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Landebank Baden WU Rttemberg, Georges Quay Funding I Ltd. v. RBS Holdings USA Inc.

United States District Court, S.D. New York

April 9, 2014

LANDESBANK BADEN-WÜ RTTEMBERG, GEORGES QUAY FUNDING I LIMITED, SPENCERVIEW ASSET MANAGEMENT LIMITED and CALEDONIAN TRUST (CAYMAN) LIMITED, ACTING IN ITS CAPACITY AS TRUSTEE OF THE LEVERAGED ACCRUAL ASSET MANAGEMENT SUB-TRUST, A SUB-TRUST OF THE PANACEA TRUST, THE LEVERAGED ACCRUAL ASSET MANAGEMENT II SUB-TRUST, A SUB-TRUST OF THE PANACEA TRUST, AND THE LEVERAGED ACCRUAL ASSET MANAGEMENT XI SUB-TRUST, A SUB-TRUST OF THE PIVOT MASTER TRUST, Plaintiffs,
v.
RBS HOLDINGS USA INC., RBS SECURITIES INC. (f/k/a GREENWICH CAPITAL MARKETS, INC.), RBS ACCEPTANCE INC. (f/k/a GREENWICH CAPITAL ACCEPTANCE, INC.) and RBS FINANCIAL PRODUCTS INC. (f/k/a GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.), Defendants

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For Landesbank Baden-Wurttemberg, Georges Quay Funding I Ltd., Plaintiffs: Corban Smith Rhodes, Mark S. Arisohn, Labaton Sucharow LLP (NYC), New York, NY; David J. Goldsmith, Joel H. Bernstein, Martis Ann Alex, Labaton Sucharow, LLP, New York, NY.

For Spencerview Asset Management Limited, Caledonian Trust (Cayman) Limited, Acting in capacity as Trustee of Leveraged Accrual Asset Management Sub-Trust, Sub-Trust of Panacea Trust, Leveraged Accrual Asset Management II Sub-Trust, Sub-Trust of Panacea Trust, and Leveraged Management XI Sub-Trust, Sub-Trust of Pivot Master Trust, Consolidated Plaintiffs: Corban Smith Rhodes, Mark S. Arisohn, Labaton Sucharow LLP (NYC), New York, NY; David J. Goldsmith, Joel H. Bernstein, Martis Ann Alex, Labaton Sucharow, LLP, New York, NY.

For RBS Holdings USA, Inc., RBS Acceptance, Inc., formerly known as Greenwich Capital Acceptance, Inc., RBS Securities, Inc., formerly known as Greenwich Capital Markets, Inc., Defendants: Christopher P. Malloy, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY; Jay B. Kasner, Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP (NYC), New York, NY.

For RBS Financial Products, Defendant: Christopher P. Malloy, LEAD ATTORNEY, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY.

OPINION

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MEMORANDUM OPINION & ORDER

Paul G. Gardephe, United States District Judge.

This action arises from Plaintiffs' investment in residential mortgage-backed securities that were issued or underwritten by RBS Holdings USA Inc., RBS Securities Inc., RBS Acceptance, Inc., and RBS Financial Products Inc. (collectively, the " Defendants" or " RBS" ). Defendants have

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moved to dismiss the consolidated complaint (the " Complaint" ) pursuant to Fed.R.Civ.P. 12(b)(1) and (6), and to strike certain paragraphs of the Complaint pursuant to Fed.R.Civ.P. 12(f). (Dkt. No. 11) On March 31, 2014, this Court issued and order granting Defendants' motion in part, and denying the motion in part. The purpose of this opinion is to explain the Court's reasoning.

BACKGROUND[1]

I. MORTGAGE SECURITIZATION

Residential mortgage-backed securities (" RMBS" ) are financial products collateralized by residential mortgages. Securitization is the process through which thousands of individual mortgages are pooled together into discrete trusts, which then issue securities to investors in the form of certificates. (Cmplt. (Dkt. No. 6) ¶ 34) A trustee is appointed to oversee the management of each trust, which involves, among other things, distributing revenue payments to the holders of trust certificates. (Id.) The source of this revenue is the monthly payments made by borrowers whose mortgages are held by the trust. (Id.)

The RMBS process begins with lending institutions, or " originators," that make home loans to consumers that are secured by mortgages. (Id. ¶ 35) In an effort to ensure that borrowers will be able to repay their loans, originators employ certain underwriting guidelines, or metrics, that they use to evaluate borrowers' creditworthiness. (Id. ¶ 47) A " sponsor" or " seller" of RMBS -- usually an affiliate of an investment bank -- purchases the mortgages in bulk from one or more originators. (Id. ¶ 35) Frequently, the sponsor provides " warehouse" lines of credit to originators to facilitate lending. (Id.) The sponsor or seller then pools thousands of the mortgage loans together and transfers them to a " depositor" -- usually another affiliate of the same investment bank. (Id. ¶ 36) The sponsor and depositor are both considered to be an " issuer" of the RMBS. (Id.)

