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Oklahoma Police Pension & Retirement System v. U.S. Bank National Association

United States District Court, Second Circuit

June 3, 2013



JOHN G. KOELTL, District Judge.

This case is part of the fallout from the residential mortgage crisis. The plaintiff, Oklahoma Police Pension and Retirement System, brings this putative class action against the defendant, U.S. Bank National Association ("U.S. Bank"), the trustee for fourteen trusts in which the plaintiff and the other members of the putative class invested (the "Covered Trusts"). The trusts own residential mortgage loans that were pooled and sold together as Bear Stearns mortgage backed securities ("MBS"). The plaintiff alleges that the defendant failed to fulfill its obligations as trustee for the Covered Trusts. Specifically, the plaintiff alleges violations of the Trust Indenture Act of 1939 ("TIA"), 15 U.S.C. § 77aaa et seq. (2006), breaches of contract, and breaches of the implied covenant of good faith and fair dealing under New York law. The plaintiff seeks damages for the losses it claims to have incurred due to those alleged breaches.

The defendant has moved to dismiss the Corrected Second Amended Class Action Complaint ("the Complaint") arguing that the plaintiff lacks class standing and that the Complaint fails to state a claim on the merits. Among other arguments, the defendant contends that nine of the fourteen Covered Trusts are not governed by the TIA.

This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1331 based on alleged violations of the TIA. The Court also has subject matter jurisdiction pursuant to 28 U.S.C. § 1332 based on the complete diversity of citizenship of the parties.

For the reasons explained below, the motion to dismiss is granted in part and denied in part.


In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts the allegations in the Complaint as true, and draws all reasonable inferences in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp. , 482 F.3d 184, 191 (2d Cir. 2007); Arista Records LLC v. Lime Group LLC , 532 F.Supp.2d 556, 566 (S.D.N.Y. 2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden , 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss a complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007).

"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id.

When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the Complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc. , 282 F.3d 147, 153 (2d Cir. 2002); City of Roseville Emps.' Ret. Sys. v. EnergySolutions, Inc. , 814 F.Supp.2d 395, 402 (S.D.N.Y. 2011); see also In re ProShares Trust Secs. Litig., No. 09 Civ. 6935, 2012 WL 3878141, at *1-2 (S.D.N.Y. Sept. 7, 2012).


The Court accepts the plaintiff's allegations in the Complaint as true for the purposes of this motion to dismiss. The plaintiff is a state governmental pension fund authorized under the laws of the state of Oklahoma to provide retirement benefits to its members and their beneficiaries. (Second Amended Complaint ("Compl.") ¶ 13.) The defendant is a national banking association organized under the laws of the United States and is the trustee for the Covered Trusts. (Compl. ¶ 15.)

The plaintiff invested in trusts that own residential mortgage loans that were bundled together and sold to investors as Bear Stearns MBS. (Compl. ¶ 1.) The plaintiff held interests in Bear Stearns ARM Trust 2005-9 and Bear Stearns ARM Trust 2005-12. (Shanker Decl. Exs. C ("Prospectus Supp. 2005-12") & D ("SSA"); see Compl. ¶¶ 1, 55.) The Bear Stearns ARM Trust 2005-12 contains eight groups. (Prospectus Supp. 2005-12 at S-7.) The plaintiff invested in certificates in Group I-3; thus, the plaintiff is entitled to distributions from the 2005-12 Trust only from Group I-3. (Prospectus Supp. 2005-12 at S-7, S-8.)

The other members of the putative class purchased "the same or substantially similar Bear Stearns MBS...." (Compl. ¶ 14.) The Covered Trusts are Bear Stearns ARM Trusts or Bear Stearns Alt-A Trusts for which U.S. Bank served as trustee.[1] (Compl. ¶ 1.) The MBS held by the plaintiff and other members of the class share the same trustee, sponsor, master servicer, and substantially similar governing agreements. (Compl. ¶ 14.)

