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Deutsche Alt-A Securities Mortgage Loan Trust v. DB Structured Prods., Inc.

United States District Court, S.D. New York

July 24, 2013

DEUTSCHE ALT-A SECURITIES MORTGAGE LOAN TRUST, SERIES 2006-OA1, by HSBC Bank USA, National Association, as Trustee, Plaintiff, -
v.
- DB STRUCTURED PRODUCTS, INC., Defendant

Decided July 23, 2013.

Page 489

For DEUTSCHE ALT-A SECURITIES LOAN TRUST, SERIES 2006-OA1 Plaintiff: Michael S. Shuster, Esq., Lani A. Perlman, Esq., Eileen M. DeLucia, Esq., HOLWELL SHUSTER & GOLDBERG LLP, New York, NY.

For DB STRUCTURED PRODUCTS, INC., Defendant: Thomas C. Rice, Esq., David J. Woll, Esq., Isaac M. Rethy, Esq., SIMPSON THACHER & BARTLETT LLP, New York, NY.

OPINION

Page 490

Robert W. Sweet, U.S.D.J.

Defendant DB Structured Products, Inc. (" DBSP" ) moves pursuant to Rule 12(b)(6) to dismiss the First Amended Complaint (" FAC" ) filed by Plaintiff HSBC Bank USA (" HSBC" or " Plaintiff" ). For the reasons set forth below, Defendants' Motion to Dismiss is granted in part and denied in part.

I. PRIOR PROCEEDINGS

Plaintiff HSBC initiated this action on November 27, 2012, at the direction of Monarch Alternative Capital LP (" Monarch" ), a " distressed debt" investment fund that purchased residential mortgage-backed securities (" RMBS" ) certificates issued by Deutsche Alt-A Securities Mortgage Loan Trust, Series 2006-OA1 (the " Trust" ), nearly six years after the transaction at issue.

On January 14, 2013, DBSP moved to dismiss the complaint and on February 4, 2013, Plaintiff filed the FAC. This motion was heard and marked fully submitted on May 22, 2013.

II. BACKGROUND

This dispute arises out of two related agreements (the " Agreements" ) executed in connection with the formation of the Trust and its issuance of RMBS. DBSP created the Trust, Series 2006-OA1, for the purpose of holding mortgage loans that DBSP " securitized" into RMBS to ultimately be sold to investors. (Compl. ¶ ¶ 38-39.) DBSP, as " sponsor" of the securitization, selected the mortgage loans to be securitized. ( Id . ¶ 38.) Specifically, DBSP first purchased loans from mortgage originators, and then transferred a pool of these loans to Deutsch Alt-A Securities, Inc. (" DBALT" ), a securitization conduit known as a " depositor," pursuant to a Mortgage Loan Purchase Agreement (the " MLPA" ) dated December 29, 2006 (the " Closing Date" ), which contains representations and warranties (" RWs" ) concerning the loans. (MLPA § 6.) Next, the loans, as well as DBALT's rights under the MLPA, were transferred to the Trustee, pursuant to the Trust's governing contract, a Pooling and Servicing Agreement

Page 491

dated December 1, 2006 (the " PSA" ). (PSA § 2.1.)[1] DBSP, pursuant to the MLPA, then issued certificates which entitled their holders to shares of the mortgage payments made by the borrowers on the underlying loans.

In the course of purchasing the RMBS and determining which loans to place into the securitization trust, DBSP performed due diligence on the loans. (Compl. ¶ ¶ 3, 11-12, 31, 41, 61-62.) Plaintiff alleges that this due diligence included reviewing the loans, making judgments that the loans and the borrowers were what they appeared to be, confirming that the information in the Loan Files was accurate and that the loans were originated in accordance with the loan originators' stated mortgage loan origination guidelines, and determining whether the loans were appropriate collateral for certificates to be marketed and sold to the public. ( Id . ¶ 41.) In the course of its review, DBSP had access to and possession of the Loan Files. ( See MLPA § 4(a); see also Compl. ¶ ¶ 8-9, 41-43, 71.) Plaintiff contends that in the course of this review, DBSP discovered, or should have discovered, that many of the Mortgage Loans were not originated in accordance with the originators' stated underwriting practices; that many Loan Files were materially incomplete; that borrowers' incomes were overstated; that borrowers' indebtedness was understated; that the mortgaged properties were often misstated to be the borrowers' primary residences; and that the loans suffered from other obvious deficiencies. (Compl. ¶ ¶ 11-12, 54-64.)

