Mortgage backed securities litigation has been watched closely in the aftermath of the financial crisis, and a series of recent matters involving pension fund plaintiffs have addressed themes that will likely influence how this area develops going forward. They include:
- Trustee liability: Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of America and Oklahoma Police Pension and Retirement v U.S. Bank both involved plaintiff funds suing securitization trustees for breach of contract claims under the Pooling and Servicing Agreements (PSA) for the relevant trusts in each case, as well as under the federal Trust Indenture Act (TIA). In each case, the Southern District of New York allowed the PSA breach claims to survive initial motions to dismiss, but the TIA claims outcomes were not initially as clear; in Policemen’s Annuity, the court allowed plaintiff’s TIA claims to survive, and rejected defendant’s argument that the TIA was inapplicable because the MBS securities at issue did not fit the Act’s definition of ‘debt instruments’ that would be subject to TIA provisions. However, in Oklahoma Pension, the court accepted defendants argument that the securities at issue fit the definition of notes that were exempt from the Act’s provisions under its Section 304(a)(2). The potential scope of the 304(a)(2) exemption could thus have a significant impact on related litigation going forward, as both cases suggest that the terms of the TIA impose broader recordkeeping requirements on trustees (and thus could carry a broader potential scope for trustee liability in litigation) for the types of loans that were at issue in those cases.
Tranche standing: Policemen’s Annuity and Oklahoma Police both examined a range of standing issues that may also affect potential trustee liability going forward, including the extent to which investors in specific tranches could potentially be joined as plaintiffs by:
- investors in different tranches of the same security;
- investors in different securities that were part of the same shelf offering; or
- investors of securities backed by loans that were underwritten by common originators.
In Policemen’s Annuity, the court limited the plaintiff group to investors in the same security, and more specifically to investors in tranches that were collateralized by common groups of loans (essentially allowing plaintiff groups to include investors in different tranches that were “cross collateralized” such that similar pools of residential loans secured multiple tranches). However, in Oklahoma Police, the court ruled that a plaintiff class against a securitization trustee could include investors in different securities where the loans backing the securities were administered under ‘same form’ PSA agreements. The range of investor classes that could ultimately bring claims may thus also have a significant impact on related litigation. Both cases indicate that the scope of potential plaintiff groups could also include non-pension fund investors as well, though the similar factual backdrops provide particular context on recent trends involving pension fund claims in particular, as well as on how the scope of potential trustee liability could develop going forward. This space will continue to monitor related developments as they occur.