Matter of Wells Fargo Bank

The following e-filed documents, listed by NYSCEF document number (Motion 001) 10, 30, 31, 32, 33, 44, 50, 51, 52, 53, 55, 66, 67, 68, 69, 70, 71, 72, 73, 74, 76, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 117, 118, 120, 121, 122, 123, 124, 125, 126, 128, 129, 130, 131, 132, 133, 135, 136, 137, 138, 139, 140, 141, 144, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 159, 160, 161, 162, 163, 165, 166, 167, 168, 169, 171, 176, 177, 178, 179, 180, 187, 188, 191, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 213, 226, 399, 400, 413, 414, 415, 486, 515, 516, 517, 518, 519, 520, 521, 522, 523, 524, 525, 526, 527, 528, 529, 530, 531, 532, 533, 534, 535, 536, 537, 538, 539, 540, 541, 542, 543, 544, 545, 546, 547, 548, 549; 550, 551, 552, 553, 554, 555, 556, 557, 558, 559, 560, 561, 562, 576, 577, 578, 579, 580, 581, 582, 583, 584, 585, 586, 587, 588, 589, 590, 591, 592, 593, 594, 595, 596, 597, 598, 599, 600, 601, 602, 603, 604, 605, 606, 607, 608, 609, 610, 611, 612, 613, 614, 615, 616, 617, 618, 619, 620, 621, 622, 623, 624, 625, 626, 627, 628, 629, 630, 631, 632, 633, 634, 635, 636, 637, 638, 639, 640, 641, 644, 645, 646, 647, 648, 649, 650, 651, 652, 653, 654, 655, 656, 657, 658, 659, 660, 661, 662, 663, 664, 665, 666, 667, 675, 687, 688, 689, 690, 691, 692, 693, 694, 695, 696, 698, 699, 700, 701, 702, 703, 704, 705, 706, 707, 708, 709, 717, 718, 719, 720, 721, 722, 723, 724, 725, 726, 727, 728, 729, 730, 731, 732, 733, 734, 735, 736, 737, 738, 739, 740, 741, 742, 743, 744, 745, 746, 747, 748, 749, 750, 751, 752, 753, 754, 755, 756, 757, 758, 759, 762, 763, 764, 765, 766, 767, 769, 770, 771, 772, 792 were read on this petition to/for   JUDICIAL INSTRUCTIONS. DECISION AND ORDER   Petitioners, the Trustees and payment administrators (the Trustees) of more than 250 residential mortgage-backed securities (RMBS) Trusts (the Settlement Trusts or Trusts), commenced this special proceeding, pursuant to CPLR Article 77, for judicial instructions regarding the distribution of a $4.5 billion Settlement Payment made by JPMorgan Chase & Co. (JPMorgan) to the Trustees. In a prior Article 77 proceeding this court approved the Trustees’ acceptance of a Settlement Agreement, dated as of November 15, 2013 and modified as of July 29, 2014 (the Settlement Agreement or Settlement), which covered claims against JPMorgan Chase & Co. as securitizer and servicer of the Settlement Trusts. (See Matter of U.S. Bank N.A. [v Federal Home Loan Bank of Boston], 2015 NY Slip Op 32846 (U), 2016 WL 9110399 [Sup Ct, NY County, Aug. 12, 2016] [JPMorgan I].)¹ The Settlement Agreement provided for a portion of the $4.5 billion Settlement Payment (the Trust’s Allocable Share or the Share) to be transferred to each Settlement Trust, and then distributed by petitioners to the holders of certificates or other securities issued by the Trusts (certificateholders). (Petition 1.) The Settlement was negotiated by JPMorgan and a group of institutional investors that together hold a significant percentage of the certificates issued by the Trusts (the Institutional Investors). The Institutional Investors, other certificateholders in the Settlement Trusts, and Ambac Assurance Corporation (Ambac), the certificate insurer for certain Settlement Trusts, have appeared as respondents in this proceeding, seeking to be heard on the methodology to be used in distributing the Settlement Payment.² The Petition raises a series of issues concerning the administration and distribution of the Settlement Payment on which the Trustees seek judicial instruction. According to the Trustees, resolution of these issues will affect “which classes of certificates ultimately receive the Settlement Payment and the amount of the Settlement Payment and the amount that each class receives,” as well as “which classes of certificates are written up as a result of the distribution of the Settlement Payment, the amount of such write-ups, and, ultimately, the resulting certificate principal balances of the affected classes.” (Petition 8.) As explained by the Trustees, “[e]ach certificate generally has, or is assigned, a certificate principal balance equal to the total distribution of ‘principal amount’ such certificate is entitled to receive…. Certificates cannot receive distributions of principal amount in excess of their aggregate or total certificate principal balance.” (Petition 3.) The Governing Agreements contain “waterfall” provisions that dictate the amounts of principal and interest distributable to the different classes of certificates and the order of distribution among the classes. (Id.) The Governing Agreements also contain provisions governing “the allocation of losses realized on mortgage loans to specific classes of certificates,” and provide that when a class of certificates is allocated a realized loss, the certificate principal balance for the class must be “written down by the corresponding