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Bakal v. U.S. Bank National Association

United States District Court, S.D. New York

April 2, 2018

ALEXANDER BAKAL, DAVID VISHER, SANDRA VISHER and ESM FUND I, L.P., on behalf of themselves and all others similarly situated, Plaintiffs,


          P. Kevin Castel United States District Judge.

         MASTR Adjustable Rate Mortgage Trust 2006-OA2 (the “Trust”) is a securitization trust that holds 5, 660 first-lien, adjustable-rate mortgage loans. Those loans were acquired by non-party UBS Real Estate Securities Inc. (“UBS”) from assorted mortgage-loan originators, then transferred and pooled into the Trust, which sold securitized interests in those mortgages as residential mortgage-backed securities (“RMBS”). Investors purchased certificates issued by the Trust and received distributions based on the interest and principal paid by the mortgage loans' borrowers.

         Defendant U.S. Bank National Association (“U.S. Bank, ” or the “Trustee”) is the Trustee of the Trust, and the plaintiffs are four Certificateholders of the Trust. U.S. Bank's duties as Trustee are described in the Pooling and Servicing Agreement (the “PSA”) that formed and governs the Trust. Plaintiffs allege that U.S. Bank failed to take the actions required under the PSA when it learned that UBS breached representations and warranties about the Trust's mortgage loans, and, separately, failed to enforce the PSA's remedial measures when the Master Servicer of the Trust, Wells Fargo, N.A. (“Wells Fargo”), caused purported events of default. The Court notes that in 2012, U.S. Bank brought a breach of contract action against UBS, alleging that UBS breached the PSA's representations and warranties as to the underlying mortgage loans and seeking recovery on behalf of the Trust and two near-identical RMBS trusts. U.S. Bank, National Association v. UBS Real Estate Securities Inc., 12 Civ. 7322 (PKC).

         U.S. Bank moves to dismiss the Second Amended Class Action Complaint (the “Complaint”) pursuant to Rule 12(b)(6), Fed.R.Civ.P. (Docket # 45.) Because the Complaint's theories of liability are not supported by the PSA's unambiguous language, U.S. Bank's motion to dismiss is granted in its entirety. BACKGROUND.

         A. The Organization and Purpose of the Trust.

         The Trust is a New York common law trust established and governed by the PSA. (Compl't ¶ 17.) When formed, it held 5, 660 first-lien, adjustable-rate mortgage loans, with a total principal amount of more than $2.01 billion. (Compl't ¶¶ 11, 18.) The Trust issued certificates, which entitled their holders to returns based on borrowers' payments of interest and/or principal on the mortgage loans, as set forth by the PSA. (Compl't ¶¶ 17-18.) There are 28 classes of certificates issued by the Trust, and the payment to Certificateholders varies based on borrowers' expected ability to repay principal and interest, as well as the adequacy of the borrower's collateral in the event of a default. (Compl't ¶ 18.)

         UBS purchased mortgage loans from various originators and transferred them to the Trust.[1] (Compl't ¶ 20.) In its capacity as transferor and sponsor of the Trust, UBS made numerous representations and warranties about the mortgage loans pooled into the Trust, including their compliance with originators' underwriting guidelines and the accuracy of the borrower data as set forth in a mortgage loan schedule (“MLS”). (Compl't ¶ 22.)

         The PSA requires U.S. Bank to enforce certain remedial obligations in the event that UBS breaches a representation and warranty. (Compl't ¶¶ 59, 62-64.) Under the PSA, if any mortgage loan held by the Trust is found to have breached a representation and warranty, and that breach materially and adversely affects the interests of the Certificateholders, UBS is required to cure the breach, or to replace or repurchase the defective loan. (Compl't ¶ 23, 62-64.) The PSA requires U.S. Bank to give timely notice of any breach known to it. (Compl't ¶¶ 23, 62-63.) According to the Complaint, U.S. Bank is trustee of approximately 30% of the national RMBS market, and is the largest RMBS trustee in the United States. (Compl't ¶ 12.)

         B. The Complaint's Allegations Concerning U.S. Bank's Duties to Enforce the PSA against UBS.

         Beginning in or around May 2008, an increasing number of borrowers defaulted on payments owed for the mortgage loans held by the Trust. (Compl't ¶ 90.) By November 2009, the Trust had lost more than $100 million, a sum that the Complaint calls “extraordinarily high.” (Compl't ¶ 90.) According to the Complaint, by May 2010, the percentage of loans that were delinquent, subject to bankruptcy proceedings, in foreclosure or owned by the lender peaked at 55.065% of all loans held by the Trust, reflecting 57.4% of the Trust's total balance. (Compl't ¶ 90.)

         The PSA sets forth U.S. Bank's contractual duties to protect the Trust and its Certificateholders, including the obligation to provide prompt written notice to UBS in the event that U.S. Bank learns of a breach of representations and warranties. (Compl't ¶¶ 62-63; PSA § 2.03.) According to plaintiffs, beginning in or around August 2010, U.S. Bank had knowledge that UBS had breached the representations and warranties of the PSA, but it nevertheless waited until 2012 to commence litigation against UBS. (Compl't ¶ 3.)

