United States District Court, S.D. New York
U.S. BANK, Plaintiff,
ILDA, LLC et al., Defendants.
THOMAS P. GRIESA, District Judge.
U.S. Bank National Association, acting as an indenture trustee, brings this interpleader action to determine which creditor has priority in certain assets held by U.S. Bank. Two interpleader defendants, from different classes of creditors, move for summary judgment based on their interpretation of the indenture agreement.
This case turns on the proper interpretation of an indenture governing the rights of holders of notes issued by Alesco Preferred Funding XV, Ltd. Alesco issued different classes of notes secured by a pool of collateral. The classes of notes include Class A-1 Notes and Class A-2 Notes, among others. U.S. Bank acts as the Indenture Trustee.
Interpleader defendant ILDA, LLC is a holder of Class A-1 notes. Interpleader defendants Montrose Credit I, LLC; Montrose Credit II, LLC; Montrose Credit III, LLC; and Montrose Credit IV, LLC (collectively, "Montrose Credit") are holders of Class A-2 notes.
The Indenture sets the order of priority for payment of interest and principal to the note holders. In the ordinary course, the Indenture subordinates Class A-2 notes to Class A-1 notes only with respect to principal. In other words, after the trustee pays outstanding interest on the Class A-1 notes, the trustee must pay interest on the Class A-2 notes before paying any principal on the Class A-1 notes.
The question in dispute is whether, after an event of default and acceleration, holders of Class A-1 Notes must be paid in full before holders of Class A-2 Notes receive payments of interest. Section 13.1(c) of the Indenture states:
Anything in this Indenture or the Notes to the contrary notwithstanding, the Co-Issuers and the Holders of the Class A-2 Notes agree for the benefit of the Holders of the Class A-1 Notes that with respect to payments of principal the Class A-2 Notes and the Issuer's rights in and to the Collateral (with respect to the Class A-1 Notes, and as applied to this paragraph, the "Subordinate Interests") shall be subordinate and junior to the Class A-1 Notes to the extent and in the manner set forth in this Indenture including as set forth in Section 11.l(a) and hereinafter provided. If any Event of Default has not been cured or waived and acceleration occurs in accordance with Article V, including as a result of an Event of Default specified in Section 5.l(f) or (g), the Class A-1 Notes shall be paid in full in Cash before any further payment or distribution is made on account of the Subordinate Interests.
On December 2, 2010, an event of default occurred, and the trustee delivered notice to the appropriate parties. The Indenture contains an acceleration clause, and a majority of the controlling class of notes directed acceleration on August 26, 2011.
The trustee interpreted § 13.1(c) of the Indenture to require payments of interest to holders of A-2 notes before Class A-1 notes received payments of principal. Section 13.1(c), the trustee reasoned, defines "Subordinate Interest" as Class A-2 notes only with respect to payments of principal. Accordingly, from September 2011 through September 2012, the trustee made nearly $950, 000 in interest payments to holders of Class A-2 notes.
On December 10, 2012, ILDA sent a letter to the trustee, asserting that the Indenture required the trustee to pay ILDA and other Class A-1 note holders in full-interest and principal-before Class A-2 note holders could receive any payment. On December 12, 2012, the trustee responded, explaining its continued belief that it was properly paying interest on Class A-2 notes before paying principal on Class A-1 notes. A second round of similar letters followed.
On December 19, 2012, the trustee sent a notice to the note holders, stating its intention to reserve amounts equal to the interest payments on Class A-2 notes because of ILDA's objection. The trustee then commenced this interpleader action, seeking to settle all claims to those reserved funds. ILDA and Montrose Credit both moved for summary judgment.
Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). It is the moving party's burden to show that no genuine factual dispute exists. Gallo v. Prudential Residential Servs., L.P. , 22 F.3d 1219, 1223 (2d Cir. 1994). When language contained in a contract is clear, the court is to give effect to the contract and grant summary judgment without reference to extrinsic evidence. U.S. Trust Co. of New York v. Alpert , 10 F.Supp.2d 290, 299 (S.D.N.Y. 1998). Ambiguity is not ...