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Securitization Trustee Is Unsuccessful in Obtaining Dismissal of Claims Asserted Against It in Litigation Arising out of Sub-Prime Mortgage Lender’s Bankruptcy

May 29, 2007

American Business Financial Services, Inc. v. Greenwich Capital Financial Products, Inc., 2007 WL 465571 (Bankr. D. Del. 2/13/2007). In this case arising out of the bankruptcy of a sub-prime mortgage lender, the indenture trustee defendants were unsuccessful in having all of the claims asserted against them disposed of on their motion to dismiss.

The indenture trustees were the trustees for notes issued by securitization trusts. When the Debtors concluded that they could not be reorganized, they sold all their servicing rights. The debtor in possession lender foreclosed on the remaining assets and the case was converted to chapter 7. The chapter 7 trustee then sued the indenture trustees for fraudulent transfers, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach of contract, common law fraud and civil conspiracy and objected to and sought subordination of the claims asserted by the indenture trustees in connection with notes issued by securitization trusts.

The fact pattern in the case was quite complex involving objections asserted by the indenture trustees to a sale of assets, but the court found that the chapter 7 trustee sufficiently pled or would be granted leave to replead many of his other claims. The case illustrates importance of evaluating a customer’s business before accepting a trusteeship, since the indenture trustee may be drawn into litigation involving the issuer and its principals.

Contributed by James Gadsden, Carter Ledyard & Milburn LLP in New York, gadsden@clm.com



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