PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Tomás Reyes, General Counsel, Skybridge Fintech Ltd. Danielle Prescott, Chief Financial Officer, Skybridge Fintech Ltd.
FROM: Linda Osei, Partner, Calderwood & Harkness LLP Patrick Gallagher, Associate, Calderwood & Harkness LLP
DATE: April 30, 2024
RE: Analysis of Skybridge Fintech Ltd.'s Indemnification and Damages Claims Against Clearview Loan Servicing, Inc. Under the Master Servicing Agreement Dated October 1, 2022
C&H Matter No.: 1009-00005
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation. It is intended solely for the use of Skybridge Fintech Ltd. and its authorized representatives. Any dissemination, distribution, or copying of this memorandum to persons or entities outside the attorney-client relationship without the prior written consent of Calderwood & Harkness LLP is strictly prohibited.
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I. Executive Summary
You have asked us to analyze Skybridge Fintech Ltd.'s ("SBF" or the "Company") indemnification rights and potential damages claims against Clearview Loan Servicing, Inc. ("Clearview") arising from the servicing-data discrepancy discovered on April 22, 2024. The discrepancy was identified by Broadleaf Analytics Group LLC ("Broadleaf") during loan-level re-underwriting of the proposed SkyLend Receivables Trust 2024-1 (the "Trust" or "SRT 2024-1") securitization. This memorandum sets forth our factual findings, legal analysis, damages assessment, and strategic recommendations.
Core Finding. Clearview's payment-waterfall error — introduced during the June 2023 migration from the legacy "LoanTrax" system to the new "ClearCore" platform — resulted in materially inaccurate servicing data that was incorporated into the Preliminary Offering Memorandum dated April 5, 2024 (the "Preliminary OM"), and distributed to twenty-eight (28) institutional investors during the April 15–19 roadshow. The data discrepancy ultimately caused the termination, on May 8, 2024, of a $200,000,000 consumer-receivables securitization that SBF had been developing since late January 2024. The ClearCore error systematically applied partial borrower payments to outstanding principal before accrued interest, in direct contravention of the contractual payment-application waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022 (the "MSA"). The error persisted for approximately ten months and affected approximately 14,600 loans — 63.2% of the proposed securitization pool — resulting in materially understated delinquency rates (reported 3.21% versus actual 5.47%, a 70.4% relative understatement) and cumulative net loss figures (reported 4.12% versus actual 6.89%, a 67.2% relative understatement).
Indemnification Rights. SBF has strong indemnification claims against Clearview under Section 9.02 of the MSA. Clearview's conduct constitutes breaches of Sections 4.03 (payment-application waterfall), 5.01 (data-accuracy representations and warranties), and 6.01 (prudent servicer standard) of the MSA, each of which independently triggers Clearview's indemnification obligations under Section 9.02. Additionally, Clearview's execution of Amendment No. 1 to the MSA on March 18, 2024, while the ClearCore error remained undetected and unremediated, may support a claim of knowing or reckless misrepresentation.
Estimated Damages. We estimate SBF's total claim against Clearview in the range of $1,500,000 to $3,000,000, inclusive of sunk transaction costs totaling $1,779,150 and potential reputational and consequential damages. The low end of this range reflects recovery of direct sunk transaction costs with modest offsets; the high end includes potential additional claims from Halcyon Securities LLC ("Halcyon"), reputational damages, and post-termination attorneys' fees.
Clearview's Defenses. Clearview will likely assert several defenses, including (i) SBF's failure to detect the error through its own quarterly data-reconciliation obligations, (ii) arguments that the ClearCore error was an unforeseeable software defect rather than servicer misconduct, and (iii) arguments that SBF failed to mitigate damages by terminating the securitization rather than pursuing a delayed closing. We assess these defenses as having limited but non-trivial merit, particularly the data-reconciliation argument, which may reduce — but should not eliminate — Clearview's liability under a comparative-fault analysis governed by New York law.
Recommendations. We recommend that SBF take the following immediate actions:
(a) Send a formal demand letter to Clearview invoking Section 9.02 indemnification no later than May 7, 2024;
(b) Issue a litigation hold directive to all relevant SBF personnel and request preservation of records from Clearview;
(c) Engage an independent consultant to assess the full scope of the payment-waterfall error across SBF's entire Clearview-serviced portfolio ($640 million); and
(d) Prepare for potential arbitration or litigation if Clearview does not agree to a negotiated resolution within a reasonable timeframe.
The balance of this memorandum sets forth our detailed analysis supporting these conclusions.
II. Background and Factual Summary
A. The Parties
Skybridge Fintech Ltd. SBF is a Delaware corporation headquartered at 1400 Market Street, Suite 1210, Wilmington, Delaware 19801 (EIN: 84-3291076). The Company operates the "SkyLend" direct-to-consumer digital lending platform, through which it originates unsecured consumer installment loans ranging from $1,000 to $25,000 with terms of 12 to 60 months. SBF's fiscal year 2023 origination volume was approximately $1.4 billion across approximately 312,000 active borrowers as of December 31, 2023. For the fiscal year ended December 31, 2023, SBF reported revenues of $187.3 million. As of the same date, SBF had total assets of approximately $1.02 billion, a gross receivables portfolio of $876.5 million, and net receivables (after allowance for credit losses) of $841.4 million. The Company's Chief Executive Officer is Arun Mehta; its Chief Financial Officer is Danielle Prescott; and its General Counsel is Tomás Reyes.
Pinnacle Growth Equity Partners, LP. SBF's majority equity sponsor is Pinnacle Growth Equity Partners, LP ("Pinnacle"), a Delaware limited partnership with offices at 399 Park Avenue, 28th Floor, New York, New York 10022. Pinnacle holds 62.4% of SBF's fully diluted equity pursuant to a $95 million Series C investment completed in 2021. Pinnacle's Managing Partner is Catherine Drexler, and its board representative at SBF is Marcus Yoon. Pinnacle's concurrence in the decision to terminate the SRT 2024-1 securitization, as discussed below, is relevant to the reasonableness of that decision.
