Appellate Circuit

Rewind 2008: As Phoenix Explained to SCOTUS in 2022, Securitization is a Conflicting Mess

Assignment of the claims back to Petitioners was the only solution to avoid the untenable position of an Indenture Trustee suing itself.


MAR 21, 2022 | REPUBLISHED BY LIT: MAR 22, 2022


Factual Background.

Overview of residential mortgage- backed securities.

A residential mortgage-backed security (RMBS) is the product of a multi-step process that begins when a lender or multiple lenders sells mortgages to another financial institution, referred to as a Sponsor or Seller.

(App.10-11; see also Commerzbank AG v. U.S. Bank Nat’l Ass’n, 277 F. Supp. 3d 483, 488 (S.D.N.Y. 2017)

(cited to at Appellants’ Opening Brief 8 n.3 for back- ground).)

The Sponsor then pools and transfers these bundled mortgages to a trust, where they are priori- tized into tranches reflecting different levels of risk and reward.

(App.11; see also Commerzbank, 277 3d at 488.)

The trust then issues certificates representing those tranches to underwriters, who market and sell the  certificates  to  investors.  Commerzbank,  277 Supp. 3d at 488. Because the certificates are secured by the mortgages held in trust, their expected rate of return depends on the performance of the mortgages and on the mortgagors’ ability to repay their home loans. Id.

Petitioners acquire and then re-securitize their RMBS Certificates.

The facts here stem from an additional layer to this normal RMBS process.

Petitioners are a group of investment vehicles that purchased RMBS Certificates in the manner discussed above.

(App.10-11; A2689, 2732.)

The trustees for the trusts that issued those certificates are

(1) Respondent U.S. Bank National Association (USB)


(2) Bank of America, N.A. (BANA), which settled the case prior to the resolution of the summary judgment motions that instigated the underlying appeal.

(App.10-11; A2796.)

Petitioners, however, then used those RMBS Certificates as collateral to issue notes to other investors— a process referred to as a collateralized debt obligation (CDO). (App.10-11.)

As part of the issuance of those CDO notes, Petitioners each entered into an CDO in- denture with an Indenture Trustee. (Id.)

Each CDO indenture included a limited grant of the RMBS Certificates to the Indenture Trustees. The indenture agreements were clear that the transfer was “for the benefit and security” of the parties that held Petitioners’ CDO notes and that while the Indenture Trustees received “all of [Petitioners’] rights, title and interest in, to and under” the “Collateral”—the RMBS Certificates—“[s]uch Grants are made, however, to the Trustee to hold in trust, to secure the Notes.”

(E.g., A1933-34.)

At the end of the CDO’s term, the RMBS Certificates revert back to the Petitioners. (E.g., A2089 10.9(e).)2

2 Each of the indenture agreements is substantially similar in these regards. (See granting clauses at A648-49, 894-95, 1145- 46, 1395-96, 1624-25, 2246-47; reversion clauses at A788, 1034, 1325, 1552, 1762, 2398.)

The indentures provide that Petitioners must pay principal and interest to their noteholders and would be unable to do so without ongoing proceeds from the RMBS Certificates.

(A2040 § 7.1; see also A749, 995, 1275, 1515, 1724, 2351.)

Accordingly, a “Payment Account”—funded by the proceeds received from the RMBS Certificates—was created “on behalf of the” Petitioners.

(A2041 § 7.3, 2077-78 § 10.3.)

Additionally, the Petitioners owed many performance obligations to their note holders regarding preservation of the collateral—the RMBS Certificates—that secured the loans.3 

The Indenture Trustees’ conflict of interest.

In 2014, RMBS Certificate holders nationwide in- itiated a wave of litigation against the trustees of their RMBS Certificates because those trustees allegedly routinely breached their obligations; for instance, by allowing the expiration of statute of limitations against Sellers.

(A2942-50 ¶¶ 100-108.)

USB and BANA—the RMBS trustees here—were no exception to this general trend among RMBS trustees. (Id.)

Nor were the other RMBS trustees that held the other

3 Petitioners had the obligations to

(1) take action to “secure the rights and remedies of the” noteholders;

(2) “enforce [their] rights under or with respect to . . . the Collateral” (i.e., the RMBS Certificates);

(3) “preserve and defend title to the Collateral”;

(4) retain an agent to calculate payments to noteholders and related monthly reports and compliance statements.

