National Collegiate v.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

No. 18-3327

________________

In re: NATIONAL COLLEGIATE STUDENT LOAN

TRUSTS 2003-1, 2004-1,

2004-2, 2005-1, 2005-2, 2005-3

*Waterfall Asset

Management, LLC,

One William Street Capital

Master Fund, Ltd., OWS

Credit Opportunity I, LLC,

OWS ABS Fund II, L.P. and

OWS COF 1 Master, L.P.,

Appellants

*(Pursuant to Rule 12(a) Fed. R. App. P.)

________________

No. 18-3328

________________

In re: NATIONAL COLLEGIATE STUDENT LOAN

TRUSTS 2003-1, 2004-1,

2004-2, 2005-1, 2005-2, 2005-3

U.S. Bank National Association,

Indenture Trustee,

Appellant

________________

Appeal from the United States District Court

for the District of Delaware

(D.C. Civil Action No. 1-16-cv-00341)

District Judge: Honorable Joseph F. Bataillon

Magistrate Judge: Honorable Sherry R. Fallon

________________

Argued March 11, 2020

Before: McKEE, AMBRO, and PHIPPS, Circuit Judges

(Opinion filed: August 19, 2020)

Michael Hanin (Argued)

Uri Itkin

Kasowitz Benson Torres

1633 Broadway, 21st Floor

New York, NY 10019

Henry B. Brownstein

Kosowitz Ben Torres

1399 New York Avenue, Suite 201

Washington, DC 20005

Andrew D. Cordo

Ashby & Geddes, P.A.

500 Delaware Avenue, 8th Floor

P.O. Box 1150

2

Wilmington, DE 19899

Counsel for Appellants

Waterfall Asset Management LLC,

One William Street Capital Master Fund Ltd.,

OWS Credit Opportunity I LLC,

OWS ABS Fund II LP, OWS COF I Master LP

Jeffrey T. Castellano

John W. Shaw

Shaw Keller

1105 North Market Street

I.M. Pei Building, 12th Floor

Wilmington, DE 19801

Louis Chaiten

James R. Saywell

Jones Day

901 Lakeside Avenue

North Point

Cleveland, OH 44114

Keith Kollmeyer

Matthew Martel (Argued)

Anthony Masero

Joseph B. Sconyers

Jones Day

100 High Street

Boston, MA 02110

Counsel for Appellant

US Bank NA, as Indenture Trustee

3

Daniel L. Berger

Charles T. Caliendo

James J. Sabella

Grant & Eisenhofer

485 Lexington Avenue, 29th Floor

New York, NY 10017

Kimberly Evans (Argued)

Michael T. Manuel

Grant & Eisenhofer

123 Justison Street, 7th Floor

Wilmington, DE 19801

Counsel for Appellees

________________

OPINION OF THE COURT

________________

AMBRO, Circuit Judge

Six Delaware statutory trusts (the “Trusts”) acquired

student loans, issued notes for those acquisitions, and pledged

the student loans as collateral for the notes. This process,

called a securitization, works well when the students do not

default on their loans. When they do, a servicer of the loans

attempts to collect. If that servicer comes up short, there is a

problem. That is what occurred here. To remedy the problem

and aid collection, an additional servicer was added by the

owners of the Trusts. May this be done under the documents

for the securitization and, if so, were the requirements in those

documents followed? To flesh out this dispute, what follows

4

is a Reader’s Digest version followed by a more complete

factual and procedural background.

Each Trust stems from a trust agreement (the “Trust

Agreement”) pursuant to the Delaware Statutory Trust Act.

Del. Code Ann. tit. 12, § 3801(g). The Trusts issued notes (the

“Notes”) entitling their holders (the “Noteholders”) to the

income from the student loans purchased with Note proceeds.

To secure the Notes, the Trusts pledged the student loans under

a “Granting Clause” in documents called “Indentures” entered

into with U.S. Bank National Association (“U.S. Bank”), as

Indenture Trustee.

The Indentures also contain various protections for the

benefit of the Indenture Trustee and the Noteholders, including

a requirement that the Trusts obtain consent from the Indenture

Trustee and the Noteholders to amend, supplement, or

terminate the Indentures (the “Consent Clause”).

The Trusts initially did not provide for servicing loans

delinquent in their payments. They later entered into a

“Special Servicing Agreement” to do so. U.S. Bank became

both the Indenture Trustee and the “Special Servicer” under the

Special Servicing Agreement. It is here our dispute begins.

U.S. Bank allegedly failed as the Special Servicer to

collect hundreds of millions of dollars in delinquent loans. To

mitigate losses, holders of the equity ownership interests in the

Trusts (the “Owners”) sought to hire an additional loan

servicer, and ultimately entered into an agreement for Odyssey

Education Resources, LLC (“Odyssey”) to serve in that role

(the “Odyssey Agreement”). Thereafter the Trusts submitted

invoices from Odyssey for payment from the trust estate.

The parties dispute whether the Trusts had the right to

enter the Odyssey Agreement and whether that Agreement

5

conflicts with the “Basic Documents,” meaning the Indentures,

the Trust Agreements, along with the Servicing Agreements,

and other related agreements. On cross-motions for summary

judgment, the District Court held that: (1) the Trusts did not

violate the Granting Clause by hiring Odyssey and retaining

the right to hire a new servicer; (2) the Trusts were not required

to obtain consent to hire Odyssey because the Odyssey

Agreement did not waive, amend, modify, supplement, or

terminate any of the terms of the Basic Documents; (3)

Odyssey’s invoices were accordingly payable; and (4) the

question whether the Odyssey Agreement was the result of

improper self-dealing was irrelevant. U.S. Nat’l Bank Ass’n v.

Nat’l Collegiate Student Loan Tr. 2003-1, No. 16-cv-341, 2018

WL 4462369 (D. Del. Sept. 18, 2018).

We affirm in part and reverse in part. We agree that the

Granting Clause does not bar the Trusts from appointing an

additional servicer, yet we also hold that several provisions of

the Odyssey Agreement violate the Granting Clause by

impermissibly transferring to the Owners of the Trusts rights

reserved for the Indenture Trustee. We also part with the

District Court and hold that the Odyssey Agreement

supplements and modifies several provisions of the Basic

Documents, thus requiring consents not obtained from the

Indenture Trustee. Accordingly, the Odyssey Agreement is

invalid, and we remand to the District Court to determine

whether the Odyssey invoices are nonetheless payable (which

may include a re-look at the self-dealing issue).

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Creation, Structure, and Basic

Documents of the Trusts

The Trusts (National Collegiate Student Loan Trusts

2003-1, 2004-1, 2004-2, 2005-1, 2005-2, and 2005-3) were

6

created between 2003 and 2005. Their purpose was to acquire

student loans by issuing notes and executing indentures, to

provide for administration of the Trusts and servicing of the

student loans, and to enter into other necessary agreements to

achieve the foregoing. Trust Agreement (“TA”) § 2.03(a), J.A.

267–68.

The Trust Agreements appointed an owner trustee (the

“Owner Trustee”) to act for and manage the affairs of each

Trust. The Owner Trustee in turn appointed an administrator

(the “Administrator”) to aid it in discharging its duties and to

take certain actions under an administration agreement (the

“Administration Agreement”). GSS Data Services Inc.

