U.S. District Judge William H. Pauley, III for the U.S. District Court for the Southern District of New York first decided that the pension plan plaintiffs lack standing to assert claims regarding the trusts referenced in the complaint in which they never invested. He dismissed those claims with prejudice, and said plaintiffs may pursue claims relating only to the 26 trusts in which they allege current or former holdings.  

Plaintiffs hold notes issued by a single Delaware trust. (Compl. Ex. B.) The court rejected BNY Mellon’s challenge to the pension funds’ standing to sue regarding notes issued by a single Delaware trust because the trust is fully guaranteed—or “wrapped”—by a mono line insurer, and funds do not allege that the insurer failed to perform. The court noted that for “fully wrapped” trusts, “the risk of a litigation outcome that impairs the loans in a securitization rests solely with the insurer, not with the security holders.” BNY Mellon contended that this economic reality undermines the funds’ standing because where a “plaintiff suffered no injury, it does not have standing to pursue its TIA (Trust Indenture Act) claim.”   

According to Pauley, III, ultimately, the presence of the mono line guarantee may preclude the funds from proving any damages resulting from their ownership of notes issued by the Delaware trust. However, the pension funds contend that BNY Mellon’s alleged conduct caused the value of their notes to drop, and they claim to have sold notes issued by the Delaware trust at a significant loss. So, the court found the funds alleged damages beyond those covered by the guarantee.   

The court also rejected BNY Mellon’s argument that the TIA does not apply to the certificates issued by the 25 New York trusts mentioned in the suit, because the TIA covers only debt securities, and does not apply to equity securities. BNY Mellon said the New York trusts’ certificates were equity securities. According to the opinion, for example, the Delaware Indenture provides that “[a]ll Notes … shall be valid obligations of the Issuer, evidencing the same debt[.]” In contrast, the pooling and servicing agreements (PSAs) governing the New York trusts clarify that certificates “represent[] a beneficial ownership interest in the Trust Fund created by the Agreement.” Similarly, whereas the Delaware Indenture defines the issuer’s failure to pay interest or principal to noteholders as an “event of default,” the New York PSAs do not. BNY Mellon asserted that these differences are dispositive because, by definition, a certificate that evidences ownership must be equity, not debt. The bank also contended that the PSAs’ lack of language regarding payment default or acceleration proves that the New York certificates are equity.  

(Cont...)

However, Pauley, III noted that despite BNY Mellon’s arguments, many courts suggest that certificates similar to those issued by the New York trusts are debt, not equity. To begin with, "as many courts have observed, pass-through certificates are structurally similar in form and function to bonds issued under an indenture," the opinion said. Consistent with the case law and the IRS factors, the New York certificates resemble debt, the court found.   

Finally, Pauley, III dismissed the pension funds’ claim that BNY Mellon violated § 315(a) of the TIA by failing to examine the evidence provided by the master servicer, Countrywide, certifying compliance with the PSAs and sale and servicing agreement (SSA). The court pointed out that § 315(a) does not require a trustee to examine all evidence it might receive. Rather, the trustee's duty is limited to examining evidence furnished under § 77nnn, which requires "[e]ach person who ... is or is to be an obligor" to provide certain information to the trustee. BNY Mellon contended that the "examine the evidence" provision does not apply here because Countrywide and its successor Bank of America are not "obligors," and because its duty to examine evidence extends only to form, not substance. The pension funds offered no arguments to this.  

The pension funds claimed that Countrywide breached its obligations as master servicer by failing "to provide mortgage loan files in their possession, to cure defects in the mortgage loan files and/or to substitute the defective loans with conforming loans." They further alleged that BNY Mellon did nothing to remedy the inadequate servicing of the mortgages undergirding the trusts. Specifically, they contend that the bank failed to take possession of the loan files, review the loan files adequately and require Countrywide and Bank of America to cure, substitute, or repurchase the defective loans.  

Rather, on June 28, 2011, BNY Mellon entered into an agreement with Countrywide and Bank of America to settle all potential claims belonging to the trusts for which it is trustee for $8.5 billion. The funds contend that, regardless of the settlement's fairness, BNY Mellon caused them significant losses. They alleged that the value of their mortgage-backed securities plummeted as a consequence of the underwriting defects and inadequate servicing of the underlying mortgages.