IN RE: HBK MASTER FUND L.P. (2026)

Order, Supreme Court, New York County (Andrea Masley, J.), entered on or about July 8, 2025, which, to the extent appealed from as limited by the briefs, granted defendant/respondent NewRez LLC's motion to dismiss the complaint/petition in this hybrid plenary action and CPLR article 77 proceeding pursuant to CPLR 3211(a)(1) and (7), unanimously affirmed, without costs.

Plaintiff/petitioner HBK Master Fund LP, seeks to enforce rights under the Pooling and Servicing Agreement (PSA) related to the Series 2004–W5 Trust (Trust), a residential mortgage-backed security trust.  The Trust was administered by nominal defendant/respondent Deutsche Bank National Trust Company as trustee, and NewRez as the servicer was responsible for collecting payments from borrowers and remitting those funds to the trustee for distribution to investors.  When borrowers fell behind in their payments NewRez was responsible for curing delinquencies or pursuing foreclosure in order to maximize recoveries for certificate holders.  HBK was issued 100% of the Trust's Class CE certificates, which were subordinate to the Class A and Mezzanine Class (Class M) Certificates.

The PSA contains a no-action clause in § 11.03, which provides that no certificate holder shall have “any right” to “institute any suit, action or proceeding” unless they are “the Holders of Certificates entitled to at least 25% of the Voting Rights.”  PSA § 1.01 defines “Voting Rights” as the portion of the voting rights of all Certificates that is allocated to any Certificate “in proportion to the then outstanding Certificate Principal Balances of their respective Certificates․  The Voting Rights allocated to each Class of Certificates shall be allocated among Holders of each such class in accordance with their respective Percentage Interests as of the most recent Record Date.”

In November 2019, after the Trust suffered losses due to the 2008 change in the mortgage market and the federal intervention that followed, the Aggregate Stated Principal Balance of remaining mortgage loans fell below 10% of the original balance.  As a result, NewRez, pursuant to PSA § 9.01(b), elected to exercise its right to purchase all remaining Trust assets and terminate the Trust.  NewRez purchased the remaining mortgage loans and the REO property, which the PSA defines as mortgaged property acquired by the servicer on behalf of Trust certificate holders through foreclosure or deed-in-lieu of foreclosure.  NewRez calculated the Termination Price in accordance with the formula contained in PSA § 9.01(b) and delivered it to Deutsche Bank as trustee.  Deutsche Bank, in turn, distributed the funds to certificate holders according to the payment priorities established in the PSA for all such distributions.

HBK asserts that when NewRez terminated the Trust in November 2019 by calculating and paying the Termination Price, the Class M–7 and Class CE Certificate holders did not receive funds they were entitled to receive through the PSA's waterfall cashflow distributions.  Specifically, HBK alleges that the Class M–7 and Class CE Certificate holders did not receive any funds because NewRez excluded the “Deferred Principal Balances” from the “Stated Principal Balance” when it calculated the “Termination Price.”

By letter dated October 10, 2023, HBK gave Deutsche Bank written notice pursuant to PSA § 11.03 of an ongoing default and requested that it commence legal action against NewRez.  By letter dated November 20, 2023, Deutsche Bank declined the request but stated that it had no objection to “HBK proceeding with legal action in its own name for the benefit of all Trust beneficiaries.”  On December 14, 2023, HBK commenced this hybrid action/proceeding.

The first cause of action in the complaint alleges that NewRez breached § 9.01 of the PSA by underpaying the Termination Price by at least $3.25 million.  The second cause of action seeks a declaration that NewRez's Termination Price should have included the Deferred Principal Balances.  The CPLR article 77 petition asks the court to instruct Deutsche Bank and NewRez on the correct calculation of the Termination Price, to require NewRez to deliver to the Trust the underpayment amount with statutory interest, and to direct Deutsche Bank to distribute to outstanding certificate holders the additional amounts received from NewRez in accordance with the priority of payments set forth in the PSA.

