FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`SUPREME COURT OF THE STATE OF NEW YORK
`COUNTY OF NEW YORK
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`In the matter of the application of
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`U.S. BANK NATIONAL ASSOCIATION
`(as Trustee, Securities Administrator, Paying
`Agent, and/or Calculation Agent under various
`Pooling and Servicing Agreements),
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`for judicial instructions under CPLR Article
`77.
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`Petitioner,
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`Index No. 656028/2021
`Hon. Andrew S. Borrok
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`AMENDED ANSWER OF POETIC
`HOLDINGS TO FIRST AMENDED
`PETITION
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`Poetic Holdings 8 LP, Poetic Holdings IX LP, and Poetic Holdings VII LLC (together
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`“Poetic Holdings”) hereby file their Amended Answer to the First Amended Petition of U.S. Bank
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`National Association (the “Petitioner”).
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`NOTICE OF INTENTION TO APPEAR
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`1.
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`Poetic Holdings 8 LP holds ownership interests in the following Subject Trusts:1
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`BSMFT 2006-SL6, BSABS 2005-EC1, BSABS 2006-HE2, BSABS 2007-AQ1, BSABS 2007-
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`HE3, SACO I 2006-5, SACO I 2006-9. Based on its interests in those Subject Trusts, Poetic
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`Holdings 8 LP notifies the Court and parties that it intends to appear in this proceeding.
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`2.
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`Poetic Holdings IX LP holds ownership interests in the following Subject Trusts:
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`BSABS 2004-HE5, BSABS 2005-AQ2, BSABS 2005-EC1, BSABS 2005-HE8, BSABS 2005-
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`HE10, BSABS 2005-HE11, BSABS 2006-EC2, BSABS 2006-HE1, BSABS 2006-HE2, BSABS
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`2007-AQ1, BSABS 2007-FS1, BSABS 2007-HE3, BSMFT 2006-SL2, BSMFT 2006-SL4,
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`1 Unless otherwise defined in this Amended Answer, capitalized terms are used as defined in
`the Governing Agreements or the First Amended Petition.
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`SACO I 2006-4, and SACO I 2006-7. Based on its interests in those Subject Trusts, Poetic
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`Holdings IX LP notifies the Court and parties that it intends to appear in this proceeding.
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`3.
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`Poetic Holdings VII LLC holds ownership interests in the following Subject Trusts:
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`BSABS 2005-HE3, BSABS 2005-HE7, BSABS 2006-HE1, SACO I 2005-9, SACO I 2005-WM2,
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`SACO I 2005-WM3, and SACO I 2006-6. Based on its interests in those Subject Trusts, Poetic
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`Holdings VII LLC notifies the Court and parties that it intends to appear in this proceeding.
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`STATEMENT OF POSITIONS
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`4.
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`The First Amended Petition seeks judicial instruction on two primary issues that
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`affect Poetic Holdings’ interests in the Subject Trusts. Poetic Holdings states the following
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`positions on those issues. At this time, Poetic Holdings take no positions on any other issues raised
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`in the First Amended Petition but not addressed in this Amended Answer, but reserve the right to
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`be heard on matters including but not limited to all issues raised by the First Amended Petition, as
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`may be amended in the future, or on other filings made by parties in this action.
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`A.
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`5.
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`Post-Zero Balance Collections Should Be Distributed Under the Excess
`Cashflow Waterfall and Are Not Subject to the Retired Class Provision.
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`The first issue asks how the Petitioner should distribute payments to certificate-
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`holders after the Primary Classes’ aggregate outstanding principal balances are reduced to zero. In
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`particular, this issue implicates (a) the distribution of Post-Zero Balance Collections under the
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`waterfalls, and (b) the application of the Retired Class Provision. These questions relate to three
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`general features of the Governing Agreements.
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`6.
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`First, the Governing Agreements provide that payments are distributed to different
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`classes of certificates in a specific order as set forth in three separate waterfalls: (1) the principal
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`waterfall, (2) the interest waterfall, and (3) the Excess Cashflow waterfall. Under the principal and
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`interest waterfalls, funds are distributed to the Primary Classes in amounts calculated based on the
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`Certificate Principal Balance of each Primary Class. Under the Excess Cashflow waterfall, funds
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`are distributed in a priority position to the Primary Classes to reimburse them for realized losses
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`and interest shortfalls, and any remaining funds are distributed in a subordinate position to the
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`Class C Classes.
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`7.
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`Second, the Governing Agreements also provide for an overcollateralization
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`structure. The Overcollateralization Amount at any given time is equal to the difference between
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`the stated principal balances of the mortgage loans in the Subject Trusts and the Certificate
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`Principal Balances of the Primary Classes. This overcollateralization was intended as a credit
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`enhancement for the Primary Classes and to protect the Primary Classes from future losses. If the
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`Overcollateralization Amount on any payment date exceeds the Overcollateralization Target
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`Amount, the excess funds would be distributed under the Excess Cashflow waterfall.
