Phoenix Light SF Dac et al v. The Bank of New York Mellon

Exhibit C

Southern District of New York, nysd-1:2018-cv-01194

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3 Exhibit C 3 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK R EBUTTAL R EPORT OF M ARK A DELSON October 3, 2019 Phoenix Light SF DAC and Kleros Preferred Funding V PLC, — against — The Bank of New York Mellon 18-cv-11904 Rebuttal Report of Mark Adelson CONFIDENTIAL 1 3 Table of Contents I. Introduction ......................................................................................................................... 3 II. Market Participants Would Not View the Fact that Multiple Contracts Cover Different Aspects of a Single Transaction as Nullifying the Individual Features of Those Contracts ..................................................................................... 3 III. The Schwarcz Report Is Incorrect in Characterizing the Transfer and Servicing Agreement as Not Addressing the Rights of Noteholders .................................. 5 IV. The Schwarcz Report Is Incorrect in Characterizing the Indenture Provision Concerning Equal Treatment of Noteholders as Nullifying Noteholders' Right to Sue Individually under the TSA.......................................................................... 9 Attachment A.............................................................................................................................. 12 Rebuttal Report of Mark Adelson CONFIDENTIAL 2 3 I. Introduction 1. Wollmuth Maher & Deutsch LLP has asked me to review the report of Prof. Steven L. Schwarcz, dated August 1, 2019 (the "Schwarcz Report") and to offer my reaction to the report. I refer to my prior report, dated August 1, 2019 (the "Adelson Initial Report" or "Adelson Report"), with respect to my qualifications, my compensation, and matters for which I have prepared reports or testified as an expert witness during the past four years. 2. Nothing in the Schwarcz Report causes me to change the opinions that I previously expressed in the Adelson Initial Report. In addition, the fact that I have not responded to certain points in the Schwarcz Report should not be taken to mean that I agree with those points. 3. This report comprises four parts. The first part is this brief introduction. The second explains that, contrary to the Schwarcz Report, market participants would not view the fact that multiple contracts cover different aspects of a single transaction as nullifying the individual features of those contracts. The third part describes how the Schwarcz Report is incorrect in characterizing the Transfer and Servicing Agreement ("TSA") as not addressing the rights of noteholders. The fourth part explains that the Schwarcz Report is incorrect in characterizing the Indenture provision concerning equal treatment of noteholders as nullifying noteholders' right to sue individually under the TSA. II. Market Participants Would Not View the Fact that Multiple Contracts Cover Different Aspects of a Single Transaction as Nullifying the Individual Features of Those Contracts 4. The Schwarcz Report (p. 4) asserts that "when two or more contracts govern a single integrated business transaction, they are meant to be read together." The report cites no authorities in support of that general assertion but rather simply claims that the "principle is so well accepted that industry participants regard it as implicit." 5. The Schwarcz Report ignores the fact that § 10.2 of the Transfer and Servicing Agreement ("TSA") provides that the TSA "contains the entire agreement. . . ." The full provision states: Rebuttal Report of Mark Adelson CONFIDENTIAL 3 3 SECTION 10.2 Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. 6. The existence of a separate Indenture and TSA, combined with TSA § 10.2 suggests that market participants would expect the individual features of those agreements to have effect. 7. Moreover, apart from the general assertion that contracts governing an "integrated business transaction" should be read together, the Schwarcz Report does not explain why a reasonable market participant would view Indenture § 5.6 as applying to the TSA even though such an approach ignores the fact that the TSA is a standalone agreement and that it includes an integration clause (§ 10.2). 8. Rather, a reasonable market participant would read Indenture § 5.6(a) — the provision limiting Noteholders rights to sue individually unless five conditions are met — as applying to only actions for enforcing the Indenture. The provision states that it applies "in the case of an Indenture Event of Default" which is defined as having the "meaning specified in Section 5.1" of the Indenture. Indenture § 5.1 describes payment defaults, the Issuer's failure to adhere to one of its covenants or representations and warranties "made in this Indenture," and certain insolvency and tax events. Nothing in Indenture §§ 5.1 or 5.6 indicates any intention to create a no-action provision applicable to the TSA. If the parties wished to draft such a provision, they could have done so and included it in the TSA as other parties have done in similarly structured transactions. 1 9. The Schwarcz Report (p. 5) also asserts that the intention to apply Indenture § 5.6(a) to the TSA is buttressed by the boilerplate no-recourse provision in Indenture § 11.15(a). 1 AABST 2006-1 Transfer and Servicing Agreement § 10.8 ("No Noteholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Master Servicer or the Indenture Trustee, as applicable, a written notice of an Event of Default and of the continuance thereof, as herein provided, and unless the Holders of Notes evidencing not less than 25% of the Voting Interests evidenced by the Notes shall also have made written request to the Master Servicer or the Indenture Trustee, as applicable, to institute such action, suit or proceeding in its own name as Indenture Trustee hereunder.