The United States District Court for the Southern District of New York (the “Court”) issued a decision addressing the issue of whether cash proceeds from the portfolio collateral of a collateralized loan obligation (the “CLO”) should be reinvested or distributed to noteholders when the collateral manager had committed during the reinvestment period to make certain new purchases with the proceeds, but the CLO did not receive such proceeds until after the reinvestment period had ended. Certain holders of the CLO’s senior note classes favored distribution of the proceeds, while the collateral manager and the holder of the CLO’s junior securities (so-called income notes) advocated using the proceeds to fulfill the purchase commitments. The Court noted that the collateral manager stood to realize higher fees if the cash proceeds were reinvested.
The Court, relying on the principle that “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms,” ruled that the over $65 million of proceeds must be distributed to the noteholders. Judge Rakoff reasoned that per “the plain language of the Indenture” governing the CLO’s notes, most collateral proceeds (including those at issue) received after the end of the reinvestment period could not be reinvested and had to be distributed to the noteholders, noting that cash proceeds could not be reinvested before they were received per the “plain meaning” of the word “reinvested”. U.S. Bank, N.A., Trustee, Interpleader Plaintiff vs. Black Diamond CLO 2005-1 Adviser, No. 11- cv-5675 (S.D.N.Y., filed Dec. 30, 2011).