United States District Court, S.D. New York
Decided: June 4, 2013.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For BNP Paribas Mortgage Corporation and BNP Paribas, Plaintiffs: Robin A. Henry, Esq., Motty Shulman, Esq., Jack Wilson, Esq., BODIES SCHILLER & FLEXNER LLP, Armonk, NY.
For Deutsche Bank AG, Plaintiff: William E. McDaniels, Esq., Stephen D. Andrews, Esq., Stephen P. Sorensen, Esq., Daniel M. Dockery, Esq., Katherine O'Connor, Esq., WILLIAMS & CONNOLLY LLP, Washington, DC.
For Bank of America, N.A., Defendant: Marc T.G. Dworsky, Esq., Kristin Linsley Myles, Esq., Gregory Weingart, Esq., Richard St. John, Esq., MUNGER, TOLLES & OLSON LLP, Los Angeles, CA; Richard T. Marooney, Esq., KING & SPALDING LLP, New York, NY.
ROBERT W. SWEET, U.S.D.J.
Defendant Bank of America, N.A. (" BOA" or " Defendant" ) has moved pursuant to Rule 12(b) (6) of the Federal Rules of Civil Procedure to dismiss counts four through twelve of the second amended complaints (" Second Amended Complaints" ) filed by Plaintiffs' BNP Paribas Mortgage Corporation (" BNP" ) and BNP Paribas (" BNPP" ) (collectively, the " BNP Plaintiffs" ) and Deutsche Bank AG (" DB" ) and count fourteen of the BNP Plaintiffs' Second Amended Complaint. For the reasons set forth below, the motion is granted.
The highly skilled advocates on each side have once again been of great assistance to the Court in illuminating the complex set of issues involved.
I. PRIOR PROCEEDINGS
The Plaintiffs initiated these actions against BoA on November 25, 2009, and each filed Amended Complaints on March 17, 2010. Plaintiffs' initial complaint alleged that (1) they had invested, collectively, over $1.6 billion in short-term notes issued by Ocala (the " Ocala Notes" ), a wholly-owned subsidiary of Taylor, Bean & Whitaker Mortgage Corp. (" TBW" ) that served as a funding vehicle for TBW; (2) Ocala's assets were to have served as collateral for repayment of Plaintiffs' notes; (3) due to a massive fraud by TBW, Ocala's assets were diverted or stolen by TWB and others; and (4) BoA should be responsible for these losses because it served as Indenture Trustee, Collateral Agent, Depositary, and Custodian for the Ocala notes, and in such capacities allegedly breached its responsibilities under the corresponding facility documents, which includes the Base Indenture, the Security Agreement, the Depositary Agreement, and the Custodial Agreement (collectively, the " Facility Documents" ), by failing to protect Ocala's collateral from the sort of wrongdoing that TBW committed.
BoA moved to dismiss these complaints on February 5, 2010. In response, Plaintiffs filed their First Amended Complaints (the " FACs" ) reasserting their initial claims, adding new claims for breach of contract and breach of fiduciary duty, and generally supplementing and refining their factual allegations. Further, in addition to their earlier theory that BoA had negligently performed its contractual duties, the Plaintiffs' FACs asserted that BoA had negligently provided them with incorrect Borrowing Base Certificates, on which Plaintiffs allegedly relied in deciding to " roll" their Ocala notes.
On April 30, 2010, BoA moved to dismiss the FACs and oral argument was heard on that motion on September 15, 2010. On March 23, 2011, this Court issued its ruling on BoA's motion in BNP Paribas Mortg. Corp. v. Bank of America, N.A., 778 F.Supp.2d 375 (S.D.N.Y. 2011) (the " March Opinion" ). The decision dismissed (1) Plaintiffs' contract claims for lack of standing under the Depositary Agreement, the
Custodial Agreement and the March 2009 Letter; (2) Plaintiffs' indemnification claims; and (3) all claims relating to Ocala Notes issued prior to July 20, 2009. The decision upheld all remaining claims.