amount of such realized loss.” (Id. 5.) A Trust may receive a monetary recovery related to a realized loss previously allocated to the certificates. Most Trusts refer to such a recovery as a “subsequent recovery,” and provide that “[w]hen a subsequent recovery is realized, certificate principal balances of previously written down certificates generally must be increased, or ‘written up,’ by the amount of the subsequent recovery.” (Id. 7.) A threshold issue in this proceeding is whether, in distributing the Settlement Payment, the Trustees should follow the “Write-Up First Method” or the “Pay First Method.” Under the Write-Up First Method, the certificate principal balances of the affected classes are increased — i.e., written up-before the Settlement Payment is distributed. Under the Pay First Method, the Settlement Payment is distributed before the balances are written up. A related issue is whether the Settlement Payment may cause the Trusts to be “temporarily overcollateralized” where the Pay First Method is applied. (Petition 28.) Other issues in distributing the Settlement Payment concern “the method for writing up certificate principal balances of previously written down certificates,” and “the treatment of certain classes of certificates and loan groups with current aggregate certificate balances of zero.” (Petition 8; Petition, Request for Relief 5.)³ Resolution of these issues will require interpretation of the Settlement Agreement and the Governing Agreements for the Trusts.⁴ Write-Up First or Pay First Method The Trustees seek an instruction, for the Trusts listed in Exhibit D, as to whether the Allocable Shares for the Trusts should be administered and distributed using the Pay First Method, the Write-Up First Method, or a different method authorized by this court. (Petition, Request for Relief 5 [a].) The Trustees note that “[s]ection 3.06 of the Settlement Agreement specifies two operations that must be performed in connection with the Settlement Payment: (i) the distribution of the Settlement Payment to Certificateholders, and (ii) the writing up of certificate principal balances in the amount of the Settlement Payment Write-Up.” (Petition 21.) They take the position that the Settlement Agreement does not address the order of operations — that is, whether the Settlement Agreement “requires the Petitioners to apply the Settlement Payment Write-Up after distribution of the Settlement Payment to Certificateholders or merely after the Petitioners receive the Settlement Payment but before distribution to Certificateholders.” (Id.) The Trustees further represent that “[f]or Settlement Trusts with Governing Agreements that clearly specify a particular order of operations,…[they] are required and intend to follow the provisions of the Governing Agreements for such Settlement Trusts.” (Id. 23.) The Trustees state, however, that the Governing Agreements for the Trusts listed on Exhibit D, which exceed 200, “do not clearly specify whether the Petitioners should use the Pay First Method or the Write-Up First Method in this circumstance.” (Id.) Respondents, in contrast, claim that the order of operations is in fact addressed by the Settlement Agreement and/or the Governing Agreements. Notably, respondents do not claim that the Settlement Agreement or any Governing Agreement is ambiguous, although their interpretations of the Agreements markedly differ. For example, Tilden Park argues that ‘[t]he Settlement Agreement controls all distribution and write-up issues to the extent it purports to do so,” but that it “delegates” the issue of the order of operations to the Governing Agreements “by employing the distribution provisions of those agreements applicable to ‘subsequent recoveries.’” (Tilden Park Initial Memo. at 1,2 [emphasis omitted].) Tilden Park further contends that some of the Tilden Park Trusts clearly require the Write-Up First Method, while some plainly require the Pay First Method. (Id. at 2.) HBK argues that the Governing Agreements for the HBK Trusts unambiguously require the Pay First Method. (HBK Response Memo. at 5, 7-9.) Olifant argues that the Governing Agreements for the Olifant Trusts unambiguously require the Write-Up First Method, that the Settlement Agreement is consistent with this method or, at a minimum, does not require Pay First, and that the Settlement Agreement could not in any event amend the Governing Agreements. (Olifant Initial Memo. at 2, 9-10; Response Memo, at 4.) The Institutional Investors contend that “the Governing Agreements are silent as to the order of operations,” that the Settlement Agreement requires the Pay First Method, and that the Settlement Agreement accordingly controls. (Institutional Investors Initial Memo, at 2; Response Memo. at 5; GMO Initial Memo, at 4-5 [joining Institutional Investors' Memo.].)