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Deutsche Bank Nat'l Trust Co. v. Morgan Stanley Mortg. Capital Holdings LLC

United States District Court, S.D. New York

April 3, 2015

DEUTSCHE BANK NATIONAL TRUST CO., Plaintiff,
v.
MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS LLC, Defendant

For Deutsche Bank National Trust Company, solely in its capacity as Trustee for the Morgan Stanley Structured Trust I 2007-1, Plaintiff: Justin Michael Ellis, LEAD ATTORNEY, Molo Lamken LLP (NYC), New York, NY; Steven Francis Molo, LEAD ATTORNEY, Lauren Marguerite Weinstein, MoloLamken, LLP, New York, NY; Justin Vaun Shur, Kobre & Kim LLP, New York, NY.

For Morgan Stanley Mortgage Capital Holdings LLC, as Successory-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant: Brian Stryker Weinstein, James P. Rouhandeh, LEAD ATTORNEYS, Carissa Marie Pilotti, Davis Polk & Wardwell L.L.P., New York, NY.

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Memorandum Opinion And Order

LAURA TAYLOR SWAIN, United States District Judge.

Plaintiff Deutsche Bank National Trust Company (" Trustee" or " Plaintiff" ), in its

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capacity as Trustee for the Morgan Stanley Structured Trust I 2007-1 (the " Trust" ), brings this action against Defendant Morgan Stanley Mortgage Capital Holdings LLC (" MSMC" or " Defendant" ), asserting claims for breach of contract and breach of the covenant of good faith and fair dealing. MSMC now moves, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the complaint for failure to state a claim upon which relief can be granted. The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1332. The Court has considered the parties' submissions carefully. For the reasons stated below, the Court grants in part, and denies in part, Defendants' motion.

Background[1]

This action arises from a transaction in which MSMC served as the sponsor of a residential mortgage-backed securitization. (Compl. ¶ 1.) MSMC and EMC Mortgage Corporation sold a pool of 4,374 mortgage loans, with an aggregate principal balance of approximately $735,000,000, to Bear Stearns Asset Backed Securities I LLC, pursuant to the terms of a Mortgage Loan Purchase Agreement (" MLPA" ). (Compl. ¶ ¶ 1, 13 and Ex. 1.) Bear Stearns agreed to deposit the loans into a trust (the " Trust" ), for which Plaintiff was to serve as Trustee. (Id. ¶ ¶ 14-15.) Bear Stearns and Plaintiff, along with Wells Fargo Bank, entered into a Pooling and Servicing Agreement (" PSA" ) in order to create the Trust. (Id. ¶ 15 and Ex. 2.) Both the MLPA and the PSA had a closing date of July 6, 2007. (Id. ¶ 15.) The loans served as collateral for securities, called certificates, issued by the Trust. (Id. ¶ 10.) Certificates generate cash flow as borrowers make payments on loans in the Trust; thus, the value of the certificates depends largely on the quality of the loans in the pool. (Compl. ¶ ¶ 10-11.)

As the sponsor of the securitization, MSMC was obligated to provide certificateholders with an extensive set of representations and warranties attesting to the quality of the loans and creditworthiness of the borrowers. (Id. ¶ ¶ 19-21; Ex. 1., MLPA § 10.) MSMC also committed itself to bearing the risk should any of the loans fail to meet the minimum quality standards guaranteed in the representations and warranties. (Id. ¶ 23.) The parties to the MLPA agreed that, if any of the loans were found to have breached the representations and warranties, MSMC would be obligated to cure such breaches or repurchase the affected loans in order to make the Trust whole. (Id. ¶ ¶ 27-28; Ex. 1, MLPA § 10.) A subset of the loans was originated by an entity known as Accredited Home Lenders, Inc. (" Accredited" ). (Id. ¶ 33.) According to the Trustee, representations and warranties made by Accredited were incorporated by reference into the MLPA (See MLPA § 10), and MSMC assumed the responsibility of curing or repurchasing any defective Accredited-originated loans that Accredited fail to cure. (See Compl. ¶ 34; Ex. 1, MPLA § 10.)

The mechanism for remedying a breach of the representations and warranties, referred to as the " repurchase protocol," operated in two steps. First, the party discovering the breach was to provide prompt written notice of the defective loans to the other parties to the transaction. (Compl. ¶ 29; Ex. 1, MLPA § 10.) Receipt of notice by MSMC triggered a 90-day period within which MSMC was obligated to cure or repurchase the defective loans. (Id. ¶ ¶ 31-32; Ex. 1, MLPA § 10.) Should

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MSMC fail to cure, the Trustee was empowered by the PSA to enforce MSMC's obligations through legal action. (Id. ¶ 37; Ex. 2, PSA § 2.02(d).)

On April 4, 2013, the Trustee sent a letter to MSMC enclosing an April 2, 2013, breach notice from a certificateholder that identified allegedly material breaches in 1,620 loans. (Compl. ¶ 47; Ex. 3.) Of these loans, approximately 300 had been originated by Accredited.[2] (Id. ¶ 48.) A forensic analysis had allegedly revealed several types of material breaches permeating the loan pool, including, inter alia: income misrepresentation, misrepresentation of debt obligations, employment misrepresentation, impermissible debt-to-income ratios, misrepresentations of occupancy and lack of arms-length transactions. (See id. ¶ ¶ 49-59.) Plaintiff further alleges that MSMC had previously performed extensive due diligence review of the loans that would necessarily have alerted MSMC to deficiencies permeating the loan pool. (Compl. ¶ ¶ 61-63.)

By the time that MSMC's 90-day cure or repurchase period expired on July 3, 2013, MSMC had failed to cure or repurchase any of the allegedly defective loans. (Id. ¶ 67.) MSMC has since repurchased 149 of the loans. (Id.) On April 28, 2014, Plaintiff filed suit, seeking to enforce MSMC's cure or repurchase obligations. Plaintiff also seeks damages to the extent that repurchase of the defective loans is insufficient to provide the Trust with the economic benefit of its bargain. (Compl. ¶ 69.)

Discussion

Motion to Dismiss Standard

When deciding a Rule 12(b)(6) motion to dismiss a complaint for failure to state a claim, the Court assumes the truth of the facts asserted in the complaint and draws all reasonable inferences from those facts in favor of the plaintiff. See Harris v. Mills, 572 F.3d 66, 71 (2d Cir. 2009). To survive a motion to dismiss, " 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, 678, 129 S.Ct. 1937, 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)). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). If the plaintiff has not " nudged [its] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Twombly, 550 U.S. at 570.

In evaluating a Rule 12(b)(6) motion to dismiss, a court may consider " only the complaint and any documents attached thereto or incorporated by reference and documents upon which the complaint relies heavily." Building Indus. Elec. Contractors Ass'n v. City of New York,678 F.3d 184, 187 (2d Cir. 2012) (citing In re Citigroup ERISA Litig.,662 F.3d 128, 135 (2d Cir. 2011) (internal quotation marks omitted)). In deciding this motion, the Court has considered, in addition to the Complaint, the breach notice letter, the MLPA, the PSA and the exhibits attached to those documents. All of these ...


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