U.S. Bank National Association v. Triaxx Asset Management LLC

Background

U.S. Bank National Association is the trustee and collateral administrator for two collateralized debt obligations. Triaxx Asset Management serves as collateral manager. The obligations consist of underlying securities and notes issued to investors, including PIMCO and Serengeti. PIMCO is the senior-most noteholder in both obligations.

U.S. Bank brought the case as an interpleader under Federal Rule of Civil Procedure 22. The central dispute was whether Triaxx had a contractual duty to sell certain securities. After a bench trial, the Court directed judgment in PIMCO’s favor and ordered the disputed securities sold immediately. Triaxx and Serengeti appealed to the Second Circuit and sought a stay of enforcement while the appeal proceeded.

Legal standard

Under Federal Rule of Civil Procedure 62(c), a district court may stay an injunction during an appeal. The Court considered four factors: whether the applicants showed a strong likelihood of success, whether they would suffer irreparable harm without a stay, whether a stay would substantially harm other interested parties, and where the public interest lies. The moving parties carried the burden of showing that these factors favored a stay.

Likelihood of success on appeal

The movants did not argue that the Court wrongly interpreted the contracts as requiring Triaxx to sell the disputed securities. Instead, they argued that the Court lacked subject-matter jurisdiction under the Edge Act, 12 U.S.C. § 632. They contended that the Court had relied on an earlier pleading that Triaxx later amended and that no operative claim involved U.S. Bank.

The Court rejected that argument. It found that Triaxx’s amended pleading expressly sought a declaratory judgment binding on U.S. Bank, even though the amended pleading did not formally assert a cross-claim against U.S. Bank. The Court also found that U.S. Bank’s role was sufficient for Edge Act jurisdiction because the securities were pledged to U.S. Bank, U.S. Bank held a lien for the noteholders, and U.S. Bank would have to release that lien before the securities could be sold.

The Court further concluded that Edge Act jurisdiction did not require the international banking activity to be central to the claim. The collateralized debt obligations involved issuers based in the Grand Cayman, and the Court found that the foreign elements and U.S. Bank’s required participation in a potential sale created the necessary international connection. The movants therefore did not show a sufficient likelihood of success on appeal.

Irreparable harm to the movants

The movants first argued that selling the securities would make their jurisdictional appeal moot. The Court disagreed because other securities would eventually become subject to the sale requirement, meaning the case would continue to present a live dispute and a reversal could still provide meaningful relief.

The Court accepted the movants’ second argument as to Serengeti. If the securities were sold and the Second Circuit later reversed, the collateralized debt obligations could not repurchase the securities or restore the related cash flows. Serengeti therefore could not be returned to its previous position. The Court found that Serengeti would suffer irreparable harm without a stay.

Harm to PIMCO

The Court found that a stay would substantially harm PIMCO. It rejected PIMCO’s arguments based on the possible lost investment opportunity and litigation fees because those injuries were speculative or unsupported by authority.

The Court accepted PIMCO’s argument concerning “leakage.” It found that continued payments to junior noteholders and administrative expenses would reduce the value available to PIMCO over time. One of the collateralized debt obligations, Triaxx 2007-1, lacked sufficient assets to pay PIMCO’s notes in full, and the parties did not dispute that the leakage amounted to hundreds of thousands of dollars. PIMCO would therefore face substantial injury if enforcement were stayed.

Disposition

The Court treated the public-interest factor as having little effect and weighed the other factors together. Although Serengeti had shown irreparable harm, PIMCO would be substantially injured by a stay, and the movants had not shown a sufficient likelihood of success on appeal. The Court therefore denied the movants’ motion to stay enforcement of the Court’s September 16, 2019 Order. The opinion states that this resolved Docket Numbers 162 and 170.