Knowledge of any of these deficiencies would result in a material breach of DBSP's RWs regarding the quality of the Mortgage Loans, triggering DBSP's repurchase obligation. Specifically, section 7(a) of the MLPA requires that DBSP repurchase breaching loans within 90s days of either its own discovery of such breaches, or its receipt of notice from the Depositor or its assignee (the Trustee) as to such breaches. The MLPA provides in relevant part that,

Upon discovery by the Seller [i.e., DBSP], the Purchase [i.e., DAAS], or any assignee . . . of . . . a breach of any of the representations and warranties contained in Section 6 that materially and adversely affects the value of any Mortgage Loan or the interest therein of the Purchaser or the Purchaser's assignee, transferee or designee, the party discovering such breach shall give prompt written notice to the Seller. Within sixty (60) days of its discovery or its receipt of notice . . . the Seller [DBSP] promptly shall . . . cure such breach in all material respects or, in the event that the Seller . . . cannot cure such . . . breach, the Seller shall, within ninety (90) days of its discovery or receipt of notice . . . (i) repurchase the affected Mortgage Loan . . . .

(MLPA § 7(a).) Section 2.3(a) of the PSA affirms DBSP's obligation to promptly cure or repurchase breaching loans upon discovery or receipt of notice.

The Complaint alleges that despite these obligations, DBSP, as a result of its own pre-closing due diligence, was aware when

Page 492

the securitization closed and immediately thereafter of hundreds of breaches of its RWs concerning the Mortgage Loans, and nevertheless failed to cure any breach or repurchase any loan. (Compl. ¶ ¶ 11, 54-64, 76.) Plaintiff contends that this failure to cure or repurchase despite knowledge of material breaches resulted in DBSP breaching its obligations under the Agreements. ( Id .)

Approximately five years after the securitization, a certificateholder performed its own due diligence on the loans ( id . ¶ ¶ 44-46), discovered the breaches that Plaintiff alleges DBSP knew, or should have known, from its initial due diligence, ( id . ¶ ¶ 1, 3, 48, 62), and provided notice of these breaches to the Trustee, which transmitted this information to DBSP. ( Id . ¶ ¶ 2, 67.) Specifically, on November 16, 2011, a law firm representing Monarch sent a letter to the Trustee noticing beaches of RWs concerning 38 loans, and requested that the Trustee notify DBSP of such breaches and request repurchase of the loans. (Declaration of Isaac M. Rethy, " Rethy Decl." ; Ex. A.) This letter was forwarded to DBSP on December 1, 2011, noting that the Monarch letter identifi[ed] mortgage loans that may have breached certain representations and warranties." ( Id .) DBSP responded by letter dated February 23, 2012, stating that DBSP needed to review these loans to determine whether any breached RWs, and requesting loan documents to make this determination.[2] (Rethy Decl. Ex. B.)

In June of 2012, the Trustee forwarded DBSP five additional letters from Monarch which asserted further breaches. (Rethy Decl. Exs. D-F, H-I.) In these letters, the Trustee wrote that it had " not conducted any independent review of the facts asserted and ma[de] no representations as to the accuracy of the information contained herein." ( Id .) DBSP contends that it responded to the Trustee by letter dated August 14, 2012, reiterating its need to assess the underlying loan documentation in order to determine whether repurchase was required. ( Id . Ex. J.) These requested documents were provided to DBSP on October 3, 2012, accompanied by a letter asserting that the Trustee had no obligation to provide DBSP any supporting information or to investigate any breach allegations made by certificateholders. ( Id . Ex. K.) The Letter also asserted that the time period allotted for DBSP to repurchase the 323 loans had already expired. ( Id .)

