12-0168-cv L , 12-0169-cv CON , 12-0878-cv CON , 12-0880-cv CON Franklin Advisers, Inc v. CDO Plus Master Fund, Ltd. 1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND…

12-0168-cv(L), 12-0169-cv(CON), 12-0878-cv(CON), 12-0880-cv(CON) *
Franklin Advisers, Inc. v. CDO Plus Master Fund, Ltd.
1
UNITED STATES COURT OF APPEALS 2
3
FOR THE SECOND CIRCUIT 4
5
August Term, 2012 6
7
8
(Argued: March 1, 2013 Decided: August 1, 2013) 9
10
Docket Nos. 12-0168, 12-0169, 12-0878, 12-0880* 11
12
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 13
14
THE BANK OF NEW YORK TRUST COMPANY, 15
N.A., AS TRUSTEE, 16
17
Plaintiff, 18
19
- v.- 20
21
FRANKLIN ADVISERS, INC., 22
23
Defendant-Appellee, 24
25
FRANKLIN CLO II, LTD., FRANKLIN CLO CORP., CHASE MANHATTAN 26
BANK LONDON NOMINEE FOR SEIRA 13, AS NOMINEE, DEUTSCHE BANK 27
SECURITIES INC., AS A NOMINEE, GENSEC IRELAND LIMITED, AS A 28
NOMINEE, HARE & CO., AS NOMINEE, MAC & CO., MASSACHUSETTS 29
MUTUAL LIFE INSURANCE CO., SUN LIFE INSURANCE CO. OF CANADA, 30
AS A NOMINEE, TEMPLETON GLOBAL ADVISORS, LTD., AS A NOMINEE, 31
“JOHN DOE 1,” THROUGH “JOHN DOE” 12, THE LAST TWELVE NAMES 32
BEING FICTITIOUS AND UNKNOWN TO PLAINTIFF, THE PERSONS OR 33
PARTIES INTENDED BEING THE BENEFICIAL OWNERS OF THE 34
PREFERRED SHARES, THE SERIES I COMBINATION SECURITY AND THE 35
CLASS C2 NOTES UNDER COMPLAINT, 36
37
Defendants, 38
39
- v.- 40
41
* Appeals docketed as 12-0168-cv(L) and 12-0169-cv(CON)
were closed by stipulation of the parties on March 8, 2012.

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CDO PLUS MASTER FUND, LTD., MERRILL LYNCH, PIERCE, FENNER & 1
SMITH INC., AS A NOMINEE, 2
3
Defendants-Appellants. 4
5
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 6
7
Before: JACOBS, Chief Judge, POOLER, Circuit 8
Judge, and VITALIANO, District Judge.**
9
10
Merrill Lynch, Pierce, Fenner & Smith Inc., together 11
with CDO Plus Master Fund, Ltd., (collectively, the 12
“Shareholders”), appeal an order of the United States 13
District Court for the Southern District of New York 14
(Marrero, J.) denying their motion for summary judgment and 15
granting partial summary judgment to Franklin Advisers, Inc. 16
(“Franklin”), in a dispute over the payment of a contingent 17
collateral management fee. The Shareholders argue that the 18
district court erred in relying on extrinsic evidence and 19
concluding that Franklin, as collateral manager, was 20
entitled to the contingent fee after the portfolio produced 21
a twelve-percent internal rate of return, according to the 22
terms of the governing indenture. The Shareholders also 23
appeal Franklin’s award of attorney’s fees and statutory 24
prejudgment interest. For the following reasons, we affirm 25
** The Honorable Eric N. Vitaliano of the United
States District Court for the Eastern District of New York,
sitting by designation.
2

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the grant of summary judgment and the award of attorney’s 1
fees, vacate the award of prejudgment interest, and remand 2
with the instruction to award actual interest on the 3
judgment. 4
JAMES C. MARTIN, Reed Smith LLP, 5
New York, New York (James C. 6
McCarroll and C. Neil Gray, on 7
the brief), for Appellants. 8
9
JONATHAN L. HOCHMAN, Schindler 10
Cohen & Hochman LLP, New York, 11
New York (Matthew A. Katz, on 12
the brief), for Appellee. 13
14
DENNIS JACOBS, Chief Judge: 15
16
This interpleader action was initiated by The Bank of 17
New York Trust Company, N.A. (“BNY”), as Trustee of an 18
investment portfolio of collateralized loan obligations, to 19
resolve a contract dispute between certain shareholders and 20
the manager of that portfolio, Franklin Advisers, Inc. 21
(“Franklin”). In dispute are the terms of the underlying 22
indenture and, specifically, terms governing distribution of 23
a Contingent Collateral Management Fee (the “Contingent Fee” 24
or the “Fee”), which was payable to Franklin only if 25
distributions reached a twelve percent internal rate of 26
return (“IRR”). Franklin claimed the Fee (exceeding $7 27
million) when the portfolio’s return surpassed twelve 28
3