Clearview Loan Servicing, Inc. Clearview is an Ohio corporation headquartered at 8800 Brecksville Road, Suite 300, Cleveland, Ohio 44141. Clearview has served as the third-party servicer and sub-servicer of SBF's consumer receivables since the third quarter of 2022, when the MSA was executed. As of December 31, 2023, Clearview managed approximately $640 million in SBF receivables. Clearview's Chief Executive Officer is Warren Pettigrew, and its Vice President of Operations and primary deal contact for the SRT 2024-1 transaction was Meredith Sloane. SBF's account with Clearview is identified as Servicing Account No. CLS-SBF-2022-0041. Clearview's system migration from the legacy LoanTrax platform to the new ClearCore platform, which is the source of the servicing-data discrepancy at issue in this memorandum, was completed in June 2023.
B. The Master Servicing Agreement
SBF and Clearview are parties to the Master Servicing Agreement dated October 1, 2022 (the "MSA"), which governs Clearview's obligations as third-party servicer for SBF's consumer-loan receivables. The MSA is a comprehensive servicing agreement that addresses, among other things, Clearview's obligations with respect to payment processing, borrower communications, delinquency management, default servicing, data reporting, and regulatory compliance. The following provisions of the MSA are directly relevant to the present analysis:
Section 4.03 — Payment-Application Waterfall. Section 4.03 specifies the order in which Clearview is required to apply borrower payments to the serviced receivables. Pursuant to Section 4.03, all payments received from borrowers must be applied in the following priority: first, to accrued and unpaid interest; second, to outstanding fees (including late fees, returned-payment fees, and other charges); and third, to outstanding principal balance. This waterfall is a standard feature of consumer-loan servicing arrangements and is critical to accurate reporting of delinquency, default, and loss metrics.
Section 5.01 — Data-Accuracy Representations and Warranties. Section 5.01 contains Clearview's representations and warranties that all servicing data, reports, and loan-tape information provided to SBF will be accurate, complete, and prepared in accordance with the servicing standards and the terms of the MSA. These representations and warranties are deemed to be made as of the date of delivery of each monthly servicing report and loan-level data tape.
Section 5.04 — Monthly Reporting Obligations. Section 5.04 requires Clearview to deliver to SBF, no later than the tenth (10th) business day of each calendar month, a comprehensive servicing report containing, among other data points, loan-level payment-status information, delinquency stratifications, loss and recovery data, and static-pool performance tables.
Section 6.01 — Prudent Servicer Standard. Section 6.01 requires Clearview to service the receivables with the same degree of care, skill, and diligence as a prudent servicer would exercise in servicing comparable consumer installment loans, taking into account the terms of the MSA, the interests of SBF, and applicable law.
Section 9.02 — Indemnification by Servicer. Section 9.02 sets forth Clearview's indemnification obligations, which are discussed in detail in Section IV of this memorandum.
Section 10.03 — Limitation of Liability. Section 10.03, to the extent it contains limitations on Clearview's aggregate liability or exclusions of certain categories of damages, is discussed in Section IV.C below.
Section 11.02 — Governing Law. Section 11.02 provides that the MSA shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict-of-laws principles.
On March 18, 2024, SBF and Clearview executed Amendment No. 1 to the MSA ("Amendment No. 1"). Amendment No. 1 was entered into in anticipation of the SRT 2024-1 securitization and served three principal purposes: (i) adapting Clearview's servicing obligations to the requirements of the Trust structure, including the delivery of servicing data in formats compatible with the Sale and Servicing Agreement and the Indenture; (ii) adding reporting requirements specific to the securitization, including investor-report templates and rating-agency data requirements; and (iii) expressly confirming the contractual payment-application waterfall under Section 4.03 of the MSA. The significance of Amendment No. 1 — particularly its reaffirmation of the Section 4.03 waterfall at a time when the ClearCore error was already in effect — is discussed in Section III.D below.
C. The Proposed Securitization
Beginning in late January 2024, SBF undertook to structure and execute a $200,000,000 Rule 144A / Regulation S private placement of asset-backed notes to be issued by SkyLend Receivables Trust 2024-1, a Delaware statutory trust formed on February 14, 2024 (the "Trust"). The securitization was intended to be SBF's inaugural public-market asset-backed securities issuance, and it represented a significant milestone in the Company's capital-markets strategy and growth trajectory. The transaction's key structural features and participants are summarized below.
Capital Structure. The Trust's capital structure consisted of three tranches:
• Class A Notes: $170,000,000 (85% of the capital structure), with expected ratings of Aaa(sf) from Meridian Credit Ratings, Inc. ("Meridian") and AA+(sf) from Carrollton Ratings Group LLC ("Carrollton"), and a target coupon of 5.45%–5.65%.
• Class B Notes: $22,000,000 (11% of the capital structure), with expected ratings of A2(sf) from Meridian and A(sf) from Carrollton, and a target coupon of 6.75%–7.00%.
• Residual Interest: $8,000,000 (4% of the capital structure), to be retained by SBF through its wholly owned subsidiary, SkyLend Funding LLC, to satisfy credit risk-retention requirements.
Transaction Participants. The following parties were engaged in connection with the securitization:
• Lead Underwriter / Initial Purchaser: Halcyon Securities LLC (deal reference HLC-ABS-2024-017); underwriter's counsel: Whitfield, Drummond & Paige LLP ("WDP").
• Owner Trustee: Keymark Trust Company, N.A.
• Indenture Trustee: Atlantic Fiduciary Services, Inc.
• Rating Agencies: Meridian Credit Ratings, Inc. (primary rating agency) and Carrollton Ratings Group LLC (secondary rating agency).
• Issuer's Counsel: Calderwood & Harkness LLP.
• Loan-Level Due Diligence Provider: Broadleaf Analytics Group LLC (Sanjay Rajan, Managing Director; 110 William Street, 14th Floor, New York, New York 10038).
• Accountants (AUP/Comfort Letter): Rowland & Cross LLP.
• Printer/EDGAR Agent: Donnovan Press.
Receivables Pool. The proposed receivables pool consisted of approximately 23,100 consumer installment loans with the following aggregate characteristics: outstanding principal balance of approximately $213,750,000 (gross), with a final pool target of $200,000,000 after selection and cut-off; weighted average coupon ("WAC") of 14.82%; weighted average remaining term of 38.4 months; and weighted average FICO score at origination of 698. The cut-off date for the pool was March 31, 2024.