The motion court properly dismissed the complaint/petition based on documentary evidence.  Under the language of PSA § 11.03, only the trustee has any right to institute an action, suit, or proceeding with respect to the PSA, and may only do so after the Holder of Certificates entitled to at least 25% of the voting rights places the trustee on notice of a continuing default and offers reasonable indemnity against costs, expenses, and liabilities to be incurred in instituting the action.  PSA § 11.03 also allows the trustee to refuse to litigate, and to allow the Holder of Certificates with at least 25% of the voting rights to bring the action.  However, a certificate holder being entitled to at least 25% of the voting rights is a condition precedent to requesting or commencing a legal action (see ACE Sec. Corp. v. DB Structured Prods., Inc., 112 A.D.3d 522, 523, 977 N.Y.S.2d 229 [1st Dept 2013], affd 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 [2015] ).  Thus, for HBK to have any right to sue NewRez, it first had to be entitled to at least 25% of the Voting Rights of Class CE Certificates on October 10, 2023, the date on which it requested that Deutsche Bank institute a legal action.

The documentary evidence contradicts HBK's assertion that if NewRez had not omitted Deferred Principal Balances and properly allocated these amounts in the percentage of Voting Rights calculation, HBK would have held at least 41% of the Voting Rights.  The distribution reports prepared by Deutsche Bank establish that on April 27, 2015, the Class CE Certificates had a Realized Loss of $392,725.59.  In October 2019, the Class CE Certificates had a Current Principal Balance of $51,814.17 which at the time represented only approximately 0.1% of the Voting Rights, and the November 25, 2019, posttermination distribution report lists the “Certificate Principal Balances” for Class CE Certificates and M–7 Certificates as zero, which represents 0.0% of the voting rights for all certificates.

The PSA's no-action clause requirement, a condition precedent that HBK has not met, is a complete defense to HBK's unsupported assumptions of the potential percentage of Voting Rights it claims it would have after a reallocation of the Deferred Principal Balance (see Hudson ES LLC v. First Franklin Fin. Corp., 248 A.D.3d 414, 415, 251 N.Y.S.3d 666 [1st Dept 2026] ).  HBK has not refuted the documentary evidence submitted by NewRez, which demonstrates that posttermination in November 2019, the outstanding Certificate Principal Balances of all relevant voting certificates was and remained zero through October 10, 2023, an insufficient amount to request that Deutsche Bank institute legal action.  Thus, HBK does not hold at least 25% of the Voting Rights required by the no-action clause to institute a legal action.

HBK asserts that in November 2019, all certificate holders that received a distribution gave their Certificates to the trustee in exchange for repayment of their entire outstanding Certificate Principal Balances.  HBK further asserts that since it still physically possesses the Class CE Certificates posttermination, pursuant to PSA § 1.01 it is the current Holder of 98% of the Voting Rights for all the outstanding Certificates.  However, this argument distorts the plain meaning of the no-action clause because there was no Certificate Principal Balance remaining in the Class CE Certificates to be repaid.  The Class CE Certificates had zero value when HBK made the request to Deutsche Bank, and therefore had no percentage of voting rights.  No additional meaning should be implied that would add new terms to the PSA (see Walnut Place LLC v. Countrywide Home Loans, Inc., 96 A.D.3d 684, 685, 948 N.Y.S.2d 580 [1st Dept 2012] ).  The PSA's no-action clause should be read narrowly and should not be construed to add new terms that imply additional rights that were not intended by the parties (see Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 560, 992 N.Y.S.2d 687, 16 N.E.3d 1165 [2014] ).  Even if HBK continued to physically possess the Class CE Certificates, HBK did not have 25% of the Voting Rights under the PSA's no-action clause because the principal balance of the certificates was zero.

Considering our disposition, we need not address HBK's remaining arguments.

Motion for leave to file an amicus brief, granted.