On June 15, 2023, the Court of Appeals issued a decision in IKB Intl., S.A. v. Wells Fargo Bank, N.A., 2023 NY Slip Op. 03302, holding that a no-action clause cannot bar a claim against an RMBS trustee, explaining:
Standard no-action clauses in trust agreements provide that a shareholder must satisfy certain requirements before bringing a lawsuit on behalf of the shareholders, including giving a trustee an opportunity to bring a lawsuit on behalf of the trust. The specific clause at issue is found in section 10.08 of the governing agreements and provides that
No Certificateholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of an Event of Default and of the continuance thereof, as herein provided, and unless the Holders of Certificates evidencing not less than 25% of the Voting Rights evidenced by the Certificates shall also have made written request to the Trustee to institute such action, suit or proceeding . . . .
Supreme Court rejected defendants’ argument that the action was barred because plaintiffs did not comply with the notice and demand requirements of the no-action clauses, holding that compliance was excused because it would be futile to demand that the trustee commence an action against itself for breaches of the governing agreements and that once performance of the demand requirement in the no-action clause is excused, performance of the entire provision is excused, including the requirement that demand be made by 25% of the certificate holders. The Appellate Division affirmed. We agree that compliance with the no-action clause was unnecessary here.
As we have previously noted, in dicta, claims against the trustee cannot be prohibited by a no-action clause. Because a standard no-action clause vests in the trustee all of the securityholders’ rights to bring suit, making the trustee the only path to a remedy, courts have been unwilling to enforce such clauses when the trustee’s conflicts or irrationality bar that path to relief. A request by plaintiffs that the Trustee sue itself would have been futile, because, as defendants have acknowledged, the Trustee cannot not sue itself, and therefore compliance was not required.
Defendants attempt to parse the language of the clause and read the request by holders of at least 25 percent of the voting rights as a distinct, and enforceable, condition. We reject that contention. The 25 percent approval requirement is inextricably intertwined with the initial notice requirement, as well as with the trustee’s status as interested. Once a certificateholder is absolved of the requirement to provide written notice to the Trustee, separately maintaining the requirement that additional certificateholders make an equally futile demand for suit is illogical. Accordingly, failure to comply with the no-action clause does not bar suit against the Trustee.
(Internal quotations and citations omitted).
The court went on to hold, however, that a PSA provision in which the trustee agreed to exercise a trust’s rights did not create a duty on the trustee’s part to enforce those rights, explaining:
We have long held that when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. A trustee is required to do only what the governing agreements prescribe. Before an EOD has occurred, RMBS Trustees’ rights and duties are defined exclusively by the terms of the agreement. A pre-EOD Trustee’s role is essentially ministerial; a Trustee has only a duty to avoid conflicts of interest and a duty to perform ministerial tasks with due care, in addition to any express duties provided by the governing agreements.
The governing agreements here make clear this circumscribed scope of duties. Article 8 of the governing agreements states that the Trustee shall undertake to perform such duties and only such duties as are specifically set forth in this Agreement, that the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement, that the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this agreement, that no implied covenants or obligations shall be read into this Agreement against the Trustee, and that the rights of the Trustee to perform any discretionary act enumerated in this Agreement shall not be construed as a duty.
As is common in RMBS agreements, the governing agreements here contain a repurchase protocol that provides that the obligated parties (typically, the Sponsor) have a duty to either cure, substitute, or repurchase loans that contain document defects or breaches of representations and warranties. Sections 2.02 and 2.03 of the governing agreements provide that, when a document defect or breach of representations and warranties in a loan is discovered, the obligated party must first attempt to cure the defect or breach and, if the defect or breach cannot be cured, the obligated party must then remove the loan and either substitute a complying loan in its place or repurchase the loan. The governing agreements for the 25 trusts at issue here do not specify which party is to enforce this repurchase protocol.
Section 2.06 of the governing agreements, titled “Execution and Delivery of Certificates,” provides in part that the Trustee agrees to hold the Trust Fund and exercise the rights referred to above for the benefit of all present and future Holders of the Certificates and to perform the duties set forth in this Agreement according to its terms. Because the repurchase protocol of sections 2.02 and 2.03 is located above section 2.06, plaintiffs argue that the language in section 2.06 that the Trustee agrees to hold the Trust Fund and exercise the rights referred to above for the benefit of certificateholders incorporates the repurchase protocol and imposes an affirmative duty on the Trustee to enforce the protocol, and that by failing to do so the Trustee breached the agreements.
