Potential Expansion of Trustees' Duty to Give Notices of Default

November 5, 2015

By: Alan Kolod, David Rabinowitz, Kent C. Kolbig, Mark N. Parry, Dean Swagert, Alan E. Gamza, Jonathan B. Ross, James M. Sullivan, and Mildred Quinones-Holmes

Moses & Singer Alert

One of the obligations of indenture trustees is to give notice of defaults and Events of Default under an indenture. Trustees for residential mortgage-backed securities ("RMBS") trusts under both note indentures and pooling and servicing agreements ("PSAs") have been sued in a number of cases for, among other things, failing to give such notices. Recent decisions in those cases have recognized the enforceability of trust agreement provisions that provide that a trustee does not have knowledge of an Event of Default unless a Responsible Officer of the trustee has received written notice of such Event of Default. However, the cases have not enforced such provisions consistently on motions to dismiss.

A recent New York state court decision enforced such a provision in a PSA governed by New York law literally, while recent federal decisions in the Southern District of New York involving both New York law PSAs and indentures governed by the Trust Indenture Act ("TIA") have not allowed the trustee to invoke such a provision if its own conduct (such as failing itself to give notice of a default to the issuer) led to the trustee's not receiving written notice of the Event of Default.

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