ERISA Plan-Asset “Look-Through” for RMBS: Regular-Interest Trust Certificates Are Beneficial Interests; Indenture Notes Without Substantial Equity Features Are Not

Case: Powell v. Ocwen Fin. Corp. (2d Cir. Mar. 26, 2026)
Court: United States Court of Appeals for the Second Circuit
Core Holding: Under the DOL plan-asset regulation, mortgages backing RMBS indenture notes are not ERISA plan assets when the notes are “indebtedness” with “no substantial equity features,” but mortgages backing RMBS trust certificates are plan assets when the certificates constitute “beneficial interest[s] in a trust.”

1. Introduction

This appeal arose from ERISA claims brought by trustees of the United Food & Commercial Workers Union & Employers Midwest Pension Fund (the “Plan”) against mortgage servicers and related entities. The Plan invested in six classes of residential mortgage-backed securities (“RMBSs”) issued by six RMBS trusts. Three investments were notes issued pursuant to indenture agreements (Delaware statutory trusts), and three were regular-interest trust certificates issued by New York-law REMIC trusts.

The trustees alleged that the mortgage servicer (Ocwen) mismanaged the underlying mortgage loans and engaged in self-dealing and prohibited transactions, and that the master servicer (Wells Fargo) failed to supervise and failed to pursue claims. The threshold issue was whether the mortgages backing the RMBSs were “plan assets” under ERISA—because fiduciary status and ERISA duties turn on authority or control over plan assets.

Key Parties and Roles

• Plaintiffs-Appellants: Plan trustees (on behalf of an ERISA plan).
• Ocwen: Servicer for the mortgages underlying all six trusts (alleged ERISA fiduciary/prohibited transaction actor).
• Wells Fargo: Master servicer for one indenture trust and two REMIC trusts (alleged co-fiduciary and direct fiduciary breaches).

2. Summary of the Opinion

The Second Circuit affirmed in part, reversed in part, and remanded. It agreed with the district court that the mortgages underlying the indenture notes were not plan assets because the notes were debt instruments lacking “substantial equity features.” But it held that mortgages underlying the REMIC regular-interest certificates are plan assets because those certificates represent beneficial interests in a trust, which the regulation treats as equity interests, thereby triggering the regulation’s “look-through” treatment of underlying trust assets as plan assets.

The court declined to decide in the first instance whether Ocwen acted as an ERISA fiduciary with respect to the mortgages deemed plan assets, remanding that question.

3. Analysis

A. The Governing Framework: The DOL Plan-Asset Regulation

ERISA does not itself define “plan assets,” and Congress delegated that task to the Department of Labor. The controlling rule was the DOL’s regulation at 29 C.F.R. § 2510.3-101.

• General rule (no look-through): A plan’s assets include its investment in an entity, but not the entity’s underlying assets solely by reason of that investment. § 2510.3-101(a)(1)-(2)
• Look-through exception: If a plan invests in an equity interest in certain non-public/non-registered entities, the plan’s assets include an undivided interest in the entity’s underlying assets. § 2510.3-101(a)(2)
• Equity interest definition: Generally includes any interest other than an instrument treated as indebtedness under local law with no substantial equity features; expressly includes “a beneficial interest in a trust.” § 2510.3-101(b)(1)

B. Precedents Cited (and How They Shaped the Court’s Approach)

1) Summary judgment and standard-of-review authorities

• Hachette Book Grp., Inc. v. Internet Archive and Windward Bora, LLC v. Wilmington Sav. Fund Soc'y, FSB supplied the de novo review framework for cross-motions.
• Galloway v. County of Nassau and Alberty v. Hunter reinforced the Rule 56 standard and the requirement to view evidence in the non-movant’s favor.

These cases did not drive the substantive ERISA outcome but anchored the appellate posture: the Second Circuit treated the plan-asset question as one of law applied to largely undisputed instruments.

2) Debt-versus-equity jurisprudence used to interpret “substantial equity features”

Because the regulation does not define “substantial equity features,” the court turned to traditional debt/equity distinctions, drawing heavily from tax and finance characterization cases:

• TIFD III-E, Inc. v. United States (and its IRS-factor discussion) supplied a multi-factor lens for distinguishing risk capital (equity) from a strict debtor-creditor relationship (debt).
• Gilbert v. Comm'r of Internal Revenue provided the classic definition of debt: fixed obligation, fixed maturity, fixed interest payable regardless of income.
• Hewlett-Packard Co. v. Comm'r of Internal Revenue reinforced “preferred and limited payments for a fixed period” as a debt hallmark.
• Comm'r of Internal Revenue v. O.P.P. Holding Corp. supplied the “vital difference” framing: equity “adventurer” participates in profits; debt is paid independent of business success.
• Fin Hay Realty Co. v. United States and Est. of Mixon v. United States were cited to underscore that factor tests serve the “economic reality” inquiry, especially the centrality of risk allocation.

