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US Bank Payment of Legal Expenses From Trust Funds Class Action

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Royal Park Investments (RPI) hired US Bank National Association as trustee for twenty-one of its residential mortgage-backed securities (RMBS) trusts, but apparently was not satisfied with the bank’s performance. It is suing US Bank in a case called Royal Park Inv. SA/NV v. U.S. Bank Nat’l Ass’n, No. 1:14-cv-02590-VM—but it claims to have recently discovered that the bank has been funding its defense with money from the trusts.

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

The complaint for the original action alleges that US Bank failed to fulfill its duties as trustee to the RMBS trusts and to the certificate holders who invested in the trusts. For example, the complaint claims that US Bank ignored problems with mortgage loans in the trusts that had breached the representations and warranties of the originators or sellers, even though it knew of breaches, substandard underwriting, and “outright fraud” in the origination of the loans. It claims that US Bank did nothing because it wanted to preserve its lucrative interests with certain parties.

A Supplemental Complaint in that case also claims that US Bank failed to pursue claims on behalf of the trusts related to the Lehman Brothers bankruptcy.

The complaint for this class action claims that, under both the trusts’ Governing Agreements and the common law of trusts, a trustee like US Bank is not allowed use funds for its own benefit. While the trustee is permitted to withdraw funds to pay for the costs of administering the trust or servicing the loans, the complaint says, the trustee is also required to administer the trusts for the sole benefit of the certificate holder. According to the complaint, it does not have unfettered discretion over how to use the trusts’ assets.

The complaint also notes that twenty of the trusts in question are governed by New York state law and the twenty-first by Delaware state law, and these laws, it claims, also prohibit US Bank’s actions.

Thus the complaint alleges that the bank has injured the investors in the trusts twice—first, by breaching the contractual and common-law duties owed to the certificate holders, and second, by defending its misconduct with money that belongs to the certificate holders. The complaint asks that all funds used for US Bank’s legal fees and expenses be returned to the trusts.

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