Trustee Bound by Obligation to Exercise a Trust’s Rights

Here is a recent decision by Justice Cohen in an RMBS trustee action. There is lots of good stuff in here, in particular the recognition that the duty to hold the trust fund for the benefit of certificateholders includes the duty to enforce the trust’s contractual rights, an argument some SDNY judges have (erroneously in my view) rejected. While the immediate implications of this are on RMBS trustee litigations, this decision could end up being more broadly applied to other financial structures involving indenture trustees.

Under Section 2.06 of the HEMT 2005-5 PSA, US Bank “agree[d] to hold the Trust Fund and exercise the rights referred to above for the benefit of all present and future” certificateholders (Fitzgerald Aff. Ex. 9 [NYSCEF 66] ). Undisputedly, the “rights referred to above” include the right to enforce the repurchase protocol in Section 2.03. And in “agree[ing] to . . . exercise the rights referred to above,” US Bank assumed an affirmative duty to enforce the repurchase obligation (see Royal Park Invs. SA/NV v Deutsche Bank Nat’l Tr. Co., 2016 WL 439020, at *4 [SD NY Feb. 3, 2016] [analyzing substantively identical provision and holding that it imposed obligation upon RMBS trustee to enforce the repurchase obligations] ). While the PSA forbids “implied covenants or obligations” to be “read into [the PSA] against the Trustee” (HEMT 2005-5 PSA, § 8.01 [i] [NYSCEF 83] ), Section 2.06 evinces an express obligation on US Bank’s part to exercise certain rights (see id. [“[T]he duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement . . . .”] ).

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