Court Opinion

ID: 1036115
Source: CourtListenerOpinion
Date Created: 2013-08-01 21:06:14.041787+00
Date Added: 2024-06-11T12:30:54.698412
License: Public Domain

12-0168-cv(L), 12-0169-cv(CON), 12-0878-cv(CON), 12-0880-cv(CON)*
     Franklin Advisers, Inc. v. CDO Plus Master Fund, Ltd.
 1
 2                       UNITED STATES COURT OF APPEALS
 3
 4                           FOR THE SECOND CIRCUIT
 5
 6                               August Term, 2012
 7
 8
 9        (Argued: March 1, 2013              Decided: August 1, 2013)
10
11             Docket Nos. 12-0168, 12-0169, 12-0878, 12-0880*
12
13   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
14
15   THE BANK OF NEW YORK TRUST COMPANY,
16   N.A., AS TRUSTEE,
17
18                     Plaintiff,
19
20               - v.-
21
22   FRANKLIN ADVISERS, INC.,
23
24                     Defendant-Appellee,
25
26   FRANKLIN CLO II, LTD., FRANKLIN CLO CORP., CHASE MANHATTAN
27   BANK LONDON NOMINEE FOR SEIRA 13, AS NOMINEE, DEUTSCHE BANK
28   SECURITIES INC., AS A NOMINEE, GENSEC IRELAND LIMITED, AS A
29   NOMINEE, HARE & CO., AS NOMINEE, MAC & CO., MASSACHUSETTS
30   MUTUAL LIFE INSURANCE CO., SUN LIFE INSURANCE CO. OF CANADA,
31   AS A NOMINEE, TEMPLETON GLOBAL ADVISORS, LTD., AS A NOMINEE,
32   “JOHN DOE 1,” THROUGH “JOHN DOE” 12, THE LAST TWELVE NAMES
33   BEING FICTITIOUS AND UNKNOWN TO PLAINTIFF, THE PERSONS OR
34   PARTIES INTENDED BEING THE BENEFICIAL OWNERS OF THE
35   PREFERRED SHARES, THE SERIES I COMBINATION SECURITY AND THE
36   CLASS C2 NOTES UNDER COMPLAINT,
37
38                     Defendants,
39
40               - v.-
41

           *
            Appeals docketed as 12-0168-cv(L) and 12-0169-cv(CON)
     were closed by stipulation of the parties on March 8, 2012.
1    CDO PLUS MASTER FUND, LTD., MERRILL LYNCH, PIERCE, FENNER &
2    SMITH INC., AS A NOMINEE,
3
4                  Defendants-Appellants.
5
6    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
7

 8       Before:       JACOBS, Chief Judge, POOLER, Circuit
 9                     Judge, and VITALIANO, District Judge.**
10
11       Merrill Lynch, Pierce, Fenner & Smith Inc., together

12   with CDO Plus Master Fund, Ltd., (collectively, the

13   “Shareholders”), appeal an order of the United States

14   District Court for the Southern District of New York

15   (Marrero, J.) denying their motion for summary judgment and

16   granting partial summary judgment to Franklin Advisers, Inc.

17   (“Franklin”), in a dispute over the payment of a contingent

18   collateral management fee.   The Shareholders argue that the

19   district court erred in relying on extrinsic evidence and

20   concluding that Franklin, as collateral manager, was

21   entitled to the contingent fee after the portfolio produced

22   a twelve-percent internal rate of return, according to the

23   terms of the governing indenture.   The Shareholders also

24   appeal Franklin’s award of attorney’s fees and statutory

25   prejudgment interest.   For the following reasons, we affirm

          **
             The Honorable Eric N. Vitaliano of the United
     States District Court for the Eastern District of New York,
     sitting by designation.
                                   2
1    the grant of summary judgment and the award of attorney’s

2    fees, vacate the award of prejudgment interest, and remand

3    with the instruction to award actual interest on the

4    judgment.

 5                                 JAMES C. MARTIN, Reed Smith LLP,
 6                                 New York, New York (James C.
 7                                 McCarroll and C. Neil Gray, on
 8                                 the brief), for Appellants.
 9
10                                 JONATHAN L. HOCHMAN, Schindler
11                                 Cohen & Hochman LLP, New York,
12                                 New York (Matthew A. Katz, on
13                                 the brief), for Appellee.
14
15   DENNIS JACOBS, Chief Judge:
16
17       This interpleader action was initiated by The Bank of

18   New York Trust Company, N.A. (“BNY”), as Trustee of an

19   investment portfolio of collateralized loan obligations, to

20   resolve a contract dispute between certain shareholders and

21   the manager of that portfolio, Franklin Advisers, Inc.

22   (“Franklin”).     In dispute are the terms of the underlying

23   indenture and, specifically, terms governing distribution of

24   a Contingent Collateral Management Fee (the “Contingent Fee”

25   or the “Fee”), which was payable to Franklin only if

26   distributions reached a twelve percent internal rate of

27   return (“IRR”).     Franklin claimed the Fee (exceeding $7

28   million) when the portfolio’s return surpassed twelve

                                     3
1    percent upon an optional redemption voted by the

2    shareholders.

