In two recent cases arising out of the RMBS meltdown of the preceding decade, BlackRock Core Bond Portfolio v. U.S. Bank National Association (S.D.N.Y. February 26, 2016) and BlackRock Allocation Target Shares: Series S Portfolio v. The Bank of New York Mellon (S.D.N.Y. March 25, 2016), courts have confirmed that aggrieved bondholders have an implied right of action under certain provisions of the Trust Indenture Act of 1939. While consistent with prior case law, the recent cases serve as a reminder that what might otherwise be garden-variety fiduciary law claims under an indenture can morph into federal causes of action. This note focuses on the Bank of New York Mellon case, which provides somewhat more detailed analysis.
In Bank of New York Mellon , the plaintiffs were a group of investors in 260 RMBS trusts created between 2004 and 2008 and originally secured by loans valued at more than $176 billion. The suit is a derivative action brought against Bank of New York Mellon in its role as the trustee of those trusts. The plaintiffs allege various claims including breach of contract, negligence and breach of fiduciary duty; but these are all state law claims and the plaintiffs’ ability to bring suit in federal court hinged on whether they also had a federal cause of action, namely an implied right to sue under the TIA.
The plaintiffs alleged violations by the trustee under three subsections of Section 315 of the TIA. Subsection (a), among other things, provides that qualified indentures are deemed to contain a provision (unless expressly excluded) that prior to default, an indenture trustee is not liable except for performance of the duties specifically set forth in the indenture, and may conclusively rely upon certificates or opinions conforming to the requirements of the indenture. Subsection (b) requires an indenture trustee to provide security holders with notice of all defaults known to the trustee within 90 days after occurrence, subject to certain limitations. Subsection (c) provides that upon the occurrence of default, the trustee must exercise the rights and powers vested in it by the indenture and “use the same degree of care and skill in their exercise, as a prudent man would exercise or use in the circumstances in the conduct of his own affairs.”
The Court’s Analysis
The court disposed of the claim under TIA Section 315(a), saying that this subsection does not impose any duties upon the trustee and simply limits the trustee’s duties to those in the indenture prior to default. On the other hand, the court held that Sections 315(b) and (c) did impose affirmative obligations on the trustee. Citing to a number of recent district court decisions and the Second Circuit’s older decision in Bluebird Partners, L.P. v. First Fidelity Bank, N.A. , 85 F 3d 970 (2d Cir. 1996) (citing approvingly to a 1980 case from the Third Circuit, Zeffrio v. First Pa. Banking & Tr. Co. , 623 F. 2d 290 (3d Cir. 1980)), the court remarked that the courts of the district have consistently recognized a private right of action under Section 315. Bank of New York Mellon, however, argued that the Supreme Court decisions in Stoneridge Partners, LLC v. Sci.-Atlanta , 552 U.S. 148 (2008), and Alexander v. Sandoval , 532 U.S. 275 (2001), abrogated prior case law. For example, in Stoneridge , the Supreme Court held that an implied cause of action existed “only if the underlying statute can be interpreted to disclose the intent to create one.” Distinguishing Stoneridge and Sandoval , the Court emphasized that a private right of action under the TIA has been recognized for at least 35 years.
The holdings in these recent decisions, and the cases that precede them, are important for two reasons. First, they provide an admission ticket to federal courts for plaintiffs suing trustees under TIA-qualified indentures. More importantly, perhaps, they underscore the heightened duties imposed upon trustees when defaults are pending under TIA-qualified indentures and the care that must be exercised by these trustees, and the professionals who represent them, in navigating the treacherous waters of defaulted debt.