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percent upon an optional redemption voted by the 1
shareholders. 2
On cross-motions for summary judgment, the United 3
States District Court for the Southern District of New York 4
(Marrero, J.) ruled that: (1) the Fee can be paid on an 5
optional redemption; (2) proceeds of an optional redemption 6
should be included in calculating the IRR; and (3) the 7
indenture (“Indenture”) is ambiguous as to when the Fee 8
begins to accrue, i.e., whether the fee begins to accrue 9
from the closing date forward, or from the date the 10
portfolio’s IRR exceeds twelve percent (an issue the parties 11
resolved by arbitration). On appeal, Merrill Lynch, Pierce, 12
Fenner & Smith Inc. (“Merrill Lynch”) and CDO Plus Master 13
Fund, Ltd. (“CDO Plus”) (collectively, the “Shareholders”) 1
14
argue that each of those rulings was error. They also 15
challenge the court’s award of fees and costs, and its award 16
of prejudgment interest at a rate of nine percent pursuant 17
to N.Y. C.P.L.R. § 5001(a). We vacate the award of 18
statutory prejudgment interest and direct that interest be 19
paid only as actually accrued. In all other respects, we 20
affirm. 21
1 The term “Shareholders” refers specifically to the
Appellants, while “shareholders” refers broadly to all
holders of CLO II equity.
4

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I 1
A. The Transaction 2
The $600 million collateral loan obligation from which 3
this dispute arises, titled “CLO II,” closed on July 26, 4
2001. The securities were collateralized by a pool of 5
leveraged commercial loans and then sold to investors who 6
were paid based on cash flow from the underlying loans. 7
As collateral manager for CLO II, Franklin was 8
responsible for structuring the transaction with the 9
underwriter and for the active management of the portfolio. 10
Merrill Lynch was engaged as underwriter, and two special- 11
purpose investment vehicles were formed as issuer and co- 12
issuer: Franklin CLO II, Ltd. and Franklin CLO Corp. (the 13
“Issuers”). BNY, as Trustee (and stakeholder here), was 14
responsible for collecting principal and interest payments, 15
paying fees and expenses, and then distributing the 16
remaining proceeds to investors. 2
17
On the day of closing, the Trustee and the Issuers 18
executed an Indenture drafted by deal counsel, Cleary 19
Gottlieb Steen & Hamilton LLP (“Cleary”). The same day, 20
2 BNY succeeded Chase Manhattan Bank, the original
Trustee, on October 1, 2006.
5

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Franklin and the Issuers executed a Collateral Management 1
Agreement, incorporating all relevant provisions of the 2
Indenture. Merrill Lynch as underwriter sold the CLO II 3
securities to investors on the secondary market. The 4
securities consisted of (1) notes divided into different 5
levels of risk, held by CLO noteholders, and (2) shares of 6
CLO II’s equity, held by CLO II shareholders. As portfolio 7
manager, Franklin assembled and maintained CLO II’s assets, 8
which, in the main, were leveraged, secured loans made to 9
below-investment-grade borrowers. These loans served as 10
collateral for CLO II’s debt obligations to the CLO II 11
noteholders. 12
B. Provisions in Dispute. 13
1. The Article 11 “Waterfalls”. The Indenture 14
provides that proceeds from the portfolio were to be 15
distributed by BNY according to two sets of detailed payment 16
priorities on defined, quarterly distribution dates. The 17
two payment priorities, set out in Article 11, are called 18
“Waterfalls” because the payments cascade downward to a pool 19
at the bottom for distribution to the shareholders. The 20
first governs distribution of interest proceeds (the 21
“Interest Proceeds Waterfall”) and the second governs 22
6

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distribution of principal proceeds derived from obligations 1
paid at maturity or upon liquidation of CLO II (the 2
“Principal Proceeds Waterfall”). The priorities are (1) 3
expenses, (2) noteholders, and (3) shareholders, in that 4
order. Id. 5
2. Franklin’s Fees. Franklin was to be paid three 6
types of fees for its work as collateral manager. Two of 7
them were guaranteed and are not at issue here: the Base 8
Collateral Management Fee and the Subordinated Collateral 9
Management Fee. 3 The dispute is over the Contingent 10
Collateral Management Fee, a performance-based fee 11
contingent on the shareholders having “received an internal 12
rate of return of 12% per annum . . . on the amount of the 13
initial purchase price of the Preferred Shares for the 14
period from the Closing Date through [the] Distribution 15
Date,” JA 79-80, 4 a precondition designated the “IRR 16
Hurdle.” The base calculation of the Fee is approximately 17
equal to 0.25 percent per annum of the value of the 18
collateral and cash in the deal for a given period. 19
20
3 The combined guaranteed fees amounted to
approximately $14 million over the life of CLO II.
4 “JA” refers to the Joint Appendix; “CA” refers to the
Confidential Appendix; “SPA” refers to the Special Appendix;
and “SA” refers to the Supplemental Appendix.
7

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3. Optional Redemption Provision. CLO II was 1
structured to reach maturity on August 28, 2013. However, 2
Section 9.1(a) of the Indenture provided that, before then, 3
the holders of a majority of the CLO II preferred shares 4
could call for an optional redemption, directing Franklin to 5
sell CLO II’s assets, pay its expenses, redeem outstanding 6
notes, and distribute any remaining proceeds to the 7
shareholders. 8
C. The Redemption Controversy. In January 2007, a 9
majority of CLO II shareholders called for an optional 10
redemption, to take effect February 28, 2007. On February 11
7, 2007, Franklin auctioned off CLO II’s portfolio. 12
It is undisputed that prior to this liquidation 13
Franklin had not achieved the twelve percent rate of return 14
necessary to surmount the IRR Hurdle and earn the Contingent 15
Fee. However, if proceeds on liquidation were included in 16
the calculation, the IRR would have reached 17.7 percent per 17
annum. CDO Plus notified BNY and Franklin of its position 18
that the Fee should be calculated pre-liquidation and that 19
Franklin therefore was not entitled to the Fee. 5
20
5 Franklin points out that CDO Plus has shifted
positions. CDO Plus’s principal, Don Uderitz, sent a
February 2007 email calculating an even greater IRR (28.62
percent) but contending that Franklin had waived its
8