(“GSS”) initially served as Administrator. J.A. 148–49.

To fund the acquisition of the student loans, the Trusts

issued Notes to the Noteholders. The Notes are backed by the

loans and are paid through principal and interest payments

received from the student loan borrowers.

Appellants are the Noteholders,1 and U.S. Bank, which

serves as the current Indenture Trustee for the Trusts (together

“Appellants”). The Indentures are governed by New York law.

See Indenture § 11.13, J.A. 384.

The Administration Agreements were entered into on

various dates by and among each of the Trusts, Wilmington

Trust Company (“Wilmington Trust”) as Owner Trustee, U.S.

Bank as Indenture Trustee, The National Collegiate Funding

1

The interested Noteholders (participating in this suit)

are Waterfall Asset Management, LLC, One William Street

Capital Master Fund, Ltd., OWS Credit Opportunity I, LLC,

OWS ABS Fund II, L.P., and OWS COF I Master, L.P. The

Noteholders and U.S. Bank initially brought separate appeals

that are herein consolidated.

7

LLC as the Depositor, and First Marblehead Data Services,

Inc. (“First Marblehead Data”) as Administrator under each

Administration Agreement.

Under the Indentures, the Trusts granted all of the right,

title, and interest in and to, among other things, the student

loans held by the Trusts, the related agreements, funds and

accounts, and all related present and future claims related

thereto (collectively, the “Indenture Trust Estate”) to the

Indenture Trustee for the benefit of the Noteholders.

The Granting Clause, under which the Trusts grant their

interest in the student loans to the Indenture Trustee, provides

in relevant part:

The Issuer [i.e., the Trust] hereby Grants2 to the

Indenture Trustee at the Closing Date with

2

The Indenture defines “Grant” in a litany of legal

jargon meant to be very broad:

“Grant” means mortgage, pledge, bargain, sell,

warrant, alienate, remise, release, convey,

assign, transfer, create, and grant a lien upon and

a security interest in and right of setoff against,

deposit, set over and confirm pursuant to the

Indenture. A Grant of the Collateral or of any

other agreement or instrument shall include all

rights, powers and options (but none of the

obligations) of the Granting party thereunder,

including the immediate and continuing right to

claim for, collect, receive and give receipt for

principal and interest payments in respect of the

Collateral and all other moneys payable

thereunder, to give and receive notices and other

8

respect to the Initial Financed Student Loans,

and as of each Subsequent Transfer Date with

respect to Subsequent Loans acquired as of such

date, as trustee for the benefit of the holders of

the Notes, all the Issuer’s right, title and interest

in and to the following:

(a) the Student Loans, and all obligations of the

Obligors thereunder including all moneys paid

thereunder on or after the Cutoff Date . . . ;

(b) all Servicing Agreements and all Student

Loan Purchase Agreements, including the right

of the Issuer to cause the Sellers to repurchase[,]

or the Servicer to purchase, Student Loans from

the Issuer under circumstances described therein;

....

Indenture at 1–2, J.A. 317–18. It is “absolute.” Indenture

§ 3.07(f), J.A. 336.

To protect the Noteholders’ interests, the Indentures

include “Issuer Separateness Covenants” that impose on the

Trusts obligations to “maintain an arm’s length relationship

with . . . any of the [Trusts’] Affiliates.” Indenture § 3.23(l),

communications, to make waivers or other

agreements, to exercise all rights and options, to

bring Proceedings in the name of the Granting

party or otherwise and generally to do and

receive anything that the Granting party is or

may be entitled to do or receive thereunder or

with respect thereto.

Indenture, App. A-16, J.A. 406.

9

J.A. 346. So long as the Notes are outstanding, the Trusts must

“avoid the appearance [] of conducting business on behalf of

any Owner or any Affiliate of an Owner.” TA § 2.03(b)(iv),

J.A. 268. In addition, the Indentures require the consent of

Noteholders and the Indenture Trustee in order to “waive,

amend, modify, supplement or terminate” any of the Basic

Documents. Indenture §§ 3.07(c), (f), J.A. 336–37.

B. Special Loan Servicing Agreements

At the Trusts’ inception, the Pennsylvania Higher

Education Assistance Agency (“PA Education Agency”) acted

as the sole Servicer for each Trust pursuant to a servicing

agreement (the “PA Education Agency Servicing

Agreement”). Under it, the PA Education Agency serviced

performing, or up-to-date, student loans and could purchase

those loans out of the Trusts but only for “an amount equal to

the principal balance and accrued and unpaid interest.” J.A.

605, 740.

The Basic Documents at the outset did not provide for

servicing loans delinquent in their payments because The

Educational Resources Institute Inc. (the “Resource Institute”)

guaranteed full repayment on those loans. After that entity’s

bankruptcy in 2008, however, the Trusts established a regime

for servicing delinquent student loans. Specifically, in 2009

the Trusts entered into a “Special Servicing Agreement” for the

purpose of servicing two categories of non-performing student

loans, “Defaulted Loans” and “Delinquent Loans.” J.A. 428.

The Special Servicing Agreement was entered into by

and among First Marblehead Education Resources, Inc. (“First

Marblehead Education”) and each of the Trusts, which named

First Marblehead Education as Special Servicer for delinquent

and defaulted loans (hereinafter referred to as “Defaulted

Loans”). The Special Servicing Agreement provided that U.S.

10

Bank was the “Back-up Special Servicer,” and that if First

Marblehead Education were to resign as Special Servicer, U.S.

Bank would replace it. J.A. 428.

The Special Servicing Agreement further provided that

Defaulted Loans are serviced exclusively by the Special

Servicer. Amendments to the Special Servicing Agreement

had to be agreed to by parties other than the Trust, including

the Special Servicer, and U.S. Bank (as Indenture Trustee) and

the Administrator. Special Servicing Agreement (“SSA”)

§ 16, J.A. 442. For the Trusts to replace the Special Servicer,

they were required to provide prior written notice to the rating

agencies Moody’s Corp., S&P Global Ratings, and Fitch

Ratings Inc., (collectively, the “Rating Agencies”), and receive

written confirmation that the proposed successor would not

result in a reduction or withdrawal of the Notes’ then-current

ratings (the “Special Servicing Agreement Rating Agency

Condition”). SSA § 6(E), J.A. 433; see also Indenture,

Definitions, J.A. 414 (instructing that “each Rating Agency

shall have been given 10 days’ prior notice thereof . . . [,] and

that none of the Rating Agencies shall have notified the

Administrator or the Indenture Trustee[] in writing that such

action will in and of itself result in a reduction or withdrawal

of the then current rating of the Notes . . . .” (the “Indenture

Rating Agency Condition”)).

In 2012, First Marblehead Data was sold, and shortly

thereafter First Marblehead Education resigned as Special

Servicer. U.S. Bank then became Special Servicer.

C. The Trusts Hire Odyssey

The Trusts allege that since U.S. Bank took over as

Special Servicer over $1 billion of loans have become

uncollectable due to the expiration of the relevant statute of

limitations and over $4 billion of loans have defaulted. The

11

Trusts are paying servicing fees in excess of any revenues they

can collect on the Defaulted Loans.

