United States District Court, S.D. New York
BLACKROCK ALLOCATION TARGET SHARES SERIES S PORTFOLIO, et al., Plaintiffs,
WELLS FARGO BANK, NATIONAL ASSOCIATION, et al., Defendants. ROYAL PARK INVESTMENTS SA/NV, Individually and on Behalf of all Others Similarly Situated, Plaintiffs,
WELLS FARGO BANK, N.A, as Trustee, Defendant. NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Constitution Corporate Federal Credit Union, Plaintiff,
WELLS FARGO BANK, NATIONAL ASSOCIATION, Defendant. and NCUA GUARANTEED NOTES TRUST 2010-R1, NCUA GUARANTEED NOTES TRUST 2010-R2, NCUA GUARANTEED NOTES TRUST 2010-R3, NCUA GUARANTEED NOTES TRUST 2011-R2, NCUA GUARANTEED NOTES TRUST 2011-R4, NCUA GUARANTEED NOTES TRUST 2011-R5, and NCUA GUARANTEED NOTES TRUST 2011-M1, Nominal Defendants. PHOENIX LIGHT SF LIMITED,
WELLS FARGO BANK, N.A., Defendant. COMMERZBANK AG, Plaintiffs,
WELLS FARGO BANK N.A., Defendant.
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge
near-decade since the collapse of the United States
real-estate market, this District has been inundated with
lawsuits brought by putative victims of that collapse against
those they blame for it. As time has lapsed, and with it
various statutes of limitation, the targets of these lawsuits
- as well as the proffered bases of liability - have evolved.
The instant cases represent the latest wave: They are brought
by and on behalf of certificateholders
(“Plaintiffs”) of 53 residential-mortgage-backed
securities (“RMBS”) trusts (the
“Trusts”) against the Trusts' common Trustee,
Wells Fargo Bank, National Association (“Wells
Fargo” or “Defendant”). Plaintiffs allege
that Defendant failed to discharge its duties as Trustee.
More specifically, Plaintiffs claim that Defendant discovered
pervasive documentation errors, breaches of seller
representations and warranties (“R&Ws”), and
systemic loan-servicing violations, but disregarded its
contractual obligations to protect Plaintiffs therefrom
because, among other consequences, doing so would have
exposed Defendant to liability for its own RMBS-related
has moved to dismiss each of the above-captioned related
actions for failure to state a claim. For the reasons set forth
below, Defendant's motion is granted in part and denied
in part. In brief, Defendant's motion to dismiss
Plaintiffs' breach of contract claims is denied; its
motion to dismiss Plaintiffs' tort claims is granted in
part and denied in part; its motion to dismiss
Plaintiffs' claims under the Trust Indenture Act is
granted in part and denied in part; its motion to dismiss
Plaintiffs' claims under the Streit Act is granted; its
motion to dismiss Plaintiff NCUAB's derivative claims is
granted without prejudice to NCUAB's ability to move for
leave to replead; its motion to dismiss NCUAB's direct
claims is denied; and its motion to dismiss Commerzbank's
claims on timeliness grounds is denied.
of the typical formation process and structure of RMBS trusts
abound in this District, and this Court will not here
reinvent the wheel. Only a brief description is provided for
context. See also BlackRock Allocation Target Shares v.
Wells Fargo Bank, Nat'l Ass'n, No. 14 Civ. 9371
(KPF) (SN), 2017 WL 953550, at *1-3 (S.D.N.Y. Mar. 10, 2017)
(describing the background of this consolidated action).
RMBS Trusts Generally
Trusts in the instant action were originally securitized by
residential mortgage loans, and created to facilitate the
sale of those loans to investors. (BR Compl. ¶¶
3-4). Such RMBS Trusts are formed according to
the following process: First, institutions known as
“sponsors” or “sellers” acquire and
pool residential mortgage loans. (Id. at
¶¶ 5, 43). Each sponsor also selects the loans'
“servicer, ” “often an affiliate of the
seller or originator, to collect payments on the
loans.” (Id. at ¶ 5). “Once the
loans are originated, acquired and selected for
securitization, the seller, through an affiliate called the
depositor, creates a trust where the loans are deposited for
the benefit of the Noteholders.” (Id.). Then
the depositor “segments the cash flows and risks in the
loan pool among different levels of investment or
‘tranches.'” (Id. at ¶ 44).
Typically, “cash flows from the loan pool are applied
in order of seniority, going first to the most senior
tranches[, ] [and] ... any losses to the loan pool due to
defaults, delinquencies, foreclosure or otherwise, are
applied in reverse order of seniority.” (Id.).
Next, “the depositor conveys the mortgage pool to the
trust in exchange for the transfer of the RMBS to the
depositor.” (Id. at ¶ 45).
“Finally, the depositor sells the RMBS to an
underwriter, and provides the revenue from the sale to the
seller. The underwriter markets and sells the RMBS to
investors.” (Id. at ¶ 46).
the sponsor-selected servicer's responsibility to collect
loan principal and interest (“P&I”) payments
from the underlying borrowers. (BR Compl. ¶ 47).
“After collection, the servicer sends the funds to the
trust, which then makes payments to the noteholders. Mortgage
delinquencies and defaults reduce the available P&I
payments to be paid to the trust and passed through to
investors.” (Id.). Therefore, “proper
loan origination and underwriting of the mortgages underlying
the RMBS, and proper and timely loan servicing and
oversight” are of critical importance to investors,
directly dictating their timely receipt of passed-through
payments. (Id. at ¶ 48).