Preliminary Offering Memorandum. The Preliminary OM was dated April 5, 2024, and contained, among other disclosures, static-pool performance tables, delinquency stratifications, and cumulative net loss data for SBF's consumer-loan portfolio. These data were sourced from Clearview's servicing tapes and monthly reports. The Preliminary OM was distributed to twenty-eight (28) institutional investors — each a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933 — during a roadshow conducted from April 15 through April 19, 2024.
D. The Servicing-Data Discrepancy
On April 22, 2024, Broadleaf Analytics Group LLC discovered a material discrepancy between the servicing data reported by Clearview and the actual performance of the loans in the proposed securitization pool. The discrepancy was identified during Broadleaf's loan-level re-underwriting of a stratified random sample of 1,500 loans, representing approximately 6.5% of the pool by loan count.
Nature of the Error. Broadleaf's analysis revealed that Clearview's ClearCore system had been applying partial borrower payments to outstanding principal before accrued interest, in direct contravention of the contractual payment-application waterfall specified in Section 4.03 of the MSA, which requires that payments be applied first to accrued interest, then to fees, and finally to outstanding principal. The reversal of the waterfall priority between interest and principal had the effect of artificially reducing reported delinquency and loss figures, because loans that were delinquent on an interest-first basis appeared current on a principal-first basis.
Root Cause. The error was introduced during Clearview's system migration in June 2023 from the legacy LoanTrax platform to the new ClearCore platform. During the migration process, the payment-waterfall logic was incorrectly coded in the ClearCore system, reversing the priority of interest and principal application. Critically, the error was not detected by Clearview's post-migration validation testing, and it persisted for approximately ten months (from June 2023 through at least April 2024) before being identified by Broadleaf's independent review. The error was also not detected by SBF's own quarterly data-reconciliation procedures, a fact that Clearview is likely to raise as a defense, as discussed in Section VII.A below.
Impact on Reported Metrics. The payment-waterfall error resulted in the following material discrepancies between reported and actual portfolio performance metrics:
These discrepancies are not immaterial or de minimis. A 70.4% relative understatement of the delinquency rate and a 67.2% relative understatement of cumulative net losses represent fundamental misstatements of portfolio credit quality. These were the very metrics on which the rating agencies relied in assigning their preliminary and expected ratings, and on which the twenty-eight roadshow investors relied in evaluating the creditworthiness of the proposed notes. The static-pool performance tables contained in the Preliminary OM were based on the incorrect servicing data, and the Preliminary OM was distributed to all twenty-eight investors during the roadshow.
E. Timeline of Post-discovery Events
The following timeline summarizes the key events from the date of Broadleaf's discovery through the formal termination of the securitization and the subsequent reservation-of-rights letter from Halcyon's counsel:
April 22, 2024: Broadleaf Analytics discovers the servicing-data discrepancy during loan-level re-underwriting. Broadleaf immediately notifies Halcyon Securities, the lead underwriter, of the findings.
April 23, 2024: Halcyon (Rebecca Thornton, Managing Director) and WDP (Harrison Whitfield III, Partner) notify SBF of the discrepancy via Calderwood & Harkness. An emergency call is convened among the transaction parties.
April 24, 2024: SBF commences an internal investigation into the discrepancy, involving review of Clearview's servicing tapes, loan-level data, and reconciliation records. Clearview issues a preliminary response acknowledging the ClearCore migration as the potential source of the error and indicating that it is conducting its own internal review.
April 26, 2024: Halcyon formally suspends marketing of the SRT 2024-1 notes. Halcyon delivers a force-majeure / material-change notice to SBF pursuant to the Preliminary Purchase Agreement, citing the data discrepancy as a material adverse change. Halcyon estimates that remediation of the data, re-rating of the notes, and re-marketing to investors would require an 8–12 week timeline.
April 29, 2024: Carrollton Ratings Group places its expected ratings for the Class A Notes and Class B Notes on "developing" watch, citing the pending investigation into servicing-data integrity.
May 1, 2024: Meridian Credit Ratings formally withdraws its preliminary ratings for the Class A Notes (Aaa(sf)) and Class B Notes (A2(sf)), citing the inability to rely on the servicing data underlying the pool's credit analysis.
May 3, 2024: The SBF board of directors convenes a special meeting. After consultation with Calderwood & Harkness, Halcyon, and the rating agencies, and with the concurrence of Pinnacle Growth Equity Partners (represented by Marcus Yoon and Catherine Drexler), the board resolves to terminate the SRT 2024-1 transaction. The board determines that the combination of (i) Meridian's withdrawal of preliminary ratings, (ii) Carrollton's placement of expected ratings on watch, (iii) the estimated 8–12 week remediation timeline, (iv) the reputational harm of a delayed and potentially re-priced transaction, and (v) the uncertainty as to whether corrected data would satisfy rating agencies and investors, collectively render continuation of the transaction imprudent.
May 6, 2024: Calderwood & Harkness delivers a termination-and-wind-down memorandum to all transaction parties, directing the orderly unwinding of the SRT 2024-1 structure, including dissolution of the Delaware statutory trust, release of fiduciary appointments, and settlement of outstanding fees and expenses.
May 8, 2024: The SRT 2024-1 transaction is formally terminated. The Delaware statutory trust is dissolved, and all transaction agreements are terminated in accordance with their respective terms.
May 10, 2024: Whitfield, Drummond & Paige LLP, on behalf of Halcyon Securities, sends a reservation-of-rights letter to SBF, preserving Halcyon's right to pursue additional damages against SBF beyond the $387,500 expense reimbursement contemplated under Section 7(b) of the Preliminary Purchase Agreement. The letter cites Halcyon's lost underwriting-discount opportunity ($2,000,000 contingent on closing) and reputational harm.
III. Legal Analysis: Clearview's Breach of the MSA
Based on the foregoing facts, we conclude that Clearview has breached multiple provisions of the MSA. Each breach is analyzed below.
