Franklin Advisers, Inc. v. CDO Plus Master Fund, Ltd., No. 12-168 (2d Cir. 2013)
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BNY, as Trustee of an investment portfolio of collateralized loan obligations, initiated an interpleader action to resolve a contract dispute between certain shareholders and the manager of that portfolio, Franklin. At issue were the terms of the indenture and, specifically, terms governing distribution of a Contingent Collateral Management Fee, which was payable to Franklin only if distributions reached a twelve percent internal rate of return (IRR). The court granted the partial summary judgment to Franklin and the denial of summary judgment to the Shareholders, as well as the award of attorneys fees and costs. The court vacated, however, the award of statutory prejudgment interest with instruction to award prejudgment interest actually accrued on the fee owed to Franklin, to be paid from the court's account.
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12-0168-cv(L), 12-0169-cv(CON), 12-0878-cv(CON), 12-0880-cv(CON)* Franklin Advisers, Inc. v. CDO Plus Master Fund, Ltd. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2012 (Argued: March 1, 2013 Decided: August 1, 2013) Docket Nos. 12-0168, 12-0169, 12-0878, 12-0880* - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x THE BANK OF NEW YORK TRUST COMPANY, N.A., AS TRUSTEE, Plaintiff, - v.FRANKLIN ADVISERS, INC., Defendant-Appellee, FRANKLIN CLO II, LTD., FRANKLIN CLO CORP., CHASE MANHATTAN BANK LONDON NOMINEE FOR SEIRA 13, AS NOMINEE, DEUTSCHE BANK SECURITIES INC., AS A NOMINEE, GENSEC IRELAND LIMITED, AS A NOMINEE, HARE & CO., AS NOMINEE, MAC & CO., MASSACHUSETTS MUTUAL LIFE INSURANCE CO., SUN LIFE INSURANCE CO. OF CANADA, AS A NOMINEE, TEMPLETON GLOBAL ADVISORS, LTD., AS A NOMINEE, JOHN DOE 1, THROUGH JOHN DOE 12, THE LAST TWELVE NAMES BEING FICTITIOUS AND UNKNOWN TO PLAINTIFF, THE PERSONS OR PARTIES INTENDED BEING THE BENEFICIAL OWNERS OF THE PREFERRED SHARES, THE SERIES I COMBINATION SECURITY AND THE CLASS C2 NOTES UNDER COMPLAINT, Defendants, - v.- * Appeals docketed as 12-0168-cv(L) and 12-0169-cv(CON) were closed by stipulation of the parties on March 8, 2012. 1 2 3 4 5 6 7 8 9 10 11 CDO PLUS MASTER FUND, LTD., MERRILL LYNCH, PIERCE, FENNER & SMITH INC., AS A NOMINEE, Defendants-Appellants. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x Before: JACOBS, Chief Judge, POOLER, Circuit Judge, and VITALIANO, District Judge.** Merrill Lynch, Pierce, Fenner & Smith Inc., together 12 with CDO Plus Master Fund, Ltd., (collectively, the 13 Shareholders ), appeal an order of the United States 14 District Court for the Southern District of New York 15 (Marrero, J.) denying their motion for summary judgment and 16 granting partial summary judgment to Franklin Advisers, Inc. 17 ( Franklin ), in a dispute over the payment of a contingent 18 collateral management fee. 19 district court erred in relying on extrinsic evidence and 20 concluding that Franklin, as collateral manager, was 21 entitled to the contingent fee after the portfolio produced 22 a twelve-percent internal rate of return, according to the 23 terms of the governing indenture. 24 appeal Franklin s award of attorney s fees and statutory 25 prejudgment interest. The Shareholders argue that the The Shareholders also For the following reasons, we affirm ** The Honorable Eric N. Vitaliano of the United States District Court for the Eastern District of New York, sitting by designation. 2 1 the grant of summary judgment and the award of attorney s 2 fees, vacate the award of prejudgment interest, and remand 3 with the instruction to award actual interest on the 4 judgment. 5 6 7 8 9 10 11 12 13 14 15 16 17 JAMES C. MARTIN, Reed Smith LLP, New York, New York (James C. McCarroll and C. Neil Gray, on the brief), for Appellants. JONATHAN L. HOCHMAN, Schindler Cohen & Hochman LLP, New York, New York (Matthew A. Katz, on the brief), for Appellee. DENNIS JACOBS, Chief Judge: This interpleader action was initiated by The Bank of 18 New York Trust Company, N.A. ( BNY ), as Trustee of an 19 investment portfolio of collateralized loan obligations, to 20 resolve a contract dispute between certain shareholders and 21 the manager of that portfolio, Franklin Advisers, Inc. 22 ( Franklin ). 23 indenture and, specifically, terms governing distribution of 24 a Contingent Collateral Management Fee (the Contingent Fee 25 or the Fee ), which was payable to Franklin only if 26 distributions reached a twelve percent internal rate of 27 return ( IRR ). 28 million) when the portfolio s return surpassed twelve In dispute are the terms of the underlying Franklin claimed the Fee (exceeding $7 3 1 percent upon an optional redemption voted by the 2 shareholders. 3 On cross-motions for summary judgment, the United 4 States District Court for the Southern District of New York 5 (Marrero, J.) ruled that: (1) the Fee can be paid on an 6 optional redemption; (2) proceeds of an optional redemption 7 should be included in calculating the IRR; and (3) the 8 indenture ( Indenture ) is ambiguous as to when the Fee 9 begins to accrue, i.e., whether the fee begins to accrue 10 from the closing date forward, or from the date the 11 portfolio s IRR exceeds twelve percent (an issue the parties 12 resolved by arbitration). 13 Fenner & Smith Inc. ( Merrill Lynch ) and CDO Plus Master 14 Fund, Ltd. ( CDO Plus ) (collectively, the Shareholders )1 15 argue that each of those rulings was error. 