Lawyers have opened a new front in mortgage securities litigation by suing BNY Mellon and U.S. Bank over an alleged failure to properly handle the storage and recordkeeping of mortgage documents.
But observers and participants in more established mortgage repurchase litigation question whether suing over trust and document custody errors is a promising fight.
The suits, filed in the U.S District Court for the Southern District of New York, allege that the banks failed in their duties as trustees and custodians to properly secure mortgage notes and other files, review them and track mortgage assignments. The suits also allege that trust banks may be reluctant to allow investor actions against banks because they wish to hide defects in their own recordkeeping.
"BNY Mellon…systematically disregarded its contractual and fiduciary duties to take physical possession of the key documents in the mortgage loan files," Scott & Scott attorneys wrote in Retirement Board Of The Policemen's Annuity and Benefit Fund Of The City Of Chicago v. The Bank of New York Mellon. The policeman's fund was an investor in mortgage securities and in August filed its suit; it has not previously been the subject of news reports. Scott & Scott did not return calls seeking comment.
Bank of New York Mellon did not respond to a request for comment on Friday.
In filing its suits, the plaintiffs' firm is seeking class action status against both BNY Mellon and U.S. Bank, as well as unspecified damages for losses due to alleged failures in gathering and keeping records. While the agreements creating mortgage security trusts often require the trustee's approval before investors can pursue legal action, the Scott & Scott briefs argue that plaintiffs are free to sue over custodial matters.
"To the extent that U.S. Bank failed to institute suit against [loan originators and servicers] because such a suit would expose it to liability for its own misconduct…U.S. Bank violated its duty of loyalty as well as due care," Scott & Scott's attorneys wrote in Oklahoma Police Pension and Retirement Fund vs. U.S. Bank, which was filed Nov. 9.
U.S. Bank, a unit of U.S. Bancorp, said in a written statement: "We strongly believe we fulfilled our obligations as trustee, and we intend to vigorously defend ourselves against this lawsuit."
In the BNY Mellon suit, the plaintiffs firm appears to be basing its complaint on doubts that are already in the public record about the integrity of documents involved in securitizations. Much will be familiar to people who have followed this issue. That includes: citations of work by Adam Levitin, a Georgetown University professor who argues that a failure to comply with the technical requirements of securitizations could render trusts invalid; allegations of botched recordkeeping by the New York Attorney General's office; and testimony by Linda DeMartini, a former Countrywide Financial employee who told a New Jersey court that the lender did not regularly transfer loan files to trusts.
Seeking to hold the trustee responsible for the poor performance of MBS is an approach that plaintiffs attorneys have declined to take previously, given the largely passive role trustees play in administering mortgage securities trusts. Making the case would require plaintiffs attorneys to show that missing documentation was the fault of the trustee or custodian, and that the gaps resulted in an inability to foreclose on properties.
"I don't see that being a frequently repeated situation or a very high-dollar situation," says David Grais of Grais & Ellsworth, who has filed numerous mortgage securities suits on behalf of Federal Home Loan Banks and private investors.
If the plaintiffs are able to demonstrate the trust banks routinely failed to keep track of foundational mortgage documents, however, that would further complicate the process of settling the foreclosure mess nationwide.
Industry attorneys questioned that premise.
"If there really was a serious problem, I think we would already know," says Jeffrey Naimon, an attorney for Buckley Sandler who defends servicers.
Though the process of retrieving a mortgage note for court proceedings can be surprisingly lengthy — "you thought it should be like falling off a log, but it turns out that sometimes it isn't," Naimon said — the paperwork almost invariably shows up. Foreclosure defense attorneys have generally reported the same.
"You thought it [retrieving paperwork] should be like falling off a log, but it turns out it isn't," Naimon said.