On August 30, 2010, the Plaintiffs filed new actions against BoA in the Southern District of Florida, asserting claims for conversion of Ocala's assets and seeking to recover for their investment losses on their unpaid Ocala notes. Deutsche Bank AG v. Bank of America (" Deutsche II" ), S.D. Fla. Civil Action No. 10-23124 and BNP Paribas Mortg. Corp. v. Bank of America (" BNP IT" ), S.D. Fla. Civil Action No. 10-23115 (collectively, the " Conversion Actions" ). On November 17, 2010, the actions were transferred to the Southern District of New York and referred to this Court. On August 30, 2011, this Court dismissed Plaintiffs' conversion claims. BNP Paribas Mortg. Corp. v. Bank of America, N.A., Nos. 10-8630 and 10-8299, 2011 WL 3847376 (S.D.N.Y. Aug. 30, 2011) (the " August Opinion" ).
The parties commenced discovery in April 2011. BoA answered the Plaintiffs' FACs on June 8, 2011 and asserted several affirmative defenses. The parties stipulated and agreed to complete document production by March 30, 2012, close fact discovery on November 16, 2012 and extended the time to amend pleadings to December 17, 2012.
On July 6, 2011, Plaintiffs made a formal demand by letter on BoA, as Indenture Trustee and Collateral Agent, to pursue claims against the Depositary, Custodian and Collateral Agent for breaches of the corresponding Depositary, Custodial and Security Agreements. On August 6, 2011, BoA refused Plaintiffs' demands.
On June 22, 2011, BoA filed its Complaint against Third party defendant BMP Paribas Securities Corporation (" BNPPS" ) and third party defendant Deutsche Bank Securities, Inc. (" DBS" ) (collectively, the " Note Dealers" or the " Third Party Defendants" ), and the motions were heard and marked fully submitted on January 25, 2012. On December 29, 2011, Plaintiffs filed the motion to amend, which was heard and marked fully submitted on April 4, 2012. On June 5, 2012, this Court issued its ruling on BoA's Complaint against the Third Party Defendants and Plaintiffs' Motion to Amend in BNP Paribas Mortg. Corp. v. Bank of America, N.A., 866 F.Supp.2d 257 (S.D.N.Y. 2012) (the " June Opinion" ). The decision dismissed BoA's Complaint in its entirety and granted Plaintiffs' motion to amend and file the Second Amended Complaint.
Plaintiffs filed their Second Amended Complaints (" BNP SAC" and " DB SAC" ) (collectively, the " SACs" ) on October 1, 2012, reasserting their initial surviving claims and adding allegations of (1) BoA failing to " sue itself" or assign its claims; (2) negligence and negligent misrepresentation; and (3) contingent quasi-contract claims.
On January 15, 2013, BoA filed a motion to dismiss counts four through twelve of the Plaintiffs' SACs and BNP's Fourteenth Cause of Action. This motion was heard and marked fully submitted on May 1, 2013.
Separately, on March 15, 2013 BoA filed a motion in limine to (1) admit testimony regarding advice of third party's counsel; and (2) exclude inquiry into privileged communications with outside counsel. The parties resolved this motion on May 1, 2013.
Familiarity with the general background of this case and prior litigation between the parties is assumed. The allegations as described in the contract cases are repeated
in part as relevant to the issues presented by the instant motions.
This dispute arises generally from the multi-billion dollar collapse of TBW in late summer 2009. According to the Amended Complaints, TBW was " the largest non-depositary residential mortgage lender in the United States" and the " twelfth-largest mortgage originator." (BNP AC ¶ 25; DB AC ¶ 2.) Its core business was: " (i) originating, underwriting, processing and funding conforming, conventional, government-insured residential mortgage loans; (ii) the sale of mortgage loans into the 'secondary market' zo government-sponsored enterprises such as Federal Home Loan Mortgage Corporation (" Freddie Mac" ); and (iii) mortgage payment processing and loan servicing." (BNP AC ¶ 26; DB AC ¶ 3.)
