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
2
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.
3
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
1
The seller’s interest is the difference between the total
amount of securitized receivables and the trust’s outstanding
debt.
4
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,
5
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 five-
month 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
2
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.
6
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.
7
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
8
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
3
The full Transfer and Servicing Agreement is not in the
record.
9
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
10
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
11
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.