In addition, lawsuits filed by U.S. Bank on behalf of the

Trusts against borrowers for collection on Defaulted Loans

were dismissed due to faulty documentation and procedures,

and subsequently the Trusts were sued in both class action suits

and by individuals for illegal collection practices.

To mitigate losses, the Owners sought to hire an

additional loan servicer. In 2014 they entered an agreement for

Odyssey to act as a Servicer for each Trust’s Loans. Odyssey

Agreement (“OA”), J.A. 490–500.

At inception the Owners of the Trusts were the National

Collegiate Funding LLC, a depositor and sponsor of the

securitizations, and the Resource Institute. In 2014, at the time

of the Odyssey transaction, the beneficial owners of the Trusts

were an affiliate of Citibank named SL Resid Holdings, LLC

(“Citibank”) and an affiliate of VCG Securities, LLC (“VCG”)

named NC Owners, LLC. VCG was the authorized

representative of the Owners in connection with the Odyssey

transaction. At the time of the Odyssey Agreement, Odyssey

had two members, VCG and Boston Portfolio Advisors, Inc.

The latter resigned in 2017, leaving VCG as the sole member

of Odyssey.3

3

Appellants point out that VCG is now the majority

equity owner of the Trusts and the only owner of Odyssey.

This arguably leaves one entity doing the pooling and the

servicing of the student loans.

The Trusts counter that U.S. Bank is the party with a

“substantial conflict[] of interest” here “given its dual roles as

Indenture Trustee and Special Servicer . . . .” Appellees’ Br.

12

When the Owners decided to hire an additional loan

servicer, they sent letters to the Rating Agencies informing

them about the Odyssey Agreement. None of the agencies

expressed that hiring Odyssey would cause a downgrade.

After more than 10 days had passed from the time the Rating

Agencies were notified of the Trusts’ intention to hire

Odyssey, the Owners directed Wilmington Trust to execute the

Odyssey Agreement and notify GSS (as Administrator) and

U.S. Bank (as Indenture Trustee) of that action.

The Trusts thereafter asked U.S. Bank to acknowledge

Odyssey’s hiring. Under Section 11.01 of the Indentures, if the

Issuer (i.e., a trust) requests that the Indenture Trustee (U.S.

Bank) take any action, the Issuer must provide “the Indenture

Trustee (i) an Officers’ Certificate of the Issuer stating that all

conditions precedent . . . relating to the proposed action have

been complied with and (ii) an Opinion of Counsel stating” as

much. J.A. 380. On January 14, 2016, per the requirements of

Section 11.01, Wilmington Trust sent an Officers’ Certificate

of Issuer and an opinion letter to U.S. Bank. It, however,

refused to acknowledge Odyssey’s retention.

D. The Odyssey Agreement

Under the Odyssey Agreement, Odyssey is to service

“Defaulted Loans” and “Loans Eligible For Sale.” OA at 1,

§ 2(B), J.A. 491. Odyssey has the authority to purchase certain

defaulted Loans from the Trusts.

2. They posit that, “[a]s Special Servicer, U.S. Bank receives

a fee based on the total outstanding Loan balances . . . [.] To

the extent hiring Odyssey will result in Loans being sold, this

will reduce the fees to which U.S. Bank would otherwise be

entitled.” Id.

13

The Noteholders and U.S. Bank, as Indenture Trustee,

allege that VCG has sought to transfer servicing of newly

Defaulted Loans from the Special Servicer (U.S. Bank) to

Odyssey.

One of the main disputes before us is whether the

Odyssey Agreement unilaterally, and thus impermissibly,

amended the Basic Documents. The parties disagree as to what

extent the Odyssey Agreement and the Special Servicing

Agreement are incompatible.

For example, Appellants (U.S. Bank and the

Noteholders) argue that the Special Servicing Agreement does

not permit sales of loans. The Odyssey Agreement authorizes

Odyssey to purchase Defaulted Loans at a “purchase price”

that is 10% less than fair market value of the Defaulted Loan

(put differently, to retain a 10% commission for arranging for

the sale of the Loan). OA § 2(C), J.A. 492–93. Appellees (the

Trusts) point to several sections of the Indentures to argue the

Basic Documents, including the Special Servicing Agreement,

do allow the sale of loans. Section 3.14 permits the Indenture

Trustee to dispose of Loans to three parties: a guarantor, a

seller, and a servicer. Indenture § 3.14, J.A. 340. Loans sold

to the Servicer must be at a “price [] equal to or in excess of

the amount required by the applicable . . . Servicing Agreement

. . . .” Indenture § 3.14(b), J.A. 340. The Special Servicing and

Odyssey Agreements also arguably vary in several other

respects:

 The Special Servicing Agreement allows the

Indenture Trustee to remove the Special Servicer

for cause without the consent of the Trusts. SSA

§ 6(D), J.A. 432–33. The Odyssey Agreement

allows for the removal of Odyssey for cause only

“with the prior written consent of the Trust.” OA

§ 6(C), J.A. 494 (emphasis added).

14

 Amendments to the Special Servicing

Agreement require the consent of the

Administrator. SSA § 16, J.A. 442. The

Odyssey Agreement requires the Trusts to

consent to any amendments to the Odyssey

Agreement. OA § 15, J.A. 497.

 The Special Servicing Agreement provides that

the Indenture Trustee and other transaction

parties shall be indemnified by the Special

Servicer for liability arising from “willful

misconduct, negligence or bad faith,” SSA, § 10,

J.A 441, whereas the Odyssey Agreement

provides indemnification for only “willful

misconduct, gross negligence or bad faith,” OA

§ 9, J.A. 496 (emphasis added).

 The Basic Documents did not permit dealings

with affiliates. TA § 2.03(b)(iv), J.A. 268. The

Odyssey Agreement permits Odyssey to “enter

into transactions or otherwise deal with any of its

affiliates.” OA § 5(B), J.A. 494.

E. The Unpaid Invoices

In December 2015, the Trusts submitted more than

$1.24 million in invoices from Odyssey for payment from the

Indenture Trust Estate. Odyssey performed services such as

conducting audits and other work to evaluate which Defaulted

Loans could be sold. GSS, as Administrator, refused to process

the invoices and requested additional information. It sent the

invoices to U.S. Bank as Indenture Trustee, complaining that

no documentation was provided for the alleged expenses.

15

F. Procedural History

In February 2016, U.S. Bank sought instruction from a

Minnesota state court on (1) whether Odyssey was properly

appointed as a servicer, (2) whether the Odyssey Agreement is

invalid because it would amend or modify the Basic

Documents, and (3) whether the invoices submitted by

Odyssey for services should be paid.

The Trusts removed the case to the United States

District Court for the District of Minnesota. Thereafter, the

parties stipulated to transferring the case to the United States

District Court for the District of Delaware. After discovery,

the parties filed cross-motions for summary judgment.