In total, the Trustee sent DBSP six breach notices (the " Breach Notices" ) concerning a total of 323 loans (the " Breaching Loans" ). Each Breach Notice identified each individual Breaching Loan by its unique loan identification number, as well as identifying the specific RWs of the MLPA that DBSP had breached; providing a description of the facts and circumstances giving rise to those breaches; and explaining how those breaches materially and adversely affected the interest of the certificateholders in each of the Breaching Loans. ( Id . ¶ ¶ 68-72.) Plaintiff maintains that this notice, as with DBSP's own discovery of the breaches prior to the closing of the securitization, contractually required DBSP to either cure its breaches within 60 days or repurchase the Breaching Mortgage Loans within 90 days. ( See MLPA § 7(a), PSA § 2.3(a).) DBPS to date has not cured or repurchased any of the loans at issue.

The Complaint alleges breach of contract for both the initial alleged breach by DBSP, arising from its own discovery and

Page 493

knowledge of breaches of RWs at the time of closing, as well as the second, distinct set of alleged breaches arising from DBSP's failure to act upon the Trustee's Breach Notices. Plaintiff asserts that the underlying breaches of the RWs materially and adversely affected the risk profile and, thus, the value of each Breaching Loan, as well as the entire securitization itself, given that the Breaching Loans comprised some 21% of the entire pool of Mortgage Loans. (Compl. ¶ ¶ 1-2, 11.) In conveying such a heavily tainted securitization pool to the Trust, and in refusing to perform its obligations, Plaintiff further alleges that DBSP has distorted the Agreements and frustrated the core purpose of the parties' contractual arrangements, thereby committing a fundamental breach of the Agreements. ( Id . ¶ 17.)

The PSA allows Plaintiff the ability, in accordance with procedures set forth in Section 2.3 of the PSA (the " Repurchase Protocol" ), to enforce DBSP's obligation to repurchase a loan that breaches the RWs made in the MLPA. The Repurchase Protocol provides:

Upon discovery or receipt of notice . . . of a breach by [DBSP] of any [RW] in respect of any Loan that materially and adversely affects the value of such Loan, or the interest therein of the Certificateholders, the Trustee shall promptly notify [DBSP] of such . . . breach and request that [DBSP] . . . cure such . . . breach within 60 days from the date [DBSP] was notified of such . . . breach . . . . If [DBSP] does not . . . cure such . . . breach in all respects during such period, the Trustee shall enforce the obligations of [DBSP] under the [MLPA] to repurchase such Loan from the REMIC I at the Purchase Price within 90 days after the date on which [DBSP] was notified of such . . . breach. . . . It is understood and agreed that the obligation of [DBSP] to cure or to repurchase (or to substitute for) any Loan as to which . . . such a breach has occurred and is continuing shall constitute the sole remedy respecting such . . . breach available to the trustee and the Certificateholders.

(PSA § 2.3.)

In turn, Defendant maintains that Plaintiff's Complaint, in the face of clear terms of the PSA, attempts to sue for RW breaches without providing sufficient prior notice, and that Plaintiff is incorrect that it can obtain " rescissory" and other measures of damages, given the PSA's express limitation of remedies. The PSA, Defendant maintains, clearly provides that the loan-by-loan Repurchase Protocol set forth in Section 2.3 for specific performance " shall constitute the sole remedy respecting such omission, defect or breach available to the Trustee and the Certificateholders." Additionally, Defendant asserts that the FAC does not allege that any of the breaches alleged by Monarch pertained to assets of the Trust. The PSA provides chat DBSP has no obligation to repurchase mortgage loans that are no longer assets of the Trust or have otherwise been extinguished. (Def. Mem. at 5.) Because Plaintiff has not specified which, if any, of their breach claims pertain to loans still the property of the Trust and capable of being repurchased, Defendant maintains that Plaintiff's claims must be dismissed.

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 ...


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