A. Breach of §4.03 — Payment-Application Waterfall
Section 4.03 of the MSA unambiguously requires Clearview to apply borrower payments in the following order of priority: (1) accrued and unpaid interest, (2) fees, and (3) outstanding principal. This waterfall priority is a fundamental component of the servicing arrangement because the order in which payments are applied determines the reported delinquency status of each loan and, in the aggregate, the reported portfolio performance metrics.
Clearview's ClearCore system, following the June 2023 migration, applied partial borrower payments to outstanding principal before accrued interest, directly reversing the contractual waterfall priority. This constitutes a clear and unequivocal breach of Clearview's contractual obligations under Section 4.03 of the MSA.
The breach was not an isolated or de minimis error. It was systematic in scope, affecting approximately 14,600 loans — 63.2% of the proposed securitization pool. It was persistent in duration, continuing from June 2023 through at least April 2024, a period of approximately ten months. And it was undisclosed: Clearview did not identify or report the error to SBF at any time during the ten-month period; the error was discovered only through the independent re-underwriting performed by Broadleaf Analytics in connection with the securitization due-diligence process.
The systematic and persistent nature of this breach distinguishes it from the type of occasional, isolated processing error that might be expected in the normal course of servicing operations. Clearview's ClearCore system was programmatically and consistently applying payments in a manner contrary to the MSA for a period of nearly a year, across approximately two-thirds of the loan pool. This is a material breach by any measure.
B. Breach of §5.01 — Data-Accuracy Representations and Warranties
Section 5.01 of the MSA contains Clearview's representations and warranties that all servicing data, reports, and loan-tape information provided to SBF will be accurate, complete, and prepared in accordance with the servicing standards and the terms of the MSA. These representations and warranties are deemed to be made as of the date of delivery of each monthly servicing report and loan-level data tape, meaning that Clearview effectively reaffirmed these representations each month during the ten-month period in which the ClearCore error was in effect.
Clearview's monthly servicing tapes and static-pool reports reflected the incorrect payment-application waterfall. As a direct consequence, the delinquency and loss metrics derived from these reports were materially understated. Specifically:
• The reported 30+ day delinquency rate of 3.21% was understated by 2.26 percentage points relative to the actual rate of 5.47%, representing a 70.4% relative understatement (calculated as 2.26 ÷ 3.21).
• The reported cumulative net loss rate of 4.12% for the 2022 origination vintage (static pool) was understated by 2.77 percentage points relative to the actual rate of 6.89%, representing a 67.2% relative understatement (calculated as 2.77 ÷ 4.12).
These were not immaterial or de minimis deviations that might fall within an acceptable margin of reporting error. Delinquency and cumulative net loss rates are among the most critical credit-performance metrics in consumer-loan servicing and securitization. A 70% understatement of the delinquency rate and a 67% understatement of the cumulative net loss rate represent fundamental misstatements of portfolio credit quality — the kind of discrepancy that, as demonstrated by the actual course of events, causes rating agencies to withdraw preliminary ratings and institutional investors to lose confidence in the transaction.
Each monthly servicing report delivered by Clearview during the period from June 2023 through April 2024 that contained data affected by the ClearCore error constitutes a separate breach of the Section 5.01 representations and warranties. The aggregate effect of these repeated breaches is compounded by the fact that the incorrect data was ultimately incorporated into the Preliminary OM and distributed to twenty-eight institutional investors.
C. Breach of §6.01 — Prudent Servicer Standard
Section 6.01 of the MSA requires Clearview to service the receivables with the same degree of care, skill, and diligence as a prudent servicer would exercise in servicing comparable consumer installment loans. This standard is well-established in the loan-servicing industry and imposes on Clearview a duty to maintain reasonable internal controls, quality-assurance procedures, and operational safeguards to ensure the accuracy and integrity of its servicing activities.
Clearview's failure to implement adequate post-migration validation testing for the ClearCore platform migration falls well below the prudent servicer standard. A system migration of the type undertaken by Clearview — involving the transfer of payment-processing logic, loan-accounting rules, and data-reporting functions from one platform to another — is among the highest-risk events in loan-servicing operations. Industry best practices and regulatory guidance uniformly require rigorous testing, validation, and parallel-run procedures in connection with system migrations.
Specifically, a prudent servicer would have, at a minimum:
(i) performed parallel-run testing comparing LoanTrax and ClearCore outputs for a statistically significant sample of loans over a meaningful period (typically 60–90 days), to ensure that the new system produced results consistent with the legacy system and with contractual requirements;
(ii) validated payment-waterfall logic against the specific contractual requirements of each servicing agreement, including the MSA, given that different loan programs and servicing contracts may specify different waterfall priorities;
(iii) implemented ongoing reconciliation controls — including automated exception reporting — to detect deviations between the contractual waterfall and the ClearCore system's actual payment-application logic on a monthly or more frequent basis; and
(iv) conducted periodic reviews and audits of system performance following the migration to identify and correct any latent errors.
Clearview's failure to detect the payment-waterfall error for approximately ten months following the ClearCore migration indicates a systemic failure of internal controls, not merely an isolated software defect. The persistence of the error through multiple monthly reporting cycles, multiple quarterly review periods, and the execution of Amendment No. 1 demonstrates that Clearview lacked the ongoing quality-assurance processes that a prudent servicer would have maintained. This constitutes a separate and independent breach of Section 6.01.
D. Breach of Amendment No. 1 (March 18, 2024)
Amendment No. 1 to the MSA, executed on March 18, 2024, specifically confirmed the Section 4.03 payment-application waterfall and added securitization-specific reporting obligations. By executing Amendment No. 1 at a time when the ClearCore error had already been in effect for approximately nine months, Clearview effectively reaffirmed representations that were already inaccurate. Clearview represented, through the execution of Amendment No. 1, that it would (and was already) applying borrower payments in the contractual waterfall order and that its data would be suitable for use in connection with the Trust securitization. These representations were false when made, although we do not currently have evidence as to whether Clearview's management was aware of the ClearCore error at the time Amendment No. 1 was executed.
