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ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Gische, determined that defendant’-trustee’s motion to dismiss the breach of contract cause of action should not have been granted. Although the defendant indenture trustee did not owe the plaintiffs a fiduciary duty with regard to the sale of securities, the trustee still owed plaintiffs a duty of care as described in the trust agreement, including a duty to avoid conflicts of interest. Here the plaintiffs alleged the trustee sold the securities below market price and then sold them for a profit, thereby depriving plaintiffs of the equity in the securities:

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This appeal concerns the rights and obligations of the parties with respect to the termination of certain REMIC (real estate mortgage investment conduit) trusts. The assets held by the trusts were mortgage loans. The trusts originally sold securities to outside investors, representing two classes of holders, i.e., regular security holders and residual security holders. Plaintiffs … are holders of the residual security interests in those trusts. While the holders of regular securities were entitled to receive regular payments on distribution dates, the residual security holders had no such right. Instead, they were entitled to receive the proceeds of the disposition of any asset remaining in the trust REMICs upon their termination, but only after each class of regular security holder had been paid. Plaintiffs’ interest is referred to as the trust “equity.” The residual holder interest was the riskiest tranche of ownership and any right to payment was subordinate to payment in full of amounts due to the regular interest holders.

… The trustee argues that under the trust documents, it had the right to purchase trust assets at below market, even though it could resell them within days of acquiring them, allowing the trustee to realize millions of dollars in personal profit. The trustee is alleged to have kept for itself the profit it realized on the forward sale, which was in excess of $3,000,000.

… Even if the sale of assets to the trustee had been conclusively established by documentary evidence, there is still a valid claim that the trustee’s actions create a conflict of interest prohibited under the operative trust agreements and in violation of the trustee’s contractual obligations. The trust documents do not give the trustee the express right to purchase the trust assets for its own financial benefit at less than market value and to thereby diminish, let alone extinguish, plaintiffs’ interest as residual security holders. NMC Residual Ownership L.L.C. v U.S. Bank N.A., 2017 NY Slip Op 05923, First Dept 8-1-17

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Similar issues and result in Cece & Co. Ltd. v U.S. Bank N.A., 2017 NY Slip Op 05924, First Dept 8-1-17 (Gische, J)

 

SECURITIES (ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/TRUSTS AND ESTATES (REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS, ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS (ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/CONTRACT LAW (REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS, ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))

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