The Magistrate Judge issued a Report and

Recommendation (“R&R”), recommending that the District

Court grant the Trusts’ motion for summary judgment, deny

U.S. Bank’s motion, and order that the Odyssey invoices be

paid. The Magistrate Judge found that: (1) under Section 2.03

of the Indentures, the Trusts have the power “to enter into such

agreements that are necessary, suitable or convenient” to

administer the Trusts and service the loans, and that no other

relevant agreement establishes “an exclusive arrangement

pursuant to which the Trusts forfeited their right . . . to enter

into other servicing agreements,” J.A. 38; (2) the Odyssey

Agreement does not waive, amend, or terminate the terms of

the Basic Documents because, inter alia, Section 3.14 of the

Indentures specifically allows for the sale of loans to a servicer

and there is no conflict between the Odyssey Agreement and

the Special Servicing Agreement; and (3) the Trusts satisfied

the applicable Indenture Rating Agency Condition. The

Magistrate found that VCG and Odyssey’s alleged self-dealing

were not dispositive of the issues.

16

U.S. Bank and the Noteholders filed objections to the

R&R. The Trusts contend that most of their objections raised

new arguments not presented before the Magistrate Judge,

including that the Granting Clause precluded the Trusts from

hiring Odyssey.

The District Court essentially adopted the R&R in its

entirety and held that arguments not presented to the

Magistrate Judge were waived. U.S. Nat’l Bank Ass’n, 2018

WL 4462369.

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had subject matter jurisdiction under

28 U.S.C. §§ 1332, 1348, 1441(b), and 1446. We have

appellate jurisdiction pursuant to 28 U.S.C. § 1291.

“The standard of review in an appeal from an order

resolving cross-motions for summary judgment is plenary.”

Cantor v. Perelman, 414 F.3d 430, 435 n.2 (3d Cir. 2005).

Summary judgment is appropriate where “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).

“Under our case law, contract interpretation is a

question of fact reviewed for clear error and contract

construction is a question of law reviewed de novo.” Wayne

Land & Mineral Grp. LLC v. Del. River Basin Comm’n, 894

F.3d 509, 528 (3d Cir. 2018). Contract interpretation involves

determining the meaning of the contract language and giving

effect to the parties’ intent. See John F. Harkins Co., Inc. v.

Waldinger Corp., 796 F.2d 657, 659 (3d. Cir. 1986).

Construction of a contract goes beyond interpretation and

requires determining the legal effect and consequences of

contractual provisions. Id. (citing 3 Corbin, Corbin on

Contracts § 534 at 9 (1960)); see also Garden State Tanning

17

Inc. v. Mitchell Mfg. Grp., Inc., 273 F.3d 332, 335 (3d Cir.

2001) (“When an ambiguity exists in the agreement, the

problem is one of interpretation. If, however, the terms are

clear, construction of the contract determines its legal

operation.”).

“This case raises an issue of contract construction

because the issue[s] on appeal do[] not require interpretation of

any particular terms, but instead ask[] us to determine the legal

effect of and interplay between various provisions” of the

Basic Documents and the Odyssey Agreement. Medtronic,

Inc. v. Mirowski Family Ventures, LLC, 682 F. App’x 921, 926

(Fed. Cir. 2017); see also Ram Constr. Co. v. Am. States Ins.

Co., 749 F.2d 1049, 1052–53 (3d Cir. 1984) (stating that a case

raised issues of contract construction because the court had to

assess how actions of the parties affected the initial agreement

and whether a subsequent agreement was created). We thus

apply a de novo standard of review.

Because the District Court adopted the Magistrate

Judge’s R&R in all material respects, we review the Magistrate

Judge’s proposed disposition of the case and treat it and the

District Judge’s order interchangeably. See Shaver v. Siemens

Corp., 670 F.3d 462, 470 (3d Cir. 2012).

III. DISCUSSION

A. The Odyssey Agreement Violates the

Granting Clause.

Appellants argue that the Indentures’ Granting Clause

precluded the Trusts from appointing Odyssey as a new

Servicer because its plain language assigned to the Indenture

Trustee (U.S. Bank), for the benefit of the Noteholders, any

right the Trusts may have previously had to appoint servicers.

The Trusts counter that Appellants waived this argument

18

because they failed to raise it before the Magistrate Judge.

Alternatively, they argue that the Trusts had the authority to

appoint Odyssey under the plain language of the Basic

Documents and they complied with all the requirements of the

Basic Documents in entering the Odyssey Agreement.

We agree with the Appellants that the Odyssey

Agreement violates the Granting Clause. However, we reach

this conclusion not because the plain language of the Granting

Clause prohibits the Trusts from appointing a new servicer, but

rather because the Odyssey Agreement specifically assigned to

the Owners of the Trusts several rights reserved for the

Indenture Trustee, for the benefit of the Noteholders, in the

Basic Documents.

1. The Granting Clause Argument was

not Waived.

We first address whether Appellants waived their

argument that the Granting Clause precludes the Trusts from

entering into the Odyssey Agreement.4 Arguments not

presented to a magistrate judge and raised for the first time in

objections to the magistrate’s recommendations are deemed

4

We note that forfeiture “is the failure to make the

timely assertion of a right,” or the “inadvertent failure to raise

an argument,” while waiver, in contrast, is the “intentional

relinquishment or abandonment of a known right.” Barna v.

Bd. of Sch. Directors of Panther Valley Sch. Dist., 877 F.3d

136, 147 (3d Cir. 2017) (citations and internal quotation marks

omitted). Although “forfeiture” of arguments may be the

applicable concept to describe Appellants’ alleged failure to

raise certain arguments here, we use “waiver” because the

parties and District Court did and the Appellants’ relevant

arguments are not forfeited in any event.

19

waived. See Marshall v. Chater, 75 F.3d 1421, 1426 (10th Cir.

1996) (“Issues raised for the first time in objections to the

magistrate judge’s recommendation are deemed waived.”). A

“passing reference to an issue” does not suffice to preserve it.

See Laborers’ Int’l Union of N.A. v. Foster Wheeler Energy

Corp., 26 F.3d 375, 398 (3d Cir. 1994).

First, the Trusts misrepresent that the District Court held

that the Granting Clause argument was waived. The Court in

fact addressed this argument expressly by holding that “the

granting clause does not preclude the trusts from appointing

new servicers.” U.S. Nat’l Bank Ass’n, 2018 WL 4462369, at

*5. It recited the standard for waiver but did not hold that there

was waiver. Id. at *4.

Second, the Trustees concede that the Noteholders

argued to the Magistrate Judge “that the Odyssey Agreement

violates the grant of the Indentures,” yet posit that this was

insufficient to preserve the issue because the argument was

merely a “passing reference.” Appellees’ Br. 32. This too

misrepresents the record. The Noteholders’ submission to the

Magistrate Judge devoted an entire section to the argument that

the Odyssey Agreement “repudiates the Issuers’ grant.” J.A.

1024–25. The Judge expressly discussed the Granting Clause.

And the Noteholders joined U.S. Bank’s submissions on

summary judgment, which included arguments that the

Odyssey Agreement violated the Clause.

On this record, the Trusts cannot claim the Granting

Clause argument surprised them. Cf. Lark v. Sec’y Pa. Dep’t

of Corr., 645 F.3d 596, 607 (3d Cir. 2011) (stating that “the

crucial question regarding waiver” is whether the proceedings

“put the [d]istrict [c]ourt on notice of the legal argument”).

Moreover, even if Appellants had not clearly raised the

argument, we have discretion to consider whether the Odyssey

Agreement contravenes the Grant of the Indenture (something

20

we would do if needed), which presents a “pure question of

law” “closely related to arguments that [the parties] did raise”

and for which “[n]o additional fact-finding is necessary.”

