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National Credit Union Administration Board v. U.S. Bank National Association

United States Court of Appeals, Second Circuit

August 2, 2018

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, National Credit Union Administration Board on Behalf of the NGN Trusts, Graeme W. Bush, as Separate Trustee, Plaintiffs-Appellants,
v.
U.S. Bank National Association, Bank of America, National Association, Defendants-Appellees, NCUA Guaranteed Notes Trust 2010-R1, NCUA Guaranteed Notes Trust 2010-R2, NCUA Guaranteed Notes Trust 2010-R3, NCUA Guaranteed Notes Trust 2011-R1, NCUA Guaranteed Notes Trust 2011-R2, NCUA Guaranteed Notes Trust 2011-R3, NCUA Guaranteed Notes Trust 2011-R4, NCUA Guaranteed Notes Trust 2011-R5, NCUA Guaranteed Notes Trust 2011-R6, NCUA Guaranteed Notes Trust 2011-M1, Nominal Defendants.

          Argued: March 8, 2018

          On Appeal from the United States District Court for the Southern District of New York.

         The Plaintiff-Appellant National Credit Union Administration Board manages the National Credit Union Administration (together, "NCUA"), an independent federal agency responsible for regulating and insuring federal credit unions. In 2009 and 2010, NCUA liquidated five corporate credit unions and succeeded to ownership of their assets. These assets included certificates they held in residential mortgage-backed securities trusts ("RMBS Trusts"). NCUA then entered into a series of agreements to resecuritize the certificates and transferred most of the certificates into newly created and independent statutory trusts.

         In late 2014 and early 2015, NCUA brought contractual, common law, and statutory claims against the trustees of the RMBS Trusts, Defendants-Appellees U.S. Bank National Association ("U.S. Bank") and Bank of America, National Association ("Bank of America"; jointly, "Defendants"). Where NCUA had placed an RMBS Trust certificate into a statutory trust, it brought derivative claims on behalf of the statutory trust.

         The United States District Court for the Southern District of New York (Katherine B. Forrest, Judge) twice dismissed the derivative claims. The District Court subsequently denied NCUA's motion for leave to supplement its Second Amended Complaint. Judgment was entered on March 16, 2017.

         On appeal, NCUA argues that the District Court (1)erroneously determined that NCUA lacks derivative standing and (2)abused its discretion when it denied NCUA's motion for leave to supplement the Second Amended Complaint. Following the plain language of the contracts under which NCUA transferred the RMBS Trust certificates, we conclude that the District Court correctly found that NCUA lacks derivative standing to bring claims based on those certificates. We also conclude that the District Court did not abuse its discretion when it denied NCUA's motion for leave to supplement.

          Accordingly, we AFFIRM the District Court's judgment.

          David C. Frederick, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, DC (Scott K. Attaway and Frederick Gaston Hall, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, DC; and George A. Zelcs and John A. Libra, Korein Tillery LLC, Chicago, IL, on the brief), for Plaintiffs-Appellants.

          Fred A. Rowley, Munger, Tolles & Olson LLP, Los Angeles, CA (James C. Rutten, Jacob S. Kreilkamp, Wesley T.L. Burrell, and Adam P. Barry, Munger, Tolles & Olson LLP, Los Angeles, CA; David F. Graham, Sidley Austin LLP, Chicago, IL; and Isaac S. Greaney and Daniel Gimmel, Sidley Austin LLP, New York, NY, on the brief), for Defendant-Appellee Bank of America, National Association.

          David F. Adler, Louis A. Chaiten, and Amanda R. Parker, Jones Day, Cleveland, OH, for Defendant-Appellee U.S. Bank National Association.

          Before: Cabranes and Carney, Circuit Judges, and Caproni, District Judge. [*]

          JOSÉ A. CABRANES, CIRCUIT JUDGE.

