The Bank of New York Mellon, London Branch v. CART 1, LTD.

Background

The Bank of New York Mellon, London Branch, acting as indenture trustee, filed this interpleader action involving CART 1, Ltd., Deutsche Bank AG Frankfurt, and CRC Credit Fund, Ltd. The dispute concerned a credit default swap between Deutsche Bank and CART 1 and certain Conergy loans included in the transaction’s reference portfolio.

In a November 30, 2020 opinion, the court reconsidered and reversed its earlier interpretation of the contract’s Confirmation. CRC then sought clarification about whether its other breach-of-contract theories remained pending and moved for reconsideration of the November ruling. The court stated that the earlier opinion had addressed only the interpretation of the Confirmation, not all arguments in the parties’ motions to dismiss.

Motion for Reconsideration

The court denied CRC’s motion for reconsideration. CRC argued that the Confirmation incorporated servicing principles in Schedule F through a chain of references to the agreement’s Credit and Collection Policies. The court found that CRC was largely repeating arguments already considered and had not shown the clear error required for reconsideration. The court also concluded that a sentence in Schedule F contemplated possible conflicts between Schedule F and the Credit and Collection Policies, rather than incorporating Schedule F into those policies.

Deutsche Bank’s Motion to Dismiss

The court addressed three remaining breach-of-contract theories asserted by CRC: that Deutsche Bank prematurely wrote off the disputed Conergy loans; that Deutsche Bank failed to remove the loans after CRC challenged their eligibility; and that Deutsche Bank’s accountant certification covered loans that were ineligible for reasons other than their maturity dates.

The court rejected the premature-write-off theory. CRC’s allegations showed that Conergy had been in default for years, that the repayment deadline had passed, and that only a very small payment had been recovered. The court concluded that CRC had not plausibly alleged that Deutsche Bank departed from its standard servicing procedures when it wrote off the loans.

The court also rejected CRC’s argument that substituted loans were ineligible merely because they had an internal rating below iB-. The Confirmation’s Replenishment Conditions created an exception allowing substitution without satisfying certain eligibility criteria, including the internal-rating requirement, when loans were canceled or restructured.

The court allowed part of CRC’s remaining theory to proceed. The Replenishment Conditions allowed Deutsche Bank to substitute a loan from the applicable Reference Entity, but did not allow substitution with a loan from a wholly separate entity. CRC alleged facts supporting a reasonable inference that Deutsche Bank replaced a loan associated with one Conergy entity with a €2.922 million loan associated with another. If true, that loan would have been ineligible, Deutsche Bank would have been required to remove it after CRC challenged it, and the accountant certification would have been erroneous. CRC could therefore proceed to discovery on its breach-of-contract claim concerning that loan and alleged substitution. The court dismissed the claim to the extent it concerned other loans.

CRC’s Motion to Dismiss

The court granted CRC’s motion to dismiss Deutsche Bank’s tortious-interference claim. Under New York law, the economic-interest defense can protect a party that interferes with a contract to protect its own legal or financial interest in the breaching party’s business.

The court found that CRC had both legal and financial interests in CART 1’s funds. CRC was an express third-party beneficiary of CART 1’s indenture, and payments to Deutsche Bank would reduce CRC’s own payouts. The court concluded that CRC was justified in making a good-faith attempt to enforce its rights, even if it caused The Bank of New York Mellon to breach the indenture by withholding payments from Deutsche Bank.

Disposition

The court granted CRC’s motion for clarification, denied CRC’s motion for reconsideration, granted in part and denied in part Deutsche Bank’s motion to dismiss, and granted CRC’s motion to dismiss. The parties were directed to confer and propose a discovery schedule within 14 days after the opinion and order.