Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re National Collegiate Student Loan Trusts 2003-1

United States District Court, D. Delaware

May 2, 2018

IN THE MATTER OF THE NATIONAL COLLEGIATE STUDENT LOAN TRUSTS 2003-1, 2004-1, 2004-2, 2005-1, 2005-2 and 2005-3.

          REPORT AND RECOMMENDATION

          Sherry R. Fallon UNITED STATES MAGISTRATE JUDGE

         I. INTRODUCTION

         This is an action arising from a "Trust Instructional Proceeding, " a Minnesota statutory proceeding initiated for the purpose of seeking instruction concerning trust administration relating to the appointment and payment of a loan servicer for transactions relating to loans held by the trusts. Presently before the court are the following motions: (1) the motion for summary judgment of respondents National Collegiate Student Loan Trusts 2003-1, 2004-1, 2004-2, 2005-1, 2005-2, and 2005-3 (the "Trusts"); and (2) the motion for summary judgment of petitioner U.S. Bank National Association, in its capacity as indenture trustee[1] ("U.S. Bank" or the "Indenture Trustee"). (D.I. 55; D.I. 57) For the following reasons, I recommend granting the Trusts' motion for summary judgment (D.I. 55), and denying the Indenture Trustee's motion for summary judgment (D.I. 57).

         II. BACKGROUND

         A. Factual Background

         Six Delaware statutory trusts, identified as National Collegiate Student Loan Trusts 2003- 1, 2004-1, 2004-2, 2005-1, 2005-2, and 2005-3 (the "Issuers" or the "Trusts"), were created between 2003 and 2005 to acquire pools of student loans, facilitate the issuance and sale of notes (the "Notes") backed by the private student loans (the "Loans") to investors (the "Noteholders"), and provide for the servicing of the Loans ("Loan Servicing").[2] (D.I. 1-1 at ¶¶ 10-11) Wilmington Trust Company ("WTC" or the "Owner Trustee") acts as the current trustee. (Id. at ¶ 10) The Trusts are "owner-directed" Trusts, meaning that, as provided in § 2.O3(b)(i) of the Trust Agreements, in conducting the operations of the Trusts, the Trusts act solely in their own name, and "the Owner Trustee or other agents selected in accordance with this Agreement will act on behalf of the Trust subject to direction by the Owners...." (D.I. 61 at ¶ 353) Each Trust entered into an Indenture through which it pledged loans, and the rights under the Basic Documents[3], to U.S. Bank as the Indenture Trustee (the "Indentures"). (D.I. 1-1 at ¶ 11) The Trusts issued multiple classes of Notes backed by the Loans, granting the Noteholders the right to repayment from the principal and interest payments collected from the borrowers who took out the Loans. (Id.)

         The Trusts first entered into an Administration Agreement with First Marblehead Data Services, Inc. ("FMDS") to act as administrator to the Trusts. (D.I. 61 at ¶ 155) When the Notes were issued, the Pennsylvania Higher Education Assistance Agency ("PHEAA") was each Trust's sole or primary servicer, bound by the PHEAA Servicing Agreement. (D.I. 1-1 at ¶ 15) At that time, The Educational Resources Institute Inc. ("TERI") guaranteed full repayment on the Loans by agreeing to purchase a Loan for 100% of the Loan's outstanding principal balance, plus all accrued interest, whenever a borrower failed to make payments on a Loan for a specific number of days, went bankrupt, or died. (D.I. 59, Ex. 5 at ¶ 30-S31) In 2008, TERI went bankrupt and ceased guaranteeing Loans. (D.I. 58 at 9) Following TERI's bankruptcy, the Trusts entered into a Special Servicing Agreement, dated March 1, 2009 (the "Special Servicing Agreement"), with First Marblehead Education Resources, Inc. ("FMER"), providing for servicing of defaulted Loans. (D.I. 1-1 at ¶ 16) The Special Servicing Agreement established U.S. Bank as the back-up Special Servicer for the Trusts. (Id.) The Special Servicing Agreement also established requirements that had to be satisfied before a successor Special Servicer could be appointed. (D.I. 59, Ex. 6 at § 6.E) Specifically, the Special Servicing Agreement required that the Trusts provide written notice to the rating agencies, [4] and receive written confirmation from the rating agencies, that the proposed appointment would not result in a reduction or withdrawal of the Notes' then-current ratings (the "SSA Rating Agency Condition"). (Id. at §§ 6.E, 16)

