Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-05074/USCOURTS-caDC-07-05074-0/pdf.json

Parties Involved:
Bank of New York
Appellant
Federal Deposit Insurance Corporation
Appellee

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 10, 2007 Decided November 13, 2007

No. 06-5358

THE BANK OF NEW YORK,

AS INDENTURE TRUSTEE OF THE NEXTBANK CREDIT CARD

MASTER NOTE TRUST,

APPELLANT

v.

FEDERAL DEPOSIT INSURANCE CORPORATION,

IN ITS CAPACITY AS RECEIVER FOR NEXTBANK N.A.,

APPELLEE

Consolidated with

07-5074

Appeals from the United States District Court

for the District of Columbia

(No. 03cv01221)

(No. 06cv01975)

H. Stephen Harris, Jr. argued the cause and filed the briefs

for appellant.

Jaclyn C. Taner, Counsel, Federal Deposit Insurance

Corporation, argued the cause for appellee. With her on the

USCA Case #07-5074 Document #1079852 Filed: 11/13/2007 Page 1 of 11
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brief were Richard J. Osterman, Jr., Assistant General Counsel,

Colleen J. Boles, Senior Counsel, and Dennis S. Klein and Scott

H. Christensen. 

Before: HENDERSON, RANDOLPH and BROWN, Circuit

Judges.

RANDOLPH, Circuit Judge: The main issue in these

consolidated appeals from the judgments of the district court is

whether the Federal Deposit Insurance Corporation (“FDIC”),

as the receiver for NextBank, had the authority to disregard an

acceleration clause requiring the payment of interest and

principal to noteholders when NextBank failed. Judge Huvelle

issued a thorough opinion on the issue, and we closely follow

her analysis in deciding to affirm. 

NextBank, a wholly owned subsidiary of NextCard, Inc.,

was a limited purpose national credit card bank. As such, it

could not make commercial loans, and its other activities were

restricted. NextBank issued credit cards that NextCard

originated over the Internet. By February 2002, NextBank had

1.2 million holders of its Visa credit cards and credit card

receivables totaling $1.9 billion.

Credit card issuers make revolving, personal, unsecured

loans to their customers. The cardholder makes purchases

subject to a credit limit; the issuing financial institution pays the

merchant’s bank; the cardholder’s purchases are consolidated

into a monthly bill; and the cardholder pays the bill in full with

no finance charge or in part with a finance charge computed on

the unpaid balance. 

Some credit card banks “securitize” their credit card

receivables. See Charles W. Calomiris & Joseph R. Mason,

Credit Card Securitization and Regulatory Arbitrage (Fed.

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The seller’s interest is the difference between the total

amount of securitized receivables and the trust’s outstanding

debt.

Reserve Bank of Phila., Working Paper No. 03-7, 2003).

NextBank’s securitization was typical: it sold a portion of its

credit card receivables to a special purpose entity, the Master

Trust. The trust paid NextBank by selling securities backed by

the cash flows from the receivables. There were four classes of

securities or “Notes,” which varied by degree of risk. NextBank

serviced the credit cards and deposited cardholders’ payments

into a series of accounts (collectively the “Collection Account”).

It also retained about a 9 percent seller’s interest in the

receivables.1

 The Bank of New York, as indenture trustee,

maintained the Collection Account and made distributions to

noteholders based on formulas corresponding to specific classes

of Notes. 

Securitization offered NextBank several benefits. First,

NextBank received cash immediately rather than waiting for the

credit card holders to pay off their debts. Second, because

NextBank “sold” the receivables, accounting rules permitted it

to remove them from its balance sheet, thereby freeing up

capital. Third, NextBank obtained cheaper funding because the

trust’s separate legal status isolated the noteholders from

NextBank’s underlying business risk. Faced only with the risk

inherent in the receivables, investors accepted lower interest

payments.

The securitization transaction consisted of four main

documents. The Trust Agreement created the Master Trust and

set forth its powers. Although the trust was a legally separate

entity, it was wholly owned and operated by NextBank. The

Administration Agreement obligated NextBank to perform

duties of the trust as specified under the other documents. The

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Transfer and Servicing Agreement provided for the conveyance

of receivables to the trust and for servicing of the receivables by

NextBank.

The Master Indenture provided for issuance of the

receivable-backed Notes and imposed a variety of obligations on

the trust, the Bank of New York, and NextBank. One of the

clauses, the ipso facto or acceleration clause contained in Article

V, § 5.01, provided that the payment of interest and principal on

the Notes would be accelerated if NextBank went into

receivership. NextBank signed all the agreements on lines

designating it a party except the Master Indenture, which it

signed on a line marked “Acknowledged and Accepted.” The

trust and the Bank of New York signed as parties. 