A Pooling and Servicing Agreement ("PSA") governs the trusts that issued certificates. An Indenture governs the trusts that issued notes.[2] Together with related agreements, the Complaint refers to the PSA and Indenture as the "Governing Agreements." (Compl. ¶ 2.) The Governing Agreements provide that they shall be construed in accordance with the laws of the State of New York and that any dispute arising under the Governing Agreements shall be determined in accordance with the laws of the State of New York. (Shanker Decl. Ex. A ("PSA") § 12.06; Shanker Decl. Ex. B ("Indenture") § 10.11.)

As trustee, U.S. Bank allegedly owed the plaintiff and other putative class members statutory duties under the TIA and contractual duties under the Governing Agreements. The defendant owed the same duties to all the putative class members as trustee for the Covered Trusts.[3] (Compl. ¶¶ 2, 14.) The plaintiff alleges that, as part of a "common scheme and course of conduct, " the defendant "systematically failed to perform" its duties as trustee. (Compl. ¶ 14.)

The plaintiff has brought this action alleging violations of the TIA, breaches of contract, and breaches of the implied covenant of good faith and fair dealing on behalf of itself and a putative class consisting of all current and former investors in the MBS who suffered losses due to the defendant's alleged misconduct as trustee for the Covered Trusts. (Compl. ¶ 1.)


The MBS were created through a multi-step process. First, Bear Stearns and its corporate affiliates, Bear Stearns Residential Mortgage Corporation and EMC Mortgage Corporation ("EMC"), originated mortgages to borrowers and purchased mortgages originated from third-party lenders, including Wells Fargo. (Compl. ¶ 17.) Wells Fargo was the master servicer for the mortgage loans in the Covered Trusts. (Tr. 6; see Compl. ¶ 22.)

Second, Bear Stearns pooled the mortgages and sold the pool of mortgages to a depositor. (Compl. ¶ 18.) EMC was the seller for the Covered Trusts. (Compl. ¶ 18.) The depositor was typically a shell entity owned and operated by Bear Stearns. (Compl. ¶ 18.) The seller and depositor entered into the Mortgage Loan Purchase Agreement ("MLPA"). THE MLPA requires the seller, among other things, to provide complete and not defective mortgage loan files. (Compl. ¶ 18.) Through the MLPA, the seller represented and warranted that the mortgages in the pool were of a certain quality, and the seller promised to cure, substitute, or repurchase any mortgages that were not of the warranted quality or that were otherwise defective. (Compl. ¶ 18.) The MLPA further provided that the defendant as trustee would have the right to enforce the representations and warranties that the seller made in the MLPA. (Compl. ¶ 18.)

Third, the depositor transferred the mortgage pool to the trustee in exchange for the trustee's transfer of the MBS to the depositor. (Compl. ¶ 19.) The PSA, the Indenture, and related agreements govern the trustee's rights and obligations. One of the related agreements is the "Sale and Servicing Agreement" ("SSA"). The SSA governs the conveyance of mortgage loans in which the notes participate and provides the rights and obligations of the master servicer for the notes. Pursuant to the SSA, the depositor sold the mortgage loans in which the notes participate to the issuer, which is the trust. (SSA at 1.)

The Governing Agreements impose certain duties on the trustee. (Compl. ¶ 19.) The PSA provides that "[t]he Depositor concurrently with the execution and delivery of th[e] [PSA] sells, transfers and assigns to the Trust without recourse all its rights, title and interest in and to" the mortgage loans in which the certificates participate. (PSA § 2.01(a).) The PSA further provides that "[i]n connection with the above transfer and assignment, the Depositor hereby delivers to the Custodian, as agent for the Trustee" the mortgage note and other documents for each mortgage loan. (PSA § 2.01(b).) The SSA contains substantially the same provision regarding the depositor's transfer of the mortgage notes and other documents to the trustee. (SSA § 2.01.)

Finally, the depositor sold the MBS to an underwriter, typically another Bear Stearns entity, and provided the revenue from the sale to the seller, which is EMC. (Compl. ¶ 20.) The underwriter marketed and sold the MBS to investors, including the plaintiff and the other members of the putative class. (Compl. ¶ 20.)

The Covered Trusts contain tranches of MBS. (Compl. ¶ 21.) Each tranche has its own level of potential risk and reward. (Compl. ¶ 21.) Senior tranches retain priority in payment if losses occur. (Compl. ¶ 21; see Indenture § 3.24(b).) Accordingly, the tranches have different credit ratings and values. (Compl. ¶ 21.)