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Controversy arose when Franklin submitted a claim for a 1
Contingent Fee to BNY, totaling more than $7 million. 6
2
Faced with that dispute, BNY asked deal counsel for a 3
formal opinion interpreting the Indenture. Cleary concluded 4
that Franklin was entitled to the Fee. Anticipating 5
litigation between Franklin and the Shareholders, BNY (as 6
Trustee) filed this interpleader action. 7
D. Procedural History. At the close of discovery, 8
Franklin and the Shareholders filed cross-motions for 9
summary judgment. The district court ruled that, under the 10
Indenture: (1) a Contingent Fee can be paid upon an optional 11
redemption; and (2) the IRR calculation should include 12
payments made on the redemption date. See Bank of N.Y. 13
Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 14
466-67, 470 (S.D.N.Y. 2009). As to when the Fee accrues, 15
the court found a contractual ambiguity that resisted 16
summary judgment. Id. at 473. 17
18
entitlement to the Fee by filing an untimely claim. BNY
rejected this untimeliness argument, and CDO Plus has not
pursued the theory here.
6 Franklin originally claimed a Fee of $7,220,205.60,
but this claim increased to $7,466,654.47 after all interest
payments due on portfolio investments were received.
9

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Subject to the Shareholders’ reservation of their right 1
to challenge the finding that an ambiguity existed, the 2
parties agreed to arbitrate the following issue: whether 3
“the CLO II indenture should be interpreted to provide that 4
the [Contingent Fee] accrues from the closing date of the 5
transaction or accrues only from the date that the IRR 6
Hurdle is met.” 7 SA 5. In August 2011, following a four- 7
day hearing, the arbitration panel adopted Franklin’s 8
position that the Fee accrues from the closing date of the 9
CLO II transaction, even if it is payable only on a 10
distribution date following achievement of a twelve percent 11
IRR. 12
The court confirmed the arbitration award and granted 13
Franklin summary judgment on its claim for attorney’s fees. 14
The court also awarded Franklin statutory prejudgment 15
interest at a rate of nine percent pursuant to N.Y. C.P.L.R. 16
§ 5001(a). On February 17, 2012, the court entered judgment 17
in Franklin’s favor for $12,763,039.33, consisting of 18
contingent management fees of $7,466,654.47, attorneys’ fees 19
and costs of $2,064,188.63, and prejudgment interest of 20
$3,205,196.23. 21
7 Because of how the Contingent Fee is calculated, the
accrual date significantly affects the size of the Fee.
10

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II 1
We review a grant of summary judgment de novo. See 2
Compagnie Financiere de CIC et de L’Union Europeenne v. 3
Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 4
157 (2d Cir. 2000). “The question of whether the language 5
of a contract is clear or ambiguous is a question of law to 6
be decided by the court.” Id. at 158. If the court 7
determines the operative contract to be ambiguous, it may 8
evaluate the extrinsic evidence as a matter of law. Id. at 9
159-61. 10
The Shareholders contend that the district court 11
committed four errors: the first relates to the court’s use 12
of extrinsic evidence, and the latter three involve the 13
court’s interpretation of certain Fee-related provisions of 14
the Indenture. 15
16
III 17
The Shareholders argue that indentures “are governed by 18
special, market-driven rules of construction” and that 19
“courts are loathe to consider extrinsic evidence of the 20
contracting parties’ purported intentions when interpreting 21
indenture provisions.” Appellant Br. 21-22. They rely 22
11

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principally on Sharon Steel Corp. v. Chase Manhattan Bank, 1
N.A., 691 F.2d 1039 (2d Cir. 1982). 2
“It is a well-established rule in this Circuit that the 3
‘interpretation of Indenture provisions is a matter of basic 4
contract law.’” Jamie Sec. Co. v. The Ltd., Inc., 880 F.2d 5
1572, 1576 (2d Cir. 1989) (quoting Sharon Steel Corp., 691 6
F.2d at 1049) (alterations omitted). The Indenture here is 7
governed by New York law. 8
The district court thoroughly reviewed applicable 9
principles of New York contract law before construing the 10
provisions at issue. See Bank of New York Trust, N.A., 674 11
F. Supp. 2d at 463-64. One such principle is that, if 12
contract terms are ambiguous, “‘the court may accept any 13
available extrinsic evidence to ascertain the meaning 14
intended by the parties during the formation of the 15
contract.’” Id. at 463 (quoting British Int’l Ins. Co. v. 16
Seguros La Republica, S.A., 342 F.3d 78, 82 (2d Cir. 2003)). 17
The district court’s application of that principle is 18
consistent with Sharon Steel. 19
There, we construed “successor obligor” clauses in 20
indenture agreements between bondholders and a debtor 21
company in liquidation that sought to assign its debt to the 22
12