16 challenge the court s award of fees and costs, and its award 17 of prejudgment interest at a rate of nine percent pursuant 18 to N.Y. C.P.L.R. § 5001(a). 19 statutory prejudgment interest and direct that interest be 20 paid only as actually accrued. 21 affirm. On appeal, Merrill Lynch, Pierce, They also We vacate the award of 1 In all other respects, we The term Shareholders refers specifically to the Appellants, while shareholders refers broadly to all holders of CLO II equity. 4 1 I 2 A. 3 The $600 million collateral loan obligation from which The Transaction 4 this dispute arises, titled CLO II, closed on July 26, 5 2001. 6 leveraged commercial loans and then sold to investors who 7 were paid based on cash flow from the underlying loans. 8 As collateral manager for CLO II, Franklin was 9 The securities were collateralized by a pool of responsible for structuring the transaction with the 10 underwriter and for the active management of the portfolio. 11 Merrill Lynch was engaged as underwriter, and two special- 12 purpose investment vehicles were formed as issuer and co- 13 issuer: Franklin CLO II, Ltd. and Franklin CLO Corp. (the 14 Issuers ). 15 responsible for collecting principal and interest payments, 16 paying fees and expenses, and then distributing the 17 remaining proceeds to investors.2 18 BNY, as Trustee (and stakeholder here), was On the day of closing, the Trustee and the Issuers 19 executed an Indenture drafted by deal counsel, Cleary 20 Gottlieb Steen & Hamilton LLP ( Cleary ). 2 The same day, BNY succeeded Chase Manhattan Bank, the original Trustee, on October 1, 2006. 5 1 Franklin and the Issuers executed a Collateral Management 2 Agreement, incorporating all relevant provisions of the 3 Indenture. 4 securities to investors on the secondary market. 5 securities consisted of (1) notes divided into different 6 levels of risk, held by CLO noteholders, and (2) shares of 7 CLO II s equity, held by CLO II shareholders. 8 manager, Franklin assembled and maintained CLO II s assets, 9 which, in the main, were leveraged, secured loans made to Merrill Lynch as underwriter sold the CLO II The As portfolio 10 below-investment-grade borrowers. 11 collateral for CLO II s debt obligations to the CLO II 12 noteholders. 13 B. Provisions in Dispute. 14 1. The Article 11 Waterfalls . These loans served as The Indenture 15 provides that proceeds from the portfolio were to be 16 distributed by BNY according to two sets of detailed payment 17 priorities on defined, quarterly distribution dates. 18 two payment priorities, set out in Article 11, are called 19 Waterfalls because the payments cascade downward to a pool 20 at the bottom for distribution to the shareholders. 21 first governs distribution of interest proceeds (the 22 Interest Proceeds Waterfall ) and the second governs 6 The The 1 distribution of principal proceeds derived from obligations 2 paid at maturity or upon liquidation of CLO II (the 3 Principal Proceeds Waterfall ). 4 expenses, (2) noteholders, and (3) shareholders, in that 5 order. 6 2. The priorities are (1) Id. Franklin s Fees. Franklin was to be paid three 7 types of fees for its work as collateral manager. 8 them were guaranteed and are not at issue here: the Base 9 Collateral Management Fee and the Subordinated Collateral Two of 10 Management Fee.3 11 Collateral Management Fee, a performance-based fee 12 contingent on the shareholders having received an internal 13 rate of return of 12% per annum . . . on the amount of the 14 initial purchase price of the Preferred Shares for the 15 period from the Closing Date through [the] Distribution 16 Date, JA 79-80,4 a precondition designated the IRR 17 Hurdle. 18 equal to 0.25 percent per annum of the value of the 19 collateral and cash in the deal for a given period. The dispute is over the Contingent The base calculation of the Fee is approximately 20 3 The combined guaranteed fees amounted to approximately $14 million over the life of CLO II. 4 JA refers to the Joint Appendix; CA refers to the Confidential Appendix; SPA refers to the Special Appendix; and SA refers to the Supplemental Appendix. 7 1 3. Optional Redemption Provision. CLO II was 2 structured to reach maturity on August 28, 2013. 3 Section 9.1(a) of the Indenture provided that, before then, 4 the holders of a majority of the CLO II preferred shares 5 could call for an optional redemption, directing Franklin to 6 sell CLO II s assets, pay its expenses, redeem outstanding 7 notes, and distribute any remaining proceeds to the 8 shareholders. 9 C. The Redemption Controversy. However, In January 2007, a 10 majority of CLO II shareholders called for an optional 11 redemption, to take effect February 28, 2007. 12 7, 2007, Franklin auctioned off CLO II s portfolio. 13 On February It is undisputed that prior to this liquidation 14 Franklin had not achieved the twelve percent rate of return 15 necessary to surmount the IRR Hurdle and earn the Contingent 16 Fee. 17 the calculation, the IRR would have reached 17.7 percent per 18 annum. 19 that the Fee should be calculated pre-liquidation and that 20 Franklin therefore was not entitled to the Fee.5 However, if proceeds on liquidation were included in CDO Plus notified BNY and Franklin of its position 5 Franklin points out that CDO Plus has shifted positions. CDO Plus s principal, Don Uderitz, sent a February 2007 email calculating an even greater IRR (28.62 percent) but contending that Franklin had waived its 8 1 Controversy arose when Franklin submitted a claim for a 2 Contingent Fee to BNY, totaling more than $7 million.6 3 Faced with that dispute, BNY asked deal counsel for a 4 formal opinion interpreting the Indenture. 