Following the sale of the MBS, the master servicer, Wells Fargo in this case, is responsible for collecting payments from the mortgagors, including through foreclosure pursuant to the SSA. (Compl. ¶ 22; SSA § 3.12.) The proceeds are then distributed to certificate holders or note holders, respectively, in accordance with tranche priority. (Compl. ¶ 22.) In addition to other factors that affect the ratings and value of an MBS, the ratings and value of an MBS vary inversely with payment defaults. (Compl. ¶ 23.) Thus, if payment defaults increase or if foreclosure becomes impossible, the rating and value of the MBS decreases. (Compl. ¶ 23.)


The Governing Agreements impose duties on the defendant as trustee.[4] (Compl. ¶ 24.) The parties dispute the extent to which the trustee fulfilled these duties.


The Governing Agreements require that the Covered Trusts take title to the mortgage loans. (Compl. ¶¶ 27-28.) The plaintiff alleges that this requires, among other things, that the trustee, "through its agent, [] take physical possession of the Mortgage files, including the Mortgage Note and the Mortgage, properly endorsed and assigned to the Trustee." (Compl. ¶ 29; see PSA § 2.01(b)(i); Indenture §§ 2.02, 4.02.) Pursuant to the Governing Agreements, the trustee or its agent must review the mortgage loan files and file interim and final certifications verifying that the mortgage loan files are accurate and complete. (Compl. ¶¶ 31-33.)

The plaintiff alleges that a complete mortgage loan file contains documentation of a complete chain of endorsements evidencing the various assignments of the mortgage loan from the originator down the chain to the trustee. (Compl. ¶ 31, 99.) The plaintiff alleges that the trustee has a duty to ensure that each assignment of the mortgage was duly executed, and that the mortgage loan file contains all necessary documentation. (Compl. ¶¶ 31, 33, 99.) The plaintiff alleges that if the mortgage loan file did not contain an endorsement, assignment, or any other required documentation, or if it contained false information, the trustee or its agent had a duty to make reasonable efforts to obtain the missing information or correct the misinformation. (Compl. ¶ 99.) Under the Governing Agreements, the trustee is also obligated to give notice to the seller and other parties of any "breach of any of the representations and warranties set forth in the [MLPA], which breach materially and adversely affects the value of the interests of the Certificateholders or the Trustee in the related Mortgage Loan" that the trustee discovers and to enforce the seller's obligation to cure, substitute, or repurchase any defective mortgage loans. (Compl. ¶ 39; see PSA § 2.03(b).)

The Governing Agreements impose particular obligations on the trustee following an "Event of Default." Pursuant to the Indenture, only the conduct of the issuer, the trust, could constitute an Event of Default. (Indenture § 5.01, App. A at 8.) An Event of Default occurs under the Indenture, among other instances, when:

[T]here occurs a default in the observance or performance of any covenant or agreement of the Issuer made in the Indenture, or any representation or warranty of the Issuer made in the Indenture or in any certificate or other writing delivered pursuant hereto or in connection herewith proving to have been incorrect in any material respect as of the time when the same shall have been made, and such default shall continue or not be cured... for a period of 30 days after there shall have been given, by registered or certified mail, to the Issuer by the Indenture Trustee or to the Issuer and the Indenture Trustee by the Holders of at least 25% of the aggregate Note Principal Balance of the Outstanding Notes, a written notice specifying such default or incorrect representation or warranty and requiring it to be remedied and stating that such notice is a notice of default hereunder.

(Indenture, App. A at 8.) The Indenture defines a "default" as "[a]ny occurrence which is or with notice or the lapse of time or both would become an Event of Default." (Indenture, App. A at 6.) Once the trustee has actual knowledge of an Event of Default, the trustee must exercise its rights and obligations under the Governing Agreements using the same degree of care and skill as a prudent person would, under the circumstances, in the conduct of his or her own affairs. (Indenture § 6.01(a).)