         The Plaintiff-Appellant National Credit Union Administration Board manages the National Credit Union Administration (together, "NCUA"), an independent federal agency responsible for regulating and insuring federal credit unions. In 2009 and 2010, NCUA liquidated five corporate credit unions and succeeded to their assets, including certificates they held in residential mortgage-backed securities trusts ("RMBS Trusts"). NCUA then entered into a series of agreements to resecuritize the certificates and transferred most of the certificates into newly created and independent statutory trusts.

         In late 2014 and early 2015, NCUA brought contractual, common law, and statutory claims against the trustees of the RMBS Trusts, Defendants-Appellees U.S. Bank National Association ("U.S. Bank") and Bank of America, National Association ("Bank of America"; jointly, "Defendants"). Where NCUA had placed an RMBS Trust certificate into a statutory trust, it brought derivative claims on behalf of the statutory trust.

         The United States District Court for the Southern District of New York (Katherine B. Forrest, Judge) twice dismissed the derivative claims. The District Court subsequently denied NCUA's motion for leave to supplement its Second Amended Complaint. Judgment was entered on March 16, 2017.

         On appeal, NCUA argues that the District Court (1)erroneously determined that NCUA lacks derivative standing and (2)abused its discretion when it denied NCUA's motion for leave to supplement the Second Amended Complaint. Following the plain language of the contracts under which NCUA transferred the RMBS Trust certificates, we conclude that the District Court correctly found that NCUA lacks derivative standing to bring claims based on those certificates. We also conclude that the District Court did not abuse its discretion when it denied NCUA's motion for leave to supplement.

         Accordingly, we AFFIRM the District Court's judgment.

         I. BACKGROUND[1]

         A. Overview of NCUA

         NCUA is an independent federal agency managed by the NCUA Board.[2] It is responsible for, among other things, chartering and regulating federal credit unions, and operating and managing credit union insurance and stabilization funds. Two of NCUA's capacities are relevant here: (1) to act as liquidating agent for failing or failed credit unions ("NCUA Liquidating Agent"), and (2) to act as guarantor of debts ("NCUA Guarantor"). In this litigation NCUA alleges that these are "distinct capacit[ies], "[3] and in other litigation NCUA has represented that they are "separate legal entit[ies]."[4]Where appropriate, we distinguish between these two "capacities" or "entities."

         NCUA Liquidating Agent. When an insured credit union is in danger of failing, NCUA Liquidating Agent may close the credit union and appoint itself liquidating agent.[5] Upon liquidation, NCUA Liquidating Agent "succeed[s] to . . . all rights, titles, powers, and privileges of the credit union, and of any member, accountholder, officer, or director of such credit union with respect to the credit union and the assets of the credit union."[6] NCUA Liquidating Agent thereafter can "collect all obligations and money due the credit union, "[7] and may "realize upon the assets of the credit union."[8]

         NCUA Guarantor. NCUA Guarantor acts as an agency of the executive branch, and can provide a guarantee, backed by the full faith and credit of the United States, of the timely repayment of debts.

         B. NCUA Liquidates Credit Unions and Succeeds to Certificates in Residential Mortgage-Backed Securities Trusts

         In 2009 and 2010, NCUA Liquidating Agent placed five failing corporate credit unions (jointly, "the CCUs") into conservatorship and involuntary liquidation.[9] At the time of their liquidation, the CCUs held investment securities, commercial mortgages, and other "securitized" assets[10] (the "Legacy Assets"). Those Legacy Assets included certificates in ninety-eight residential mortgage-backed securities trusts ("RMBS Trusts"). Each RMBS Trust consisted of hundreds of individual residential mortgage loans that were pooled together and securitized to investors. The RMBS Trust certificates entitled the CCUs to fixed principal and interest payments, which derived from the income streams generated as borrowers made monthly payments on the mortgage loans in the RMBS Trusts. The CCUs purchased the certificates at a combined original face value of approximately $6.8 billion.

         On liquidation, NCUA Liquidating Agent succeeded to the Legacy Assets, including the certificates in the ninety-eight RMBS Trusts. NCUA Liquidating Agent also succeeded to any claims that the CCUs had as certificateholders in the RMBS Trusts.

