Beth Kaswan of Scott + Scott has the fervor of a pioneer when she talks about the implications of U.S. District Judge William Pauley‘s ruling Tuesday that her client, a Chicago police officers’ pension fund, can proceed with some claims that Bank of New York Mellon violated its duty to Countrywide mortgage-backed securities investors under the federal Trust Indenture Act. “Judge Pauley is the first judge to say the Trust Indenture Act, in existence since 1939, does apply in this type of circumstance to mortgage-backed securities,” Kaswan told me Wednesday. “That means investors can sue trustees, even if they can’t cobble together 25 percent” of the voting rights in any particular trust — a prerequisite to suing under the pooling and servicing agreements governing most MBS trusts.
Kaswan, who said her firm was the first to assert the federal law against an MBS trustee, believes Pauley’s 19-page decision offers a significant new route to damages for MBS investors. The Manhattan federal judge ruled that the Chicago fund only has standing to bring claims for the trusts in which it invested, reducing the number of Countrywide MBS trusts in the case from 530 to 26. But he also said that investors in those 26 trusts can sue BNY Mellon for allegedly failing to notify certificateholders that Countrywide and Bank of America supposedly breached their obligations to the trusts and for failing to take action on those breaches.
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