(E.g., A2044-45, 2050.)

Proceeds received in connection with the RMBS Certificates were therefore paid to Petitioners’ agent to ensure that Petitioners’ obligations were met.

(A2092-93 § 11.1(a)(i)(A)-(B).)

RMBS Certificates that Petitioners had purchased, which are the subject of separate litigation.

However, the Indenture Trustees who held Peti- tioners’ RMBS Certificates would not bring such claims against USB and the other RMBS trustees.

Even if Indenture Trustees decided to file such a suit, Petitioners feared that they would not zealously prosecute the suit.


Because the Indenture Trustees suffered from an irreconcilable, “manifest, disabling conflict of interest.”

(A511, 537, 556.)

Noting that conflict of interest, Petitioner Phoenix Light—as the controlling note- holder of the other Petitioners—demanded that the Indenture Trustees “step aside” and assign to the Petitioners any right to bring the relevant claims (id.):

First, the Indenture Trustees were in an irreconcilable conflict of interest because the Indenture Trustees were defendants in suits asserting claims against them that were virtually identical to the claims Petitioners needed them to assert against Respondents.

In addition to being the Indenture Trustees here, BNY Mellon, Deutsche Bank and Wells Fargo regularly serve as RMBS trustees that issue RMBS Certificates.

In that latter capacity, they had “already” been named as “defendant[s] in several lawsuits asserting the very same [types of ] claims” as Petitioners believed should be filed here.

(A512, 538, 557.)

In those cases, BNY Mellon, Deutsche Bank and Wells Fargo had al- ready defended themselves (or would defend themselves) by taking “positions directly at odds with the [Petitioners’] claims against the RMBS Trustees,” including positions regarding the scope of an RMBS trustee-defendant’s duty of care and on applicability of various statutes. (Id.)

Having already asserted the op- posite view of the law to defend themselves, Indenture Trustees could not now vigorously litigate the opposite, pro-RMBS Certificate Holder views of the law—they were in a positional conflict of interest that prevented them from championing the legal theory that would protect Petitioners’ interests and the interests of Petitioners’ noteholders.

If the Indenture Trustees attempted to do so, a court would rightly respond that the Indenture Trustees were speaking out of both sides of their mouth.

What’s more, the Indenture Trustees manifestly could not be trusted to vigorously take litigation positions as plaintiffs in the present case that would undoubtedly be used against them in the myriad of other cases in which they were named as defendants.

Second, the Indenture Trustees were in the most direct conflict possible—one that would put them on both sides of a lawsuit.

In addition to seeking assignment of the claims against USB and BANA, Petitioners demanded that the Indenture Trustees assign other, similar claims to them. (Id.)

Among those were cases in which the Indenture Trustees (BNY Mellon, Wells Fargo, and Deutsche Bank) were the RMBS Trustees that would be named as defendants (id.)—claims that Petitioners have filed in a separate suit.

Obviously, those entitles could not and would not sue themselves.

They could not and would not act as both plaintiffs (in their capacity as Indenture Trustees) and as defendants (in their capacity as RMBS Trustees).

Assignment of the claims back to Petitioners was the only solution to avoid “the untenable position of ” an Indenture Trustee suing itself.

Despite Petitioners’ request that the Indenture Trustees assign back these claims, the Indenture Trustees did not take the requested action at that time.

Petitioners’ Complaint And The 2015 Dismissal.

Seeing no other avenue to protect their interest in the RMBS Certificates and the interests of their note-holders who relied on those certificates as security, Petitioners brought suit against USB and BANA despite the Indenture Trustee’s failure to assign their rights of suit.


The complaint asserted claims worth “hundreds of millions of dollars”

—arising out of USB’s and BANA’s breaches as trustee of the RMBS Certificates, including claims for breach of fiduciary duty, breach of contract, negligence, and violations of statutes.

(A337-47, 493, 2906, 2962.)

LIT leaves the transcription at this point (y’all can continue by reading the PDF version above), as the key facts have been presented – which SCOTUS, and just about every court in the country wish to bury (as Phoenix have been involved in multiple lawsuits about this embarrassing situation). When Wall St. concocted their fraud on the people, they cocked up.

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Rewind 2008: As Phoenix Explained to SCOTUS in 2022, Securitization is a Conflicting Mess
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