         C. NCUA's Resecuritization of the RMBS Trust Certificates

         In 2010, the NCUA Board created the NCUA Guaranteed Notes ("NGNs") Program to liquidate and resecuritize the Legacy Assets. Under the program, NCUA Liquidating Agent transferred certain Legacy Assets, including most of the RMBS Trust certificates, into trusts (the "NGN Trusts"). The NGN Trusts then issued approximately $28.3 billion in NGNs, holders of which would receive payment from the Legacy Assets' cash flows. NCUA Guarantor provided a guaranty of the timely repayment of all principal and interest to the investors in the NGNs.

         Each NGN Trust issued the NGNs pursuant to a set of three key agreements ("Agreements"): (1) an NGN Trust Agreement, (2) an NGN Indenture Agreement, and (3) an NGN Guaranty Agreement.[11]The NGN Agreements[12] were executed on the same day.[13]

         1. NGN Trust Agreements

         The NGN Trust Agreements established each NGN Trust as "a 'statutory trust' under the Delaware Statutory Trust Act, "[14] and are governed by Delaware law.[15] As Delaware statutory trusts, the NGN Trusts are "separate legal entit[ies]."[16] The Trust Agreements appointed Wells Fargo Delaware Trust Company, N.A. ("Wells Fargo") as Owner Trustee.[17] NCUA Liquidating Agent was designated the "Seller."[18]

         In the Trust Agreements' Conveyance Clause, NCUA Liquidating Agent (or "Seller") agreed to "contribute, transfer, convey and assign to, and deposit with, the [NGN] Trust[s], without recourse, all of [NCUA's] right, title and interest in and to the . . . Trust Estate," which included RMBS Trust certificates.[19] The Trust Agreements further provided that the conveyance "is absolute and is intended by the parties, other than for federal, state and local income and franchise tax purposes, to constitute a sale . . . to the Trust."[20]

         In exchange, NCUA Liquidating Agent received Notes[21] and Owner Trust Certificates in the Trust Estate.[22] Wells Fargo, as Owner Trustee, agreed to "hold the Trust Estate . . . in trust for the exclusive use and benefit of all present and future Certificateholders of the Trust Estate."[23]

         The Notes, which were subsequently sold to investors, entitle the investors to cash flows from the Trust Estate. The Owner Trust Certificates are retained by NCUA Liquidating Agent. The Owner Trust Certificates entitle NCUA Liquidating Agent to a final distribution of the NGN Trusts' remaining assets after the Trusts have satisfied and discharged all outstanding obligations, including obligations to the holders of the Notes.[24]

         2. NGN Indenture Agreements[25]

         After receiving NCUA Liquidating Agent's interests in the Trust Estate, the NGN Trusts entered into the NGN Indenture Agreements with The Bank of New York Mellon ("BNYM") to fund the Notes. The Indenture Agreements appointed BNYM as Indenture Trustee, [26] and expressly stated that they were to be governed by New York law.[27] NCUA Liquidating Agent is not a party to the Indenture Agreements.[28] The Indenture Agreements, however, define "Guarantor" as "NCUA in its capacity as an Agency of the Executive Branch of the United States" (i.e., NCUA Guarantor).[29]

         In each Indenture Agreement, the NGN Trusts granted to BNYM as Indenture Trustee, "for the benefit of the Holders of the Notes and the Guarantor, all of the [NGN Trusts'] right, title and interest in and to" various assets, including the RMBS Trust certificates in the Trust Estate.[30] That grant expressly included "all present and future claims, demands, causes and choses in action in respect of" the assets.[31]

         BNYM, for its part, agreed to hold the assets "in trust for the exclusive use and benefit of all present and future Noteholders and the Guarantor."[32] BNYM also assumed a duty "to institute . . . any suit or other proceeding . . . to protect the interests of the Noteholders and the Guarantor."[33]

         Under the Indenture Agreements, the Noteholders have a right to institute judicial proceedings with respect to the Indentures, but only if each of certain conditions have been satisfied. These include: "the Guarantor has consented," the Noteholder has given BNYM prior written notice of the "Event of Default" underlying the anticipated suit, and the "Event of Default . . . occurred and [is] continuing."[34] The Indenture Agreements do not, on their face, grant the NGN Trusts or NCUA Liquidating Agent a right to compel any party to initiate judicial proceedings.