3        On cross-motions for summary judgment, the United

4    States District Court for the Southern District of New York

5    (Marrero, J.) ruled that: (1) the Fee can be paid on an

6    optional redemption; (2) proceeds of an optional redemption

7    should be included in calculating the IRR; and (3) the

8    indenture (“Indenture”) is ambiguous as to when the Fee

9    begins to accrue, i.e., whether the fee begins to accrue

10   from the closing date forward, or from the date the

11   portfolio’s IRR exceeds twelve percent (an issue the parties

12   resolved by arbitration).     On appeal, Merrill Lynch, Pierce,

13   Fenner & Smith Inc. (“Merrill Lynch”) and CDO Plus Master

14   Fund, Ltd. (“CDO Plus”) (collectively, the “Shareholders”)1

15   argue that each of those rulings was error.      They also

16   challenge the court’s award of fees and costs, and its award

17   of prejudgment interest at a rate of nine percent pursuant

18   to N.Y. C.P.L.R. § 5001(a).     We vacate the award of

19   statutory prejudgment interest and direct that interest be

20   paid only as actually accrued.      In all other respects, we

21   affirm.

          1
            The term “Shareholders” refers specifically to the
     Appellants, while “shareholders” refers broadly to all
     holders of CLO II equity.
                                     4
1                                      I

2        A.        The Transaction

3        The $600 million collateral loan obligation from which

4    this dispute arises, titled “CLO II,” closed on July 26,

5    2001.       The securities were collateralized by a pool of

6    leveraged commercial loans and then sold to investors who

7    were paid based on cash flow from the underlying loans.

8        As collateral manager for CLO II, Franklin was

9    responsible for structuring the transaction with the

10   underwriter and for the active management of the portfolio.

11   Merrill Lynch was engaged as underwriter, and two special-

12   purpose investment vehicles were formed as issuer and co-

13   issuer: Franklin CLO II, Ltd. and Franklin CLO Corp. (the

14   “Issuers”).       BNY, as Trustee (and stakeholder here), was

15   responsible for collecting principal and interest payments,

16   paying fees and expenses, and then distributing the

17   remaining proceeds to investors.2

18       On the day of closing, the Trustee and the Issuers

19   executed an Indenture drafted by deal counsel, Cleary

20   Gottlieb Steen & Hamilton LLP (“Cleary”).       The same day,

             2
            BNY succeeded Chase Manhattan Bank, the original
     Trustee, on October 1, 2006.
                                       5
1    Franklin and the Issuers executed a Collateral Management

2    Agreement, incorporating all relevant provisions of the

3    Indenture.     Merrill Lynch as underwriter sold the CLO II

4    securities to investors on the secondary market.     The

5    securities consisted of (1) notes divided into different

6    levels of risk, held by CLO noteholders, and (2) shares of

7    CLO II’s equity, held by CLO II shareholders.     As portfolio

8    manager, Franklin assembled and maintained CLO II’s assets,

9    which, in the main, were leveraged, secured loans made to

10   below-investment-grade borrowers.     These loans served as

11   collateral for CLO II’s debt obligations to the CLO II

12   noteholders.

13       B.   Provisions in Dispute.

14       1.   The Article 11 “Waterfalls”.     The Indenture

15   provides that proceeds from the portfolio were to be

16   distributed by BNY according to two sets of detailed payment

17   priorities on defined, quarterly distribution dates.        The

18   two payment priorities, set out in Article 11, are called

19   “Waterfalls” because the payments cascade downward to a pool

20   at the bottom for distribution to the shareholders.        The

21   first governs distribution of interest proceeds (the

22   “Interest Proceeds Waterfall”) and the second governs

                                     6
1    distribution of principal proceeds derived from obligations

2    paid at maturity or upon liquidation of CLO II (the

3    “Principal Proceeds Waterfall”).     The priorities are (1)

4    expenses, (2) noteholders, and (3) shareholders, in that

5    order.     Id.

6        2.      Franklin’s Fees.   Franklin was to be paid three

7    types of fees for its work as collateral manager.     Two of

8    them were guaranteed and are not at issue here: the Base

9    Collateral Management Fee and the Subordinated Collateral

10   Management Fee.3    The dispute is over the Contingent

11   Collateral Management Fee, a performance-based fee

12   contingent on the shareholders having “received an internal

13   rate of return of 12% per annum . . . on the amount of the

14   initial purchase price of the Preferred Shares for the

15   period from the Closing Date through [the] Distribution

16   Date,” JA 79-80,4 a precondition designated the “IRR

17   Hurdle.”     The base calculation of the Fee is approximately

18   equal to 0.25 percent per annum of the value of the

19   collateral and cash in the deal for a given period.

20

          3
            The combined guaranteed fees amounted to
     approximately $14 million over the life of CLO II.
          4
            “JA” refers to the Joint Appendix; “CA” refers to the
     Confidential Appendix; “SPA” refers to the Special Appendix;
     and “SA” refers to the Supplemental Appendix.
                                      7
1           3.     Optional Redemption Provision.   CLO II was

2    structured to reach maturity on August 28, 2013.       However,

3    Section 9.1(a) of the Indenture provided that, before then,

4    the holders of a majority of the CLO II preferred shares

5    could call for an optional redemption, directing Franklin to

6    sell CLO II’s assets, pay its expenses, redeem outstanding

7    notes, and distribute any remaining proceeds to the

8    shareholders.

9           C.    The Redemption Controversy.   In January 2007, a

10   majority of CLO II shareholders called for an optional

11   redemption, to take effect February 28, 2007.       On February

12   7, 2007, Franklin auctioned off CLO II’s portfolio.