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purchaser of its assets. Sharon Steel Corp., 691 F.2d at 1
1042-46. We deemed it significant that the indenture 2
clauses at issue were boilerplate. Id. at 1048. Such 3
provisions are given a consistent, uniform interpretation 4
because they “do not depend upon particularized intentions 5
of the parties to an indenture.” Id. “[T]he creation of 6
enduring uncertainties as to the meaning of boilerplate 7
provisions would decrease the value of all debenture issues 8
and greatly impair the efficient working of capital 9
markets.” Id. We therefore construed the terms as a matter 10
of law based on their plain meaning, but also with reference 11
to the purpose the wording was evidently drafted to serve. 12
See id. at 1049-51. 13
The Shareholders argue that Sharon Steel counsels 14
against drawing upon extrinsic evidence to interpret 15
indenture provisions, as the district court did here (to a 16
limited extent 8). This argument is flawed for several 17
reasons. [1] There is no evidence that the disputed terms 18
in the CLO II Indenture are boilerplate: to all appearances, 19
they were negotiated, tailored to the transaction, and 20
8 As explained in Section V infra, the district court
found extrinsic evidence to be dispositive only in
determining whether proceeds of an optional redemption
should be included in the calculation of the IRR.
13

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govern the amount and trigger of a performance fee 1
potentially in the millions. [2] Sharon Steel expressly 2
states that indentures are subject to basic principles of 3
contract law. See supra p. 12. [3] Although the parties 4
failed to produce such evidence, Sharon Steel allowed that 5
“custom or usage might in some circumstances create a fact 6
question as to the interpretation of boilerplate 7
provisions.” Id. at 1048. In sum, the district court’s use 8
of extrinsic evidence here is consistent with Sharon Steel, 9
as subsequent case law confirms. 9
10
The Shareholders also invoke the doctrine of contra 11
proferentem as an alternative to extrinsic evidence when the 12
language of the indenture is unclear. See Kaiser Aluminum 13
Corp. v. Matheson, 681 A.2d 392, 398-99 (Del. 1996). 14
However, it does them no good to have ambiguities construed 15
against the drafter, because Franklin did not draft the 16
contract--and did not sign it. The Indenture was drafted by 17
9 See, e.g., Law Debenture Trust Co. of N.Y. v.
Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010)
(applying basic principles of New York contract law to
indenture provisions and noting that evidence as to “custom
and usage is to be considered by the court where
necessary”); Bank of N.Y. v. First Millennium, Inc., 598 F.
Supp. 2d 550, 556 (S.D.N.Y 2009) (under New York law, if an
indenture is “ambiguous, then the court may accept any
available extrinsic evidence to ascertain the meaning
intended by the parties”).
14

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Cleary as deal counsel and was entered into between the 1
Issuers and the Trustee. Contra proferentem is not an 2
available doctrine here. 3
4
IV 5
The Shareholders argue that they were entitled to 6
summary judgment because the Indenture precludes payment of 7
a Contingent Fee upon an optional redemption. They urge 8
that Article 9 of the Indenture, which specifically governs 9
optional redemptions, creates a separate distribution scheme 10
that does not provide for a Contingent Fee and that trumps 11
the distribution scheme set out in Article 11. 12
Article 9 pertains to the “Redemption of Notes.” JA 13
203-06. Section 9.1, which applies to optional redemptions, 14
contains no reference to any Contingent Fee payment. But 15
Section 9.1(e) is not an alternative payment schedule or 16
“waterfall,” as the Shareholders suggest; rather, it adds 17
another step in the waterfall sequence set out in Article 18
11, 10 which is the only comprehensive scheme governing 19
10 Section 9.1(e) provides: “After payment of the Notes
and the expenses of the Co-Issuers on any Redemption Date,
the Trustee shall pay (i) first, to the Class C-2 Redemption
Additional Interest and (ii) second to the Preferred Share
Paying Agent, for distribution to the Holders of the
Preferred Shares as liquidating distributions, all remaining
15

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distribution of interest proceeds and principal proceeds 1
derived from obligations paid at maturity or upon 2
liquidation of CLO II. On each distribution date, principal 3
proceeds flow downward to pay, e.g., taxes and 4
administrative expenses, JA 227 § 11.1(a)(ii)(A), and debt 5
obligations to noteholders, JA 228 § 11.1(a)(ii)(D)-(H), 6
until remaining proceeds are tapped for “payment of all due 7
and unpaid Contingent Collateral Management Fees.” JA 229 § 8
11.1(a)(ii)(J). The shareholders get the money that pools 9
at the end. See JA 229 § 11.1(a)(ii)(L). Interest proceeds 10
follow a similar course. See JA 225 § 11.1(a)(i). 11
Since Article 11 is made “subject to” certain other 12
provisions in the Indenture, including Article 9, 11 the 13
Shareholders contend that Article 9 controls. But we see no 14
tension between these two provisions. Article 9 is read 15
most naturally as supplementing Article 11, not supplanting 16
it. Thus Article 9 itself states that the notes shall not 17
proceeds from the sale and/or termination of the Collateral
and all other funds in the Collection Account.” JA 204 §
9.1(e).
11 “Notwithstanding any other provision in this
Indenture, but subject to the other subsections of this
Section, Article 9, and Section 13.1, on or, with respect to
amounts referred to in Section 11.1(d), before each
Distribution Date, the Trustee shall . . . .” JA 225 §
11.1(a) (emphasis added).
16

