In two recent cases arising out of the RMBS meltdown of the
preceding decade, BlackRock Core Bond Portfolio v. U.S. Bank
National Association (S.D.N.Y. February 26, 2016) and
BlackRock Allocation Target Shares: Series S Portfolio v. The
Bank of New York Mellon (S.D.N.Y. March 25, 2016), courts have
confirmed that aggrieved bondholders have an implied right of
action under certain provisions of the Trust Indenture Act of 1939.
While consistent with prior case law, the recent cases serve as a
reminder that what might otherwise be garden-variety fiduciary law
claims under an indenture can morph into federal causes of action.
This note focuses on the Bank of New York Mellon case,
which provides somewhat more detailed analysis.
The Facts
In Bank of New York Mellon , the plaintiffs were a
group of investors in 260 RMBS trusts created between 2004 and 2008
and originally secured by loans valued at more than $176 billion.
The suit is a derivative action brought against Bank of New York
Mellon in its role as the trustee of those trusts. The plaintiffs
allege various claims including breach of contract, negligence and
breach of fiduciary duty; but these are all state law claims and
the plaintiffs' ability to bring suit in federal court hinged
on whether they also had a federal cause of action, namely an
implied right to sue under the TIA.
The plaintiffs alleged violations by the trustee under three
subsections of Section 315 of the TIA. Subsection (a), among other
things, provides that qualified indentures are deemed to contain a
provision (unless expressly excluded) that prior to default, an
indenture trustee is not liable except for performance of the
duties specifically set forth in the indenture, and may
conclusively rely upon certificates or opinions conforming to the
requirements of the indenture. Subsection (b) requires an indenture
trustee to provide security holders with notice of all defaults
known to the trustee within 90 days after occurrence, subject to
certain limitations. Subsection (c) provides that upon the
occurrence of default, the trustee must exercise the rights and
powers vested in it by the indenture and "use the same degree
of care and skill in their exercise, as a prudent man would
exercise or use in the circumstances in the conduct of his own
affairs."
The Court's Analysis
The court disposed of the claim under TIA Section 315(a), saying that this subsection does not impose any duties upon the trustee and simply limits the trustee's duties to those in the indenture prior to default. On the other hand, the court held that Sections 315(b) and (c) did impose affirmative obligations on the trustee. Citing to a number of recent district court decisions and the Second Circuit's older decision in Bluebird Partners, L.P. v. First Fidelity Bank, N.A. , 85 F 3d 970 (2d Cir. 1996) (citing approvingly to a 1980 case from the Third Circuit, Zeffrio v. First Pa. Banking & Tr. Co. , 623 F. 2d 290 (3d Cir. 1980)), the court remarked that the courts of the district have consistently recognized a private right of action under Section 315. Bank of New York Mellon, however, argued that the Supreme Court decisions in Stoneridge Partners, LLC v. Sci.-Atlanta , 552 U.S. 148 (2008), and Alexander v. Sandoval , 532 U.S. 275 (2001), abrogated prior case law. For example, in Stoneridge , the Supreme Court held that an implied cause of action existed "only if the underlying statute can be interpreted to disclose the intent to create one." Distinguishing Stoneridge and Sandoval , the Court emphasized that a private right of action under the TIA has been recognized for at least 35 years.
The Takeaway
The holdings in these recent decisions, and the cases that precede them, are important for two reasons. First, they provide an admission ticket to federal courts for plaintiffs suing trustees under TIA-qualified indentures. More importantly, perhaps, they underscore the heightened duties imposed upon trustees when defaults are pending under TIA-qualified indentures and the care that must be exercised by these trustees, and the professionals who represent them, in navigating the treacherous waters of defaulted debt.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.