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`8.
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`Third, the Governing Agreements provide that the Primary Classes’ Certificate
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`Principal Balances can be reduced—and thereby the funds to which each Principal Class is entitled
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`under the principal waterfall also is reduced—in two ways. A Certificate Principal Balance is
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`reduced when the Primary Class receives a distribution of principal. In addition, a Certificate
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`Principal Balance is reduced when the Primary Class is allocated realized losses, which are
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`allocated under the priority established in the Governing Agreements when loan-level losses
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`exceed current overcollateralization.
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`9.
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`Because of losses on the mortgage loans in the Subject Trusts, the Primary Classes
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`have incurred substantial realized losses. Over time, these realized losses not only eroded the
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`Overcollateralization Amount in the Subject Trusts, but also reduced the Certificate Principal
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`Balances of the Primary Classes. The Certificate Principal Balances of certain Primary Classes
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`will eventually be or already have been reduced to zero. Due to these losses, certain Primary
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`Classes have unreimbursed realized losses or interest shortfalls when they are reduced to zero.
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`10.
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`Turning to the waterfall question in dispute, payments are often still received by
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`the trust—or may be expected by the trust—after the Certificate Principal Balance of all Primary
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`Classes has been reduced to zero. While these collections would normally be distributed to the
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`Primary Classes under the interest or principal waterfall, the amount to be distributed to a Primary
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`Class is zero when its balance is zero. The Petitioner seeks judicial instruction on whether, under
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`the Governing Agreements, these Post-Zero Balance Collections should be distributed under the
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`principal waterfall or the Excess Cashflow Waterfall.
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`11.
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`The Court should conclude that the Governing Agreements require the Petitioner
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`to distribute Post-Zero Balance Collections under the Excess Cashflow waterfall. The reason is
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`simple: the Excess Cashflow waterfall is the only possible waterfall that could apply. The principal
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`waterfall could not apply because it expressly distributes principal payments “based on the
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`respective Certificate Principal Balances . . . until the Certificate Principal Balance thereof is
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`reduced to zero.” PSA § 5.04(a)(2).2 Nor could the interest waterfall apply because it distributes
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`“Interest Funds,” which definitionally do not accrue on principal balances of zero. Id. §§ 1.01
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`(definition of Interest Funds), 5.04(a)(1). This leaves a final waterfall: the Excess Cashflow
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`waterfall. The Excess Cashflow waterfall is intended to operate when Primary Class balances have
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`been reduced to zero and reimburses interest shortfalls or realized losses incurred by the Primary
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`Classes before distributing remaining residuals to Class C Classes. Given that Post-Zero Balance
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`2 “PSA” refers to the Pooling and Servicing Agreement for the SACO I 2006-4 trust, which is
`attached to the First Amended Petition as Exhibit C. Poetic Holdings cites to this PSA because its
`language is illustrative of and not materially different than the language of the PSAs governing all
`of the Subject Trusts in which Poetic Holdings owns certificates.
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`Collections must be distributed under one of the three waterfalls expressly provided in the
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`Governing Agreements, the Excess Cashflow waterfall applies because it is the only operable
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`waterfall and the only one that makes sense in the full context of the Governing Agreements.
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`12.
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`As for the Retired Class Provision, the provision has already been interpreted in
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`JPM II by both the Supreme Court and the Appellate Division. In JPM II, the trial court held that
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`the Retired Class Provision allows for the Primary Classes’ Certificate Principal Balances to be
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`written up after they are reduced to zero and allows “post-write-up distributions.” JPM II Trial
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`Court Order at 37-39. This ruling paved the way for settlement funds to be distributed to the
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`Primary Classes following the application of write-ups. On appeal, the Appellate Division affirmed
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`and further substantiated the trial court’s interpretation of the Retired Class Provision:
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`The retired class provisions merely provide that once a certificate has been paid in
`full and formally retired, it is no longer entitled to receive distributions that it might
`have otherwise received under the waterfall. The zero-balance certificates here have
`neither been fully repaid nor withdrawn from the market pursuant to the procedures
`set forth in the relevant governing agreements; rather, they have outstanding losses
`and are still actively traded. The provisions make clear that certificates are only
`considered “retired” when the trustee has undertaken certain affirmative steps to
`accomplish that end—e.g., paying off the certificates and withdrawing them from
`circulation; the mere reduction of the certificate balances to zero is insufficient.
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`JPM II Appellate Opinion at 8.
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`13.
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`The Appellate Division’s reasoning applies equally to the monthly payments
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`subject to this present Petition. The Primary Classes may have Certificate Principal Balances of
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`zero, but under the JPM II Appellate Opinion they are not “retired” as long as they have accrued
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`unreimbursed losses or shortfalls. As the Appellate Division made clear, “zero-balance certificates
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`[that] have neither been fully repaid nor withdrawn from the market pursuant to the procedures set
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`forth in the relevant governing documents” are not “retired.” Id. Petitioner does not allege or
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`otherwise show that the Primary Classes’ certificates in the Subject Trusts have been “retired”
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`under the procedures in the Governing Agreements. Nor does Petitioner distinguish the payments
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`discussed in the First Amended Petition from those discussed in JPM II insofar as allegedly
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`“retired” certificates are concerned. In short, JPM II controls, and the Court should conclude that
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`the Retired Class Provision does not prevent distributions of Post-Zero Balance Collections to
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`Primary Classes.
