Large National Bank and Mortgage Servicer Defeat ERISA Lawsuit

A federal judge for the U.S. District Court for the Southern District of New York recently granted summary judgment in favor of a large national bank and mortgage servicer, holding that mortgages underlying the trusts in which the plaintiff invested did not qualify as “plan assets” under the Employee Retirement Income Security Act (ERISA).  

The plaintiff, a union pension fund, alleged the mortgage servicer breached its fiduciary duty under ERISA, challenging the mortgage servicer’s handling of residential mortgages supporting certain residential mortgage-backed securities trusts (RMBS trusts) in which the union pension fund had invested.  The union pension fund alleged the mortgage servicer profited from foreclosures, which caused the union pension fund’s benefit plans to suffer losses.

The court’s opinion turned on whether the mortgages underlying the RMBS trusts were “plan assets” under ERISA; if the mortgages were not “plan assets,” the mortgage servicer could not be considered a fiduciary.  The court noted that under the applicable Department of Labor regulation, an investment is not a “plan asset” if the securities are treated as debt under applicable local law and lack substantial equity features.  The court found that the mortgage notes were classified as debt by the plain language of the contracts.  The mortgage notes had been consistently characterized as debt for tax purposes, had a fixed interest rate, and legal final maturity debts, which indicated they should be treated as debt rather than equity.

Since the securities at issue were treated as debt and the union pension fund did not identify any features that amounted to “substantial equity features,” the securities did not qualify as “plan assets” under ERISA.  Accordingly, the court granted summary judgment in favor of the defendants.