The federal courts building in Manhattan.
A new ruling by a New York federal judge will enable the NCUA to continue its long-running legal battle with Deutsche Bank National Trust Company over the billions of dollars in losses that led to the liquidation of corporate credit unions during the 2008 financial crisis.
In a 32-page ruling filed on Aug. 15, U.S. District Court Judge Sidney H. Stein dismissed a number of claims against Deutsche Bank National Trust Company (DBNTC), reducing its potential liability. However, the judge found that factual disputes remain over whether the bank had notices of breaches and whether it fulfilled its trustee enforcement duties. Those disputes may ultimately be resolved by a jury or through settlement negotiations.
This case began in November 2014 when the NCUA filed a civil lawsuit alleging that DBNTC failed in its role as trustee over Residential Mortgage Backed Securities (RMBS) trusts that suffered major losses during the financial crisis. After the NCUA liquidated the corporate credit unions and took over their RMBS assets, the federal agency created new trusts, known as NCUA Guaranteed Notes (NGN), which issued government-backed securities for investors. Proceeds from those sales helped offset the losses and stabilize the credit union system.
Five failed corporate credit unions — U.S Central FCU, Western Corporate FCU, Members United FCU, Southwest Corporate FCU and Constitution Corporate FCU — purchased $140 billion in residential mortgage-backed securities issued from the trusts between 2004 and 2007. Those securities lost value, contributing to the failure of all five corporates, the NCUA said.
DBNTC had asked Judge Stein to dismiss the NCUA’s breach claims as to certain trusts because the bank never received direction from depositors to take any enforcement action to protect the trusts from losses. The court rejected that argument, stating a trustee’s enforcement duty is not contingent upon depositor instruction.
The court also denied DBNTC’s motion to dismiss claims involving nine loans, citing unresolved factual issues.
DBNTC further argued the NCUA lacked standing to sue because the NGN structure severed the agency’s ownership of the RMBS securities. The court disagreed, finding evidence of legal reconveyance back to the NCUA, allowing its claims to proceed for trusts repackaged into NGNs.
However, the court did dismiss the NCUA’s claims involving 10 trusts and 59 loans, citing insufficient evidence that DBNTC received written breach notices, prior settlements or that the claims were filed after the statute of limitations expired.
Peter Strozniak can be reached at pstrozniak@cutimes.com.
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