5 that Franklin was entitled to the Fee. 6 litigation between Franklin and the Shareholders, BNY (as 7 Trustee) filed this interpleader action. 8 9 D. Procedural History. Cleary concluded Anticipating At the close of discovery, Franklin and the Shareholders filed cross-motions for 10 summary judgment. 11 Indenture: (1) a Contingent Fee can be paid upon an optional 12 redemption; and (2) the IRR calculation should include 13 payments made on the redemption date. 14 Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 15 466-67, 470 (S.D.N.Y. 2009). 16 the court found a contractual ambiguity that resisted 17 summary judgment. The district court ruled that, under the See Bank of N.Y. As to when the Fee accrues, Id. at 473. 18 entitlement to the Fee by filing an untimely claim. BNY rejected this untimeliness argument, and CDO Plus has not pursued the theory here. 6 Franklin originally claimed a Fee of $7,220,205.60, but this claim increased to $7,466,654.47 after all interest payments due on portfolio investments were received. 9 1 Subject to the Shareholders reservation of their right 2 to challenge the finding that an ambiguity existed, the 3 parties agreed to arbitrate the following issue: whether 4 the CLO II indenture should be interpreted to provide that 5 the [Contingent Fee] accrues from the closing date of the 6 transaction or accrues only from the date that the IRR 7 Hurdle is met. 7 8 day hearing, the arbitration panel adopted Franklin s 9 position that the Fee accrues from the closing date of the SA 5. In August 2011, following a four- 10 CLO II transaction, even if it is payable only on a 11 distribution date following achievement of a twelve percent 12 IRR. 13 The court confirmed the arbitration award and granted 14 Franklin summary judgment on its claim for attorney s fees. 15 The court also awarded Franklin statutory prejudgment 16 interest at a rate of nine percent pursuant to N.Y. C.P.L.R. 17 § 5001(a). 18 in Franklin s favor for $12,763,039.33, consisting of 19 contingent management fees of $7,466,654.47, attorneys fees 20 and costs of $2,064,188.63, and prejudgment interest of 21 $3,205,196.23. On February 17, 2012, the court entered judgment 7 Because of how the Contingent Fee is calculated, the accrual date significantly affects the size of the Fee. 10 1 II 2 We review a grant of summary judgment de novo. 3 Compagnie Financiere de CIC et de L Union Europeenne v. 4 Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 5 157 (2d Cir. 2000). 6 of a contract is clear or ambiguous is a question of law to 7 be decided by the court. 8 determines the operative contract to be ambiguous, it may 9 evaluate the extrinsic evidence as a matter of law. 10 11 See The question of whether the language Id. at 158. If the court Id. at 159-61. The Shareholders contend that the district court 12 committed four errors: the first relates to the court s use 13 of extrinsic evidence, and the latter three involve the 14 court s interpretation of certain Fee-related provisions of 15 the Indenture. 16 17 18 III The Shareholders argue that indentures are governed by 19 special, market-driven rules of construction and that 20 courts are loathe to consider extrinsic evidence of the 21 contracting parties purported intentions when interpreting 22 indenture provisions. Appellant Br. 21-22. 11 They rely 1 principally on Sharon Steel Corp. v. Chase Manhattan Bank, 2 N.A., 691 F.2d 1039 (2d Cir. 1982). 3 It is a well-established rule in this Circuit that the 4 interpretation of Indenture provisions is a matter of basic 5 contract law. 6 1572, 1576 (2d Cir. 1989) (quoting Sharon Steel Corp., 691 7 F.2d at 1049) (alterations omitted). 8 governed by New York law. 9 Jamie Sec. Co. v. The Ltd., Inc., 880 F.2d The Indenture here is The district court thoroughly reviewed applicable 10 principles of New York contract law before construing the 11 provisions at issue. 12 F. Supp. 2d at 463-64. 13 contract terms are ambiguous, the court may accept any 14 available extrinsic evidence to ascertain the meaning 15 intended by the parties during the formation of the 16 contract. 17 Seguros La Republica, S.A., 342 F.3d 78, 82 (2d Cir. 2003)). 18 The district court s application of that principle is 19 consistent with Sharon Steel. 20 See Bank of New York Trust, N.A., 674 One such principle is that, if Id. at 463 (quoting British Int l Ins. Co. v. There, we construed successor obligor clauses in 21 indenture agreements between bondholders and a debtor 22 company in liquidation that sought to assign its debt to the 12 1 purchaser of its assets. 2 1042-46. 3 clauses at issue were boilerplate. 4 provisions are given a consistent, uniform interpretation 5 because they do not depend upon particularized intentions 6 of the parties to an indenture. 7 enduring uncertainties as to the meaning of boilerplate 8 provisions would decrease the value of all debenture issues 9 and greatly impair the efficient working of capital Sharon Steel Corp., 691 F.2d at We deemed it significant that the indenture Id. at 1048. Id. Such [T]he creation of 10 markets. 11 of law based on their plain meaning, but also with reference 12 to the purpose the wording was evidently drafted to serve. 13 See id. at 1049-51. 14 Id. We therefore construed the terms as a matter The Shareholders argue that Sharon Steel counsels 15 against drawing upon extrinsic evidence to interpret 16 indenture provisions, as the district court did here (to a 17 limited extent8). 