United States District Court, S.D. New York
POLICEMEN'S ANNUITY AND BENEFIT FUND OF THE CITY OF CHICAGO, LABORERS' PENSION FUND AND HEALTH AND WELFARE DEPARTMENT OF THE CONSTRUCTION AND GENERAL LABORERS' DISTRICT COUNCIL OF CHICAGO AND VICINITY, IOWA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, and ARKANSAS PUBLIC EMPLOYEES' RETIREMENT SYSTEM, Plaintiffs,
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
For Policemen's Annuity and Benefit Fund Of The City Of Chicago, Plaintiff: Deborah Clark-Weintraub, LEAD ATTORNEY, Scott䧊 LLP, New York, NY; Max Raphael Schwartz, Scott Scott, L.L.P.( NYC), New York, NY.
For Bank of America, NA (as Trustee Under Various Pooling and Servicing Agreements), Defendant: Isaac S. Greaney, LEAD ATTORNEY, Sidley Austin LLP (NY), New York, NY; Marc T.G. Dworsky, Munger, LEAD ATTORNEY, Munger, Tolles & Olson LLP, Los Angeles, CA; David F. Graham, PRO HAC VICE, Sidley Austin, LLP (Chicago), Chicago, IL; Erin Joan Cox, Jacob S. Kreilkamp, PRO HAC VICE, Munger, Tolles & Olson LLP (LA), Los Angeles, CA; Jackie Adeline Lu, Sidley Austin LLP, New York, NY; Kristin Linsley Myles, Munger, Tolles & Olson LLP (SF), San Francisco, CA.
For U.S. Bank National Association (as Trustee Under Various Pooling and Servicing Agreements), Defendant: John Michael Vassos, Michael Stephan Kraut, Morgan, Lewis and Bockius LLP (NY), New York, NY.
OPINION & ORDER
KATHERINE B. FORREST, United States District Judge.
At its core, this is a breach of contract case. The contract at issue defines the parties' rights and obligations; plaintiffs assert that defendants failed to fulfill their obligations and that they were damaged
thereby. Rule 8 governs the pleading standard plaintiffs must meet.
Determining whether plaintiffs in a breach of contract case have pled a claim should not present unusual complexity. It is primarily a question of whether they have pled sufficient plausible facts in support of their theory. Many contract cases that do not survive this initial motion practice fail because the language of the contract at issue simply does not impose the obligations alleged; or as a matter of law, the obligations could not be breached in the manner alleged. Neither of those scenarios is at issue here.
The complexity in this case comes not from the theory pled, but rather from the fact that the contract at issue is a Pooling and Servicing Agreement C(" PSA" ) relating to mortgage-backed securities (" MBS" ). Put more bluntly, defendants assert that allowing a contract claim to proceed on the theory plaintiffs here propose would open the floodgates to a new era of litigation relating to losses arising from MBS. It is not, however, the job of this Court to pass judgment on the desirability of a particular type of litigation -- that is left to Congress. The job of this Court is to determine whether a set of facts states a plausible claim. Here, for the reasons set forth below, the answer is yes.
On December 7, 2012, this Court granted in part and denied in part a motion to dismiss the first amended complaint in this action. Thereafter, the existing plaintiffs joined additional plaintiffs, appended additional allegations, and filed a second amended complaint (" SAC" ). Defendants also stated an intention to move for reconsideration as to the Court's December 7 decision. In light of the already inevitable motion practice with respect to the SAC, this Court said that it would allow and consider any reconsideration arguments in the context of defendants' motion to dismiss the SAC -- that is, in one consolidated motion rather than two. Accordingly, pending before the Court is defendants' motion to dismiss the entirety of the SAC. To the extent that some of those arguments in effect " reargue" that which this Court previously decided and allowed (that is, as the Court had suggested, combining the reconsideration motion), the Court's ruling here provides a single and integrated Opinion and Order.
I. THE GOVERNING AGREEMENTS
Plaintiffs purchased and sold a number of MBS certificates issued by Washington Mutual Bank (" WaMu" ) or its affiliates. (Second Am. Comp. (" SAC" ) ¶ 1, ECF No. 57.) In total, plaintiffs' suit concerns 19 " substantially similar trusts" in which they invested (the " Covered Trusts" ). (Id.) Bank of America (" B of A" ) and U.S. Bank are both sued in their capacities as trustees of the Covered Trusts (" Trustees" ). B of A is the successor-in-interest by merger of LaSalle Bank National Association (" LaSalle" ), the original Trustee of the Covered Trusts; U.S. Bank succeeded B of A as Trustee. (Id.)
Plaintiffs allege that various WaMu entities were involved in the creation, sale and servicing of the MBS here at issue. WaMu securitized a large number of mortgage loans (a number of which WaMu or affiliated entities also originated) into " bond-like" instruments referred to as MBS. (Id. ¶ 22.) WaMu then assembled groups of these mortgage loans into pools; the pools were then sliced and diced into separate securities (that is, a pool of mortgages was treated as a unit, and securities were developed based on that grouping as the underlying asset class). Through this process, a group of standalone mortgage loans was transformed into a " mortgage-backed" security. (Id. ¶ ¶ 23-25.)
