Questions of Fact Preclude Dismissal of Claims Against Indenture Trustee, Rejecting Argument That its Duties Were Merely Ministerial

On April 20, 2021, the First Department issued a decision in Bankers Conseco Life Ins. Co. v. Wilmington Trust, N.A., 2021 NY Slip Op. 02355, holding that questions of fact precluded dismissal of claims against an indenture trustee, rejecting the argument that the trustee's duties were merely ministerial, explaining:

Wilmington moved to dismiss the complaint, arguing that under the relevant agreements, it was hired to perform only the ministerial functions (mainly bookkeeping and reporting) associated with the trust accounts, and had no obligation or duty to warn plaintiffs about, or prevent, Beechwood's improper investments. . . . Wilmington further argued that the agreements disclaim extra-contractual duties, and so there is no fiduciary duty between the parties that could serve as the basis for a claim for breach of fiduciary duty.

In their opposition papers, plaintiffs . . . argued that as a trustee Wilmington had fiduciary obligations to them that were extra-contractual, and that Wilmington's alleged breach of those duties were not duplicative of the allegations that they breached the contract. Supreme Court granted defendants' motion to dismiss plaintiffs' complaint. . . . As to the breach of the fiduciary duty claim, the court dismissed it as duplicative of the breach of contract claim, rejecting plaintiff's contention that the fiduciary duty arose from extra-contractual circumstances, and finding that the allegations supporting this cause of action concerned defendant's alleged breach of the same contractual provisions that were the basis for the breach of contract causes of action.

Plaintiffs argue on appeal that . . . any argument that plaintiffs cannot recover for Wilmington's failure to perform would render toothless the contractual provision holding it liable for its own negligence, a provision which was specifically required by state regulations.

. . . It is simply unclear under the case law whether the trust agreements bar plaintiffs from recovering damages based on the fact that Wilmington's negligence in allowing the placement of nonnegotiable assets in the trusts resulted in the trusts containing assets, beneficially owned by plaintiffs, that were lower in value than they would have been had Wilmington performed its duties. In the absence of clear precedent supporting Wilmington's position that the only conceivable direct damages against a sophisticated trustee who negligently performs gatekeeping duties are measured entirely based on the fees paid to the trustee, a trier of fact must resolve the ambiguity as to what constitutes recoverable direct damages versus unrecoverable consequential damages in a damages limitation provision where, as here, a gatekeeper negligently fails to perform. Thus, the breach of contract claim should not have been dismissed prior to fact and expert discovery on this point.

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee's prosecution of a put back or repurchase action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.