18 reasons. 19 in the CLO II Indenture are boilerplate: to all appearances, 20 they were negotiated, tailored to the transaction, and This argument is flawed for several [1] There is no evidence that the disputed terms 8 As explained in Section V infra, the district court found extrinsic evidence to be dispositive only in determining whether proceeds of an optional redemption should be included in the calculation of the IRR. 13 1 govern the amount and trigger of a performance fee 2 potentially in the millions. 3 states that indentures are subject to basic principles of 4 contract law. 5 failed to produce such evidence, Sharon Steel allowed that 6 custom or usage might in some circumstances create a fact 7 question as to the interpretation of boilerplate 8 provisions. 9 of extrinsic evidence here is consistent with Sharon Steel, 10 [2] Sharon Steel expressly See supra p. 12. Id. at 1048. [3] Although the parties In sum, the district court s use as subsequent case law confirms.9 11 The Shareholders also invoke the doctrine of contra 12 proferentem as an alternative to extrinsic evidence when the 13 language of the indenture is unclear. 14 Corp. v. Matheson, 681 A.2d 392, 398-99 (Del. 1996). 15 However, it does them no good to have ambiguities construed 16 against the drafter, because Franklin did not draft the 17 contract--and did not sign it. 9 See Kaiser Aluminum The Indenture was drafted by See, e.g., Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010) (applying basic principles of New York contract law to indenture provisions and noting that evidence as to custom and usage is to be considered by the court where necessary ); Bank of N.Y. v. First Millennium, Inc., 598 F. Supp. 2d 550, 556 (S.D.N.Y 2009) (under New York law, if an indenture is ambiguous, then the court may accept any available extrinsic evidence to ascertain the meaning intended by the parties ). 14 1 Cleary as deal counsel and was entered into between the 2 Issuers and the Trustee. 3 available doctrine here. Contra proferentem is not an 4 5 IV 6 The Shareholders argue that they were entitled to 7 summary judgment because the Indenture precludes payment of 8 a Contingent Fee upon an optional redemption. 9 that Article 9 of the Indenture, which specifically governs 10 optional redemptions, creates a separate distribution scheme 11 that does not provide for a Contingent Fee and that trumps 12 the distribution scheme set out in Article 11. 13 They urge Article 9 pertains to the Redemption of Notes. JA 14 203-06. 15 contains no reference to any Contingent Fee payment. 16 Section 9.1(e) is not an alternative payment schedule or 17 waterfall, as the Shareholders suggest; rather, it adds 18 another step in the waterfall sequence set out in Article 19 11,10 which is the only comprehensive scheme governing Section 9.1, which applies to optional redemptions, 10 But Section 9.1(e) provides: After payment of the Notes and the expenses of the Co-Issuers on any Redemption Date, the Trustee shall pay (i) first, to the Class C-2 Redemption Additional Interest and (ii) second to the Preferred Share Paying Agent, for distribution to the Holders of the Preferred Shares as liquidating distributions, all remaining 15 1 distribution of interest proceeds and principal proceeds 2 derived from obligations paid at maturity or upon 3 liquidation of CLO II. 4 proceeds flow downward to pay, e.g., taxes and 5 administrative expenses, JA 227 § 11.1(a)(ii)(A), and debt 6 obligations to noteholders, JA 228 § 11.1(a)(ii)(D)-(H), 7 until remaining proceeds are tapped for payment of all due 8 and unpaid Contingent Collateral Management Fees. 9 11.1(a)(ii)(J). JA 229 § The shareholders get the money that pools 10 at the end. 11 follow a similar course. 12 On each distribution date, principal See JA 229 § 11.1(a)(ii)(L). Interest proceeds See JA 225 § 11.1(a)(i). Since Article 11 is made subject to certain other 13 provisions in the Indenture, including Article 9,11 the 14 Shareholders contend that Article 9 controls. 15 tension between these two provisions. 16 most naturally as supplementing Article 11, not supplanting 17 it. But we see no Article 9 is read Thus Article 9 itself states that the notes shall not proceeds from the sale and/or termination of the Collateral and all other funds in the Collection Account. JA 204 § 9.1(e). 11 Notwithstanding any other provision in this Indenture, but subject to the other subsections of this Section, Article 9, and Section 13.1, on or, with respect to amounts referred to in Section 11.1(d), before each Distribution Date, the Trustee shall . . . . JA 225 § 11.1(a) (emphasis added). 16 1 be optionally redeemed unless a financial institution agrees 2 to pay all administrative and other fees and expenses 3 payable under the Priority of Payments [Article 11] prior to 4 the payment of the Notes. 12 5 added). 6 Payments implies that optional redemptions incorporate the 7 detailed distribution scheme established in Article 11. 8 9 JA 203 § 9.1(b) (emphasis Article 9 s reference to Article 11 s Priority of The word fees does not appear in Section 9.1(e), but elsewhere in the Indenture the words fees and expenses 10 are used interchangeably.10 11 the expenses of the Co-Issuers on any Redemption Date 12 in Section 9.1(e) can be reasonably interpreted to include 13 fees. Consequently, the reference to 14 12 The two provisions work in tandem. Article 11 sets out the priority of payments to take effect on a distribution date; and optional redemptions must fall on a distribution date. See JA 203 § 9.1(a). 