The Trusts, the Governing Agreements, and Defendant's
Trusts at issue here are of two kinds: Pooling and Service
Agreement (“PSA”) Trusts and Indenture
Trusts. 41 of the 53 Trusts at issue in this case
are PSA Trusts. (Def. Br. 5). PSA Trusts “are organized
under New York [common] law.” Ret. Bd. of
Policemen's Annuity & Benefit Fund of City of Chi. v.
Bank of N.Y. Mellon (hereinafter, “PABF
III”), 775 F.3d 154, 156 (2d Cir. 2014). In a PSA
trust, “[t]he right to receive trust income is parceled
into certificates and sold to investors, ” who are
called “certificateholders.” Id.
(quoting BlackRock Fin. Mgmt. Inc. v. Segregated Account
of Ambac Assurance Corp. (hereinafter,
“Ambac”), 673 F.3d 169, 173 (2d Cir.
2012)). “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].” Id. (alteration
in original) (quotation mark omitted) (quoting
Ambac, 673 F.3d at 173).
the 53 Trusts at issue in this case are Indenture Trusts.
(Def. Br. 5). Indenture Trusts are governed by their Trust
Agreements, Mortgage Loan Purchase and Sale Agreements
(“MPLAs”), and Sale and Service Agreements
(“SSAs”). (See BR Compl. ¶ 49).
See generally BlackRock Allocation Target
Shares, 2017 WL 953550, at *1-3. As Defendant explains,
Indenture Trusts differ from PSA Trusts in that the Depositor
conveys ownership of the pooled loans to the Issuer, which in
turn issues its own notes pursuant to the indenture. Under
the indenture, the Issuer collateralizes the notes by
pledging the mortgage loans to the indenture trustee, which
holds the pledge on behalf of the noteholders.
(Def. Br. 5).
PSAs, Trust Agreements, MPLAs, and SSAs (together, the
“Governing Agreements”) are of critical
importance to Defendant's motion; they dictate the scope
of Defendant's duties to Plaintiffs. The duties of an
RMBS trustee are “distinct from those of an
‘ordinary trustee, ' which might have duties
extending well beyond the agreement.” Phoenix Light
SF Ltd. v. Bank of N.Y. Mellon (hereinafter,
“PL/BNYM”), No. 14 Civ. 10104 (VEC),
2015 WL 5710645, at *2 (S.D.N.Y. Sept. 29, 2015) (citing
AG Capital Funding Partners, L.P. v. State St. Bank &
Tr. Co., 11 N.Y.3d 146, 156 (2008)); see also Fixed
Income Shares: Series M v. Citibank N.A. (hereinafter,
“Fixed Income Shares”), 130 F.Supp.3d
842, 857-58 (S.D.N.Y. 2015). In contrast, “the duties
of an indenture trustee ... [are] governed solely by the
terms of the indenture[.]” Millennium Partners,
L.P. v. U.S. Bank Nat'l Ass'n, No. 12 Civ. 7581
(HB), 2013 WL 1655990, at *3 (S.D.N.Y. Apr. 17, 2013)
(quotation mark omitted), aff'd sub nom.
Millennium Partners, L.P. v. Wells Fargo Bank,
N.A., 654 F. App'x 507 (2d Cir. 2016) (summary
order), and aff'd sub nom. Millennium Partners, L.P.
v. Wells Fargo Bank, N.A., 654 F. App'x 507 (2d Cir.
2016) (summary order). “This is true regardless of
whether the trust is an indenture trust or a PSA
[trust].” Royal Park Invs. SA/NV v. HSBC Bank USA,
Nat'l Ass'n (hereinafter,
“RP/HSBC), 109 F.Supp.3d 587, 597 (S.D.N.Y.
2015) (citing Greenwich Fin. Servs. Distressed Mortg.
Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23, 29
(2d Cir. 2010); Bank of N.Y. Mellon v. Walnut Place
LLC, 819 F.Supp.2d 354, 364-65 & n.6 (S.D.N.Y.
the Governing Agreements at issue here are not identical,
Plaintiffs argue that they all impose four fundamental duties
■ First, Defendant “must ensure that the Trusts
take perfected, enforceable title to the mortgage loans and
must certify receipt of complete mortgage loan files from the
Seller.” (Pl. Opp. 3 (citing BR Compl. ¶¶ 60,
62, 98, 159, Ex. 5; NCUAB Compl. ¶¶ 65-68, Ex. J;
PL Compl. ¶¶ 58-67; CB Compl. ¶¶ 34-43)).
In the event that Defendant “discovers a material
defect (e.g., a missing document), ” Defendant
is obligated to “promptly identify the loan in its
certifications, and require the Seller to cure or repurchase
the loan.” (Pl. Opp. 3-4 (citing BR Compl. ¶¶
6, 54, 98; NCUAB Compl. ¶¶ 70-71, 74-75; PL Compl.
¶¶ 65-66, 68; CB Compl. ¶¶ 41-42, 44)).
■ Second, Defendant “must give notice to the
Seller and other parties upon ‘discovery' of any
breach of the R&Ws which materially and adversely affects
the interests of the Holders or the Trust, and thereafter
enforce the obligations of the Seller to cure or repurchase
the breaching loan.” (Pl. Opp. 4 (citing BR Compl.
¶¶ 63, 164; RP Compl. ¶¶ 7-10; NCUAB
Compl. ¶¶ 75, 377; PL Compl. ¶ 68; CB Compl.