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be optionally redeemed unless a financial institution agrees 1
to pay “all administrative and other fees and expenses 2
payable under the Priority of Payments [Article 11] prior to 3
the payment of the Notes.” 12 JA 203 § 9.1(b) (emphasis 4
added). Article 9’s reference to Article 11’s Priority of 5
Payments implies that optional redemptions incorporate the 6
detailed distribution scheme established in Article 11. 7
The word “fees” does not appear in Section 9.1(e), but 8
elsewhere in the Indenture the words “fees” and “expenses” 9
are used interchangeably. 10 Consequently, the reference to 10
“the expenses of the Co-Issuers on any Redemption Date” 11
in Section 9.1(e) can be reasonably interpreted to include 12
fees. 13
14
12 The two provisions work in tandem. Article 11 sets
out the priority of payments to take effect on a
distribution date; and optional redemptions must fall on a
distribution date. See JA 203 § 9.1(a).
10 For instance, Section 11.1(a)(i)(B) provides for
the payment of “accrued and unpaid Administrative Expenses
constituting expenses of the Co-Issuers (other than the
Collateral Management Fee but including other amounts
payable by the Issuer to the Collateral Manager under the
Collateral Management Agreement or this Indenture).” JA
225, § 11.1(a)(i)(B) (emphasis added). In this provision,
“expenses of the Co-Issuers” is a category that includes the
Contingent Fee (though it just happens to be carved out
here).
17

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The Shareholders assert that plain meaning analysis 1
requires that we consider only how the two words are used 2
inside Section 9.1(e); but 9.1(e), like all provisions, 3
should be read in light of the whole agreement. See Brooke 4
Group Ltd. v. JCH Syndicate 488, 663 N.E.2d 635, 637 (N.Y. 5
1996) (“[W]hen interpreting a contract, the entire contract 6
must be considered so as to give each part meaning.”). The 7
Shareholders argue that Section 9.1(e) would have no force 8
or effect unless it alters Article 11’s Priority of 9
Payments. See In re OnBank & Trust Co., 688 N.E.2d 245, 247 10
(N.Y. 1997) (“We decline to read the amendment in such a way 11
as to render some of its terms superfluous.”) (citations 12
omitted). However, Section 9.1(e) provides for a specific 13
class of payment called the “Class C-2 Redemption Additional 14
Interest,” to be paid only in the event of an optional 15
redemption, an event that is not treated in Article 11. So 16
construing Articles 9 and 11 together does not sap Section 17
9.1(e) of force and effect. 18
If the Shareholders were right--that Article 11’s 19
Priority of Payments does not apply when shareholders call 20
an optional redemption, and that there can be no Fee in the 21
event of an optional redemption--we would expect the 22
Indenture to contain some language to this surprising 23
18

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effect. The Shareholders are arguing for specific and 1
consequential inferences that do not inhere in Section 2
9.1(e) or in the Indenture as a whole. 3
The Shareholders’ interpretation is also unworkable. 4
Section 9.1(e) cannot function as a stand-alone distribution 5
scheme and therefore cannot replace Article 11. As 6
discussed, Article 11 channels principal proceeds step-by- 7
step through each class of payment upon a distribution date. 8
It is similarly detailed as to interest proceeds. In 9
contrast, the single sentence of Section 9.1(e), if read in 10
isolation (as the Shareholders urge), leaves to the 11
imagination how classes of noteholders are to be paid, and 12
in what order, and how the portfolio manager is to be paid 13
(in base fees, subordinated fees, or contingent fees), and 14
in what order. Article 9 is therefore no useful substitute 15
for Article 11. The Shareholders’ reply brief effectively 16
concedes as much. See Appellant Reply Br. 10 (“[T]he 17
language in Article 9.1(e) referring to ‘payment of the 18
Notes and expenses of the Co-Issuers’ necessarily implicates 19
aspects of the Article 11 waterfall . . . .”). 20
Finally, the contract must be read to conform to the 21
parties’ reasonable expectations. See Spear, Leeds & 22
Kellogg v. Cent. Life Assurance Co., 85 F.3d 21, 28 (2d Cir. 23
19

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1996). The parties cannot reasonably have intended for 1
shareholders to be able to avoid the Contingent Fee by 2
exercising an option to redeem at any time prior to the 3
scheduled maturity date, particularly since poor performance 4
is not the only reason to elect redemption: shareholders 5
might seek redemption to lock in early gains. Moreover, 6
under the Shareholders’ view of the Indenture, Article 9 7
would eliminate all fees upon an optional redemption, 8
including the subordinated collateral management fee and the 9
base collateral management fee, which are, by definition, 10
guaranteed. See JA 70, 116-17. 11
Accordingly, we conclude that the Indenture allows for 12
the distribution of the Contingent Fee upon an optional 13
redemption. 11
14
15
16
17
11 Franklin offers various kinds of extrinsic evidence,
including Franklin’s contemporaneous internal and external
communications illustrating its expectation that the Fee
could be paid upon an optional redemption; communications
between BNY, deal counsel, and the Shareholders; the CLO III
transaction; the CLO II Model constructed by Merrill; and
industry custom and practice. The district court did not
find it necessary to consider this evidence given the
contract’s plain language, and neither do we.
20

