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Financial Services Law Insights and Observations

Court stays fee action against bank during pendency of RMBS action

Courts RMBS Indemnity Claims Mortgages NCUA

Courts

On November 30, the U.S. District Court for the Southern District of New York agreed to stay proceedings covering an investment company’s challenge to a bank’s practice of billing the legal fees incurred in defending a residential mortgage-backed securities (RMBS) trusts lawsuit to the RMBS trusts. According to the opinion, in 2014, an investment company filed a lawsuit against the national bank alleging breach of contract and other common law duties in the bank’s role as trustee for multiple RMBS trusts. In 2017, the investment company filed a separate lawsuit in the same court, challenging the bank’s practice of billing the RMBS trusts for the legal fees incurred by defending the original lawsuit. The two lawsuits were consolidated and the bank moved to dismiss the second lawsuit or stay the proceedings during the pendency of the original lawsuit. Upon review, the court agreed to stay the proceedings, noting the “claims at issue in the fees complaint may well turn on determinations made in the underlying suit.” The investment company argued that while the trusts’ agreements contain fee indemnity clauses, the clauses are not applicable to the bank’s alleged “willful misfeasance, bad faith, or gross negligence.” The court noted that whether the bank acted grossly negligent in its duties as trustee for the RMBS trusts is a “central factual question” in the original lawsuit and therefore, staying the proceedings “could avoid a possible waste of both the parties’ and the court’s resources.”

Additionally, in the same order, the court denied NCUA’s request to intervene in the fees action, holding the agency did not establish it could meet the higher burden of demonstrating inadequate representation by the investment company, which shares the same interests as NCUA.

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