Article 77 Proceeding Excludes Beneficiaries of Trusts That Hold Interests in Trusts That are the Subject of the Proceeding

On August 7, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Wells Fargo Bank, N.A., 2018 NY Slip Op. 31883(U), holding that beneficiaries of trusts that held interests in trusts that were the subject of an Article 77 proceeding did not have standing to appear in the proceeding, explaining:

Article 77 provides, with exceptions not here relevant, that a special proceeding may be brought to determine a matter relating to any express trust. Permissible uses of Article 77 are broadly construed to cover any matter of interest to trustees, beneficiaries or adverse claimants concerning the trust. Such proceedings are used by trustees to obtain instruction as to whether a future course of conduct is proper, and by trustees (and beneficiaries) to obtain interpretations of the meaning of trust documents. Article 77 limits the parties who may properly participate to persons interested, within the meaning of the statute. CPLR 7703 thus expressly provides: The provisions as to joinder and representation of persons interested in estates as provided in the surrogate's court procedure act shall govern joinder and representation of persons interested in express trusts. SCPA § 103(39) defines the term "Person interested" as any person entitled or allegedly entitled to share as beneficiary in the estate or the trustee in bankruptcy or receiver of such person. A creditor, shall not be deemed a person interested. SPCA § 103(8) defines Beneficiary as any person entitled to any part or all of an estate.

In determining an intent to confer a beneficial interest in a trust, a court must look to the trust agreement. It is well settled that the trust instrument is to be construed as written and the settlor's intention determined solely from the unambiguous language of the instrument itself.

The court accordingly looks to the terms of the governing agreements of the Settlement Trusts to determine intent to confer a beneficial interest in the Trusts. As described by the challenging Respondents, the agreements that govern RMBS trusts typically provide that certificates evidence the entire beneficial ownership interest in the Trust Fund. They further typically require the Trustee to act for the benefit of the certificateholders.

The Challenged Respondents do not dispute that these terms are typical of RMBS PSAs, and they do not identify any additional terms of the governing agreements of the Settlement Trusts that contemplate beneficiaries other than certificateholders or insurers. Instead, they claim that their ownership of interests in, and rights with respect to, CDO, re-REMIC, or NIM trusts afford them beneficiary status in the Settlement Trusts. The structures through which the Challenged Respondents claim an interest differ. However, the governing agreements for each, whether a CDO, re-REMIC, or NIM trust, contain provisions, like those for the Settlement Trusts, which transfer all right, title, and interest in the underlying assets held by the structure to its Trustee.

. . .

As the Challenging Respondents correctly argue, each of the Challenged Respondents in effect urges the court to conclude that it is entitled to distributions from the Settlement Trusts because: 1) each is entitled to distributions from the structure in which it is invested; and 2) that structure is entitled to distributions from the Settlement Trust. As the Challenging Respondents also correctly argue, it is the trustees of the structures in which the Challenged Respondents are investors that hold the certificates in the Settlement Trusts and attendant rights to distributions from those Trusts, although they do so for the benefit of the investors in those structures. The rights and entitlements of the Challenged Respondents to distributions from the structures in which they are investors are accordingly separate and distinct from the rights and entitlements of the trustees of those structures to distributions from the Settlement Trusts. The Challenged Respondents' economic interests in the Settlement Trusts are thus, at best, indirect.

A principal authority on which the Challenged Respondents rely, Matter of Cowles (22 AD2d 365, 370 [1st Dept 1965], affd no opinion 17 NY2d 567 [1966]), does not alter this conclusion. This case does not support the Challenged Respondents' claim to beneficiary status based on their indirect interests in the Settlement Trusts, and stands merely for the proposition that contingent remaindermen with a remote and uncertain interest in a trust may be proper, although not necessary, parties to a trust proceeding. The challenged parties in Cowles had a direct-albeit, contingent-interest in the estate that was the subject of the proceeding. In the event of the occurrence of specified conditions, they would take as beneficiaries of the estate. Here, there are no conditions under which the Challenged Respondents will acquire a direct interest in the Settlement Trusts. They will only acquire funds from the Settlement Trusts indirectly, through distributions of those funds to the trustees of the separate investment structures in which the Challenged Respondents hold interests. The Challenged Respondents' eventual receipt of funds may be more certain or likely than that of the Cowles contingent remaindermen. But their status is not analogous, as the Challenged Respondents' interest is not direct.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees. If you or a client are RMBS investors and have questions regarding potential claims against a trustee; a trustee instruction proceeding, such as the Article 77 proceeding that is the subject of this decision; or how to influence the trustee's prosecution of a put back action, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.