In Finkelstein v. U.S. Bank, N.A., 2025 N.Y. Slip Op 32882(U) (Sup. Ct., July 30, 2025) (here), plaintiff alleged that he was underpaid on his investment in a residential mortgage-backed securities (“RMBS”) trust due to the improper exercise of termination rights by the trust’s servicers. Plaintiff claimed they excluded deferred principal and interest balances from the termination price, repackaged the remaining loans, and profited from new trusts. The servicers argued that the governing agreement – the Pooling and Servicing Agreement (“PSA”) – barred the action because it included a “no action” clause requiring certificate holders, such as plaintiff, to first demand that the trustee (“Trustee”) take action before suing.
Plaintiff argued that demand was futile due to conflicts of interest, citing a “web of business dealings” and industry entanglements. The motion court, relying on Commerzbank AG v. U.S. Bank, N.A., found plaintiff’s allegations too vague and conclusory. The motion court noted that owning equity or providing services to servicers did not inherently create a conflict sufficient to excuse the no-action clause. The motion court also rejected plaintiff’s claims that the Trustee’s role in other trusts or its acquisition of servicer roles implied a conflict.
Further, the court reaffirmed that the no-action clause survived the termination of the trust. Consequently, the motion court granted defendants’ motions to dismiss the second amended complaint.
Governing Principles
A no-action clause is a contractual provision commonly found in trust indentures and pooling and servicing agreements. They are most often found in the context of securities and structured finance. The primary purpose of a no-action clause is to limit the ability of individual investors or certificate holders to bring legal action related to the trust or agreement unless certain procedural requirements are met.
There are a number of key features of a no-action clause, including:
- Pre-suit Requirements: Typically, a no-action clause requires the investor or certificate holder (a) provide written notice of default to the trustee; (b) request the trustee to take action; (c) offer reasonable indemnity to the trustee; and (d) wait a specified period (e.g., 60 days) for the trustee to act.
- Majority Support: Often, a no-action clause requires that a certain percentage (e.g., 25% or 50%) of the holders must support the action before it can proceed.
A no-action clause is designed to (a) prevent frivolous or duplicative lawsuits by minority holders; (b) centralize enforcement of the indenture documents and pooling and servicing agreements through the trustee; and (c) protect the integrity and efficiency of trust administration.
One way to avoid a no-action clause is to demonstrate that the trustee is so conflicted that it could not be expected to bring suit. In that circumstance, any demand on the trustee would be futile because in effect, the certificate holder or beneficiary would be asking the trustee to sue itself.[1]
Recently, the Court of Appeals for the Second Circuit addressed the issue of demand futility in the context of alleged conflicts of interest. In Commerzbank AG v. US. Bank, N.A., nine of the trusts at issue required notice to the trustee and the trust administrator (i.e., the party that was allegedly at fault).[2] One provided for notice to the trust administrator, but the trust administrator was also a breaching servicer. Six other trusts required notice to the securities administrator, two of whom were breaching servicers, and one was a trustee accused of similar wrongdoing in other cases.[3]
The Second Circuit remanded to the district court to examine the relationships, cautioning that: (1) “some deal parties may be directly implicated in the wrongdoing such that it would be futile to demand that these parties bring claims involving their own misconduct”; while (2) “[o]ther deal parties may not be directly involved in the misconduct but could labor under other conflicts of interest, for example, close relationships with the breaching entities, such that requiring pre-suit demands would be futile and cause unnecessary delay since it would be improbable that they would take any action.”[4] In doing so, the Second Circuit instructed “courts determining whether a No Action Clause requires pre-suit demands on other deal parties” to “consider whether such requirements would entail potential conflicts of interest on the demanded party, and if so, whether the nature and extent of the conflicts would indicate that these parties would be sufficiently unlikely to bring claims if asked to do so, such that the demand would be futile.”[5]
Upon remand, the district court excused demand for two sets of trusts. In the first, the demand party was both the trustee and the trust administrator. However, the trust administrator was Citibank, who was an alleged breaching party and also the custodian. Plus, its affiliate was an alleged breaching sponsor.[6] In the second set of trusts, the demand party was the securities administrator, who likewise was implicated in the wrongdoing, because it had a duty to act to enforce the obligations of the mortgage loan purchase agreement for loans that were missing information.[7]
Finkelstein v. U.S. Bank, N.A.
