The Appellate Division of the New York Supreme Court, First Judicial Department, held this week that Bank of New York Mellon (BNY Mellon) could be liable for its failure to maintain complete mortgage loan files in its capacity as trustee for certain residential mortgage backed securities (RMBS).  The appellate court affirmed the trial court’s denial of BNY Mellon’s motion to dismiss the claims brought by plaintiff investors.

In a suit initially filed in the Commercial Division before Justice Saliann Scarpulla, the plaintiffs alleged that BNY Mellon failed to meet its contractual obligation to keep and preserve complete mortgage files documenting the loans serving as collateral for the RMBS at issue.  When the housing market collapsed and borrowers defaulted on their mortgage loans, many of those properties entered foreclosure and became real estate owned (REO).  To successfully sell an REO property, a trust must be able to show that it has good and marketable title to that property.  The plaintiffs alleged that BNY Mellon’s lack of complete mortgage files caused defects in title for those properties, resulting in delays or even the complete inability to sell certain homes, as well as liability for properties already sold.  The plaintiff investors, including SBLI USA Mutual Life Insurance Company and Commerce Bank, brought claims for breach of contract, breach of fiduciary duty, and negligence against BNY Mellon.

Judges John W. Sweeny, Rolando T. Acosta, Paul G. Feinman, and Marcy L. Kahn of the Appellate Division agreed with Justice Scarpulla that the plaintiffs sufficiently alleged breach of contract against BNY Mellon.  Because trustees owe certificate holders a duty to perform “basic, nondiscretionary, ministerial functions,” it would be improper to dismiss the plaintiffs’ suit before allowing discovery into whether BNY Mellon failed to preserve and maintain the mortgage files at issue.  The plaintiffs also succeeded in alleging a negligence claim, as the duty to act with due care was not duplicative of the breach of contract claim.  In contrast, the appellate court affirmed dismissal of the plaintiffs’ claim for breach of fiduciary duty, agreeing that the relationship between the parties was contractual.

The case is captioned Commerce Bank et al. v. the Bank of New York Mellon, case number 651967/2014, in the Commercial Division of the Supreme Court of the State of New York, County of New York.

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