TBW created Ocala in 2005 to provide short-term liquidity to TBW between the time of TBW's origination or purchase of mortgages and the sale of those mortgages, principally to Freddie Mac. (BNP AC ¶ 28; DB AC ¶ 5.) Ocala raised cash by issuing liquidity notes in two series: Series 2005-1 Secured Liquidity Notes (the " 2005-1 Notes" ) and Series 2008-1 Secured Liquidity Notes (the " 2008-1 Notes" ) (collectively, the " Ocala Notes" ); which were, at all times, secured by the cash proceeds of those notes and mortgages. (BNP AC ¶ ¶ 39, 43; DB AC ¶ ¶ 3, 7, 34.) BNP purchased $480.7 million of the Ocala Notes, and DB purchased $1.2 billion. ( See BNP AC ¶ ¶ 2, 40; DB AC ¶ ¶ 4, 11.) The Ocala Notes " rolled over" at least once per month up to and through July 20, 2009, the date of the final rollover before TBW's collapse. (BNP AC ¶ 5; DB AC ¶ 13.)
BoA served in several distinct but related capacities for the Ocala Facility: as Indenture Trustee, Collateral Agent, Depositary and Custodian. In its various capacities, BoA agreed to administer and regulate the flow of mortgages and cash in and out of Ocala, certify the solvency of Ocala prior to its issuance of Ocala Notes, promptly notify the Ocala noteholders of any Event of Default or Potential Event of Default, as defined in the Facility Documents, and shut down the Ocala Facility upon certain Events of Default. (BNP AC ¶ 10; DB AC ¶ 23.) The rights and responsibilities of BoA are set out in the following Ocala Facility Documents: the 2008 Base Indenture (the " Base Indenture" ); the 2008 Security Agreement (the " Security Agreement" ); the 2005-1 Depositary Agreement (relating to the 2005-1 Notes and upon which the BNP Plaintiffs have sued) and 2008-1 Depositary Agreement (relating to the 2008-1 Notes and upon which DB has sued) (both referred to as the " Depositary Agreement" ); the 2008 Custodial Agreement (the " Custodial Agreement" ); and the March 2009 Letter.
On or about August 3, 2009, TBW's offices were raided by law enforcement authorities, TBW stopped originating mortgages, and Freddie Mac terminated TBW's eligibility to sell and service Freddie Mac loans. ( See DB AC ¶ ¶ 207-08.) On August 10, 2009, BoA declared an Event of Default under the Base Indenture. In the wake of TBW's collapse, Ocala has failed to repay, and indeed cannot repay, the money owed to DB and BNP, in their capacity as holders of the Ocala
Notes. ( See DB AC ¶ 21; BoA Mem. at 1.)
A. Additional Allegations in the SACs
The SACs assert new allegations, including that BoA, in direct violation of its duties under the relevant agreements, failed to securely protect Plaintiffs' collateral and instead allowed the vast majority of that collateral to leave the Ocala Facility. (BNP SAC ¶ 10; DB SAC ¶ 19.) Plaintiffs allege that BoA continued to issue Secured Notes and failed to shut down the Facility or otherwise inform Plaintiffs of Ocala's insolvency as required by the governing contracts, despite actual knowledge that the Ocala Facility was insolvent at least as early as January 25, 2008.
