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August 17, 2018  

Investors Tracking Trustee Lawsuit in Ohio

A legal battle between Western & Southern Life and BNY Mellon could mark a final opportunity for the holders of troubled structured products to seek damages from trustees.

On Oct. 2, the Ohio Court of Appeals in Cincinnati will hear Western & Southern’s appeal of a lower court’s August 2017 dismissal of claims by the insurer that BNY failed to protect it as an investor in 31 Countrywide mortgage securitizations that defaulted during the credit crisis. While the decision won’t be binding in states other than Ohio, it could set a precedent for dozens of similar lawsuits.

BlackRock, Pimco and Royal Park Investments are among firms that have filed such complaints, both in state and federal courts. Along with BNY, the trustees named have included Citigroup, HSBC, U.S. Bank and Wells Fargo.

The other cases remain in their preliminary stages.

In the initial ruling against Cincinnati-based Western & Southern, Judge Steven Martin of Hamilton County Court said trustees weren’t bound to protect mortgage-bond investors. That reinforced a key defense strategy for the banks facing similar actions. “That Ohio decision was the first trustee lawsuit that went to trial and the decision sent shockwaves to the investor community behind these lawsuits,” one attorney said. “And it emboldened the trustees’ argument that they do not have a fiduciary duty.”

The lawsuits, seen as a last wave of litigation tied to crisis-era securitizations, have proven more difficult for investors than complaints against the banks and lenders that sold them the bonds. While judges generally have declined outright dismissals of the cases, they also have rejected class certifications. And with the plaintiffs’ attorneys forced to undertake the time-consuming and costly strategy of pursuing each case individually, some have pulled back.

“Plaintiffs have been losing serious momentum and their fear is that eventually all the courts will agree there is nothing to these cases. So the decision of the Ohio appeals court will be closely watched,” another attorney said.

Still, trustees make a tempting target for investors who together lost billions of dollars during the downturn. Even if the court cases don’t work out, some see the potential for settlements mirroring ones that law firms including Bernstein Litowitz and Robbins Geller have helped them secure from other financial institutions. “It’s difficult for some plaintiffs to walk,” another source said. “Law firms have reputational issues, so I can see them pushing for some settlements. But there haven’t been any new complaints. And if the appeals court in Ohio upholds the judge’s decision, it will be tough arguing for a settlement.”