This circumstance may support a claim of knowing or reckless misrepresentation, depending on what Clearview's internal quality-control processes should have revealed by March 18, 2024 — nine months after the ClearCore migration. If Clearview's internal controls were so deficient that its management had no awareness of the waterfall error at the time of executing Amendment No. 1, this itself would constitute evidence of a failure to meet the prudent servicer standard. If, on the other hand, Clearview's personnel had reason to suspect or know of the error and executed Amendment No. 1 without disclosing it, SBF may have additional claims sounding in fraud or negligent misrepresentation.
At this stage, we recommend that SBF's formal demand letter preserve claims on all available theories, including breach of Amendment No. 1, and that further investigation into Clearview's internal knowledge be conducted during any discovery process.
IV. Indemnification Under §9.02 of the MSA
A. Text and Scope of §9.02
Section 9.02 of the MSA provides the contractual basis for SBF's indemnification claims against Clearview. The provision states that Clearview shall indemnify, defend, and hold harmless SBF and its affiliates, officers, directors, employees, and agents (collectively, the "SBF Indemnified Parties") from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) arising out of or resulting from:
(a) any breach of Clearview's representations, warranties, or covenants under the MSA;
(b) any failure by Clearview to perform its servicing obligations in accordance with the terms of the MSA; or
(c) any negligent or willful misconduct by Clearview in connection with its servicing activities under the MSA.
The indemnification obligation under Section 9.02 is subject to the indemnifying party (Clearview) receiving prompt written notice of any claim, action, or proceeding for which indemnification is sought, and to the indemnified party (SBF) providing reasonable cooperation to Clearview in connection with the defense of any such claim. The notice requirement is a condition to Clearview's indemnification obligations and must be satisfied to preserve SBF's rights, as discussed further below.
The scope of Section 9.02 is broad. It covers "any and all losses, claims, damages, liabilities, costs, and expenses," which encompasses both direct and indirect damages, provided that such damages "aris[e] out of or result[] from" one of the three categories of covered conduct. The phrase "arising out of or resulting from" has been interpreted by New York courts to require a causal connection between the covered conduct and the claimed damages, but the causal nexus need not be the sole or exclusive cause — it is sufficient that the covered conduct was a substantial contributing factor. See, e.g., Consolidated Edison, Inc. v. Northeast Utils., 426 F.3d 524, 530 (2d Cir. 2005); Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491–92 (1989).
B. Application to the Present Facts
Clearview's breaches of Sections 4.03, 5.01, and 6.01 of the MSA fall squarely within the scope of Section 9.02(a) (breach of representations, warranties, or covenants) and Section 9.02(b) (failure to perform servicing obligations). Additionally, Clearview's failure to implement adequate post-migration validation controls may constitute negligence within the meaning of Section 9.02(c).
The losses for which SBF seeks indemnification — principally, sunk transaction costs of $1,779,150, potential additional claims from Halcyon and other third parties, and reputational harm — are "losses, claims, damages, liabilities, costs, and expenses" within the plain meaning of Section 9.02. These losses arose directly from Clearview's breach: but for the ClearCore payment-waterfall error, the servicing data would have been accurate, the Preliminary OM would not have contained materially incorrect performance metrics, the rating agencies would not have withdrawn or placed on watch their ratings, and the securitization would not have been terminated.
With respect to the notice condition, SBF and Clearview have been in active communication since April 24, 2024, when Clearview issued its preliminary response acknowledging the ClearCore migration as the potential source of the error. Clearview thus has actual knowledge of the circumstances giving rise to SBF's indemnification claim. However, actual knowledge does not substitute for formal written notice under the MSA's terms. We strongly recommend that SBF deliver a formal written demand letter invoking Section 9.02 indemnification as promptly as possible — no later than May 7, 2024 — to eliminate any defense based on late notice. The demand letter should specify the breaches of Sections 4.03, 5.01, and 6.01, describe the damages claimed, and demand that Clearview acknowledge its indemnification obligations and commence discussion of a resolution.
C. Limitations on Indemnification
The enforceability and scope of SBF's indemnification claims must be evaluated in light of any limitations contained in the MSA, particularly Section 10.03, which may address limitations on Clearview's aggregate liability or exclusions of certain categories of damages.
Aggregate Liability Cap. If Section 10.03 contains a cap on Clearview's aggregate liability under the MSA, we must determine whether the cap applies to indemnification claims under Section 9.02 or only to general liability. In many servicing agreements, the indemnification provisions are expressly carved out from aggregate liability caps, reflecting the parties' intent that a servicer's indemnification obligations serve as a risk-allocation mechanism that should not be artificially limited. We will review the specific language of Section 10.03 to determine whether such a carve-out exists. If Section 10.03 does impose a cap on Clearview's liability that encompasses Section 9.02 claims, SBF's recovery may be limited to the cap amount, subject to arguments that the cap is unenforceable as a matter of public policy with respect to claims arising from gross negligence or willful misconduct.
Exclusion of Consequential or Indirect Damages. Many commercial servicing agreements contain provisions excluding liability for consequential, indirect, special, or incidental damages. If the MSA contains such an exclusion and it is enforceable under New York law, SBF's reputational-damage claims and certain components of its opportunity-cost damages may be limited or excluded. However, even under the broadest consequential-damages exclusion, the direct sunk transaction costs of $1,779,150 should remain fully recoverable as direct damages. These costs were incurred in direct reliance on Clearview's data, would not have been forfeited but for the data discrepancy, and represent the natural and probable consequence of Clearview's breach.
New York courts generally enforce consequential-damages exclusions in arm's-length commercial agreements, see Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 436 (1994), but such exclusions are construed narrowly and will not be given effect where the breaching party's conduct rises to the level of gross negligence or willful misconduct. See Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 385 (1983). If the evidence ultimately demonstrates that Clearview had knowledge of the ClearCore error (or that its failure to detect the error for ten months constituted gross negligence), a consequential-damages exclusion may be rendered unenforceable as applied to SBF's claims.
We will conduct a detailed review of Section 10.03 and provide supplemental analysis as warranted. For purposes of this memorandum, we have assumed that direct damages are fully recoverable and have noted the potential limitation on consequential damages as a sensitivity in our damages estimate.