         In 2012, FMDS was sold to GSS Data Services, Inc. ("GSSDS" or the "Administrator"), who now acts as the Administrator to the Trusts. (D.I. 1-1 at ¶ 17) Shortly after that sale, FMER resigned as Special Servicer, causing U.S. Bank to assume the role as back-up Special Servicer. (Id. at ¶ 16)

         In 2014, the owners of the beneficial interests in the Trusts were an affiliate of Citibank named SL Resid Holdings, LLC ("Citibank") and NC Owners, LLC ("NC Owners") (collectively, the "Owners"). (D.I. 64 at ¶ 62O) On December 30, 2014, the Owners entered into an agreement with Odyssey Education Resources LLC ("Odyssey"), whereby Odyssey would act as a "Servicer" for each Trust's Loans (the "Odyssey Agreement"). (D.I. 1-1 at ¶¶ 19-20) VCG Securities, LLC ("VCG") was the authorized representative of the Owners in connection with the transaction, and was an affiliate of Odyssey. (Id.; D.I. 64 at ¶ 62O)

         The Odyssey Agreement provides that Odyssey will service "Defaulted Loans"[5] and "Loans Eligible for Sale."[6] (D.I. 59, Ex. 8 at § 2.B) The Owners directed WTC as Owner Trustee to execute the Odyssey Agreement on behalf of the Trusts (D.I. 61 at ¶ 516), which it did (D.I. 61 at ¶ 35). On December 8, 2015, the Trusts submitted more than $1.24 million in invoices from Odyssey for payment from the Indenture Trust Estate (the "Odyssey Invoices"). (D.I. 59, Ex. 9) Each Odyssey Invoice seeks "Reimbursement of Expenses" in varying amounts on a monthly basis from January 2015 through February 2016. (Id.)

         B. Procedural History

         On February 18, 2016, the Indenture Trustee filed a "Petition for Instructions in the Administration of Trusts Pursuant to Minnesota Statute § 501C.0201" in Minnesota's Second Judicial District Court, in the County of Ramsey. (D.I. 1-1) The Indenture Trustee sought the state court's instruction regarding VCG's "attempt to appoint Odyssey as a servicer or special servicer for each Trust under the Odyssey Agreement." (Id. at ¶ 2) Specifically, the Indenture Trustee sought the court's instruction on three issues: (1) whether, under the governing agreements, Odyssey was properly appointed as a servicer or special servicer and whether the Odyssey Agreement was valid and binding, such that the Indenture Trustee should release funds necessary to compensate Odyssey for any future services performed; (2) to the extent Odyssey was properly appointed as servicer or special servicer and the Odyssey Agreement is valid and binding, how to resolve certain conflicts between the Odyssey Agreement and the governing agreements; and (3) to the extent Odyssey was properly appointed, whether to release the funds necessary to pay the Odyssey Invoices. (Id. at ¶¶ 5-7)

         On March 25, 2016, WTC removed the action to the United States District Court for the District of Minnesota. (D.I.I) On May 4, 2016, the parties stipulated to transfer the case to this court, and the action was transferred on May 11, 2016, (D.I, 16; D.I. 19) On March 15, 2017, both the Trusts and Indenture Trustee filed cross-motions for summary judgment.[7] (D.I. 55; D.I. 57) The court heard oral argument on May 12, 2017.

         III. LEGAL STANDARD

         "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Material facts are those that could affect the outcome of the proceeding, and "a dispute about a material fact is 'genuine' if the evidence is sufficient to permit a reasonable jury to return a verdict for the nonmoving party." Lamont v. New Jersey, 637 F.3d 177, 181 (3d Cir. 2011) (quoting Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248 (1986)). Pursuant to Rule 56(c)(1), a party asserting that a fact is genuinely disputed must support its contention either by citing to "particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for the purposes of the motion only), admissions, interrogatory answers, or other materials, " or by "showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed.R.Civ.P. 56(c)(1)(A) & (B).