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V 1
Franklin’s eligibility for the Fee depends on whether 2
the portfolio’s IRR reached the twelve percent threshold, 3
which in turn depends on whether the proceeds of the 4
optional redemption are taken into account. 5
The Shareholders urge that the waterfall structure in 6
Article 11 renders Franklin’s suggested calculation method 7
impossible, because the calculation and payment of the Fee 8
(at Step J of the priority of payments) cannot be based on 9
the funds in the final distribution made at Step L. See JA 10
229 § 11.1(a)(ii)(J)-(L). As the Shareholders describe it, 11
the funds cannot flow up a waterfall. 12
The Shareholders are pressing the waterfall analogy 13
much too hard. Article 11 sets forth a payment distribution 14
scheme. These calculations of what is to be distributed at 15
each level can of course be made in advance of the actual 16
distribution of the proceeds, and must be. Article 11 17
confirms that such calculation must take place prior to the 18
distribution: 19
In connection with the application of funds to pay 20
[Contingent Fees] in accordance with [this 21
Article], no more than one Business Day[] after the 22
Due Period ending prior to such Distribution Date, 23
the Collateral Manager shall deliver to the Trustee 24
a calculation of the amount payable on such 25
Distribution Date. 26
21

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A 229 § 11.1(e). The Collateral Manager could hardly 1
deliver a calculation to the Trustee prior to the 2
distribution date without taking into account proceeds that 3
have not descended any step of the Waterfall--including the 4
final distribution at Step L. 5
The issue is conclusively resolved by the definition of 6
“Contingent Collateral Management Fee,” which contemplates 7
that calculation of the IRR will include proceeds “from the 8
Closing Date through such Distribution Date”: 9
The fee payable for each Interest Accrual Period to 10
the Collateral Manager in arrears on each 11
Distribution Date . . . ; provided, however, that 12
the [CCMF] will be payable on each Distribution 13
Date only to the extent that (i) holders of the 14
Preferred Shares have received an internal rate of 15
return of 12% per annum . . . on the amount of the 16
initial purchase of the Preferred Shares for the 17
period from the Closing Date through such 18
Distribution Date. 19
20
JA 79 (emphasis in original). In this context, “through” 21
means “up to and including.” 18 Oxford English Dictionary 22
11 (2d ed. 1989); see also Curlett Family Ltd. P’ship, Ltd. 23
v. Particle Drilling Techs., Inc., 254 F. App’x 320, 324 n.4 24
(5th Cir. 2007). 25
We are bound, first and foremost, by the terms’ plain 26
meaning. See Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 27
1971). The clarity of the contractual language here 28
22

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obviates a need to consider extrinsic evidence. 12 See 1
Rainbow v. Swisher, 527 N.E.2d 258, 259 (N.Y. 1988). The 2
Shareholders actually acknowledge that “proceeds received 3
‘through’ a given Distribution Date may be counted in 4
determining whether the . . . Shareholders have received a 5
12% IRR on that date.” Appellant Reply Br. 14. Evidently, 6
this concession is made to assist the Shareholders’ argument 7
that Franklin would be entitled to the Fee “only on the next 8
Distribution Date,” which , in the context of an optional 9
redemption, never comes. Id. This reading of the Indenture 10
is implausible, to say the least. The Indenture itself thus 11
12 At an earlier stage of the litigation, the district
court concluded that the Indenture was ambiguous on this
point. See Bank of N.Y. Trust, N.A. v. Franklin Advisors,
Inc., 522 F. Supp. 2d 632, 637 (S.D.N.Y. 2007). At summary
judgment, the court considered extrinsic evidence such as
testimony by Rick Caplan, an industry expert, who stated
that it was “‘standard in the industry . . . that optional
redemption date proceeds are included in calculating whether
the equity holders have reached the IRR hurdle rate.’” Bank
of N.Y. Trust, N.A. v. Franklin Advisers, Inc., 674 F. Supp.
2d 458, 468 (S.D.N.Y. 2009) (quoting Caplan). Deal counsel
Raymond Check confirmed that the calculation of the IRR was
intended to account for all returns “through and including”
the distribution date, and that this usage and
interpretation is common in the industry. Id. at 468-69.
The district court observed that the Shareholders failed to
produce “any evidence tending to show that the word
‘through’ in the clause at issue is not to be interpreted to
include Redemption Date payments” and that “the extrinsic
evidence is thus one-sided in favor of Franklin Advisers’
interpretation.” Id. at 470. Because no reasonable jury
could find for the Shareholders on this issue, the court
therefore granted summary judgment to Franklin. Id.
23

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makes plain that calculation of the IRR includes redemption 1
proceeds; we need look no further. 2
3
VI 4
Having concluded that a Fee is payable following an 5
optional redemption, and that calculation of the Fee takes 6
into account redemption proceeds, we turn to the issue of 7
accrual: Franklin argues that the Fee began to accrue at the 8
date of closing (July 26, 2001); the Shareholders argue that 9
it did not begin to accrue until the date the portfolio 10
surpassed the IRR Hurdle (February 28, 2007). On this 11
point, the district court found the contract ambiguous and 12
the extrinsic evidence mixed, thus creating a genuine issue 13
of material fact. The parties submitted the issue to an 14
arbitration panel, which concluded that the evidence favored 15
Franklin’s position overwhelmingly. We discern no error in 16
the district court’s decision. 17
By definition, the Fee is triggered only upon the 18
portfolio reaching an internal rate of return of twelve 19
percent per annum. The Fee is calculated as the “accrued 20
and unpaid Contingent Collateral Management Fee (consisting 21
of the Contingent Collateral Management Fee accrued for the 22
related Interest Accrual Period and any such fee accrued for 23
24