⁵ As an initial matter, the court rejects certain respondents’ contention that no claim was made in the prior Article 77 proceeding, JPMorgan I, that the Settlement Agreement did not provide for the Pay First Method, and that the prior proceeding therefore bars any objection to the Pay First Method under the res judicata doctrine. (See Institutional Investors Initial Memo. at 6-9.) As discussed further below in connection with the Write-Up Methodology, JPMorgan I did not interpret the Settlement Agreement. The issue of whether the Settlement Agreement provides for the Pay First or Write-Up First Method does, however, require interpretation of that Agreement, to which the court turns. Section 3.06 (a) of the Settlement Agreement provides for each Trust’s Allocable Share of the Settlement Payment to be distributed to investors “in accordance with the distribution provisions of the Governing Agreements…as though [it] was a ‘subsequent recovery’ relating to principal proceeds available for distribution on the immediately following distribution date.” It is undisputed that sections 3.06 (a) and (b) of the Settlement Agreement are relevant to the determination of whether the Settlement Agreement provides for either the Pay First or. Write-Up First Method. Section 3.06 (a) provides in pertinent part: “Each Trust’s Allocable Share shall be deposited into the related Trust’s collection or distribution account pursuant to the terms of the Governing Agreements, for further distribution to Investors in accordance with the distribution provisions of the Governing Agreements (taking into account the Expert’s determination under Section 3.05) as though such Allocable Share was a ‘subsequent recovery’ relating to principal proceeds available for distribution on the immediately following distribution date (provided that if the Governing Agreement for a particular Settlement Trust does not include the concept of “subsequent recovery,” the Allocable Share of such Settlement Trust shall be distributed as though it was unscheduled principal available for distribution on such immediately following distribution date), subject to Section 3.04.” Section 3.06 (b) further provides in full: “After the distribution of the Allocable Share to a Settlement Trust pursuant to Subsection 3.06(a), the Accepting Trustee for such Settlement Trust will apply (or if another party is responsible for such function under the applicable Governing Agreement will use reasonable commercial best efforts to cause such party to apply) the amount of the Allocable Share for that Settlement Trust in the reverse order of previously allocated losses, to increase the balance of each class of securities (other than any class of REMIC residual interests) to which such losses have been previously allocated, but in each case by not more than the amount of such losses previously allocated to that class of securities pursuant to the Governing Agreements. Investors shall not be entitled to payment in respect of interest on the amount of such increases for any interest accrual period relating to the distribution date on which such increase occurs or any prior distribution date. For the avoidance of doubt, this Subsection 3.06(b) is intended only to increase the balances of the related classes of securities, as provided for herein, and shall not affect the distribution of the Settlement Payment provided for in Subsection 3.06(a).” A court presented with a contractual interpretation issue should “construe the [contract] so as to give full meaning and effect to the material provisions. A reading of the contract should not render any portion meaningless. Further, a contract should be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.” (Beal Sav. Bank v. Sommer, 8 NY3d 318, 324-25 [2007] [internal quotation marks and citations omitted]; W.W.W. Assocs, Inc. v. Giancontieri, 77 NY2d 157, 162 [reading the contract "as a whole to determine its purpose and intent"]; National Conversion Corp. v. Cedar Bldg. Corp., 23 NY2d 621, 625 [1969] [holding that "[a]ll parts of an agreement are to be reconciled, if possible, in order to avoid inconsistency”].) “Courts ‘may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.’” (Matter of Banos [v Rhea. as Chairperson of the New York City Hous. Auth., 25 NY3d 266, 287 [2015], quoting Vermont Teddy Bear v. 538 Madison Realty Co., 1 NY3d 470, 475 [2004].) “Importantly, too, courts should ‘aim [for] a practical interpretation of the expressions of the parties to the end that there be a realization of [their] reasonable expectations.’” (Matter of Banos, 25 NY3d at 287 [quoting Sutton v. East River Sav. Bank, 55 NY2d 550, 555 [1982].) In addition, the determination of whether a contract is ambiguous is one of law to be resolved by the court. (Matter of Wallace v. 600 Partners Co., 86 NY2d 543, 548 [1995]; W.W.W. Assocs. Inc., 77 NY2d at 162.) The court should determine from contractual language, without regard to extrinsic evidence, whether there is any ambiguity. (Chimart Assocs, v. Paul, 66 NY2d 570, 573 [1986].) “‘Ambiguity in a contract arises when the contract, read as a whole, fails to disclose its purpose and the parties’ intent’ or where its terms are subject to more than one reasonable interpretation.” (Universal Am. Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 25 NY3d 675; 680 [2015] [internal quotation marks and citations omitted]; Chimart Assocs., 66 NY2d at 573 [ambiguity exists where "the agreement on its face is reasonably susceptible of more than one interpretation"].) Applying these precepts, the court holds that the Settlement Agreement is not ambiguous as to the order of operations. As section 3.06(a) expressly defers to the distribution provisions of the Governing Agreements, the Governing Agreements control where they specify the order of operations, and the Settlement Agreement controls only where the Governing Agreements do not specify such order. The court further holds that the only interpretation to which the Settlement Agreement is reasonably susceptible is that the Settlement Agreement requires application of the Pay First Method, under which the Settlement Payment must be distributed prior to the writing up of the certificate principal balance. Section 3.06 (a) provides not only for “deposit” of the Trust’s Share into the Trust’s collection or distribution account, but also for “further distribution to Investors in accordance with the distribution provisions of the Governing Agreements” as a “subsequent recovery.” Section 3.06(b) addresses the write-up of the balance of previously written down classes of certificates. Section 3.06(b) thus provides that the Trustee will apply the amount of the Share for the Trust in order “to increase the balance of each class of securities…to which [] losses have been previously allocated….” Section 3.06 (b) also expressly provides for the write-up to occur “after” the distribution pursuant to 3.06(a). Citing the first sentence of section 3.06 (b) that the Trustee will write-up the balance “[a]fter the distribution of the Allocable Share to a Settlement Trust pursuant to Subsection 3.06(a),” certain respondents contend that the write-up is to occur after the deposit of the Share into the Trust account, and not after distribution of the Settlement Payment to investors. (Nover Initial Memo. at 18-20; Ambac Initial Memo. at 8-9.) This contention reads out the language of section 3.06(a) that the Share shall be deposited into the account “for further distribution to Investors in accordance with the distribution provisions of the Governing Agreements….” Moreover, the last sentence of 3.06 (b) is inconsistent with the contention that the write-up is intended to occur before the distribution to investors. This sentence unequivocally states that “Subsection 3.06(b) is intended only to increase the [certificate] balances…, and shall not affect the distribution of the Settlement Payment provided for in Subsection 3.06(a),” Write-up of the balances before distribution of the Settlement Payment would materially affect the distribution because it would increase the amounts of the Settlement Payment that certain classes are entitled to receive and/or affect the classes that are entitled to receive a portion of the Settlement Payment. (See Petition

36-37.) Having held that the Settlement Agreement governs the order of operations only if the Governing Agreements do not specify the order of operations, the court turns to interpretation of the Governing Agreements. The Institutional Investors argue that the Governing Agreements are silent as to the order of operations. Most other respondents argue that the order of operations is in fact specified in the Governing Agreements for their Trusts, and that numerous Trusts require application of the Write-Up First Method, while some provide for the Pay First Method. As discussed further below, the latter respondents demonstrate that the Trusts generally contain distribution provisions that specify the order of operations. Write-Up First Trusts As to the Write-Up First Trusts, the court holds that the distribution provisions of the Governing Agreements require distributions to various classes “until the Certificate Principal Balance thereof is reduced to zero”; that, in order to implement the distribution provisions, the Trustees must determine the Certificate Principal Balance for each class; and that this determination is in turn governed by the definition of Certificate Principal Balance for the Trusts, which provides for the certificate balances to be written up before distribution. (See e.g. Tilden Park Initial Memo. at 11.) The Pooling and Servicing Agreement for Bear Stearns Asset Backed Securities I Trust 2005-AQ2 (BSABS 2005-AQ2) contains terms typical of those in PSAs that require application of the Write-Up First Method.⁶ This PSA contains a distribution provision, section 5.04(a), which provides that principal shall be distributed “[o]n each Distribution Date,” to the classes in the order of priority specified in that section, “until the Certificate Principal Balance [of each such class] is reduced to zero.”