Bagot v. Ashcroft, 398 F.3d 252, 256 (3d Cir. 2005). With no

waiver, we thus proceed with Appellants’ arguments.

2. The Plain Language of the Grant of the

Indenture Does Not Prohibit the Trusts

from Appointing a New Servicer.

The Grant of the Indenture transferred to the Indenture

Trustee (U.S. Bank), among other rights, “all the Issuer’s right,

title and interest in and to . . . the Student Loans, . . . [and] all

Servicing Agreements . . . [,] including the right of the Issuer

to cause . . . the Servicer to purchase[] Student Loans from the

Issuer.” Indenture at 1–2, J.A. 317–18. To restate, this was

absolute.

Appellants contend that the right to appoint servicers is

not shared; it was one of the rights absolutely granted to the

Indenture Trustee, and under New York law an assignment of

this breadth makes the trustee the exclusive holder of the rights

assigned. See Phoenix Light SF Ltd. v. U.S. Bank Nat’l Ass’n,

No. 14-cv-10116, 2015 WL 2359358, at *2 (S.D.N.Y. May 18,

2015) (stating that the grant of “all . . . right, title and interest”

in the certificates and related claims constituted a “full

assignment” that “divests plaintiffs of any rights they

otherwise may have had to commence litigation on their own

behalf” (citation and internal quotation marks omitted)); House

of Eur. Funding I Ltd. v. Wells Fargo Bank, N.A., No. 13-cv-

519, 2015 WL 1472301, at *7 (S.D.N.Y. Mar. 30, 2015)

(holding that granting clause effected “complete” assignment

to trustee and rejecting contention that the clause was merely

an “assignment as security” that reserved to the issuer any right

to sue) (citation and internal quotation marks omitted).

21

The Trusts counter, and the District Court agreed,

however, that “[t]he Granting Clause does not purport to divest

the Trusts of their power and responsibility to appoint

servicers. If that was the intention of the Granting Clause, it

could have easily said so, but it did not.” Appellees’ Br. 34.

The Court relied on San Antonio Fire & Police Pension Fund

v. Amylin Pharm., Inc., 983 A.2d 304 (Del. Ch.), aff’d, 981

A.2d 1173 (Del. 2009) (applying New York law), which held

that “[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[.]” Id. at 314. Thus the Court

concluded that “[t]here is no language presented to the court

that takes away this right to appoint servicers.” U.S. Nat’l Bank

Ass’n, 2018 WL 4462369, at *5. It further pointed out that

“[t]he granting rights clause does not use the language ‘sole’

or ‘exclusive holder’ when talking about the Indenture Trustee.

Yet, when intended, the Indenture uses such words.” Id. (citing

Indenture § 6.10(b)(i)). And indeed, “[i]t is axiomatic [under

New York law] that the powers of an indenture trustee are

limited to those specifically articulated in the indentures

themselves.” See Fleet Nat’l Bank v. Trans World Airlines,

Inc., 767 F. Supp. 510, 513 (S.D.N.Y. 1991).

The other cases Appellants cite to support that under

New York law the Grant is absolute do not address whether a

trust retains its right to appoint a servicer pursuant to an

indenture. See, e.g., Nat’l Credit Union Admin. Bd. v. U.S.

Bank Nat’l Ass’n, 898 F.3d 243, 253 (2d Cir. 2018) (stating

that the granting clause effected a “complete transfer” of the

estate of trusts to an indenture trustee); BlackRock Allocation

Target Shares: Series S. Portfolio v. Wells Fargo Bank, N.A.,

247 F. Supp. 3d 377, 412–13 (S.D.N.Y. 2017) (holding that

owners of a trust had no right to control trust assets because the

owners “contracted it away” to indenture trustee in the granting

clause). Instead, they primarily involve residential mortgage-

backed security (“RMBS”) trusts, entities entirely distinct from

22

the Trusts at issue here. See, e.g., Triaxx Prime CDO 2006-1,

Ltd. v. Bank of N.Y. Mellon, No. 16-cv-1597, 2018 WL

1417850 (S.D.N.Y. Mar. 8, 2018) (involving RMBS trusts, not

owner-directed Trusts, and addressing the plaintiff’s right to

sue, not whether it had the authority to appoint a new servicer);

Triaxx Prime CDO 2006-1, Ltd. v. Ocwen Loan Servicing,

LLC, 762 F.App’x 601, 605 (11th Cir. 2019) (same); Nat’l

Credit Union Admin. Bd., 898 F.3d at 253–54 (same);

BlackRock Allocation Target Shares, 247 F. Supp. 3d at 411-

12 (same); Phoenix Light SF Ltd. v. U.S. Bank Nat’l Ass’n, No.

14-cv-10116, 2016 WL 1169515, at *7 (S.D.N.Y. Mar. 22,

2016) (same).

More instructive here is the outcome in Hildene Cap.

Mgmt., LLC v. Bank of N.Y. Mellon, 105 A.D.3d 436 (N.Y.

App. Div. 2013). There the Court held that a granting clause

similar to the one here did not deprive the issuers of notes of

their right to enforce provisions of the indentures or other

agreements. Plaintiffs, who were senior noteholders, alleged

that Bank of New York Mellon (“BNYM”), as trustee, had

improperly sold collateral securities. Id. at 437. Preferred

Term Securities XX, Ltd. (“PreTSL XX”), as the issuer of the

notes, moved to intervene, and the Court found it had standing

to do so based on the contractual duties it assumed under the

relevant indenture. Id. Specifically, in the granting clause,

PreTSL XX granted its “right, title and interest” in the

collateral securities to BNYM “for the benefit of itself and the

Holders of the Notes” and “in trust . . . to secure compliance

with the provisions of this Indenture . . . .” Id. at 438.

However, Section 3.5 of the indenture authorized PreTSL XX

to take action “necessary or advisable to: . . . preserve and

defend title to the Collateral.” Id. The Court held that it could

not read the granting clause to divest PreTSL XX of the right

to bring claims, for the benefit of itself and the noteholders, to

recover damages for BNYM’s alleged breach. Id.

23

The Trusts argue that, here too, they assumed certain

contractual obligations under the Basic Documents that were

not annulled by the Granting Clause. They assert they retain

the obligation to take various actions to protect their interests

and enforce the obligations of persons doing business with

them. This includes the obligation “to enter into such

agreements that are necessary” to “provide for . . . the servicing

of the Student Loans.” TA § 2.03(a)(ii) & (iii), J.A. 268. In

addition, Section 3.07(d) of the Indentures provides:

If the Issuer shall have knowledge of the

occurrence of a Servicer Default . . . . , the Issuer

shall promptly notify the Indenture Trustee and

the Rating Agencies thereof, and shall specify in

such notice the action, if any, the Issuer is taking

with respect to such default . . . . [T]he Issuer

shall take all reasonable steps available to it to

enforce its rights under the Basic Documents in

respect of such failure.

J.A. 336. And indeed the definition of “Grant” in the

Indentures states that it is a conveyance of the “rights, powers

and options . . . of the Granting party,” J.A. 406, and it states

as well that “none of the obligations” of the granting party are

transferred thereunder, id.

