Opinion ID: 6499888
Heading Depth: 2
Heading Rank: 2

Heading: Interest on Advances

Text: Appaloosa moved for partial summary judgment, arguing that CWC was required to use Penalty Interest to reimburse the C30 Trust for approximately $67.2 million in Interest on Advances. 2 The district court denied that motion, concluding that “CWC was not required to reimburse [Interest on Advances] from the Penalty Interest it retained from the sale of Stuy Town” because Interest on Advances must be “satisfied before CWC retained Penalty Interest.” In re Wachovia PSA Trusts, 2020 WL 1304400, at . Here, the district court erred. 2 Although the parties style the approximately $67.2 million as both “Interest on Advances” and “Additional Trust Fund Expenses,” Appaloosa’s Br. at 54; CWC’s Br. at 51, the realized loss report explains that the $67.2 million comprises approximately $58.5 million in “Interest on Advances – P&I [Principal & Interest],” approximately $2.8 million in “Interest on Advances – T&I [Taxes & Insurance”], approximately $2.6 million in “Interest on Advances – Servicing Advances,” and approximately $3.4 million in “Interest on Advances” categorized under “Additional Trust Fund Expenses,” J. App’x at 5321. For ease of reference, we refer to the $67.2 million solely as “Interest on Advances.” 9 The C30 PSA’s definition of REO Loan governs the distribution of proceeds collected on an REO Loan. 3 See C30 PSA §§ 1.01, REO Loan, J. App’x at 404–05; 3.02(b), J. App’x at 440–41. The definition requires the proceeds to be applied in four sequential steps: “first, as a recovery of . . . Advances . . . ; second, as a recovery of accrued and unpaid interest on such REO Loan . . . ; third, as a recovery of principal of such REO Loan . . . ; and fourth, as a recovery of any other amounts due and owing in respect of such REO Loan, including . . . Penalty Interest and . . . Additional Interest on other amounts, in that order.” Id. § 1.01, REO Loan, J. App’x at 404–05 (emphasis added). Under this distribution structure, Interests on Advances do not fit into any of the first three steps and presumably would be paid last at the fourth step out of the general pool of sale proceeds. But this is not the end of the inquiry. The definition of REO Loan also provides that “amounts payable or reimbursable . . . in respect of the predecessor Mortgage Loan as of the date of the related REO Acquisition” are carved out of this distribution structure and are instead reimbursed based on the ordinary terms 3 The C30 PSA makes clear that the distribution here is governed by the REO waterfall provision set forth in the definition of “REO Loan” in section 1.01. The general waterfall provision, section 3.02(b), directs that “amounts collected on any REO Loan shall be deemed to be applied in accordance with the definition thereof.” C30 PSA § 3.02(b), J. App’x at 440–41. CWC’s arguments to the contrary, in favor of applying the general waterfall provision, are unpersuasive. 10 of the C30 PSA under section 3.05(a). Id. Section 3.05(a), read in conjunction with the definition of REO Loan, provides that any Interest on Advances made on or before June 3, 2014 – the date of the transaction that made the senior loan an REO Loan (the “REO Acquisition”) – is paid first out of late payment charges and Penalty Interest and then, to the extent that the late payment charges and Penalty Interest are insufficient, out of Gain-on-Sale Proceeds, i.e., the catch-all category for any proceeds remaining for distribution after all the specified payments in the C30 PSA are made. See id. § 3.05(a)(ix), J. App’x at 452–53. Put simply, any portion of the $67.2 million attributable to Interest on Advances accruing after June 3, 2014 must be paid out of Gain-on-Sale Proceeds from the sale of Stuy Town; any portion attributable to Interest on Advances accruing on or before June 3, 2014 must be paid out of late payment charges and Penalty Interest. It is true that no party advanced this interpretation in the district court or before us. But, in our view, this interpretation offers the correct and most coherent reading of the C30 PSA’s provisions regarding the payment of Interest on Advances. We therefore reverse the district court’s denial of Appaloosa’s motion for partial summary judgment and the portion of the district court’s order granting CWC summary judgment with respect to the proper manner of payment 11 of Interest on Advances. But because it is not clear on the record before us what portion of the $67.2 million in Interest on Advances accrued before the REO Acquisition and what portion accrued after the REO Acquisition, we remand the case to the district court to make that factual determination in the first instance.