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Retirement Board of the Policemen's Annuity & Benefit Fund of Chicago v. Bank of N.Y. Mellon

United States Court of Appeals, Second Circuit

December 23, 2014


Argued: May 16, 2014.

Plaintiffs appeal from an April 3, 2012 decision and order of the United States District Court for the Southern District of New York (William H. Pauley III, Judge), granting in part and denying in part the Bank of New York Mellon's (" BNYM's" ) motion to dismiss. The district court held that Plaintiffs lacked standing to assert claims related to residential mortgage-backed securities (" RMBS" ) trusts in which they did not invest. Because Plaintiffs' own claims do not raise the " same set of concerns," NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145, 162 (2d Cir. 2012), as claims arising from trusts in which Plaintiffs did not invest, we affirm the district court's dismissal of these claims. BNYM cross-appeals from the district court's holding that the Trust Indenture Act of 1939 (" TIA" ), 15 U.S.C. § § 77aaa-77aaaa, applies to RMBS certificates governed by pooling and servicing agreements. We hold that these certificates are exempt from the TIA under § 304(a)(2) of the statute, which applies to " certificate[s] of interest or participation in two or more securities having substantially different rights and privileges." 15 U.S.C. § 77ddd(a)(2) . We therefore reverse the portion of the district court's decision declining to dismiss Plaintiffs' TIA claims related to these certificates, and remand the case for further proceedings consistent with this opinion.

WILLIAM C. FREDERICKS (Beth A. Kaswan, Max R. Schwartz, Deborah Clark Weintraub, on the brief), Scott䧊 LLP, New York, NY, for Plaintiffs-Appellants-Cross-Appellees.

CHARLES A. ROTHFELD (Christopher J. Houpt, Paul W. Hughes, Matthew D. Ingber, James F. Tierney, on the brief), Mayer Brown LLP, Washington, DC, for Defendant-Appellee-Cross-Appellant.

Eric A. Schaffer, Paige Hennessey Forster, Colin E. Wrabley, Reed Smith LLP, Pittsburgh, PA, for Amici Curiae American Bankers Association and New York Bankers Association.

Martin L. Seidel, Nathan Bull, Blake Adam Gansborg, Cadwalader, Wickersham & Taft LLP, New York, NY, for Amici Curiae Securities Industry and Financial Markets Association and The Clearing House Association L.L.C.

Before: JACOBS, CABRANES, and LIVINGSTON, Circuit Judges.


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Debra Ann Livingston, Circuit Judge :

These interlocutory appeals require us to resolve two questions that have recurred in recent cases involving residential mortgage-backed securities (" RMBS" ), but that this Court has not yet had occasion to address. The first question is whether, under our decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), cert. denied, 133 S.Ct. 1624, 185 L.Ed.2d 576 (2013), a named plaintiff in a putative class action has " class standing" to assert, on absent class members' behalf, breach-of-duty claims against the trustee of an RMBS trust in which the named plaintiff did not invest. The second question is whether the provisions of the Trust Indenture Act of 1939 (" TIA" ), 15 U.S.C. § § 77aaa-77aaaa, impose obligations on the trustees of RMBS trusts governed by pooling and servicing agreements (" PSAs" ). We answer both questions in the negative, and we therefore affirm in part and reverse in part the decision of the district court.



Since the collapse of financial markets in the latter part of the last decade, the

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RMBS trust has become a familiar subject of litigation in this circuit. See, e.g., City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014); Am. Int'l Grp., Inc. v. Bank of Am. Corp., 712 F.3d 775 (2d Cir. 2013). We have described in the past how an RMBS trust operates:

To raise funds for new mortgages, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificateholders. The trustee hires a mortgage servicer to administer the mortgages by enforcing the mortgage terms and administering the payments. The terms of the securitization trusts as well as the rights, duties, and obligations of the trustee, seller, and servicer are set forth in [governing agreements, frequently styled as PSAs].

BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169, 173 (2d Cir. 2012).

At issue in this case are 530 RMBS trusts created between 2004 and 2008 for which defendant The Bank of New York Mellon (" BNYM" ) acts as trustee. The majority of these trusts are governed by PSAs, although some are governed by so-called sale and servicing agreements (" SSAs" ) paired with indentures. The PSA-governed trusts are organized under New York law, and the SSA- and indenture-governed trusts are organized under Delaware law. Plaintiffs[1] are pension funds that invested in certain of the 530 trusts for which BNYM serves as trustee; specifically, they hold certificates issued by twenty-five of the PSA-governed New York trusts and one of the SSA- and indenture-governed Delaware trusts. Plaintiffs assert claims on behalf of a putative class comprising investors who purchased certificates from any one of the 530 trusts.