         When the Notes have been satisfied, BNYM as Indenture Trustee must return the RMBS Trust certificates and any other remaining assets to the NGN Trusts.[35] The NGN Trusts, in turn, must reconvey those assets to NCUA Liquidating Agent as holder of the Owner Trust Certificates in the NGN Trusts.[36]

         3. NGN Guaranty Agreements

         Finally, NCUA Guarantor, the NGN Trusts, and BNYM entered into NGN Guaranty Agreements. Under these Agreements, NCUA "absolutely . . . guarantee[d]" the timely payment of the principal and interest due on the Notes administered by the Indenture Trustee, BNYM.[37]

         D. NCUA Guarantor Assigns Claims to NCUA Liquidating Agent and Makes Demand on BNYM

         In January 2015, NCUA Guarantor and NCUA Liquidating Agent entered into an agreement in which NCUA Guarantor consented to NCUA Liquidating Agent pursuing RMBS Trust certificate-related claims ("Claims").[38] NCUA Guarantor also assigned to NCUA Liquidating Agent "any rights, under law, contract, or equity, that it may now or in the future have in connection with the Claims and related litigation."[39]

         That same day, NCUA Guarantor issued a direction letter to BNYM, directing the Indenture Trustee to "take action to assert" claims against the trustees of the RMBS Trusts.[40] NCUA Guarantor also notified BNYM in writing that NCUA Liquidating Agent would assert and prosecute those claims on behalf of the NGN Trusts if BNYM would not do so itself.[41]

         In February 2015, BNYM responded to the direction letter, stating that it did "not intend to pursue the claims," but that NCUA Guarantor had a right to pursue the claims itself.[42] BNYM later submitted a declaration stating that it "takes a neutral position with respect to any challenge to NCUA's standing" to assert the claims.[43]

         E. Procedural History

         In December 2014, NCUA Liquidating Agent initiated this action against Defendants. A First Amended Complaint was filed in February 2015.

         NCUA Liquidating Agent's claims stem from Defendants' service as trustees for the ninety-eight RMBS Trusts in which the CCUs held certificates.[44] NCUA Liquidating Agent alleged that, as trustees, Defendants had contractual, common law, and statutory duties to address and correct problems with the underlying mortgage loans, and to protect the RMBS Trusts' and certificateholders' interests. According to NCUA Liquidating Agent, Defendants breached their duties by, among other things, failing to take full possession of the original notes and mortgages, failing to review mortgage loan files for irregularities, and failing to take steps to hold parties accountable for the repurchase or substitution of defective mortgage loans. At oral argument, counsel for NCUA Liquidating Agent stated that it believes Defendants' failures caused "hundreds of millions of dollars" in losses to the RMBS Trusts and certificateholders.

         1. The District Court dismisses First Amended Complaint

         On May 18, 2015, the District Court dismissed in part NCUA Liquidating Agent's First Amended Complaint for lack of standing. In its Opinion and Order, the District Court found that NCUA Liquidating Agent had failed to plead adequate facts establishing that it had either direct or derivative standing to assert claims that Defendants violated their obligations as trustees of the RMBS Trusts. The District Court also identified what it believed to be the "core standing issue": "whether and to what extent NCUA's broad powers as conservator or liquidating agent of the CCUs survived after NCUA placed the CCUs' assets . . . into new, independent trusts."[45]

         The District Court cautioned NCUA Liquidating Agent that it would have only "a single opportunity to replead, "[46] and instructed that the Indenture Agreements "should be included as part of any proposed amendment."[47]

         2. The District Court dismisses Second Amended Complaint

         NCUA Liquidating Agent used its Second Amended Complaint to allege derivative claims based on 137 certificates in eighty-nine RMBS Trusts and direct claims based on nine certificates in nine RMBS Trusts. NCUA Liquidating Agent based its derivative standing on the assignment of rights from NCUA Guarantor to NCUA Liquidating Agent, the direction letter NCUA Guarantor sent to BNYM, BNYM's refusal to bring the claims itself, and BNYM's decision not to object to a suit brought on its behalf.