13          It is undisputed that prior to this liquidation

14   Franklin had not achieved the twelve percent rate of return

15   necessary to surmount the IRR Hurdle and earn the Contingent

16   Fee.       However, if proceeds on liquidation were included in

17   the calculation, the IRR would have reached 17.7 percent per

18   annum.       CDO Plus notified BNY and Franklin of its position

19   that the Fee should be calculated pre-liquidation and that

20   Franklin therefore was not entitled to the Fee.5

            5
            Franklin points out that CDO Plus has shifted
     positions. CDO Plus’s principal, Don Uderitz, sent a
     February 2007 email calculating an even greater IRR (28.62
     percent) but contending that Franklin had waived its
                                       8
1    Controversy arose when Franklin submitted a claim for a

2    Contingent Fee to BNY, totaling more than $7 million.6

3        Faced with that dispute, BNY asked deal counsel for a

4    formal opinion interpreting the Indenture.      Cleary concluded

5    that Franklin was entitled to the Fee.      Anticipating

6    litigation between Franklin and the Shareholders, BNY (as

7    Trustee) filed this interpleader action.

8        D.   Procedural History.   At the close of discovery,

9    Franklin and the Shareholders filed cross-motions for

10   summary judgment.   The district court ruled that, under the

11   Indenture: (1) a Contingent Fee can be paid upon an optional

12   redemption; and (2) the IRR calculation should include

13   payments made on the redemption date.      See Bank of N.Y.

14   Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458,

15   466-67, 470 (S.D.N.Y. 2009).      As to when the Fee accrues,

16   the court found a contractual ambiguity that resisted

17   summary judgment.   Id. at 473.

18

     entitlement to the Fee by filing an untimely claim. BNY
     rejected this untimeliness argument, and CDO Plus has not
     pursued the theory here.
          6
            Franklin originally claimed a Fee of $7,220,205.60,
     but this claim increased to $7,466,654.47 after all interest
     payments due on portfolio investments were received.
                                    9
1           Subject to the Shareholders’ reservation of their right

2    to challenge the finding that an ambiguity existed, the

3    parties agreed to arbitrate the following issue: whether

4    “the CLO II indenture should be interpreted to provide that

5    the [Contingent Fee] accrues from the closing date of the

6    transaction or accrues only from the date that the IRR

7    Hurdle is met.”7   SA 5.   In August 2011, following a four-

8    day hearing, the arbitration panel adopted Franklin’s

9    position that the Fee accrues from the closing date of the

10   CLO II transaction, even if it is payable only on a

11   distribution date following achievement of a twelve percent

12   IRR.

13          The court confirmed the arbitration award and granted

14   Franklin summary judgment on its claim for attorney’s fees.

15   The court also awarded Franklin statutory prejudgment

16   interest at a rate of nine percent pursuant to N.Y. C.P.L.R.

17   § 5001(a).    On February 17, 2012, the court entered judgment

18   in Franklin’s favor for $12,763,039.33, consisting of

19   contingent management fees of $7,466,654.47, attorneys’ fees

20   and costs of $2,064,188.63, and prejudgment interest of

21   $3,205,196.23.

            7
            Because of how the Contingent Fee is calculated, the
     accrual date significantly affects the size of the Fee.
                                    10
1                                  II

2        We review a grant of summary judgment de novo.       See

3    Compagnie Financiere de CIC et de L’Union Europeenne v.

4    Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153,

5    157 (2d Cir. 2000).   “The question of whether the language

6    of a contract is clear or ambiguous is a question of law to

7    be decided by the court.”   Id. at 158.   If the court

8    determines the operative contract to be ambiguous, it may

9    evaluate the extrinsic evidence as a matter of law.      Id. at

10   159-61.

11       The Shareholders contend that the district court

12   committed four errors: the first relates to the court’s use

13   of extrinsic evidence, and the latter three involve the

14   court’s interpretation of certain Fee-related provisions of

15   the Indenture.

16

17                                III

18       The Shareholders argue that indentures “are governed by

19   special, market-driven rules of construction” and that

20   “courts are loathe to consider extrinsic evidence of the

21   contracting parties’ purported intentions when interpreting

22   indenture provisions.”   Appellant Br. 21-22.   They rely

                                   11
1    principally on Sharon Steel Corp. v. Chase Manhattan Bank,

2    N.A., 691 F.2d 1039 (2d Cir. 1982).

3        “It is a well-established rule in this Circuit that the

4    ‘interpretation of Indenture provisions is a matter of basic

5    contract law.’”   Jamie Sec. Co. v. The Ltd., Inc., 880 F.2d

6    1572, 1576 (2d Cir. 1989) (quoting Sharon Steel Corp., 691

7    F.2d at 1049) (alterations omitted).    The Indenture here is

8    governed by New York law.

9        The district court thoroughly reviewed applicable

10   principles of New York contract law before construing the

11   provisions at issue.     See Bank of New York Trust, N.A., 674

12   F. Supp. 2d at 463-64.    One such principle is that, if

13   contract terms are ambiguous, “‘the court may accept any

14   available extrinsic evidence to ascertain the meaning

15   intended by the parties during the formation of the

16   contract.’”   Id. at 463 (quoting British Int’l Ins. Co. v.

17   Seguros La Republica, S.A., 342 F.3d 78, 82 (2d Cir. 2003)).

18   The district court’s application of that principle is

19   consistent with Sharon Steel.

20       There, we construed “successor obligor” clauses in

21   indenture agreements between bondholders and a debtor

22   company in liquidation that sought to assign its debt to the

                                     12
1    purchaser of its assets.    Sharon Steel Corp., 691 F.2d at

2    1042-46.    We deemed it significant that the indenture

3    clauses at issue were boilerplate.     Id. at 1048.   Such

4    provisions are given a consistent, uniform interpretation

5    because they “do not depend upon particularized intentions

6    of the parties to an indenture.”     Id.   “[T]he creation of

7    enduring uncertainties as to the meaning of boilerplate

8    provisions would decrease the value of all debenture issues

9    and greatly impair the efficient working of capital

10   markets.”    Id.   We therefore construed the terms as a matter

11   of law based on their plain meaning, but also with reference

12   to the purpose the wording was evidently drafted to serve.

