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ACE Secs. Corp. Home Equity Loan Trust v. DB Structured Prods., Inc.

United States District Court, S.D. New York

March 20, 2014

ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-HE3, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Plaintiff,
v.
DB STRUCTURED PRODUCTS, INC., Defendant. ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-WM2, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Plaintiff,
v.
DB STRUCTURED PRODUCTS, INC., Defendant. ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-HE4, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Plaintiff,
v.
DB STRUCTURED PRODUCTS, INC., Defendant. ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-HE5, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Plaintiff,
v.
DB STRUCTURED PRODUCTS, INC., Defendant

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[Copyrighted Material Omitted]

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For Ace Securities Corp. Home Equity Loan Trust, Series 2007-HE3, by HSBC Bank USA, National Association, in its capacity as Trustee, Plaintiff (1:13-cv-01869-AJN): Delyan Mitkov Dimitrov, Michael S. Shuster, Holwell Shuster & Goldberg, New York, NY; Lani A. Perlman, Holwell, Shuster & Goldberg LLP, New York, NY.

For DB Structured Products, Inc., Defendant (1:13-cv-01869-AJN): David J. Woll, Thomas C. Rice, Isaac Martin Rethy, LEAD ATTORNEYS, Simpson Thacher & Bartlett LLP (NY), New York, NY; Evan I. Cohen, Simpson Thacher & Bartlett LLP, New York, NY.

For ACE Securities Corp. Home Equity Loan Trust, Series 2007-WM2 by HSBC Bank USA, National Association, in its capacity as Trustee, Plaintiff (1:13-cv-02053-AJN): Daniel Peter Goldberg, Delyan Mitkov Dimitrov, Eileen Monaghan Delucia, Michael S. Shuster, Holwell Shuster & Goldberg, New York, NY.

For DB Structured Products, Inc., Defendant (1:13-cv-02053-AJN): David J. Woll, Thomas C. Rice, Isaac Martin Rethy, LEAD ATTORNEYS, Simpson Thacher & Bartlett LLP (NY), New York, NY; Evan I. Cohen, Simpson Thacher & Bartlett LLP, New York, NY.

For Ace Securities Corp. Home Equity Loan Trust, Series 2007-HE4 by HSBC Bank USA, National Association, in its capacity as Trustee, Plaintiff (1:13-cv-02828-AJN): Delyan Mitkov Dimitrov, Eileen Monaghan Delucia, Michael S. Shuster, Holwell Shuster & Goldberg, New York, NY; Lani A. Perlman, Holwell, Shuster & Goldberg LLP, New York, NY.

For DB Structured Products, Inc., Defendant (1:13-cv-02828-AJN): David J. Woll, Thomas C. Rice, Isaac Martin Rethy, Simpson Thacher & Bartlett LLP (NY), New York, NY; Evan I. Cohen, Simpson Thacher & Bartlett LLP, New York, NY.

For Ace Securities Corp. Home Equity Loan Trust, Series 2007-HE5, by HSBC Bank USA, National Association, in its capacity as Trustee, Plaintiff (1:13-cv-03687-AJN): Delyan Mitkov Dimitrov, Eileen Monaghan Delucia, Michael S. Shuster, Holwell Shuster & Goldberg, New York; Lani A. Perlman, Holwell, Shuster & Goldberg LLP, New York, NY.

For DB Structured Products, Inc., Defendant (1:13-cv-03687-AJN): Thomas C. Rice, LEAD ATTORNEY, David J. Woll, Isaac Martin Rethy, Simpson Thacher & Bartlett LLP (NY), New York, NY; Evan I. Cohen, Simpson Thacher & Bartlett LLP, New York, NY.

OPINION

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OPINION & ORDER

ALISON J. NATHAN, United States District Judge.

Before the Court are four motions to dismiss filed by Defendant DB Structured Products, Inc. (" DBSP" ) in four separate breach-of-contract actions brought by HSBC Bank USA, National Association (" Plaintiff" or the " Trustee" ) on behalf of four residential mortgage securitization trusts for which Plaintiff serves as trustee (the " Trusts" ). In each action, Plaintiff alleges that DBSP repudiated its obligations under the Trusts' governing agreements by failing to repurchase mortgage loans that it sold to the Trusts, even though DBSP knew or was notified that those loans were in breach of certain representations and warranties that it made at closing. For the reasons that follow, DBSP's motions are granted in part and denied in part.

