[1]Bank of New York Mellon [2] has issued a warning to the U.S. Supreme Court [3] predicting disaster for the residential mortgage-backed securities market if the nation’s highest court overturns a Second Circuit Court ruling that the bank was not liable for losses incurred by investors as a result of defective securities, according to a report from Law360 [4].
In a filing earlier in November, BNY Mellon asked the Supreme Court not to review a decision by the Second Circuit Court of Appeals from December 2014 which found that the mortgage-backed securities in question were not protected under the 1939 Trust Indenture Act (TIA). A group of union pension funds led by the Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago asked the Second Circuit court to reverse that decision in September 2015, which overturned a district court’s decision that permitted the pension fund to sue BNY Mellon for failing to perform its duties as a trustee on 26 trusts with about $30 billion in balances.
The trusts in question contain pools of mortgages serviced by Countrywide Financial, which was acquired by Bank of America in 2008 and has since cost that bank billions of dollars in legal fees and settlements regarding its RMBS practices.
The pension funds’ lawsuit suit claims that BNY Mellon failed in its duties as trustee with the securities because it did not intervene when Countrywide failed to perform its duties as servicer, which include reviewing loan files, repurchasing bad loans, or transferring mortgage notes to BNY Mellon. The suit alleges that BNY Mellon was negligent in its duties because it did not ensure that Countrywide performed those duties.
A district judge ruled in 2012 that the pension funds would be allowed to bring claims on 26 out of 530 trusts held by BNY Mellon which amounted to an original principal balance of approximately $424 billion. Two years later, that decision was later overturned by the Second Circuit Court of Appeals.
The pension funds allege that reversing the Second Circuit Court’s decision and allowing them to sue the bank would improve the RMBS market by improving trustee oversight of the bonds, which would lift the confidence of investors. BNY Mellon disputed that claim in its brief filed with the Supreme Court earlier this month, saying that reversing that decision would force the bank to rewrite contracts worth “trillions” that were believed to be exempt from the TIA at the time they were created. BNY Mellon said in its brief that “[N]othing could be more unsettling to investors than a ruling that, many years after the fact, retroactively changed the terms of contracts governing trillions of dollars worth of investments.”