10 For instance, Section 11.1(a)(i)(B) provides for the payment of accrued and unpaid Administrative Expenses constituting expenses of the Co-Issuers (other than the Collateral Management Fee but including other amounts payable by the Issuer to the Collateral Manager under the Collateral Management Agreement or this Indenture). JA 225, § 11.1(a)(i)(B) (emphasis added). In this provision, expenses of the Co-Issuers is a category that includes the Contingent Fee (though it just happens to be carved out here). 17 1 The Shareholders assert that plain meaning analysis 2 requires that we consider only how the two words are used 3 inside Section 9.1(e); but 9.1(e), like all provisions, 4 should be read in light of the whole agreement. 5 Group Ltd. v. JCH Syndicate 488, 663 N.E.2d 635, 637 (N.Y. 6 1996) ( [W]hen interpreting a contract, the entire contract 7 must be considered so as to give each part meaning. ). 8 Shareholders argue that Section 9.1(e) would have no force 9 or effect unless it alters Article 11 s Priority of See Brooke The 10 Payments. 11 (N.Y. 1997) ( We decline to read the amendment in such a way 12 as to render some of its terms superfluous. ) (citations 13 omitted). 14 class of payment called the Class C-2 Redemption Additional 15 Interest, to be paid only in the event of an optional 16 redemption, an event that is not treated in Article 11. 17 construing Articles 9 and 11 together does not sap Section 18 9.1(e) of force and effect. See In re OnBank & Trust Co., 688 N.E.2d 245, 247 However, Section 9.1(e) provides for a specific So 19 If the Shareholders were right--that Article 11 s 20 Priority of Payments does not apply when shareholders call 21 an optional redemption, and that there can be no Fee in the 22 event of an optional redemption--we would expect the 23 Indenture to contain some language to this surprising 18 1 effect. 2 consequential inferences that do not inhere in Section 3 9.1(e) or in the Indenture as a whole. 4 The Shareholders are arguing for specific and The Shareholders interpretation is also unworkable. 5 Section 9.1(e) cannot function as a stand-alone distribution 6 scheme and therefore cannot replace Article 11. 7 discussed, Article 11 channels principal proceeds step-by- 8 step through each class of payment upon a distribution date. 9 It is similarly detailed as to interest proceeds. As In 10 contrast, the single sentence of Section 9.1(e), if read in 11 isolation (as the Shareholders urge), leaves to the 12 imagination how classes of noteholders are to be paid, and 13 in what order, and how the portfolio manager is to be paid 14 (in base fees, subordinated fees, or contingent fees), and 15 in what order. Article 9 is therefore no useful substitute 16 for Article 11. The Shareholders reply brief effectively 17 concedes as much. 18 language in Article 9.1(e) referring to payment of the 19 Notes and expenses of the Co-Issuers necessarily implicates 20 aspects of the Article 11 waterfall . . . . ). 21 See Appellant Reply Br. 10 ( [T]he Finally, the contract must be read to conform to the 22 parties reasonable expectations. 23 Kellogg v. Cent. Life Assurance Co., 85 F.3d 21, 28 (2d Cir. 19 See Spear, Leeds & 1 1996). 2 shareholders to be able to avoid the Contingent Fee by 3 exercising an option to redeem at any time prior to the 4 scheduled maturity date, particularly since poor performance 5 is not the only reason to elect redemption: shareholders 6 might seek redemption to lock in early gains. 7 under the Shareholders view of the Indenture, Article 9 8 would eliminate all fees upon an optional redemption, 9 including the subordinated collateral management fee and the The parties cannot reasonably have intended for Moreover, 10 base collateral management fee, which are, by definition, 11 guaranteed. 12 See JA 70, 116-17. Accordingly, we conclude that the Indenture allows for 13 the distribution of the Contingent Fee upon an optional 14 redemption.11 15 16 17 11 Franklin offers various kinds of extrinsic evidence, including Franklin s contemporaneous internal and external communications illustrating its expectation that the Fee could be paid upon an optional redemption; communications between BNY, deal counsel, and the Shareholders; the CLO III transaction; the CLO II Model constructed by Merrill; and industry custom and practice. The district court did not find it necessary to consider this evidence given the contract s plain language, and neither do we. 20 1 2 V Franklin s eligibility for the Fee depends on whether 3 the portfolio s IRR reached the twelve percent threshold, 4 which in turn depends on whether the proceeds of the 5 optional redemption are taken into account. 6 The Shareholders urge that the waterfall structure in 7 Article 11 renders Franklin s suggested calculation method 8 impossible, because the calculation and payment of the Fee 9 (at Step J of the priority of payments) cannot be based on 10 the funds in the final distribution made at Step L. 11 229 § 11.1(a)(ii)(J)-(L). 12 the funds cannot flow up a waterfall. 13 See JA As the Shareholders describe it, The Shareholders are pressing the waterfall analogy 14 much too hard. 15 scheme. 