Commercial Division Blog

Posted: November 23, 2020 / Categories Commercial, Contracts

RMBS Trustee's Obligation to Hold the Trust's Contractual Rights and to Exercise Them For the Benefit of Certificateholders Includes Affirmative Duty to Enforce Those Rights

On November 5, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Western & S. Life Ins. Co. v. U.S. Bank N.A., 2020 NY Slip Op. 51307(U), holding that an RMBS trustee's obligation to hold the trust's contractual rights and to exercise them for the benefit of certificateholders includes an affirmative duty to enforce those rights, explaining:

Prior to an EOD, an RMBS trustees' duties are mostly ministerial, as spelled out in the PSAs. Indeed, pre-EOD, the trustee has only those express contractual duties specifically set forth in the PSAs. As U.S. Bank frequently, and correctly, asserts, its role is not to police their investments or to act as a fiduciary or guarantor. The question before the Court is whether Plaintiffs' pre-EOD claims fit within the express, limited pre-EOD duties imposed on US Bank under the PSAs.

Plaintiffs allege that US Bank was required under the PSAs to take action after it discovered material breaches of the seller's R & Ws with respect to loans held in the Trusts and because loans were missing documentation required to be delivered as part of the mortgage file. US Bank argues that the pre-EOD claims fail for two main reasons: (i) US Bank had no duty to provide notice of R & W breaches or enforce the Seller's obligation to repurchase loans with breaches; and (ii) some of the claims are untimely.

. . .

Plaintiffs allege that for five trusts (the Goldman Trusts, HEMT 2005-5, CMALT 2007-A7, and TBW 2006-5), US Bank also had a duty to enforce the Sellers' obligation to repurchase loans in breach of either R & W provisions or covenants relating to the completeness of mortgage files. These repurchase provisions were meant to ensure that loans not in compliance with the Sellers' representations were removed from the trusts, thus protecting the investors. The parties disagree about US Bank's duty to enforce the repurchase obligations for two of the five trusts noted above — HEMT 2005-5 and CMALT 2007-A7.

Under Section 2.06 of the HEMT 2005-5 PSA, US Bank agreed to hold the Trust Fund and exercise the rights referred to above for the benefit of all present and future certificateholders. Undisputedly, the rights referred to above include the right to enforce the repurchase protocol in Section 2.03. And in agreeing to exercise the rights referred to above, US Bank assumed an affirmative duty to enforce the repurchase obligation. While the PSA forbids implied covenants or obligations to be read into the PSA against the Trustee. Section 2.06 evinces an express obligation on US Bank's part to exercise certain rights.

(Internal quotations and citations omitted) (emphasis added).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee's prosecution of a put back or repurchase action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at