United States District Court, S.D. New York
POLICEMEN'S ANNUITY AND BENEFIT FUND OF THE CITY OF CHICAGO, Plaintiff,
BANK OF AMERICA, NA (as Trustee Under Various Pooling and Servicing Agreements), and U.S. Bank National Association (as Trustee Under Various Pooling and Servicing Agreements), Defendants.
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Deborah Clark-Weintraub, Max Raphael Schwartz, Scott Scott, L.L.P., New York, NY, for Plaintiff.
Isaac S. Greaney, Jackie Adeline Lu, Sidley Austin LLP, John Michael Vassos, Michael Stephan Kraut, Morgan, Lewis and Bockius LLP, New York, NY, Marc T.G. Dworsky, Erin Joan Cox, Jacob S. Kreilkamp, Munger, Tolles & Olson LLP, Los Angeles, CA, David F. Graham, Sidley Austin, LLP, Chicago, IL, Kristin Linsley Myles, Munger, Tolles & Olson LLP, San Francisco, CA, for Defendants.
OPINION & ORDER
KATHERINE B. FORREST, District Judge:
Plaintiff Policemen's Annuity and Benefit Fund of the City of Chicago (" plaintiff" or " PABF" ) brings this putative class action against defendants Bank of America, N.A. (" BofA" ) and U.S. Bank National Association (" U.S. Bank" and, with BofA, " defendants" ) in their capacity as trustees for forty-one trusts of residential mortgage-backed securities (" MBS" ). Plaintiff alleges that defendants breached their contractual duties under the trusts' respective Pooling and Servicing Agreements (" PSAs" ), as well as the implied covenant of good faith and fair dealing, and violated the Trust Indenture Act of 1939 (" TIA" ), 15 U.S.C. § 77aaa et seq.
The gravamen of the corrected class action complaint (the " Complaint" ) is that defendants failed to take certain actions required by the PSAs, which caused a decline in the value of plaintiff's MBS  and thus damaged plaintiff.
Defendants have moved to dismiss the Complaint. The motion was fully submitted as of July 20, 2012. The Court heard oral argument on the motion on August 6, 2012.
For the reasons that follow, defendants' motion to dismiss is GRANTED IN PART and DENIED IN PART.
I. BACKGROUND 
A. The Parties
Plaintiff PABF, a state governmental pension fund organized under Illinois law, provides retirement benefits to its members and their beneficiaries and, in that capacity, " relies heavily upon the performance of its investments." (Compl. ¶ 13, ECF No. 24.) PABF purchased certificates in five of the 41 trusts at issue in this action (the five purchased trusts, the " Trusts" ) ( id. ¶ 1, Ex. B), but no longer holds an interest in any of the Trusts (Oral Arg. Tr. (" Tr." ) 69:22-70:1, Aug. 6, 2012, ECF No. 40).
Defendant BofA is a U.S. national banking association with its principal place of business in Charlotte, North Carolina. (Compl. ¶ 15.) In early October 2007, BofA acquired LaSalle Bank National Association (" LaSalle" )— the Trusts' original
Trustee. ( Id. ¶¶ 1, 15.) Through that acquisition, BofA succeeded LaSalle as Trustee. ( Id. ¶ 15.)
Defendant U.S. Bank is a U.S. national banking association with a principal place of business in Minnesota. (Compl. ¶ 16.) In or about July 2008, U.S. Bank succeeded BofA as Trustee for certain of the Trusts. ( Id. ) 
B. MBS Securitization
Although " [t]he features of residential mortgage-securitization trusts are well known in the recent annals of litigation," BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assur. Corp., 673 F.3d 169, 173 (2d Cir.2012), reviewing the process here is helpful to resolution of the instant motion.
MBS are securities entitling the holder to income payments from pools of residential mortgage loans held by a trust. Those mortgage loans are " securitized" when they are converted into " bond-like instruments, the MBS, that trade over the counter in capital markets." (Compl. ¶ 17.) There are four major players involved in an MBS securitization: the mortgage originator/underwriter, the seller, the depositor, and the securitization underwriter. ( See id. ¶¶ 19-22.)
