This month, we discuss Retirement Board v. The Bank of New York Mellon,1 in which the U.S. Court of Appeals for the Second Circuit resolved two matters relating to residential mortgage backed securities (RMBS) on which district courts have been divided. In a decision written by Judge Debra A. Livingston and joined by Judge Dennis Jacobs and Judge José A. Cabranes, the court held that a named plaintiff in a putative class action does not have standing to assert breach-of-duty claims against an RMBS trustee on behalf of absent class members who had invested in trusts other than those in which the named plaintiff had invested.

The court also addressed the scope of the Trust Indenture Act of 1939 (TIA). Where applicable, the TIA obligates a trustee to disclose information relating to the securities underlying the trust, among other things. As a matter of first impression, the court held that the TIA does not apply to RMBS trusts governed by pooling and servicing agreements (PSAs). Accordingly, the court affirmed in part and reversed in part the district court order, remanding the case for further proceedings consistent with its opinion.

Background

Retirement Board concerned 530 RMBS trusts created between 2004 and 2008. Most of the trusts were governed by PSAs and organized under New York law. In general, RMBS trusts are organized to receive the stream of payments generated by mortgage loans and to redistribute the revenue to investors or “certificateholders.” Mortgage lenders sell pools of mortgages into the trust, and investors then purchase certificates representing the right to a share of the revenue. These certificates are often divided into different classes or tranches. The trustee typically hires a mortgage servicer to oversee and administer the mortgages.

The Bank of New York Mellon (BNYM) acts as trustee for all 530 RMBS trusts at issue in this case. Countrywide Home Loans and its affiliates (collectively, “Countrywide”) originated all of the underlying mortgage loans, sold those loans to the trusts, and acted as the mortgage servicer for the trust. In the process, Countrywide made a number of representations and warranties about the loans' characteristics, credit quality, and underwriting. The PSAs required BNYM both to ensure that the loans were properly documented and to provide notice to Countrywide if it became aware of a material breach. Upon notice, Countrywide was obligated either to cure the defect or to repurchase the defective loan.