■ Third, Defendant “must promptly notify a
responsible Servicer upon learning of the Servicer's
failure to perform in any material respect, and demand that
such servicing failure be timely remedied.” (Pl. Opp. 4
(citing BR Comp. ¶¶ 1, 63-64; RP Compl. ¶ 10;
NCUAB Compl. ¶¶ 75, 90; PL Compl. ¶ 80; CB
Compl. ¶ 55)).
■ And fourth, in the event of a “servicing
‘Event of Default'” (“EOD”) as
defined in the Governing Agreements, Defendant acquires
heightened obligations “to exercise the same degree of
care and skill as a prudent person would in the conduct of
his or her own affairs.” (Pl. Opp. 4 (citing BR Compl.
¶¶ 27, 207; RP Compl. ¶¶ 17, 61; NCUAB
Compl. ¶¶ 92, 414; PL Compl. ¶¶ 73-75; CB
Compl. ¶¶ 49-51)).
Trusts define an EOD to “include a Servicer's
failure to: (i) act in accordance with the normal and usual
standards of practice of prudent mortgage servicers;
(ii) ensure the loans are serviced legally; and (iii)
promptly notify [Defendant] and other parties upon discovery
of Sellers' R&W breaches.” (Pl. Opp. 4 (citing
BR Compl. ¶¶ 25-26; RP Compl. ¶¶ 57, 59;
NCUAB Compl. ¶¶ 85-87, 285-89, 337; PL Compl.
¶¶ 68, 79-80; CB Compl. ¶¶ 44, 54-55)).
Defendant's heightened obligations under the PSAs in the
event of an EOD include “notifying the Servicer to
require cure and notifying Certificateholders of any uncured
[EODs].” (Id. at 4-5 (citing BR Compl. ¶
26; RP Compl. ¶ 60; NCUAB Compl. ¶¶ 90-91,
290; PL Compl. ¶¶ 69, 73-77; CB Compl. ¶¶
Indenture Trusts' Governing Agreements “contain
similar provisions.” (Pl. Opp. 5 (citing BR Compl.
¶¶ 68-70; NCUAB Compl. ¶ 97 n.12; PL Compl.
¶¶ 131-32)). EODs with regard to Indenture Trusts,
however, are “triggered by conduct of the Issuer
(i.e., the Trust itself) rather than the
Servicer.” (Id. (citing BR Compl. ¶¶
68-70; NCUAB Compl. ¶ 87 n.12; PL Compl. ¶¶
131-32)). Plaintiffs maintain that this is a distinction
without a difference, because here “each Indenture
Trust contracted separately with Sellers and Servicers ...
[to] make certain R&Ws and agree to cure or repurchase
defective loans, ” such that “known and
unremedied Seller and Servicer defaults [would still]
constitute ... a violation of the issuer's duties under
the Indenture.” (Id. (quotation marks omitted)
(quoting Royal Park/HSBC, 109 F.Supp.3d at 604)
(citing BR Compl. ¶¶ 6, 59, 68; NCUAB Compl.
¶¶ 64-69, 74, 92; PL Compl. ¶ 131 & Ex.
Defendant's Alleged Breaches
contend that while serving as Trustee, Defendant realized
that the Trusts contained numerous loans and loan files that
materially breached the sellers' R&Ws. (Pl. Opp. 5
(citing BR Compl. ¶¶ 73-120; RP Compl. ¶¶
70-103; NCUAB Compl. ¶¶ 104-282; PL Compl.
¶¶ 107-15, Ex. F; CB Compl. ¶¶ 80-89, Ex.
F)). Plaintiffs infer Defendant's realization from a host
of facts. For example, Defendant “received
‘Document Exception Reports' prepared by the
custodians identifying massive numbers of loan files that
contained missing or incomplete documentation that were not
cured within the specified time period.” (Id.
(citing BR Compl. ¶¶ 98-99; NCUAB Compl. ¶
352; PL Compl. ¶¶ 63, 119-20; CB Compl.
¶¶ 39, 93-94)). And Defendant itself “tracked
and reported the Trusts' performance in remittance
reports, including unprecedented levels of delinquencies,
early payment defaults, loss severity, credit downgrades and
mortgage insurance rescissions, ” and
“admitted” in its “internal
documents” that its findings constituted “clear
indications of Seller breaches of R&Ws.”
(Id. at 5-6 (citing BR Compl. ¶¶ 110, 112;
NCUAB Compl. ¶ 336; PL Compl. ¶¶ 53, 104; CB
Compl. ¶¶ 29, 78)). Additionally, in certain cases
where “historical delinquencies and collateral losses
were so severe that [they] caused ‘Triggering
Events' under the Trusts' [Governing Agreements],
” Defendant had to “change the distribution of
Trust proceeds, evaluate the performance of the Trusts'
Servicers, make increased disclosures to the credit rating
agencies, and in some instances declare [EODs].”
(Id. at 6 (citing BR Compl. ¶ 111)).
conclude that, given the many different sources of
information, Defendant's responsible officers
knew of and received written notice of Servicer breaches of
duties with respect to specific loans in the Trusts, based on
data from Servicers that it used to prepare monthly
remittance reports and that identified and tracked when
certain defaulted loans within the Trusts became distressed,
when the loans were processed and eliminated, and the
recurring annual and monthly servicing costs incurred by the
Trusts for these defaulted loans.
(Pl. Opp. 7 (citing BR Compl. ¶¶ 146-53; RP Compl.
¶ 118; PL Compl. ¶¶ 128, 138-41; CB Compl.
