In the Matter of the Trusts established under the Pooling and Servicing…

Background

The dispute arose after the owners of Peter Cooper Village and Stuyvesant Town defaulted on a mortgage. Five commercial mortgage-backed securities trusts held loans secured by that mortgage. CWCapital Asset Management LLC served as the special servicer for one of the trusts, and Appaloosa Investment L.P. I and Palomino Master Ltd. were among the investors in the trusts.

The litigation concerned the allocation of funds connected to the October 2015 sale of Stuy Town. Earlier, the district court had ruled that certain amounts allocated to CWCapital as penalty interest and to Freddie Mac and Fannie Mae as yield maintenance were not gain-on-sale proceeds. The Second Circuit upheld much of that ruling but held that interest on advances accruing on or before June 3, 2014 had to be paid from late-payment charges and penalty interest. It remanded the case for further determination of the relevant amounts and accrual dates.

After the remand, CWCapital and Appaloosa agreed to settle the remaining dispute. CWCapital agreed to place $27.5 million into escrow for distribution to certificateholders. The parties stipulated that $27.5 million represented interest on advances accruing on or before June 3, 2014, but they did not admit liability or agree on the amount of interest on advances accruing after that date. Appaloosa proposed distributing the settlement payment, after fees and expenses, pro rata among the five trusts based on their shares of the senior loan as of the distribution date, with the funds treated as principal within each trust.

Objection and fee request

Cobalt objected to both the allocation and Appaloosa’s fee request. It argued that the $27.5 million should instead be treated as gain-on-sale proceeds and distributed according to the trusts’ capital structures as of the January 2016 distribution date, principally to reimburse realized losses of certificates that had already been written down. Appaloosa argued that the payment was reimbursement for interest on advances and should be distributed to existing certificateholders on the next distribution date under the pooling and servicing agreements. CWCapital took no position on the allocation.

Appaloosa requested $7,912,052.80 in attorneys’ fees and $1,063,359.85 in expenses from the settlement fund. It relied on the common-fund doctrine, under which a party that creates a fund benefiting others may receive reasonable compensation from that fund. Cobalt argued that the request was excessive because many of Appaloosa’s arguments had failed and the issue producing the settlement had not been argued by the parties.

Settlement approval

The court applied a “fair and reasonable” framework drawn from New York decisions reviewing shareholder-derivative and class-action settlements. The court considered factors including the likelihood of success, the parties’ support, counsel’s judgment, good-faith bargaining, the legal and factual issues, the risk and cost of continued litigation, and the interests of certificateholders. Because the trustee took a neutral position, the court did not apply standards designed for reviewing a trustee’s affirmative settlement decision.

The court found no collusion. It noted that the parties had disagreed throughout the litigation, that CWCapital still declined to characterize the payment or take a position on its allocation, and that rejecting the settlement would likely lead to extended litigation and another appeal. The court also found that Cobalt had received a full and fair opportunity to object even though it had not participated in settlement discussions.

The court concluded that the settlement payment was reimbursement for interest on advances, not gain-on-sale proceeds. The court reasoned that the relevant question under the pooling and servicing agreement was when the interest on advances accrued, not how the reimbursement was funded. Using penalty interest to reimburse the trusts did not change the purchase price used to calculate gain-on-sale proceeds and therefore did not convert the reimbursement into gain-on-sale proceeds. The court found that Appaloosa’s proposed allocation was consistent with the agreement and protected the certificateholders’ contractual priority rights.

The court therefore approved the parties’ proposed settlement and rejected Cobalt’s objection to it.

Attorneys’ fees and expenses

The court applied common-fund principles and considered the time and effort involved, the quality and complexity of the representation, litigation risks, the relationship between the requested fees and the settlement, public-policy concerns, and the degree of success achieved.

The court recognized that Appaloosa’s counsel had litigated complex issues for years and that the litigation produced a $27.5 million settlement fund. But the court also noted that Appaloosa had lost its summary-judgment arguments in the district court, that its claims against the government-sponsored enterprises had been rejected and that rejection had been upheld on appeal, and that some expert testimony had provided little assistance.

The court reduced the requested attorneys’ fees by 20%, awarding $6,329,642.24. It reduced the requested expenses by 30%, awarding $744,351.90. The court thus granted in part Appaloosa’s request for attorneys’ fees and expenses.

Disposition

The court rejected Cobalt’s objection, approved the proposed settlement, and awarded Appaloosa $6,329,642.24 in attorneys’ fees and $744,351.90 in litigation expenses from the settlement payment. It directed the trustee to submit a revised proposed order issuing judicial instructions and directed the Clerk of Court to lift the stay and terminate the fee motion at docket entry 445.