On Tuesday, two Merrill Lynch mortgage-backed securities trusts,
with original principal of more than $1 billion, filed a complaint in New York State Supreme Court against two Merrill
units and Bank of America, claiming that Merrill is responsible
for the repurchase of deficient loans underlying the trusts. The
backstory on these particular put-back claims is complicated
because the trusts have already reached settlements in the
bankruptcy of the loan originator, ResMAE Mortgage, and Merrill
asserts that it has been released from liability as a result.
But in the burgeoning arena of put-back litigation, what may be
more interesting than the specific details of this case is the
caption: The trusts themselves -- rather than U.S. Bank as MBS
trustee -- are named as plaintiffs.
The complaint, filed by Quinn Emanuel Urquhart & Sullivan,
says that the trusts are bringing claims "by" U.S. Bank but goes
on to say that the "plaintiffs are two securitization trusts
that hold and administer mortgage loans on behalf of investors
who own securities collateralized by such loans (and) seek to
enforce their contractual rights." U.S. Bank itself is not named
as a party.
This isn't the only recent put-back suit in which MBS trusts
are named as plaintiffs, instead of the trustee. Two different
Manhattan state court suits against Morgan Stanley, one brought by Grais & Ellsworth, the other by MoloLamken, are, for
instance, styled the same way as the new Merrill complaint,
naming trusts as plaintiffs instead of an MBS trustee. Morgan
Stanley doesn't seem to think that's a significant point: In its
motion to dismiss one of the put-back suits, the bank's lawyers
at Davis Polk & Wardwell address the claims as though they were
brought by U.S. Bank, the trustee.
But in a case in federal court in Manhattan, UBS's lawyers
at Skadden, Arps, Slate, Meagher & Flom are arguing that
put-back cases can't be brought by trusts, which, according to
UBS, cannot bring their own claims under either New York law or
MBS pooling and servicing agreements. I've previously talked about the UBS put-back case because an MBS investors' trade
group has moved to intervene, but the new Merrill suit, as well
as a new filing by UBS, put a spotlight on this question: Can
trusts bring claims in their own name?
The brief UBS filed Monday, asking U.S. District Judge
Harold Baer to toss the case, argues that they cannot. Trusts
are "non-juridical entities that lack the legal capacity to
sue," the filing said. Moreover, the brief cast doubt on the
trusts' assertion that they're bringing claims through U.S.
Bank, the trustee. To support that point, UBS cited a brief by
U.S. Bank that opposed an unrelated motion to intervene in the
case. "The trustee has now stated ... that it 'is not a party --
as a plaintiff, defendant, or otherwise -- to this action,'" the
UBS brief said. "Given this admission and the opacity of the
pleading regarding the trustee's role, if any, in this
litigation, the complaint should be dismissed."
U.S. Bank may have denied being a party in the case, but
when I went back to check the brief UBS quoted, it's clear that
the trustee is not disavowing the trusts' put-back suit. Indeed,
the trustee said explicitly that the trusts were acting through
U.S. Bank (as a trustee) when they filed their claims against
UBS. The trustee's brief acknowledged that trusts don't have a
legal right to sue on their own but also said, in a footnote,
that in this case, "as a technical matter, the trustee filed its
lawsuit solely in its capacity as trustee of the trusts."
This whole issue might seem like a matter of sheer semantics
or, at most, a problem that could be solved through amending
complaints to reflect that put-back suits are being filed at the
direction of MBS trustees. But that leads to another interesting
question: Are trustees concerned about their own liability if
they appear as parties in put-back captions? Remember, two New
York federal district judges have now concluded that MBS trustees can be sued by noteholders for failing to exercise
their responsibilities. The intervenors in the UBS case want to
bring such claims against U.S. Bank, so it's in the bank's
interest to be able to argue that it can't be roped into the
put-back case because it's not a party. In essence, by having
trusts sue in their own names, MBS trustees can indeed have
their cake and eat it too.
I left requests for comment with a U.S. Bank representative
and with Philippe Selendy of Quinn, who represents the trusts
suing both UBS and Merrill. Neither got back to me.
(Reporting by Alison Frankel)
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