First Department Reaffirms Indenture Trustee's Fiduciary Duties

On August 1, 2017, the First Department issued a decision in Cece & Co. Ltd. v. U.S. Bank N.A., 2017 NY Slip Op. 05924, reaffirming that an indenture trustee cannot take advantage of trust beneficiaries for its own benefit, even if the indenture does not prohibit its actions. On the same day, the First Department issued a decision in NMC Residual Ownership L.L.C. v. U.S. Bank N.A., 2017 NY Slip Op. 05923, deciding a similar issue in a different appeal using the same reasoning.

In Cece & Co., the defendant trustee of RMBS trusts "purchased the trust assets for its own account at below market value." Relying on the rule that "[u]nlike an ordinary trustee, the rights, duties and obligations of an indenture trustee are not defined by a fiduciary relationship. Instead, they are defined exclusively by the terms of the agreements by which the relationships were formed," the motion court dismissed the plaintiff's claim, holding that the indenture allowed the trustee to purchase trust assets. The First Department reversed and reinstated the plaintiff's breach of contract claim, explaining:

An indenture trustee clearly owes the security holders a duty to perform its ministerial functions with due care. Most importantly, the courts have recognized that even an indenture trustee has a fundamental duty to avoid conflicts of interest. Avoiding conflicts of interest encompasses a trustee's duty not to profit at the possible expense of the beneficiary. . . . .

At bar, while the trustee had an express right to purchase the remaining trust assets in its own name, there was no express contractual right to purchase the assets at less than market value. In the absence of an express contractual right to do so, the trustee's action clearly constitutes a prohibited conflict of interest, because it financially benefitted the trustee at the expense of the residual security holders. The trustee completely defeated the equity value of the trust assets that belonged to the residual security owners by usurping the profitable value of the assets for itself.

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