 NextBank’s operational problems, including its issuance of

credit cards to subprime customers without verifying

information they supplied online, ultimately led to its downfall.

When the FDIC stepped in as receiver in February 2002, it was

faced with three options: abide by the acceleration clause and

keep the credit card accounts open; abide by the acceleration

clause and close the credit card accounts, prohibiting any new

charges; or disregard the acceleration clause and continue the

securitization, essentially stepping into NextBank’s shoes. The

first option would have required the FDIC to use $760 million

of its own funds to operate the credit card business. The FDIC

concluded that the third option was the least costly, and

purported to exercise its authority to enforce the transaction

documents under the Financial Institutions Reform Recovery

and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat.

183. 

The credit card portfolio continued to struggle under the

FDIC’s direction. Five months into the receivership, the

portfolio failed to meet a financial performance standard,

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Congress has redesignated this section as § 1821(e)(13).

See Bankruptcy Abuse Prevention and Consumer Protection Act

of 2005, Pub. L. No. 109-8, § 904(a)(1), 119 Stat. 23, 165. We

use the pre-2005 numbering because that was in effect at the

time the Agency acted and for consistency with Judge Huvelle’s

opinion and the parties’ briefs.

triggering another acceleration provision. The FDIC repudiated

substantially all of its obligations under the transaction

documents pursuant to 12 U.S.C. § 1821(e)(1), but continued to

pay interest and principal to the noteholders. Class A and B

noteholders were fully repaid, Class C noteholders received half

their principal, and Class D noteholders received no principal.

Acting on behalf of the Class C and D noteholders, the

Bank of New York sued the FDIC for conversion for not

immediately accelerating interest and principal payments upon

NextBank’s receivership. The Bank of New York claimed that

the noteholders suffered $800 million in losses during that fivemonth window because the FDIC used collections to continue

to service the credit cards rather than make accelerated

payments to the noteholders. Judge Huvelle granted summary

judgment to the FDIC, holding that the FDIC properly

disregarded the acceleration clause pursuant to its authority

under 12 U.S.C. § 1821(e)(12) (2000).2

 The Bank of New York

appealed on October 27, 2006 (“2006 Appeal”).

Shortly afterward, the noteholders directed the Bank of New

York (1) to exercise control over the receivables to repay the

Notes and (2) to sue the trust for amounts outstanding on the

Notes. The noteholders threatened to sue the Bank of New York

if it did not comply. In turn, citing the district court’s decision,

the FDIC threatened to sue the Bank of New York if it did

comply. The Bank of New York filed an interpleader action in

New York state court seeking resolution of the conflicting

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claims to the receivables. The FDIC then sued in the District of

Columbia to enjoin the Bank of New York from suing the trust

and seizing the receivables. Judge Huvelle granted the FDIC’s

requested injunctions, and the Bank of New York appealed on

February 28, 2007 (“2007 Appeal”).

 

I.

As receiver the FDIC “may enforce any contract . . . entered

into by the depository institution notwithstanding any provision

of the contract providing for” acceleration upon appointment of

a receiver. 12 U.S.C. § 1821(e)(12)(A). Accordingly, for the

FDIC to have validly disregarded the Master Indenture’s

acceleration provision, NextBank must have “entered into” that

agreement. But what does “entered into” mean? The Bank of

New York tells us that it means “became a party to.” It means

this because that is the definition of “enter into” contained in

Black’s Law Dictionary. See BLACK’S LAW DICTIONARY 552

(7th ed. 1999). We agree with Judge Huvelle that things are not

so simple.

To begin, why choose Black’s? Other dictionaries contain

broader definitions of these words. See 5 OXFORD ENGLISH

DICTIONARY 288 (2d ed. 1989) (defining “enter into” as, inter

alia, “To take on oneself,” “To take part in,” and “To take an

interest in”); WEBSTER’S THIRD NEW INTERNATIONAL

DICTIONARY 757 (1981) (defining “enter into” as, inter alia, “to

participate or share in”). That Black’s favors the Bank of New

York’s reading obviously cannot be a reason for choosing it over

the others. See Alarm Indus. Commc’ns Comm. v. FCC, 131

F.3d 1066, 1069 (D.C. Cir. 1997). The Bank of New York says

we should prefer Black’s because “entered into” is a legal term.