The SACs also allege that BoA repeatedly and falsely misrepresented the satisfaction of the Borrowing Base Condition and permitted Ocala to issue Ocala notes in an amount greater than its assets, up to and through July 20, 2009, the last date on which the Ocala Notes rolled over. According to the SACs, on their face, each and every Certificate during this period of time-and each one directly certified by BoA-reflected Ocala's insolvency, which constituted an Event of Default or a Potential Event of Default under the Base Indenture. Despite these certificates showing insolvency, Plaintiffs' allege that they did not receive copies of the Borrowing Base Certificates prepared by Ocala and certified by BoA for any of the roll dates prior to the end of December 2008. (BNP SAC ¶ 14.) Instead, the SACs assert that BoA began sending Borrowing Base Certificates only in February 2009, after Plaintiffs requested such copies, but that these Borrowing Base Certificates, unlike those certified by BoA between June and December 2008 and not provided to Plaintiffs, falsely showed Ocala to be solvent. (BNP SAC ¶ 17; DB SAC ¶ 22.) Plaintiffs allege that in issuing these inaccurate Borrowing Base Certificates, from December 17, 2008 to August 4, 2009, BoA repeatedly and negligently misrepresented the state of Ocala's assets by delivering false loan reports to Plaintiffs. ( Id.) Plaintiffs represent that BoA knew or should have known that its representations in these reports were false, and that Plaintiffs were relying on BoA's representations in deciding whether to roll over the Secured Notes (BNP SAC ¶ 18; DB SAC ¶ 22.)
Moreover, the SACs allege that at no point did BoA inform Plaintiffs that the pre-December 2008 Borrowing Base Certificates, which had not been shared with Plaintiffs, showed the Facility to be insolvent. According to Plaintiffs, had BoA adequately performed its contractual obligations or acted with reasonable care, (i) Plaintiffs would not have purchased the Secured Notes on June 30, 2008 or any of the subsequent roll dates; or (ii) Plaintiffs' Secured Notes would be fully secured as required by the Ocala Facility Agreements. (BNP SAC ¶ 22; DB SAC ¶ 33.)
Plaintiffs' state that as a direct and proximate result of BoA's breaches of its contractual duties and negligence, Plaintiffs' Secured Notes are significantly under-collateralized and BoA has failed to make payment to Plaintiffs for their Secured Notes. ( Id.)
In addition, Plaintiffs allege that BoA made " intra-day loans" to Ocala on each day that the Ocala notes matured, including July 20, 2009, which purportedly enabled Ocala to repay maturing notes. These loans allegedly made BoA an unsecured creditor of Ocala, at least until it was repaid the same day with funds received from Plaintiffs' purchase of new notes. ( See BNP SAC ¶ ¶ 269-74; DB SAC ¶ ¶ 350-55.) According to Plaintiffs, this allowed BoA to profit unjustly at Plaintiffs' expense. ( Id.)
Finally, the SACs allege that BoA has continued to breach its obligations to Plaintiffs in the period of time following TBW's collapse. Plaintiffs maintain that BoA, in its capacities as Indenture Trustee and Collateral Agent, has ongoing legal and contractual rights and obligations, as well as its fiduciary duty to recover damages caused by itself in its individual capacity and in its capacities as Collateral Agent, Depositary and Custodian for the benefit of Plaintiffs. (BNP SAC ¶ 24; DB SAC ¶ 31.) Plaintiffs allege that they have instructed BoA to bring claims in its capacities as Indenture Trustee and Collateral Agent against itself in its role as Collateral Agent, Custodian, Depositary and in its individual capacity, or in the alternative, assign any such claims directly to Plaintiffs. The SACs allege that in refusing to bring or assign such claims as instructed, and in making only limited efforts to recover Ocala's assets, BoA is depriving Plaintiffs of recoveries available to pay their Secured Notes and thus continuing to breach both its contractual and fiduciary duties to Plaintiffs. (BNP SAC ¶ 23; ¶ 27; DB SAC ¶ 18; ¶ 32.)
III. STANDARD OF REVIEW
On a motion to dismiss pursuant to Rule 12(b)(6), all factual allegations in the complaint are accepted as true, and all inferences are drawn in favor of the pleader. Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). The issue " is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995) (quoting Scheuer v. Rhodes, 416 U.S. 232, 235-36, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)).
To survive a motion to dismiss pursuant to Rule 12(b)(6), " a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Plaintiffs must allege sufficient facts to " nudge[ ] their claims across the line from conceivable to plausible." Twombly, 550 U .S. at 570. Though the court must accept the factual allegations of a complaint as true, ...