A residential securitization trustee could be held to a fiduciary standard under federal retiree law as the Second Circuit Court of Appeals looked to split definitional hairs on whether the mortgages are considered plan assets.

The case was brought by six trustees of the United Food & Commercial Workers Union & Employers Midwest Pension Fund, who appealed a district court decision which granted summary judgement to the servicer, Ocwen (now known as Onity). The trial court ruled that the controlling regulation defined only the residential mortgage-backed securities, and not the mortgages backing them, as retirement plan assets regulated by the Employee Retirement Income Security Act.

While the appellate panel agreed with the trial court that the underlying mortgages of securitizations issued as indenture agreements do not meet the definition of plan assets, the case was remanded on another issue.

Those underlying mortgages included in securitization trust certificates do meet the ERISA definition and could be plan assets, the panel decided.

As a result, the panel, consisting of Judges Richard Sullivan, who wrote the decision; Denny Chin; and Susan Carney, affirmed the original decision in part, reversed it in part and remanded back to the trial court.

Arguments in this case were on Sept. 5, 2024, but it took over a year for the court to issue its ruling on March 26.

"We have received the court's order in this matter and are currently reviewing it," an Onity spokesperson said.

A request for comment was sent to the United Food & Commercial Workers Union & Employers Midwest Pension Fund.

In the original filing, made in March 2018 in the Southern District of New York, the trustees alleged the companies responsible for servicing the underlying mortgages mismanaged the loans, engaged in self-dealing, and otherwise failed to act in investors' best interests.

The fund acquired notes in three RMBS and three real estate mortgage investment conduits.

It alleged in a putative class action filing that Ocwen breached its fiduciary duties as the servicer for the six trusts by mismanaging the mortgages.

As part of the case they alleged Wells Fargo, master servicer on one of the MBS trusts and two of the REMICs, breached its fiduciary duties by not adequately supervising Ocwen and by failing to pursue litigation a breach of Ocwen's own fiduciary duties under ERISA. The summary judgement was issued on June 2, 2023.

But in its ruling overturning part of the trial court's decision, the court only addresses Ocwen's role as the servicer.

"We therefore remand to allow the district court to consider in the first instance whether Ocwen acted in a fiduciary capacity with respect to the mortgages underlying the three REMIC trusts," Judge Sullivan wrote.