In yet another of the many cases against Residential Mortgage Backed Securities (RMBS) trustees for their alleged responsibility for losses suffered by investors, Judge Jesse Furman of the Southern District of New York precluded inquiry into the conduct of the trustee where a bankruptcy plan intervened. The plaintiffs were caught in a bind. Alleging misfeasance by the trustee prior to the commencement of the bankruptcy case would have been barred by the statute of limitations. Allegations of misfeasance subsequent to the commencement of the case were swept away by confirmation of the plan. The plaintiffs were accordingly left without a remedy, with the court not even addressing the merits of their claims.
Background
Fixed Income Shares: Series M, et al. v. Citibank N.A. (S.D.N.Y. March 2018) was an action brought by a number of funds against Citibank N.A. as trustee of a series of RMBS trusts. Following earlier dismissals, only two plaintiffs were left standing in the case. The dramatis personae and dramatis documenta were the usual for an RMBS case. American Home Mortgage Acceptance Inc. was the seller of the mortgages, and American Home Mortgage Servicing Inc. was the servicer. The trust was American Home Mortgage Investment Trust 2004-3, a Delaware statutory trust (AHM 2004-3 Trust). The main agreements consisted of a mortgage loan purchase agreement, an indenture and a servicing agreement.
The RMBS were issued in 2004. In August 2007, the promoter and the servicer filed for bankruptcy in Delaware. The bankruptcy court established Jan. 11, 2008, as the bar date for filing proofs of claim, and the trustee filed a proof of claim against each of the debtors’ estates prior to the bar date.
The bankruptcy court subsequently approved a liquidation plan with a formula that estimated claims for breach of representations and warranties. In March 2010, the bankruptcy court approved a stipulation resolving the trustee’s claims, which allowed no recovery for the representation and warranty claims and $65,000 for servicing-related claims. The trustee notified the noteholders under the AHM 2004-3 Trust of the court’s order and informed the noteholders that Citibank did not intend to take any further action in the bankruptcy proceeding “unless [it was] otherwise instructed and directed.” Citibank did not receive any instruction or direction from the noteholders.
Four years later, in November 2014, the plaintiffs filed suit against Citibank in its capacity as trustee. The claims that were the subject of the court’s decision were, first, that the trustee failed to act on representation and warranty breaches with respect to the defective mortgages following their discovery by Citibank. Second, the plaintiffs alleged, Citibank had knowledge of servicer breaches but failed to provide notice of the breaches to the investors, and also failed to act prudently to protect the investor interests following the occurrence of the events of default under the...
