BNY Mellon

Federal Court Permits BlackRock’s Breach of Contract Claims to Proceed against BNY Mellon

On March 28, Judge George Daniels of the U.S. District Court for the Southern District of New York granted in part and denied in part Bank of New York Mellon’s motion to dismiss an action brought by BlackRock.  BlackRock, as a holder in numerous trusts for which BNY Mellon serves as trustee, alleges that BNY Mellon failed to (i) provide notice of breaches of seller representations and warranties, (ii) enforce seller repurchase obligations, (iii) provide notice of events of default, and (iv) act prudently upon learning of events of default.  The court exercised supplemental jurisdiction over state law claims concerning 243 trusts, holding that the claims arise out of the same operative facts as those of the federal claims concerning 17 other trusts.  The court permitted BlackRock’s breach of contract claims to proceed, but dismissed fiduciary duty claims as duplicative of the contract claims.  Judge Daniels also dismissed Trust Indenture Act claims in light of the Second Circuit’s holding that the TIA does not apply to the trusts like those at issue, and dismissed negligence and conflict of interest claims for failure to adequately state a claim. Decision.

RMBS Trustee Seeks Court Guidance on Distribution of Settlement Proceeds

On February 5, 2016, the Bank of New York Mellon (“BNY Mellon”), in its capacity as trustee of 530 RMBS trusts, filed an Article 77 petition with the Supreme Court of the State of New York requesting instruction as to how it should distribute proceeds from an upcoming $8.5 billion settlement payment from Bank of America Corporation. The settlement payment relates to a 2011 settlement of claims arising from representations and warranties made by Countrywide Financial Corporation and Countrywide Home Loans, Inc. in connection with the 530 RMBS trusts at issue.

The petition highlights a dispute among Certificateholders in the 530 trusts regarding how settlement proceeds should most fairly be disseminated to investors. Among other consideration, the petition concerns the application of “write up” provisions—by which the principal balance on previously written-down certificates is increased—and how these provisions could affect the allocation of proceeds in over-collateralized trusts.  The petition states that the distribution process may create the artificial appearance that a trust’s overcollateralization target was hit, resulting in the unintended “leakage” of settlement proceeds to subordinated Certificateholders, at the expense of the senior tranches.

Petitioners request the court clarify whether BNY Mellon must: (a) pay disbursements first and subsequently adjust the overcollateralization calculation to prevent leakage; (b) pay disbursements first and make no adjustment to the overcollateralization calculation, thereby permitting leakage; or (c) change its settlement disbursement operations to “write up first and pay second.” As BNY Mellon puts it: “the resolution of this question has significant consequences . . . affecting the distribution of potentially billions of dollars.” Verified Petition.

Phoenix Light Sues Five RMBS Trustees Over $2.4 Billion in RMBS

On December 23 and 24, Phoenix Light SF Limited and other RMBS certificateholders filed suit against HSBC, Wells Fargo, Deutsche Bank, Bank of New York Mellon, U.S. Bank, and Bank of America in the United States District Court for the Southern District of New York regarding $2.4 billion in RMBS. The complaints assert causes of action under the Trust Indenture Act and a provision of the New York Real Property Law known as the Streit Act, as well as under state law for breach of contract, breach of fiduciary duty, negligence, gross negligence, and negligent misrepresentation. Plaintiffs allege that the trustees breached their duties under the governing trust agreements by failing to notify the investors of deficiencies in the loans, failing to take action to address those alleged deficiencies, and failing to require the repurchase of defective loans. Plaintiffs seek compensatory damages and unspecified equitable relief.  HSBC ComplaintWells Fargo ComplaintDeutsche Bank ComplaintBNY Mellon ComplaintU.S. Bank and Bank of America Complaint.

Second Circuit Holds that Trust Indenture Act Does Not Apply and Dismisses RMBS Investor Claims Against BNY Mellon

On December 23, the United States Court of Appeals for the Second Circuit dismissed claims against Bank of New York Mellon, as trustee, by four pension funds in a putative class action relating to 530 Countrywide RMBS trusts worth $424 billion. The Second Circuit affirmed the district court’s holding that the plaintiffs did not have standing to assert claims related to certificates issued by trusts in which no plaintiff ever invested. The court further held that the Trust Indenture Act (TIA) does not apply to the trusts because they are “certificate[s] of interest or participation in two or more securities having substantially different rights and privileges” and therefore within an exemption to the TIA. As a result, the court reversed the district court’s decision denying the bank’s motion to dismiss claims under the TIA.  Decision.

Bank of America’s US$8.5 Billion RMBS Settlement Approved

On January 31, Justice Barbara R. Kapnick of the Supreme Court of New York for New York County approved, with one exception, an US$8.5 billion settlement between Bank of America and a group of RMBS investors.  The Bank of New York Mellon, acting as the trustee for trusts that in the aggregate issued US$424 billion in RMBS backed by mortgages originated by Countrywide, entered into an agreement with Bank of America in 2011 to resolve claims alleging breaches of representations and warranties and alleged violations of prudent servicing obligations.  After more than two years of State and Federal Court proceedings, Justice Kapnick approved the settlement, and found that BNY Mellon as Trustee did not abuse its discretion or act in bad faith or outside the bounds of reasonable judgment in reaching the settlement, except to agree to the settlement of certain loan modification claims, which the Court did not approve.  The Court declined to approve the compromise of the loan modification claims based on its conclusion that BNY Mellon settled those claims “without investigating their potential worth or strength.” Order.

Bank of America Announces Proposed $8.5 Billion Settlement With Institutional Investors Over Claims Related to Countrywide RMBS

On June 29, 2011, Bank of America and 22 institutional investors jointly announced that they had reached a settlement of repurchase and mortgage servicing claims related to 530 RMBS trusts of primarily first-lien loans issued by Countrywide. The trusts had an original principal balance of $424 billion and current unpaid principal balance of approximately $221 billion, and represent nearly all Countrywide first-lien private label RMBS exposure held by Bank of America.

The terms of the settlement provide that (1) Bank of America pay $8.5 billion to the Trustee of the trusts (BNY Mellon) to be allocated to the trusts on a collateral loss formula; (2) Bank of America will implement several loan servicing improvements designed to improve both borrower and investor outcomes; (3) the Trustee will seek court approval of the settlement; and (4) the institutional investors will intervene in the action and use their best efforts to ensure court approval. As part of the settlement, Bank of America also has agreed to cover future losses to investors when foreclosure on defaulting borrowers is prevented because of faulty or missing documentation. The settlement is expressly limited to repurchase and servicing claims, and any direct claims held by investors based on allegedly misleading disclosures or omissions in connection with the sale of the RMBS issued by the trusts are not released.

The settlement is subject to court approval, which could require changes to the terms of the agreement. Bank of America also retains the right to withdraw from the settlement if trusts holding a certain, confidential percentage of the aggregate principle balance are not part of the settlement. Bank of America Press Release. Investor Press Release. Settlement Agreement. Bank of America Investor Presentation.