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prior Due Periods but not paid on any prior Distribution 1
Date) that is payable on such Distribution Date as described 2
above.” 13 JA 79-80 (emphasis added). 3
Neither argument is compelled by the wording. The 4
provision states that the Contingent Fee includes any fee 5
accrued (but not yet paid) for this or prior periods, 6
without specifying an accrual date. The Shareholders’ 7
reading strikes us as unlikely because it would mean that 8
whenever the portfolio manager achieves the stated goal of 9
producing a twelve percent annual IRR, it is entitled to 10
nothing except the potential for a fee, large or small, at 11
some point in the future--subject to the whim of 12
shareholders who may avoid that fee award by taking an 13
optional redemption. Such an incentive fee award creates 14
virtually no incentive at all. 15
Nevertheless, the Indenture contains two seemingly 16
inexplicable features. First, as the Shareholders point 17
out, the Principal Proceeds Waterfall provides for the 18
payment of all “due and unpaid” fees, JA 229 § 19
11.1(a)(ii)(J), while the Interest Proceeds Waterfall 20
13 The Indenture further provides that the Fee shall
not exceed forty percent of all interest and principal
proceeds available for distribution after the portfolio has
reached an IRR of twelve percent. See JA 80.
25

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provides for the payment of “(1) the Contingent Collateral 1
Management Fee for such Distribution Date, and then (2) all 2
accrued and unpaid Contingent Collateral Management Fees 3
accrued on prior Distribution Dates.” JA 227 § 4
11.1(a)(i)(O) (emphasis added). The distinction (if any) 5
between “due and unpaid” and “accrued and unpaid” is not 6
clear; but, even if the distinction is meaningful, it does 7
not indicate whether accrual begins at closing or upon 8
surmounting the IRR Hurdle. 9
Second, the definition of “Subordinated Collateral 10
Management Fee ,” one of two guaranteed fees not tied to 11
performance, states that the fee “accrue[s] from the Closing 12
Date whether or not currently payable.” JA 116-17. Since 13
it would have been easy and consistent to include such clear 14
wording in the definition of the Contingent Fee (if that is 15
what the parties intended), the absence lends support to the 16
Shareholders’ argument that the Fee does not accrue at 17
closing. However, as the district court observed, the two 18
fees serve distinct purposes and are described in different 19
terms throughout the Indenture. See Bank of N.Y. Trust, 20
N.A. v. Franklin Advisers, Inc., 674 F. Supp. 2d 458, 470-71 21
(S.D.N.Y. 2009). 22
26

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The parties strain to find support in the Indenture for 1
their competing interpretations. As is sometimes the case, 2
a detailed and ramified contract--even one that attempts to 3
provide for innumerable contingencies, to anticipate 4
disputes and to preempt litigation--may yet be silent as to 5
a question that later becomes critical. Reliance upon 6
extrinsic evidence then becomes perfectly appropriate. See 7
British Int’l Ins. Co. Ltd. v. Seguros La Republica, S.A., 8
342 F.3d 78, 82 (2d Cir. 2003) (applying New York law). The 9
district court therefore committed no error. 14
10
VII 11
The Shareholders challenge the district court’s ruling 12
that prejudgment interest of nine percent is mandatory under 13
N.Y. C.P.L.R. § 5001(a). See Bank of New York Trust, N.A. 14
v. Franklin Advisers, Inc., No. 07 Civ. 1746 (S.D.N.Y. Nov. 15
14 As noted supra p. 24, the district court ultimately
determined that the extrinsic evidence was not conclusive,
and the parties submitted the issue to an arbitration panel.
The panel decided the issue in Franklin’s favor, concluding
that a “large amount” of evidence indicated that the Fee was
intended to accrue at closing. SA 27. For example, the
panel found it significant that a Merrill Lynch financial
model created for CLO II calculated the Fee to accrue from
closing regardless of whether it was actually payable in a
particular period. The panel also found that “it was the
uniform practice and custom in the industry that once the
IRR Hurdle had been satisfied in a CLO transaction, the
[Fee] would be payable from the time of the closing of the
transaction.” SA 23.
27

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15, 2011) (ECF No. 145). We agree with the Shareholders 1
that this was error. 2
We start with the interpleader statute, N.Y. C.P.L.R. § 3
1006(f), which provides that if a court determines that a 4
claimant in an interpleader action is entitled to interest, 5
the stakeholder “shall be liable to such party for interest 6
to the date of discharge at a rate no greater than the 7
lowest discount rate of the Federal Reserve.” N.Y. C.P.L.R. 8
§ 1006(f) (McKinney 2013). This statute “provides for an 9
award of interest against a stakeholder up to the time of 10
discharge . . . but not against unsuccessful claimants.” 11
Mfr.’s & Traders Trust Co. v. Reliance Ins. Co., 870 N.E.2d 12
124, 126-27 (N.Y. 2007) (emphasis added). As a result, “the 13
interest award here must be authorized, if at all, by the 14
general interest statute, CPLR 5001(a).” Id. at 127. 15
Section 5001(a) provides for a mandatory award of 16
prejudgment interest in certain actions, including those for 17
breach of contract, but the statute contains an exception 18
for actions at equity: 19
Interest shall be recovered upon a sum awarded 20
because of a breach of performance of a contract, 21
or because of an act or omission depriving or 22
otherwise interfering with title to, or possession 23
or enjoyment of, property, except that in an action 24
of an equitable nature, interest and the rate and 25
28