         The District Court again dismissed the derivative claims for two principal reasons. First, NCUA Liquidating Agent did not stand "in direct line to assert a derivative claim" because the NGN Trusts had themselves conveyed the claims to BNYM.[48] NCUA Liquidating Agent, in other words, was "twice removed" from the claims.[49]Second, the Indenture Agreements' Granting Clause "effected a complete transfer of all rights including explicitly the right to sue," which precluded the NGN Trusts, as transferor, from bringing any derivative claims.[50] Because NCUA Liquidating Agent was one step further removed from the claims than the NGN Trusts, NCUA Liquidating Agent likewise could not bring any derivative claims.

         3. The District Court denies NCUA's motion to supplement the Second Amended Complaint

         Following the District Court's dismissal in part of the Second Amended Complaint for lack of derivative standing, NCUA Liquidating Agent attempted yet again to remedy its standing defects, this time "through a two-prong maneuver."[51] First, NCUA Liquidating Agent moved to supplement its Second Amended Complaint under Federal Rule of Civil Procedure 15(d) to add new allegations regarding the December 2015 "winding up" of one NGN Trust and the April 2016 appointment of Graeme W. Bush as a "Separate Trustee." Second, NCUA Liquidating Agent sought to substitute Bush as the real party in interest under Federal Rule of Civil Procedure 17(a)(3).

         In May 2016, the District Court denied NCUA Liquidating Agent's motion, "principally on the basis that any amendment of the pleadings is untimely."[52] The District Court stated that it had already "entertained several complaints," having "made it perfectly clear a year ago that [NCUA Liquidating Agent's] assertions of derivative standing were legally infirm and [having] allowed one final amendment to address the deficiencies."[53] The District Court also faulted NCUA Liquidating Agent for not invoking Rule 17 before it dismissed the derivative claims, and for "[sitting] silently" instead of notifying it of the unwinding of one NGN Trust.[54] Finally, the District Court found that an amendment to the pleadings would be futile because NCUA Liquidating Agent lacked Article III standing at the time it first brought the action.[55]

         NCUA Liquidating Agent thereafter voluntarily dismissed the remaining direct claims with prejudice. This appeal followed.

         II. DISCUSSION

         We consider, first, whether NCUA Liquidating Agent has derivative standing to bring claims on behalf of the NGN Trusts or BNYM as Indenture Trustee. We conclude that it does not. Second, we address whether the District Court abused its discretion when it denied NCUA Liquidating Agent's motion to supplement the Second Amended Complaint. We hold that the District Court did not abuse its discretion. Accordingly, we affirm the judgment of the District Court.

         A. Whether NCUA Liquidating Agent Has Derivative Standing

         NCUA Liquidating Agent seeks to recover losses that Defendants allegedly caused when they breached their duties as trustees of the RMBS Trusts. NCUA Liquidating Agent brought these claims derivatively on behalf of the nominal defendants, the NGN Trusts. On appeal, NCUA Liquidating Agent argues that the District Court erred when it dismissed the derivative claims for lack of standing. We disagree. Under the clear and unambiguous language of the Trust and Indenture Agreements, [56] NCUA Liquidating Agent lacks derivative standing to sue on behalf of either the NGN Trusts or BNYM.

         1. Standard of review

         We review de novo the District Court's dismissal of a complaint under Federal Rule of Civil Procedure 12(b)(6).[57] We "accept[ ] as true the factual allegations of the complaint and draw[ ] inferences based upon these allegations in the light most favorable to the plaintiffs."[58]To survive a motion to dismiss, the complaint must "contain[ ] sufficient factual ...


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