Second Circuit Holds RMBS-Issued Certificates Are Exempt From The TIA

On December 23, 2014, the United States Court of Appeals for the Second Circuit issued an opinion on an issue of first impression, namely the scope of § 304(a)(2) of the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa-77aaaa (the "TIA"), and its application to certificates issued by trusts under pooling and servicing agreements ("PSAs"). See Ret. Bd. of Policemen's Annuity & Benefit Fund v. Bank of N.Y. Mellon, Nos. 13-1776-cv, 13-1777-cv (2d Cir. Dec. 23, 2014).

The United States District Court for the Southern District of New York (Judge William H. Pauley, III) previously granted in part and denied in part Bank of New York Mellon's motion to dismiss claims relating to the purchase of certificates from certain residential mortgage-backed securities ("RMBS") trusts. See Ret. Bd. of Policemen's Annuity & Benefit Fund v. Bank of N.Y. Mellon, 914 F. Supp. 2d 422 (S.D.N.Y. 2012). The district court held that the TIA applied to RMBS trusts governed by PSAs. The district court also held that the plaintiffs lacked "class standing," or standing to assert claims related to RMBS trusts in which they did not invest, since such claims do not raise "the same set of concerns" as the plaintiffs' own claims. Plaintiffs appealed the district court's ruling on class standing and defendant Bank of New York Mellon (BNYM) appealed the district court's holding on the application of the TIA.

Noting that RMBS trusts have "become a familiar subject of litigation" in the Second Circuit, the Second Circuit affirmed the district court's denial of class standing. The Court of Appeals held that the plaintiffs lack standing to assert claims against BNYM, the RMBS trustee, related to trusts in which the plaintiffs did not invest because such claims do not "implicate[] the same set of concerns" as the named plaintiffs' own claims. The Court of Appeals focused on the fact that the specific terms and parties in each RMBS trust were not identical and would need to be reviewed in each and every case thus making class standing inappropriate.

With regard to the application of the TIA to trusts governed by PSAs, the Second Circuit noted that this issue has generated conflicting decisions from district courts in the Southern District of New York. The Court then explained that the TIA applies only to certain kinds of instruments, namely "only instruments that do not fall within at least one" of the TIA's exemptions. In addressing the exemptions, the Second Circuit held that the...