Phoenix Light SF Limited v. U.S. Bank National Association

Background

Phoenix Light SF Limited, Blue Heron Funding VI Ltd., Blue Heron Funding VII Ltd., Kleros Preferred Funding V PLC, Silver Elms CDO PLC, Silver Elms CDO II Limited, C-Bass CBO XIV Ltd., and C-Bass CBO XVII Ltd. were issuers of collateralized debt obligations backed in part by residential mortgage-backed securities. U.S. Bank National Association and Bank of America, N.A., served at different times as trustees for the residential mortgage-backed securities trusts. The plaintiffs alleged that U.S. Bank breached duties imposed by the relevant pooling and servicing agreements, including duties arising after an event of default.

Earlier in the case, the plaintiffs obtained assignments from their CDO indenture trustees purporting to transfer the rights to pursue the claims in this litigation. The assignments referred specifically to this lawsuit and related cases. The plaintiffs paid nothing for the assignments, agreed to fund litigation arising from them, and were entitled to reimbursement of costs and expenses from any recovery but not to the litigation proceeds themselves. Bank of America later settled with the plaintiffs and was dismissed from the case; the opinion addressed U.S. Bank’s motions.

Motions and Legal Standards

U.S. Bank moved for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c) concerning certain post-event-of-default contract claims. It also moved for summary judgment under Rule 56. U.S. Bank argued that the assignments were void under New York’s prohibition on champerty and that, without valid assignments, the plaintiffs lacked standing to sue.

Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court explained that standing requires a plaintiff to have a legally protected interest in the claim. A valid assignment can sometimes allow an assignee to stand in the place of the injured party, but an invalid assignment cannot establish standing.

Champerty Analysis

New York Judiciary Law § 489 generally prohibits a corporation or association from taking an assignment of a claim with the intent and purpose of bringing an action on it. The court explained that the key question is the purpose behind the assignment. An assignment is champertous when bringing a lawsuit is its primary purpose rather than an incidental means of protecting an independent right. The court also discussed an exception for an assignee that already has a proprietary interest in the debt or instrument connected to the lawsuit.

The court found no genuine dispute that the plaintiffs sought the assignments solely to pursue this litigation. The assignment agreements identified the litigation by caption, and testimony showed that the plaintiffs sought the assignments so they could bring the claims. The court also relied on evidence that Erste Abwicklungsanstalt, which owned all notes issued by Phoenix Light, encouraged the litigation as part of its effort to recover value and minimize losses to stakeholders.

The court rejected the plaintiffs’ argument that they retained ownership of the residential mortgage-backed securities because they had merely pledged them as security. Adopting an earlier ruling in the case as law of the case, the court concluded that the CDO indentures transferred all rights, title, and interest in the securities, including the right to bring related claims, to the CDO indenture trustees. The court independently concluded that the indenture language effected a complete transfer rather than only a security pledge.

Because the plaintiffs had transferred their proprietary interests before obtaining the assignments, the court held that the assignments did not qualify for the exception recognized in Love Funding. The plaintiffs therefore did not have a preexisting proprietary interest in the securities sufficient to avoid the champerty rule.

Ruling

Judge Broderick held that the assignments were void under New York’s champerty law. Because the plaintiffs lacked valid assignments, they lacked both constitutional and prudential standing to pursue the breach-of-contract claims. The court granted U.S. Bank’s motion for summary judgment and dismissed the case. It denied U.S. Bank’s motion for partial judgment on the pleadings as moot and directed the clerk to terminate the motions.