Countrywide Home Loans, Inc. and its affiliates (" Countrywide" ), now owned by Bank of America Corporation, originated the residential mortgage loans underlying the 530 trusts at issue and sold them to the trusts. (Countywide also acted as " master servicer" for the trusts, meaning that it was charged with collecting payments from the mortgage loans and remitting them to the trusts.) In connection with these loan sales, Countrywide made numerous representations and warranties about the characteristics, credit quality, and underwriting of the mortgage loans. If Countrywide received notice that particular loans breached these representations and warranties in a way that materially and adversely affected the certificateholders, it was obligated to cure the defect or repurchase the defective loans from the trust. Plaintiffs allege that defects among the loans sold to the trusts were " systemic and pervasive" as a result of Countrywide's failure to adhere to prudent underwriting standards, leading to widespread breaches of its representations and warranties. J.A. 968. These defects allegedly caused significant losses to certificateholders because the loans underlying the trusts defaulted at higher-than-expected rates.

Plaintiffs seek to hold BNYM responsible for the losses allegedly caused by Countrywide's breaches of its representations and warranties. They claim that BNYM owed to certificateholders fiduciary duties of care and loyalty, contractual

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duties under the trusts' governing agreements, and statutory duties imposed by the TIA. For instance, the PSAs provided that BNYM was required to provide notice to Countrywide if it became aware of a material breach of the representations and warranties; if Countrywide did not act to remedy the breach within 60 days, BNYM was required to exercise its powers under the PSA with such " care and skill" as a " prudent person" would use under the circumstances. J.A. 958. Plaintiffs contend that BNYM had a similar duty under the TIA. See 15 U.S.C. § 77ooo(c) ( " The indenture trustee shall exercise in case of default . . . such of the rights and powers vested in it by such indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs." ). According to Plaintiffs, BNYM knew of the widespread defects among the trusts' loans, and it therefore had a duty to enforce Countrywide's repurchase obligation and, pursuant to the TIA, to inform certificateholders of Countrywide's breaches. See id. § 77ooo(b).

Plaintiffs further claim that BNYM failed to meet its contractual obligation to ensure that the loans held by the trusts were properly documented. Under the PSAs, BNYM had a duty to examine the mortgage loan files at the closing of each securitization and prepare an " exception report" informing Countrywide of any missing or incomplete documents. J.A. 954. Countrywide was then required to cure any deficiencies within 540 days of the closing date. According to Plaintiffs, the deficiencies that BNYM identified remained uncured beyond that period, thereby triggering BNYM's duty to act on certificateholders' behalf to ensure that Countrywide cured the deficiencies. These persisting document deficiencies allegedly made it more difficult to foreclose on delinquent loans, causing losses to certificateholders.


Plaintiffs filed a complaint against BNYM in the United States District Court for the Southern District of New York on August 5, 2011, and filed a verified class action and derivative complaint (the " amended complaint" ) on August 31, 2011. On December 16, 2011, BNYM moved to dismiss the amended complaint, arguing, among other things, that Plaintiffs lacked standing to bring claims on behalf of investors in the hundreds of trusts in which Plaintiffs themselves did not invest, and that certificates issued by the PSA-governed New York trusts are not subject to the TIA.

On April 3, 2012, the district court (William H. Pauley III, Judge ) granted in part and denied in part BNYM's motion to dismiss. Ret. Bd. of Policemen's Annuity & Benefit Fund v. Bank of N.Y. Mellon, 914 F.Supp.2d 422 (S.D.N.Y. 2012) (" BNYM I" ). The court determined that Plaintiffs did not have standing to bring claims pertaining to RMBS trusts in which no named Plaintiff had invested, and accordingly dismissed those claims. Id. at 426. Plaintiffs challenge this dismissal on appeal.

The district court also determined that the TIA applies to certificates issued by the PSA-governed New York trusts. Looking to § 304(a)(1) of the TIA, 15 U.S.C. § 77ddd(a)(1), the provision that BNYM relied upon as exempting the certificates at issue from the TIA's reach,[2] the

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district court asserted that " the TIA covers only debt securities, and does not apply to equity securities." 914 F.Supp.2d at 427. The court then rejected BNYM's argument that the certificates in question were equity securities, instead finding that the certificates were similar " in form and function to bonds issued under an indenture," and also that they " resemble debt," as defined by federal tax law. Id. at 428, 429 (quoting Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F.Supp.2d 162, 182 (S.D.N.Y. 2011)) (internal quotation marks omitted). The court also declined to assign any persuasive force to interpretive guidance on the SEC's website, which indicated that PSA-governed RMBS certificates are exempt from the TIA pursuant to § 304(a)(2) thereof, which exempts " certificate[s] of interest or participation in two or more securities having substantially ...

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