⁷ Section 5.04 (a) is, however, silent, as to whether the write-up of the Certificate Principal Balance must occur before or after the distribution. Section 5.04 (b) provides that, “with respect to any Subsequent Recoveries,” “[i]f, after taking into account such Subsequent Recoveries, the amount of a Realized Loss is reduced, the amount of such Subsequent Recoveries will be applied to increase the Certificate Principal Balance of the Class of Certificates with the highest payment priority to which Realized Losses have been allocated….”⁸ Section 5.04 (b) is the write-up provision, as it is the provision that directs the increase of the Certificate Principal Balance. This section too, however, is silent as to whether the write-up must occur before or after the distribution. The order of operations is left to the definition in the PSA of Certificate Principal Balance. As stated in this definition, Certificate Principal Balance is the balance “as of any Distribution Date” of the Initial Certificate Principal Balance, plus, in the case of specified certificates, “any Subsequent Recoveries added to the Certificate Principal Balance of such Certificate[s] pursuant to Section 5.04 (b),” less (i) all amounts distributed “in reduction of the Certificate Principal Balance thereof on previous Distribution Dates…and (ii) any Applied Realized Loss Amounts allocated to such Certificate[s] on previous Distribution Dates.”⁹ The definition of Certificate Principal Balance thus provides for deduction of payments of principal that were made “on previous Distribution Dates” and for deduction of losses that were allocated “on previous Distribution Dates.” In contrast, this definition provides for addition not only of previously distributed Subsequent Recoveries but of “any” Subsequent Recoveries “as of any Distribution Date.” Had the drafters intended to include only previous subsequent recoveries in the calculation of Certificate Principal Balance and thereby to delay the write-up of such subsequent recoveries, they could have done so, as they did for other principal distributions and losses. (Tilden Park Initial Memo. at 14-16; Olifant Initial Memo. at 2-6; D.E. Shaw Initial Memo. at 2 [adopting Tilden Park's arguments]; Poetic & Prophet Initial Memo. at 2-5; Nover Initial Memo. at 14-18; DW/Ellington Initial Memo. at 21-24 [for Ellington Trust only]; Ambac Response Memo. at 2-3].) The court further holds that the provisions of the BSABS 2005-AQ2 PSA and similar PSAs are not reasonably susceptible to a contrary interpretation. The Institutional Investors assert that the Governing Agreements for the Exhibit D Trusts are “silent” as to, or do not specify, the order of operations. (Institutional Investors Response Memo. at 1, 10.) They contrast certain “JPALT” Trusts, which the Trustees have excluded from Exhibit D. It is undisputed by the Trustees and respondents that the Certificate Principal Balance definition for these Trusts provides for the Pay First Method by stating that the certificate balances shall be measured “as of the close of business of the immediately preceding Distribution Date…” (Id. at 11 [emphasis in original]; Sheeren Supp. Aff., Ex. 22 [NYSCEF Doc. No. 665] [excerpts from PSAs for JPALT Trusts excluded from Trustees' Ex. D].) The Certificate Principal Balance definition for these Trusts thus does not include Subsequent Recoveries to be distributed on the current Distribution Date. The Institutional Investors also point out that the Trustees have excluded from Exhibit D certain Trusts which provide for the Write-Up First Method by using a definition of “Class Principal Amount” that is materially similar to the Certificate Principal Balance definition in the BSABS 2005-AQ2 PSA, except that it also refers to a provision that specifically states that the write-up of the Class Principal Amount will occur “prior to giving effect to distributions” on the Distribution Date. (Institutional Investors Reply Memo. at 7; Second Supplemental Sheeren Aff., Ex. 25 [NYSCEF Doc. No. 741] [excerpts from PSAs for Write-Up First Trusts excluded from Trustees' Ex. D].) The provisions of the BSABS 2005-AQ2 PSA and similar PSAs do not address the order of operations as explicitly as the PSAs for the JPALT Trusts or the excluded Write-Up First Trusts. Determination of the timing of the write-up for the Trusts with PSAs similar to BSABS 2005-AQ2 thus requires analysis of the operative provisions of the PSAs, including the full definition of Certificate Principal Balance and the distribution and write-up provisions. Contrary to the Institutional Investors’ apparent contention, however, the need for interpretation of these provisions does not mean that they are silent as to the order of operations. The definition of Certificate Principal Balance in these PSAs expressly provides