The issuer typically re-underwrites the loans made by the originators; in other words, it conducts an independent assessment of the individual borrower's ability to meet the mortgage obligations. This assessment involves reviewing the loan files provided by the originators, which contain the information gathered by originators in the lending process. (Id. ¶ ¶ 42-43) Issuers usually delegate this work to third-party due diligence vendors, such as Clayton Holdings, LLC (" Clayton" ), which verify key information contained in the loan files, including the borrower's income, assets, credit history, and employment. (Id. ¶ ¶ 40, 43) After review, the due diligence vendor provides the issuer with a report of its findings. (Id. ¶ 44) This report assesses the quality of the loans with reference to the originator's stated underwriting guidelines, and identifies which loans comply with the guidelines and which do not. (Id.) The issuer then uses this report to determine which loans to pool together in a securitization. (Id. ¶ ¶ 44-45)

Once the desired pool of loans is assembled, the depositor transfers the loans into an " issuing trust." (Id. ¶ 37) It then securitizes the loan pool so that the rights to the cash flow from the loans can be sold to investors. The loan pool is securitized in " tranches," each of which has a different risk profile. (Id.) The most senior tranches

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are the least risky -- they enjoy first priority in claiming payments from mortgagors. (Id.) Conversely, the junior tranches are the last to receive their share of borrowers' repayments, and thus carry more risk and a higher return; they are also the first to be impacted by losses in the loan pool. (Id.) Once this process is completed, the depositor passes the certificates to underwriters, who offer them for sale to investors. (Id. ¶ 38) Investors interested in purchasing the certificates are provided " Offering Materials," prepared by the issuer, which make representations regarding important characteristics of the loan pool. (Id. ¶ 45) Offering Materials include the loan-to-value (LTV) and combined loan-to-value (CLTV) ratios of the mortgages, the originators' adherence to underwriting standards, and the owner-occupancy status of the mortgaged properties. (Id.) The Offering Materials also certify that the mortgages and all necessary underlying documentation will be transferred to the trust. (Id.)

II. THE PARTIES

Plaintiff Landesbank Baden-Württemberg (" LBBW" ) is a commercial bank incorporated in Germany. (Id. ¶ 19) LBBW's claims relate to certificates it acquired in connection with its 2008 acquisition of another German bank, Sachsen LB, and that bank's subsidiary, Sachsen LB Europe Plc. (Id. ¶ 20) Plaintiff Georges Quay Funding I Limited (" Georges Quay" ) is a special purpose vehicle incorporated in Ireland and formerly managed by Sachsen LB Europe. It purchased and holds RMBS certificates issued by one or more of the Defendants. (Id. ¶ 24) Plaintiff Spencerview Asset Management Limited (" Spencerview" ) is a special purpose vehicle set up by LBBW and incorporated in Ireland. LBBW transferred to Spencerview some of the certificates that it acquired from Sachsen LB Europe. (Id. ¶ 22) Plaintiff Caledonian Trust (Cayman) Limited (" Caledonian" ) serves as Trustee for the following trusts: the Leveraged Accrual Asset Management Sub-Trust (" LAAM I" ), a sub-trust of the Panacea Trust; the Leveraged Accrual Asset Management XI Sub-Trust (" LAAM II" ), a sub-trust of the Panacea Trust; and the Leveraged Accrual Asset Management XI Sub-Trust (" LAAM XI" ), a sub-trust of the Pivot Master Trust. (Id. ¶ 25) LBBW became sole investor in LAAM I, LAAM II, and LAAM XI upon its acquisition of Sachsen LB. (Id.)

Defendant RBS Holdings USA Inc. (" RBS Holdings" ), RBS Securities Inc. (" RBS Securities" ), RBS Acceptance Inc. (" RBS Acceptance" ), and RBS Financial Products (" RBS Financial Products" ), are Delaware corporations headquartered in Stamford, Connecticut. (Id. ¶ ¶ 27-30) RBS Holdings is a wholly owned subsidiary of The Royal Bank of Scotland Group PLC, and was known as Greenwich Capital Holdings, Inc. until April 2009. (Id. ¶ 27) RBS Holdings is the parent company of Defendants RBS Securities Inc., RBS Acceptance Inc., and RBS Financial Products Inc. (Id.) RBS Securities is a registered broker-dealer and was an active underwriter of RMBS. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. (Id. ¶ 28) RBS Acceptance served as a depositor for RMBS securitizations and was known as Greenwich Capital Acceptance, Inc. until August 2007. (Id. ¶ 29) RBS Financial Products was the sponsor for certain securitizations at issue and was known as Greenwich Capital Financial Products, Inc. prior to April 2009. (Id. ¶ 30)

III. THE COMPLAINT

Plaintiffs allege various improprieties by Defendants in connection with the creation, offering, and sale of certain RMBS.

