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Ibanez: Trustee Liability

posted by Adam Levitin

I've gotten a bunch of questions in recent days about whether the RMBS trustees in the Ibanez case are on the hook for the screw up. The trustees (US Bank and Wells Fargo) insist that they have no possible liability.  I'm not so sure.  I think it's actually a more complex issue.

So, to recall, the dispositive factor in Ibanez was that neither securitization trust could prove that the mortgage had ever been assigned to the trust.  The reason for this was that (1) assignment in blank doesn't work in Massachusetts, (2) the mortgage doesn't follow the note in Massachusetts, and (3) the PSA couldn't be found in one case and in the other case was insufficient to act as an assignment because it wasn't executed and because the loan schedule did not sufficiently show that the mortgage was actually covered by the PSA. 

The extent of the trustee's liability is determined by the PSA, which is the document creating the trust and the trusteeship contract.  But without a PSA, what is there that limit's the trustee's liability?  Isn't the trustee just serving as a common law trustee for a common law trust?  Would it be negligent for a common law trustee not to retain a copy of the trust agreement, especially if that agreement was necessary for preservation of the trust's assets?

Now, we do have an unexecuted copy of the Larace mortgage's PSA (for ABFC Asset-Backed Certificates Series 2005-OPT1 (no one can find a copy of the Ibanez mortgage's PSA). Nothing in it indicates who, if anyone, is responsible for maintaining a true, original copy of the PSA (it actually permits multiple valid counterparts). That's not to say that the trustee isn't or shouldn't be responsible, but there's no specific duty, and section 8.01 of the PSA provides that "The Trustee...[absent a Servicer default]...undertakes to perform such duties and only such duties as are specifically set forth in this Agreement." Moreover,  Section 8.03 provides that

"The Trustee makes no representations as to the validity or sufficiency of this Agreement or of the Certificates (other than the signature and authentication of the Trustee on the Certificates) or of any Mortgage Loan or Related Document. ....

Maybe one could try and bootstrap in the PSA by reference to the signature on the certificates themselves (that attests to their authcenticity and issuance under the PSA).  If the PSA were executed, there wouldn't be a problem with its lack of execution (duh), so this language is arguably superfluous.  But maybe it provides some comfort to the trustees.  

Let's say that an executed copy could somehow be located, but that there would still be a flaw with the loan schedules that would prevent the PSA from serving as a valid assignment of the mortgages to the trust. Would that change anything?  Again, I'm not sure that there's a cut and dry case that the trustee has no liability.  Some PSA sections are in tension with each other.  (You'd think there'd be more careful drafting than this...)  For starters, there is other language is section 8.03 of the PSA would seem to indicate that the trustee has no liability.

"The Trustee makes no representations as to the validity or sufficiency of ... any Mortgage Loan or Related Document. .... The Trustee shall not at any time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Mortgage or any Mortgage Loan, or the perfection and priority of any Mortgage or the maintenance of any such perfection and priority, or for or with respect to the sufficiency of the Trust or its ability to generate the payments to be distributed to Certificateholders under this Agreement, ... the validity of the assignment of any Mortgage Loan to the Trustee or of any intervening assignment; the completeness of any Mortgage Loan;...."

So this looks good for the trustees (assuming an executed agreement). But I think there's a tension between secton 8.03 and section 8.01, which provides that:

"The Trustee, upon receipt of all resolutions, certificates,statements, opinions, reports, documents, orders or other instruments furnished to the Trustee which are specifically required to be furnished pursuant to any provision of this Agreement, shall examine them to determine whether they conform to the requirements of this Agreement; provided, however, that that the Trustee shall not be responsible for the accuracy or content of any resolution, certificate, statement, opinion, report, document, order or other instrument furnished by the Servicer, the Seller, the NIMS Insurer or the Depositor hereunder. If any such instrument is found not to conform in any material respect to the requirements of this Agreement, the Trustee shall notify the Certificateholders of such instrument in the event that the Trustee, after so requesting, does not receive a satisfactorily corrected instrument.

It's not clear if this provision covers the PSA itself. Could a trustee for a trust created by a PSA be liable for the PSA not being executed (and therefore not creating the trust)?  There's a terrible circularity here. But let's say that an executed copy can be found.  Note that the carve out for documents provided by the depositor is for accuracy and content, not for facial errors.  

    And then, perhaps scariest of all for the trustees, there's a liability catch-all:  "No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own misconduct..." 

Is failure to ensure a valid PSA and loan schedules and thus enforceable mortgages negligent?  Maybe.  Depends on the trustee's duty, of course, but I don't think US Bank and Wells Fargo should be feeling entirely comfortable about lack of liability.  

One last point:  is there anyone who can sue the trustee?  I think so.  My read of the PSA is that the collective action clause does not apply to suits against the trustee.  Section 11.03 of the PSA (again that pesky execution issue) provides that:

"No Certificateholder shall have any right by virtue of any provision 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 default and of the continuance thereof, as herein provided, and unless also the Holders of Certificates having not less than 51% of the Voting Rights shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding."

This provision clearly limit investor suits on behalf of the trust unless 51% of them want to do so and the trustee won't act.  But I don't think it requires 51% of investors to sue the trustee for negligence, etc.  If it did, the indemnification and the request that the trustee proceed in its own name would make no sense.  So, I think this means that an individual investor can sue the trustees over the screw-up in Ibanez.  We'll see if anyone actually does so, but the last thing a trustee wants is an adverse precedent on the books that increases its possible liability on existing deals, so I'd think a quiet settlement would be in order. 

[Another post is to follow about the particular loan schedule in Ibanez.]

Comments

This is solid analysis one can take to the bank.

Justice Cordy's stinging characterization of bank assignment behavior in Ibanez as "utterly careless" puts blood in the water WRT to that particular securitization portfolio, but the asymmetry in this area is that a single due diligence failure WRT a single identified mortgage does not amount to Trustee failure of due diligence for the entire portfolio so as to trigger shareholder causes of action for negligence.

As others have noted, shareholders will have quite a task during discovery (and having expert analysis performed on the data obtained through discovery) proving negligence as to the entire portfolio, not merely anecdotal failures identified by individual homeowners and their attorneys. Viewing Ibanez in the most narrow sense, portfolios containing an abundance of Massachusetts mortgages will be a likely starting point for any shareholder litigation.

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