Phoenix Light SF Limited v. HSBC Bank USA, National Association

Background

The plaintiffs were three issuers of collateralized debt obligations that held residential mortgage-backed securities issued by three trusts selected through a bellwether process. HSBC served as trustee for those trusts. The amended complaint asserted breach of contract, breach of fiduciary duty, violations of the Trust Indenture Act, violations of New York’s Streit Act, negligence, and breach of the duty of good faith.

The plaintiffs had transferred their rights in the securities to collateralized-debt-obligation trustees. After this lawsuit began, those trustees reassigned litigation rights to the plaintiffs. The plaintiffs relied on those reassignments to pursue claims against HSBC.

Court’s Analysis

The court held that the plaintiffs were barred from relitigating standing under collateral estoppel, also called issue preclusion. In a prior related proceeding involving substantially similar claims, a court had determined that comparable assignments were made for the purpose of pursuing litigation, were invalid under New York’s champerty law, and did not give the plaintiffs standing. The Second Circuit affirmed that decision. The court found that the assignments and reassignments at issue here were materially the same and that the plaintiffs had had a full and fair opportunity to litigate the standing issue.

The court also reached the same result through a new standing analysis. The original transfers gave the collateralized-debt-obligation trustees all of the plaintiffs’ rights, title, and interest in the securities, including the right to bring claims. The court treated those transfers as complete transfers, leaving the plaintiffs without at least the required prudential standing to assert claims connected to the securities.

The court ruled that the reassignments back to the plaintiffs were champertous under New York Judiciary Law § 489. New York’s champerty law makes an assignment invalid when a corporation takes an assignment of a claim with the intent and purpose of bringing a lawsuit. The court relied on testimony from the plaintiffs’ representative that the plaintiffs sought the reassignments for the purpose of bringing this litigation. The court also rejected the plaintiffs’ argument that they had a preexisting ownership interest that would have placed the reassignments within an exception recognized in prior New York authority.

Disposition

Judge Lorna G. Schofield granted HSBC’s motion for summary judgment on all claims. The court denied the plaintiffs’ motion for summary judgment and directed the clerk to close the motion and the case. The opinion’s earlier discussion describes the plaintiffs’ motion as denied as moot, while the conclusion states simply that it was denied.