RMBS trusts

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.

FDIC Sues BNY Mellon For Alleged Failure As Trustee of RMBS

On August 19, 2015, the Federal Deposit Insurance Corp., acting as receiver for Guaranty Bank, filed suit against Bank of New York Mellon Corp. in New York federal court, alleging that BNY breached its duties as trustee of 12 RMBS trusts that issued approximately $2 billion in certificates.  The trusts were sponsored by Countrywide Home Loans and EMC Mortgage Corp.  The FDIC alleges that BNY breached its contractual obligations by failing to provide notice of representation and warranty violations and demand Countrywide and EMC to replace or buy back the noncompliant loans, provided false regulatory certifications and remittance reports, and failed to take possession of complete mortgage files.  The FDIC asserts claims for breach of contract, the federal Trust Indenture Act, and the New York Streit Act.  Complaint.

Judge Scheindlin Denies Motion to Dismiss NCUA Claims

On July 20, 2015, Judge Scheindlin of United States District Court for the Southern District of New York denied HSBC Bank USA, NA’s (“HSBC”) motion to dismiss claims brought by the National Credit Union Administration (“NCUA”) related to the administration of mortgage-backed securities worth $2 billion.  NCUA alleges that HSBC failed to perform its duties as the indentured trustee for 37 RMBS trusts.  Judge Scheindlin rejected HSBC’s argument that NCUA lacked standing to bring the suit because most of the debt had been resecuritized, and held that NCUA has standing to pursue the claims against HSBC derivatively because the current trustee of the resecuritized loans tacitly consented to the action by remaining neutral.  Opinion and Order.