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Posted: April 11, 2017

Collateral Manager Not Entitled to Expense Payments Greater Than Provided by Contract

On March 31, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Commonwealth Advisors, Inc. v Wells Fargo Bank, N.A., 2017 NY Slip Op. 30622(U), holding that the collateral manager of a CDO was not entitled to expense reimbursements greater than were provided in the agreements governing the CDO, explaining:

Commonwealth claims that it should be entitled to recover more than $75,000 because Wells Fargo supposedly assured it that further reimbursement would be provided if Commonwealth liquidated the CDO’s collateral. Commonwealth alleges that detrimentally relied on this promise and that it would not have liquidated the collateral had it known that its Administrative Expenses reimbursement would be capped at $75,000. For the purposes of this motion, the court assumes the truth of these allegations. Nonetheless, these allegations do not state a claim upon which relief may be granted.

Wells Fargo’s alleged assurances are the predicate for Commonwealth’s causes of action for promissory estoppel, negligent misrepresentation, and equitable estoppel, none of which are viable because Commonwealth’s reliance on Wells Fargo’s assurances were not reasonable as a matter of law.

Under the CMA, and by virtue of its fiduciary duties to the CDO, Commonwealth had the obligation to act in the best interests of the CDO (subject, as previously noted, to inapplicable fiduciary duty waivers). If Commonwealth believed, as it professes, that the liquidation of the CDO’s collateral was the right thing to do for the CDO, it had no right to condition such liquidation on Wells Fargo’s promise to provide Administrative Expenses reimbursement in excess-of that permitted by the Indenture. Indeed, there is no basis to believe that Wells Fargo itself had the right to breach the Indenture’s waterfall provisions by remitting Administrative Expenses out of the waterfalls’ order or priority or in excess of the applicable caps. Wells Fargo, as indenture trustee, must carry out its ministerial duties in accordance with the Indenture. Therefore, it was unreasonable for Commonwealth to rely on Wells Fargo’s assurances because the absence of such assurances cannot have legitimately informed Commonwealth’s decision to liquidate the collateral. Simply put, Wells Fargo had no right to violate the Indenture, nor did Commonwealth have the right, as a sophisticated party, to rely on an erroneous interpretation of the Indenture or a promise it should have known would contravene the Indenture. The Indenture serves to protect the rights of the CDO and its noteholders. Commonwealth cannot insist that the Indenture be violated by virtue of the Trustee’s or Commonwealth’s prior erroneous understanding of its waterfall provisions.

(Internal quotations and citations omitted) (emphasis added).

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