Plaintiff claimed he was underpaid on his investment because the defendant servicers allegedly exercised termination rights improperly. Specifically, Plaintiff claimed that the servicers should have included unpaid deferred principal and interest balances in the termination price. Instead, according to plaintiff, the servicers exercised their “call rights” (to purchase the Trust’s assets) without including the deferred payments in the valuation. Then, they repackaged the remaining loans into new trusts and sold them to new investors at a profit for themselves.
Plaintiff brought suit. However, the PSA governing the Trust at issue had a no-action clause. Under Section 11.03 of the PSA, entitled “Limitation of Rights of Certificate Holders”, certificate holders were not allowed to bring suit unless they first demanded that the Trustee take action.
To avoid the no-action clause, plaintiff alleged a purported “web of business dealings” that pervaded the industry such that the Trustee was too conflicted to bring suit. Therefore, according to plaintiff, demand on the Trustee would be futile.
The motion court rejected plaintiff’s argument. The motion court held that the allegations alleged by plaintiff were “insufficient to show a conflict of interest on the part of [the Trustee].”[8] The motion court found “[p]laintiffs allegations concerning the so called ‘web of business dealings’ … too conclusory to set aside the no action clause.”[9] For example, said the motion court, plaintiff failed to allege any facts showing that the “web of business dealings” would cause the Trustee not to bring suit if a demand were made by plaintiff.[10] The motion court also said that plaintiff failed to allege any facts showing that the Trustee was affiliated with large banks that provided banking services to other businesses and related to “repurchase rights holders” under the PSAs.[11] In addition, the motion court found that plaintiff failed to allege any facts showing that the Trustee’s acquisition of Bank of America’s trust business included the servicers under the PSA.[12] Further, the motion court said that plaintiff failed to allege facts showing a conflict of interest because it owned equity and debt in Wells Fargo, one of the alleged breaching parties.
Finally, the motion court rejected plaintiff’s allegation that the Trustee became the trustee for some of the new resecuritization trusts and, therefore, was a participant in the alleged scheme.[13] “Plaintiff does not allege which ones or even that some of the deferred principal loans from the trust at issue here wound up in a new trust,” said the motion court.[14] The motion court found “[p]laintiffs’ allegations that the Trustee participated in a scheme to terminate the trusts to secure roles as trustee for resecuritized trusts [were] vague and conclusory” and “certainly [did] not excuse [the] failure to comply with the no action clause.”[15] The motion court concluded that “the hope of new business would swallow whole the no-action clause if that were a sufficient basis to excuse it.”[16]
In conclusion, the motion court held:
plaintiff does not plead any facts to show a conflict such that it would be asking the Trustee to sue itself. There are no allegations showing: (1) the Trustee’s involvement in terminating the trusts, (2) the Trustee’s obligation to ensure the correct calculation of the Termination Price, (3) the Trustee’s receipt of any “windfall” from the Termination Price, (4) the Trustee’s alleged dual role as servicers in other actions, (5) lawsuits against the Trustees in their alleged capacity as servicers, or (6) how the Trustees knew the Termination Price had been calculated incorrectly but refused to take action because of their conflicts of interest. Without more, the no action clause stands.
[1] Deer Park Rd. Mgmt. Co., LP v. Nationstar Mortg., LLC, 233 A.D.3d 564, 565 (1st Dept. 2024).
[2] 100 F4th 362 (2d Cir.), cert. denied, 145 S. Ct. 279 (2024).
[3] Id. at 375.
[4] Id.
[5] Id.
[6] Commerzbank AG v. US. Bank, N.A., 2024 WL 5089017, at *4 (S.D.N.Y. Dec. 12, 2024).
[7] Id. at *6-7.
[8] Slip Op. at *3.
[9] Id.
[10] Id. at *4.
[11] Id.
[12] Id.
[13] Id. at *5.
[14] Id. at *5.
[15] Id.
[16] Id. (citing Rimrock High Income v. Avanti, 157 A.D. 3d 543 (1st Dept. 2018).