16 each level can of course be made in advance of the actual 17 distribution of the proceeds, and must be. 18 confirms that such calculation must take place prior to the 19 distribution: 20 21 22 23 24 25 26 Article 11 sets forth a payment distribution These calculations of what is to be distributed at Article 11 In connection with the application of funds to pay [Contingent Fees] in accordance with [this Article], no more than one Business Day[] after the Due Period ending prior to such Distribution Date, the Collateral Manager shall deliver to the Trustee a calculation of the amount payable on such Distribution Date. 21 1 A 229 § 11.1(e). 2 deliver a calculation to the Trustee prior to the 3 distribution date without taking into account proceeds that 4 have not descended any step of the Waterfall--including the 5 final distribution at Step L. 6 The Collateral Manager could hardly The issue is conclusively resolved by the definition of 7 Contingent Collateral Management Fee, which contemplates 8 that calculation of the IRR will include proceeds from the 9 Closing Date through such Distribution Date : 10 11 12 13 14 15 16 17 18 19 20 21 JA 79 (emphasis in original). In this context, through 22 means up to and including. 18 Oxford English Dictionary 23 11 (2d ed. 1989); see also Curlett Family Ltd. P ship, Ltd. 24 v. Particle Drilling Techs., Inc., 254 F. App x 320, 324 n.4 25 (5th Cir. 2007). 26 The fee payable for each Interest Accrual Period to the Collateral Manager in arrears on each Distribution Date . . . ; provided, however, that the [CCMF] will be payable on each Distribution Date only to the extent that (i) holders of the Preferred Shares have received an internal rate of return of 12% per annum . . . on the amount of the initial purchase of the Preferred Shares for the period from the Closing Date through such Distribution Date. We are bound, first and foremost, by the terms plain 27 meaning. 28 1971). The clarity of the contractual language here See Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 22 1 obviates a need to consider extrinsic evidence.12 2 Rainbow v. Swisher, 527 N.E.2d 258, 259 (N.Y. 1988). 3 Shareholders actually acknowledge that proceeds received 4 through a given Distribution Date may be counted in 5 determining whether the . . . Shareholders have received a 6 12% IRR on that date. 7 this concession is made to assist the Shareholders argument 8 that Franklin would be entitled to the Fee only on the next 9 Distribution Date, which, in the context of an optional Appellant Reply Br. 14. 10 redemption, never comes. Id. 11 is implausible, to say the least. See The Evidently, This reading of the Indenture 12 The Indenture itself thus At an earlier stage of the litigation, the district court concluded that the Indenture was ambiguous on this point. See Bank of N.Y. Trust, N.A. v. Franklin Advisors, Inc., 522 F. Supp. 2d 632, 637 (S.D.N.Y. 2007). At summary judgment, the court considered extrinsic evidence such as testimony by Rick Caplan, an industry expert, who stated that it was standard in the industry . . . that optional redemption date proceeds are included in calculating whether the equity holders have reached the IRR hurdle rate. Bank of N.Y. Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 468 (S.D.N.Y. 2009) (quoting Caplan). Deal counsel Raymond Check confirmed that the calculation of the IRR was intended to account for all returns through and including the distribution date, and that this usage and interpretation is common in the industry. Id. at 468-69. The district court observed that the Shareholders failed to produce any evidence tending to show that the word through in the clause at issue is not to be interpreted to include Redemption Date payments and that the extrinsic evidence is thus one-sided in favor of Franklin Advisers interpretation. Id. at 470. Because no reasonable jury could find for the Shareholders on this issue, the court therefore granted summary judgment to Franklin. Id. 23 1 makes plain that calculation of the IRR includes redemption 2 proceeds; we need look no further. 3 4 VI 5 Having concluded that a Fee is payable following an 6 optional redemption, and that calculation of the Fee takes 7 into account redemption proceeds, we turn to the issue of 8 accrual: Franklin argues that the Fee began to accrue at the 9 date of closing (July 26, 2001); the Shareholders argue that 10 it did not begin to accrue until the date the portfolio 11 surpassed the IRR Hurdle (February 28, 2007). 12 point, the district court found the contract ambiguous and 13 the extrinsic evidence mixed, thus creating a genuine issue 14 of material fact. 15 arbitration panel, which concluded that the evidence favored 16 Franklin s position overwhelmingly. 17 the district court s decision. 18 On this The parties submitted the issue to an We discern no error in By definition, the Fee is triggered only upon the 19 portfolio reaching an internal rate of return of twelve 20 percent per annum. 21 and unpaid Contingent Collateral Management Fee (consisting 22 of the Contingent Collateral Management Fee accrued for the 23 related Interest Accrual Period and any such fee accrued for The Fee is calculated as the accrued 24 1 prior Due Periods but not paid on any prior Distribution 2 Date) that is payable on such Distribution Date as described 3 above. 13 4 JA 79-80 (emphasis added). Neither argument is compelled by the wording. The 5 provision states that the Contingent Fee includes any fee 6 accrued (but not yet paid) for this or prior periods, 7 without specifying an accrual date. 8 reading strikes us as unlikely because it would mean that 9 whenever the portfolio manager achieves the stated goal of The Shareholders 10 producing a twelve percent annual IRR, it is entitled to 11 nothing except the potential for a fee, large or small, at 12 some point in the future--subject to the whim of 13 shareholders who may avoid that fee award by taking an 14 optional redemption. 