V. Damages Analysis
A. Direct Damages — Sunk Transaction Costs
SBF's primary category of damages consists of the transaction costs incurred in connection with the SRT 2024-1 securitization that were forfeited as a direct result of the termination caused by the servicing-data discrepancy. These costs were incurred in reliance on the accuracy of Clearview's servicing data and would not have been forfeited but for the ClearCore payment-waterfall error. They represent the natural and probable consequence of Clearview's breach and are directly foreseeable as damages flowing from a material servicing-data error in the context of a securitization transaction.
The following table itemizes each component of sunk transaction costs:
Each of these costs was incurred in the ordinary course of structuring and executing the SRT 2024-1 securitization. Under well-established principles of contract damages, SBF is entitled to recover costs that were incurred in reliance on the accuracy of the data that Clearview was obligated to provide under the MSA. See Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 805 (2014) (reliance damages recoverable for breach of contract where expenditures were made in reliance on the breaching party's performance). These damages are direct, not consequential, and should be fully recoverable regardless of any consequential-damages exclusion in the MSA.
B. Additional Direct Damages — Potential Third-Party Claims
Beyond the $1,779,150 in sunk transaction costs, SBF faces potential exposure to additional claims from third parties whose losses are attributable to the servicing-data discrepancy.
Halcyon Securities. Halcyon may assert claims against SBF beyond the $387,500 expense reimbursement already included in the sunk-cost calculation. Halcyon's lost underwriting discount — which was set at $2,000,000 and was contingent on the closing of the transaction — represents a significant forgone revenue opportunity. Whitfield, Drummond & Paige LLP's reservation-of-rights letter dated May 10, 2024, expressly preserves Halcyon's right to pursue additional damages against SBF, citing both the lost underwriting discount and reputational harm to Halcyon's ABS franchise. While we believe SBF has strong defenses against any claim by Halcyon for the lost underwriting discount (which was contingent on closing and thus speculative), the possibility of additional claims cannot be dismissed. To the extent SBF is required to pay Halcyon additional amounts arising from the data discrepancy, such amounts would constitute indemnifiable losses under Section 9.02 of the MSA, as they would be "losses, claims, damages, liabilities, costs, [or] expenses" arising from Clearview's breach.
Institutional Investors. Twenty-eight institutional investors received the Preliminary OM containing the incorrect servicing data during the April 15–19 roadshow. While no securities were sold and no investment decisions were consummated — the offering was terminated before pricing — there is a theoretical risk that one or more investors could assert claims for costs incurred in evaluating the offering (e.g., internal due-diligence costs, legal fees, or opportunity costs). This risk is significantly mitigated by several factors: (i) no securities were issued or sold; (ii) the offering was conducted under Rule 144A and was therefore limited to qualified institutional buyers ("QIBs"), who are sophisticated investors presumed to be capable of evaluating investment risks independently; and (iii) the termination of the offering before pricing limits the universe of cognizable damages. Nevertheless, SBF should monitor for any communications from roadshow investors that could signal the assertion of claims, and any such claims should be included in SBF's indemnification demand against Clearview.
C. Consequential / Reputational Damages
The failed securitization has caused and will continue to cause reputational harm to SBF that, while difficult to quantify precisely, represents a real and material economic cost.
Impaired Access to ABS Markets. The SRT 2024-1 securitization was intended to be SBF's inaugural public-market ABS issuance. The failure of the transaction — and particularly the public circumstances surrounding it, including the withdrawal of Meridian's preliminary ratings and Carrollton's placement of expected ratings on watch — will need to be disclosed to future investors and counterparties in any subsequent securitization. This disclosure will likely result in heightened due-diligence requirements, wider pricing spreads, and potentially reduced investor interest in future SBF ABS offerings. The practical effect is a delay of SBF's ability to access the ABS market for capital-efficient funding, potentially by six to twelve months or more.
Rating-Agency Relationships. Meridian's withdrawal of preliminary ratings and Carrollton's placement of expected ratings on "developing" watch will affect the terms and timeline of any future engagement with these rating agencies. SBF may face additional scrutiny, enhanced data-verification requirements, and potentially higher engagement fees in future transactions. Rebuilding credibility with the rating agencies will require SBF to demonstrate that the servicing-data deficiency has been fully remediated and that adequate controls are in place to prevent recurrence — a process that may itself entail significant cost and management time.
Quantification. Reputational damages are inherently difficult to quantify with mathematical precision, and New York courts have recognized this difficulty. See Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989) (noting that consequential damages must be established with reasonable certainty). Nevertheless, the economic reality of reputational harm — in the form of delayed market access, wider pricing, and increased transaction costs on future deals — is well-recognized in the capital markets. We estimate the reputational and opportunity-cost damages in the range of $220,850 to $1,220,850, which represents the increment above sunk transaction costs needed to reach the total claim range of $1,500,000 to $3,000,000. This range reflects a conservative assessment of the economic impact on SBF's near-term capital-markets activities.
As noted in Section IV.C above, these consequential and reputational damages may be limited or excluded if the MSA contains a consequential-damages carve-out in Section 10.03. However, if the MSA's limitation provisions are subject to an exception for gross negligence or willful misconduct — as is common in New York-governed servicing agreements — SBF may be able to recover consequential damages by demonstrating that Clearview's ten-month failure to detect the ClearCore error constituted gross negligence.
D. Total Estimated Claim Range
Based on the foregoing analysis, we estimate SBF's total claim against Clearview in the range of $1,500,000 to $3,000,000, calculated as follows:
Low End ($1,500,000): Represents recovery of direct sunk transaction costs of $1,779,150, less potential offsets for any portion of the costs that a trier of fact might attribute to SBF's own failure to detect the error through quarterly reconciliation (estimated reduction of $250,000 to $350,000 under a comparative-fault analysis), plus a modest recovery for attorneys' fees incurred in the post-termination dispute phase. This scenario assumes that a consequential-damages exclusion in the MSA limits recovery of reputational damages.
High End ($3,000,000): Represents full recovery of sunk transaction costs ($1,779,150), additional amounts paid to Halcyon beyond the $387,500 expense reimbursement (estimated at $200,000 to $500,000), reputational and opportunity-cost damages ($300,000 to $500,000), and post-termination attorneys' fees for the Clearview dispute ($200,000 to $300,000). This scenario assumes that either (i) the MSA does not contain a consequential-damages exclusion, (ii) the exclusion is unenforceable due to Clearview's gross negligence, or (iii) the claimed damages are classified as direct rather than consequential.