…"). Rebuttal Report of Mark Adelson CONFIDENTIAL 4 3 Again, the Schwarcz Report fails to explain why the TSA integration provision (TSA § 10.2) should be ignored. Moreover, the Schwarcz Report misconstrues Indenture § 11.15 and incorrectly argues that it should be read into the TSA. Provisions like Indenture § 11.15, which is titled "Trust Obligations," are meant only to make clear that agents of the Trust are not personally liable for Note payments and that their liability is limited to the liability described in the relevant agreement. 10. The relevant agreement, the TSA, states in § 6.14(b) that "[n]o provision of this Agreement shall be construed to relieve the Master Servicer from liability for its own negligent action, its own negligent failure to act or its own willful misconduct" and sets forth some parameters describing the potential liability of the Master Servicer. Additionally, TSA § 10.11 addresses who may receive (and who may not receive) a "benefit" or "claim" under the TSA and expressly references the "Noteholders" as parties who may receive a "benefit or any legal or equitable right, power, remedy or claim under this Agreement."2 A reasonable market participant would consider these specific provisions in the TSA as the provisions that govern the Master Servicer's potential liability for breaches under the TSA. III. The Schwarcz Report Is Incorrect in Characterizing the Transfer and Servicing Agreement as Not Addressing the Rights of Noteholders 11. The Schwarcz Report (pp. 3-4) asserts that "[n]othing in the TSA… purported to document the issuance of the Notes to the Noteholders or the relationship among the Noteholders." The Schwarcz Report ignores the fact that the TSA refers to Noteholders nearly 100 times beginning in the Whereas clauses, which note that the Master Servicer and Subservicer are "willing" to service the Mortgage Loans "for the benefit of the Noteholders." Other key examples include the following (emphasis added): SECTION 2.5 Review of Documentation. (a) The Indenture Trustee declares that, subject to the review provided for in this Section, it has received and shall hold the Trust Fund, as Indenture Trustee, in trust, for the benefit and use of the Noteholders and the Ownership Certificateholder and for the purposes and subject to the terms and conditions set forth in this Agreement, and, concurrently with such receipt, the Trust has issued 2As I noted in the Adelson Initial Report (n.13), I understand that Plaintiffs received consent from Cede & Co. to exercise the rights of Noteholders to proceed with their claims. Rebuttal Report of Mark Adelson CONFIDENTIAL 5 3 and delivered the Notes and the Ownership Certificate to the Depositor or its designee, in exchange for the Trust Fund. *** SECTION 3.7 Representations and Warranties in respect of the Mortgage Loans. (a) The Originator hereby makes those representations and warranties as to the characteristics of the Mortgage Loans set forth in Schedule B. (b) Upon discovery or receipt of written notice by the Depositor, Master Servicer, the Securities Administrator, the Indenture Trustee or the Owner Trustee that the Originator has breached any representation or warranty set forth in Schedule B in respect of a Mortgage Loan that materially and adversely affects the value of such Mortgage Loan or the interest therein of the Noteholders and the Ownership Certificateholder, the Depositor, the Master Servicer, the Securities Administrator, the Indenture Trustee, or the Owner Trustee, as the case may be, promptly shall notify the other party in writing of such breach, and the Indenture Trustee shall enforce the Originator's obligations under this Agreement and cause the Originator to repurchase the related Mortgage Loan from the Trust Fund at the Repurchase Price… *** SECTION 5.14 Indemnification; Third Party Claims. *** None of the Depositor, the Master Servicer or the Subservicer shall be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its respective duties hereunder and which in its opinion may involve it in any expense or liability; provided, however, that each of the Depositor, the Master Servicer and the Subservicer may in its sole discretion undertake any such that it may deem necessary or desirable in respect of this Agreement and the rights and duties of the parties hereto and interests of the Indenture Trustee and the Noteholders hereunder. *** SECTION 6.1 Duties of the Master Servicer. *** (c) The Master Servicer, for the benefit of the Trust, the Indenture Trustee, the Noteholders and the Ownership Certificateholder, shall enforce the obligations of the Subservicer hereunder, and shall, in the event that the Subservicer fails to perform its obligations in accordance herewith, terminate the rights and obligations of the Subservicer hereunder and either act as subservicer of the Rebuttal Report of Mark Adelson CONFIDENTIAL 6 3 related Mortgage Loans or cause other parties to either assume the obligations of the Subservicer under this Agreement… *** SECTION 6.4 Master Servicer Liable for Enforcement. The Master Servicer shall use commercially reasonable efforts to ensure that the Mortgage Loans are serviced in accordance with the provisions of this Agreement and shall use commercially reasonable efforts to enforce the applicable provisions of this Agreement for the benefit of the Noteholders and the Ownership Certificateholder.… *** SECTION 6.18 Master Servicer Events of Default; Indenture