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date from which it shall be computed shall be in 1
the court’s discretion. 2
3
N.Y. C.P.L.R. § 5001(a) (McKinney 2013) (emphasis added). 4
Because interpleader actions “are indeed equitable,” 5
Manufacturer’s, 870 N.E.2d at 127, the district court erred 6
in concluding that the award was mandated by statute. Cf. 7
United Bank Ltd. v. Cosmic Int’l, Inc., 542 F.2d 868, 878 8
(2d Cir. 1976) (holding that prejudgment interest was 9
required by statute because, while Section 5001 10
“specifically excepts ‘action(s) of an equitable nature’ 11
from the provision’s mandatory scope,” the stakeholder did 12
not file an interpleader action). 13
In Manufacturer’s, the Court went a step further, 14
holding that the successful claimant was not entitled to 15
statutory prejudgment interest because there was no “sum 16
awarded” against the adverse parties. 870 N.E.2d at 127. 17
Additionally, the Court observed that there had been no 18
finding that the losing claimants breached any contract, 19
interfered unlawfully with the possession or enjoyment of 20
any property, asserted frivolous claims, conducted vexatious 21
litigation, or acted solely to cause delay. Id. at 127-28. 22
As a result, there was no basis for an award of statutory 23
prejudgment interest against them. 24
29

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The same is true here. The only meaningful distinction 1
is that, in Manufacturer’s, the parties had inexplicably 2
failed to place the contested funds in an interest-bearing 3
account, so that the successful claimant received no 4
compensation for the lost use of its money. Id. at 128. 5
Here, however, the Trustee deposited the stake with the 6
district court, which placed the funds in an interest- 7
bearing account. Franklin is entitled to that accrued sum, 8
and no more. Accordingly, we vacate the award of statutory 9
prejudgment interest and remand with the instruction to 10
award the prejudgment interest actually accrued on the 11
$7,466,654.47 fee owed to Franklin, to be paid from the 12
court’s account. 13
14
VIII 15
Finally, the Shareholders challenge the award of 16
attorney’s fees. Without contesting the amount 17
(approximately $2 million), they argue that Franklin is 18
entitled to indemnification only for costs incurred in 19
litigation with third parties, not with contracting parties. 20
However, this litigation is a third-party dispute. 21
The Collateral Management Agreement (the “Agreement”) 22
provides: 23
30

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The Issuer shall indemnify and hold harmless 1
[Franklin] . . . from and against any and all 2
Liabilities, and will reimburse [Franklin] for all 3
reasonable fees and expenses (including reasonable 4
fees and expenses of counsel) . . . as such 5
Expenses are incurred in investigation, preparing, 6
pursuing, or defending any claim, action, 7
proceeding or investigation with respect to any 8
pending or threatened litigation (collectively, the 9
“Actions”), caused by, or arising out of or in 10
connection with the issuance of the Offered 11
Securities . . . . 12
13
JA 321 § 10(b) (emphasis added). Franklin contends that 14
this indemnification provision applies broadly to “any 15
pending or threatened litigation” and has no language 16
restricting it to third-party actions, which is true enough. 17
But neither does it clearly state that the provision applies 18
to third-party claims; and we are wary of the inference that 19
indemnification clauses apply to litigation between the 20
parties in the absence of express wording. See Oscar Gruss 21
& Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003) 22
(“Promises by one party to indemnify the other for 23
attorneys’ fees run against the grain of the accepted policy 24
that parties are responsible for their own attorneys’ 25
fees.”). In New York, courts “‘should not infer a party’s 26
intention’ to provide counsel fees as damages for a breach 27
of contract ‘unless the intention to do so is unmistakably 28
clear’ from the language of the contract.” Id. (quoting 29
31

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Hooper Assocs., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 1
905 (N.Y. 1989)). Where, as here, the contract does not 2
“exclusively or unequivocally refer[] to claims between the 3
parties themselves,” Hooper Assocs., Ltd., 548 N.E.2d at 4
905, we will presume that indemnification extends only to 5
third-party disputes. 6
However, it matters not whether the Agreement covers 7
litigation between the contracting parties because this 8
litigation is a third-party dispute. The Agreement was 9
entered into between Franklin and the Issuers . The 10
Shareholders concede (in another context) that they “played 11
no role whatsoever in the execution and drafting of the 12
[Agreement].” Appellant Reply Br. 26. Accordingly, this 13
dispute does not implicate the warning in Oscar Gruss 14
against broadly construing indemnification clauses to cover 15
litigation between contracting parties. 16
Additionally, indemnification clauses (like most other 17
contractual provisions) should be read to implement the 18
parties’ intentions, to the extent possible. See Oscar 19
Gruss & Son, Inc., 337 F.3d at 199. The Agreement here 20
specifically contemplates litigation between management and 21
shareholders. In discussing the limits of Franklin’s 22
responsibilities, Section 10(a) refers to Franklin’s 23
32

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potential liability for mismanaging its investments and 1
providing misleading marketing materials. JA 320 § 10(a). 2
These are fertile areas of litigation with investors, as is 3
management fees. Because the parties’ intent is 4
ascertainable from the plain wording of the agreement, 5
indemnification does not offend the rule that “such 6
contracts must be strictly construed to avoid inferring 7
duties that the parties did not intend to create.” Id. We 8
therefore affirm the indemnification award. 9
10
CONCLUSION 11
For the foregoing reasons, we affirm the grant of 12
partial summary judgment to Franklin and the denial of 13
summary judgment to the Shareholders, as well as the award 14
of attorney’s fees and costs, but we vacate the award of 15
statutory prejudgment interest and remand with the 16
instruction to award actual interest. 17
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