13   See id. at 1049-51.

14       The Shareholders argue that Sharon Steel counsels

15   against drawing upon extrinsic evidence to interpret

16   indenture provisions, as the district court did here (to a

17   limited extent8).    This argument is flawed for several

18   reasons.    [1] There is no evidence that the disputed terms

19   in the CLO II Indenture are boilerplate: to all appearances,

20   they were negotiated, tailored to the transaction, and

          8
            As explained in Section V infra, the district court
     found extrinsic evidence to be dispositive only in
     determining whether proceeds of an optional redemption
     should be included in the calculation of the IRR.
                                     13
1    govern the amount and trigger of a performance fee

2    potentially in the millions.     [2] Sharon Steel expressly

3    states that indentures are subject to basic principles of

4    contract law.    See supra p. 12.     [3] Although the parties

5    failed to produce such evidence, Sharon Steel allowed that

6    “custom or usage might in some circumstances create a fact

7    question as to the interpretation of boilerplate

8    provisions.”    Id. at 1048.   In sum, the district court’s use

9    of extrinsic evidence here is consistent with Sharon Steel,

10   as subsequent case law confirms.9

11       The Shareholders also invoke the doctrine of contra

12   proferentem as an alternative to extrinsic evidence when the

13   language of the indenture is unclear.       See Kaiser Aluminum

14   Corp. v. Matheson, 681 A.2d 392, 398-99 (Del. 1996).

15   However, it does them no good to have ambiguities construed

16   against the drafter, because Franklin did not draft the

17   contract--and did not sign it.       The Indenture was drafted by

          9
            See, e.g., Law Debenture Trust Co. of N.Y. v.
     Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010)
     (applying basic principles of New York contract law to
     indenture provisions and noting that evidence as to “custom
     and usage is to be considered by the court where
     necessary”); Bank of N.Y. v. First Millennium, Inc., 598 F.
     Supp. 2d 550, 556 (S.D.N.Y 2009) (under New York law, if an
     indenture is “ambiguous, then the court may accept any
     available extrinsic evidence to ascertain the meaning
     intended by the parties”).
                                     14
1    Cleary as deal counsel and was entered into between the

2    Issuers and the Trustee.   Contra proferentem is not an

3    available doctrine here.

4

5                                  IV

6        The Shareholders argue that they were entitled to

7    summary judgment because the Indenture precludes payment of

8    a Contingent Fee upon an optional redemption.    They urge

9    that Article 9 of the Indenture, which specifically governs

10   optional redemptions, creates a separate distribution scheme

11   that does not provide for a Contingent Fee and that trumps

12   the distribution scheme set out in Article 11.

13       Article 9 pertains to the “Redemption of Notes.”      JA

14   203-06.   Section 9.1, which applies to optional redemptions,

15   contains no reference to any Contingent Fee payment.     But

16   Section 9.1(e) is not an alternative payment schedule or

17   “waterfall,” as the Shareholders suggest; rather, it adds

18   another step in the waterfall sequence set out in Article

19   11,10 which is the only comprehensive scheme governing

          10
            Section 9.1(e) provides: “After payment of the Notes
     and the expenses of the Co-Issuers on any Redemption Date,
     the Trustee shall pay (i) first, to the Class C-2 Redemption
     Additional Interest and (ii) second to the Preferred Share
     Paying Agent, for distribution to the Holders of the
     Preferred Shares as liquidating distributions, all remaining
                                   15
1    distribution of interest proceeds and principal proceeds

2    derived from obligations paid at maturity or upon

3    liquidation of CLO II.     On each distribution date, principal

4    proceeds flow downward to pay, e.g., taxes and

5    administrative expenses, JA 227 § 11.1(a)(ii)(A), and debt

6    obligations to noteholders, JA 228 § 11.1(a)(ii)(D)-(H),

7    until remaining proceeds are tapped for “payment of all due

8    and unpaid Contingent Collateral Management Fees.”      JA 229 §

9    11.1(a)(ii)(J).   The shareholders get the money that pools

10   at the end.   See JA 229 § 11.1(a)(ii)(L).    Interest proceeds

11   follow a similar course.     See JA 225 § 11.1(a)(i).

12         Since Article 11 is made “subject to” certain other

13   provisions in the Indenture, including Article 9,11 the

14   Shareholders contend that Article 9 controls.     But we see no

15   tension between these two provisions.     Article 9 is read

16   most naturally as supplementing Article 11, not supplanting

17   it.   Thus Article 9 itself states that the notes shall not

     proceeds from the sale and/or termination of the Collateral
     and all other funds in the Collection Account.” JA 204 §
     9.1(e).
           11
            “Notwithstanding any other provision in this
     Indenture, but subject to the other subsections of this
     Section, Article 9, and Section 13.1, on or, with respect to
     amounts referred to in Section 11.1(d), before each
     Distribution Date, the Trustee shall . . . .” JA 225 §
     11.1(a) (emphasis added).
                                     16
1    be optionally redeemed unless a financial institution agrees

2    to pay “all administrative and other fees and expenses

3    payable under the Priority of Payments [Article 11] prior to

4    the payment of the Notes.”12     JA 203 § 9.1(b) (emphasis

5    added).      Article 9’s reference to Article 11’s Priority of

6    Payments implies that optional redemptions incorporate the

7    detailed distribution scheme established in Article 11.

