Blackrock v. US Bank: No-Action Clause Does Not Prohibit Suit Against RMBS Trustee | Practical Law

Blackrock v. US Bank: No-Action Clause Does Not Prohibit Suit Against RMBS Trustee | Practical Law

The US District Court for the Southern District of New York, in Blackrock Core Bond Portfolio v. US Bank National Association, held that a "no-action" clause included in an RMBS indenture did not bar a suit brought against the RMBS trustee.

Blackrock v. US Bank: No-Action Clause Does Not Prohibit Suit Against RMBS Trustee

Practical Law Legal Update w-001-5217 (Approx. 4 pages)

Blackrock v. US Bank: No-Action Clause Does Not Prohibit Suit Against RMBS Trustee

by Practical Law Finance
Published on 15 Mar 2016 • USA (National/Federal)
The US District Court for the Southern District of New York, in Blackrock Core Bond Portfolio v. US Bank National Association, held that a "no-action" clause included in an RMBS indenture did not bar a suit brought against the RMBS trustee.
On February 26, 2016, the US District Court for the Southern District of New York, in Blackrock Core Bond Portfolio v. U.S. Bank National Ass'n, held that a "no-action" clause included in a residential mortgage-backed securities (RMBS) indenture had no effect on a suit brought against the RMBS trustee ( (S.D.N.Y. Feb. 26, 2016)).

Background

The plaintiffs were investors in 27 Delaware statutory trusts that issued RMBS. The trusts suffered total realized collateral losses of $2 billion. US Bank acted as the indenture trustee for the 27 RMBS trusts, and administered the trusts. Plaintiffs were each noteholders in one or more of the 27 RMBS trusts.
US Bank, together with its affiliates, acted as trustee for more than $1 trillion in RMBS. Additionally, US Bank, together with its subsidiary, served as master servicer of residential mortgage loans.
The rights of the noteholders as well as the contractual duties of US Bank as trustee for the RMBS trusts were set out in a series of documents governing all aspects of the securitization, trusts, and servicing process (collectively, the governing agreements), which included:
  • Various mortgage loan purchase and sale agreements (MLPAs).
  • The trust agreement (the operative document which created the Delaware statutory trust).
  • A Sale and Servicing Agreement (SSA) between the transaction's depositor, the master servicer, the issuer of the RMBS, the transaction's sponsor, and US Bank in its capacity as indenture trustee.
  • A contract between the issuer of the RMBS and US Bank in its capacity as indenture trustee.
Under these governing agreements, US Bank was required to follow certain guidelines in the event of a failure to perform any covenant or agreement under the SSA or if an event of default occurred under the SSA.
Plaintiffs asserted that US Bank:
  • Knew of various failures of the servicers to perform their obligations under the SSAs, as well as the occurrence of other events of default under the SSAs, and therefore breached its obligations under the SSAs.
  • Breached its contractual and statutory duties under the Trust Indenture Act (TIA) by failing to provide notice to the servicers of these defaults and events of default. Under the TIA, an indenture trustee must provide notice within 90 days after a default to all indenture security holders (15 U.S.C. § 77ooo(b)) and is held to a "prudent person" standard after such default (15 U.S.C. § 77ooo(c)).
  • Failed to act diligently to protect the interests of the RMBS trusts since doing so would have conflicted with its own interests.

Outcome

Plaintiffs therefore brought four causes of action for:
  • Breach of contract.
  • Violation of the TIA.
  • Breach of fiduciary duty.
  • Breach of extra-contractual duties.
Each of the RMBS trusts were governed by individual indentures. Each indenture, as well as seven of the SSAs, included no-action clauses with many subparts. In general, under these no-action clauses, a noteholder's right to sue was limited to instances where:
  • The noteholder gave notice of an event of default to the indenture trustee;
  • The noteholders of at least 25% of the outstanding notes submitted written request to the indenture trustee to initiate a proceeding;
  • The noteholder offered the indenture trustee reasonable indemnity against the costs of the request;
  • The indenture trustee failed to act on the notice for 60 days following the request; and
  • During that 60 day period, no inconsistent request was received by holders of a majority of the outstanding notes.
US Bank argued to dismiss the claims against it because:
  • Plaintiffs failed to provide written notice of default.
  • The holders of not less than 25% did not make a written request to the trustee to commence any suit against the trustee.
  • Plaintiffs failed to offer satisfactory indemnification.
The court ultimately held that the no-action clauses in the indentures did not prohibit a suit against the RMBS trustee. The court relied on Cruden v. Bank of New York, 957 F.2d 961, 968 (2d Cir. 1992), in which the Second Circuit held that no-action clauses are to be "strictly construed." The court held that the "principles in Cruden nevertheless lead the Court to conclude that the no-action clause is unenforceable in suits against trustees and does not bar plaintiffs’ claims here."
Therefore, the court:
  • Dismissed plaintiffs' claims for breach of fiduciary duty.
  • Dismissed plaintiffs' claims for breach of extra-contractual duties.
  • Denied a motion by US Bank to dismiss a claim for breach of contract.
  • Denied a motion by US Bank to dismiss a claim for violation of the TIA.

Practical Implications

The district court pointed out that no-action and other provisions that prevent suits only apply to the right to sue the issuer for nonpayment of principal and interest until default. Since the allegations against the trustees were not related to payment default but rather for separate breaches of the indenture, the no-action clauses did not apply.