         The Complaint describes various ways that U.S. Bank knew that the Trust was “filled” with defective loans, including written breach notices and a subsequent lawsuit that the certificate insurer, Assured Guaranty Municipal Corp. (“Assured”), brought against UBS; awareness on the part of U.S. Bank that the Trust owned an ever-growing number of loans that were made to borrowers who were delinquent, in bankruptcy protection, subject to foreclosure or had mortgage loans owned by the lender; that the MLS data for loans held by the Trust included information that was not true and correct in all material respects; that government reports placed U.S. Bank on notice of lending abuses by the originators; that U.S. Bank was aware that mortgage loans were performing poorly based on its role as servicer of other RMBS trusts; and that insurers who covered losses from borrower defaults gave U.S. Bank notice of defective underwriting and securitization practices. (Compl't ¶¶ 68-123.)

         According to the Complaint, after learning of defects in loans held by the Trust, U.S. Bank failed to carry out its duty to enforce the PSA. The Complaint alleges that plaintiffs urged U.S. Bank to notify UBS that the Trust's underlying mortgage loans were in breach of the representations and warranties, but that U.S. Bank refused to take “appropriate actions” to enforce UBS's obligations to repurchase, replace or cure defective loans. (Compl't ¶¶ 132-34.)

         Plaintiffs allege that U.S. Bank also failed to carry out its duties as Trustee because it never physically possessed the Mortgage Files of loans held by the Trust. (Compl't ¶¶ 59-61.) “Mortgage File” is a defined term under the PSA, and includes the original mortgage note, the lender's title policy and other defined documents related to a mortgage loan. (PSA §§ 1.01, 2.01(b).) Plaintiffs allege that it was the responsibility of U.S. Bank to take possession of the Mortgage Files and to notify UBS of any document defects. (Compl't ¶¶ 60, 124; PSA §§ 2.01, 2.02.) As will be discussed below, however, the PSA unambiguously assigns that task to Wells Fargo in its capacity as Custodian.

         C. The Complaint's Additional Allegations as to U.S. Bank's Duties as Trustee, Including those Related to Enforcing the PSA as to Wells Fargo.

         Plaintiffs also allege that U.S. Bank failed to take actions required under the PSA when an event of default arose out of the performance of the Trust's Master Servicer, non-party Wells Fargo Bank, N.A. (“Wells Fargo”). Wells Fargo was a party to the PSA, and acted as the Trust Administrator, Master Servicer and Custodian. (Compl't ¶ 28.)

         The PSA sets forth distinct, separately defined obligations on the part of Wells Fargo in each of these capacities. Because plaintiffs' claims turn in large part on Wells Fargo's performance as Master Servicer, in reviewing the Complaint's allegations, it is important to distinguish among Wells Fargo's different contractual duties, depending on the capacity in which it is acting. Among other things, the Master Servicer supervises, monitors and oversees the performance of the Trust's individual mortgage loan servicers, and is responsible for depositing funds in the Distribution Account established by the PSA.[2] (PSA §§ 3.01-3.02.) The relationship between the Trustee and the Master Servicer is governed by Article VIII of the PSA. As Trust Administrator, Wells Fargo's duties include the distribution of available funds to Certificateholders, according to the order of priority set by the waterfall provisions of the PSA. (Compl't ¶ 72.) The duties of the Trust Administrator are governed by Article IX of the PSA.

         Many of plaintiffs' claims turn on allegations related to a purported “Master Servicer Event of Termination” (“MSET”), which qualifies as an event of default under the PSA. Plaintiffs allege that when U.S. Bank becomes aware of an MSET, its duty of care to the Certificateholders “significantly increased, ” and U.S. Bank was required to “act like a quasi-fiduciary for plaintiffs . . . .” (Compl't ¶ 67.) U.S. Bank's remedies for an uncured MSET include the power to terminate the Master Servicer, permit the Master Servicer to cure, or assume the duties of Master Servicer itself. (Compl't ¶ 66; PSA § 7.01.) In the event that U.S. Bank learns that an uncured event of default has occurred, the PSA provided that U.S. Bank “shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs.” (Compl't ¶ 67; PSA § 8.01.)

         Section 7.01 of the PSA defines the circumstances that constitute an MSET, and thus an event of default. The Complaint alleges that under section 7.01(i) of the PSA, an MSET occurred in August 2010, when Wells Fargo failed to deposit with the Trust the amounts required under the PSA, and that its deposits continued to fall short in the months that followed. (Compl't ¶ 136.) These purported shortfalls prompted a chain of developments that included coverage obligations by the certificate insurer, Assured, to provide full payment to certain classes of Certificateholders, and Assured's subsequent lawsuit against UBS alleging breaches of representations and warranties. (Compl't ¶ 137.)

         According to the Complaint, U.S. Bank should have, but did not, provide written notice of default to Wells Fargo, and did not terminate Wells Fargo's rights and obligations as Master Servicer. (Compl't ¶ 138.) The Complaint alleges that in failing to take such actions, U.S. Bank “imprudently caused harm to Plaintiffs and breached the PSA.” (Compl't ¶ 140.)