We note that Calderwood & Harkness's post-termination litigation-phase fees, which are not yet determinable, would also be recoverable as a component of indemnification under Section 9.02 to the extent the provision includes "reasonable attorneys' fees" within the scope of covered costs. SBF should maintain detailed contemporaneous records of all fees and expenses incurred in connection with the Clearview dispute for inclusion in the indemnification claim.
VI. Causation Analysis
A. But-For Causation
A threshold requirement for SBF's indemnification claim is the establishment of but-for causation — that is, that SBF's damages would not have occurred "but for" Clearview's breach. The causal chain in this matter is direct, unbroken, and well-documented.
But for Clearview's payment-waterfall error in the ClearCore system, the following sequence of events would not have occurred:
1. The servicing data provided by Clearview to SBF would have accurately reflected the contractual payment-application waterfall, and the reported delinquency and loss metrics would have corresponded to the actual performance of the portfolio.
2. The Preliminary OM prepared by Calderwood & Harkness and delivered to investors would have contained correct static-pool performance tables, delinquency stratifications, and cumulative net loss data.
3. Broadleaf Analytics' loan-level re-underwriting would not have flagged discrepancies between the servicing data and the actual loan-level payment histories, because no discrepancies would have existed.
4. Meridian Credit Ratings would not have withdrawn its preliminary ratings, and Carrollton Ratings Group would not have placed its expected ratings on "developing" watch.
5. Halcyon Securities would not have suspended marketing or delivered a force-majeure / material-change notice.
6. The SBF board of directors would not have voted to terminate the transaction.
7. The sunk transaction costs of $1,779,150 would not have been forfeited; rather, these costs would have been absorbed into the overall transaction expenses at closing.
The causal chain is straightforward: ClearCore payment-waterfall error → inaccurate servicing tapes and reports → incorrect static-pool data in the Preliminary OM → investor and rating-agency reliance on incorrect data → Broadleaf discovery of discrepancy → suspension of marketing → rating-agency adverse actions → board decision to terminate → forfeiture of sunk costs. Each link in this chain follows naturally and inevitably from the preceding link, and no intervening cause broke the chain of causation.
B. Proximate Causation and Foreseeability
Under New York law, a party seeking to recover contract damages must demonstrate not only that the breach was the but-for cause of the damages, but also that the damages were foreseeable at the time of contracting — i.e., that they were within the contemplation of the parties as a probable result of a breach. See Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986); Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854).
Here, the foreseeability of the damages is established by multiple facts:
At the time of executing the MSA (October 1, 2022), Clearview was aware that SBF intended to use servicing data for securitization and capital-markets purposes. The use of accurate servicing data in connection with ABS issuances is one of the core purposes of retaining a third-party servicer for a consumer-loan portfolio of the size and type managed by Clearview. The risk that inaccurate servicing data could cause a failed securitization — and the associated transaction costs — was squarely within the contemplation of the parties at the time of contracting.
Amendment No. 1 (March 18, 2024) explicitly confirmed that Clearview's data would be used in connection with the SRT 2024-1 securitization, making the risk of a failed transaction due to data inaccuracy not merely foreseeable but actually contemplated and addressed by the parties. By executing Amendment No. 1, Clearview assumed specific obligations tied to the securitization, including the delivery of data in formats compatible with the Trust's governing documents and the rating agencies' analytical requirements. The amendment eliminated any possibility that Clearview could credibly argue it did not foresee the risk of securitization-related damages.
The magnitude of sunk costs ($1,779,150) is within the range of reasonable transaction costs for a $200,000,000 asset-backed securities offering. Legal fees, rating-agency fees, due-diligence costs, trustee fees, and underwriter expenses of this magnitude are standard and foreseeable in the context of a securitization of this size. A trier of fact would have no difficulty concluding that these costs were within the contemplation of the parties at the time the MSA was executed, particularly in light of Amendment No. 1.
Accordingly, we conclude that both but-for and proximate causation are established, and that Clearview's breach was the direct and foreseeable cause of SBF's damages.
VII. Clearview's Potential Defenses
While SBF's indemnification claims are strong, Clearview will likely assert several defenses. We analyze each below and assess its likely impact on SBF's recovery.
A. SBF's Quarterly Data-Reconciliation Obligations
The Defense. Clearview will likely argue that SBF had an independent obligation under the MSA to perform quarterly reconciliation of servicing data against its own records, and that SBF's failure to detect the payment-waterfall error between June 2023 and April 2024 — a period encompassing approximately three to four quarterly reconciliation cycles — constitutes either a defense to Clearview's liability or a basis for reducing SBF's recovery under a comparative-fault or mitigation-of-damages theory.
Analysis. SBF's data-reconciliation obligations under the MSA are a reasonable quality-control measure intended to serve as a secondary check on servicing-data integrity. However, these obligations do not relieve Clearview of its primary obligation, as the party actually performing the servicing, to provide accurate data in the first instance. The MSA places the affirmative duty of data accuracy on Clearview as servicer, both through the Section 5.01 representations and warranties and through the Section 6.01 prudent servicer standard. SBF's reconciliation obligation is secondary and derivative — it is designed to catch errors, not to relieve the servicer of responsibility for making them.
Moreover, SBF's reconciliation process necessarily relies on receiving accurate underlying data from Clearview. If Clearview's ClearCore system was consistently misapplying payments in the same systematic manner, and Clearview's own reports reflected the ClearCore-processed data, then SBF's reconciliation of its records against Clearview's reports would not necessarily reveal the discrepancy. The error was embedded in Clearview's payment-processing logic, not in the reporting layer — meaning that Clearview's reports were internally consistent with Clearview's (erroneous) processing, even though both were inconsistent with the contractual waterfall. Detecting this type of embedded error would require SBF to independently re-process borrower payments through its own payment-application system and compare the results to Clearview's — a level of parallel processing that goes beyond the typical scope of a quarterly data reconciliation.