As in Hildene Capital Management, 105 A.D.3d 436,

reading the Granting Clause here to prevent the Trusts from

hiring a new Servicer would render meaningless Sections

2.03(a)(ii) and (iii) of the Trust Agreements, and other rights

and powers of the Trusts, including, inter alia, their right and

power to hire, designate, and appoint the Special Servicer

under each Trust’s respective Indenture, Indenture

§ 2.03(a)(ii)–(iii), to direct audits on behalf of the Trusts, id.

§ 4.03(d), and to protect the Trusts and take action if they

become aware of a servicer default, id. § 3.07(d).

24

It is a “cardinal rule of construction that a court should

not ‘adopt an interpretation’ which will operate to leave a

‘provision of a contract . . . without force and effect.’” Corhill

Corp. v. S.D. Plants, Inc., 9 N.Y.2d 595, 599 (N.Y. 1961)

(citations omitted). And where one interpretation of a contract

provision would place it in conflict with another provision,

courts are obliged to reconcile the provisions to give both

effect. Perlbinder v. Board of Mgrs. of 411 E. 53rd St. Condo.,

65 A.D.3d 985, 987 (N.Y. App. Div. 2009). Holding that the

Granting Clause prevents the Trusts from ever appointing a

new servicer would render ineffective several provisions of the

Basic Documents. Thus we decline to adopt such an

interpretation.

Because the Granting Clause does not state that it

divests the Trusts of their power and obligation to appoint

servicers and because interpreting the Clause to do so would

render several other provisions of the Basic Documents not

effective, we hold that the Granting Clause does not

categorically prohibit the Trusts from appointing another

servicer.

This conclusion does not end our analysis, however.

That the Trusts still have authority to appoint a new servicer

does not mean that the Odyssey Agreement specifically does

not violate the Granting Clause.5

5

The Trusts also argue that Section 2 of the Special

Servicing Agreement gives them the power to appoint the

Special Servicer under each of the Trust’s respective

Indentures. They point out that U.S. Bank itself became the

Special Servicer after signing the Special Servicing Agreement

in March 2009 (years after the Indentures were executed), and

that the Trusts previously entered into servicing agreements

25

3. The Odyssey Agreement Violates the

Granting Clause by Reserving for the

Trusts Rights Belonging to the

Indenture Trustee for the Benefit of the

Noteholders.

Appellants also countered that the Odyssey Agreement

impermissibly reserved for the Trusts several rights that the

Granting Clause conveyed to the Indenture Trustee, including,

among others, the right to replace Odyssey for cause (Section

6(C)), and the right to direct Odyssey to act free from liability

to the Indenture Trustee (Section 9). J.A. 492, 494, 496.

We agree. Under the Special Servicing Agreement, the

Indenture Trustee “shall” remove the Successor Special

with different entities, such as the Master Servicing Agreement

between the PA Education Agency and the First Marblehead

Corporation in 2006. According to the Trusts, just as they

could enter the Special Servicing Agreement and the Master

Servicing Agreement, they could enter the Odyssey

Agreement. This argument fails, however, because, with

respect to the Special Servicing Agreement, U.S. Bank is not

acting only as the Special Servicer; it also serves as the

Indenture Trustee and its complaint about the Odyssey

Agreement is that its rights as Trustee are being violated. And

that the terms of the Master Servicing Agreement and any other

servicing agreement may not have violated the Basic

Documents does not shield the Odyssey Agreement from

criticism. Appellants do not argue that those other agreements

usurped the rights of the Indenture Trustee or included the kind

of provisions the Odyssey Agreement includes. Those

agreements are substantively different from the Odyssey

Agreement and not pertinent in our case.

26

Servicer upon the occurrence of certain specified defaults.

SSA § 6.D, J.A. 432–33. Odyssey, in contrast, cannot be

removed for defaults under the Odyssey Agreement without

consent of the Trusts. OA § 6(C), J.A. 494.6 Likewise, under

the Special Servicing Agreement the Indenture Trustee had a

right to indemnity by the Special Servicer for liability traced to

“willful misconduct, negligence or bad faith,” SSA § 10, J.A.

6

The Trusts claim that Section 6(C) cannot violate the

Granting Clause because the Master Servicing Agreement gave

First Marblehead Corporation the right to terminate the Master

Servicing Agreement. However, Appellants correctly point

out that Section 6(C) is readily distinguishable from the rights

granted to First Marblehead Corporation under the Master

Servicing Agreement. It expressly contemplated that First

Marblehead Corporation’s rights under that Agreement would

be assigned to “Permitted Assignees” — i.e., the Indenture

Trustee, among others — as part of the original securitization

process. Master Servicing Agreement (“MSA”) § 1.32, J.A.

742 (defining “Permitted Assignees” to include the Indenture

Trustee); MSA §13.02(b), J.A. 771 (contemplating that rights

of First Marblehead Corporation will be “assigned to Permitted

Assignees”); MSA § 13.03, J.A. 771–72 (“all rights and

obligations of [First Marblehead Corporation] under this

Agreement with respect to [] Student Loans shall inure to . . .

the Permitted Assignees”). Whatever termination rights First

Marblehead Corporation had under the Master Servicing

Agreement were ultimately granted to the Indenture Trustee.

Moreover, the Master Servicing Agreement specifically states

that “[n]othing contained herein shall be construed to create an

exclusive arrangement . . . . The Servicer understands and

agrees that [First Marblehead Corporation] may enter into

other agreements for the servicing of Private Student Loans in

the future.” MSA § 15.03, J.A. 776.

27

441, whereas the Odyssey Agreement provides

indemnification for only “willful misconduct, gross negligence

or bad faith,” OA § 9, J.A. 496 (emphasis added).

We discuss in the next section how the Odyssey

Agreement impermissibly modified and supplemented the

Basic Documents. Some of those modifications were the same

reassignment of rights from the Indenture Trustee to the Trusts

discussed here. Whether we treat the relevant provisions of the

Odyssey Agreement as impermissible reassignments of rights

or unilateral modifications, they render the Odyssey

Agreement invalid.

B. The Odyssey Agreement Impermissibly

Modified and Supplemented the Basic

Documents Without Consent.

Although we hold that the Granting Clause does not

divest the Trusts of their authority to appoint new servicers, we

still must address Appellants’ argument that the Indentures

unambiguously require consent from the Indenture Trustee and

the Noteholders for any amendment, supplement, or

termination of the terms of the Basic Documents, and whether

the Odyssey Agreement modified and supplemented the Basic

Documents without that consent.7

7

Our reading of the Granting Clause avoids the

untenable outcome that the Trusts can never replace the

servicer no matter how ineffectual it may be in performing its

role (the accusation they direct at U.S. Bank). Holding that the

Odyssey Agreement specifically violated the Granting Clause

does not render the Trusts helpless. It allows them to appoint

a new servicer. They just cannot do so in a way that violates

the Basic Documents. For example, the Trusts conceivably

28

The parties do not contest that the Trusts did not obtain

consent from the Indenture Trustee or the Noteholders before

entering the Odyssey Agreement. The question thus devolves

to whether that agreement impermissibly effected any

modifications or supplements to the Basic Documents.

1. We Assess the Effect of the Odyssey

Agreement on the Basic Documents to

Determine Whether it Violated the

Consent Clause of the Indentures.

