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Suits trying to hold mortgage-backed securities trustees liable for MBS losses haven’t been at the forefront of investor litigation spawned by the mortgage crisis. But a ruling Monday in a putative class action against Bank of America and U.S. Bancorp reaffirms that such claims spell big trouble for banks.

Expanding on an earlier decision from December, U.S. District Judge Katherine Forrest in Manhattan ruled that plaintiffs lawyers at Scott + Scott and Cohen Milstein Sellers & Toll can press ahead with claims against BofA and U.S. Bancorp over their roles as trustees for billions of dollars in MBS certificates issued by Washington Mutual Bank. Among other things, the plaintiffs allege that the banks breached their obligations under loan pooling and servicing agreements for the securities by failing to notify investors of loan defaults. They seek to hold the defendants liable for violating both the agreements and the Trust Indenture Act of 1939.

Forrest held that the plaintiffs can pursue both the TIA and contract claims, rejecting the banks’ argument that they can’t be held liable because they weren’t on notice of the alleged breaches under the terms of the agreements. The defendants are represented by Munger, Tolles & Olson and Sidley Austin (for BofA) and Morgan, Lewis & Bockius (for Bancorp unit U.S. Bank National Association).

"[D]efendants assert that allowing a contract claim to proceed on the theory plaintiffs here propose would open the floodgates to a new era of litigation relating to losses arising from MBS," Forrest wrote. "It is not, however, the job of this Court to pass judgment on the desirability of a particular type of litigation. . .The job of this Court is to determine whether a set of facts states a plausible claim. Here, for the reasons set forth below, the answer is yes."

As we’ve reported, last April U.S. District Judge William Pauley III in Manhattan became the first judge to give MBS plaintiffs the green light to sue trustees under the TIA when he refused to dismiss a proposed class action against Bank of New York Mellon over its role as trustee for MBS issued by Countrywide Financial. In February Pauley certified the issue of the TIA’s applicability to MBS claims for interlocutory appeal, offering the banks a chance to hobble the plaintiffs at the U.S. Court of Appeals for the Second Circuit. We couldn’t immediately confirm Tuesday whether the appeal was moving forward.

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