Client Alert: Trustee Not Liable for RMBS Losses

June 13, 2019

In a non-precedential ruling, a Third Circuit appeals panel rejected the appeal by IKB International SA and IKB International A.G. (together, “IKB”) of the dismissal of their action against Wilmington Trust Company (“WTC”) in connection with losses on residential mortgage-backed securities investments issued by fifteen securitization trusts for which WTC acted as owner trustee.

In their appeal, IKB argued, among other things, that WTC’s obligation, as owner trustee, to administer the trust created a supervisory and overarching duty to protect the trust and that WTC should be liable for its failure to compel other actors (e.g., the servicer) to carry out their obligations under the trust’s governing agreements.

However, the panel rejected IKB’s argument that there should be implied duties read into the agreement against the owner trustee and noted that WTC’s role, as owner trustee, was limited and “primarily ministerial” with a defined set of duties. The panel further stated that the related “Trust Agreement restricts WTC’s duties, compelling it to act in just two instances (1) when obligated to do so by a term of the Trust Agreement, and (2) when instructed to do so and indemnified by the certificate-holders. Otherwise, Wilmington owes no duty to act.”

Ultimately, the panel determined that WTC, as owner trustee, did not breach its obligations as alleged by the plaintiffs because the express terms of each trust’s governing documents imposed no such obligations on the owner trustee and affirmed the dismissal of Plaintiffs’ complaint. In making its determination, the panel referenced numerous traditional trustee protections and limitations of liability, which underscores the importance of unambiguous and robust trustee protections in trust agreements and related transaction documents.

See IKB International SA et al. v. Wilmington Trust Co. et al, case number 18-2312, in the U.S Court of Appeals for the Third Circuit for more information.