Skip to main content

Request for Good Faith Finding in New York Article 77 Proceedings May Not Waive Privilege

In an Article 77 trust instruction proceeding, the Commercial Division of the Supreme Court of the State of New York recently issued a ruling safeguarding privileged communications between a corporate trustee and securities administrator (the “trustee”) and its counsel where the trustee is seeking a finding of good faith. The development suggests that trustees and other parties may seek findings of good faith in Article 77 proceedings without losing privilege protections, so long as certain criteria are met.

In 2021, the trustee filed a petition under Article 77 of the New York Civil Practice Law and Rules seeking judicial guidance concerning certain issues related to the application of the payment waterfalls for dozens of residential mortgage-backed securitizations. Among other things, the trustee’s petition seeks a finding that it acted in good faith in making changes to its application of the waterfalls prior to the filing of the petition, and seeks instruction concerning the appropriate future application of the waterfalls. Numerous investors have appeared in the case and are taking conflicting positions.

Following discovery, a single investor filed a motion to compel seeking disclosure of documents and testimony regarding communications between the trustee and its counsel. The investor asserted that the trustee has placed its discussions with counsel at issue because it is seeking a finding that it acted in good faith in changing its waterfall practices. The investor argued that the trustee changed its practices only after receiving certain demand letters and conducting a “review” that consisted only of conferring with counsel. According to the investor, it needed sufficient information to assess the review—which would require the disclosure of privileged communications with counsel.

The trustee resisted disclosure, arguing that it explicitly told the investor that it was not relying on advice of counsel in seeking a good faith finding and instead was relying solely on a February 2020 court order from another case. The trustee said it would not rely on, or even refer to, the trustee’s discussions with counsel in seeking a good faith finding. For this and other reasons, the trustee argued that the documents and communications sought by the investor were protected by the attorney-client privilege.

The Court ultimately denied the investor’s motion. It agreed that the trustee had not placed any legal advice at issue because it is only seeking a good faith finding based on its compliance with a prior court order, not on anything discussed with counsel. However, the Court added that if the trustee were “arguing that it is entitled to a good faith finding based on having followed the advice of counsel,” then that “advice would be at issue and disclosure would be required.”

While this ruling applies well-established law, it is nonetheless significant in that in confirms that a trustee or other party does not automatically waive any privileges or protections merely by seeking a finding of good faith in a New York Article 77 proceeding. So long as a party does not affirmatively rely on advice of counsel and instead relies on a non-privileged record, it may seek a good faith finding without effecting a waiver. For parties that may find themselves in trust instruction proceedings, this provides useful guidance that should be used for planning and strategy related to issues of historical conduct and requests for judicial protection or relief.

The decision discussed in this update was issued in In the Matter of the Application of Wells Fargo Bank, NA (as Trustee or Securities Administrator of Certain Residential Mortgage Backed Securitization Trusts) For Judicial Instructions Under CPLR Article 77 on the Administration and Distribution of Subsequent Recoveries and the Proper Application of Related Write-Ups, Index No. 154984/2021 (Sup. Ct. N.Y. Cnty.).  We will continue to monitor the case and may provide future updates concerning the decision, including with respect to any challenges or appeals.

Subscribe To Viewpoints


Keith M. Kollmeyer is a Member at Mintz who advises financial institutions in complex litigation and regulatory matters involving structured financial products and consumer financial products, with a particular emphasis on matters involving asset-backed securities (ABS). He represents clients in high-stakes cases in state and federal courts in New York and Delaware.

Alyssa C. Scruggs