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Wells Fargo Unlawful Payment of Expenses from Trust Funds Class Action

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Perhaps we should call this a second-story case, because it’s built on top of another case. Royal Park Investments (RPI) sued Well Fargo in Royal Park Investments SA/NV v. Wells Fargo Bank, N.A., No. 1:14-cv-09764-KPF-SN (S.D.N.Y.), claiming that Wells Fargo had failed to fulfill its duties as a trustee of two of RPI’s trusts, allegedly damaging RPI and the classes’ certificate holders. What did Wells Fargo do? According to the complaint for this class action, it began to pay its own legal fees in the case with funds from the trusts.

The class for this action is all current and former investors who held RMBS certificates in the covered trusts during the time when Wells Fargo improperly paid for its legal fees and costs in the litigation from the covered trusts’ assets and suffered damage as a result.

The two trusts in question are RPI’s Asset Backed Funding Corporation Trust and its Structured Asset Securities Corporation, both of which are residential mortgage-backed securities (RMBS) trusts; the certificate holders are investors in the trusts. Wells Fargo has been the trustee, and RPI is alleging, in the earlier case, that Wells Fargo breached its contractual and common-law duties to RPI and the certificate holders, for example by ignoring important events, failing to cure certain defects, or botching foreclosure actions “due to gross errors, blatant misrepresentations, or criminal misconduct.”

The complaint claims that Wells Fargo has defended itself in the case with wasteful, inappropriate measures, “scorched earth tactics,” and “oppressive discovery.” This was mystifying to RPI, until, the complaint claims, “in early 2017, RPI became aware that Wells Fargo may have been billing the costs of defending the Litigation” to the trusts themselves.

According to the complaint, Wells Fargo is not permitted to do this under either the trusts’ governing agreements or the common law of trusts. It says, “Wells Fargo is improperly and illegally financing its defense of the Litigation with funds from the very investors that have accused Wells Fargo of wrongdoing. Thus, the investors are being harmed by Wells Fargo twice – first through Wells Fargo’s misconduct … and second through Wells Fargo’s improper and illegal use of those same damaged investors’ funds to defend itself for its misconduct.”

The complaint points out that the very purpose of having trustees is to ensure that the trusts have at least one independent party that can protect the interests of RPI and the certificate holders and administer the trusts for their benefit.

The complaint thus alleges that Wells Fargo is guilty of breach of contract, unjust enrichment, conversion, breach of trust, and failing to provide equitable accounting.

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