Section 3.07(c) of the Indentures prohibits any

alteration to the Special Servicing Agreement or other Basic

Documents — specifically, any change that would “waive,

amend, modify, supplement or terminate” them — “without

the consent of the Indenture Trustee and the Interested

Noteholders . . . .” Indenture § 3.07(c), (f), J.A. 336. The

Special Servicing Agreement also prohibits any amendment

without the consent of “the parties [thereto]” and “the

Administrator;” any amendment must also satisfy the Rating

Agency Condition; and any successor servicer must be

approved by the Indenture Trustee and be affirmatively

approved by the Rating Agencies. SSA §§ 6(E), 16, 22(A),

J.A. 433, 442, 444.

We address first whether only formal alterations of the

Basic Documents violate Section 3.07(c). The Trusts argue in

essence, and the District Court agreed, that any agreement

short of a formal modification cannot trigger the Consent

Clause because Section 3.07(f) states that approval is required

for anything that “amend[s], modif[ies], waive[s],

supplement[s], terminate[s] or surrender[s] . . . the terms of . . .

the Basic Documents,” J.A. 336–37 (emphasis added), and the

could have entered another agreement that did not retain solely

for the Trusts the right to hire and fire the servicer.

29

Odyssey Agreement did not make any actual modifications or

additions to those terms. Applying a strict construction, the

Court held that the Odyssey Agreement does not alter the terms

of the Special Servicing Agreement or other Basic Documents.

U.S. Nat’l Bank Ass’n, 2018 WL 4462369, at *5.8

We disagree and hold that the District Court’s

conclusion contravenes well-settled New York law. Under that

law, parties to contracts cannot do anything that “‘will have the

effect of destroying or injuring the right of the other party to

receive the fruits of the contract.” Empresas Cablevision,

S.A.B. de C.V. v. JPMorgan Chase Bank, N.A., 680 F. Supp. 2d

625, 631 (S.D.N.Y.) (quoting Dalton v. Educ. Testing Serv.,

663 N.E.2d 289 (N.Y. 1995)), aff’d and remanded, 381 F.

App’x 117 (2d Cir. 2010) (per curiam). Courts look to the

effect of a contractual action. In Empresas, for example,

Cablevisión sought to enjoin its lender, JPMorgan, from selling

a 90% “participation” in the loan (an action that did not require

Cablevisión’s consent under the credit agreement), arguing

that the participation was in fact an “assignment” under the

agreement (an action that did explicitly require Cablevisión’s

consent). 680 F. Supp. 2d at 626. The Court held that

JPMorgan could not under the guise of selling a “participation”

8

Appellees assert that Appellants waived several of

their arguments as to how the Odyssey Agreement alters

provisions in the Basic Documents. However, the Magistrate

Judge specifically considered the modification argument, J.A.

47–49, even if not quite in the form presented before us. These

arguments are thus not waived. See United States v. Joseph,

730 F.3d 336, 341 (3d Cir. 2013) (holding that while parties

may not raise new arguments, they may place “greater

emphasis and more fully explain an argument on appeal”).

30

accomplish what was in substance a forbidden assignment. Id.

at 631–32.

Here too the Trusts cannot circumvent Section 3.07(c)

by entering a “new” agreement for the servicing of Defaulted

Loans that achieves the same result as an amendment without

obtaining the required consents. See Penny Lane Owners

Corp. v. Conthur Dev. Co., No. 94-cv-940, 2000 WL 178189,

at *12 (S.D.N.Y. Feb. 16, 2000) (refusing to “exalt form over

function” by treating a “lease” as an “assignment,” “even if

[the agreement] is not labeled so”); In re LightSquared Inc.,

511 B.R. 253, 333 (Bankr. S.D.N.Y. 2014) (holding that party

to credit agreement could not “end-run . . . the Eligible

Assignee provisions of the Credit Agreement” by engaging in

prohibited conduct through a shell company). Cf. President &

Fellows of Harvard Coll. v. Glancy, No. 18790, 2003 WL

21026784, at *14, 20 (Del. Ch. Mar. 21, 2003) (rejecting

shareholder agreement that effectively amended a preexisting

voting trust agreement without the required unanimous

shareholder approval). Indeed, the Trusts concede that the

purpose of the Odyssey Agreement was to remedy and replace

the existing special servicing arrangement because of U.S.

Bank’s alleged poor collection practices.

Thus we assess whether the Odyssey Agreement had the

effect of altering the Basic Documents even if there was no

formal amendment. If the Odyssey Agreement is indeed an

attempt to end-run the Consent Clause and modifies or

supplements the Basic Documents without the consent of the

Indenture Trustee and Noteholders, then it is invalid. We

review each alleged modification or supplement in turn.

2. Purchasing Loans from the Trust at

Below-Market Value

Appellants assert that the Odyssey Agreement amends

31

the Basic Documents by giving a new power to Odyssey to

purchase certain Defaulted Loans from the Trusts at below-

market value and to control the purchase price and the sale

process of loans pledged to the Indenture Trustee. The

Odyssey Agreement authorizes Odyssey to purchase Defaulted

Loans at a “purchase price” that is 10% less than fair market

value of the Defaulted Loan, in other words, to retain a 10%

commission for arranging for the sale of the Loan. OA § 2(C),

J.A. 492–93.

The Trusts counter that Odyssey may only purchase

Defaulted Loans from them in accord with mechanisms

provided in the Basic Documents. They point to several

sections of the Indentures to suggest the Basic Documents,

including the Special Servicing Agreement, do allow the sale

of loans. For example, Section 3.14 allows the Indenture

Trustee to dispose of loans to three parties: a guarantor, a seller,

and a servicer, J.A. 340, and loans sold to the Servicer must be

at a “price equal to or in excess of the amount required by the

applicable . . . Servicing Agreement,” Indenture § 3.14(b), J.A.

340.

Contrast this with the Odyssey Agreement. For

Odyssey to purchase Defaulted Loans from the Trusts, the

latter must provide an Issuer Order to the Indenture Trustee

directing the sale of the Loans to Odyssey, and that Order must

state the purchase price. OA § 2.C, J.A. 492–93; Indenture,

§ 3.14, J.A. 340. The Indenture Trustee must acknowledge and

sign the Order for the Loans to be sold to Odyssey. Id. This

same mechanism is specifically provided in the Basic

Documents. Moreover, the Trusts allege the Odyssey

Agreement does not allow Defaulted Loans to be sold at

below-market value and the Trusts cannot unilaterally set a

purchase price, as the Indenture requires that the purchase price

be equal to or in excess of the market value as determined in

the Odyssey Agreement. However, that market value is

32

determined according to the methods provided in the Odyssey

Agreement. It provides for two methods for calculating the

market value, specifically: (i) the highest bid received from at

least three qualified bidders when conducting the sale in a

manner that will yield the “highest and best net proceeds to be

paid” in exchange for the Loans; or (ii) the average value

determined from the appraisal values of two reputable

appraisers. OA § 2(C)(iii), J.A. 493.

Market value is thus ultimately determined by methods

laid out in the Odyssey Agreement. They do not appear in the

Basic Documents. Accordingly, the Odyssey Agreement

supplemented the Basic Documents at least with respect to the

methods for calculating market value of the Defaulted Loans

Odyssey may purchase. This supplement was made without

the consent of the Indenture Trustee or Noteholders, and thus

it violates the Consent Clause.

