Although the Trusts granted their rights, title, and interest in the Collateral, they retained a duty to provide for the administration and servicing of the loans.6 since the Trusts did not have any employees, an owner trustee (the Owner Trustee) had the right to act on the Trusts’ behalf for this purpose. Further, Ambac Financial Group (the Reinsurer) acted as a reinsurer with the responsibility for covering any shortfalls in payments that were due to the noteholders.⁷

Once several actions were consolidated, the parties moved for judgment on the pleadings on 143 requests for declaratory relief.⁸ As a matter of first impression in Delaware, the court was asked to determine whether, under Delaware law, the “Owners” (who were holders of residual interests with a right to collect loan proceeds after no notes remain outstanding), with obligations and an incentive to collect on the student loans, owe fiduciary duties to noteholders and the Reinsurer.⁹

Analysis

In its analysis, the court stated a foundational principle in Delaware fiduciary jurisprudence: “one who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner.”¹⁰ Under this principle, the court explained that while the noteholders and the Reinsurer are not beneficial owners of the Trusts, they are the beneficial owners of the Collateral.¹¹ In the Indenture, the Trusts granted all their interest in the Collateral “to the Indenture Trustee, as trustee for the benefit of the [noteholders and Reinsurer].”¹² However, the Trusts retained legal title to the Collateral so that they could collect student loans for distribution according to the Indenture.¹³

The court observed that when parties agree to split legal and equitable title to property in an assignment for purposes of collection, “the resultant split in ownership gives rise to a fiduciary relationship between the assignor and assignee.”¹⁴

The court’s conclusion relies on the key “underlying premise for the imposition of fiduciary duties,” i.e., the “separation of legal control from beneficial ownership.”¹⁵ Thus, if parties agree to divide property in this manner, “[e]quitable principles act in those circumstances to protect the beneficiaries who are not in a position to protect themselves.”¹⁶ Thus, the Trusts owe fiduciary duties to the noteholders and Reinsurer (the beneficial owners of the Collateral) to the extent the Trusts exercise control over the Collateral.¹⁷

Because the Owners have the right to direct the Trusts, “the Owners also owe fiduciary duties to the noteholders and [Reinsurer] to the extent they direct the Trusts in their control of the Collateral for the purposes of collecting the student loans (or otherwise purport to exercise control over the assigned Collateral).”¹⁸ Importantly, the court observed that the “Trust Agreements could have waived this fiduciary duty with clear and unambiguous language.” However, “nothing in the Trust Agreements purports to alter the Owners’ common law fiduciary duties.”¹⁹

Key takeaways

Statutory trusts that hold property for the benefit of noteholders and a reinsurer owe fiduciary duties to those noteholders and reinsurer under the principles of Delaware law. Further, certain owners of a residual right in those trusts’ collateral and the ability to direct the actions of the trusts owe fiduciary duties to those noteholders and reinsurer.

1. ---

   In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402 (Del. Ch. Aug. 27, 2020).
2. In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402, at *2.
3. Id at *5.
4. Id. at *7.
5. Id. at *8.
6. In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402, at *2.
7. Id.
8. Id. at *15. This article focuses on the court’s analysis of fiduciary duties.
9. Id. at *20.
10. In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402, at *60.
11. Id. at *59.
12. Id.
13. Id.
14. In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402, at *59.
15. Id.
16. Id.
17. The court made sure to clarify its ruling by stating: “To be clear, this fiduciary duty arises because of the noteholders and [reinsurer’s] relationship to the Collateral, rather than their relationship to the Trusts. As long as the Notes are outstanding, the Indenture Trustee holds the Collateral for the benefit of the holders of the Notes and [reinsurer].”
18. In re Nat’l Collegiate Student Loan Tr. Litig., 2020 WL 5049402, at *60.
19. Id.

Client Alert 2020-544