8        The word “fees” does not appear in Section 9.1(e), but

9    elsewhere in the Indenture the words “fees” and “expenses”

10   are used interchangeably.10     Consequently, the reference to

11   “the expenses of the Co-Issuers on any Redemption Date”

12   in Section 9.1(e) can be reasonably interpreted to include

13   fees.

14

             12
             The two provisions work in tandem. Article 11 sets
     out the priority of payments to take effect on a
     distribution date; and optional redemptions must fall on a
     distribution date. See JA 203 § 9.1(a).
             10
             For instance, Section 11.1(a)(i)(B) provides for
     the payment of “accrued and unpaid Administrative Expenses
     constituting expenses of the Co-Issuers (other than the
     Collateral Management Fee but including other amounts
     payable by the Issuer to the Collateral Manager under the
     Collateral Management Agreement or this Indenture).” JA
     225, § 11.1(a)(i)(B) (emphasis added). In this provision,
     “expenses of the Co-Issuers” is a category that includes the
     Contingent Fee (though it just happens to be carved out
     here).
                                      17
1        The Shareholders assert that plain meaning analysis

2    requires that we consider only how the two words are used

3    inside Section 9.1(e); but 9.1(e), like all provisions,

4    should be read in light of the whole agreement.   See Brooke

5    Group Ltd. v. JCH Syndicate 488, 663 N.E.2d 635, 637 (N.Y.

6    1996) (“[W]hen interpreting a contract, the entire contract

7    must be considered so as to give each part meaning.”).     The

8    Shareholders argue that Section 9.1(e) would have no force

9    or effect unless it alters Article 11’s Priority of

10   Payments.   See In re OnBank & Trust Co., 688 N.E.2d 245, 247

11   (N.Y. 1997) (“We decline to read the amendment in such a way

12   as to render some of its terms superfluous.”) (citations

13   omitted).   However, Section 9.1(e) provides for a specific

14   class of payment called the “Class C-2 Redemption Additional

15   Interest,” to be paid only in the event of an optional

16   redemption, an event that is not treated in Article 11.     So

17   construing Articles 9 and 11 together does not sap Section

18   9.1(e) of force and effect.

19       If the Shareholders were right--that Article 11’s

20   Priority of Payments does not apply when shareholders call

21   an optional redemption, and that there can be no Fee in the

22   event of an optional redemption--we would expect the

23   Indenture to contain some language to this surprising

                                   18
1    effect.   The Shareholders are arguing for specific and

2    consequential inferences that do not inhere in Section

3    9.1(e) or in the Indenture as a whole.

4        The Shareholders’ interpretation is also unworkable.

5    Section 9.1(e) cannot function as a stand-alone distribution

6    scheme and therefore cannot replace Article 11.     As

7    discussed, Article 11 channels principal proceeds step-by-

8    step through each class of payment upon a distribution date.

9    It is similarly detailed as to interest proceeds.        In

10   contrast, the single sentence of Section 9.1(e), if read in

11   isolation (as the Shareholders urge), leaves to the

12   imagination how classes of noteholders are to be paid, and

13   in what order, and how the portfolio manager is to be paid

14   (in base fees, subordinated fees, or contingent fees), and

15   in what order.    Article 9 is therefore no useful substitute

16   for Article 11.     The Shareholders’ reply brief effectively

17   concedes as much.     See Appellant Reply Br. 10 (“[T]he

18   language in Article 9.1(e) referring to ‘payment of the

19   Notes and expenses of the Co-Issuers’ necessarily implicates

20   aspects of the Article 11 waterfall . . . .”).

21       Finally, the contract must be read to conform to the

22   parties’ reasonable expectations.     See Spear, Leeds &

23   Kellogg v. Cent. Life Assurance Co., 85 F.3d 21, 28 (2d Cir.

                                     19
1    1996).    The parties cannot reasonably have intended for

2    shareholders to be able to avoid the Contingent Fee by

3    exercising an option to redeem at any time prior to the

4    scheduled maturity date, particularly since poor performance

5    is not the only reason to elect redemption: shareholders

6    might seek redemption to lock in early gains.    Moreover,

7    under the Shareholders’ view of the Indenture, Article 9

8    would eliminate all fees upon an optional redemption,

9    including the subordinated collateral management fee and the

10   base collateral management fee, which are, by definition,

11   guaranteed.     See JA 70, 116-17.

12       Accordingly, we conclude that the Indenture allows for

13   the distribution of the Contingent Fee upon an optional

14   redemption.11

15

16

17

          11
            Franklin offers various kinds of extrinsic evidence,
     including Franklin’s contemporaneous internal and external
     communications illustrating its expectation that the Fee
     could be paid upon an optional redemption; communications
     between BNY, deal counsel, and the Shareholders; the CLO III
     transaction; the CLO II Model constructed by Merrill; and
     industry custom and practice. The district court did not
     find it necessary to consider this evidence given the
     contract’s plain language, and neither do we.
                                     20
1                                  V

2        Franklin’s eligibility for the Fee depends on whether

3    the portfolio’s IRR reached the twelve percent threshold,

4    which in turn depends on whether the proceeds of the

5    optional redemption are taken into account.

6        The Shareholders urge that the waterfall structure in

7    Article 11 renders Franklin’s suggested calculation method

8    impossible, because the calculation and payment of the Fee

9    (at Step J of the priority of payments) cannot be based on

10   the funds in the final distribution made at Step L.    See JA

11   229 § 11.1(a)(ii)(J)-(L).   As the Shareholders describe it,

12   the funds cannot flow up a waterfall.

