MANHATTAN, N.Y. (7/22/15)--A U.S. District Court judge in Manhattan has rejected a motion to dismiss the National Credit Union Administration’s lawsuit against HSBC Holdings Plcs over the bank’s failure as trustee to monitor 37 residential mortgage-backed securities (RMBS) totaling $2.37 billion.

The securities contributed to the failure of U.S. Central and four other corporate credit unions.

According to Reuters.com (July 21), U.S. District Court Judge for the Southern District of New York Shira A. Scheindlin said that NCUA has standing to sue even though it has already recovered most of the resecuritized debt and a new trustee had refused to file the suit on NCUA’s behalf.

Scheindlin also rejected HSBC’s argument that the lawsuit came too late. NCUA filed the suit March 20, six years after the first two corporates failed.

The agency can still pursue claims as the corporates’ “conservator” or “liquidating agent,” even though it has resecuritized the distressed securities and guaranteed payments on the newly issued notes. NCUA sued to fulfill its governmental purpose of stabilizing the credit union system, Scheindlin said. She noted it was “perverse” to conclude that the agency is not bringing suit as a conservator or liquidating agent “simply because it took this extra step.”

NCUA sued in its capacity as liquidating agent for U.S. Central, Western Corporate, Constitution Corporate, Members United Corporate and Southwest Corporate credit unions (News Now March 22). The suit alleges the bank violated state and federal law by failing to fulfill its duties as trustee for the securities’ trust dating from 2004 to 2007. Specifically, HSBC failed to provide required notices to certificate holders and other parties, properly monitor loan servicers, and take timely action to force the repurchase, substitution or cure of defective mortgage loans or otherwise preserve trust remedies, the complaint said.

CUNA supports NCUA’s efforts to recover funds lost on behalf of the corporate credit unions because the funds recovered help offset the costs of corporate stabilization. The lawsuit is one of a number of suits the agency has filed against various banks over RMBS trusts.

A similar lawsuit against U.S. Bank National Association and Bank of America National Association was filed in December over 99 RMBS but another federal judge in Manhattan dismissed it, citing the resecuritized securities. However, Scheindlin said she disagreed with that ruling, made by U.S. District Court Judge Katherine Forrest, and added the case could also be distinguished on its facts. NCUA filed an amended complaint against BofA and U.S. Bank last week, said Reuters.