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Plaintiffs assert against all Defendants causes of action for common law fraud, fraudulent concealment, and, in the alternative, negligent misrepresentation. (Id. ¶ ¶ 325-44, 351-358) Against Defendant RBS Securities only, Plaintiffs assert claims of aiding and abetting fraud or, alternatively, a claim of rescission based on mutual mistake. (Id. ¶ 345-350, 359-365)

In 2006 and 2007, Plaintiffs purchased more than $243 million worth of RMBS certificates from Defendants (the " Certificates" ). (Id. ¶ 1) These Certificates were issued, marketed, and sold by Defendants in three separate RMBS securitizations: MHL 2006-1, HVMLT 2006-12, and HVMLT 2007-5 (collectively, the " Securitizations" ). (Id. at 11, Table (" tbl." ) 1) Defendants acquired the loans underlying these Certificates from third-party mortgage originators (and non-parties to this action) Countrywide Homes Loans, Inc. (" Countrywide" ), American Home Mortgage Corp. (" American Home" ) and MortgageIT, Inc. (" MortgageIT" ). (Id. ¶ 32) Plaintiffs allege numerous knowing misrepresentations of material fact made by Defendants through the Offering Materials for the Securitizations, which included registration statements, prospectuses, prospectus supplements, and other filings. (Id. ¶ 4) Each Securitization had its own set of Offering Materials.

The misrepresentations alleged by Plaintiffs relate to different stages of the securitization process. At the origination stage, Plaintiffs allege that Defendants failed to reveal in the Offering Materials that originators systematically abandoned their underwriting standards, thereby reducing the quality of loans in the securitization pool by making it less likely that borrowers would be able to repay. (Id. ¶ ¶ 75-81) After origination, Plaintiffs allege that Defendants manipulated and failed to disclose the true results of their due diligence vendors' review of the loan pools. These actions led to poor-quality loans being included in the Securitizations. (Id. ¶ ¶ 82-84) Plaintiffs further allege that Defendants understated the LTV and CLTV ratios of the Securitizations' loan pools by overstating the appraised values of the underlying properties. (Id. ¶ ¶ 85-113) These figures are material to investors' assessment of a given loan pool, as they reflect the amount of equity that borrowers have in their homes, which, in turn, affects the likelihood of repayment. (Id. ¶ 86) The metrics also inform investors of the trustee's ability to recover value from the property in the event of foreclosure. (Id. ¶ 88) The Complaint also alleges misrepresentations about the owner-occupancy status of mortgaged properties included in the Securitizations (Id. ¶ ¶ 114-22), as well as failures to transfer mortgages and notes to the trusts (Id. ¶ ¶ 207-41).

DISCUSSION

I. DEFENDANTS' MOTION TO STRIKE

Defendants have moved to strike Paragraphs 133, 135-37, 141-42, 144-46, 150-64, 170-76, 190-95, 198, 241, 284-85, and 313 of the Complaint on the grounds that they refer to news articles and complaints in other actions. See Def. Mot. (Dkt. No. 11); Def. Br. (Dkt. No. 12) at 19 (citing RSM Prod. Corp. v. Fridman, 643 F.Supp.2d 382, 403 (S.D.N.Y. 2009), aff'd, 387 F.App'x 72 (2d Cir. 2010) (" Second Circuit case law is clear that paragraphs in a complaint that are either based on, or rely on, complaints in other actions that have been dismissed, settled, or otherwise not resolved, are, as a matter of law, immaterial within the meaning of Fed.R.Civ.P. 12(f)." (citing Lipsky v. Commonwealth United Corp., 551 F.2d 887, 892-94 (2d Cir. 1976))).

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" To prevail on a [Rule 12(f)] motion to strike, a party must demonstrate that (1) no evidence in support of the allegations would be admissible; (2) that the allegations have no bearing on the issues in the case; and (3) that to permit the allegations to stand would result in prejudice to the movant." In re Fannie Mae 2008 Sec. Litig., 891 F.Supp.2d 458, 2012 WL 3758537, at *4 (S.D.N.Y. 2012) (alteration in original) (internal quotation marks and citations omitted). Defendants have not met this standard.

RSM Prod Corp., 643 F.Supp.2d 382, cited by Defendants, relies on Lipsky, 551 F.2d 887. Although " some courts in this district have stretched the holding in Lipsky to mean that any portion of a pleading that relies on unadjudicated allegations in another complaint is immaterial under Rule 12(f)[,] [n]either Circuit precedent nor logic supports such an absolute rule." In re Bear Stearns Mortgage Pass-Through Certificates Litig., 851 F.Supp.2d 746, 768 n.24 (S.D.N.Y. 2012) (internal citation omitted).

