BofA settlement, exposes breach of fiduciary duties of trustees

In a recent spate of cases, the role of the trustee towards MBS noteholders has been frowned upon. The Wall Street bundling of securities has been facing litigations exposing the mal practices that led to the boom and bust of the housing bubble in the US.

The issue was triggered with Bank of America’s $8.5 billion proposed settlement with Countrywide MBS noteholders, wherein there was a collapse in the value of the mortgage loans held by the trusts, due to bank loan origination and false representation and warranties made by the originators to the investors. Under the pooling and servicing agreement Bank of New York Mellon (BNYM) acting as trustee to 530 trusts incorporated for the benefit of the MBS noteholders.

Some of the rights and duties of a trustee under a standard MBS pooling and servicing agreement are ensuring proper transfer of loans from Countrywide to the trusts, ensuring assignment of mortgage in favor of the trusts, original mortgage documents to be delivered to the trust, issue certificate of compliance, the right of demanding the mortgage issuer to buy back deficient underlying loans, negotiate the settlement in the best interest of the noteholders etc.

BNYM violated the fiduciary duties as trustees. Firstly, Countrywide did not transfer complete loan mortgage documentation which impaired the noteholders to foreclose delinquent mortgages, due to which the investors suffered huge losses. Then, BNYM went for a judicial approval of the settlement under CPLR Article 77, which allows a trustee to seek a judicial endorsement of trust-related decisions, wherein, BNYM sought approval for the proposed settlement wherein the cash payment was far less than the losses investors had faced and sought for the settlement to be binding on all trust beneficiaries, successors and assigns under Article 77.

Further, BNYM further sought indemnification from Master Servicer of each trust, for costs and liabilities that arise out of certain duties that BNYM is to perform for the trusts. Under the proposed settlement BNYM negotiated itself an indemnity from Countrywide that was beyond the scope of indemnity under the PSAs, as BNYM asked for indemnity from any liability arising from the negotiation and implementation of the terms of the settlement apart from those under the PSA; the very party that is adverse to the interest of beneficiaries of the trust.

While, the trustees should have negotiated the settlement in the best interest of the noteholders, the very role of trustees’ stands breached and impaired as the trustees themselves were benefiting from the proposed settlement.

In an earlier case of Kemp vs. Countrywide, United States Bankruptcy Court, District of New Jersey, (Case No.  08-18700- JHW), failure to maintain adequate documentation by Countrywide was well established. While, this has made investors frown at the role of the trustees in such issuances, there have been series of cases filed against originators by trustees, demanding them to buy back loans which were misrepresented, the mortgage foreclosure process being shoddy, legal documents forged and so on. Wells Fargo has recently sued EMC Mortgages LLC, demanding them to buy back the 800 mortgages that breached the representation made about them. Wells Fargo had filed a complaint in the Delware Chancery Court in January, 2011, under pressure from a Bear Sterns MBS noteholder, holding 42% of the certificates in trust. Further, U.S Bank had earlier sued Bank of America, acting as a securitization trustee, demanding to repurchase the deficient loan underlying Greenwich Capital’s MBS offering with the Minnesota Federal Court. Another suit was filed against Bank of America by Western and Southern Life Insurance Co. for misrepresentation of mortgage backed securities that the firm sold to the insurance company in August, 2011.

[Reported by: Nidhi Bothra]

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