Newsflash: How Secure Is a Securitization’s "Debt" Classification for ERISA Purposes? Pending Sub-Prime Lawsuit Asks Court to Look Through the Matter

April 03, 2019

A recent judicial decision involving a securitization vehicle may highlight the importance of the “plan assets” analysis under the Employee Retirement Income Security Act of 1974 (“ERISA”) for such vehicles. In Powell v. Ocwen Financial Corporation, an investing ERISA plan (the “Plan”) has asserted that: (i) notes (“Notes”) it purchased from various trusts (the “Trusts”) that was invested in asset-backed securities (“ABS”) should be effectively treated as equity interests for ERISA purposes; (ii) as a result, based on the ERISA status of the investors who acquired Notes, the Trust’s assets, under applicable ERISA principles, were plan assets that were subject to ERISA; and (iii) the Plan therefore has ERISA claims against the Trust servicers (the “Servicers”).

The case is particularly noteworthy in that it marks the first time of which we are aware that a judicial decision (even an interlocutory one) has expressly raised the issue of whether the sponsors’ debt characterization of securities issued by the sponsors of a securitization vehicle for ERISA purposes may be incorrect, and that the vehicle would therefore be a plan-assets vehicle that is subject to ERISA. If an assertion of that type were correct, those with discretion over (or who provide investment advice with respect to) the assets of the vehicle may be ERISA fiduciaries with potential fiduciary liability under ERISA. In addition, any number of parties dealing with the vehicle could have excise-tax liability for possible “prohibited transactions” under the corresponding provisions of the Federal tax code.

Ocwen involves losses stemming from the 2008-2009 financial crisis involving so-called sub-prime debt securities. The defendants in Ocwen are the servicers of the Trusts, which held a pool of mortgage loan assets. The Plan is alleging that the Trusts were plan-assets vehicles that were subject to ERISA, and that the defendants were ERISA fiduciaries that violated their fiduciary duties. In this regard, the plaintiffs generally alleged that, in light of the ERISA status of the investors that had acquired Notes, the Trusts were subject to ERISA because the Notes should be characterized as equity, rather than as debt, for ERISA purposes. The court, while seemingly skeptical of this claim, nonetheless declined to dismiss the case at this stage.3 The Notes were apparently covered by a tax opinion from a major law firm that came to the conclusion that the Notes will be characterized as debt for Federal income-tax purposes.

It is not always immediately clear in advance just how a technical legal argument may actually move from the background to the foreground, and become the subject of significant litigation. Ocwen arguably demonstrates the practical risks that can arise when, for example, an investment vehicle’s assets diminish in value, thereby giving investors the incentive to find legal arguments in support of claims for material damages. 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, often in the background, have become the centerpiece of a lawsuit against major financial institutions.

If you would like to discuss Ocwen or any other ERISA-related matters relating to securitizations, please contact one of the Dechert lawyers listed below or any Dechert lawyer with whom you regularly work. 


1) 1:18-cv-01951 (S.D.N.Y March 15, 2019).

2) See 29 C.F.R. § 2510.3-101(f); ERISA § 3(42).

3) The court stated that the defendants “have filed numerous exhibits in conjunction with their motions to dismiss, which cast considerable doubt on Plaintiffs' ability to support these allegations.”  However, the court then directed that the parties engage in limited discovery with respect to (i) whether the underlying mortgages in the Trusts qualify as plan assets under ERISA and, (ii) if so, whether the Trust servicer is a Plan fiduciary.  In refusing to grant the defendants’ motion to dismiss, the court expressly stated that the “Plaintiffs may only proceed on their ERISA claims if two conditions are satisfied: first, the mortgages underlying the . . . Trusts must qualify under ERISA as ‘plan assets’ of the . . . Plan; and second, . . . the servicer of those ‘plan assets[]’ must qualify under ERISA as a "fiduciary" of the . . . Plan.” 

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