that “any” Subsequent Recoveries are to be added to the balance. The Institutional Investors thus do not persuasively contend that the definition of Certificate Principal Balance is silent as to “which subsequent recoveries are used to increase” the balance. (Response Memo. at 12 [emphasis in original].) Nor is the court persuaded by the further contention that the word “any” does not include both current and previously distributed Subsequent Recoveries, or that the word “all” (as opposed to “any”) is required to convey such meaning. (See Institutional Investors Reply Memo. at 7; Oral Argument Transcript at 5-6.) The court is also unpersuaded by the arguments advanced in support of the claim, made by HBK alone, that the BSABS 2005-AQ2 and similar PSAs require the Pay First Method. (HBK Initial Memo. at 7-9.) HBK appears to assert that the “structure” of the PSA requires the Pay First Method because the distribution provision, section 5.04 (a), appears in the PSA before the write-up provision, section 5.04 (b), and the latter provision refers to “the foregoing distributions.” (Id. at 7; Response Memo, at 9-11.) The mere sequence of these provisions cannot serve to impose an order of operations and, as held above, neither section imposes an order of operations. Contrary to HBK’s further contention, section 5.04 (b) does not specify an order of operations by stating that the Certificate Principal Balance will not be written up unless or until, “after taking into account such Subsequent Recoveries, the amount of a Realized Loss is reduced….” Characterizing the reduction of a Realized Loss as a “condition precedent” to the write-up, HBK asserts, without support, that the Trustee cannot determine if this condition precedent has been met-that is, the Trustee cannot determine if the amount of a Realized Loss has been reduced — until after the distribution actually occurs. (See HBK Initial Memo. at 8.) To the extent that HBK relies on section 5.05 in support of this contention (see HBK Response Memo. at 17), such reliance is misplaced, as section 5.05 applies to allocation, not reduction, of realized losses. Nor does HBK offer convincing support for its assertion that the Write-Up First Method is not provided for by the definition of Certificate Principal Balance or that this definition does not reflect a material distinction between Subsequent Recoveries, on the one hand, and prior distributions of principal and allocation of losses on the other. As discussed above, the definition of Certificate Principal Balance instructs that “any Subsequent Recoveries” be added to the balance, without limitation as to when the recoveries are received, while providing for deduction from the balance only of principal distributions, and of Applied Realized Loss Amounts allocated, “on previous Distribution Dates.” HBK posits, without explanation, that it is unnecessary to clarify that the definition of Certificate Principal Balance refers to Subsequent Recoveries from previous distribution dates because Subsequent Recoveries are “a component of Applied Realized Losses.” (HBK Response Memo. at 16.) In sum, the court holds that respondents Tilden Park, Olifant, D.E. Shaw, Poetic & Prophet, Nover, Ellington, and Ambac demonstrate that specified Trusts in which they have interests contain provisions substantially similar to the provisions of the BSABS 2005-AQ2 Trust discussed above, and therefore provide for the application of the Write-Up First Method in distributing the Settlement Payment. It is noted that although these respondents do not quote each Trust’s PSA provisions, respondents that oppose the Write-Up First Method do not point to any material differences in the provisions of the PSAs for the specified Trusts. Pay First Method Two respondents further contend that the Governing Agreements for certain of their Exhibit D Trusts provide for application of the Pay First Method in distributing the Settlement Payment. Tilden Park claims that 24 of the Trusts in which it has an interest are Pay First Trusts, while D.E, Shaw claims that two of its Trusts are Pay First Trusts. (Tilden Park Initial Memo. at 17, n 9, 10; 18, n 11, 12; D.E. Shaw Initial Memo. at 1-2.) Tilden Park claims that the Pay First Trusts fall into four groups. (Tilden Park Initial Memo. at 16-18.) The first, which includes BSABS 2005-SD2, is governed by a PSA in which the definition of Certificate Principal Balance limits the Subsequent Recoveries to be added to the balance (i.e., written up) to “any Subsequent Recoveries allocated to such Class on previous Distribution Dates….”