State AGs Granted Right to Intervene in Private MBS Action

RMBS

On June 6, a New York state court ordered that the attorneys general for the states of Delaware and New York (state AGs) could intervene in a case challenging an $8.5 billion settlement related to allegations that the originator and servicer of certain mortgage backed securities breached obligations owed to the trusts. In re Application of The Bank of New York Mellon, No. 651786/11, slip op. (NY Sup. Ct. Jun 6, 2012). The trustee is seeking state confirmation that it had authority to enter into the settlement agreement and in so doing did not violate its duties under the trust agreements and state law. A group of institutional investors moved to challenge the settlement, and in a decision earlier this year the Second Circuit reversed a federal district court and held that the case fell within the securities exception to both original and appellate jurisdiction under the Class Action Fairness Act of 2005 and should proceed in state court. The federal district court also had granted a motion to intervene filed by the state AGs, holding that they could appropriately intervene to represent the interests of absent investors. The court reasoned that the state AGs had "parens patriae standing" to preserve an "honest marketplace." On remand in state court, the state AGs renewed their motions to intervene. In granting intervention, the state court rejected arguments made by the trustee and the institutional investors that the state AGs lack parens patriae standing, and that the state AGs are not seeking any injunctive relief to protect any quasi-sovereign interests. Instead, the court followed the prior federal court decision and held that the state AGs identified legitimate quasi-sovereign interests sufficient to provide standing to intervene.