SS M&A Litigation Outlook - Flipbook - Page 26
ln re National Collegiate Student Loan Trusts Litigation,
C.A. No. 12111-VCS (Del. Ch. Aug. 27, 2020)
Why it is important
In In re National Collegiate Student Loan Trusts
Litigation, the Delaware Court of Chancery held
in a 191-page ruling that trusts holding title to
collateralized student loans had a fiduciary duty to
exercise control rights retained under securitization
agreements for the benefit of the noteholders and
other parties who held beneficial interests in the loans
and could not exploit their control rights for personal
gain through self-dealing transactions. The court’s
decision, which addressed the fiduciary duties owed
to the beneficial owners of the collateralized loans as
a matter of first impression and myriad other legal
issues, provides guidance on the legal principles
courts will use to interpret indenture agreements in
securitization transactions.
Summary
The disputes at issue in this litigation concern a
group of Delaware statutory trusts formed between
2003 and 2007 for the purpose of acquiring and
servicing a multi-billion dollar portfolio of student
loans. The function of the trusts, the court found,
was to “serve as special purpose vehicles designed
to separate the Student Loans from the balance
sheets of the financial institutions that first extended
credit to the borrowers.” They did so in the following
manner: first, the trusts acquired the student
loans with proceeds they received by issuing notes;
they then entered into an indenture, granting all
“right, title and interest” in the student loans to an
Indenture Trustee acting for the noteholders, with
the trusts retaining an obligation to “provide for” the
“administration” and the “servicing of the Student
Loans.” Myriad disputes arose regarding what
powers the trusts, which held title to the student
loans, had retained, and what duties they owed
to the noteholders, reinsurers, and other parties
who acquired beneficial interests in the student
loans. The trusts argued that they had not assigned
ownership of the student loans under the indenture
agreement and accordingly remained free to direct
their representatives “to do anything with respect to
the Trusts as long as the directions fit within certain
contractual boundaries.” The beneficial owners of
the loans disagreed and argued that “the Owners
lack any plenary authority to control the Trusts, and
certainly have no right to cause the Trusts to enter
into self-dealing transactions.”
The Court of Chancery held that as a matter of New
York law, the indenture agreement created both a
precautionary security interest and an assignment,
and that it was an “inescapable conclusion, based on
the plain language of the Indenture, that the Trusts
currently have no beneficial interest in the Student
Loans that serve as collateral for the Notes.” The
court further found that, as a matter of Delaware
law, “the Owners’ ultimate control over certain
aspects of these owner-directed Trusts justifies
the imposition of fiduciary duties upon them,
running to the Indenture Parties, to the extent they
exercise that control as the Trusts’ fulfill their role as
administrator (and collector) of the Student Loans.”
The court also noted that other disputes among the
parties “too numerous to recite” had arisen, and
that “the parties are so disconnected in their views
of the transactional structure created by the Trust
Related Agreements . . . that they have brought 143
competing requests for declaratory relief relating
to nearly all aspects of the Trusts’ governance
and operation.” These disputes, the court found,
“have left the Trusts in a state of near paralysis,”
including because “[t]hird parties interacting
with the Trusts cannot determine who actually
speaks for the Trusts and who has authority to
bind the Trusts.” The court’s ruling provides
guidance on the legal principles courts will use to
interpret indenture agreements in securitization
transactions and may be helpful to parties seeking
to reduce the likelihood of similar disputes in future
securitization transactions.
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