After six years of litigation, a significant lawsuit against a residential mortgage-backed security (RMBS) trustee has come to an end as Royal Park Investments SA/NV (Royal Park) and the Bank of New York Mellon, as an RMBS trustee under a pooling and servicing agreement, agree to the terms of a settlement very favorable to the RMBS trustee. This settlement is another affirmation that an indenture trustee’s duties and liabilities can be limited under contract and will be interpreted by courts within the plain meaning of the agreement’s provisions.
The action was brought by Royal Park, an RMBS investor, against the RMBS trustee in the Southern District of New York (Royal Park Investments SA/NV vs. The Bank Of New York Mellon, as Trustee) in 2014. If no certificate holder objects to the proposed settlement, the case will end with the trustee agreeing only to pay a portion of Royal Park’s legal cost, but having no liability to the trust or the certificateholders. The final resolution and victory on the part of the RMBS trustee came as other RMBS cases settled similar issues in favor of trustees.
The final issue, in this case, was whether the certificateholders could be certified as a class in order to allow the plaintiff’s causes of action to move forward on behalf of all certificateholders. A successful class certification would have significantly increased the likelihood of an award of extensive damages against the RMBS trustee. Other judges in the Southern District of New York, however, had previously determined that class certification of certificateholders was not appropriate, because certificateholders were “not defined using objective criteria that establish a membership with definite boundaries.” Not having the benefit of class certification, Royal Park would have to (i) prove that its damages were tied to the RMBS trustee’s breaches of specific duties with respect to specific loans, (ii) tie those breaches to losses on a loan-by-loan basis, and (iii) demonstrate how those losses resulted in a decrease in value to Royal Park’s holdings. Such a costly and time-consuming process was not one that Royal Park was willing to take on.
While the judge in the Royal Park case did not reach a ruling on every count prior to the parties agreeing to settlement, the case was proceeding along the same lines as other similar victories for RMBS trustees, such as in the case filed by the Western and Southern Life Insurance Company against BNY Mellon, as trustee under a different pooling and servicing agreement (The Western and Southern Life Insurance Company, et al. v The Bank of New York Mellon). Last year, the Ohio Appeals Court affirmed a lower court’s thorough and well-reasoned decision based on recent case law applicable to RMBS trustees’ duties. The lower court held that the RMBS trustee has no fiduciary duty prior to an event of default, and therefore has no duty to monitor the performance of the underlying loans, to enforce the representations or warranties of the mortgage depositors, or to actively monitor the activities of the master servicer.
To reach its finding that the RMBS trustee had no fiduciary duty prior to an event of default, the lower court found certain provisions of the pooling and servicing agreement (PSA) to be unambiguous, specifically those provisions that say the trustee has no liabilities or duties to certificateholders prior to an event of default except as specifically provided for in the agreement. The court determined that any duties of the RMBS trustee should be interpreted consistently with the plain meaning of the language, and no implied duties have been imposed on the RMBS trustee by the Trust Indenture Act or other applicable law. Dismissing the plaintiff’s allegations that the RMBS trustee owed a fiduciary duty to the certificateholders to protect them from losses, the court ruled that the duties of an indenture trustee, unlike an ordinary trustee, are governed by the provisions of the PSA or the indenture. Accordingly, because the PSA contained no provisions that imposed on the RMBS trustee the duties the plaintiffs were seeking to enforce, the RMBS trustee had no such obligations.
Successful outcomes in these cases and other similar cases are affirmations that an RMBS trustee’s duties can be limited under contract. These cases should give RMBS trustees much-needed assurance that language limiting the trustee’s duties pursuant to provisions of PSAs and indentures will be enforced and can be relied upon by RMBS trustees.