But statutes are filled with legal terms, and yet we have never

supposed that only Black’s should be consulted for their

meaning. Cf. Buckhannon Bd. & Care Home, Inc. v. W. Va.

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Dep’t of Health & Human Res., 532 U.S. 598, 615–16 (2001)

(Scalia, J., concurring). The printed dictionaries, Black’s

included, may be useful, but “we cannot be sure what was in the

mental dictionaries of the members of Congress.” Doris Day

Animal League v. Veneman, 315 F.3d 297, 299 (D.C. Cir. 2003).

Besides, as Judge Huvelle pointed out, even if “entered into”

means “became a party to,” this still leaves questions. We have

said before that a “definition only pushes the problem back to

the meaning of the defining terms.” Goldstein v. SEC, 451 F.3d

873, 878 (D.C. Cir. 2006). And so one must ask what is a

“party”? If the answer is that a “party” may be “[o]ne who takes

part in a transaction,” BLACK’S LAW DICTIONARY 1144 (7th ed.

1999), we are still left with the question what is the meaning of

“takes part”?

All indications are that NextBank participated in the

transaction with which we are concerned – the consummation of

the Master Indenture. Whatever the reach of § 1821(e)(12)(A)

and its “entered into” language, we believe, as did Judge

Huvelle, that whenever an entity agrees to undertake obligations

and gain rights in a contract, that entity has “entered into” the

contract. Here the Master Indenture imposed a number of

binding obligations on NextBank. For example, the Indenture

required NextBank to “pay to the Indenture Trustee [the Bank

of New York] from time to time reasonable compensation for all

services rendered” under the Indenture, § 6.07; to “prepare or

. . . cause to be prepared” tax returns, § 6.13; to “establish and

maintain . . . Qualified Accounts,” § 8.03; to “apply or . . .

instruct the Indenture Trustee to apply all funds on deposit in the

Collection Account,” § 8.04(a); and to “deposit Collections into

the Collection Account” at specified times, id. NextBank

acknowledged these binding duties when it signed the Master

Indenture. That NextBank did not sign on a line designating it

a party cannot alter the substance of the contract terms.

NextBank was legally obligated to perform these functions, and

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The full Transfer and Servicing Agreement is not in the

record.

the line on which it did sign stated that it had “Acknowledged

and Accepted” the Master Indenture.

The Bank of New York tells us that NextBank’s obligations

under the Master Indenture actually arose under other

securitization documents, particularly the Transfer and Servicing

Agreement, and were merely “referred to” in the Master

Indenture. Pet’r Br. 38. Even so, that would not change the fact

that NextBank was bound by the Master Indenture. For

instance, in an opinion letter, NextBank’s own counsel stated as

part of its assumptions that “each of the [securitization]

Documents constitutes the legal, valid, and binding obligation

of [NextBank] and is enforceable against [NextBank] in

accordance with the terms thereof.” There is no doubt that

NextBank could have been sued for violating the Master

Indenture.

Moreover, the record does not support the Bank of New

York’s contention that the Master Indenture duties were merely

duplicative. The Bank of New York has not cited, in its briefs

or during oral argument, specific provisions of the Transfer and

Servicing Agreement that encompass NextBank’s obligations

under the Master Indenture. Where these duties are stated in the

Master Indenture, there are no concurrent references to the other

agreements. We have been unable to find anything in the other

contracts that matches the duties described above.3 

To be sure, there are provisions in the documents that

address the same subject matter. For instance, Section 3.01(e)

of the Transfer and Servicing Agreement states that NextBank

“shall pay out of its own funds . . . fees and disbursements of the

. . . Indenture Trustee.” But this is not the same as requiring

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paying “from time to time reasonable compensation.” Indeed,

that same provision of the Master Indenture refers to

NextBank’s “payment obligations to the Indenture Trustee

pursuant to this Section 6.07” (emphasis added). Similarly,

Section 3.01(b) of the Transfer and Servicing Agreement states

that NextBank “shall collect and deposit into the Collection

Account amounts received under the Receivables.” But this

does not specify when deposits are to be made, a requirement

recited in Section 8.04 of the Master Indenture. Some of the

Bank of New York’s own documentation contradicts its

contentions. In its Proof of Claim before the FDIC, it stated that

“pursuant to Section 6.07 of the Indenture, the Servicer [i.e.,

NextBank] is required to pay the expenses of the Trust,

including legal fees” (emphasis added). We therefore conclude

that the Master Indenture set forth independent obligations of

NextBank. 