For the MBS securitizations here, Washington Mutual Bank (" WaMu" ) and its affiliates played all four roles. WaMu originated the mortgage loans through its own mortgage lending arm, or through certain " correspondent" mortgage lenders. (Compl. ¶ 19.)  The seller (a WaMu affiliate) acquired the mortgages from WaMu, grouped them into " loan pools," and then sold/transferred them to the depositor-here, WaMu Asset Acceptance Corp. (" WAAC" ). ( Id. ¶ 20.) To effect the transfer, the seller and depositor entered into an agreement, the Mortgage Loan Purchase Agreement (" MLPA" ). ( Id. ) The MLPA contains the seller's representations and warranties about the quality of the mortgages in the loan pool as well as an agreement from the seller to cure, substitute, or repurchase any mortgages that do/did not comply with the representations and warranties. ( Id. )
After the seller-to-depositor transfer, the depositor then transferred the mortgage loan pool into the trust, created specifically for the securitization. (Compl. ¶ 21.) The trust then issued certificates to the underwriter— here, WaMu Capital Corp. (" WCC" )— who then marketed and sold the certificates to investors, including plaintiff. ( Id. ¶ 22.) In purchasing certificates, investors essentially acquired the right to receive cash flows generated from the principal and interest payments of the mortgagors. ( Id. ¶ 23.) Once the loans were deposited into the trust, they were overseen by a servicer (here, WaMu ( see PSA at 112)), who " service[d] and administer[ed] the Mortgage Loans" by, inter alia, collecting the principal and interest payments and distributing those remittances to certificate-holders pursuant to a payment schedule, colloquially referred to as a " waterfall." (PSA at 92, 112.)
Each MBS securitization trust comprises various " tranches" — slices or levels— of MBS. Each tranche bears its own distinct characteristics— i.e., priority of payment, credit rating, level of credit risk, type of credit enhancement, etc. ( Id. ¶ 23.) Certificate-holders in the various tranches are paid according to the waterfall. Certificate-holders
who hold " senior" tranches— i.e., tranches with higher credit ratings and higher payment priority-receive their allotted percentage of the incoming cash flows first (they are the " top" of the waterfall); tranches lower in payment entitlement are paid out in a predetermined order, descending from " mezzanine," or mid-level, tranches to the " equity," or lower level, tranches. The certificate-holders of more subordinated tranches may or may not receive the hoped-for/expected amount of the cash flows, as they are lower in the waterfall's payment schedule.
The value of the certificates, then, depends upon, inter alia, the mortgagors' ability to repay the loan principal and interest. ( See Compl. ¶ 25.) In other words, mortgagors' defaults on their loans affect payments to certificate-holders (depending on the tranche in which they are invested)— e.g., lower tranches may receive only a percentage (or none) of the expected principal and interest payments if the trusts' underlying mortgages experience a significant rate of default. ( Id. ) Such reduced payments likely equate with a reduction in the value of the MBS. ( See id. )
C. The PSAs 
Plaintiff alleges that the Trustee had specific duties in connection with the Trusts, emanating from the PSAs. ( See Compl. ¶ 27.) The PSA is a lengthy document, imposing myriad duties upon the Trustee (and others). Only the Trustee's duties pertinent to the instant motion are discussed below.
Section 2.05 of the PSA provides the Trustee authorization " to appoint on behalf of the Trust any bank or trust company ... as Custodian of the documents or instruments referred to in this Section 2.05, in Section 2.12 or in Section 2.15, and to enter into a Custodial Agreement for such purpose." (WMALT Series 2006-5 Trust PSA (" PSA" ) (Compl. Ex. C, ECF No. 24-3) at 102.)  The " Custodian" for the Trusts is defined as " [t]he Initial Custodian and any other custodian which is appointed by the Trustee with the consent of the Servicer ... [who] shall act as agent on behalf of the Trustee." ( Id. at 47.) The " Initial Custodian" is defined as Washington Mutual fsb (" WaMu fsb" ). ( Id. at 59). Despite appointment of a Custodian, however, the PSA makes clear that with respect to the duties set forth in PSA §§ 2.05, 2.12 and 2.15, " the Trustee shall be and remain liable for the acts and omissions of any such Custodian to the extent (and only to the extent) that it would have been liable for such acts and omissions hereunder had such acts and omissions been its own acts and omissions." ( Id. at 102.)