Supreme Court credited this argument, holding that Section 2.06 obligates the Trustee to enforce the repurchase protocol and reasoning that it is undisputed that repurchase rights are among the rights of the Trusts and the silence of the Governing Agreements as to the particular party that is to enforce this specific remedy on behalf of the Trusts does not relieve the Trustees of their obligation to enforce remedies pursuant to the broader charge of the Governing Agreements. The Appellate Division majority agreed, holding that Supreme Court correctly found an affirmative duty on the part of the Trustee to enforce the repurchase obligations of other parties because the relevant language imposed an express duty on the trustees to enforce the repurchase protocol for the benefit of investors. The dissenting Justices disagreed with the majority’s holding creating an affirmative duty not found in the agreements and would have held that the agreements do not state that the trustee is under a pre-EOD affirmative duty to enforce the seller’s repurchase obligations.
We agree with defendants and the dissent below that the relevant language does not impose an affirmative duty on the part of the Trustee to enforce repurchase obligations, but instead explains that the Trustee must act for the benefit of certificateholders when the Trustee is exercising the rights described in section 2.06.
First, the relevant provision addresses the larger role of the Trustee with respect to certificateholders, and the preceding sentences speak to the Trustee’s acknowledgement that it has executed and delivered the Certificates in authorized denominations evidencing directly or indirectly the entire ownership of the Trust Fund. That is not where one would expect to find an enforcement mechanism for the repurchase protocol required of third parties that is outlined several sections above.
Moreover, a right is not a duty. The disputed language does not transform the discretionary nature of the Trustee’s ability to exercise rights into a duty to do so. As the governing agreements specifically provide, the rights of the Trustee to perform any discretionary act enumerated in this Agreement shall not be construed as a duty.
Reading the challenged language to impose an implicit duty would require us to disregard the numerous contractual provisions expressly limiting the Trustee’s duties to only such duties as are specifically set forth in this Agreement and prohibiting the imposition of implied duties. Assumption of an affirmative duty to enforce repurchase obligations based on language referencing the exercise of rights is inconsistent with each one of these provisions.
Those provisions in the governing agreements that do impose an express duty on parties, including the Trustee, use explicit language and provide details regarding the extent of the parties’ obligations. Comparing the exercise the rights referred to above language with the mandatory language found throughout the governing agreements further demonstrates that section 2.06 was not intended to transform discretionary rights into affirmative duties. For example, the repurchase protocol itself advises that the obligated party shall cure the breach or repurchase the loan; section 2.01 (b) discusses the steps a Trustee shall take with respect to the receipt of required documents; and section 3.06 (e) provides that the Trustee shall establish and maintain the certificate account.
. . .
The argument to the contrary, that the inclusion of this language in some agreements but not in others is belt and suspender language that is the product of being added to a form agreement that was duped out as part of the deal documents in some cases but not others, would require us to disregard the plain language of the contracts and resort to unsupported speculation about the drafting process. Another court reasoned, in finding a duty to enforce in the language of section 2.05, that the rights referred to above language must incorporate the rights articulated in the repurchase protocol, and so defendant has an obligation to exercise its rights to enforce the substitution and repurchasing remedies. We do not find this analysis in any way persuasive.
Accordingly, we hold that the “rights referred to above” language does not impose an affirmative duty on the Trustee to enforce repurchase rights. This result adheres to the language and structure of the contract and is consistent with the role of the Trustee prior to an EOD. Accordingly, plaintiffs’ claims arising out of the pre-EOD repurchase enforcement claims for these 25 Trusts should be dismissed.
(Internal quotations and citations omitted).
Chief Judge Wilson’s dissent pointed out what we view as significant flaws in the majority’s reasoning, including the following:
[T]he majority’s interpretation of the central contractual provision, Section 2.06, is contrary to its plain language and rests on an unsupportable distinction. According to the majority, when a contract specifies that one party “shall enforce” a contractual right, that obligates the party to do so, but if the contract instead specifies that one party “agrees to enforce” a right, the party is under no obligation to do so. Furthermore, an essential element of the majority’s analysis is to compare the agreements at issue here to other agreements involving different parties. Not only is that an extremely dubious way to determine the meaning of the terms in the contracts at issue, but the reliance on the terms of other agreements is reliance on parol evidence, which the majority cannot consider unless the at-issue contracts are not clear on their face. Of course, if they are not clear on their face, the Trustee’s motion to dismiss must be denied, to allow for the development of a factual record. For the reasons stated below, I dissent and would affirm the holding of the Appellate Division denying the motion to dismiss with respect to plaintiffs’ claims predicated on a violation of Section 2.06.