Here are some recent RMBS-related legal developments.
First, the Court of Appeals held that the statute of limitations for a claim brought by a trustee is based on where the trustee is located, not where the trust was formed. For that reason, Deutsche Bank Trust Co., which is located in California, had only four years (California’s statute of limitations) to bring put-back actions on behalf of New York common law trusts, not New York’s six years. Judge Wilson’s dissent is long but worth reading.
Second, in US Bank v. UBS, the First Department affirmed Justice Friedman’s dismissal of put-back claims that initially were brought by a certificateholder and where the trustee sought to replace the certificateholder as plaintiff after the statute of limitations had expired. Because the certificateholder lacked standing to sue, there were no valid claims to which that trustee’s late-filed claims could relate back and, without relation back, the trustee’s claims were time-barred.
Third, in Royal Park v. BoNYM, Judge Woods continued the trend in the SDNY of not allowing sampling in RMBS trustee actions. Judge Woods agreed that sampling could be appropriate in a trustee action, but rejected it in the action before him because he could not “conclude that Royal Park’s proposed sampling-related expert discovery is proportional to the needs of this case because breach rate evidence only provides substantial probative value for Royal Park’s claims if Royal Park can demonstrate that BNYM was under an obligation to conduct a investigation of the loans in each of the trusts.” With respect to the plaintiff’s post-EoD claims, Judge Woods held that the plaintiff had not “adduce[d] any evidence supporting its contention that the ‘prudent person’ standard encompasses a duty to investigate.” Judge Wood held open the possibility that the plaintiff might later present such proof and that sampling might at that point be appropriate. The suggestion that a prudent person managing a billion-dollar trust had no duty to see why the trust’s loans were defaulting at such a rate that the trust had lost hundreds of millions of dollars seems a bit much to me. The response to this opinion should be that more should be said to a court about what a prudent person should have done in this situation when requesting sampling.
And to editorialize a bit, I have not checked the trusts in this action—which likely are indenture trusts—but for PSA trusts, it is common that the trustee has a duty to investigate when there is an event of default. For example, the PSA for CSMC 2006-8 provides:
SECTION 9.02 Certain Matters Affecting the Trustee. (a) Except as otherwise provided in Section 9.01: . . . (v) prior to the occurrence of an Event of Default hereunder and after the curing or waiver of all Events of Default that may have occurred, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing so to do by Holders of Certificates evidencing greater than 50% of the Voting Rights allocated to each Class of Certificates . . . .
(Emphasis added). This provision of course means that when there is not an EoD, the trustee has no duty to investigate. But it also means that when there is an event of default, the trustee does have to investigate (at least when that is what “a prudent person” would do “in the conduct of such person’s own affairs.”