First Department Holds Certificate Holder Whose Certificates Had Zero Principal Balance Could Not Satisfy No-Action Clause’s Voting Rights Threshold

Posted: October 9, 2026 / Written by: Samuel L. Butt / Categories Contract Interpretation, Motion to Dismiss

First Department Holds Certificate Holder Whose Certificates Had Zero Principal Balance Could Not Satisfy No-Action Clause’s Voting Rights Threshold

On August 27, 2026, in Matter of HBK Master Fund L.P. v. NewRez LLC, 252 AD3d 438, Index No. 656286/23, the Appellate Division, First Department unanimously affirmed an order of Justice Andrea Masley of the New York County Commercial Division dismissing a certificate holder’s claims against the servicer of a residential mortgage-backed securities trust.

HBK held all of the trust’s subordinate Class CE certificates. In November 2019, after the trust’s remaining loan balance fell below 10% of its original balance, NewRez exercised its right under the pooling and servicing agreement (PSA) to purchase the remaining assets and terminate the trust. HBK alleged that NewRez underpaid the termination price by at least $3.25 million by excluding deferred principal balances, leaving the Class CE holders with nothing. In 2023, HBK asked the trustee to sue; the trustee declined but did not object to HBK suing in its own name. The PSA’s no-action clause, however, barred certificate holder suits unless the holders were entitled to at least 25% of the voting rights, which the PSA allocated based on outstanding certificate principal balances. The trustee’s distribution reports showed that the Class CE principal balance was zero after the termination. HBK argued that, because it still physically held its certificates after other holders had surrendered theirs, it held 98% of the voting rights. Rejecting that argument, the Court explained:

[T]his argument distorts the plain meaning of the no-action clause because there was no Certificate Principal Balance remaining in the Class CE Certificates to be repaid. The Class CE Certificates had zero value when HBK made the request to Deutsche Bank, and therefore had no percentage of voting rights. No additional meaning should be implied that would add new terms to the PSA (see Walnut Place LLC v. Countrywide Home Loans, Inc., 96 A.D.3d 684, 685, 948 N.Y.S.2d 580 [1st Dept 2012]). The PSA’s no-action clause should be read narrowly and should not be construed to add new terms that imply additional rights that were not intended by the parties (see Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 560, 992 N.Y.S.2d 687, 16 N.E.3d 1165 [2014]). Even if HBK continued to physically possess the Class CE Certificates, HBK did not have 25% of the Voting Rights under the PSA’s no-action clause because the principal balance of the certificates was zero.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning no-action clauses.

To read more about no-action clauses in RMBS pooling and servicing agreements, see Schlam Stone & Dolan’s related Commercial Division Blog posts on a decision holding that compliance with a no-action clause, including its 25% requirement, was excused where it would be futile to demand that the trustee sue itself and a decision rejecting the argument that a directing certificateholder, rather than the trust representative, was the “effective” plaintiff for purposes of a PSA’s no-action clause.