         The Complaint alleges that U.S. Bank itself also triggered an event of default when it failed to provide written notice that representations and warranties had been breached. (Compl't ¶ 135.) According to plaintiffs, U.S. Bank had an obligation to declare its own event of default under the PSA and to provide notice of its failure to provide timely breach notices. (Compl't ¶ 135.)

         D. Other Legal Actions Related to the Trust.

         The current action was brought in the wake of three other, related litigations in this District. Those proceedings are relevant both as background context for the Certificateholders' claims here, and because they relate to the substance of their claims that U.S. Bank failed to enforce UBS's obligations under the PSA.

         In Wells Fargo Bank, N.A. v. ESM Fund I, LP, et al., 10 Civ. 7332 (LBS), Wells Fargo, acting “solely in its capacity as Trust Administrator, ” brought an interpleader action against the plaintiff Certificateholders in this action, Assured, and others, in order to adjudicate the priority of payments to be made out of the Trust's Distribution Account. Senior Certificateholders and Assured had disputed their respective entitlement to the priority of payments from the Trust, and advanced conflicting interpretations of the PSA's “waterfall” provisions at section 4.02. (Id. Docket # 1.) Judge Sand construed the waterfall provisions and concluded that the senior Certificateholders, such as plaintiffs in the present case, had a higher priority of payment than both Assured and the Trust's less-senior Certificateholders, and he directed Wells Fargo in its capacity as Trust Administrator to make distributions accordingly. Wells Fargo Bank, N.A. v. ESM Fund I, LP, 785 F.Supp.2d 188, 194 (S.D.N.Y. 2011).

         In Assured Guaranty Municipal Corp. v. UBS Real Estate Securities Inc., 12 Civ. 1579 (HB), Assured alleged that UBS breached certain representations and warranties contained in the PSA, as well as in the near-identical PSAs of two other RMBS trusts. Judge Baer denied UBS's motion to dismiss that claim, as well as a breach of contract claim alleging that UBS conveyed false data to ratings agencies about the quality of the underlying mortgage loans. See Assured Guar. Mun. Corp. v. UBS Real Estate Sec., Inc., 2012 WL 3525613 (S.D.N.Y. Aug. 15, 2012). Judge Baer dismissed Assured's declaratory judgment claims and Assured's claim that UBS breached its obligation to repurchase or cure defective loans, concluding that the PSAs did not give Assured the power to enforce UBS's repurchase obligations, which instead resided with U.S. Bank as Trustee. Id. at *4-7. The parties filed a stipulation of voluntary dismissal on May 6, 2013. (12 Civ. 1579, Docket # 90.)

         Acting on behalf of the Trust and two near-identical RMBS trusts, U.S. Bank commenced a breach of contract action, which alleged that UBS was required to replace, repurchase or cure loans that were in breach of representations and warranties. U.S. Bank, National Association v. UBS Real Estate Securities Inc., 12 Civ. 7322 (PKC). Judge Baer accepted assignment of that action as related to the Assured case, and it was later transferred to the undersigned, following the death of Judge Baer. In a pre-trial ruling, this Court concluded that U.S. Bank provided UBS with mandatory written notice of all loans alleged to have breached the PSA's representations and warranties. MASTR Adjustable Rate Mortgages Tr. 2006-OA2 v. UBS Real Estate Sec. Inc., 2016 WL 1449751 (S.D.N.Y. Apr. 12, 2016) (citing Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep't 2015)).

         Shortly after the Trustee's action against UBS was filed, the plaintiff Certificateholders in the present case moved to intervene, urging that U.S. Bank could not adequately protect their interests. Judge Baer denied the motion, and concluded that U.S. Bank and the Trust's Certificateholders had the same “ultimate objective” of maximizing recovery against UBS. MASTR Adjustable Rate Mortgages Trust 2006-OA3 v. UBS Real Estate Sec., Inc., 2013 WL 139636 (S.D.N.Y. Jan. 11, 2013). More recently, on February 6, 2018, Sandra Visher and David Visher, who are plaintiffs in the present action, filed another motion to intervene, which remains sub judice. (12 Civ. 7322, Docket # 569.)

         This Court presided over a bench trial of that action from April 18 to May 13, 2016. In a 239-page decision, the Court set forth its findings of fact and conclusions of law, which construed the PSAs, applied them to twenty exemplar loans and concluded that a Master must be appointed to review all loans that remained in dispute. U.S. Bank, Nat'l Ass'n v. UBS Real Estate Sec. Inc., 205 F.Supp.3d 386 (S.D.N.Y. 2016). Among other things, the Court concluded that UBS had warranted that all loans in the three trusts had been originated in compliance with applicable underwriting guidelines and also warranted that all data contained in the MLS was true and correct. See id. The Court's review of the exemplar loans found instances of borrower fraud, inaccuracies in the MLS and incomplete documentation. See id. Final judgment has not yet been entered in that case.

         E. The Relief Sought by ...

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