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Royal Park Investments SA/NV v. HSBC Bank USA, National Association

United States District Court, S.D. New York

August 2, 2018

ROYAL PARK INVESTMENTS SA/NV, Individually and on Behalf of All Others Similarly Situated, Plaintiff,



         On December 5, 2017, the National Credit Union Administration Board (“NCUA” or “Intervenor”) moved to intervene in a lawsuit brought by Plaintiff Royal Park Investments (“Royal Park”) against Defendant HSBC Bank USA, National Association (“HSBC” or “Defendant”) regarding HSBC's use of trust funds to indemnify itself in related litigation. HSBC opposes the intervention. For the reasons discussed below, NCUA's motion to intervene is DENIED.

         I. BACKGROUND

         This case is part of the next round of litigation between entities that lost money when the Residential Mortgage-Backed Securities (“RMBS”) market collapsed and a few banks that appear to represent the last available deep pockets that may have some conceivable liability for those investment losses. In an earlier round of litigation, which is still ongoing, unhappy holders of RMBS certificates are suing financial institutions that serve as trustees for RMBS trusts. See, e.g., Royal Park Investments SA/NV v. HSBC Bank USA Nat'l Ass'n, 14-CV-8175 (LGS)(SN); Blackrock Allocation Target Shares v. Wells Fargo Bank, Nat'l Ass'n, 14-CV-9371(KPF)(SN); Phoenix Light v. Bank of New York Mellon, 14-CV-10104 (VEC). Broadly speaking, those cases (hereafter collectively referred to as “Trustee Liability Cases”) seek to hold the trustees responsible for failing to detect or to act on information that may have indicated there were problems with the residential mortgages that underlay the RMBS. See, e.g., Complaint [Dkt. 1] ¶¶ 10-14 (citations omitted). As is relevant to this matter, Trustee Liability Cases have been brought against HSBC by Royal Park, NCUA, and several other plaintiffs in actions that are now coordinated in front of Judge Schofield and Magistrate Judge Netburn. See, e.g., Royal Park v. HSBC [Dkt. 473] (ordering stay in six coordinated actions against HSBC, including those brought by Royal Park and NCUA[1]). In Trustee Liability Cases, including the cases against HSBC, trustees have taken the position that they are entitled to be indemnified for their defense costs from the trust funds for which they serve as trustees. See, e.g., Complaint ¶ 15.

         Apparently now concerned that litigation costs may deplete funds that would otherwise be used to make payments to holders of RMBS certificates and vexed that the availability of indemnification of defense costs eradicates what might otherwise motivate the trustees to settle, some of the plaintiffs from Trustee Liability Cases have brought a new round of cases designed to prevent the trustees from using trust funds to indemnify themselves for defense costs. On October 6, 2017, Royal Park brought this case to challenge HSBC's use of trust funds to pay its litigation costs in Royal Park v. HSBC. See Complaint. Royal Park's Complaint focuses on withdrawals from three of the trusts that are at issue in Royal Park v. HSBC: DBALT 2006-AR5, FHLT 2006-C, WFHET 2006-2. Id. ¶ 1. On December 4, 2017, Defendant moved to dismiss the Complaint. See Motion to Dismiss [Dkt. 30]. The next day, December 5, 2017, NCUA moved to intervene in this action pursuant to Federal Rule of Civil Procedure 24(a)(2) or, in the alternative, pursuant to Rule 24(b). See generally Motion to Intervene [Dkt. 35]; Memorandum in Support of Motion to Intervene by National Credit Union Administration Board as Liquidating Agent (“Int. Mem.”) [Dkt. 36].

         NCUA is an independent federal agency that, inter alia, may act as conservator and liquidating agent for failed credit unions.[2] Int. Mem. at 4 (citations omitted). NCUA has taken multiple credit unions into liquidation since 2010, and, through those liquidations, it now “oversees a large portfolio of RMBS.” Id.

         NCUA contends that Defendant's use of RMBS trust funds to indemnify itself for litigation costs will harm NCUA even though NCUA does not itself own any of the RMBS certificates that are held by the trusts at issue. Int. Mem. at 4. Instead, in its role as a liquidator of credit unions, it “resecuritized” many RMBS into NCUA Guaranteed Notes (“NGN”) that were issued by trusts established for this purpose (“NGN Trusts”). Id. NCUA holds residual interests in the form of Owner Trust Certificates (“OTCs”). Id. The OTCs entitle NCUA to any assets remaining in the NGN Trusts after all NGN Noteholders have been paid.[3] Id. NCUA's theory of harm is that HSBC's use of trust funds to indemnify itself will diminish the value of the OTCs, and, therefore, NCUA will be harmed “in the same or similar way by HSBC's unlawful conduct as where NCUA is the direct holder of an RMBS certificate.” Id. NCUA's complaint in its Trustee Liability Case against HSBC involves 37 RMBS trusts, one of which is among the three trusts at issue in this case, and fourteen of which come from “the same securitization shelves as the three trusts at issue . . . and which have similar indemnification language as the three [Pooling and Service Agreements] to be construed by this Court.” Id. at 5 (citations omitted). Nonetheless, NCUA's Proposed Complaint [Dkt. 37-1] is limited to the one overlapping trust already included in Royal Park's Complaint-FHLT 2006-C[4]-and does not raise additional claims regarding other trusts from the same shelves. Id.