¶¶ 103, 111-14)). Indeed, Defendant
knowledge of the Servicers' systemically abusive
servicing practices, including (i) [Defendant's]
involvement in government investigations, prosecutions, and
settlements targeting both itself and many of the Servicers
for the same alleged improper servicing practices; and (ii)
[Defendant's] responsible officers' receipt of
written notice from Holders, monoline insurers and other
stakeholders to other RMBS trusts regarding the same
servicing violations by the same servicers to the Trusts
(Id. (citing BR Compl. ¶¶ 154-56; RP
Compl. ¶¶ 121-27; NCUAB Compl. ¶¶ 258-60,
277-82; PL Compl. ¶¶ 142-48, Ex. H; CB Compl.
¶¶ 115-21, Ex. H)). And Plaintiffs contend that
Defendant's knowledge is evinced by its own internal
records, which “further confirm that [Defendant]
repeatedly received notice from investors and monoline
insurers regarding systemic R&W violations.”
(Id. at 6 (citing BR Compl. ¶¶ 100, 116;
PL Compl. ¶¶ 99-102; CB Compl. ¶¶
Defendant lacked such direct notice and knowledge, they could
not feign ignorance of the fact that “the Trusts were
filled with loans originated by some of the most notorious
financial-crisis-era lenders ... and were sponsored by banks
with known securitization abuses.” (Pl. Opp. 6 (citing
BR Compl. ¶¶ 80, 86, 94-95, Ex. 9; RP Compl. ¶
71; NCUAB Compl. ¶¶ 47-48, 120-244; PL Compl.
¶¶ 109-10, Ex. F; CB Compl. ¶¶ 82-83, Ex.
F)). Plaintiffs argue that at a minimum, Defendant had to
be aware of the “[h]ighly publicized news reports,
lawsuits, and investigations concerning” its sellers,
as well as the fact that “several of the Trusts [had]
been the subject of RMBS investor lawsuits alleging pervasive
loan underwriting abuses.” (Id. (citing BR
Compl. ¶¶ 96-120, Ex. 10-11; RP Compl. ¶¶
72-103; NCUAB Compl. ¶¶ 261-82; PL Compl.
¶¶ 107-15; CB Compl. ¶¶ 80-89)).
Plaintiffs' claims build on the foundation of
Defendant's alleged discovery and knowledge of these
breaches. Plaintiffs allege that despite this awareness,
Defendant took “virtually no action to enforce Seller
obligations to repurchase defective loans and Servicer
obligations to cure defaults and reimburse the Trusts for
damages.” (Pl. Opp. 7 (citing BR Compl. ¶¶
163-87; RP Compl. ¶ 129; NCUAB Compl. ¶¶
361-96; PL Compl. ¶¶ 115-18, 160-61; CB Compl.
¶¶ 89-92, 129-30)). This “inaction” has
caused “billions of dollars in losses to the
Blackrock plaintiffs brought the first of these related cases
against Defendant on November 24, 2014. (2014 Civ. 9371, Dkt.
#1). Royal Park brought its action on December 11, 2014 (2014
Civ. 9764, Dkt #1); the NCUAB brought its action on December
22, 2014 (2014 Civ. 10067, Dkt. #1); and Phoenix Light and
others brought their action on December 23, 2014 (2014 Civ.
10102, Dkt. #1). Royal Park, the NCUAB, and the Phoenix Light
plaintiffs all filed amended complaints on March 13, 2015.
(2014 Civ. 9764, Dkt #24; 2014 Civ. 10067, Dkt. #27; 2014
Civ. 10102, Dkt. #25).
filed its Motion to Dismiss the Complaints in each of these
four cases on April 30, 2015. (2014 Civ. 9371, Dkt.
#46-56). The motion was fully briefed as of June
29, 2015. (Id. at Dkt. #60-61). While the motion was
pending, on December 24, 2015, Commerzbank brought the fifth
of the related cases at issue in this Opinion. (2015 Civ.
10033, Dkt. #1). The case was accepted as related to the four
earlier-filed cases on December 28, 2015. (2015 Civ. 10033,
Docket Entries dated December 28, 2015).
thereafter, on January 19, 2016, Judge Richard M. Berman, to
whom these related cases were originally assigned, issued a
Decision and Order resolving Defendant's motion to
dismiss. (2014 Civ. 9371, Dkt. #95). Judge Berman declined to
exercise supplemental jurisdiction over Blackrock's
PSA-Trust-related claims, granted Defendant's motion in
part, and declined to reach the merits of the parties'
claims. (Id. at Dkt. #95). Judge Berman also
extended to Plaintiffs the opportunity to amend their
pleadings. (Id.; see also Dkt. #101). The
Blackrock Plaintiffs accordingly filed their amended
complaint on February 23, 2016. (Id. at Dkt.
requested a pre-motion conference, which was scheduled for
May 24, 2016. (2014 Civ. 9371, Dkt. #138, 158). During that
conference, a briefing schedule was set for Defendant's
contemplated motion to dismiss the operative complaints.