These precedents mattered because the court used them to give content to “substantial equity features” and to reject the trustees’ attempt to convert ordinary credit risk into “equity-like” exposure.

3) “Functional plan asset” arguments rejected in favor of the regulation

• Kayes v. Pac. Lumber Co. and Acosta v. Pac. Enters. were invoked by the trustees for a “twofold functional test” focusing on fiduciary benefit at plan expense.
• Lowen v. Tower Asset Management, Inc. was cited for substance-over-form rhetoric in service of ERISA’s remedial purposes.

The Second Circuit declined to apply Kayes/Acosta and narrowed Lowen to its corporate-form context. The court held the dispute must be resolved through the DOL’s plan-asset regulation, not a free-floating remedial “effectiveness” inquiry.

4) Administrative law and delegation

• Loper Bright Enters. v. Raimondo was cited to emphasize that where Congress delegates definitional authority to an agency, courts must respect that delegation.

In this opinion, Loper Bright Enters. v. Raimondo functioned as a boundary marker: the court treated the DOL regulation as controlling and refused to supplement or circumvent it with alternative tests, absent a direct challenge to the regulation under the APA.

5) Trust/beneficial-interest principles and New York law for REMIC certificates

• Hammond v. United States supported consulting the governing state law (New York) to determine whether the instruments created “beneficial interests.”
• Schoellkopf v. Marine Tr. Co. of Buffalo supplied New York’s broad conception: any right under the trust instrument to receive a benefit is a beneficial interest.
• Jo Ann Howard & Assocs., P.C. v. Cassity (and the Restatement definition it quotes) reinforced the standard meaning of “beneficiary.”
• BlackRock Fin. Mgmt. Inc. v. Segregated Acct. of Ambac Assur. Corp. was used to describe certificateholders as having a right to receive trust income generated by the mortgages.
• Ret. Bd. of the Policemen's Annuity & Ben. Fund of the City of Chi. v. Bank of N.Y. Mellon was cited by analogy to characterize such arrangements as interests/participations in underlying mortgages (in that case, under the Trust Indenture Act).
• Romano v. John Hancock Life Ins. Co. (USA) was cited (with a DOL Advisory Opinion quotation) to emphasize that property held in trust for a plan is “manifestly” within plan assets.

These authorities collectively supported the court’s conclusion that the regular-interest certificateholders were trust beneficiaries under the instruments and New York law, thereby fitting the regulation’s express “beneficial interest in a trust” category.

6) Remand practice

• Jusino v. Fed'n of Cath. Tchrs., Inc. recognized affirmance on any ground supported by the record.
• New York ex rel. James v. Niagara-Wheatfield Cent. Sch. Dist. stated the “preferred” practice of allowing the district court to address arguments first.

These cases framed the court’s choice to remand the fiduciary-status question instead of deciding it.

C. Legal Reasoning

1) Why the indenture notes did not trigger look-through

The trustees argued that various features made the indenture notes “equity-like”: thin capitalization, acquisition-financing function, subordination to general creditors, and the practical dependence of repayment on mortgage performance. The court rejected those as “insubstantial” equity features in context.

• Fixed obligations and enforceability: The notes carried fixed interest, set maturity, and “absolute and unconditional” rights to payment, including suit to enforce—core debt markers.
• No residual upside: The trusts issued separate certificates representing beneficial ownership/residual interests; noteholders had no residual claim to “profits” or remaining trust value.
• Credit risk ≠ equity risk: The fact that repayment depends on asset performance in an insolvency scenario is “universal credit risk,” not a substantial equity feature.
• Backstop provision inapplicable: § 2510.3-101(g) applies to joint ownership or equity interests; the notes were neither.
• Misconduct does not redefine assets: Alleged wrongdoing could not expand “plan assets” beyond what the regulation defines.

2) Why the regular-interest REMIC certificates did trigger look-through

The decisive move for the REMIC instruments was not a balancing of equity-like features; it was the regulation’s express classification: “beneficial interest[s] in a trust are equity interests.” The court then asked whether the certificates were, in fact, beneficial interests under New York law and the trust documents.