Pursuant the PSA, only the conduct of the master servicer, Wells Fargo, can trigger an Event of Default. (PSA § 8.01.) An Event of Default under the PSA occurs, among other instances, when:

The Master Servicer fails to observe or perform in any material respect any other material covenants and agreements set forth in this Agreement to be performed by it... and such failure continues unremedied for a period of 60 days after the date on which written notice of such failure... shall have been given to the Master Servicer by the Trustee or to the Master Servicer and the Trustee by the Holders of Certificates evidencing Fractional Undivided Interests aggregating not less than 25% of the Trust Fund.

(PSA § 8.01(ii).) Pursuant to the PSA:

If an Event of Default has occurred and has not been cured or waived, the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and... use the same degree of care and skill in their exercise, as a prudent person would exercise under the circumstances in the conduct of his [or her] own affairs.

(PSA § 9.01(a).)

Under the PSA and the Indenture, the duties of the trustee prior to an Event of Default and after the waiver or cure of an Event of Default are to be determined "solely by the express provisions of this Agreement...." (PSA § 9.01(d)(i); see Indenture § 6.01(b)(i).) "[N]o implied covenants or obligations shall be read into this Agreement against the Trustee...." (PSA § 9.01(d)(i); see Indenture § 6.01(b)(i).)

The plaintiff claims that Events of Default occurred and that the defendant did not fulfill its obligations as trustee following the Events of Default. (Compl. ¶¶ 103-05.) The plaintiff alleges that the master servicer and the issuer breached the following obligations:

(a) [to] notify the Trustee and others of breaches of the representations and warranties that applied to the mortgages in the Covered Trusts; (b) [to] maintain accurate and adequate loan and collateral files in a manner consistent with prudent mortgage servicing standards; (c) [to] demand that deficient mortgage records be cured; (d) [to] avoid unnecessary servicing fees and overcharging for its services; and (e) place the interests of the MBS holders' before its own interests.

(Compl. ¶ 103.) The plaintiff relies on "[r]epresentative samples... [that] show that the assignments and transfers of the Mortgage Loans to U.S. Bank as Trustee had not occurred and/or were not recorded at the time that the Covered Trusts closed." (Compl. ¶ 6.) Public land records demonstrated that "the chain of assignments between the Originator and the Trust for the Mortgage Notes and Mortgages was incomplete and invalid [because]... the assignments to U.S. Bank were not regularly made at the time the Mortgage Loans were conveyed to the Covered Trusts...." (Compl. ¶ 57.) The plaintiff claims that it suffered damages as a direct result of the defendant's failure to perform its obligations as trustee under the Governing Agreements. (Compl. ¶ 106.)


The TIA provides "minimum federal protections to investors" that are incorporated in the Indenture, which governs the notes. (Compl. ¶¶ 26, 99.) The TIA requires the trustee to "examine the evidence furnished to it [by obligors of the indenture, certifying, among other things, their compliance with conditions and covenants provided for in the indenture, ] to determine whether or not such evidence conforms to the requirements of the indenture." (Compl. ¶ 42 (citing 15 U.S.C. § 77ooo(a) (alteration in Compl. and citation omitted).) Following a default, the trustee must provide notice within ninety days to all indenture security holders. (Compl. ¶ 43 (citing 15 U.S.C. § 77ooo(b).) During the period following a default, the trustee has a duty to behave as a prudent person would under the circumstances. (Compl. ¶ 44 (citing 15 U.S.C. § 77ooo(c).)

The Governing Agreements impose other duties on the trustee with regard to the notes. (Compl. ¶¶ 42, 92-93.) Under the Indenture, prior to default the trustee must (i) take "all necessary steps to perfect ownership rights in the mortgage notes and collateral for the Covered Trusts"; (ii) review "the Mortgage Loan Files to ensure that the Mortgage Loans were properly documented"; (iii) review "the endorsements to the original mortgage note to ensure that there was a complete chain of endorsements" from the seller to the trustee, and if endorsements were missing, take reasonable steps to secure the endorsements; (iv) review "the Mortgage Loan Files to ensure that there was a duly executed assignment of mortgage for each of the Mortgage Loans in the Covered Trusts, " and if the assignments were missing to take reasonable steps to secure the assignments; (v) identify "those Mortgage Loans for which there was missing, defective and/or incomplete documentation, " and take ...

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