Sterling Federal Bank, F.S.B. et al v. DLJ Mortgage Capital, Inc et al

Filing 138

MEMORANDUM Opinion Signed by the Honorable John F. Grady on 7/30/2012. Mailed notice(cdh, )

09-6904.121-RSK

July 30, 2012

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
STERLING FEDERAL BANK, F.S.B.,
Plaintiff,
v.
THE BANK OF NEW YORK MELLON and
U.S. BANK, N.A.,
Defendants.

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No. 09 C 6904

MEMORANDUM OPINION
Before the court is U.S. Bank, N.A.’s motion to dismiss.

For

the reasons explained below, we grant U.S. Bank’s motion.
BACKGROUND
We will assume that the reader is familiar with our prior
opinions in this case.

See Sterling Federal Bank, F.S.B. v. DLJ

Mortg. Capital, Inc., No. 09-cv-6904, 2010 WL 3324705 (N.D. Ill.
Aug. 20, 2010) (“Sterling I”); Sterling Federal Bank, F.S.B. v. DLJ
Mortg. Capital, Inc., No. 09-cv-6904, 2011 WL 1792710 (N.D. Ill.
May 11, 2011) (“Sterling II”).

In Sterling I, we dismissed

Sterling Federal Bank, F.S.B.’s (“Sterling”) claims against DLJ
Mortgage Capital, Inc. (“DLJ”), Bank of America, N.A. (“BOA”), and
Select Portfolio Servicing, Inc. (“SPS”) for failing to comply with
the “no action clause” in the Pooling and Service Agreements
(“PSAs”) governing the mortgage-backed pass-through certificates

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acquired by Sterling.

See Sterling I, 2010 WL 3324705, *4-5.

The

no-action clause provides as follows:
No Certificateholder shall have any right by virtue or by
availing itself of any provisions of this Agreement to
institute any suit or proceeding in equity or at law upon
or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trust
Administrator a written notice of an Event of Default and
of the continuance thereof, as provided herein, and
unless the Holders of Certificates evidencing not less
than 25% of the Voting Rights evidenced by the
Certificates shall also have made written request upon
the Trust Administrator to institute such action, suit or
proceeding in its own name as Trust Administrator
hereunder and shall have offered to the Trust
Administrator such reasonable indemnity as it may require
against the costs, expenses, and liabilities to be
incurred therein or thereby, and the Trust Administrator
for 60 days after its receipt of such notice, request and
offer of indemnity, shall have neglected or refused to
institute any such action, suit or proceeding; it being
understood and intended, and being expressly covenanted
by
each
Certificateholder
with
every
other
Certificateholder and the Trust Administrator, that no
one or more Holders of Certificates shall have any right
in any manner whatever by virtue or by availing itself or
themselves of ay provisions of this Agreement to affect,
disturb or prejudice the rights of the Holders of any
other of the Certificates, or to obtain priority or
preference to any other such Holder or to enforce any
right under this Agreement, except in the manner herein
provided
and
for
the
common
benefit
of
all
Certificateholders.
(PSA, dated July 1, 2002, attached as Ex. D to Second Am. Compl.,
§ 12.07.)1

We held that Sterling’s claims against DLJ, BOA, and

SPS fell within this provision’s broad application to “any suit or

1/
There are two “Certificate Series” at issue in this case, governed by
separate PSAs. However, the terms of the PSAs are substantially similar. See
Sterling I, 2010 WL 3324705, *1 n.1.

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proceeding in equity or at law upon or under or with respect to
[the PSAs].”

See Sterling I, 2010 WL 3324705, *5.

And Sterling

admitted that it had not complied with the procedural hurdles that
the no-action clause imposes on such suits. Id. at *4. Therefore,
we dismissed without prejudice Sterling’s claims against those
defendants.

However, applying New York law, we concluded that §

12.07 did not apply to Sterling’s claims against defendant Bank of
New York Mellon (“BNYM”), identified in Sterling’s previous filings
as the “Trustee” and the “Trust Administrator” under the PSAs.
(See Sterling’s Resp. to Defs.’ Mot. to Dismiss (Dkt. 42) at 17);
First Am. Compl. (Dkt. 59) ¶ 7.)

We reasoned that it would be

“absurd” to ask BNYM to sue itself. See Sterling I, 2010 WL
3324705, *4 (citing Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d
Cir. 1992) and Peak Partners, LP v. Republic Bank, 191 Fed.Appx.
118, 126 n. 11 (3d Cir. 2006).

We reaffirmed this conclusion in

Sterling II in response to BNYM’s motion to dismiss Sterling’s
amended complaint.

See Sterling II, 2011 WL 1792710, *1-2.

Sterling has since filed a second amended complaint alleging that
U.S. Bank, not BNYM, was the Trustee during the relevant time
period.

(See Second Am. Compl. ¶ 1.)

In Count III of its second

amended complaint, Sterling claims that U.S. Bank breached its
obligation under § 9.01 of the PSAs to “examine” certain documents
provided to U.S. Bank by BNYM (as Trust Administrator).
at ¶¶ 71-74.)

(See id.

U.S. Bank has moved to dismiss Count III on several

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grounds, including Sterling’s failure to comply with the no-action
clause.
A.

Legal Standard
The purpose of a 12(b)(6) motion to dismiss is to test the

sufficiency of the complaint, not to resolve the case on the
merits.

5B Charles Alan Wright & Arthur R. Miller, Federal

Practice and Procedure § 1356, at 354 (3d ed.2004).

To survive

such a motion, “a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on
its face.’ A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 570, 556 (2007)).

When evaluating a

motion to dismiss a complaint, we must accept as true all factual
allegations in the complaint. See id.