         Courts considering cross-motions for summary judgment will treat each motion independently. T-Mobile, Ne., LLC v. City of Wilmington, 2018 WL 1472526, at *2 (D. Del. Mar. 26, 2018) (citing Rains v. Cascades Industries, Inc., 402 F.2d 241, 245 (3d Cir. 1968)). The moving party bears the initial burden of proving the absence of a genuinely disputed material fact.[8] See Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The burden then shifts to the non-movant to demonstrate the existence of a genuine issue for trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Williams v. Borough of West Chester, Pa., 891 F.2d 458, 460-61 (3d Cir. 1989). When determining whether a genuine issue of material fact exists, the court must view the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in that party's favor. See Scott v. Harris, 550 U.S. 372, 380 (2007); Wishkin v. Potter, 476 F.3d 180, 184 (3d Cir. 2007). However, the existence of some evidence in support of the nonmoving party may not be sufficient to deny a motion for summary judgment. Rather, there must be enough evidence to enable a jury reasonably to find for the nonmoving party on the issue. See Anderson, 477 U.S. at 249. If the nonmoving party fails to make a sufficient showing on an essential element of its case on which it bears the burden of proof, the moving party is entitled to judgment as a matter of law. See Celotex Corp., 477 U.S. at 322.

         IV. DISCUSSION

         A. Odyssey's Appointment as a Servicer

         The Indenture Trustee argues that Odyssey was not validly appointed to act as a Servicer because neither the Noteholders nor the Indenture Trustee approved Odyssey's appointment, as the Indentures require. (D.I. 58 at 2) Specifically, the Indenture Trustee argues that (1) the Odyssey Agreement purporting to appoint Odyssey as a servicer would waive, amend, modify, supplement, or terminate the Basic Documents' terms, and, therefore, Indenture Trustee and Noteholder approval was required; and (2) the Odyssey Agreement is invalid because the Trusts did not satisfy the SSA Rating Agency Condition. (D.I. 58 at 9-12) The Trusts argue that its hiring of Odyssey as an additional servicer complied with all provisions of the relevant agreements, and that the Odyssey Agreement does not conflict with any provisions of the Special Servicing Agreement or any Basic Document.[9] (D.I. 56 at 1-2)

         1. Indenture Trustee and Noteholder Approval

         The Indenture Trustee first argues that the Odyssey Agreement would waive, amend, modify, supplement, or terminate the terms of the Basic Documents, so Noteholder and Indenture Trustee approval was required for Odyssey's appointment. (D.I. 58 at 9-10; D.I. 65 at 4) The Trusts argue that it had the power to appoint Odyssey as a Servicer and enter into the Odyssey Agreement, and the Odyssey Agreement does not modify the terms of the Special Servicing Agreement or other Basic Documents. (D.I. 63 at 6) The Indentures require Noteholder and Indenture Trustee approval for anything that "waive[s], amend[s], modif[ies], supplement[s], or terminate[s]" the Basic Documents or their terms, "except to the extent otherwise provided therein." (D.I. 61 at ¶ 65-66, § 3.07) As such, the court must determine whether the Odyssey Agreement waives, amends, modifies, supplements, or terminates the Basic Documents, thus triggering the requirement to obtain Noteholder and Indenture Trustee approval in accordance with the Indentures.

