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HSBC Bank Payment of Legal Expenses from Trust Funds Class Action

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This is the third in a series of class action suits filed by Royal Park Investments (RPI) based on other current lawsuits. The original lawsuits each allege that a certain bank has failed to fulfill its duties as trustees to RPI funds; these secondary suits allege that the defendant banks have been paying their legal fees for the original suits out of the trusts’ funds. In other words, the banks accused of wrongdoing are paying their legal fees out of the pockets of the investors who are accusing them.

The class for this action is all current and former investors who held RMBS certificates in the trusts at issue during the time when HSBC improperly paid for its legal fees and costs for the Litigation from the trusts’ assets and were damaged as a result.

HSBC Bank has served as trustee for three RPI residential mortgage-backed securities (RMBS) trusts since they were formed in 2006.  

In 2014, RPI filed a lawsuit—Royal Park Inv. SA/NV v. HSBC Bank USA, National Association, as Trustee, No. 1:14-cv-08175-LGS-SN—alleging that HSBC had not fulfilled its duties as trustee and thereby had damaged the trusts’ investors.

For example, the complaint claimed that HSBC had known of, and received notice of, breaches of warranties from the originators, warrantors, or sellers of certain mortgage loans but had failed to “effectuate the repurchase” of those loans. The complaint claims that HSBC took no action whatsoever because it cared more about its profitable relationships with the responsible parties than it did about the interests of the trust’s investors. As another example, RPI claims that loan servicers botched foreclosure actions because of “gross errors, blatant misrepresentations or criminal conduct” and that “HSBC was acquiescing in or actively participating in this misconduct.”

Now, RPI claims that it has discovered that, while HSBC defending itself against these charges, it has been paying its legal fees from the funds in the trusts it has been accused of damaging. The complaint for this class action claims that neither the trusts’ Governing Agreements nor the common law of trusts permits HSBC to use the trusts’ funds for this purpose. As the complaint puts it, “Thus, the investors are being harmed by HSBC twice—first through HSBC’s misconduct as alleged in the Litigation, and second through HSBC’s improper and illegal use of those same damaged investors’ funds to defend itself for its misconduct.”

The complaint also claims that HSBC has engaged in a “scorched earth” defense strategy, wasting unreasonable amounts of time and money on irrelevant or valueless legal maneuvers.

The complaint alleges that HSBC is guilty of breach of contract, unjust enrichment, conversion, breach of trust, and failure to provide equitable accounting, and it asks for declaratory relief, damages, and other relief.

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