13       The Shareholders are pressing the waterfall analogy

14   much too hard.   Article 11 sets forth a payment distribution

15   scheme.   These calculations of what is to be distributed at

16   each level can of course be made in advance of the actual

17   distribution of the proceeds, and must be.    Article 11

18   confirms that such calculation must take place prior to the

19   distribution:

20             In connection with the application of funds to pay
21             [Contingent Fees] in accordance with [this
22             Article], no more than one Business Day[] after the
23             Due Period ending prior to such Distribution Date,
24             the Collateral Manager shall deliver to the Trustee
25             a calculation of the amount payable on such
26             Distribution Date.

                                   21
1    A 229 § 11.1(e).   The Collateral Manager could hardly

2    deliver a calculation to the Trustee prior to the

3    distribution date without taking into account proceeds that

4    have not descended any step of the Waterfall--including the

5    final distribution at Step L.

6        The issue is conclusively resolved by the definition of

7    “Contingent Collateral Management Fee,” which contemplates

8    that calculation of the IRR will include proceeds “from the

9    Closing Date through such Distribution Date”:

10              The fee payable for each Interest Accrual Period to
11              the Collateral Manager in arrears on each
12              Distribution Date . . . ; provided, however, that
13              the [CCMF] will be payable on each Distribution
14              Date only to the extent that (i) holders of the
15              Preferred Shares have received an internal rate of
16              return of 12% per annum . . . on the amount of the
17              initial purchase of the Preferred Shares for the
18              period from the Closing Date through such
19              Distribution Date.
20
21   JA 79 (emphasis in original).    In this context, “through”

22   means “up to and including.”    18 Oxford English Dictionary

23   11 (2d ed. 1989); see also Curlett Family Ltd. P’ship, Ltd.

24   v. Particle Drilling Techs., Inc., 254 F. App’x 320, 324 n.4

25   (5th Cir. 2007).

26       We are bound, first and foremost, by the terms’ plain

27   meaning.   See Laba v. Carey, 277 N.E.2d 641, 644 (N.Y.

28   1971). The clarity of the contractual language here

                                     22
1    obviates a need to consider extrinsic evidence.12    See

2    Rainbow v. Swisher, 527 N.E.2d 258, 259 (N.Y. 1988).       The

3    Shareholders actually acknowledge that “proceeds received

4    ‘through’ a given Distribution Date may be counted in

5    determining whether the . . . Shareholders have received a

6    12% IRR on that date.”   Appellant Reply Br. 14.    Evidently,

7    this concession is made to assist the Shareholders’ argument

8    that Franklin would be entitled to the Fee “only on the next

9    Distribution Date,” which, in the context of an optional

10   redemption, never comes.   Id.    This reading of the Indenture

11   is implausible, to say the least.     The Indenture itself thus

          12
            At an earlier stage of the litigation, the district
     court concluded that the Indenture was ambiguous on this
     point. See Bank of N.Y. Trust, N.A. v. Franklin Advisors,
     Inc., 522 F. Supp. 2d 632, 637 (S.D.N.Y. 2007). At summary
     judgment, the court considered extrinsic evidence such as
     testimony by Rick Caplan, an industry expert, who stated
     that it was “‘standard in the industry . . . that optional
     redemption date proceeds are included in calculating whether
     the equity holders have reached the IRR hurdle rate.’” Bank
     of N.Y. Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp.
     2d 458, 468 (S.D.N.Y. 2009) (quoting Caplan). Deal counsel
     Raymond Check confirmed that the calculation of the IRR was
     intended to account for all returns “through and including”
     the distribution date, and that this usage and
     interpretation is common in the industry. Id. at 468-69.
     The district court observed that the Shareholders failed to
     produce “any evidence tending to show that the word
     ‘through’ in the clause at issue is not to be interpreted to
     include Redemption Date payments” and that “the extrinsic
     evidence is thus one-sided in favor of Franklin Advisers’
     interpretation.” Id. at 470. Because no reasonable jury
     could find for the Shareholders on this issue, the court
     therefore granted summary judgment to Franklin. Id.
                                      23
1    makes plain that calculation of the IRR includes redemption

2    proceeds; we need look no further.

3

4                                   VI

5        Having concluded that a Fee is payable following an

6    optional redemption, and that calculation of the Fee takes

7    into account redemption proceeds, we turn to the issue of

8    accrual: Franklin argues that the Fee began to accrue at the

9    date of closing (July 26, 2001); the Shareholders argue that

10   it did not begin to accrue until the date the portfolio

11   surpassed the IRR Hurdle (February 28, 2007).    On this

12   point, the district court found the contract ambiguous and

13   the extrinsic evidence mixed, thus creating a genuine issue

14   of material fact.    The parties submitted the issue to an

15   arbitration panel, which concluded that the evidence favored

16   Franklin’s position overwhelmingly.    We discern no error in

17   the district court’s decision.

18       By definition, the Fee is triggered only upon the

19   portfolio reaching an internal rate of return of twelve

20   percent per annum.    The Fee is calculated as the “accrued

21   and unpaid Contingent Collateral Management Fee (consisting

22   of the Contingent Collateral Management Fee accrued for the

23   related Interest Accrual Period and any such fee accrued for

                                    24
1    prior Due Periods but not paid on any prior Distribution

2    Date) that is payable on such Distribution Date as described

3    above.”13   JA 79-80 (emphasis added).

