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Blackrock Allocation Target Shares v. U.S. Bank National Association

United States District Court, S.D. New York

May 18, 2015

BLACKROCK ALLOCATION TARGET SHARES: SERIES S PORTFOLIO et al., Plaintiffs,
v.
U.S. BANK NATIONAL ASSOCIATION, Defendant, THE TRUSTS IDENTIFIED IN EXHIBIT 1, Nominal defendant.

OPINION & ORDER

KATHERINE B. FORREST, District Judge.

Plaintiffs are certificateholders in 843 residential mortgage-backed security ("RMBS") trusts. (Complaint ("Compl.") ¶ 17 & Ex. 1, ECF No. 1.) 810 are trusts that issue certificates and are governed by pooling and servicing agreements ("PSA trusts"); 33 are Delaware statutory trusts that issue notes pursuant to Indentures ("indenture trusts").[1] Defendant U.S. Bank National Association ("U.S. Bank" or "defendant") is sued in its role as trustee of all 843 trusts. In their 184-page, 642-paragraph complaint, plaintiffs seek to proceed derivatively (or, in the alternative, on a class basis) to hold U.S. Bank accountable for breaches of contract, violations of the Trust Indenture Act of 1939 ("TIA"), negligence, and breaches of fiduciary duty.

Before the Court is U.S. Bank's motion to dismiss. (ECF No. 56.) U.S. Bank argues that plaintiffs' claims as to the 810 PSA trusts should be dismissed for lack of subject matter jurisdiction because the TIA is inapplicable to PSA trusts, and supplemental jurisdiction is improper. In addition, U.S. Bank argues that plaintiffs' derivative claims as to the remaining trusts should be dismissed because, inter alia, plaintiffs have not adequately pled demand or futility and, in any event, plaintiffs' claims are direct, not derivative. For the reasons set forth below, U.S. Bank's motion is GRANTED on those bases. U.S. Bank also argues that there are substantive bases supporting dismissal of each claim. The Court declines to reach the substantive bases at this time, as it will provide plaintiffs with a single opportunity to replead.[2]

I. FACTUAL BACKGROUND

A. The Trusts at Issue

810 of the 843 trusts at issue in this action are governed by PSAs. In a PSA trust, an owner of mortgage loans conveys the loans to a trustee, who holds legal title to those assets in its name. (See Compl. ¶¶ 277-79, 291-92.) Investors have a beneficial interest in the mortgage loans that are held by the trustee. (See id. ¶ 292.)

The remaining 33 trusts at issue are Delaware statutory trusts that issue notes pursuant to Indentures. (See Compl. ¶ 319; see also Declaration of David F. Adler in Support of Defendant U.S. Bank National Association's Motion to Dismiss ("Adler Decl.") Exs. E-G, ECF No. 58.) A Delaware statutory trust is created by a trust agreement between a depositor, an owner trustee, and an administrator. (See, e.g., Adler Decl. Ex. E; id. § 2.04 (appointing owner trustee).) In 32 of the 33 indenture trusts at issue here, the owner trustee is not U.S. Bank; it is Wilmington Trust Company. (See, e.g., Adler Ex. E § 1.01 (defining "Owner Trustee" as "Wilmington Trust Company, not in its individual capacity but solely as trustee under this Agreement, and any successor trustee hereunder").)[3]

The trust-which is the owner of the mortgage loans-enters into a Sale and Servicing Agreement (or Transfer and Servicing Agreement) with, inter alia, an indenture trustee. (Compl. ¶ 325; see, e.g., Adler Decl. Ex. F.) Separately, the trust also enters into an Indenture with the indenture trustee; notes in the trust are issued pursuant to this Indenture. (Compl. ¶ 320; see, e.g., Adler Decl. Ex. G.) Under an Indenture, the trust pledges its assets to secure the payment of principal and interest on the notes. (Compl. ¶ 320; see, e.g., Adler Decl. Ex. E § 2.03(a); id. Ex. F § 1.01 (definition of "Trust Estate"); id. Ex. G § 2.13.) The indenture trustee holds this pledge on behalf of investors who purchase the notes. (Compl. ¶ 320; see, e.g., Adler Decl. Ex. E § 2.03(e).)

According to the governing documents here, a "Certificate, " "Class R Certificate, " or "Ownership Certificate" is an "equity certificate representing an undivided beneficial interest in the Trust." (See, e.g., Adler Decl. Ex. E § 1.01; id. Ex. O § 1.01; id. Ex. P § 1.01; id. Ex. Q § 1.01.) By contrast, "notes" are debt instruments. (See, e.g., Adler Decl. Ex. G § 2.13.) In that respect, "notes" issued pursuant to an Indenture are different from "certificates" issued by the statutory trust. Plaintiffs here are noteholders with regard to the 33 indenture trusts at issue; they are not certificateholders.

B. U.S. Bank's Duties as Trustee

Each of the 843 trusts has its own governing agreement (a PSA or an Indenture). Each governing agreement provides that the trustee has certain duties and responsibilities, including, inter alia, to take title to the mortgage loans conveyed to the 843 trusts, to provide notice of incomplete or defective mortgage files, to provide notice of breaches, and to take certain actions in response to servicing failures and "Events of Default."

The governing agreements provide that before "the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, " a trustee is only required "to perform such duties and only such duties as are specifically set forth in this Agreement"; the trustee "shall not be liable except for the performance of the duties and obligations specifically set forth in this Agreement, " and "no implied covenants or obligations shall be read into this Agreement against the Trustee." (See, e.g., Adler Decl. Ex. H § 8.01; see also id. Ex. B § 8.01; id. Ex. I § 8.01.)

Moreover, the trustee has no contractual obligation to monitor or oversee servicers or the master servicer-either because the depositor is obligated to do so or because the trustee is explicitly exempted from doing so. (See, e.g., Adler Decl. Ex. B § 3.03 ("Depositor may, but is not obligated to, enforce the obligations of the Master Servicer hereunder...."); id. Ex. I § 3.03 (trustee shall not "have any responsibility or liability for any action or failure to act by the Servicer" and is not "obligated to supervise the performance of the Servicer hereunder or otherwise").) Similarly, the trustee is not charged with knowledge of any Event of Default unless it has received written notice of such. (See, e.g., Adler Decl. Ex. H § 8.02(h) ("Trustee shall not be deemed to have knowledge of an Event of Default until a Responsible Officer of the Trustee shall have received written notice thereof."); id. Ex. B § 8.02(viii) (same); id. Ex. K § 8.02(vi) (same).)[4] The trustee is not required to terminate a servicer unless expressly directed to do so by a specified percentage of certificateholders. (See, e.g., Adler Decl. Ex. J § 8.01 (25%); id. Ex. B § 7.01 (51%).)

The trustee is also not required to make any investigation unless requested to do so in writing by certificateholders with at least 25% of the voting rights. (See, e.g., Adler Ex. H § 8.02(d); id. Ex. K § 8.02(iv) (same); id. Ex. L § 6.02(iv) (same).) The trustee is not required to demand repurchase of mortgage loans except "[u]pon discovery or receipt of written notice" of a ...


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