¹⁰ It is now undisputed that the Pay First Method should be applied to this Trust. (See Chart of Parties’ Positions [NYSCEF Doc. No. 772 at 4].) The court holds that group 1 PSAs with substantially similar definitions of Certificate Principal Balance also provide for the Pay First Method. The second group consists of the JPALT Trusts, discussed above, which were excluded by the Trustees from Exhibit D, as their Governing Agreements indisputably provide for the Pay First Method. The third group, which includes JPALT 2006-A5, is governed by a PSA in which the definition of Certificate Principal Amount provides for the amount (or balance) to be increased “by the amount of Subsequent Recoveries distributed as principal….”¹¹ Tilden contends, and the court holds that, the Pay First Method is imposed by the requirement that the Subsequent Recoveries have been distributed before the increase. The fourth group involves Trusts with Governing Agreements which, according to Tilden Park, “require a Pay First Method by omitting any explicit method for writing up certificate balances for subsequent recoveries.” (Tilden Park Initial Memo. at 18.) This group also includes the two D.E. Shaw Trusts. (D.E. Shaw Initial Memo. at 1-2.) Tilden Park cites, as an example of such a Trust, SAMI 2006-AR8. The PSA for this Trust has a definition of Certificate Principal Balance which is substantially similar to that for the BSABS 2005-AQ2 Trust in that it requires “any Subsequent Recoveries” to be added to the balance pursuant to a specified provision in the PSA, section 6.02, and requires that the balance be reduced by previously distributed principal and Applied Realized Loss Amounts. The heading of section 6.02 is “Allocation of Losses and Subsequent Recoveries on Certificates.” The body of the provision does not, however, mention Subsequent Recoveries or otherwise address increases in the certificate balance. Tilden Park does not persuasively argue that the Governing Agreements for these Trusts, which are affected by an apparent drafting error, should be regarded as imposing the Pay First Method. They also cannot be viewed as imposing the Write-Up First Method, given their silence as to the write-Up mechanics. The court holds, in the absence of a controlling provision in the Governing Agreements, that the group four Trusts are governed by the Settlement Agreement, which requires application of the Pay First Method. Overcollateralization of Pay First Trusts A further sharply disputed issue is whether the Settlement Payment may create overcollateralization if the Pay First Method is applied. The Trustees do not explicitly request instruction on this issue, but highlight the potential for the Pay First Method to cause the trusts with an overcollateralization structure (OC Trusts) “to appear to be temporarily overcollateralized.” (Petition 28.) Tilden Park and HBK assert that, under the terms of the Governing Agreements for the OC Trusts, overcollateralization may occur if the Pay First Method is applied, thus requiring distribution of a portion of the Settlement Payment (the Overcollateralization Release Amount) through a different waterfall than the waterfall for distribution of principal. (Tilden Park Response Memo. at 13-15; HBK Response Memo. at 3-4, 21-25.) The Institutional Investors dispute this interpretation of the Governing Agreements and contend that, under their terms, distribution of the Settlement Payment will not create overcollateralization. (Institutional Investors Initial Memo. at 14-18; GMO Initial Memo. at 4-5 [adopting the arguments of the Institutional Investors].) The Institutional Investors also claim that if the Settlement Payment were found to cause overcollateralization, the result would be absurd, commercially unreasonable, or contrary to the reasonable expectations of the investors. (Institutional Investors Initial Memo. at 18-20.) Other respondents take the position that the Pay First Method should not be applied because it would cause the OC Trusts to appear to be temporarily overcollateralized although they are not, and would result in distribution of the Settlement Payment in an absurd or commercially unreasonable manner. (Nover Initial Memo. at 20-22; Olifant Initial Memo. at 10-11.) As the Trustees explain, in Trusts with an overcollateralization structure, the “initial aggregate mortgage loan balances…are greater than the initial aggregate certificate principal balances of the Class A, Class M, and Class B certificates….” (Petition 25.) The excess of aggregate mortgage loan balances over aggregate certificate principal balances is often referred to as the “overcollateralization amount.” (Id.) Where the overcollateralization amount exceeds a specified “overcollateralization target,” the amount in excess of the target “constitutes ‘overcollateralization release amount,’ which is typically distributed as excess cashflow instead of as principal amount in any given month.” (Id. 26.) The distribution of excess cashflow is made under a waterfall that differs from the waterfall for principal distributions and can have significant impacts on the distribution of the settlement payment, including distribution of some portion of the settlement payment to junior certificates and, in some OC Trusts, to a certificate insurer. (Id.