15 virtually no incentive at all. 16 Such an incentive fee award creates Nevertheless, the Indenture contains two seemingly 17 inexplicable features. 18 out, the Principal Proceeds Waterfall provides for the 19 payment of all due and unpaid fees, JA 229 § 20 11.1(a)(ii)(J), while the Interest Proceeds Waterfall First, as the Shareholders point 13 The Indenture further provides that the Fee shall not exceed forty percent of all interest and principal proceeds available for distribution after the portfolio has reached an IRR of twelve percent. See JA 80. 25 1 provides for the payment of (1) the Contingent Collateral 2 Management Fee for such Distribution Date, and then (2) all 3 accrued and unpaid Contingent Collateral Management Fees 4 accrued on prior Distribution Dates. 5 11.1(a)(i)(O) (emphasis added). 6 between due and unpaid and accrued and unpaid is not 7 clear; but, even if the distinction is meaningful, it does 8 not indicate whether accrual begins at closing or upon 9 surmounting the IRR Hurdle. JA 227 § The distinction (if any) 10 Second, the definition of Subordinated Collateral 11 Management Fee, one of two guaranteed fees not tied to 12 performance, states that the fee accrue[s] from the Closing 13 Date whether or not currently payable. 14 it would have been easy and consistent to include such clear 15 wording in the definition of the Contingent Fee (if that is 16 what the parties intended), the absence lends support to the 17 Shareholders argument that the Fee does not accrue at 18 closing. 19 fees serve distinct purposes and are described in different 20 terms throughout the Indenture. 21 N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 470-71 22 (S.D.N.Y. 2009). JA 116-17. Since However, as the district court observed, the two 26 See Bank of N.Y. Trust, 1 The parties strain to find support in the Indenture for 2 their competing interpretations. 3 a detailed and ramified contract--even one that attempts to 4 provide for innumerable contingencies, to anticipate 5 disputes and to preempt litigation--may yet be silent as to 6 a question that later becomes critical. 7 extrinsic evidence then becomes perfectly appropriate. 8 British Int l Ins. Co. Ltd. v. Seguros La Republica, S.A., 9 342 F.3d 78, 82 (2d Cir. 2003) (applying New York law). 10 Reliance upon See The district court therefore committed no error.14 11 12 As is sometimes the case, VII The Shareholders challenge the district court s ruling 13 that prejudgment interest of nine percent is mandatory under 14 N.Y. C.P.L.R. § 5001(a). 15 v. Franklin Advisers, Inc., No. 07 Civ. 1746 (S.D.N.Y. Nov. See Bank of New York Trust, N.A. 14 As noted supra p. 24, the district court ultimately determined that the extrinsic evidence was not conclusive, and the parties submitted the issue to an arbitration panel. The panel decided the issue in Franklin s favor, concluding that a large amount of evidence indicated that the Fee was intended to accrue at closing. SA 27. For example, the panel found it significant that a Merrill Lynch financial model created for CLO II calculated the Fee to accrue from closing regardless of whether it was actually payable in a particular period. The panel also found that it was the uniform practice and custom in the industry that once the IRR Hurdle had been satisfied in a CLO transaction, the [Fee] would be payable from the time of the closing of the transaction. SA 23. 27 1 15, 2011) (ECF No. 145). 2 that this was error. 3 We agree with the Shareholders We start with the interpleader statute, N.Y. C.P.L.R. § 4 1006(f), which provides that if a court determines that a 5 claimant in an interpleader action is entitled to interest, 6 the stakeholder shall be liable to such party for interest 7 to the date of discharge at a rate no greater than the 8 lowest discount rate of the Federal Reserve. 9 § 1006(f) (McKinney 2013). N.Y. C.P.L.R. This statute provides for an 10 award of interest against a stakeholder up to the time of 11 discharge . . . but not against unsuccessful claimants. 12 Mfr. s & Traders Trust Co. v. Reliance Ins. Co., 870 N.E.2d 13 124, 126-27 (N.Y. 2007) (emphasis added). 14 interest award here must be authorized, if at all, by the 15 general interest statute, CPLR 5001(a). 16 As a result, the Id. at 127. Section 5001(a) provides for a mandatory award of 17 prejudgment interest in certain actions, including those for 18 breach of contract, but the statute contains an exception 19 for actions at equity: 20 21 22 23 24 25 Interest shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and 28 1 2 3 4 N.Y. C.P.L.R. § 5001(a) (McKinney 2013) (emphasis added). 5 Because interpleader actions are indeed equitable, 6 Manufacturer s, 870 N.E.2d at 127, the district court erred 7 in concluding that the award was mandated by statute. 8 United Bank Ltd. v. Cosmic Int l, Inc., 542 F.2d 868, 878 9 (2d Cir. 1976) (holding that prejudgment interest was date from which it shall be computed shall be in the court s discretion. Cf. 10 required by statute because, while Section 5001 11 specifically excepts action(s) of an equitable nature 12 from the provision s mandatory scope, the stakeholder did 13 not file an interpleader action). 