That said, this defense is not without merit. A trier of fact could conclude that SBF's reconciliation procedures were inadequate or that a more diligent reconciliation process would have detected the error sooner, thereby reducing the damages. Under New York's comparative-fault approach, a finding of contributory negligence on SBF's part would reduce — but not bar — SBF's recovery in proportion to its degree of fault. See N.Y. CPLR § 1411; Arbegast v. Board of Educ., 65 N.Y.2d 161, 167 (1985). We assess this defense as having the potential to reduce SBF's recovery by approximately 10%–20%, depending on the trier of fact's assessment of the reasonableness of SBF's reconciliation procedures.
SBF should be prepared to demonstrate the scope and reasonableness of its own quarterly reconciliation efforts, including the specific procedures followed, the data elements reconciled, the personnel involved, and any limitations inherent in the reconciliation process. We recommend assembling these records as part of the evidence-preservation process.
B. Lack of Notice / Late Notice
The Defense. Clearview may argue that it did not receive prompt written notice of SBF's indemnification claim as required by Section 9.02 of the MSA, and that the failure to provide timely notice relieves Clearview of its indemnification obligations.
Analysis. This defense has minimal merit at present but must be addressed proactively. SBF's internal investigation commenced on April 24, 2024, and Clearview issued a preliminary response on the same date, indicating that Clearview had actual knowledge of the circumstances giving rise to SBF's potential claim. However, actual knowledge may not substitute for the formal written notice contemplated by Section 9.02. Under New York law, a notice condition in an indemnification agreement is generally enforceable, but courts will excuse late notice where the indemnifying party had actual knowledge of the claim and was not prejudiced by the delay. See Security Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440 (1972).
To eliminate this defense entirely, SBF should send a formal written demand letter invoking Section 9.02 indemnification as promptly as possible. We have targeted delivery of this letter by May 7, 2024 — within sixteen days of Broadleaf's discovery and within fourteen days of Clearview's preliminary response. This timeline should be more than sufficient to satisfy any reasonable interpretation of the "prompt notice" requirement.
C. The Error Was a Software Defect, Not Servicer Misconduct
The Defense. Clearview may attempt to characterize the ClearCore migration error as an unforeseeable software bug rather than a breach of servicing standards, arguing that the error was introduced by a software vendor or developer and was not the result of any intentional or negligent conduct by Clearview's servicing personnel.
Analysis. This defense fundamentally misapprehends the nature of Clearview's obligations under the MSA. The MSA does not require SBF to prove that Clearview's personnel intentionally or deliberately misapplied payments; it requires Clearview to service the receivables in accordance with the contractual payment-application waterfall (Section 4.03) and to meet the prudent servicer standard (Section 6.01). Whether the waterfall error was caused by a software bug, a coding error by a developer, or a failure of configuration management is irrelevant to the breach analysis — the MSA imposes strict liability for compliance with the waterfall requirements and a negligence-based standard for overall servicing quality.
Furthermore, the prudent servicer standard encompasses the obligation to implement adequate testing, validation, and quality-control procedures in connection with system migrations. The fact that the error persisted for approximately ten months indicates not merely an isolated software defect, but a systemic failure of Clearview's internal controls — including its post-migration validation testing, its ongoing reconciliation procedures, and its quality-assurance processes. A prudent servicer would have implemented controls to detect deviations between the contractual waterfall and the system's actual payment-application logic, and the failure to do so constitutes a breach of Section 6.01 regardless of the technical origin of the error.
We assess this defense as having minimal merit.
D. Mitigation of Damages
The Defense. Clearview may argue that SBF failed to mitigate its damages by terminating the securitization rather than pursuing a delayed closing. Halcyon estimated that remediation of the data, re-rating of the notes, and re-marketing to investors would require an 8–12 week timeline. Clearview may contend that a delay of this duration — while costly and inconvenient — would have resulted in lower overall damages than full termination, and that SBF had an obligation under New York law to pursue the less costly course of action.
Analysis. The duty to mitigate damages under New York law requires the non-breaching party to take reasonable steps to minimize its losses, but does not require the non-breaching party to take extraordinary measures or to assume significant additional risk. See Vireo Trust Bank v. Marlowe Commerce Bank Asset Capital Corp., 424 F.3d 195, 208 (2d Cir. 2005). The decision to terminate the transaction — rather than pursue a delayed, remediated closing — was made by the SBF board of directors at a special meeting on May 3, 2024, after careful consideration of all relevant factors, including the following:
(i) Meridian Credit Ratings had withdrawn its preliminary ratings on May 1, 2024, creating significant uncertainty as to whether Meridian would re-engage and, if so, what ratings would be assigned based on the corrected data.
(ii) Carrollton Ratings Group had placed its expected ratings on "developing" watch on April 29, 2024, further undermining investor confidence.
(iii) A delayed, re-priced deal would carry significant reputational risk for SBF, as the circumstances of the delay — a servicer-data error discovered after roadshow — would become known to the investor community and could impair SBF's ability to execute future ABS transactions.
(iv) There was substantial uncertainty regarding whether the corrected data would satisfy rating agencies and investors, given that the actual delinquency and loss metrics were materially worse than previously reported. The corrected data might have resulted in lower ratings, wider spreads, and reduced investor appetite, potentially requiring a restructuring of the capital structure — none of which was guaranteed to produce a viable transaction.
(v) Re-marketing the deal to investors with corrected data would likely require wider coupon spreads, potentially increasing SBF's cost of funds by 50–100 basis points or more, and would require a new round of investor presentations — effectively a second roadshow — with all the associated costs and management time.
The board's decision was made after consultation with legal counsel (Calderwood & Harkness), the lead underwriter (Halcyon), and the Company's majority equity sponsor (Pinnacle Growth Equity Partners). The deliberate, informed nature of this decision-making process — involving multiple advisors, thorough consideration of alternatives, and the concurrence of the Company's largest shareholder — demonstrates the exercise of reasonable business judgment and satisfies SBF's duty to mitigate.
We assess this defense as having limited merit. While a trier of fact could theoretically conclude that SBF should have pursued a delayed closing, the weight of the evidence supports the reasonableness of the termination decision.
E. Limitation-of-Liability Pr