September 26, 2019

United States Supreme Court May Consider Constitutionality of Minnesota Trust Code

A Petition for Certiorari is pending before the Supreme Court of the United States in the case of Ambac Assurance Corporation v. U.S. Bank National Association, asking the Court to consider the constitutionality of whether Minnesota Courts may exercise in rem jurisdiction over trust assets that are not located in Minnesota. The Petition is set for conference on October 1, 2019.

Case Background

U.S. Bank National Association, the Respondent to the Petition for Certiorari to the Supreme Court, serves as trustee for a residential mortgage-backed trust known as HarborView Mortgage Loan Trust 2005-10. After the financial crisis, certain Trust investors directed U.S. Bank to initiate litigation against the originator of the underlying mortgage loans. After years of litigation, the originator made a settlement offer to the Trustee. The Trustee commenced a trust instruction proceeding (TIP) in Minnesota state court under the Minnesota Trust Code seeking direction from the Minnesota court with respect to the proposed settlement and invoking the court’s in rem jurisdiction over the Trust’s assets.

Ambac Insurance Corporation, an insurer with a subrogated beneficial interest in the insured certificates issued by the Trust, is the Petitioner with respect to the Petition. Ambac objected to the Minnesota court’s exercise of in rem jurisdiction over the Trust and moved to dismiss U.S. Bank’s TIP based on, among other things, the argument that the Minnesota court could not exercise in rem jurisdiction over the Trust consistent with due process. The district court denied Ambac’s motion to dismiss, and Ambac appealed. The Minnesota Court of Appeals upheld the district court’s exercise of in rem jurisdiction over the Trust in an unpublished opinion, reasoning that the “contact” between the Trust property and the state of Minnesota satisfied due process requirements.

The Minnesota Supreme Court declined further review, and Ambac filed the Petition before the Supreme Court of the United States on February 11, 2019. U.S. Bank initially filed a waiver of its right to respond, but the Supreme Court thereafter requested a response which U.S. Bank filed on May 22, 2019. Ambac filed its reply brief on June 5, 2019.

What Are the Arguments?

The crux of the substantive argument in favor of granting the Petition is that the Minnesota courts’ decisions violate constitutional due process limits on in rem jurisdiction.

In the decisions below, the Minnesota courts focused on the Trust’s intangible rights to pursue litigation and that Minnesota was where U.S. Bank had in part administered the Trust and made decisions regarding the New York action. The Minnesota courts determined that these factors satisfied due process requirements, because they provided sufficient contact between the Trust property and the state of Minnesota.

Ambac argues in the Petition that the Minnesota courts ignored due process requirements, because the Trust’s primary assets—the mortgage loans that generate cash flow to Trust beneficiaries—are located outside of Minnesota and thus not subject to the state’s in rem jurisdiction. Ambac contends that the decision of the Minnesota Court of Appeals would allow courts of any state in which corporate trust services are provided to issue orders that bind property, and the interests of persons therein, well beyond their territorial jurisdiction.

In its opposition brief, the Trustee argues that the courts below correctly applied the “minimum contacts” standard of due process by relying on the location where the Trustee exercises the right to pursue litigation. The Trustee further contends that the Petition should be denied because there is no division of authority on the issue, the question presented only implicates one statute of one state, and the Petition is a poor vehicle for addressing the question because the Petition is interlocutory and because Ambac is an insurer rather than a certificateholder.

The Petition is set for conference October 1, 2019.

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