However, we need not accept

as true its legal conclusions; “[t]hreadbare recitals of the
elements of a cause of action, supported by mere conclusory
statements, do not suffice.”

Id. (citing Twombly, 550 U.S. at

555).
B.

Sterling’s Failure to Comply with the No-Action Clause
Sterling effectively admits that it did not comply with §

12.07 before filing its claim against U.S. Bank, arguing instead
that § 12.07 does not apply.

However, our reasoning in Sterling I

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and Sterling II supports the opposite conclusion.

We previously

held that the no-action clause does not apply to Sterling’s claims
against BNYM because it would be absurd to ask BNYM to sue itself,
see Sterling I, 2010 WL 3324705, *4, not because “trustees” are
categorically

exempt

from

no-action

clauses.

The

PSAs

are

contracts, and the parties are entitled to rely on their express
terms.

See

Cruden,

957

“strictly construe[d]”).

F.2d

at

968

(no-action

clauses

are

Sterling’s claim that U.S. Bank breached

§ 9.01 arises “under or with respect to” the PSAs, and there is
nothing “absurd” about asking BNYM (as Trust Administrator) to sue
U.S. Bank (as Trustee).

BNYM and U.S. Bank are separate entities,

making our previous ruling with respect to DLJ, BOA, and SPS
applicable to U.S. Bank.

See Sterling I, 2010 WL 3324705, *5

(“There is an important difference between asking the trustee to
sue itself — an ‘absurd’ requirement that we presume the parties
did not intend — and asking it to sue a third party, even when the
investor alleges wrongdoing by the trustee.”).
Sterling’s efforts to avoid the clear import of our previous
rulings are unavailing.

Sterling argues that the no-action clause

does not apply if the party that the certificateholder wants the
Trust Administrator to sue (in this case, U.S. Bank) does not owe
a duty to the Trust Administrator.

(See Sterling Resp. at 4.)

According to Sterling, U.S. Bank, unlike DLJ and SPS, does not owe
any duties to BNYM — it is, in Sterling’s words, “above the Trust

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Administrator in hierarchy” — and therefore the no-action clause
does not apply to claims against U.S. Bank.

(Id. at 3-4.)

First,

Sterling has not cited, nor are we aware of, any legal authority
supporting its interpretation of the no-action clause. Second, and
more importantly, its argument cannot be squared with the no-action
clause’s plain language. The no-action clause applies to “any suit
or proceeding in equity or at law upon or under or with respect to”
the PSAs.

It is not limited to certificateholder claims based on

explicit duties owed to the Trust Administrator by the party the
certificateholder wants the Trust Administrator to sue. Indeed, as
U.S. Bank points out, this argument misconstrues the no-action
clause’s purpose.

A suit brought by the Trust Administrator

pursuant to a certificateholder’s demand is not a suit to vindicate
the Trust Administrator’s rights. It is the certificateholder’s
rights that are at issue.

Sterling alleges that it was injured

when U.S. Bank breached its duties under the PSAs.

As a third-

party beneficiary, Sterling has standing to file a claim against
U.S. Bank, but to do so it must first comply with the procedures
set forth § 12.07.

It has not done so, therefore its claim against

U.S. Bank must be dismissed.
C.

Bankers Ins. Co. v. The Bank of New York Mellon, 12-cv-1199
Approximately three months after Sterling’s counsel filed this

lawsuit, they filed a separate lawsuit on behalf of different
certificateholders (Bankers Insurance Company and Bankers Life

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Insurance Company, collectively “Bankers”) in the Middle District
of Florida.

The proceedings in Bankers tracked the proceedings in

this case, and the Florida court’s rulings were largely consistent
with our own.

Specifically, the Florida court held that § 12.07

barred Bankers’s claims against DLJ and SPS,2 but did not bar its
claims against BNYM.

See Bankers Ins. Co. v. DLJ Mortg. Capital,

Inc., No. 8:10–CV–0419–T–27EAJ, 2011 WL 2470615, *1-2 (M.D. Fla.
June 21, 2011) (citing Sterling I and Sterling II); Bankers Ins.
Co. v. DLJ Mortg. Capital, Inc., No. 8:10–CV–0419–T–27EAJ, 2011 WL
2470226, *2-4 (M.D. Fla. Mar. 17, 2011) (same); Bankers Ins. Co. v.
DLJ

Mortg.

Capital,

Inc.,

No.

8:10–CV–0419–T–27EAJ,

4867533, *2-4 (M.D. Fla. Oct. 8, 2010) (same).

2010

WL

As Sterling did in

this case, Bankers belatedly added U.S. Bank as a defendant in the
Florida action.

U.S. Bank filed a motion to dismiss Bankers’s

complaint substantially similar to the motion it filed in this
case.

In the alternative, U.S. Bank asked the Florida court to

transfer the case to this District. The Florida court granted U.S.
Bank’s motion to transfer, and denied the motion to dismiss without
prejudice to U.S. Bank refiling the motion after the case was
transferred.

(See

Order

Adopting

Report

and

Recommendation,

Bankers v. The Bank of New York Mellon, 12-cv-1199 (Dkt. 92).)
After Bankers was transferred to this District, we granted the
parties’ joint motion to reassign the case to us as related to this

2/

BOA was not named as a defendant in Bankers.

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case. Our conclusion that Sterling must comply with § 12.07 before
suing U.S. Bank applies equally to Bankers.

Accordingly, we will

enter an appropriate order in Bankers dismissing Bankers’s claim
against U.S. Bank (Count III of its second amended complaint).
CONCLUSION
U.S. Bank’s motion to dismiss [119] is granted.

Count III of

Sterling’s second amended complaint is dismissed without prejudice.

DATE:

July 30, 2012

ENTER:

___________________________________________
John F. Grady, United States District Judge