I. BACKGROUND

The Court will briefly outline the procedural history of these four actions and DBSP's motions to dismiss before turning to Plaintiff's allegations. These actions

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are materially similar, in terms of the parties and their claims, to two parallel cases, one before Judge Sweet in this district and one in New York state court. See Deutsche Alt-A Sec. Mortg. Loan Trust, Series 2006-0A1 v. DB Structured Prods., Inc., 958 F.Supp.2d 488 (S.D.N.Y. 2013) (granting in part and denying in part DSBP's motion to dismiss); ACE Sec. Corp. v. DB Structured Prods., Inc., 40 Misc.3d 562, 965 N.Y.S.2d 844 (N.Y. Sup.Ct.) (denying DBSP's motion to dismiss on statute-of-limitations grounds), rev'd, 112 A.D.3d 522, 977 N.Y.S.2d 229 (1st Dep't 2013).

A. Procedural History

Between March and May of 2013, Plaintiff filed four complaints against DBSP. They contained similar allegations, but each one concerned a different residential mortgage-backed securities (" RMBS" ) transaction involving DBSP. Specifically, No. 13 Civ. 1869, which was initially assigned to the undersigned, concerned a securitization trust called ACE Securities Corp. Home Equity Loan Trust, Series 2007-HE3, or " ACE 2007-HE3" (the " HE3 action" ); No. 13 Civ. 2053, originally assigned to Judge Hellerstein, involved ACE 2007-WM2 (the " WM2 action" ); No. 13 Civ. 2828, originally assigned to Judge Marrero, involved ACE 2007-HE4 (the " HE4 action" ); and No. 13 Civ. 3687, originally assigned to Judge Kaplan, involved ACE 2007-HE5 (the " HE5 action" ). On August 29, 2013, the undersigned accepted the WM2, HE4, and HE5 actions as related to the HE3 action.

On May 3, 2013, DBSP filed a motion to dismiss in the HE3 action, which was fully submitted as of July 12, 2013. Subsequently, on July 26, DBSP filed a similar motion to dismiss in the WM2 action. But once the three related cases were reassigned, the parties stipulated that DBSP would withdraw its original motion to dismiss in the WM2 action and re-file it simultaneously with motions to dismiss in the HE4 and HE5 actions. The Court authorized consolidated briefing for those three motions. Thus, the three motions to dismiss were filed, along with a single opening brief from DBSP, on September 27, 2013. Plaintiff filed its opposition on October 25, and DBSP's reply followed on November 15.

As discussed in greater detail below, Plaintiff's allegations and the arguments advanced in the parties' briefs are, with certain exceptions, materially identical across the four cases. In the remainder of this opinion, the Court will note pertinent differences where necessary, but will generally address the factual and legal issues in a unified fashion.

B. RMBS Securitizations Generally

An RMBS securitization involves the sale to investors of securities, or RMBS, issued by a trust. (For tax reasons, the trust is typically organized as a Real Estate Mortgage Investment Conduit, or " REMIC." See 26 U.S.C. § § 860A-860G.) The trust's assets consist of numerous residential mortgage loans; the payments made on the loans are " passed through" to the investors holding the RMBS, who receive distributions on their securities to the extent and in the priority provided for by the securitization documents. WM2 Compl. ¶ ¶ 26-30.

A securitization generally involves a " sponsor," which is an affiliate of a bank, which acquires mortgage loans from their originators. The sponsor then sells the loans to a special-purpose entity known as the " depositor," which is typically affiliated with the sponsor, and which immediately transfers (or " deposits" ) the mortgage loans into the trust. The trust then issues securities to the depositor, which sells

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them to investors through an underwriter. In this way, the proceeds generated by the sale of the securities ultimately finance the purchase of the mortgage loans. A trustee then holds the loans and administers the trust for the benefit of investors. And a " servicer" is engaged to collect payments on the underlying loans in a manner consistent with the securitization documents. WM2 Compl. ¶ ¶ 26-27.