(Id. at Dkt. #158).
any motion was filed, however, the five related cases at
issue here were reassigned to the undersigned on June 17,
2016. (Docket Entries dated June 17, 2016). Defendant then
filed its motion to dismiss each operative complaint on July
8, 2016. (2014 Civ. 9371, Dkt. #168-71). Plaintiffs filed
their joint opposition on August 22, 2016 (id. at
Dkt. #201-02), and Defendant its reply on September 6, 2016
(id. at Dkt. #208-09).
considering a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), a court should “draw all reasonable
inferences in [the plaintiffs'] favor, assume all
well-pleaded factual allegations to be true, and determine
whether they plausibly give rise to an entitlement to
relief.” Faber v. Metro. Life Ins. Co., 648
F.3d 98, 104 (2d Cir. 2011) (quotation marks and citation
omitted) (quoting Selevan v. N.Y. Thruway Auth., 584
F.3d 82, 88 (2d Cir. 2009)). Thus, “[t]o 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 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). In this regard, a complaint is deemed to include any
written instrument attached to it as an exhibit or any
statements or documents incorporated in it by reference.
See, e.g., Hart v. FCI Lender Servs., Inc.,
797 F.3d 219, 221 (2d Cir. 2015) (citing Fed.R.Civ.P. 10(c)
(“A statement in a pleading may be adopted by reference
elsewhere in the same pleading or in any other pleading or
motion. A copy of a written instrument that is an exhibit to
a pleading is a part of the pleading for all
Twombly does not require heightened fact pleading of
specifics, it does require enough facts to ‘[nudge a
plaintiff's] claims across the line from conceivable to
plausible.'” In re Elevator Antitrust
Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per curiam)
(quoting Twombly, 550 U.S. at 570). “Where a
complaint pleads facts that are ‘merely consistent
with' a defendant's liability, it ‘stops short
of the line between possibility and plausibility of
entitlement to relief.'” Iqbal, 556 U.S.
at 678 (quoting Twombly, 550 U.S. at 557). Moreover,
“the tenet that a court must accept as true all of the
allegations contained in a complaint is inapplicable to legal
conclusions. Threadbare recitals of the elements of a cause
of action, supported by mere conclusory statements, do not
launches numerous attacks on Plaintiffs' pleadings,
claiming that wholesale dismissal is warranted because: (i)
Plaintiffs have failed to plead that Defendant discovered any
of the alleged breaches of the Governing Agreements; (ii)
Plaintiffs' breach-of-contract and fiduciary-duty claims
are premised on an EOD that occurred, if at all, without
Defendant's knowledge; (iii) Plaintiffs' tort claims
are duplicative of their contract claims, violative of the
economic-loss rule, and insufficiently pleaded; (iv)
Plaintiffs do not, and cannot, have a cause of action under
the Trust Indenture Act (the “TIA”); (v) the
Streit Act, New York's analogue to the TIA, either does
not apply to Plaintiffs' claims or was not violated; (vi)
the NCUAB lacks standing to bring its derivative claims,
which are actually improper direct claims; (vii) the NCUAB
lacks standing to bring direct claims premised on Trusts
unwound after it first brought its action; and (viii)
Commerzbank's claims are time-barred. The Court will
consider each of these arguments in turn.
Defendant's Motion to Dismiss Plaintiffs'
Breach-of-Contract Claims Is Denied
Plaintiffs' Allegations Are Sufficient at the Pleading
arguments on this first front focus on Defendant's
alleged knowledge, or perhaps more properly, its lack
thereof. (Def. Br. 8). That is, Defendant contends Plaintiffs
have pleaded only generalized allegations that, at most,
Defendant may have been alerted “to a
possibility of a breach, not that it discovered any
actual breaches in the loans in the Trusts.”
(Id.). Such allegations are insufficient as a matter
of law, Defendant argues, because a viable breach-of-contract
claim requires proof of a Trustee's actual notice of a
breach. Id. (quoting Policemen's Annuity
& Benefit Fund v. Bank of Am., NA (hereinafter,
“PABF II”), 943 F.Supp.2d 428, 442
(S.D.N.Y. 2013), abrogated on other grounds by PABF
III, 775 F.3d 154).
arguments do not succeed. To the contrary, courts in this
District have repeatedly rejected similar arguments by
reminding litigants of the difference between sufficient
pleading and successful claims. So too will this Court.
true that “[t]o prevail ultimately on the breach of
contract claim, a plaintiff does have to demonstrate breach
on a ‘loan-by-loan and trust-by-trust
basis.'” Phoenix Light SF Ltd. v. Deutsche Bank
Nat'l Tr. Co. (hereinafter,
“PL/DB”), 172 F.Supp.3d 700, 713
(quoting Royal Park Invs. SA/NV v. Deutsche Bank
Nat'l Tr. Co. (hereinafter,
“RP/DB”), No. 14 Civ. 4394 (AJN), 2016
WL 439020, at *6 (S.D.N.Y. Feb. 3, 2016)); see also PABF
III, 775 F.3d at 162. “But this is not a pleading
requirement, ” because at the pleading stage such
information “is uniquely in the possession of
defendants.” PL/DB, 172 F.Supp.3d at 713
(quotation marks omitted) (quoting PABF II, 943
F.Supp.2d at 442). “Rather, plaintiffs satisfy their
[pleading] burden where their allegations raise a reasonable
expectation that discovery will reveal evidence proving their
claim.” Id.; accord, e.g., Royal
Park Invs. SA/NV v. Bank of N.Y. Mellon (hereinafter,
“RP/BNYM”), No. 14 Civ. 6502 (GHW) 2016
WL 899320, at *4-5 (S.D.N.Y. March 2, 2016); Blackrock
Core Bond Portfolio v. U.S. Bank Nat'l Ass'n,
No. 14 Civ. 9401 (KBF), 165 F.Supp.3d 80, 99-100 (S.D.N.Y.
