Second Circuit Enforces the No-Action Clause of a Pooling and Servicing Agreement

June 13, 2012

In Teachers Insurance and Annuity Association of America v. CRIIMI MAE Services Limited Partnership, No. 11-940-cv, 2012 WL 1994473 (2d Cir. June 5, 2012) (“TIAA”), the Second Circuit affirmed the district court’s order granting summary judgment on plaintiffs’ breach of contract claims because they failed to satisfy their pre-suit obligations under the operative pooling and servicing agreement (“PSA”).

The decision is notable because it further develops the law in the Second Circuit with respect to the interpretation and enforcement of a no-action clause in a PSA. As many courts including the Second Circuit agree, strict enforcement of no-action clauses is important because the cost of defending frivolous litigation brought by an individual certificateholder is borne by the trusts and, therefore, by all certificateholders.


In TIAA, certain certificateholders holding 25 percent of the interest-only (“IO”) class of certificates in a commercial real estate mortgage investment conduit brought breach of contract claims against the special servicer for the transactions. Plaintiffs alleged that the special servicer breached the terms of the PSA by selling one of the underlying loans and applying the sale proceeds as a payment of principal thereby depriving plaintiffs of their contractual right to interest payments.

The special servicer moved for summary judgment based on the no-action clause of the underlying PSA, which is similar in most PSAs and provided in pertinent part:

No Certificateholder shall have any right to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless . . . the Holders of Certificates representing Percentage Interests of at least 25% of each affected Class of Certificates shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 30 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding.

Teachers Ins. & Annuity Ass’n of Am. v. CRIIMI MAE Servs. Ltd. P’ship, 763 F. Supp. 2d 665, 667 (S.D.N.Y. 2011) (emphasis added).

Based on the above provision, Defendants argued that Plaintiffs’ claims were barred because they did not hold 25 percent of an additional class of certificates (the “A-1” certificates) that had the right to receive both principal and interest (P&I) under the PSA, which class also would have suffered injury under Plaintiffs’ theory. Because the no-action clause required 25 percent representation from “each affected class,” Defendants argued that summary judgment should be granted for Plaintiffs’ failure to comply with their obligations under the PSA. In response, Plaintiffs argued that the A-1 class was not adversely affected because it received the sale proceeds as a return of principal. Judge Kaplan, the district court judge, disagreed and held that Plaintiffs did not satisfy their burden to demonstrate that the A-1 certificates were not adversely affected by the loss of interest at the high certificate rate (7.1%) provided under the terms of the PSA. Therefore, the district court held that Plaintiffs did not hold the required 25 percent of certificates in each affected class to commence a suit under the PSA. Id. at 670. In a succinct Summary Order, the Second Circuit affirmed the district court’s ruling that “as a matter of law . . . [the] Class A-1 Certificateholders were adversely affected because they did not receive the interest income that they otherwise would have received had defendants not sold the loan.” TIAA, 2012 WL 1994473, at *1. 

The TIAA decision is a notable development in the Second Circuit. While the Second Circuit has addressed no-action clauses in the context of trust indentures, the TIAA decision explicitly confirms that no-action clauses in PSAs should be strictly construed and routinely enforced.  The TIAA decision also clarifies that under an agreement like the one in TIAA, 25 percent of each adversely affected class must be represented to bring a lawsuit for breach of contract. No-action clauses provide an important and fundamental check on an individual certificateholder’s agenda and should be considered as a first line of defense in any breach of contract action. Indeed, TIAA reminds practitioners to analyze critically whether other classes of certificates might be adversely affected when assessing compliance with a no-action clause, and not merely verify that the complaining parties have the requisite percentage ownership of the class of securities they claim are affected.

This alert was authored by Bingham securities and financial institutions litigation partner Susan F. DiCicco and counsel Colleen J. O’Loughlin. For more information about the subject matter of this alert, please contact the authors or a Bingham partner with whom you regularly work.

This article was originally published by Bingham McCutchen LLP.