MEMORANDUM OPINION AND ORDER Interpleader Plaintiff Wells Fargo Bank, N.A. (“Wells Fargo”) seeks the Court’s assistance in determining how to distribute certain funds it controls in its role as trustee of a collateralized debt obligation (“CDO”). On one hand, the Bank of New York Mellon (“BNYM”), as party to an interest rate swap agreement (the “Swap Agreement”) between itself and the issuer of the CDO, claims that certain funds under Wells Fargo’s controls are owed to BNYM as payments owed pursuant to the Swap Agreement (the “res”). On the other hand, Waterfall Asset Management, LLC (“Waterfall”) contends that BNYM is misinterpreting the Swap Agreement, that it will bring suit against Wells Fargo if Wells Fargo distributes the res to BNYM, and that BNYM is liable to the trust for alleged overpayments made to BNYM pursuant to the Swap Agreement. To resolve these competing claims, Wells Fargo served an interpleader complaint pursuant to Federal Rule of Civil Procedure 22. BNYM moved to dismiss the complaint, arguing that interpleader was inappropriate in this context. Wells Fargo and Waterfall opposed that motion, which is currently before the Court.On the surface, this case bears many of the hallmarks of interpleader. However, in this case Wells Fargo is not a disinterested party merely holding the res and seeking the Court’s assistance in determining its distribution. Rather, issues of trust governance predominate over issues of res distribution here. Further, pursuant to Waterfall’s competing theory for how the res should be distributed, Wells Fargo may have further obligations and/or liabilities which extend beyond distribution of the fund — indeed Wells Fargo’s failure to live up to its contractual obligations may have been one of the root causes of the current dispute. Additionally, the extension of interpleader into this fact pattern would set a precedent that essentially any question of trust governance is subject to interpleader determination so long as any specter of litigation risk regarding trust assets can be articulated by a weak-kneed trustee — undermining the principles of majority creditor control that underpin many indentures of this type. As a result, neither law nor equity nor policy favor Wells Fargo’s use of interpleader here. Accordingly, for the reasons that follow, BNYM’s motion to dismiss is GRANTED, interpleader is DENIED, and this case is dismissed.I. BACKGROUNDA. Factual Background1. The Contractual ContextThe operative facts are not in dispute. In late 2004, Tropic CDO IV Corp. (“Tropic”), brought to market a CDO governed by an indenture (the “Tropic CDO IV”). Amended Compl. (“AC”) 1. This case stems from that indenture (the “Indenture”), which was executed among Wells Fargo as Trustee, Tropic CDO IV Ltd., as Issuer, and Tropic, as Co-Issuer. AC at 1. The Indenture establishes six classes of notes subject to various terms and conditions established in the Indenture (the “Notes”). See, AC, Ex. A (ECF No. 53-1) (the “Indenture”), art. XI. “The Notes are secured by a portfolio of fixed income assets (the ‘Portfolio Collateral’) owned by the Issuer.” AC 14.In its capacity as Trustee, Wells Fargo holds the Portfolio Collateral and “distributes available proceeds (the ‘Available Adjusted Collections’) to Noteholders pursuant to Section 11.1 of the Indenture,” otherwise known as the payment waterfall. AC 15. The payment waterfall is structured so that “lower-tiered creditors receive principal and interest payments only after the higher-tiered creditors are paid in full.” BNYM’s Br. (ECF No. 60) at 7 (citing AC 15, Indenture §11.1). “Pursuant to the payment waterfall, the Indenture provides that senior Class A noteholders receive periodic interest payments on certain payment dates. Once the Senior Class A noteholders are paid in full, any remainder flows to the subordinated noteholders as per the priority of payments.” Id. (citing AC
15-16, Indenture §11.1) (internal citations omitted); see Indenture, Preliminary Statement. Waterfall is the beneficial holder of certain junior subordinated notes. AC 11. Defendant Cede & Co. (“Cede”) is the registered noteholder for certain Notes which it holds for “ultimate benefit of others.” AC 13.1On November 18, 2004,2 contemporaneously with the execution of the Indenture, the Issuer entered into an interest-swap agreement with Tropic and the Bank of New York Mellon (“BNYM”). AC 2; see AC, Ex. B, (ECF No. 53-2) (the “Swap Agreement”). Wells Fargo, as Trustee, “is the Issuer’s assignee under the Swap Agreement, and is required under the Indenture to take all steps necessary to enforce the Issuer’s rights under” the Swap Agreement. BNYM’s Br.