14 In Manufacturer s, the Court went a step further, 15 holding that the successful claimant was not entitled to 16 statutory prejudgment interest because there was no sum 17 awarded against the adverse parties. 18 Additionally, the Court observed that there had been no 19 finding that the losing claimants breached any contract, 20 interfered unlawfully with the possession or enjoyment of 21 any property, asserted frivolous claims, conducted vexatious 22 litigation, or acted solely to cause delay. 23 As a result, there was no basis for an award of statutory 24 prejudgment interest against them. 29 870 N.E.2d at 127. Id. at 127-28. 1 The same is true here. The only meaningful distinction 2 is that, in Manufacturer s, the parties had inexplicably 3 failed to place the contested funds in an interest-bearing 4 account, so that the successful claimant received no 5 compensation for the lost use of its money. 6 Here, however, the Trustee deposited the stake with the 7 district court, which placed the funds in an interest- 8 bearing account. 9 and no more. Id. at 128. Franklin is entitled to that accrued sum, Accordingly, we vacate the award of statutory 10 prejudgment interest and remand with the instruction to 11 award the prejudgment interest actually accrued on the 12 $7,466,654.47 fee owed to Franklin, to be paid from the 13 court s account. 14 15 16 VIII Finally, the Shareholders challenge the award of 17 attorney s fees. 18 (approximately $2 million), they argue that Franklin is 19 entitled to indemnification only for costs incurred in 20 litigation with third parties, not with contracting parties. 21 However, this litigation is a third-party dispute. 22 23 Without contesting the amount The Collateral Management Agreement (the Agreement ) provides: 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 JA 321 § 10(b) (emphasis added). 15 this indemnification provision applies broadly to any 16 pending or threatened litigation and has no language 17 restricting it to third-party actions, which is true enough. 18 But neither does it clearly state that the provision applies 19 to third-party claims; and we are wary of the inference that 20 indemnification clauses apply to litigation between the 21 parties in the absence of express wording. 22 & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003) 23 ( Promises by one party to indemnify the other for 24 attorneys fees run against the grain of the accepted policy 25 that parties are responsible for their own attorneys 26 fees. ). 27 intention to provide counsel fees as damages for a breach 28 of contract unless the intention to do so is unmistakably 29 clear from the language of the contract. The Issuer shall indemnify and hold harmless [Franklin] . . . from and against any and all Liabilities, and will reimburse [Franklin] for all reasonable fees and expenses (including reasonable fees and expenses of counsel) . . . as such Expenses are incurred in investigation, preparing, pursuing, or defending any claim, action, proceeding or investigation with respect to any pending or threatened litigation (collectively, the Actions ), caused by, or arising out of or in connection with the issuance of the Offered Securities . . . . Franklin contends that See Oscar Gruss In New York, courts should not infer a party s 31 Id. (quoting 1 Hooper Assocs., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 2 905 (N.Y. 1989)). 3 exclusively or unequivocally refer[] to claims between the 4 parties themselves, Hooper Assocs., Ltd., 548 N.E.2d at 5 905, we will presume that indemnification extends only to 6 third-party disputes. 7 Where, as here, the contract does not However, it matters not whether the Agreement covers 8 litigation between the contracting parties because this 9 litigation is a third-party dispute. The Agreement was 10 entered into between Franklin and the Issuers. 11 Shareholders concede (in another context) that they played 12 no role whatsoever in the execution and drafting of the 13 [Agreement]. 14 dispute does not implicate the warning in Oscar Gruss 15 against broadly construing indemnification clauses to cover 16 litigation between contracting parties. 17 Appellant Reply Br. 26. The Accordingly, this Additionally, indemnification clauses (like most other 18 contractual provisions) should be read to implement the 19 parties intentions, to the extent possible. 20 Gruss & Son, Inc., 337 F.3d at 199. 21 specifically contemplates litigation between management and 22 shareholders. 23 responsibilities, Section 10(a) refers to Franklin s See Oscar The Agreement here In discussing the limits of Franklin s 32 1 potential liability for mismanaging its investments and 2 providing misleading marketing materials. 3 These are fertile areas of litigation with investors, as is 4 management fees. 5 ascertainable from the plain wording of the agreement, 6 indemnification does not offend the rule that such 7 contracts must be strictly construed to avoid inferring 8 duties that the parties did not intend to create. 9 therefore affirm the indemnification award. JA 320 § 10(a). Because the parties intent is Id. We 10 11 CONCLUSION 12 For the foregoing reasons, we affirm the grant of 13 partial summary judgment to Franklin and the denial of 14 summary judgment to the Shareholders, as well as the award 15 of attorney s fees and costs, but we vacate the award of 16 statutory prejudgment interest and remand with the 17 instruction to award actual interest. 33
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