Feb. 26, 2016); RP/DB, 2016 WL 439020, at *6;
PL/BNYM, 2015 WL 5710645, at *4; RP/HSBC,
109 F.Supp.3d at 602-03. (See also Pl. Opp. 9 &
Plaintiffs have more than met this standard. Plaintiffs have
alleged Defendant's knowledge of R&W breaches on the
basis of Defendant's internal documents: Defendant
received “exception reports identifying incomplete or
improperly documented loan files that were not corrected or
addressed.” (Pl. Opp. 11 (citing BR Compl. ¶¶
98-99; PL Compl. ¶¶ 63, 118-20; CB Compl.
¶¶ 39, 93-94)). Defendant also “received
mortgage insurance coverage denials and policy rescissions as
a result of the improper loan underwriting, ” and
Defendant's internal documents both reflect that
Defendant tracked “the Trusts' abject performance,
” and “contain admissions that certain adverse
metrics were indicative of Seller R&W breaches.”
(Id. at 11-12; see also BR Compl. ¶
110; NCUAB Compl. ¶ 336; PL Compl. ¶¶ 53, 104;
CB Compl. ¶¶ 28, 78). It is Plaintiffs'
contention that such allegations “go far beyond many
other RMBS trustee complaints, which themselves have been
found sufficient to state a claim.” (Id. at
12). The Court agrees.
good measure, Plaintiffs also amass the R&W breach
allegations with which courts in this Circuit have become so
familiar: Plaintiffs allege, inter alia, that
Defendant had discovered and knew of the alleged breaches on
the basis of (i) “the abysmal performance of the Trust
collateral” (BR Compl. ¶ 10); (ii) “a steady
stream of public disclosures [linking] the abject performance
of the Trusts to systemic abandonment of underwriting
guidelines” (id. at ¶ 12); (iii) various
investor “putback initiatives” (id. at
¶¶ 14-17); (iv) investigations targeting
Defendant's own deficient servicing operations
(id. at ¶¶ 19-20); (v) notice Defendant
received in its capacity as Trustee to other RMBS trusts
“from investors of pervasive and systemic violations of
representations and warranties by the loan sellers”
(id. at ¶ 100); (vi) lawsuits brought by
monoline insurers against sellers “for breach of their
representations and warranties in connection with other RMBS
trusts” to which Defendant has ties (id. at
¶ 116); and (vii) Defendant's analysis undertaken in
connection with its provision of “collateral risk
management services” (id. at ¶ 118).
(See also RP Compl. ¶¶ 70-136; NCUAB
Compl. ¶¶ 104-282; PL Compl. ¶¶ 107-15;
CB Compl. ¶¶ 80-89). And with regard to several of
the Trusts, “the historical delinquencies and
collateral losses within the Trusts' loan pools [were] so
severe that [they] ... caused ‘Triggering Events'
under the Trusts' Governing Agreements, ” some of
which amounted to EODs. (BR Compl. ¶ 111). This Court
finds, as have many others, that these allegations are
sufficient to “raise a reasonable expectation that
discovery will reveal evidence proving [Plaintiffs']
claim[s].” PL/DB, 172 F.Supp.3d at 713
(quoting PABF II, 943 F.Supp.2d at 442).
Plaintiffs allege that EODs occurred when Servicers failed to
“(i) act in accordance with the normal and usual
standards of practice of prudent mortgage servicers;
(ii) ensure the loans were serviced legally; and (iii)
promptly notify [Defendant] and other parties upon discovery
[of Sellers'] R&W breaches.” (Pl. Opp. 4
(citing BR Compl. ¶¶ 25-26; RP Compl. ¶¶
57, 59; NCUAB Compl. ¶¶ 85-87, 285-89, 337; PL
Compl. ¶¶ 68, 79-80; CB Compl. ¶¶ 44,
54-55)). These allegations also support Plaintiffs'
claims that Defendant breached its post-EOD contractual duty
to act as would a prudent person by failing to (i) notify
Servicers of the R&W breaches of which it was aware, (ii)
require those Servicers to cure those breaches, or to
repurchase defective loans; (iii) notify Certificateholders
of any uncured EODs; and (iv) reimburse the Trusts for
damages. (Pl. Opp. 3-5, 7 (citing BR Compl. ¶¶
163-87; RP Compl. ¶ 129; NCUAB Compl. ¶¶
361-96; PL Compl. ¶¶ 115-18, 160-61; CB Compl.
¶¶ 89-92, 129-30)).
Plaintiffs have pleaded adequately that Defendant discovered
and knew of the alleged breaches of the Trusts' Governing
Agreements. Plaintiffs likewise adequately have pleaded that
when Defendant failed to act despite its discovery and
knowledge, it breached the Governing Agreements.
Defendant's motion to dismiss Plaintiffs'
breach-of-contract claims is denied.
Commerce Bank Does Not Change This Court's
credit, Defendant acknowledges at the outset that its
arguments regarding the adequacy of the Complaints'
discovery and knowledge allegations implicate “issues
that have been resolved repeatedly against RMBS
trustees.” (Def. Br. 8). Undaunted, Defendant contends
that recent legal developments so “seriously undermine
the federal court decisions to date rejecting the RMBS
trustees' contract-based arguments” that this Court
must chart a new course. (Id.). In support,
Defendant relies upon the First Department's
“rejection” in Commerce Bank v. Bank of N.Y.
