As has been widely reported in corporate trust circles, just before Christmas, the Second Circuit issued an important decision for RMBS trustees. In Retirement Board of the Policemen’s Annuity and Benefit Fund v. The Bank of New York Mellon, certain pension funds that invested in RMBS trusts filed suit against The Bank of New York Mellon (BNYM), as trustee of those trusts, asserting that it breached obligations under the common law and the federal Trust Indenture Act (TIA). Although the pension funds held investments in only 25 trusts for which BNYM serves as trustee, they purported to represent a class asserting claims concerning 534 trusts. After the district court ruled that the funds lack standing to assert claims involving the more than 500 trusts in which they did not invest, and also denied BNYM’s motion to dismiss the TIA claims as to PSA-governed trusts, the court certified its order for an interlocutory appeal to the Second Circuit. The court of appeals has now ruled for BNYM on both issues, and in doing so, has provided guidance on the merits of the state-law claims as well. BNYM was represented by a team of trial and appellate litigators from Mayer Brown's New York and Washington DC offices; Special Counsel, Charles Rothfeld, argued the case.

The Second Circuit first affirmed the district court’s determination that the pension funds lack standing to assert claims except with respect to trusts in which they invested. “Class standing” depends on whether the class members’ claims “implicate[] the same set of concerns” as the claims that plaintiffs could assert in their own right. Here, the court of appeals held that test not to be satisfied because the claims against one trust are quite different from those against another, as “BNYM’s alleged misconduct must be proved loan-by-loan and trust-by-trust.” The court explained that, for example, “whether Countrywide breached its obligations under the governing agreements (thus triggering BNYM’s duty to act) requires examining its conduct with respect to each trust.” Likewise, whether Countrywide “was obligated to repurchase a given loan,” as well as whether “a loan’s documentation was deficient,” requires a loan-by-loan analysis. In the court’s view, it could “see no way in which answering these questions for the trusts in which the plaintiffs invested will answer the same questions for the numerous trusts in which they did not invest.”

The holding—that an investor in one securitization cannot represent a class of investors in other deals in a suit against the trustee—is important on its own. It means that the plaintiffs’ bar should not be able to leverage holders in one securitization into a class covering an entire shelf. But the decision may affect the validity of the plaintiffs’ claims as well. Essential to the holding was the court’s reasoning that whether Countrywide experienced a servicing Event of Default depends on “its conduct with respect to each trust.” This logic runs directly counter to the plaintiffs’ theory that the trustee was on notice of Events of Default because of public allegations about “pervasive breaches” by Countrywide. If determining the existence of an Event of Default at trial requires “examining” that conduct “loan-by-loan and trust-by-trust,” then it may be difficult to show that the trustee had knowledge of an Event of Default if it did not receive a similarly granular notice (or undertake a trust-by-trust investigation).

The court then went on to hold that the TIA does not apply to PSA-governed trusts, finding those trusts exempt from the Act pursuant to Section 304(a)(2). That subsection exempts any “certificate of interest or participation in two or more securities” that have “substantially different rights and privileges.” The court concluded that this description applies to the trust certificates at issue here: PSA “pass-through” certificates are “certificates of interest” in the mortgage loans; the mortgage pools underlying the trusts contain hundreds or thousands of individual loans, which are “securities” for TIA purposes; and the rights and privileges of each home loan differ significantly from those of the others. The court noted that its holding is consistent with longstanding, albeit informal, guidance provided by the SEC, which has long treated such trusts as exempt from the TIA’s requirements. As we argued on behalf of BNYM, and as several industry groups confirmed in amicus briefs, retroactively applying the TIA to deals structured as common-law trusts could have been difficult at best. This decision should restore some measure of certainty to these transactions.