Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Blackrock Allocation Target Shares Series S Portfolio v. Wells Fargo Bank, National Association

United States District Court, S.D. New York

March 30, 2017

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, N.A., Defendant. COMMERZBANK AG, Plaintiffs,


          KATHERINE POLK FAILLA, District Judge

         In the 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 misconduct.

         Defendant has moved to dismiss each of the above-captioned related actions for failure to state a claim.[1] 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.


         A. Factual Background

         Explanations 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).

         1. RMBS Trusts Generally

         The 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).[3] 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).

         It is 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).

         2. The Trusts, the Governing Agreements, and Defendant's Duties Thereunder

         The 53 Trusts at issue here are of two kinds: Pooling and Service Agreement (“PSA”) Trusts and Indenture Trusts.[4] 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).

         12 of 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).

         The 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. 2011)).

         Though the Governing Agreements at issue here are not identical, Plaintiffs argue that they all impose four fundamental duties on Defendant:

■ 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. ¶ 44)).
■ 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)).

         The PSA 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. ¶¶ 45, 49-52)).

         The 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. C)).

         3. Defendant's Alleged Breaches

         Plaintiffs 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)).

         Plaintiffs 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 “uniquely” had

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 here.

(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. ¶¶ 73-77)).

         Even if 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)).

         All of 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 Trusts.” (Id.).

         B. Procedural Background

         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).

         Defendant filed its Motion to Dismiss the Complaints in each of these four cases on April 30, 2015. (2014 Civ. 9371, Dkt. #46-56).[5] 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).

         Soon 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. #105-06).

         Defendant 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).

         Before 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).


         A. Applicable Law

         When 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 purposes.”)).

         “While 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 suffice.” Id.

         B. Analysis

         Defendant 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.

         1. Defendant's Motion to Dismiss Plaintiffs' Breach-of-Contract Claims Is Denied

         a. Plaintiffs' Allegations Are Sufficient at the Pleading Stage

         Defendant's 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).

         These 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.

         It is 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 & n.5).

         Here, 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.

         For 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).

         Additionally, 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)).

         In sum, 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.

         b. Commerce Bank Does Not Change This Court's Analysis

         To its 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 breach.[6]

         This 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 added).

         But the 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.

         Moreover, 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 discovery.

         Defendant 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.

         This 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.

         That 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.

         Courts 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 undermine it.

         Finally, 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 distinguish.

         2. Defendant's Motion to Dismiss Specific R&W Claims Is Denied

         In a 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).

         Plaintiffs 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).

         Ultimately, 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.

         3. Defendant's Motion to Dismiss Plaintiffs' Tort and Fiduciary-Duty Claims Is ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.