Mellon, 35 N.Y.S.3d 63 (1st Dep't 2016), of the
theory that an RMBS Trustee has a duty to “nose to the
source” upon learning facts suggestive of
Court does not dispute Commerce Bank's relevance
to its analysis. Indeed the case addresses the very question
now before the Court - the sufficiency of pleaded facts
regarding an RMBS-trustee defendant's knowledge of
breach. Commerce Bank, 35 N.Y.S.3d at 64. And there,
the First Department found the facts alleged by the
Commerce Bank plaintiffs insufficient to state a
claim. Id. Reviewing the PSAs at issue, the court
recited their common requirement that the Trustee discover an
R&W breach with regard to a “loan-to-loan ratio,
whether there are other liens on a property, whether a loan
was underwritten pursuant to [a nonparty's] underwriting
guidelines, ” and so on. Id. The First
Department concluded the plaintiffs “[did] not
allege that defendant discovered breaches of such
representations and warranties.” Id. (emphasis
First Department did not elaborate on the bases for this
conclusion. And without more, this Court will not read
Commerce Bank to conflict with the very case law
from this District that the First Department cited therein as
“persuasive” in its analysis of pleading
sufficiency. See Commerce Bank, 35 N.Y.S.3d
at 64 (citing RP/BNYM, 2016 WL 899320, at *4
(collecting cases); PL/DB, 172 F.Supp.3d at 712-13).
Significantly, Defendant assumes that the Commerce
Bank plaintiffs and Plaintiffs here suffer from the same
pleading deficiency, viz., a failure to plead
Defendant's actual discovery of R&W breaches. (Def.
Br. 8-10). But the First Department's analysis is not so
clear. That court said only that the Commerce Bank
plaintiffs “do not allege that defendant
discovered breaches of such representations and
warranties.” Commerce Bank, 35 N.Y.S.3d at 64
(emphasis added). The court did not explain what precisely it
found lacking. This Court cannot therefore determine
precisely where the Commerce Bank court would draw a
line; the insufficiency of the allegations in that case do
not preclude the Court from finding the far more robust
allegations in this case to be sufficient.
the Court notes that the Commerce Bank court was
considering pleading sufficiency under a different standard.
Defendant has challenged Plaintiffs' pleading under
Federal Rule of Civil Procedure 12(b)(6), the analytical
requirements of which are outlined above. The Commerce
Bank court analyzed pleading sufficiency under New York
Civil Practice Law and Rules § 3211(a)(1) and (7). Even
allowing for a similarity between Section 3211(a)(7) and Rule
12(b)(6), see Util. Metal Research, Inc. v. Generac Power
Sys., Inc., No. 02 Civ. 6205 (FB) (RML), 2004 WL
2613993, at *3 n.1 (E.D.N.Y. Nov. 18, 2004) (“This is
... a distinction without a difference.”),
aff'd in part, vacated in part, and remanded on other
grounds, 179 F. App'x 795 (2d Cir. 2006) (summary
order), the different standard required by § 3211(a)(1)
casts Commerce Bank's relevance into doubt.
See, e.g., DDR Constr. Servs., Inc. v. Siemens
Indus., Inc., 770 F.Supp.2d 627, 647-48 (S.D.N.Y. 2011)
(“Rule 3211(a)(1) allows dismissal on the ground that
‘a defense is founded upon documentary
evidence.'” (quoting N.Y. C.P.L.R. 3211(a)(1))). It
is possible, for example, that the Commerce Bank
court considered defenses not available to this Court at this
stage. Stated simply, Commerce Bank is not
sufficiently specific for this Court to determine the precise
manner in which the First Department concluded that the
plaintiffs therein had not alleged the defendant's
also contends that the First Department relieved RMBS
Trustees of a duty to “nose to the source.” (Def.
Br. 10). But that contention overstates the First
Department's holding. In considering a trustee's
duties prior to an EOD, the First Department recited the
well-settled proposition “that prior to default,
indenture trustees owe note holders [only] an
extracontractual duty to perform basic, nondiscretionary,
ministerial functions.” Commerce Bank, 35
N.Y.S.3d at 65 (quotation mark omitted) (quoting AG
Capital Funding Partners, 11 N.Y.3d at 157). This
limited pre-default duty, the Court concluded, did not
encompass a duty to monitor or a duty to “nose to the
source” of improper servicing. Id.
holding is not inconsistent with the District decisions cited
by the First Department. Prior to considering a trustee's
pre-default duties, the Commerce Bank court had
found that the plaintiffs there had not alleged the requisite
discovery by the defendant. Commerce Bank, 35
N.Y.S.3d at 64-65.
is, the plaintiffs had alleged no discovery of R&W
breaches, and no provision of written notice of any EOD.
Id. Thus, the court reasoned, the defendant could
not have violated any duty to afford plaintiffs notice.
Id. at 65. Pre-default, and without default
discovery or written notice, the Commerce Bank
defendant had no such duty. Id.
in this Circuit have agreed. They have held that while
“[l]earning of facts merely suggestive of a breach
would not require the Trustee to immediately raise a claim,
” “upon receipt of such notice, it
becomes incumbent upon the [Trustee] to pick up the scent and
nose to the source.” Policemen's Annuity &
Benefit Fund of City of Chi. v. Bank of Am., NA
(hereinafter, “PABF I”), 907 F.Supp.2d
536, 553 (S.D.N.Y. 2012) (alterations in original) (emphasis
added) (quotation marks omitted) (quoting MASTR Asset
Backed Sec. Tr. 2006-HE3 ex rel. U.S. Bank Nat'l
Ass'n v. WMC Mortg. Corp., Civil Nos. 11-2542
(JRT/TNL), 12-1372 (JRT/TNL), 12-1831 (JRT/TNL), 12-2149
(JRT/TNL), 2012 WL 4511065, at *6 (D. Minn. Oct. 1, 2012)).
