, 1960 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of "entitlement to relief."'" Id. (quoting Twombly, 550 U.S. at 557). "Determining whether a complaint states a plausible claim for relief [is] a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950.

In determining the sufficiency of a complaint, this Court may consider "the factual allegations in [the] . . . complaint, . . . documents attached to the complaint as an exhibit or incorporated in it by reference, . . . matters of which judicial notice may be taken, [and] documents either in plaintiffs' possession or of which the plaintiffs had knowledge and relied on in bringing suit." Brass v. Am. Film Techs., Inc. , 987 F.2d 142, 150 (2d Cir. 1993)); see also Chambers, 282 F.3d at 153 (documents that are "integral" to the complaint may be considered on motion to dismiss); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (court may consider documents plaintiff relied on in framing the complaint). Here, the Court will consider the facts alleged in the Amended Complaint and the Indenture and Collateral Management Agreement on which Plaintiff's claims are predicated.

"Interpretation of indenture provisions is a matter of basic contract law." Sharon Steel Corp. v. Chase Manhattan Bank, 691 F.2d 1039, 1049 (2d Cir. 1982). "Under New York law, the initial interpretation of a contract 'is a matter of law for the court to decide.'" *fn4 K. Bell & Assocs. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir. 1996)); see also Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000) ("Construing an unambiguous contract provision is a function of the court, rather than a jury, and matters extrinsic to the agreement may not be considered when the intent of the parties can fairly be gleaned from the face of the instrument.") (citing Teitelbaum Holdings, Ltd. v. Gold, 48 N.Y.2d 51, 56 (1979)).

'"[A] written contract is to be interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed."' Rockland Exposition, Inc. v. Alliance of Auto. Serv. Providers of N.J., 08-CV-7069 (KMK), 08-CV-11107 (KMK), 2009 WL 1154094, at *5 (S.D.N.Y. Mar. 19, 2009) (quoting Terwilliger, 206 F.3d at 245). Accordingly, where a "'contract is clear and unambiguous on its face, the intent of the parties must be gleaned from within the four corners of the instrument, and not from extrinsic evidence.'" RJE Corp. v. Northville Indus. Corp., 329 F.3d 310, 314 (2d Cir. 2003) (quoting De Luca v. De Luca, 300 A.D.2d 342 (2d Dept. 2002)).

However, "[w]here there are alternative, reasonable constructions of a contract, i.e., the contract is ambiguous, the issue 'should be submitted to the trier of fact.'" K. Bell & Assocs., 97 F.3d at 637 (quoting Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 573 (2d Cir. 1993)). "An ambiguity exists where the terms of the contract 'could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'" RSL Commc'ns, PLC v. Bildirici, No. 04 Civ. 5217(RJS), 2010 WL 846551, at *1 (S.D.N.Y. Mar. 5, 2010) (quoting Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010)). "[T]he court should not find the contract ambiguous where the interpretation urged by one party would 'strain [] the contract language beyond its reasonable and ordinary meaning.'" Maverick Tube Corp., 595 F.3d at 467 (quoting Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456, 459 (1957)).

I.THE INDENTURE'S LIMITATION ON SUITS PROVISION

A.Prerequisites for Suit

Defendants argue that this action must be dismissed because of Plaintiff's failure to satisfy the prerequisites for suit set forth in § 5.8 of the Indenture. That section provides:

No Holder of any Note shall have any right to institute any Proceedings, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or ...


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