Commercial Division Blog

Posted: October 8, 2021 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Contracts, Settlements

Settlement Agreement Providing that Trustees to Distribute Shares as if "Subsequent Recovery" Ignored as "Gap Filler"

On August 19, 2021, in Matter of Wells Fargo Bank v Aegon USA Inv. Mgt., LLC, 2021 NY Slip Op 04740, the First Department issued a decision holding, inter alia, that even though the settlement agreement set forth the means for calculating and distributing the allocable share to each of the settlement trusts, the trustees overseeing the administration and distribution of a $4.5 billion settlement involving more than 300 residential mortgage-backed security (RMBS) trusts could make payment in accordance with the settlement agreement only when the pooling and servicing agreements (PSAs) were silent, explaining:

The court correctly determined that Section 3.06(b) of the settlement agreement is a "gap filler" intended only to apply where the governing agreement is silent as to write-up mechanics and does not supersede or override the governing agreements. Section 3.06(a) provides that each settlement allocable share shall be distributed to the certificate holders in accordance with the distribution provisions of the respective governing agreements: "Each Trust's Allocable Share shall be deposited into the related Trust's collection or distribution account pursuant to the terms of the Governing Agreements, for further distribution to Investors in accordance with the distribution provisions of the Governing Agreements, for further distribution to Investors in accordance with the distribution provisions of the Governing Agreements . . . as though such Allocable Share [were] a 'subsequent recovery.'"

As noted by the court, Section 3.06(a) "expressly defers to the distribution provisions of the Governing Agreements [so that] the Governing Agreements control where they specify the order of operations, and the Settlement Agreement controls only where the Governing Agreements do not specify such order." Section 7.05 provides that the settlement agreement "is not intended to, and shall not be argued or deemed to constitute, an amendment of any term of any Governing Agreement." Had the drafters intended Section 3.06(b) to be an exception to [*4]the Section 7.05 mandate that the settlement agreement not amend any term of the governing agreement, they would have expressly said so. They did not.

The general merger clause in section 7.13, cited by certain respondents, is not to the contrary. The governing agreements were negotiated among parties other than those defined as "parties" to the settlement agreement, and therefore those agreements were not "between the Parties" as set forth in Section 7.13. More importantly, Section 7.13 is explicitly made " [s]ubject to Section 7.05," which, as discussed, provides that the settlement agreement does not amend the governing agreements.

The court correctly found that where the governing agreements provide only for the write-up of subordinate certificates—conspicuously excluding senior certificates from the write-up instructions—the plain and unambiguous intent is that only subordinate certificates will be written up.

. . . .

Certain respondents assert that the subordinate write-up provisions are "silent" regarding the write-up of senior certificates. The subordinate write-up provisions, however, are not in fact silent as to senior certificates; by purposefully omitting the write-up of senior certificates from these provisions, the drafters clearly intended to express that only subordinate certificates are to be written up (see Ambac Assur. Corp. v EMC Mtge. LLC, 121 AD3d 514, 518 [1st Dept 2014] ["the omission of a term . . . must be deemed an intentional choice of the parties to the agreement"]).

The attorneys at Schlam Stone & Dolan LLP frequently litigate contract disputes involving more than one agreement and advise on merger clauses and other key provisions in settlement agreements. Contact the Commercial Division Blog Committee at if you or a client have questions concerning a contract dispute or drafting a settlement agreement.