Commercial Division Blog

Posted: April 5, 2017 / Categories Commercial, Contracts

RMBS Settlement Proceeds Must Be Distributed As Provided By Terms of Agreements

On March 31, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Matter of Bank of N.Y. Mellon, 2017 NY Slip Op. 27102, holding that the proceeds of a settlement entered into by an RMBS trustee must be distributed to investors according to the terms of the settlement agreement notwithstanding the claims by one class of investors that such a distribution is contrary to the principles inherent in the structure of the trusts, explaining:

As an alternative argument, AIG contends that the Settlement Agreement and Governing Agreements are ambiguous. AIG asserts that the Court should interpret the Settlement Agreement and the Governing Agreements in keeping with the clear intent of the parties that the most senior tranches are paid first and the more junior tranches would generally receive nothing from the settlement. However, because the Settlement Agreement and Governing Agreements are clear regarding how the Allocable Share must be distributed and how the corresponding Principal Distribution Amount must be calculated, I decline to find an ambiguity in the agreements. Courts should not strain to find contractual ambiguities where they do not exist.

AIG further contends that distributing a significant portion of the Allocable Share to junior certificates with realized losses must be avoided because it is a commercially absurd result. AIG appears to argue that, in light of this absurd result, the Court should supply terms to the Settlement Agreement and Governing Agreements to ensure that the Allocable Share is distributed pursuant to the Standard Intex method.

Under New York law, even in the absence of a claim for reformation, courts may as a matter of interpretation carry out the intention of a contract by transposing, rejecting, or supplying words to make the meaning of the contract more clear. This approach is appropriate only in those limited instances where some absurdity has been identified or the contract would otherwise be unenforceable either in whole or in part.

Here, it is neither an absurd or unenforceable result that the Principal Distribution Amount calculated under the Governing Agreements may be small in proportion to the entire amount of the Allocable Share, resulting in the majority of the Allocable Share to be distributed to certificates with realized losses, particularly because the parties anticipated that this result might occur. Even if this distribution can be characterized as unusual, terms that are novel or unconventional do not render a result absurd. Moreover, it is not absurd that, once the Principal Distribution Amount is distributed, it is in fact the senior certificates with realized losses that will be paid first before junior certificates with realized losses.

. . .

While I understand that the plain language of the Settlement Agreement and Governing Agreements do not reflect the senior certificateholders' belief as to how Allocable Shares would be distributed with respect to these few trusts, I may not look beyond the four corners of the relevant agreement to determine the parties' intent, when the contract language itself is clear. Where the parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. In the interpretation of contracts, our courts are concerned "with what the parties intended, but only to the extent that they evidenced what they intended by what they wrote.

. . .

In interpreting contracts, courts look "to the objective meaning of contractual language, not to the parties' individual subjective understanding of it. Our courts apply this rule with even greater force — in cases like this one — involving commercial contracts negotiated at arm's length by sophisticated, counseled businesspeople. Upon careful examination of the plain language of the Settlement Agreement and Governing Agreements, I find that their objective meaning is to direct the Trustee to distribute the Allocable Shares for the Fourteen Trusts using the pay first, write up second method, which includes the calculation of the Principal Distribution Amount pursuant to the terms of the Governing Agreements.

(Internal quotations and citations omitted).

NOTE: Schlam Stone & Dolan is counsel for Blue Mountain in this proceeding.