The sponsor typically conducts " some form of review" of the mortgage loan origination files and therefore is acquainted with the characteristics of the loans that it sells to the trust via the depositor. These files include borrowers' applications and associated documentation. Because they are not available to investors in the RMBS prior to purchase, and because the loans' characteristics affect the cash flows that those investors will receive and the credit ratings of the RMBS, the sponsor makes numerous " representations and warranties" as to the characteristics of the loans. These representations and warranties are backstopped by specific remedies provided in the securitization documents, which generally require a sponsor, once it becomes aware that a representation or warranty is not accurate with respect to a certain loan, to either " cure" such breach or replace or repurchase the loan from the trust within a specified period of time. WM2 Compl. ¶ ¶ 28-37.

C. The Parties' Agreements

Plaintiff was the trustee and DBSP was the sponsor for the four securitizations at issue in these actions. Each securitization involved two contracts relevant here: a Mortgage Loan Purchase Agreement (" MLPA" ) and a Pooling and Servicing Agreement (" PSA" ) (together, the " Agreements" ). Both Agreements are governed by New York law. PSA § 12.04; MLPA § 17.[1]

Pursuant to the MLPA, the depositor, ACE Securities Corp. (" ACE" ), purchased the loans from the sponsor, DBSP. In the MLPA, ACE is named as the " Purchaser," and DBSP is named as the " Seller." The MLPA sets forth numerous representations and warranties made by DBSP with respect to the characteristics of the mortgage loans. See MLPA § 6. It also specifies a repurchase protocol:

Upon discovery by the Seller, the Purchaser or any assignee, transferee or designee of the Purchaser 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 of . . . any such breach of a representation and warranty, the Seller promptly shall . . . cure such . . . breach in all material respects or, in the event the Seller cannot . . . cure such . . . breach, the Seller shall, within ninety (90) days of its discovery or receipt of notice of . . . any such breach of a representation and warranty, either (i) repurchase the affected Mortgage Loan at the Purchase Price (as such term is defined in the [PSA]) or (ii) pursuant to the provisions of the [PSA], cause the removal of such Mortgage

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Loan from the Trust Fund and substitute one or more Qualified Substitute Mortgage Loans.

Id. § 7(a). The MLPA provides that " the obligations of the Seller . . . to cure or repurchase a defective Mortgage Loan . . . constitute the sole remedies of the Purchaser against the Seller respecting a . . . breach of the representations and warranties." Id. § 7(c).

Pursuant to the PSA, ACE deposited the loans into the Trusts. The PSA names ACE as the " Depositor," DBSP as the " Sponsor," and Plaintiff as the " Trustee." The PSA provides that the " Depositor does hereby transfer, assign, set over and otherwise convey to the Trustee . . ., for the benefit of the Certificateholders, . . . the rights of the Depositor under the [MLPA] (including, without limitation the right to enforce the obligations of the other parties thereto thereunder)." PSA § 2.01. The PSA also contains a section concerning the repurchase of defective loans, which references the representations and warranties made by DBSP in the MLPA as well as its cure, substitution, or repurchase obligations under that agreement:

Upon discovery or receipt of notice . . . of a breach by the Sponsor of any representation, warranty or covenant under the [MLPA] in respect of any Mortgage Loan that materially and adversely affects the value of such Mortgage Loan or the interest therein of the Certificateholders, the Trustee shall promptly notify the Sponsor and the Servicer of such . . . breach and request that the Sponsor . . . cure such . . . breach within sixty (60) days from the date the Sponsor was notified of such . . . breach, and if the Sponsor does not . . . cure such . . . breach in all material respects during such period, the Trustee shall enforce the obligations of the Sponsor under the [MLPA] to repurchase such Mortgage Loan . . . at the Purchase Price within ninety (90) days after the date on which the Sponsor was notified of such . . . breach, if and to the extent that the Sponsor is obligated to do so under the [MLPA] . . . . In lieu of repurchasing any such Mortgage Loan as provided above, if so provided in the [MLPA], the Sponsor may cause such Mortgage Loan to be removed from [the Trust] . . . and substitute one or more Qualified Substitute Mortgage Loans . . . .

Id. ยง 2.03(a). And like the MLPA, the PSA provides that " the obligation of the Sponsor to cure or to repurchase (or to substitute for) any Mortgage Loan . . . as to which such a breach has occurred and is continuing shall constitute the sole remedy respecting such . . . ...


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