Phoenix Light SF Limited v. The Bank of New York Mellon Corporation

Background

The opinion concerns two cases brought by entities that issued collateralized debt obligations backed by certificates from residential mortgage-backed securities trusts. The Bank of New York Mellon served as trustee for a number of those trusts. In the 2014 case, the plaintiffs alleged that the bank breached duties connected to 27 securitization trusts, later reduced to 20. In the 2018 case, they alleged that the bank breached duties as master servicer for one securitization trust.

The plaintiffs had acquired the relevant certificates from third parties but transferred them to collateralized-debt-obligation indenture trustees when the obligations were sold. Before filing the 2014 case, they asked those trustees to assign to them the right to sue the residential-mortgage-backed-securities trustees. The plaintiffs received the assignments after filing the 2014 case but before filing the 2018 case.

The court had stayed both cases while the Second Circuit considered a similar case involving the same plaintiffs, the same type of indentures, and the same assignments, but a different bank. The Second Circuit held that the plaintiffs lacked prudential standing because the assignments were invalid under New York's rule against champerty—an invalid assignment made primarily to bring a lawsuit.

Issue Preclusion and Prudential Standing

The court applied issue preclusion, which prevents a party from relitigating an issue that was already actually litigated and decided, when the party had a full and fair opportunity to litigate and the decision was necessary to the prior judgment. The court found that all requirements were met.

The Second Circuit had decided prudential standing in the earlier proceeding. The plaintiffs who had participated in that proceeding had litigated and appealed the issue. The court also held that Blue Heron Funding V Ltd., which was a plaintiff in these cases but not in the earlier proceeding, had sufficient legal connection to the earlier plaintiffs because Phoenix Light admitted that it owned more than 50 percent of Blue Heron V's controlling class of notes and Blue Heron V relied on the same assignments.

The court rejected the plaintiffs' argument that the issue was merely whether the bank had waived a champerty defense. It distinguished that defense from the plaintiffs' separate obligation to prove that they had standing. The court also rejected arguments that the issue was purely legal or that the Second Circuit had relied on alternative grounds. According to the court, the Second Circuit's decision turned on the factual finding that the assignments were obtained for the purpose of pursuing litigation, and its holding rested on prudential standing.

The court further stated that it would reach the same result even without issue preclusion. Because the plaintiffs had transferred their rights in the underlying securities to the indenture trustees, they did not retain legal title to the certificates. The later assignments back to the plaintiffs, made primarily to permit litigation, were therefore not valid and did not give the plaintiffs prudential standing.

Disposition

The court concluded that the plaintiffs lacked prudential standing in both cases and dismissed both cases. It did not reach Article III standing or the merits of the alleged breaches of duty. The court directed the Clerk of Court to terminate the open motions in each docket and close both cases.