Section 2.05 allows the Initial Custodian to " perform responsibilities of the Trustee on the Trustee's behalf with respect to the delivery, receipt, examination, custody and release of the Mortgage Files related to the Mortgage Loans." ( Id. ) Although PSA § 2.05 absolves the Trustee for " responsibility for the acts or omissions of the Initial Custodian" in that regard, the Trustee
remains liable for " its own negligent action, its own negligent failure to act or its willful misconduct." ( Id. )
Here, the Trustee (at the time, LaSalle) entered into a Custodial Agreement with WaMu fsb to act as Custodian " on behalf of the Trust and to perform the function of Custodian." ( See, e.g., Custodial Agreement WaMu Mortgage Pass Through Certificates Series 2006-AR16 Trust at 1 (Aff. of Irina Palchuk (" Palchuk Aff." ) Ex. B, ECF No. 22).) In that agreement, the Trustee designated to WaMu fsb, as Custodian, the duties set forth in section 2.05 of the PSA. ( Id. at 2-6.) The Custodial Agreement limited the Custodian's duties to those " specifically set forth" in that agreement, and explicitly noted that the Custodian would be regarded as making no representations and having no " responsibilities as to the validity, sufficiency, value, genuineness, ownership or transferability of any Mortgage Loans." ( Id. at 8.) The Custodial Agreement also required the Custodian to indemnify the Trustee for any suit " arising out of the negligent performance by the Custodian of its duties and responsibilities." ( Id. at 9.)
PSA § 2.07 requires the Trustee to " acknowledge[ ] receipt ... on behalf of the Trust of the documents ... referred to in Section 2.05 above, but without having made the review required to be made within 45 days pursuant to this Section 2.07." (PSA at 104.) The Trustee is also required to
review (or, with respect to the Mortgage Loans identified in the Initial Custodial Agreement, cause the Initial Custodian to review) each Mortgage File within 45 days after the Closing Date and deliver to the Company [WAAC] a certification or ... cause the Initial Custodian to deliver to the Company a certification, which satisfies the applicable requirements of this Agreement.
( Id. ) In undertaking that review, the Trustee accepts responsibility to notify the Servicer " promptly" of any loan document in the Mortgage File that was not executed or received. ( Id. at 104-05.) The Trustee (or Custodian) need only conduct the review as specified in the PSA. ( Id. at 104.)
The PSA further requires that, upon gaining " actual knowledge" of " a breach of any of the representations and warranties [in the MLPA by the Seller] in respect of the Mortgage Loan," the Trustee " give prompt written notice" to WAAC and WaMu (as the Servicer). (PSA at 107 (Section 2.09).) The Servicer must then inform the Seller of any breaches of any Mortgage Loan and " take appropriate steps on behalf of the Trustee to enforce the Seller's obligation ... to cure such breach in all material respects or repurchase or substitute for the affected Mortgage Loan." ( Id. )
Article VIII of the PSA independently discusses other matters " [c]oncerning the Trustees." (PSA at 143.) Section 8.01 specifies the Trustee's duties " prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred." ( Id. ) That same section makes clear that " the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement." ( Id. at 144 (§ 8.01(c)(i)).)  The PSA also requires the Trustee to, inter alia, examine all documents (of various types) provided to it to ensure they meet the PSA's requirements and, within ten business days subsequent to " an Event of Default known to the Trustee," provide notice of such default to the various rating agencies. (PSA at 144 (§ 8.01(b), (d)).)
Prior to an Event of Default, the Trustee does not have any obligation to investigate " facts or matters" contained in documents provided to the Trustee " unless requested in writing to do so by the holders of Certificates evidencing Percentage Interests aggregating not less than 25% of REMIC III." (PSA at 145 (§ 8.02(iv)).) Further, the PSA requires the Trustee to have " actual knowledge" — or have received written notice— with respect to " any matter, including without limitation an Event of Default." ( Id. (Section 8.02(vi)).)
D. The Trustee's Alleged Breaches
Plaintiff alleges that the Trustee " failed to perform" the following " critical duties necessary to protect the Covered Trusts, Plaintiff and the Class members" :
• " [R]eview[ing] the loan files for missing, incomplete and defective documentation" (Compl. ¶ 69);
• Providing notice of incomplete mortgage files and the Seller's breaches of its representations and warranties as set forth in the MLPA (Pl.'s Mem. Law Opp'n Defs. Mot. to Dismiss (" Pl. Opp'n" ) 16-19, ECF No. 30);
• Enforcing the certificate-holders' " rights to the have the Seller repurchase Mortgage Loans or notify MBS holders of the many defaulted obligations" in the Mortgage Loans (Compl. ¶ 68; see also id. ¶ 71).
( See also Pl. Opp'n at 13, 16, ...