FDIC Sues BONY in its Capacity as Trustee

By now, everyone knows that that many of the Residential Backed Mortgage Securities (RMBS) packaged and sold in the run up to the 2007 financial crisis were junk. There have been many suits against the issuers of these securities. The results have been mixed. Recently, however, the FDIC has set its sites on the banks that acted as trustees for these mortgage trusts.

Earlier this year the FDIC sued Bank of New York Melon (BONY) over RMBS securities bought by Guaranty Bank. BONY wasn’t the issuer of the mortgage bonds, however. They were the trustees. The FDIC lawsuit against BONY follows a similar claim brought by the agency against U.S. Bancorp.

Countrywide Financial and Bear Stearns issued the mortgage backed securities involved in the case.

Guaranty Bank went under in August of 2009, one of the many casualties of the financial crisis. The FDIC sold off its assets to BBVA, a Spanish bank but was stuck with the underperforming mortgage bonds. Those bonds were ultimately sold off in 2010 but at a loss of hundreds of millions of dollars. In an effort to recoup its losses, the FDIC sued the trustees.

Trustees have a duty to protect the investors (bondholders), something that the FDIC says Bank of New York failed to do. The FDIC says that both BONY and US Bancorp failed to check to determine if the loans in the trust were properly documented or if they were defective. According to the lawsuit, "While BNY Mellon stood idly for years, the sponsors kept defective mortgage loans in the covered trusts, servicers reaped excessive fees for servicing the defaulted loans from the covered trusts, and plaintiff was left to suffer enormous losses."

Banks don’t generally comment on pending lawsuits and BONY is no exception.

As lender liability lawyers, we have seen in our own cases where banks shirk their duties as trustee. In several cases involving real estate developer Carlton Cabot, now under indictment, the bank trustees including U.S. Bank stood by idly and did nothing to enforce cash management or lock bock agreements. That allowed Cabot to steal money from the rent monies received from commercial tenants, all to the detriment of the owners and investors in Cabot’s projects.

In the last few years, the FDIC has begun going after banks involved with residential mortgage backed securities sold to failed banks. When a bank fails, the FDIC often transfers the bank’s assets to another solvent bank but remains stuck with the troubled and worthless assets.

Both the U.S. Bancorp and BONY suits are in their infancy. We will follow both cases closely, however.

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Few small and medium sized law firms are willing or able to prosecute lender liability cases, especially cases brought against banks in their capacity as servicer or trustee. These cases are often relegated to the mega-size law firms that are either very expensive or defense oriented or both. We are unique two boutique law firms willing to take national cases against banks.

For more information, contact attorney Brian Mahany at [hidden email] or by telephone at (414) 704-6731 (direct). Callers may also contact attorney Chris Katers at [hidden email] or by telephone at 414-777-0778

MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers

Related topics: RMBS (3)