A recent New York Supreme Court decision, STS Partners Fund LP v. Deutsche Bank Securities Inc. (NY Sup. Ct. June 21, 2016), addressed the question of how far an amendment that does not expressly conflict with other provisions of a trust agreement can go in eliminating rights of non-consenting parties to the agreement. The answer is pretty far, even to the point of termination. Along the way, Justice Eileen Bransten dealt with a variety of other issues of perennial interest.

Factual Background1

The plaintiffs, STS Partners Fund and Burgess Creek Master Fund, invested in two trusts, referred to in the court’s opinion as the RS-5 Trust and the RS-6 Trust, that were terminated by defendants Deutsche Bank Securities Inc., Deutsche Mortgage Securities Inc. and Wells Fargo Bank N.A. Deutsche Bank Mortgage was the depositor under the trusts. Deutsche Bank Securities, acting as initial purchaser, sold the certificates representing beneficial interest in the trusts, and Wells Fargo was the trustee of the trusts. The trusts used the proceeds of sale of the certificates to purchase RMBS-related assets.

The certificates purchased by the plaintiffs were interest-only certificates, whose value was dependent on both the performance of the underlying RMBS-related assets and the continued existence of the trusts. There were also other series of certificates issued by the trusts with different terms and rights. The trusts authorized certain designated entities to act on behalf of certificate holders. Although it was not a party to the trust agreements, Deutsche Bank Securities was the “designated entity” authorized to act on behalf of the holders of the interest-only certificates, among other series of certificates.

The trust agreements provided for the termination of the trusts in a variety of ways. The trusts could be terminated with the consent of all certificate holders and the payment of a prescribed distribution. The trusts also provided for the periodic auction, under specified terms, of the underlying RMBS, with the trust terminating if an auction was successful.

The trust agreements prohibited the trustee from disposing of assets or dissolving or liquidating the trusts except as permitted by the terms of the agreements. However, the trust agreements could be amended at any time by Deutsche Bank Mortgage and Wells Fargo with the consent of the designated entities. The amendment provisions allowed amendments “to add any provisions to or change in any manner or eliminate any of the provisions of the [trust agreement] or to modify in any manner the rights of the holders of the [certificates] or any Designated Entity.” The trustee was required in this regard to obtain an opinion of counsel as to the permissibility and tax consequences of the amendments and obtain certain representations of the rating agencies. Finally, each trust agreement contained a “no action” clause which prohibited certificate holders from commencing an action under the agreement unless they held at least 25% of the voting rights and made a prior demand on the trustee with “written notice of default and of the continuance thereof.”

The plaintiffs purchased their interest-only certificates in April and May 2014, and thereafter received distributions. In September 2014, the trust agreement of the RS-6 Trust was amended to provide that Deutsche Bank Securities could bid on the underlying RMBS without seeking other qualifying bids, and could apply certain amounts owed to it to the purchase price. The amendment also terminated the trust. Later that month, Wells Fargo informed the plaintiffs that the auction had been conducted, the RS-6 Trust had been terminated and they would receive no further distributions. In contrast, Deutsche Bank Securities received a substantial sum after it acquired and/or liquidated the underlying RMBS. Deutsche Bank Mortgage and Wells Fargo received substantial payments and benefits in connection with the termination, including unpaid fees, expenses and indemnity amounts.

The RS-5 Trust was terminated by defendants in October 2015, by way of a similar amendment to the trust agreement and an auction in which Deutsche Bank Securities acquired the underlying RMBS. (The one difference was that this amendment eliminated the requirement that certificate holders consent to termination, substituting the requirement that only the “designated entities” consent.) Once again, later that month, the plaintiffs received notice that an auction had been conducted and that the trust had been terminated. The plaintiffs received no further distributions or proceeds of the auction, although Wells Fargo received a variety of payments, including processing fees, collections fees and a payment calculated as a percentage of the trust assets.

In November 2015, the plaintiffs filed a supplemental complaint to recover damages for the alleged unlawful termination of the trusts.

The Issues and the Court’s Rulings

The court issued its opinion on motions to dismiss, granting the motions with respect to the Deutsche Bank entities but not Wells Fargo.

Standing and the no-action clause. The court began by addressing the plaintiffs’ standing to bring suit. Standing in the way of the suit against the Deutsche Bank entities were the no-action clauses of the trust agreements, with which the plaintiffs could not comply because they held nonvoting securities. The plaintiffs argued that the no-action clauses were not a bar to their case because the trusts had terminated. The court rejected their argument, citing to New York precedent for the proposition that no-action clauses apply to former bondholders to the same extent as current security holders. The court, and apparently Wells Fargo, conceded that a no-action clause is not a bar to actions against a trustee. (See “No-Action Clauses in Lawsuits Against the Trustee,” Debt Dialogue, June 2016.) The court therefore proceeded to the merits of the action (including with respect to the Deutsche Bank entities, should its decisions on standing be overturned).

