The New York Appellate Division has decided the appeals in the Article 77 proceeding in which The Bank of New York Mellon (BNYM) sought approval relating to an $8.5 billion settlement covering 530 RMBS trusts.1 The settlement—between BNYM, Bank of America, and Countrywide—resolved claims related to alleged breaches of underwriting representations and warranties, as well as loan servicing and document delivery obligations. The trial court had approved the trustee’s petition with one exception: It found that BNYM had acted “unreasonably” in evaluating and releasing claims arising out of the servicer’s alleged failure to repurchase modified loans.

The Appellate Division modified that decision “to approve the settlement in all respects,” holding that “the Trustee properly exercised its discretion in its settlement of all claims.” Though the decision did not break any new legal ground, it is the first major decision to recognize the discretion that securitization trustees may choose to exercise. Several aspects of the decision bear special note.

First, the court reaffirmed the broad scope of trustee’s discretion in making business judgments. It held that “[t]he ultimate issue for determination here is whether the trustee’s discretionary power was exercised reasonably and in good faith,” and that “[i]t is not the task of the court to decide whether [it] agree[s] with the Trustee’s judgment.”

Second, in approving of BNYM’s evaluation of the loan modification claims, the court emphasized that “if a trustee has selected trust counsel prudently and in good faith, and has relied on plausible advice on a matter within counsel’s expertise, the trustee’s conduct is significantly probative of prudence.” The court further explained that “a party challenging the decisions of a trustee who followed the advice of a highly-regarded specialist in the relevant area of law can prevail only upon a showing that, based on the particular circumstances, the reliance on such counsel’s assessment was unreasonable and in bad faith.” The court found that BNYM’s reliance “on the advice of lead counsel, Jason Kravitt, was eminently reasonable,” and that Kravitt had in turn acted within his discretion in recommending against pursuit of what he perceived as weak loan modification claims.

Third, the Appellate Division concluded that the trial court had “disregarded the standard of deference due to a trustee’s exercise of discretionary judgment,” and had imposed a standard that “allows a court to micromanage and second guess the reasoned, and reasonable, decisions of the Trustee.”

Notably, the court expressed no opinion on the merits of the settled claims other than the loan modification claims (noting that they were reasonably believed to be weak). That silence is significant after a trial in which objecting investors had argued that the settlement was too small, and it reinforces the procedure-based standard—it is not the outcome of the trustee’s decision that matters, but the process by which the trustee arrived at its decision.

1 Mayer Brown represented BNYM in all aspects of the case, including the negotiation.