National Credit Union Administration Board v. HSBC Bank US

Background

The National Credit Union Administration Board (NCUAB), acting as liquidating agent for five corporate credit unions, sued HSBC Bank US, National Association (HSBC). The suit concerns alleged damages from the credit unions’ purchase of residential mortgage-backed securities certificates from 37 trusts for which HSBC acted as trustee. NCUAB asserted claims for alleged breaches of contractual and fiduciary duties, breach of the covenant of good faith, and violations of the Streit Act and the Trust Indenture Act of 1939.

The credit unions’ certificates were later liquidated, re-securitized, and transferred to newly created NCUA Guaranteed Notes Trusts. Those trusts issued notes under an indenture agreement involving the trusts, the Bank of New York Mellon (BNYM) as indenture trustee, and NCUAB as guarantor. HSBC had previously challenged NCUAB’s ability to sue on claims related to those trusts. An earlier ruling in this case found that NCUAB might have derivative standing, meaning authority to assert claims connected to another party’s legal rights, and directed NCUAB to plead those claims derivatively.

After other rulings and an appellate decision concluded that NCUAB lacked derivative standing under the governing trust and indenture agreements, BNYM appointed Graeme W. Bush as a separate trustee. NCUAB then moved for permission to file a supplemental First Amended Complaint and to substitute Bush as plaintiff for the claims related to the NCUA Guaranteed Notes Trusts. Magistrate Judge Sarah Netburn granted that motion in an order filed May 22, 2019. HSBC objected and moved to vacate that order.

Standard of review

Judge Schofield treated the magistrate judge’s order as a ruling on a nondispositive matter. Under Federal Rule of Civil Procedure 72(a), the district court could modify or set aside the order only if it was clearly erroneous or contrary to law. The court stated that it would reach the same result even under the more searching de novo standard proposed by HSBC.

The court also applied the standards for supplementing a pleading and substituting the real party in interest. A supplemental pleading adds events occurring after the earlier pleading. A real party in interest is the person or entity legally entitled to pursue the claim. Such substitution generally should be allowed when it is merely formal and does not change the factual allegations or issues in the case.

Discussion

Timeliness. HSBC argued that NCUAB should have sought the substitution earlier because district courts had already questioned NCUAB’s derivative standing. The court upheld the finding that the motion was timely. NCUAB had previously received a favorable standing ruling in this case, and there was no rule requiring it to abandon that position merely because another district court issued a contrary, nonprecedential decision. NCUAB filed the motion fewer than two months after the Second Circuit ruled that NCUAB lacked derivative standing.

Bad faith. HSBC argued that NCUAB knew from the beginning that the separate trustee was the proper plaintiff and had deliberately concealed the problem by submitting only excerpts of the indenture agreement. The court upheld the finding that NCUAB had not acted in bad faith. Its standing theory was not frivolous because the law had been unsettled and this case had previously recognized NCUAB’s standing. The court also noted that the judge’s filing rules limited exhibits to 15 pages and required parties to include only relevant excerpts. HSBC presented no evidence sufficient to show bad faith.

Prejudice. HSBC argued that the substitution would require extensive new discovery after the parties had already conducted substantial discovery based on NCUAB’s status as plaintiff. The court upheld the finding that any additional discovery would be extremely limited. Existing discovery would remain relevant, and the parties could complete the minimal additional discovery before summary-judgment briefing. The court also relied on a similar substitution in related litigation that resulted in only minimal additional discovery.

Futility and the indenture agreement. HSBC argued that the proposed substitution would be futile because the indenture agreement did not give the separate trustee the necessary authority and did not permit BNYM to appoint a separate trustee for this lawsuit. The court rejected those arguments. It held that the agreement’s provisions allowing BNYM to retain recovery rights or terminate the separate trustee for cause did not prevent the separate trustee from being the real party in interest. The appointment documents transferred to Bush all legal title, claims, powers, rights, authorities, and duties connected with the claims at issue.

The court also agreed that the agreement allowed BNYM to appoint a separate trustee to pursue the litigation. It read together provisions concerning the separate trustee’s appointment and BNYM’s authority to institute or appear in litigation to protect the interests of noteholders and the guarantor. The court further held that the agreement allowed BNYM to consent to the separate trustee’s independent pursuit of the litigation. The court did not address whether the claims brought by the separate trustee were timely because the magistrate judge’s order did not decide that issue.

Disposition

Judge Schofield adopted the order granting leave to file a supplemental First Amended Complaint and substitute Graeme W. Bush as plaintiff for certain claims. HSBC’s objection was overruled, and HSBC’s motion to vacate was denied. NCUAB’s motion to file a sur-reply was denied as moot. The clerk was directed to close the motions listed at Docket Nos. 379 and 384.