Here, the news reports and complaints cited in the disputed paragraphs are neither extraneous nor immaterial to the Complaint's allegations. For example, Plaintiffs allege that " Defendants' systematic misrepresentation of the quality of the Certificates they created and sold" is evidenced by an FHAA forensic review of a May 2007 RBS offering. In referring to this study, Plaintiffs cite to the complaint filed in Federal Housing Fin. Agency v. The Royal Bank of Scotland Group plc, et al., No. 11-CV-01383 AWT (D. Conn.) (ECF No. 40, Feb. 1, 2012). (Cmplt. (Dkt. No. 6) ¶ 170) " It makes little sense to say," as Defendants urge, " that information from such a study -- which [Plaintiffs' Complaint] could unquestionably rely on if it were mentioned in a news clipping or public testimony -- is immaterial simply because it is conveyed in an unadjudicated complaint." Bear Stearns, 851 F.Supp.2d at 768 n.24. Accordingly, Defendants' motion to strike will be denied.

II. LEGAL STANDARD GOVERNING MOTION TO DISMISS

To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain " enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the complaint," Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citing Dougherty v. Town of N. Hempstead Bd. Of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must " draw all reasonable inferences in favor of the plaintiff." Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)).

A complaint is inadequately pled " if it tenders 'naked assertion[s]' devoid of 'further factual enhancement,'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 557), and does not provide factual allegations sufficient " to give the defendant fair notice of what the claim is and the grounds upon which it rests." Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555).

Fraud claims are subject to Fed.R.Civ.P. 9(b), which states that " a party must state with particularity the circumstances constituting fraud or mistake." To satisfy Rule 9(b), " the complaint must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."

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Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d. Cir. 2006). To adequately plead fraud, the complaint must also plead facts that give rise to a strong inference of scienter. S.Q.K.F.C., Inc. v. Bell Atlantic TriCon Leasing Corp., 84 F.3d 629, 634 (2d Cir. 1996).

III. LBBW AND SPENCERVIEW'S STANDING

Defendants move to dismiss the claims of LBBW and Spencerview for lack of standing pursuant to Fed.R.Civ.P. 12(b)(1). " Although standing is a fundamental jurisdictional requirement, it is still subject to the same degree of proof that governs other contested factual issues." Baur v. Veneman, 352 F.3d 625, 631 (2d Cir. 2003) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)). Accordingly, when " ruling on a motion to dismiss for want of standing," this Court " must accept as true all material allegations of the complaint, and must construe the complaint in favor of the complaining party." Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). " [S]tanding allegations need not be crafted with precise detail, nor must the plaintiff prove his allegations of injury." Baur, 352 F.3d at 631.

The Complaint alleges that Sachsen LB, its wholly-owned subsidiary Sachsen LB Europe, Georges Quay, and Caledonian Trust -- acting in its capacity as trustee of the Leveraged Accrual Asset Management funds -- purchased the seven RMBS Certificates at issue.[2] (Cmplt. (Dkt No. 6) ¶ ¶ 23-25)

Plaintiff

Offering and Class

CUSIP

Purchasing Entity

LBBW

HVMLT 2006-12

41162DAD1

LAAM X

HVMLT 2007-5

41165AAD4

Sachsen LB

Georges Quay

MHL 2006-1

6195RBZ8

Georges Quay

Spencerview

HVMLT 2007-5

41165AAD4

Sachsen LB Europe

Caledonian

HVMLT 2006-12

41162DAD1

LAAM I

HVMLT 2006-12

41162DAD1

LAAM II

HVMLT 2006-12

41162DAD1

LAAM XI

(Cmplt. (Dkt. No. 6) ¶ 25 & tbl. 1) A CUSIP number is a 9-character alphanumeric code that identifies a security for purposes of clearing and settlement of trades. CUSIP refers to the Committee on Uniform Security Identification Procedures.

Through a series of purchase agreements executed between mid-August 2007 and April 1, 2008, LBBW " completely assumed" " all claims and liabilities of Sachsen LB, and Sachsen LB's Certificates and [Sachsen LB Europe's] Certificates" as " universal successor by operation of German law." (Id. ¶ ¶ 19-21) LBBW further alleges that it acquired Sachsen LB's rights as " sole unitholder" of the LAAM X Trust, and that it subsequently transferred the LAAM X Trust's assets to its own balance sheet upon LAAM X's " termination." (Id. ¶ 23) Spencerview claims the right to sue on a Certificate originally purchased by Sachsen LB Europe. (Id. ¶ 22) According to the Complaint, after LBBW ...


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