We could end our analysis here, but we briefly consider

several additional provisions of the Odyssey Agreement that

modified the terms of the Basic Documents.9

9

Appellants also argue that the PA Education Agency

Servicing Agreement and the Special Servicing Agreement

created an exclusive servicing arrangement for Defaulted

Loans, which are now handled by U.S. Bank in its role as

Successor Special Servicer, J.A. 958, and that the Odyssey

Agreement modifies and violates this exclusive servicing

arrangement by providing for Odyssey to service Defaulted

Loans. This argument fails for the reasons discussed above in

Section III.A.3.

33

3. Indemnity Protection

The Odyssey Agreement also modifies indemnity

protections related to servicing. The Special Servicing

Agreement provides that the Indenture Trustee and other

parties shall be indemnified by the special servicer for liability

arising from “willful misconduct, negligence or bad faith,”

SSA § 10, J.A. 441, whereas the Odyssey Agreement provides

indemnification for only “willful misconduct, gross negligence

or bad faith,” O.A. § 9, J.A. 496 (emphasis added).

The District Court held that there is “no provision in the

Indentures or in the [Special Servicing Agreement] [that]

[provides] that every servicing agreement must mirror the

others, ,” U.S. Nat’l Bank Ass’n, 2018 WL 4462369, at *5, and

the Trusts add that the existence of differing terms in the

Odyssey Agreement and the Special Servicing Agreement does

not mean the former modified the latter.

However, the question is not whether all servicing

agreements must be identical. Appellants have rights outlined

in the Basic Documents as Indenture Trustee and Noteholders.

U.S. Bank as Indenture Trustee (not as servicer) has less

indemnity protection under the terms of the Odyssey

Agreement than under the terms of the Special Servicing

Agreement. This result also is a modification of the Special

Servicing Agreement that was not consented to by the

Indenture Trustee or the Noteholders. It thus violates the

Consent Clause.

4. Removal of Servicer

As discussed in Section III.A.3 above, the Odyssey

Agreement also modified the process by which a servicer could

be removed. Briefly, under the Special Servicing Agreement

the Indenture Trustee “shall” remove the Successor Special

34

Servicer when certain defaults occur. SSA, § 6.D, J.A. 432–

33. Odyssey, in contrast, cannot be removed for defaults under

the Odyssey Agreement without consent of the Trusts. OA

§ 6(C), J.A. 494. Hence Section 6(C) of the Odyssey

Agreement also modified the Special Servicing Agreement

without consent of the required parties.10

10

Appellants tell us that the Odyssey Agreement fails to

satisfy the Indenture Rating Agency Condition and the Special

Servicing Agreement Rating Agency Condition, effectively

writing both provisions out of the Basic Documents and thus

modifying them. The Trusts counter that they satisfied the

Indenture Rating Agency Condition, see Indenture,

Definitions, J.A. 414, when they provided the Rating Agencies

with notice of their “intention to hire Odyssey as a Servicer”

and sent them each a copy of the Odyssey Agreement. J.A.

844. None of the Rating Agencies sent written notice that the

Agreement would result in a reduction or withdrawal of the

rating of the Notes. As for the Special Servicing Agreement

Rating Agency Condition, see SSA § 6(E), J.A. 433, the Trusts

allege that it applies only to the “resignation or removal of the

Special Servicer,” J.A. 433, and that here the Trusts have not

removed U.S. Bank as Special Servicer nor was Odyssey hired

as a successor Special Servicer. The Trusts contend that

Odyssey was appointed as an additional servicer for Defaulted

Loans and they informed the Ratings Agencies as much. J.A.

873. But even assuming both Ratings Agency Conditions have

been met, our conclusion remains unchanged—several

provisions of the Odyssey Agreement violate the Granting

Clause and the Consent Clause.

35

5. Amendments

Amendments to the Special Servicing Agreement must

be agreed to by parties other than the Trust, including the

Special Servicer, Indenture Trustee, and the Administrator.

SSA § 16, J.A. 442. The Odyssey Agreement has no such

provision and reserves for the Trusts the right to amend it. OA

§ 15, J.A. 497. This too is a modification inasmuch as it affects

the rights of the Indenture Trustee and Noteholders vis-a-vis

the servicer.11

C. The District Court Must Determine in the

First Instance Whether the Odyssey Invoices

Are Payable.

Because the District Court held that the Odyssey

Agreement did not violate the Granting Clause or the Consent

11

Because we hold that the Odyssey Agreement

violated the Granting Clause and the Consent Clause, we need

not decide whether the Agreement’s formation was an arm’s-

length transaction or improper self-dealing. We note, however,

that the Indentures require the Trusts to “maintain an arm’s

length relationship with . . . any of the [Trusts’] Affiliates” and

to preserve the lien of the Indentures. Indenture § 3.23(l), (o),

J.A. 346. The Trust Agreements prohibit the Trusts from

giving “the appearance [] of conducting business on behalf of

any Owner or any Affiliate of an Owner.” TA § 2.03(b)(iv),

J.A. 268. VCG nonetheless stands on both sides of the

Odyssey Agreement. Its chairman signed VCG’s letter (as an

Owner of the Trusts) directing the Trusts to appoint Odyssey

as servicer. He also signed the Odyssey Agreement on behalf

of Odyssey. J.A. 500. It is hard to see how such a transaction

could be considered as conducted at arm’s length. See LiquidX

Inc. v. Brooklawn Capital, LLC, 254 F. Supp. 3d 609, 618

36

Clause and was thus enforceable, it also ruled that Odyssey is

entitled to payment for its invoices from the pledged assets of

the Trusts. The Court had no opportunity to consider whether

the invoices would be payable if the Odyssey Agreement were

invalid and thus void. It will need to answer this question on

remand.

Appellants maintain that, because the appointment of

Odyssey was invalid, it was never an authorized servicer and

has no right to any payment. However, because the District

Court did not rule on this issue and the parties have not fully

briefed it before us, we decline to decide in the first instance

whether Odyssey’s invoices are payable.

CONCLUSION

Although the Odyssey Agreement does not violate the

Granting Clause by appointing another servicer, it does violate

it by assigning to the Owners of the Trusts several rights

reserved for the Indenture Trustee, for the benefit of the

Noteholders, in the Basic Documents. The Odyssey

Agreement required the consent of the Indenture Trustee and

Noteholders because it supplements and amends several

provisions of the Basic Documents. Accordingly, the Odyssey

Agreement is invalid and, if so, the Odyssey Invoices are likely

(S.D.N.Y. 2017) (holding that a transaction engineered “from

both sides” cannot be at “arm’s length”); Roso v. Saxon Energy

Corp., 758 F. Supp. 164, 169 (S.D.N.Y. 1991) (transaction

where a party held “integral positions on both sides of the

agreement” could not be “considered at arms-length”). It is

true that the decision to hire Odyssey was not VCG’s alone,

but jointly VCG and Citibank’s call. However, that other

parties were involved does not resolve the problem of VCG

being on both sides of the Agreement.

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not payable. We remand to the District Court to decide that

issue in the first instance with the benefit of further briefing.

Hence we affirm in part and reverse in part the rulings of the

District Court.

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