Court Finds Pooling and Servicing Agreement to be Ambiguous, Orders Discovery

On November 9, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Matter of U.S. Bank N.A., 2018 NY Slip Op. 32875(U), holding that a pooling and servicing agreement was ambiguous and ordering discovery, explaining:

Under New York law, written agreements are construed in accordance with the parties' intent and the best evidence of what parties to a written agreement intend is what they say in their writing. Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Extrinsic evidence may be used to interpret a contract only where it is ambiguous, and the determination as to ambiguity is a question of law to be answered by the court. A contract is ambiguous if on its face it is reasonably susceptible of more than one interpretation. There must be no reasonable basis for a difference of opinion, but ambiguity does not exist simply because one of the parties attaches a different, subjective meaning to one of its terms. Furthermore, the existence of ambiguity is determined by examining the entire contract and considering the relation of the parties and the circumstances under which it was executed -- with the wording viewed in the light of the obligation as a whole and the intention of the parties as manifested thereby.

The petition is denied and the parties are directed proceed with discovery. As a preliminary matter, it is of some significance that the alleged error in allocation was not discovered by the Objectors for three years, and that US Bank then found the new interpretation to be sufficiently reasonable that it employed it for two years. Indeed, the bank was so persuaded that the new procedure was correct that it did not seek judicial instructions at that time. And even after reversing its conclusion, US Bank has asserted only that the original allocation procedure was the best reading. Assuming that that is so, it still does not mean that it is the only reasonable reading. The case thus presents something more than merely one of the parties attaching a subjective meaning to the language of a contract; rather, it is a case of a third party, disinterested sophisticated financial institution attaching conflicting meanings to the same language on three different occasions. The court finds this confusion to be understandable and holds that the PSA is ambiguous regarding the proper allocation of the lost interest.

Read in context with sections 6.5, 6.6(a) and the later passages of 6.6(f), the PSA can reasonably be construed as either permitting, or prohibiting, application of the interest losses to the Certificate Balances. The parties have attempted to support their positions by applying competing axioms of contractual construction to selected passages of the PSA. However, those tools are too blunt to be applied to such a complex financial transaction and do not meaningfully resolve the conflict And even if the language were sufficiently clear to permit the court to commit to one interpretation or the other, the parties' submissions have failed to provide an easily comprehensible explanation (if one is possible) of how the payments are calculated and distributed to the various classes of Certificates, The mechanism is apparently something to be pieced together from the 300-
page PSA's Preliminary Statement, the Definition section and the schedules contained therein, and the various paragraphs of section 6.

In this connection, the court notes that the status of the Class A-JFX Certificates is unclear, counsel having stipulated at oral argument as to the seniority of the Class A-J Certificates hut indicated that Class A-JFK was a different story. Those Certificates are mentioned in footnote (c) of the schedule of REMIC III Class designations, which indicates that they represent the Class JFX Percentage Interests of the Class JFL Regular Interests. Later in that footnote, it is stated that following the Second Restatement Date the Aggregate Certificate Balances of the Class JFX Certificates and three other classes will be subject to further re-designations as between such Classes pursuant to Section 3, 10. Expert affidavits or testimony may thus be required to clarify this and other issues, especially because apart from appeals to common sense and contractual construction, some of parties' arguments center around the financial purposes, tax policies and other considerations underlying the complicated structure of the Trust Their resolution may implicate business judgments rather than legal considerations.

Finally, the court concurs that the ProSupp may have some evidentiary value, in that it provides a clear sequence to the allocation of Realized Losses among the items in 6.6(f)(A), (B) and (C). But that also raises the question of why the clarifying language was not incorporated into the PSA itself resort to the intent of the drafters, and witnesses with expertise in REMIC structured trusts will be needed. Similarly, their assistance would be helpful in explaining the relevance and import of the guidance provided the Commercial Real Estate Finance Council with respect to the reporting of a modification resulting in a permanent rate reduction.

(Internal quotations and citations omitted).

Under New York law, the starting point of contract interpretation is the words of the contract. As this decision shows, sometimes those words, without context, may be insufficient to establish what the parties intended--if anything. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.