Triaxx Prime CDO 2006-1 Ltd. v. U.S. Bank National Association

Background

The plaintiffs were Triaxx Prime CDO 2006-1 Ltd., Triaxx Prime CDO 2006-2, Ltd., Triaxx Prime CDO 2007-1, Ltd., and Triaxx Asset Management, LLC. The three issuer plaintiffs created collateralized debt obligations backed by residential mortgage-backed securities. U.S. Bank served as trustee for the three CDOs and also served as trustee for at least some of the underlying mortgage-backed securities trusts.

The plaintiffs alleged that U.S. Bank, acting as the CDO trustee, refused to pursue, accept direction concerning, or assign to the plaintiffs authority to pursue claims against mortgage-backed-securities trustees and servicers. They alleged that this conduct breached Section 7.5 of the CDO indentures and Section 2(d) of the collateral-management agreements. They also alleged negligence based on U.S. Bank’s supposed failure to avoid conflicts of interest. The complaint sought more than $100 million in damages, based on recoveries the plaintiffs said could have been obtained through the underlying litigation.

U.S. Bank moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. U.S. Bank argued that the claims were barred by the earlier related Triaxx litigation, that the agreements did not require the conduct alleged, and that the negligence claim failed because U.S. Bank owed no relevant duty to the plaintiffs and the claim was duplicative of the contract claim.

Collateral Estoppel

The court declined to dismiss the action based on collateral estoppel, also called issue preclusion. That doctrine prevents a party from relitigating an issue that was necessarily decided in an earlier case after a full and fair opportunity to litigate it.

The court recognized that the earlier related case involved similar allegations about Section 7.5, conflicts of interest, and U.S. Bank’s refusal to assign litigation authority. But the earlier court dismissed the equitable-relief claim because the plaintiffs had not shown that the injured parties lacked an adequate remedy at law. The earlier court therefore did not necessarily decide whether the indentures or collateral-management agreements affirmatively required U.S. Bank to assign its rights or pursue the underlying claims. The court concluded that collateral estoppel did not prevent consideration of the present claims.

Breach of Contract

The court nevertheless held that the complaint did not state a breach-of-contract claim. It interpreted Section 7.5 as addressing the protection, perfection, and enforcement of the CDO’s security interests in the collateral. In the court’s view, the provision did not require U.S. Bank to sue the trustees or other parties responsible for the underlying mortgage-backed securities, or to assign authority to the plaintiffs to bring those lawsuits.

The court also relied on other indenture provisions stating that the trustee had no general duty to exercise its powers, unless directed by a majority of the controlling class of CDO noteholders and provided sufficient indemnity. The court found that this structure was inconsistent with the plaintiffs’ proposed interpretation of Section 7.5 as imposing an independent and unlimited duty to pursue underlying litigation.

Section 2(d) of the collateral-management agreements did not change the result. Any direction from the collateral manager had to comply with the indentures, which did not require U.S. Bank to bring or assign the underlying claims without the required noteholder direction. In addition, U.S. Bank was not a party to the collateral-management agreements, so its failure to follow the collateral manager’s letter could not constitute a breach of Section 2(d) of those agreements.

Negligence

The court held that the negligence claim also failed. Under New York law, a negligence claim requires a duty of care owed by the defendant to the plaintiff, a breach, and resulting damages. The court acknowledged that trustees generally have limited duties outside their contracts, including duties to avoid conflicts of interest and to perform ministerial tasks with due care. But the plaintiffs identified no authority establishing that a CDO trustee owed comparable duties to the CDO issuers or collateral manager.

The court also noted that the plaintiffs did not own CDO notes and alleged harm based on reduced note value. The court concluded that the plaintiffs had not shown how they, rather than the noteholders, were harmed by the alleged negligence. Separately, the court held that the negligence claim was duplicative of the contract claim because both claims relied on the same alleged refusal to pursue or assign the underlying claims and sought the same damages. The court did not reach U.S. Bank’s remaining arguments concerning the negligence claim.

Disposition

Judge Barbara Moses granted U.S. Bank’s motion to dismiss. The plaintiffs did not seek permission to amend and did not suggest that they could cure the defects through a new pleading. The Clerk was directed to terminate the motion, enter judgment for U.S. Bank, and close the case. The opinion does not state that the dismissal was with or without prejudice.