The restrictions in 12 C.F.R. § 360.6 do not change our

conclusion that the FDIC acted validly. That regulation

prohibits the FDIC from disaffirming or repudiating contracts

through § 1821(e)(1) in order to “reclaim, recover, or

recharacterize” as its own property “any financial assets

transferred . . . in connection with a securitization.” 12 C.F.R.

§ 360.6(b). The Bank of New York argues that the FDIC

violated this prohibition by repudiating the ipso facto clause and

failing to accelerate payments. But this is not an accurate

description of the FDIC’s action. Section 360 deals with the

FDIC’s authority to “disaffirm or repudiate any contract”

pursuant to § 1821(e)(1). The FDIC did not repudiate the

Master Indenture under § 1821(e)(1). Compare FDIC v. Ernst

& Young LLP, 374 F.3d 579, 584 (7th Cir. 2004). Rather, it

continued the securitization transaction as executed in the

transaction documents. This constitutes “enforce[ment] . . .

notwithstanding any provision of the contract providing for”

acceleration. § 1821(e)(12)(A). If ignoring an ipso facto clause

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were seen as a repudiation, then every such action under

§ 1821(e)(12) would become an action under § 1821(e)(1).

Because NextBank entered into the Master Indenture by

agreeing to undertake rights and obligations, the FDIC validly

enforced that contract notwithstanding the ipso facto clause.

Accordingly, we affirm Judge Huvelle’s judgment in the 2006

Appeal. 

II.

The Bank of New York raises four issues with respect to

its 2007 Appeal. The first is whether collateral estoppel bars it

from litigating whether the trust is liable for failing to accelerate

payments pursuant to the ipso facto clause. The Bank of New

York argues that the first case addressed the FDIC’s liability,

not the trust’s. The idea is that the § 1821(e)(12) defense only

protects the FDIC and cannot protect any other entities. Judge

Huvelle, in her merits decision in 2006, determined that the

FDIC validly enforced the transaction documents

notwithstanding the ipso facto clause. In other words, it was

proper for the transactions to continue as if the acceleration

clause had no effect. Given this ruling, there is no room for

argument that the trust could be liable for failure to give effect

to the acceleration clause. Judge Huvelle thoroughly explained

why the issue of the trust’s liability was presented and decided.

See FDIC v. Bank of N.Y., 479 F. Supp. 2d 1, 14–18 (D.D.C.

2007). 

The Bank of New York also argues that the noteholders

were necessary parties in the district court. Federal Rule of

Civil Procedure 19(a) requires that a non-party “be joined if

feasible” if “(1) complete relief cannot be accorded in its

absence; or (2) the absentee’s ability to protect its interests may

be impaired by the disposition of the action; or (3) those already

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parties will be subject to a substantial risk of incurring

inconsistent obligations because of the absence.” Cloverleaf

Standardbred Owners Ass’n v. Nat’l Bank of Wash., 699 F.2d

1274, 1278–79 (D.C. Cir. 1983). There is nothing to the Bank

of New York’s contention that the noteholders’ interests were

impaired because “the court’s ruling requires that assets claimed

by the noteholders be given instead to the” FDIC. Pet’r Br. 47.

Rule 19 turns on the noteholders’ ability to protect their

interests, and a party can adequately protect a non-party. See

Ramah Navajo Sch. Bd. v. Babbitt, 87 F.3d 1338, 1351 (D.C.

Cir. 1996). The Bank of New York, as trustee, has done that.

See 7 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY

KAY KANE, FEDERAL PRACTICE AND PROCEDURE § 1618, at 284

(3d ed. 2001); see also Green v. Brophy, 110 F.2d 539, 542

(D.C. Cir. 1940).

The Bank of New York’s third point is that it is subject

to inconsistent obligations because both the noteholders and the

FDIC claim rights to the funds. We have already decided that

the FDIC properly ignored the acceleration clause and that the

issue cannot be relitigated. The noteholders thus have no actual

claim to the funds. 

The Bank of New York’s final challenge is to venue.

Venue was proper in the district court because the FDIC’s

decisionmaking and the prior judgment constitute a “substantial

part of the events . . . giving rise to the claim.” 28 U.S.C.

§ 1391(b)(2). The FDIC sued on the basis of the district court’s

earlier decision. In any event, the Bank of New York does not

appear to dispute the district court’s assertion that venue was

proper to enforce the court’s prior judgment. See 479 F. Supp.

2d at 13; Pet’r Br. 51.

Affirmed.

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