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Weil Obtains Summary Judgment on behalf of MBIA in Interpleader Action

SDNY Rules in Favor of MBIA on Two Key Issues Relating to a CDO Transaction
Weil, Gotshal & Manges LLP obtained a significant victory for client MBIA Insurance Corporation (MBIA) on March 12, 2013, when U.S. District Judge William H. Pauley III of the Southern District of New York granted summary judgment in favor of MBIA on two key issues in an interpleader action brought by the trustee of a collateralized debt obligation (CDO) transaction.

The action was brought by U.S. Bank National Association as the trustee of Cedarwoods CRE CDO II because the senior noteholder had asserted that certain events of default had occurred, allowing such noteholder to direct early acceleration and liquidation of the entire transaction. The noteholder claimed, among other things, that the collateral manager improperly classified certain collateral securities owned by the issuer, resulting in a miscalculation of certain principal coverage ratios and a failure by the issuer to make certain early principal payments to such noteholder. The noteholder argued that such errors resulted in three separate events of default: (1) for failure to pay “any principal, when due and payable of any Secured Note”; (2) for “failure on any Payment Date to disburse amounts available in accordance with” a specified section of the indenture; and (3) for “a default in the performance, or breach, of any other covenant … or if any certificate or writing delivered pursuant hereto proves to be incorrect when made, which default has a material adverse effect on the Secured Noteholders”. The collateral manager and MBIA, which insures the second most senior class of notes, disputed that any alleged events of default had occurred. After limited discovery, the noteholder moved for summary judgment, asking the court to rule that the first two alleged events of default occurred. MBIA cross-moved for a ruling that the first two alleged events of default did not occur and moved for partial summary judgment on a limited issue with respect to the third alleged event of default.

The court denied the noteholder’s motion for summary judgment in its entirety and granted MBIA’s motion for summary judgment with respect to the first two alleged events of default, holding that such events of default had not occurred. The court denied MBIA’s motion for partial summary judgment with respect to the third alleged event of default, requiring further proceedings on that issue.

The cross-disciplinary Weil team representing MBIA included Securities Litigation partners Richard Levine and Robert Carangelo; Structured Finance & Derivatives partners Frank Nocco and Robert Chiperfield; Securities Litigation associates Michael Firestone, Layne Behrens, Adam Bookman and Ondrej Staviscak Diaz; and Structured Finance & Derivatives associates Jay Park Jr. and Alexander Swartz (all New York).