Amendment. The plaintiffs alleged that Deutsche Bank Mortgage, together with Wells Fargo, breached the trust agreements by executing the amendments, selling the trust assets and terminating the trusts. The plaintiffs argued that the amendment provisions were silent with respect to terminating the trusts, and did not expressly permit termination. The court disagreed and held that in view of the sweeping power of the amendment provisions, an express provision permitting alteration of the termination provisions was unnecessary. Indeed, to preclude termination by amendment, the trust agreements would have had to contain an express provision to that effect. The court also rejected the contention that the exercise by the defendants of the amendment power was inconsistent with other provisions of the trust, including requiring consent of certificate holders to terminate, prohibiting asset sales and prohibiting dissolutions. There was nothing to prohibit an amended termination provision from trumping these other provisions.

Breach of covenant of good faith and fair dealing. Another of the plaintiffs’ claims was for breach of the implied covenant of good faith and fair dealing. The court, citing to precedent, wrote that such a claim arises “when a party to a contract acts, in a matter that, although not expressly forbidden by any contractual provision, [deprives] the other party of the right to receive benefits under their agreement.” The plaintiffs alleged that Deutsche Bank Mortgage “intentionally and purposefully applied the provisions of the Trust Agreement … to strip Plaintiffs of their rights” and frustrated their reasonable expectations. The court rejected this argument as well, stating, “[T]he covenant of good faith and fair dealing … cannot be construed so broadly as effectively to nullify other express terms of a contract, or to create independent contractual rights,” citing Fesseha v. TD Waterhouse Investor Services, Inc., 305 A.D. 2d 268, 761 N.Y.S.2d 22 (1st Dept. 2003). Here, the defendants had unlimited power to amend the trust agreements, and the exercise of that right could not be said to frustrate the plaintiffs’ reasonable expectations.

Opinion of counsel. The plaintiffs also claimed the defendants failed to comply with the provisions of the trust agreements requiring that the trustee receive an opinion of counsel in connection with amendments. Apparently, the opinion of counsel obtained by the trustee was in summary form without analysis, which the plaintiffs objected to as “boiler plate.” The court disagreed. It held that the opinion of counsel need only track the language of the trust agreements, to the effect that counsel read the relevant language and that the amendment was in compliance. This, of course, is customary practice.

Third-party beneficiary. The plaintiffs also asserted claims against Deutsche Bank Securities, alleging that its role in the amendment process prejudiced their rights. Deutsche Bank Securities was a designated entity and an express third-party beneficiary of the trust agreements. Citing to the New York case of N.F. Gozo Corp. v. Kiselman, 38 Misc.3d 48, 60 N.Y.S.2d 846 (2d Dept. 2012), the court held that the plaintiffs were not entitled to assert a cause of action under the trust agreements against Deutsche Bank Securities on account of its status as a third-party beneficiary. “While the status of an intended third-party beneficiary gives that individual a right to sue on a contract to which that individual is not a party, this status does not confer upon one of the parties to the agreement [or here, other third-party beneficiaries] the right to sue the third party.”

The court addressed a variety of other issues as well, allowing some claims to go forward against Wells Fargo, particularly as to whether the defendants complied with certain auction-related provisions of the trust agreements.


Justice Bransten has once again provided interesting food for thought to practitioners in the debt documentation space. (See “Curing Substantive Ambiguities in Debt Documentation and More,” Debt Dialogue, July 2016.) Where amendment provisions of debt documentation are unconstrained, her opinion suggests that even the most fundamental provisions of the documentation may be altered and even gutted. After all, nothing can be more extreme than a termination of the contract and the deprivation of a party’s right to receive distributions, as was the case here. In another important takeaway, the case suggests that equitable considerations, including the overarching principle of good faith and fair dealing, will not be availing against express provisions of an agreement, even where those provisions appear to work extreme hardship on a party. As is often the case, buyers of debt should proceed with their eyes open and cannot expect the courts to rush to their rescue with supra-contractual assistance where their fate is sealed by the express terms of the documentation.

The opinion offers a number of collateral points of interest. It reaffirms standard practice in rendering opinions of counsel on modifications to debt documentation, which need only recite the satisfaction of conditions to amendment without analysis or discussion. Also, it gives comfort to third parties named as beneficiaries to debt documentation, that they cannot be tagged with liability by virtue of the benefits they receive. Finally, no-action clauses survive termination of a trust instrument. Good to know.