         New York law governs the Indentures, Special Servicing Agreement, and the Odyssey Agreement. (D.I. 59, Ex. 6 at § 22.B; Ex. 8 at § 21.B; Ex. 4 at § 11.13) Under New York law, "[i]ndentures are to be read strictly and to the extent they do not expressly restrict the rights of the issuer, the issuer is left with the freedom to act, subject only to the boundaries of other positive law." San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc., 983 A.2d 304, 314 (Del. Ch.), aff'd, 981 A.2d 1173 (Del. 2009) (applying New York law) (citing In re Loral Space & Commc 'ns Inc., 2008 WL 4293781, at *35 (Del. Ch. Sept. 19, 2008) (same)). Under the Indentures, the Trusts have the power to, inter alia, "provide for the administration of the Trusts and the servicing of the [] Loans, " and "to enter into such agreements that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith." (D.I. 61 at ¶ 353, §§ 2.O3(a)(ii), (iii)) While the Trusts previously entered into servicing agreements with different entities, such as the Master Servicing Agreement and the Special Servicing Agreement, no provision in those agreements, or any other relevant agreement, purports to establish an exclusive arrangement pursuant to which the Trusts forfeited their right and power under Sections 2.O3(a)(ii) and (iii) of the Indentures to enter into other servicing agreements for the Loans. The Master Servicing Agreement, for example, states: "[n]othing herein shall be construed to create an exclusive arrangement as to First Marblehead Corporation ("FMC").[10] The Servicer understands and agrees that FMC may enter into other agreements for the servicing of Private Student Loans in the future." (D.I. 61 at ¶ 47l, § 15.03) Moreover, the Indentures state that "the [Trusts] will contract with other [p]ersons to assist it in performing its duties under this Indenture." (Id. at TA65, § 3.07(b)) The language from these agreements makes clear that the Trusts could subsequently enter into additional servicing contracts. The parties do not cite to any provision in the Basic Documents that requires either Noteholder or Indenture Trustee approval before the Trusts can hire a servicer. Therefore, because the Indentures and other Basic Documents do not expressly restrict the rights of the Trusts to hire other servicers, the Trusts retained the right to hire Odyssey.

         Although the Trusts retained the right to hire Odyssey as a servicer, the court must next determine whether the Odyssey Agreement waives, amends, modifies, supplements, or terminates the Basic Documents or their terms.[11] The complaint does not enumerate a list of purported conflicts between the Odyssey Agreement and Basic Documents. (D.I. 1, Ex. 1) However, the Indenture Trustee argues in its briefs, and at oral argument, that the Odyssey Agreement materially weakens or eliminates numerous rights and protections that the Special Servicing Agreement provides to the Noteholders and Indenture Trustee: (1) by allowing defaulted Loans to be sold at below-market value; (2) by weakening the Noteholders' and Indenture Trustee's indemnification rights with respect to defaulted loan servicing; (3) by weakening the Noteholders' and Indenture Trustee's ability to remove Odyssey for cause; (4) by weakening protections in the event Odyssey's parent company encounters financial hardship; and (5) by eliminating the requirement that the Administrator consent to any amendments. (D.I. 58 at 10; 5/12/17 Tr. at 30:1-31:12) The court will discuss each of these alleged conflicts in turn.

         a. Odyssey's Purchase and Sale of Loans "Below Market Value"

         The Indenture Trustee first argues that the Odyssey Agreement modifies the existing servicing agreements and Indentures because the Special Servicing Agreement does not allow Loans to be sold (see D.I. 59, Ex. 6), whereas the Odyssey Agreement allows Odyssey to purchase and sell Loans "below-market value" (D.I. 59, Ex. 8 at § 2.C). (D.I. 58 at 10; D.I. 65 at 6) The Trusts argue that although the Special Servicing Agreement does not allow U.S. Bank to purchase Loans from the Trusts whereas the Odyssey Agreement allows Odyssey to do so, this does not effectively waive or amend the Special Servicing Agreement. (D.I. 66 at 4) Specifically, the Special Servicing Agreement does not prohibit the sale of non-performing Loans, and instead provides that U.S. Bank will perform its duties in accordance with the terms of the Indentures, which specifically allow the sale of Loans (D.I. 61 at ¶ 69, § 3.14). (D.I. 66 at 4)

         There are two key provisions in the Indentures that relate to the sale and purchase of loans: Section 2.09 and Section 3.14. Section 2.09, entitled "Release of Collateral" provides that the Indenture Trustee "shall release property from the lien of this Indenture only upon receipt of an Issuer Request accompanied by an Officers' ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.