4         Neither argument is compelled by the wording.     The

5    provision states that the Contingent Fee includes any fee

6    accrued (but not yet paid) for this or prior periods,

7    without specifying an accrual date.      The Shareholders’

8    reading strikes us as unlikely because it would mean that

9    whenever the portfolio manager achieves the stated goal of

10   producing a twelve percent annual IRR, it is entitled to

11   nothing except the potential for a fee, large or small, at

12   some point in the future--subject to the whim of

13   shareholders who may avoid that fee award by taking an

14   optional redemption.     Such an incentive fee award creates

15   virtually no incentive at all.

16        Nevertheless, the Indenture contains two seemingly

17   inexplicable features.     First, as the Shareholders point

18   out, the Principal Proceeds Waterfall provides for the

19   payment of all “due and unpaid” fees, JA 229 §

20   11.1(a)(ii)(J), while the Interest Proceeds Waterfall

          13
            The Indenture further provides that the Fee shall
     not exceed forty percent of all interest and principal
     proceeds available for distribution after the portfolio has
     reached an IRR of twelve percent. See JA 80.
                                     25
1    provides for the payment of “(1) the Contingent Collateral

2    Management Fee for such Distribution Date, and then (2) all

3    accrued and unpaid Contingent Collateral Management Fees

4    accrued on prior Distribution Dates.”     JA 227 §

5    11.1(a)(i)(O) (emphasis added).    The distinction (if any)

6    between “due and unpaid” and “accrued and unpaid” is not

7    clear; but, even if the distinction is meaningful, it does

8    not indicate whether accrual begins at closing or upon

9    surmounting the IRR Hurdle.

10       Second, the definition of “Subordinated Collateral

11   Management Fee,” one of two guaranteed fees not tied to

12   performance, states that the fee “accrue[s] from the Closing

13   Date whether or not currently payable.”     JA 116-17.   Since

14   it would have been easy and consistent to include such clear

15   wording in the definition of the Contingent Fee (if that is

16   what the parties intended), the absence lends support to the

17   Shareholders’ argument that the Fee does not accrue at

18   closing.   However, as the district court observed, the two

19   fees serve distinct purposes and are described in different

20   terms throughout the Indenture.    See Bank of N.Y. Trust,

21   N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 470-71

22   (S.D.N.Y. 2009).

                                   26
1        The parties strain to find support in the Indenture for

2    their competing interpretations.   As is sometimes the case,

3    a detailed and ramified contract--even one that attempts to

4    provide for innumerable contingencies, to anticipate

5    disputes and to preempt litigation--may yet be silent as to

6    a question that later becomes critical.   Reliance upon

7    extrinsic evidence then becomes perfectly appropriate.    See

8    British Int’l Ins. Co. Ltd. v. Seguros La Republica, S.A.,

9    342 F.3d 78, 82 (2d Cir. 2003) (applying New York law).    The

10   district court therefore committed no error.14

11                                VII

12       The Shareholders challenge the district court’s ruling

13   that prejudgment interest of nine percent is mandatory under

14   N.Y. C.P.L.R. § 5001(a).   See Bank of New York Trust, N.A.

15   v. Franklin Advisers, Inc., No. 07 Civ. 1746 (S.D.N.Y. Nov.

          14
            As noted supra p. 24, the district court ultimately
     determined that the extrinsic evidence was not conclusive,
     and the parties submitted the issue to an arbitration panel.
     The panel decided the issue in Franklin’s favor, concluding
     that a “large amount” of evidence indicated that the Fee was
     intended to accrue at closing. SA 27. For example, the
     panel found it significant that a Merrill Lynch financial
     model created for CLO II calculated the Fee to accrue from
     closing regardless of whether it was actually payable in a
     particular period. The panel also found that “it was the
     uniform practice and custom in the industry that once the
     IRR Hurdle had been satisfied in a CLO transaction, the
     [Fee] would be payable from the time of the closing of the
     transaction.” SA 23.
                                   27
1    15, 2011) (ECF No. 145).     We agree with the Shareholders

2    that this was error.

3        We start with the interpleader statute, N.Y. C.P.L.R. §

4    1006(f), which provides that if a court determines that a

5    claimant in an interpleader action is entitled to interest,

6    the stakeholder “shall be liable to such party for interest

7    to the date of discharge at a rate no greater than the

8    lowest discount rate of the Federal Reserve.”     N.Y. C.P.L.R.

9    § 1006(f) (McKinney 2013).     This statute “provides for an

10   award of interest against a stakeholder up to the time of

11   discharge . . . but not against unsuccessful claimants.”

12   Mfr.’s & Traders Trust Co. v. Reliance Ins. Co., 870 N.E.2d

13   124, 126-27 (N.Y. 2007) (emphasis added).     As a result, “the

14   interest award here must be authorized, if at all, by the

15   general interest statute, CPLR 5001(a).”     Id. at 127.

16       Section 5001(a) provides for a mandatory award of

17   prejudgment interest in certain actions, including those for

18   breach of contract, but the statute contains an exception

19   for actions at equity:

20            Interest shall be recovered upon a sum awarded
21            because of a breach of performance of a contract,
22            or because of an act or omission depriving or
23            otherwise interfering with title to, or possession
24            or enjoyment of, property, except that in an action
25            of an equitable nature, interest and the rate and

                                     28
1             date from which it shall be computed shall be in
2             the court’s discretion.
3
4    N.Y. C.P.L.R. § 5001(a) (McKinney 2013) (emphasis added).

