165 F. Supp. 3d 80
S.D.N.Y.2016Background
- Noteholders (BlackRock funds) sued U.S. Bank as indenture trustee for 27 RMBS trusts, alleging widespread loan defects, servicing failures, and that U.S. Bank knew of Events of Default but failed to act.
- Trusts were governed by a set of Governing Agreements: MLPAs (loan purchase), Trust Agreements, Sale & Servicing Agreements (SSAs), and Indentures; plaintiffs rely mainly on Indentures and SSAs.
- Plaintiffs allege systemic breaches of sellers’ representations and warranties (underwriting, occupancy, appraisals, LTVs) and servicer misconduct, supported by public reports, downgrades, litigation, and loan performance.
- Plaintiffs assert breach of contract (Indentures/SSAs), violations of the Trust Indenture Act (15 U.S.C. §315), breach of fiduciary duty, and breach of extra-contractual duties/conflict-of-interest claims.
- U.S. Bank moved to dismiss, arguing plaintiffs failed to plead required preconditions in the indentures (no-action clause), lacked loan-specific allegations and requisite knowledge, and that fiduciary/tort claims are barred by the economic loss doctrine.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of no-action clause to suits against trustee | No-action clause demand/25%/indemnity requirements should not block suit against trustee; Cruden excused demand | U.S. Bank: remaining no-action requirements (notice, 25% support, indemnity) must be met; clause enforceable to limit suits | Court: Cruden excused the demand/25% requirement and, reading the clause as an integrated sequence, the entire no-action provision is unenforceable as to suits against the trustee (including the notice step) |
| Sufficiency of pleading (Rule 8/Twombly/Iqbal) — specificity of loan-level allegations and knowledge | Plaintiffs: circumstantial and market-wide evidence, public investigations, downgrades, and trust performance plausibly give trustee knowledge and suffice at pleading stage | U.S. Bank: plaintiffs must plead specific defective loans and particularized facts showing trustee knowledge | Court: allegations (including public records, trust performance metrics, and analogous wrongs elsewhere) are sufficient at pleading stage to state plausible claims against the trustee |
| Trustee’s post-default duties (prudent-person duties, enforcement such as putbacks/terminate servicer) | Plaintiffs: Indentures (and some SSAs) impose a post-Event-of-Default ‘‘prudent person’’ duty to exercise rights and powers (including enforcing repurchase/remedies); trustee failed to act | U.S. Bank: trustee’s duties are limited to indenture text; many SSAs do not impose prudent-person duties or assign putback enforcement to trustee | Court: Indentures contain post-default prudent-person language; as pleaded, plaintiff’s breach-of-contract claim survives as to counts tied to Indentures/SSAs that impose obligations on the trustee |
| TIA private right of action (Sections 315(b),(c)) | Plaintiffs: Sections 315(b)/(c) impose duties (notice, prudent-person) and allow private enforcement by noteholders | U.S. Bank: TIA does not create a private right for investors; or plaintiffs failed to plead defaults/knowledge | Court: recognizes authority supporting a private right under §315(b),(c) and holds plaintiffs pleaded TIA claims sufficiently at the motion-to-dismiss stage |
| Breach of fiduciary / extra-contractual duties | Plaintiffs: trustee had conflicts of interest and extra duties beyond contract, leading to disloyalty and special damages | U.S. Bank: duties arise from contract; tort claims duplicative; economic loss doctrine bars recovery in tort for contract-based injury | Held: fiduciary and extra-contractual claims dismissed — plaintiffs’ damages flow from contractual obligations and are barred by the economic loss doctrine |
Key Cases Cited
- Cruden v. Bank of New York, 957 F.2d 961 (2d Cir. 1992) (no-action clause demand excused where it would require holders to ask trustee to sue itself; interpret indenture by contract principles)
- Elliott Assocs. v. J. Henry Schroder Bank & Trust Co., 838 F.2d 66 (2d Cir. 1988) (indenture trustee duties are strictly defined and limited to indenture terms)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must state a claim plausible on its face)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (courts need not accept conclusory allegations; plausibility standard)
- Royal Park Investments SA/NV v. HSBC Bank USA, Nat. Ass'n, 109 F. Supp. 3d 587 (S.D.N.Y. 2015) (construed Cruden as excusing no-action demand as to trustee; recognized TIA and prudent-person allegations survived dismissal)
- AG Capital Funding Partners, L.P. v. State Street Bank & Trust Co., 11 N.Y.3d 146 (N.Y. 2008) (an indenture is a contract; trustee duties arise from contractual terms)
- Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382 (N.Y. 1987) (tort recovery for breach generally barred where injury is purely contractual; need independent legal duty)