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`B.
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`14.
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`Deferred Principal Collections Require Write-Ups for the Primary Classes.
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`The second issue concerns how Deferred Principal Collections should be treated to
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`write up the Primary Classes’ Certificate Principal Balances.
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`15.
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`By way of brief background, servicers for the mortgage loans in the Subject Trusts
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`have agreed to modifications that allow borrowers to defer their scheduled principal payments. As
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`an accounting matter and as a result of directions under the U.S. Department of Treasury Home
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`Affordable Modification Program (“HAMP”)—not because of anything contained in the
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`Governing Agreements—servicers report these deferred principal amounts as losses on the
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`mortgage loans to account for the risk that borrowers may not pay back the deferred principal
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`amounts. Many borrowers, however, have made payments on deferred principal, or Deferred
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`Principal Collections. Because of the servicers’ treatment, these loan-level losses resulted in
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`realized losses to the Primary Classes. When a realized loss is applied, the Petitioner reduces, or
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`“writes down,” a Primary Class’s Certificate Principal Balance. But if a Deferred Principal
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`Collection is distributed, the Petitioner’s practice is not to reverse the loss on, or “write up,” the
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`Primary Class’s Certificate Principal Balance. This means that the Certificate Principal Balance
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`will be reduced to zero more quickly, which impairs the Primary Class’s ability to receive future
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`distributions under the principal waterfall.
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`16.
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`According to the Petitioner, the Governing Agreements provide that Subsequent
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`Recoveries require the Petitioner to write up a Primary Class’s Certificate Principal Balance to
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`account for a previously applied realized loss arising from liquidation or final disposition. The
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`Petitioner further believes that, because Subsequent Recoveries do not include Deferred Principal
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`Collections, the Petitioner is not required to write up the Certificate Principal Balance when
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`Deferred Principal Collections are distributed.
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`17.
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`The Court should instruct the Petitioner that Deferred Principal Collections require
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`write-ups of the Primary Classes’ Certificate Principal Balances whether or not Deferred Principal
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`Collections are Subsequent Recoveries. The losses due to deferred principal were reported in
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`expectation of potential future losses (under HAMP guidance) rather than in recognition of actual
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`losses (as contemplated by the Governing Agreements), so it is only reasonable that they be
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`reversed when it becomes clear that those balances are paid rather than lost. This would be
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`consistent with the Appellate Division’s reasoning in JPM II, which affirmed that Certificate
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`Principal Balances that have been reduced to zero may be written up. See JPM II Appellate Opinion
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`at 8.
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`REQUEST FOR RELIEF
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`WHEREFORE, Poetic Holdings respectfully requests that the Court enter judgment with
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`respect to Poetic Holdings’ interests in the Subject Trusts as follows:
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`a.
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`Instruct the Petitioner to distribute Post-Zero Balance Collections under the Excess
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`Cashflow waterfall;
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`b.
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`Instruct the Petitioner that the Retired Class Provision does not prevent the
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`distribution of Post-Zero Balance Collections;
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`c.
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`Instruct the Petitioner to write up the Primary Classes’ Certificate Principal
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`Balances based on Deferred Principal Collections;
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`d.
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`Grant the parties leave to file briefing, including memoranda of law, to more fully
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`address the issues presented in the First Amended Petition on the merits; and
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`e.
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`Order any other relief that the Court may deem just and proper.
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`Dated: February 7, 2022
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`GREENE ESPEL PLLP
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`/s/ John B. Orenstein
`John B. Orenstein, NY Bar No. 1940501
`222 S. Ninth Street, Suite 2200
`Minneapolis, MN 55402
`(612) 373-8361
`jorenstein@greeneespel.com
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`Gary Greenberg
`666 Third Ave., 10th Floor
`New York, NY 10017
`(212) 765-5770
`gg@ggreenberglaw.com
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`Attorneys for Poetic Holdings VII LLC,
`Poetic Holdings 8 LP, and Poetic Holdings
`IX LP
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`FILED: NEW YORK COUNTY CLERK 02/07/2022 02:19 PM
`NYSCEF DOC. NO. 102
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`INDEX NO. 656028/2021
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`RECEIVED NYSCEF: 02/07/2022
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`CERTIFICATE OF SERVICE
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`I certify that on February 7, 2022, I caused this Amended Answer of Poetic Holdings to
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`First Amended Petition to be served on all parties who have appeared in this action via NYSCEF.
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`I also caused service to be effectuated on all parties who have appeared by overnight mail.
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`/s/ John B. Orenstein
`John B. Orenstein
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