In Commerce Bank, there was no notice, no discovery,
and therefore no duty to “nose to the source.”
This is consistent with the law in this Circuit; it does not
even if Defendant's proffered interpretation of
Commerce Bank were correct, this Court would be
skeptical of its authority. As noted above, the case was
decided under New York law that differs significantly from
Rule 12(b)(6). And a district court only is “bound to
apply the law as interpreted by New York's intermediate
appellate courts, ” absent “persuasive evidence
that the New York Court of Appeals ... would reach a
different conclusion.” Cornejo v. Bell, 592
F.3d 121, 130 (2d Cir. 2010) (omissions in original)
(emphasis added) (quotation marks omitted) (quoting
Pahuta v. Massey-Ferguson, Inc., 170 F.3d 125, 134
(2d Cir. 1999)). Here, there is such persuasive evidence; it
is the abundant case law from this District that the First
Department itself cited as persuasive and made no attempt to
Defendant's Motion to Dismiss Specific R&W Claims Is
catch-all section in its opening brief, Defendant takes issue
with various subsets of Plaintiffs' claims. First,
Defendant argues that Plaintiffs have improperly alleged
violations of duties to enforce repurchase obligations with
regard to certain Trusts that created no such obligations.
(Def. Br. 16). Second, Defendant identifies three Trusts for
which “Plaintiffs failed to allege that [Defendant]
knew of R&W breaches prior to the expiration of the
Warrantors' obligations to repurchase loans that breached
R&Ws.” (Id.). Third, Defendant argues that
for “four additional Trusts, Plaintiffs fail to include
any allegation regarding the relevant Warrantors, let alone
allegations supporting a plausible inference that [Defendant]
had knowledge of R&W breaches within the applicable
limitations period.” (Id. at 17). And fourth,
Plaintiffs argue that Defendant cannot be held liable for any
failure to enforce its obligations to cure, substitute, or
repurchase faulty loans against Warrantor American Home
Mortgage Acceptance, Inc. (“AHM”), because AHM
filed for bankruptcy in 2007. (Id. at 17-18).
rebut each allegation. First, Plaintiffs dispute
Defendant's argument that certain Trusts do not impose
repurchase obligations on Defendant; they claim that the
relevant governing agreements, read as a whole, require that
Defendant “notify specified parties upon its discovery
of a material R&Ws breach, ” which notice
“triggers [the] Seller repurchase obligations”
that Defendant “has power to enforce.” (Pl. Opp.
13 (citing BR Compl. ¶¶ 63 & n.7, 193; RP
Compl. ¶¶ 52-55; NCUAB Compl. ¶¶ 73-75;
PL Compl. ¶¶ 44, 68; CB Compl. ¶ 44)). Second,
Plaintiffs disclaim a duty to “allege the precise time
of [Defendant's] discovery of R&W breaches or
knowledge of Servicer events of default, which will be
fleshed out in discovery.” (Id. at 14). In a
similar vein, Plaintiffs argue to Defendant's third point
that any “statute of limitations defense cannot be
resolved at this stage because it involves factual questions
as to when and against whom the claims accrued, whether
violations were continuing, and whether tolling
applies.” (Id.). And fourth, Plaintiffs reject
Defendant's arguments regarding AHM's 2007 bankruptcy
because “this argument also involves questions of fact
that cannot be resolved at the pleading stage, such as what
enforcement efforts [Defendant] made or failed to make before
AHM declared bankruptcy, whether it should have submitted a
bankruptcy claim, and what other responsible parties or
claims remain available, including for ongoing Servicer
violations.” (Id. at 14-15).
the Court agrees with Plaintiffs. Each of Defendant's
arguments implicating the statute of limitations is
premature; the Court cannot resolve these issues from the
face of the Complaints. See Staehr v. Hartford Fin.
Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008)
(noting that a statute of limitations defense may be
“raise[d] ... in a pre-answer Rule 12(b)(6) motion if
the defense appears on the face of the complaint”).
Working backwards from Defendant's last argument, the
Court cannot determine at this stage the implications of
AHM's 2007 bankruptcy filing for Defendant's duties
with regard to the AHM-2004 Trust. As Plaintiffs argue, the
possible existence of other responsible parties or claims,
including claims for ongoing Servicer violations, precludes
resolution of this issue at present. Because, as the Court
found above, Plaintiffs need not allege loan-specific
breaches at this stage, and because Plaintiffs have raised
the specter of tolling agreements and ongoing breaches, the
Court is also unable to determine as a matter of law that
Plaintiffs have insufficiently alleged discovery of R&W
breaches before expiration of applicable statutes of
limitations. (Pl. Opp. 14 & n.8). And finally, the Court
finds that Plaintiffs have alleged that Defendant breached
its obligations even with regard to Trusts the Governing
Agreements of which “are silent as to which entity is
responsible for enforcing the sellers' compliance with
their repurchase obligations, prior to an [EOD].” (BR
Compl. ¶ 63 & n.7 (citing as an example FMIC 2007-1,
SSA § 3.02)). At this stage, Plaintiffs are not required
to specify precisely when, and precisely on what basis,
Defendant breached each of its contractual obligations.
Defendant's Motion to Dismiss Plaintiffs' Tort and
Fiduciary-Duty Claims Is ...