5    Because interpleader actions “are indeed equitable,”

6    Manufacturer’s, 870 N.E.2d at 127, the district court erred

7    in concluding that the award was mandated by statute.     Cf.

8    United Bank Ltd. v. Cosmic Int’l, Inc., 542 F.2d 868, 878

9    (2d Cir. 1976) (holding that prejudgment interest was

10   required by statute because, while Section 5001

11   “specifically excepts ‘action(s) of an equitable nature’

12   from the provision’s mandatory scope,” the stakeholder did

13   not file an interpleader action).

14       In Manufacturer’s, the Court went a step further,

15   holding that the successful claimant was not entitled to

16   statutory prejudgment interest because there was no “sum

17   awarded” against the adverse parties.   870 N.E.2d at 127.

18   Additionally, the Court observed that there had been no

19   finding that the losing claimants breached any contract,

20   interfered unlawfully with the possession or enjoyment of

21   any property, asserted frivolous claims, conducted vexatious

22   litigation, or acted solely to cause delay.   Id. at 127-28.

23   As a result, there was no basis for an award of statutory

24   prejudgment interest against them.

                                  29
1        The same is true here.   The only meaningful distinction

2    is that, in Manufacturer’s, the parties had inexplicably

3    failed to place the contested funds in an interest-bearing

4    account, so that the successful claimant received no

5    compensation for the lost use of its money.   Id. at 128.

6    Here, however, the Trustee deposited the stake with the

7    district court, which placed the funds in an interest-

8    bearing account.   Franklin is entitled to that accrued sum,

9    and no more.   Accordingly, we vacate the award of statutory

10   prejudgment interest and remand with the instruction to

11   award the prejudgment interest actually accrued on the

12   $7,466,654.47 fee owed to Franklin, to be paid from the

13   court’s account.

14

15                                VIII

16       Finally, the Shareholders challenge the award of

17   attorney’s fees.   Without contesting the amount

18   (approximately $2 million), they argue that Franklin is

19   entitled to indemnification only for costs incurred in

20   litigation with third parties, not with contracting parties.

21   However, this litigation is a third-party dispute.

22       The Collateral Management Agreement (the “Agreement”)

23   provides:

                                   30
 1              The Issuer shall indemnify and hold harmless
 2              [Franklin] . . . from and against any and all
 3              Liabilities, and will reimburse [Franklin] for all
 4              reasonable fees and expenses (including reasonable
 5              fees and expenses of counsel) . . . as such
 6              Expenses are incurred in investigation, preparing,
 7              pursuing, or defending any claim, action,
 8              proceeding or investigation with respect to any
 9              pending or threatened litigation (collectively, the
10              “Actions”), caused by, or arising out of or in
11              connection with the issuance of the Offered
12              Securities . . . .
13
14   JA 321 § 10(b) (emphasis added).    Franklin contends that

15   this indemnification provision applies broadly to “any

16   pending or threatened litigation” and has no language

17   restricting it to third-party actions, which is true enough.

18   But neither does it clearly state that the provision applies

19   to third-party claims; and we are wary of the inference that

20   indemnification clauses apply to litigation between the

21   parties in the absence of express wording.    See Oscar Gruss

22   & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003)

23   (“Promises by one party to indemnify the other for

24   attorneys’ fees run against the grain of the accepted policy

25   that parties are responsible for their own attorneys’

26   fees.”).   In New York, courts “‘should not infer a party’s

27   intention’ to provide counsel fees as damages for a breach

28   of contract ‘unless the intention to do so is unmistakably

29   clear’ from the language of the contract.”    Id. (quoting

                                    31
1    Hooper Assocs., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903,

2    905 (N.Y. 1989)).   Where, as here, the contract does not

3    “exclusively or unequivocally refer[] to claims between the

4    parties themselves,” Hooper Assocs., Ltd., 548 N.E.2d at

5    905, we will presume that indemnification extends only to

6    third-party disputes.

7        However, it matters not whether the Agreement covers

8    litigation between the contracting parties because this

9    litigation is a third-party dispute.      The Agreement was

10   entered into between Franklin and the Issuers.      The

11   Shareholders concede (in another context) that they “played

12   no role whatsoever in the execution and drafting of the

13   [Agreement].”   Appellant Reply Br. 26.    Accordingly, this

14   dispute does not implicate the warning in Oscar Gruss

15   against broadly construing indemnification clauses to cover

16   litigation between contracting parties.

17       Additionally, indemnification clauses (like most other

18   contractual provisions) should be read to implement the

19   parties’ intentions, to the extent possible.     See Oscar

20   Gruss & Son, Inc., 337 F.3d at 199.    The Agreement here

21   specifically contemplates litigation between management and

22   shareholders.   In discussing the limits of Franklin’s

23   responsibilities, Section 10(a) refers to Franklin’s

                                   32
1    potential liability for mismanaging its investments and

2    providing misleading marketing materials.     JA 320 § 10(a).

3    These are fertile areas of litigation with investors, as is

4    management fees.   Because the parties’ intent is

5    ascertainable from the plain wording of the agreement,

6    indemnification does not offend the rule that “such

7    contracts must be strictly construed to avoid inferring

8    duties that the parties did not intend to create.”     Id.   We

9    therefore affirm the indemnification award.

10

11                             CONCLUSION

12       For the foregoing reasons, we affirm the grant of

13   partial summary judgment to Franklin and the denial of

14   summary judgment to the Shareholders, as well as the award

15   of attorney’s fees and costs, but we vacate the award of

16   statutory prejudgment interest and remand with the

17   instruction to award actual interest.

                                   33