         a. NCUA is Not Entitled to Intervention as of Right

         Pursuant to Federal Rule of Civil Procedure 24(a)(2), a court “must permit anyone to intervene who . . . claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest.” To intervene either as of right or with permission, “an applicant must (1) timely file an application, (2) show an interest in the action, (3) demonstrate that the interest may be impaired by the disposition of the action, and (4) show that the interest is not protected adequately by the parties to the action. . . . Failure to satisfy any one of these four requirements is a sufficient ground to deny the application.” Floyd v. City of New York, 770 F.3d 1051, 1057 (2d Cir. 2014) (citations, alteration, and internal quotation marks omitted). “While accepting as true the non-conclusory allegations of the motion courts applying Rule 24 must be mindful that each intervention case is highly fact specific and tends to resist comparison to prior cases.” Kamdem- Ouaffo v. Pepsico, Inc., 314 F.R.D. 130, 134 (S.D.N.Y. 2016) (citation and internal quotation marks omitted).

         NCUA argues that the Court should grant its motion to intervene as of right. See Int. Mem. at 6-13. NCUA asserts that its motion is timely, that it has a sufficient interest in Royal Park's action, that its ability to protect its interest would be impaired if it cannot intervene, and that Royal Park does not adequately represent NCUA's interest. Id.; Reply Memorandum in Support of Motion to Intervene by National Credit Union Administration Board as Liquidating Agent (“Reply”) [Dkt. 51] at 2-10. Defendant asserts that NCUA does not satisfy any of the required factors. See Memorandum in Opposition to Motion to Intervene by National Credit Union Administration Board as Liquidating Agent (“Opp.”) [Dkt. 48] at 8-24. The Court analyzes each factor below.

         i. NCUA's Motion is Timely

         Whether a motion is timely “defies precise definition [but] is not confined strictly to chronology.” Floyd, 770 F.3d at 1058 (quoting United States v. Pitney Bowes, Inc., 25 F.3d 66, 70 (2d Cir. 1994)) (internal quotation marks omitted). The determination is flexible and “entrusted to the [Court's] sound discretion.” Id. (citing United States v. Yonkers Bd. of Educ., 801 F.2d 593, 594-95 (2d Cir. 1986)) (internal quotation marks omitted). A court considers “(a) the length of time the applicant knew or should have known of its interest before making the motion; (b) prejudice to existing parties resulting from the applicant's delay; (c) prejudice to the applicant if the motion is denied; and (d) the presence of unusual circumstances militating for or against a finding of timeliness.” Id. (quoting MasterCard Int'l Inc. v. Visa Int'l Serv. Ass'n, Inc., 471 F.3d 377, 390 (2d Cir. 2006)) (internal quotation marks omitted).

         NCUA asserts that its motion is timely because it filed its motion the day after Defendant filed its motion to dismiss and less than two months after the Complaint was filed. Int. Mem. at 6-7; Reply at 2-3. NCUA also argues that there is no prejudice to the parties because discovery has been stayed, and because NCUA does not seek to add any additional trusts to the case. Int. Mem. at 7; Reply at 3. Denial of intervention, NCUA argues, will prejudice its interests because a decision from this Court could affect any separate case NCUA might bring and could produce inconsistent rulings as to whether HSBC can use trust funds from the FHLT 2006-C trust to pay for its defense in the underlying litigation. Int. Mem. at 8; Reply at 4. Lastly, NCUA claims that there are no unusual circumstances bearing on timeliness that disfavor intervention. Int. Mem. at 8-9; Reply at 4.

         Defendant argues that NCUA knew about its alleged interest in this case well before it sought to intervene and intended to delay the case by waiting to move to intervene until after Royal Park's motion to dismiss was filed. Opp. at 19-22. The delay prejudices HSBC because intervention would postpone resolution of the parties' dispute to allow NCUA to make arguments that Royal Park is well-suited to make itself. Id. at 23. HSBC claims that NCUA would not suffer any prejudice if this Court denies its motion because it can file a separate action to protect its purported interest, and that no unusual circumstances favor intervention. Id. at 23- 24.

         The Court finds that, in all, NCUA's motion is timely. While its motion did not immediately follow the Complaint's filing, NCUA did move within two months of the case's commencement.[5] Were the Court to grant Intervenor's motion, it would likely strike the current briefing on Defendant's motion to dismiss, and order the plaintiffs to file a single consolidated amended complaint. Doing so would generate some amount of prejudice to HSBC, which would have to again move to dismiss the complaint. But there could also be prejudice to NCUA in denying intervention, as denial could potentially lead to inconsistent rulings as to HSBC's ability to fund its litigation defense from the FHLT 2006-C trust, and the trust funds could thereby be depleted to NCUA's detriment. And lastly, the Court does not find any notable unusual circumstances that militate for or against intervention. On balance, the Court finds NCUA's motion to be timely.

         ii. NCUA Does Not Have a Sufficient Interest in the Action to Intervene

         “[F]or an interest to be ‘cognizable' under Rule 24, it must be direct, substantial, and legally protectable [such that an] interest that is remote from the subject matter of the proceeding, or that is contingent upon the occurrence of a sequence of events before it becomes colorable, will not satisfy the rule.” Floyd, 770 F.3d at 1060 (quoting Bridgeport Guardians, Inc. v. Delmonte, 602 F.3d 469, 473 ...

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