Second Circuit Holds That ERISA Plan’s REMIC Regular-Interest Certificates Represent Beneficial Interests in Trust and Are Equity Interests Under DOL Plan-Asset Regulation; Remands for Consideration of Mortgage Servicer’s Fiduciary Status

In Powell as Trustee of United Food & Commercial Workers Union & Employers Midwest Pension Fund v. Ocwen Financial Corporation, — F.4th —-, 2026 WL 1084825 (2d Cir. Apr. 22, 2026) (Chin, Carney, and Sullivan, Circuit Judges) (amending and superseding 171 F.4th 598 (2d Cir. Mar. 26, 2026)), the trustees of an ERISA-regulated pension fund invested in six classes of residential mortgage-backed securities issued by six trusts: three Delaware statutory trusts that issued notes under indenture agreements, and three New York trusts structured as real estate mortgage investment conduits (“REMICs”) that issued regular-interest certificates. The trustees filed a putative class action against Ocwen Financial Corporation and its affiliates (“Ocwen”), the servicer for all six trusts, and Wells Fargo Bank, N.A., the master servicer for three of them, alleging breach of fiduciary duty, prohibited transactions, and co-fiduciary liability arising from Ocwen’s alleged mismanagement of and self-dealing with respect to the underlying mortgage pools. The threshold question before the district court and the Second Circuit was whether the mortgages held by the six trusts qualified as plan assets, thereby triggering ERISA’s fiduciary obligations as to Ocwen’s and Wells Fargo’s conduct. The district court granted summary judgment to defendants, concluding that both the indenture notes and the REMIC regular-interest certificates constituted debt instruments with no substantial equity features under the Department of Labor’s plan-asset regulation, 29 C.F.R. § 2510.3-101, such that the underlying mortgages were not plan assets. The trustees appealed.

Under the DOL regulation, the general rule is that when a plan invests in an entity, the plan’s assets include the investment itself but not the underlying assets of the entity. A “look-through” exception applies, however, when the plan holds an “equity interest,” defined as any interest other than an instrument “treated as indebtedness under applicable local law and which has no substantial equity features.” The regulation further provides that a “beneficial interest in a trust” is categorically an equity interest.

The Second Circuit affirmed in part and vacated in part. As to the three indenture trusts, the court affirmed the district court’s holding that the notes lacked substantial equity features. Applying the traditional debt-equity distinction, the court reasoned that the quintessential attribute of equity is a realistic possibility of upside potential through a residual interest in an enterprise’s performance risk, not merely exposure to credit risk. The indenture notes carried fixed interest at fixed maturity dates, granted no residual interest in the trusts’ estates, and were senior to separate residual certificates issued by the same trusts. The court rejected the trustees’ arguments that thin capitalization, subordination to general creditors, use of note proceeds to fund the mortgage pool, and practical dependence of repayment on mortgage performance constituted substantial equity features, holding that universal credit risk shared by all creditors cannot, as a matter of law, be a substantial equity feature.

As to the three REMIC trusts, the court reversed the district court and held that the plan’s regular-interest certificates represent beneficial interests in the trusts and are therefore equity interests under the regulation’s plain text. Applying New York law, which governs each of the REMIC trusts, the court found that “any right given by the trust instrument to receive a benefit from the trust in some contingency” constitutes a beneficial interest. Each REMIC trust agreement expressly conveyed the underlying mortgage pool to the trustee for the benefit of certificateholders, and directed the trustee to collect and distribute mortgage proceeds to regular-interest certificate holders. The court rejected defendants’ contention that only residual certificate holders qualify as trust beneficiaries, finding it contradicted by the trust agreements’ plain language. The court also observed that the regulation’s carved-out exception for government-guaranteed mortgage pool certificates would be superfluous unless certificates backed by mortgage pools could otherwise qualify as equity interests. The Second Circuit declined to address whether the mortgages underlying the REMIC trusts in fact constitute plan assets, leaving that determination to the district court on remand, along with the question of whether Ocwen’s servicing functions qualified as a fiduciary activity under ERISA.

Note on Amendment: The original opinion (171 F.4th 598, decided March 26, 2026) was amended and superseded on April 22, 2026 (2026 WL 1084825). The original opinion stated that the REMIC regular-interest certificates qualified as equity interests because they represented beneficial interests in the trusts and that, as a result, “the mortgages underlying the regular-interest certificates” were plan assets. The amended opinion narrows the court’s holding: rather than declaring the underlying mortgages to be plan assets, the court holds only that the certificates are equity interests and remands with explicit instruction that the district court must first determine whether the look-through exception’s additional conditions are satisfied before concluding that the underlying assets are plan assets. The amended opinion also correspondingly changes the disposition from “affirmed in part, reversed in part, and remanded” to “affirmed in part, vacated in part, and remanded,” and adds a footnote identifying the additional elements the district court must address on remand, including whether the plan’s investment is not a publicly-offered security, not a registered investment company security, and whether benefit plan investor equity participation in the entity is significant.