Concord Real Estate CDO 2006-1, Ltd. v. Bank of America N.A.

Concord Real Estate CDO 2006-1, Ltd., and Concord Real Estate CDO 2006-1, LLX (collectively, Concord) (plaintiffs) issued several classes of notes under an indenture. The classes of notes had different priority levels. The notes with higher priorities in principal and interest payments paid the noteholders a lower rate of interest. The Concord Debt Funding Trust (the trust), which was related to Concord, held several classes of the notes issued by Concord. Concord became worried that it would be unable to cover certain classes of the notes, which would result in Concord failing a coverage test. In response, the trust surrendered its notes (the subject notes), which had a principal amount over $66 million, back to Concord at no charge. Concord delivered the subject notes to Bank of America, N.A. (defendant), the indenture trustee and notes registrar, for cancellation, but Bank of America refused to cancel the notes. If the subject notes were not canceled, Concord would fail the coverage test and owe other noteholders over $900,000 in redemption payments. If the subject notes were canceled, Concord would not fail the coverage test and would not owe any redemption payments. Bank of America reasoned that the cancellation was not allowed under the indenture. The indenture did not include any provision about the voluntary surrender and cancellation of a note by the noteholder. Bank of America also argued that the cancellation would go against the reasonable expectations of senior noteholders, who expected to receive redemption payments in the event of a coverage failure. Concord filed a lawsuit in Delaware state court against Bank of America, arguing that it had properly delivered the subject notes for cancellation.