Written by Andrew Oringer and Steven Rabitz for Dechert LLP in April 2019
In Powell v. Ocwen Financial Corporation, the investing employee retirement income security act (ERISA) plan asserts that (1) notes it purchased from various trusts invested in asset-backed securities (ABS) should be effectively treated as equity interests for ERISA purposes; (2) resultingly, the trust’s assets were plan assets that were subject to ERISA standards; and (3) the plan, therefore, has ERISA claims against the Trust servicers. This pending subprime lawsuit functionally asks the Court to clarify the security of securitization’s debt classifications for ERISA purposes. This case highlights the importance of the “plan assets” analysis under ERISA for securitization vehicles.
The case is especially noteworthy, as it represents the court’s first consideration of debt characterization of sponsor-issued securities for ERISA purposes. Powell questions the validity of sponsors’ debt characterization of securities, arguing that securitization vehicles could be categorized as “plan-assets” vehicles that are subject to ERISA standards. If their assertion proves valid, those with discretion over the assets of securitization vehicles may be ERISA fiduciaries with potential liability. Additionally, any parties dealing with the vehicle could have excise-tax liability for “prohibited transactions” under the corresponding provisions of the Federal tax code.
Ocwen involves losses stemming from the 2008-2009 financial crisis loans labelled as “subprime debt securities.” The defendants in Ocwen are the servicers of the Trusts, which held a pool of mortgage loan assets. The Plan alleges that the Trusts were plan-assets vehicles subject to ERISA standards, and that the defendants were ERISA fiduciaries that violated their mandated duties.
Here, technical issues like the debt/equity characterization of the notes and other aspects of the analysis relating to plan-assets status of an investment vehicle have become the centerpiece of a lawsuit against major financial institutions’ practices.
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