• Trust documents said “for the benefit of the Certificateholders”: The depositor conveyed the mortgage pool to the trustee “to create a trust for the benefit of the Certificateholders,” and collection/distribution accounts were held “for the benefit of the Certificateholders.”
• Right to receive trust distributions: Regular-interest holders had contractual rights to monthly distributions of interest/principal according to priority—sufficient under New York’s broad “beneficial interest” definition.
• Residual holders not exclusive beneficiaries: The court found the claim that only residual holders are beneficiaries was contradicted by the instruments’ plain language.
• Regulatory structure confirmation: The exception for “guaranteed governmental mortgage pool certificate[s]” in § 2510.3-101(i)(1) makes sense only if mortgage-backed certificates could otherwise be treated as equity interests subject to look-through.

3) The unresolved question: Ocwen’s fiduciary status

Even after finding plan assets for the REMIC trusts, the court did not decide whether mortgage servicing, in this case, amounted to fiduciary conduct under 29 U.S.C. § 1002(21)(A). It remanded for the district court to address that issue first.

D. Impact

1) Practical consequences for RMBS held by ERISA plans

• Instrument form matters: The same economic exposure (mortgage pools) can produce different ERISA outcomes depending on whether the plan holds indenture notes (debt) or trust certificates that are beneficial interests (equity under the regulation).
• Expanded potential ERISA exposure in securitization servicing: For New York-law REMIC trusts (and similarly structured trusts), underlying mortgages may be “plan assets,” potentially pulling servicers/master servicers into ERISA fiduciary/prohibited-transaction litigation—subject to the remanded fiduciary-function analysis.
• Limits on “functional” plan-asset theories: The opinion signals that, at least in this Circuit, litigants should expect courts to hew closely to the DOL regulation rather than adopting broader functional tests like those articulated in Kayes v. Pac. Lumber Co. or Acosta v. Pac. Enters..

2) Litigation and structuring implications

• Deal documentation scrutiny: Trust language (“benefit of certificateholders,” “in trust,” distribution rights) may become central in ERISA risk assessments.
• Potential forum significance: The Second Circuit’s emphasis on the text of the DOL regulation and governing state trust law may influence pleading strategies and choice-of-law disputes.
• Servicer governance: Servicers and master servicers may reassess controls around conflicts, affiliated transactions, and fee arrangements where underlying loans could be treated as plan assets.

4. Complex Concepts Simplified

• “Plan assets” (ERISA): Property treated as belonging to the retirement plan; controlling those assets can make an entity an ERISA fiduciary.
• DOL “general rule” vs “look-through”: Normally the plan owns only the security it bought (not the issuer’s assets). “Look-through” treats the plan as owning a slice of the issuer’s underlying assets when the plan holds an “equity interest” of the kind covered by the regulation.
• “Equity interest” vs “indebtedness”: Equity typically implies residual upside and performance risk; debt implies a fixed repayment claim and primarily credit risk. The regulation expressly treats “beneficial interest[s] in a trust” as equity interests.
• “Substantial equity features”: A debt instrument may have some equity-like characteristics, but only meaningful features indicating equity-style performance risk (not merely insolvency/credit risk) would matter under the regulation.
• RMBS notes vs trust certificates: Notes are usually debt claims under an indenture; trust certificates can represent beneficiary interests in the trust holding the mortgages.
• REMIC / regular-interest vs residual-interest: A REMIC issues “regular-interest” certificates (bond-like payment streams) and “residual” interests (what’s left after regular classes are paid). Here, both types were described in the documents as beneficial ownership interests, and regular-interest holders were still beneficiaries.
• Master servicer vs servicer: The servicer manages loan collections and related actions; a master servicer oversees performance and reporting. Whether that role is fiduciary under ERISA depends on discretionary control over plan assets.

5. Conclusion

Powell v. Ocwen Fin. Corp. draws a sharp, regulation-centered line for ERISA “plan asset” treatment in RMBS investing. Indenture-issued RMBS notes that look and function like classic debt—fixed payments, enforceable rights, no residual upside—do not convert the underlying mortgage pool into plan assets merely because repayment depends on the pool’s performance. By contrast, regular-interest certificates issued by New York-law REMIC trusts were treated as “beneficial interest[s] in a trust,” making them “equity interests” under 29 C.F.R. § 2510.3-101(b)(1) and triggering look-through treatment of the mortgages as plan assets.

The decision’s broader significance lies in its method: it prioritizes the DOL’s plan-asset regulation and trust-law characterization over functional, remedial approaches—while leaving open, on remand, the separate and consequential question whether a mortgage servicer’s conduct constitutes ERISA fiduciary action with respect to those plan assets.