The Covered Trusts at issue here were, like many such securities, further grouped into trenches. (Id.) Each tranche of a particular trust is associated with its own level of credit risk and reward (which plaintiffs refer to as the " interest" or " yield" ). (Id.) Payments follow a " waterfall" structure in which the trenches are paid in order of credit risk, with the least risky paid first and the most risky paid last. (Id.) " At initiation of the Trust, the most senior and least risky trenches typically receive triple A ratings" from rating agencies. (Id.)
Another WaMu entity, the WaMu Acceptance Corp. (" WAAC" ), was a special purpose entity formed to act as the " Depositor" . (Id. ¶ 25.) The Depositor transferred the pool of mortgages to the Trustee; in exchange, the Trustee transferred the MBS to the Depositor. (Id. ¶ 26.) The Depositor sold the MBS to an underwriter. In the instant case, that underwriter also happened to be a WaMu entity, WaMu Capital Corp. (" WCC" ). (Id. ¶ 27.) The WaMu underwriter then marketed and sold the MBS to investors, including plaintiffs. (Id.)
An entity designated as the " Servicer" was responsible for the collection of mortgage payments and, if necessary, foreclosure or putback, of the underlying loans. (Id. ¶ 29.) Here, another WaMu entity was designated as the Servicer. As holders of the MBS, plaintiffs were entitled to cash flows generated from the underlying pool of mortgages. (Id. ¶ 28.) Plaintiffs hold what are referred to as " certificates" in the trusts consisting of MBS.
The Depositor, Trustee and the Servicer entered into a series of governing contractual documents, of which the PSA is the primary agreement. (Id. ¶ 32.) The Trustee and the WaMu Servicer also entered into a Custodial Agreement. (See, e.g., Custodial Agreement WaMu Mortgage Pass-Through Certificates Series 2006-AR16 Trust (" Custodial Agreement" ) at 1, Aff. of Irina Palchuck (" Palchuck Aff." ) Ex. B., ECF No. 22.) Pursuant to the Custodial Agreement, a WaMu entity was designated to act as the Custodian to fulfill various of the Trustee's obligations under the PSA.
Plaintiffs' contract claim is based on an assertion that defendants (as Trustees) breached their obligations under the PSA -- obligations meant to ensure an independent actor would protect plaintiffs and the other investors in the MBS trusts.
Several provisions of the PSA are particularly relevant here: Section 2.05 sets forth the Trustee's duties with respect to the delivery of mortgage files, § 2.07 relates to acceptance of those mortgage files by the Trustee, § 2.09 sets forth certain representations and warranties, § 8.01 sets forth the Trustee's pre-default duties, and § 8.02 sets forth other duties, including when the Trustee has a duty to investigate potential breaches or events of default. (See generally, Pooling and Servicing Agreement (" PSA" ), SAC Ex. 5, ECF No. 57.)
Section 2.05 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."  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." (PSA § 1.01.) The " Initial Custodian" is defined as Washington Mutual fsb (" WaMu fsb" ). (Id.) 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. § 2.05.)
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 at 1.) In that agreement, the Trustee designated to WaMu fsb, as Custodian, the duties set forth in § 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 § 2.07.) 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 a certification (or cause the Initial Custodian to deliver to the Company and the Trustee a certification, which satisfies the applicable requirements of this Agreement . . . .)
The Trustee shall not be required to make any independent examination of any documents contained in the Mortgage File beyond the review specifically required herein . . . .
If the Trustee finds any document or documents required to be included in the Mortgage File or Mortgage Loan pursuant to the definition of " Mortgage File" not to have been executed and received, the Trustee shall promptly so notify the Servicer. An exception report delivered by the Custodian to the Servicer
pursuant to the Custodial Agreement shall be deemed to constitute such notice. Upon notice from the Trustee or the Custodian of any document required to be included in the Mortgage File for a Mortgage Loan has not been executed and received, the Servicer shall promptly notify the applicable Seller of such defect and take appropriate steps on behalf of the Trust to enforce such Seller's obligation, pursuant to Section 2.4 of the Mortgage Loan Purchase Agreement, to correct or cure such defect or repurchase or substitute for such Mortgage loan, in accordance with and subject to the time limitation set forth in such Section 2.4 . . . .
(emphasis added.) Section 2.09 governs the representations and warranties of the sellers regarding the mortgage loans. This provision states that
Upon discovery by any of the Company, the Servicer or the Trustee (in the case of the Trustee, having actual knowledge thereof) of a breach of any of the representations and warranties in respect of the Mortgage Loan . . . that materially and adversely affects the value of the related Mortgage Loans or the interests of the Trust in the related ...