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IN THESE ACTIONS BY INVESTORS AGAINST TRUSTEES STEMMING FROM THE COLLAPSE OF RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) THE COURT HELD (1) CLAIMS AGAINST TRUSTEES ARE NOT PROHIBITED BY A NO-ACTION CLAUSE (2) THE TRUSTEES WERE NOT REQUIRED TO ENFORCE REPURCHASE OBLIGATIONS AND (3) THE TORT CLAIMS WERE DUPLICATIVE OF THE BREACH OF CONTRACT CLAIMS (CT APP).

​The Court of Appeals, reversing (modifying) the appellate division, over two dissents, in these actions by investors against the trustees stemming from the collapse of residential mortgage-backed securities [RMBS], determined (1) claims against a trustee are not precluded by a “no action” clause, (2) trustees are not required to enforce repurchase obligations, and (3) the tort claims are duplicative of the breach of contract claims:

… RMBS [residential mortgage-backed securities] are financial instruments, popular in the mid-2000s, backed by individual mortgage loans …  The securitization process involves a “sponsor” who acquires a bundle of loans from banking institutions (“originators”) and sells the pooled loans to a “depositor,” who places the loans into a trust … . The trust issues certificates purchased by investors, who are entitled to a portion of the revenue stream from the borrowers’ payments … . The mortgage loans in the trust are serviced by a “servicer,” a party typically affiliated with the sponsor or originator. Each trust has a Trustee which acts on behalf of the Trust and whose responsibilities are prescribed by the securitization trusts’ governing agreements. While our previous RMBS cases have been brought by RMBS trustees, investors, or their insurers against RMBS sponsors, depositors, servicers, and originators (collectively, obligated parties) to recover for losses on the certificates, here the investors are suing the RMBS Trustees. * * *

… [C]laims against the trustee . . . cannot be prohibited by a no-action clause” … . “Because a standard no-action clause vests in the trustee all of the securityholders’ rights to bring suit, making the trustee the only path to a remedy, courts have been unwilling to enforce such clauses when the trustee’s conflicts or irrationality bar that path to relief” … . … [t]he Trustee cannot not sue itself ,,, and therefore compliance was not required. * * *

Defendants moved to dismiss plaintiffs’ claims that they breached the governing agreements by failing to enforce repurchase obligations, arguing that these agreements do not impose such a duty on trustees…. . We … hold that the governing agreements do not impose on defendants an affirmative duty to enforce repurchase obligations and so those claims should be dismissed. * * *

We hold that, to the extent any tort claims remain, they should be dismissed as duplicative of the breach of contract claims. IKB Intl., S.A. v Wells Fargo Bank, N.A., 2023 NY Slip Op 03302, CtApp 6-15-23

Practice Point: Here residential mortgage-backed securities (RMBS) investors sued the trustees. The actions were not prohibited by no-action clauses. The trustees were not obligated to enforce repurchase agreements. And the tort claims were duplicative of the breach of contract claims.

 

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