Retirement Board Of The Policemen's Annuity and Benefit Fund Of The City Of Chicago v. The Bank of New York Mellon

Filing 37

MEMORANDUM & ORDER: granting in part and denying in part 18 Motion to Dismiss. For the foregoing reasons, BNYM's motion to dismiss the Complaint is granted in part and denied in part. Because Plaintiffs lack standing to pursue claims regardi ng trusts in which they never invested, all such claims are dismissed with prejudice. Further, BNYM's motion to dismiss Plaintiffs' claims under TIA §§ 315(a) and 316(b) is granted, and those claims are also dismissed with prejudi ce. BNYM's motion to dismiss Plaintiffs' claims under TIA §§315(b) and 315(c) is denied. This Court exercises supplemental jurisdiction over Plaintiffs' state law claims. The Clerk ofthe Court is directed to terminate the motion pending at ECF No. 18. (Signed by Judge William H. Pauley, III on 4/3/2012) (djc)

UNITED STATES DISTRICT COllRT
SOUTHERN DISTRICT OF NEW YORK

-------------------------------x
11 Civ. 5459 (WHP)

RETIREMENT BOARD OF THE
POLICEMEN'S ANNUITY AND
BENEFIT FUND OF THE CITY
OF CHICAGO, et aI.,

MEMORANDUM & ORDER

Plaintiffs,

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#:

-againstTHE BANK OF NEW YORK MELLON,
Defendant.

~~--

DATE FILED:

-------------------------------x
WILLIAM H. PAULEY III, District Judge:

Plaintiffs-suing individually, on behalf of a putative class, and derivativelyown mortgage-backed securities issued by trusts for which Defendant, The Bank of New York
Mellon ("BNYM"), serves as trustee. They allege that BNYM violated several provisions of the
Trust Indenture Act of 1939, 15 U.S.C. § 77aaa, et seq. (the "TIA"), and breached its contractual
and fiduciary duties. BNYM moves to dismiss the Class Action and Derivative Complaint in its
entirety. For the following reasons, BNYM's motion to dismiss is granted in part and denied in
part.

BACKGROUND
This case is another installment in litigation over BNYM's obligations as trustee
for hundreds of securitization trusts. The structure of the underlying residential mortgage
securitization transactions is familiar: "To raise funds for new mortgages, a mortgage lender

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sells pools of mortgages into trusts created to receive the stream of interest and principal
payments from the mortgage borrowers. The right to receive trust income is parceled into
certificates and sold to investors, called certificateholders." BlackRock Fin. Mgmt. Inc. v.
Segregated Account of Ambac Assurance Com., ---F.3d

n

--,

2012 WL 611401, at *1 (2d CiT.

2012). Here, the mortgage lenders are Countrywide Home Loans, Inc. and various affiliates
("Countrywide"). (Class Action and Derivative Complaint, dated Aug. 31, 2011 ("CompL" or
the "Complaint") ~ 35.) Bank of America Corporation ("Bank of America") now owns
Countrywide. (CompL ~ 15.)
Plaintiffs hold securities issued by twenty-five New York trusts and one Delaware
trust. (Compl. Ex. B.) BNYM is trustee for the New York trusts, and Countrywide (now Bank
of America) is the "master servicer." (Compl.

~~

1, 15,96 n.2.) As in BlackRock, 2012 WL

611401, at *1, the terms of the New York trusts as well as the rights, duties, and obligations of
the trustee and the master servicer are set forth in Pooling and Servicing Agreements ("PSAs").
(Compl. ~ 2; CompL Ex. C: Pooling and Servicing Agreement dated Sept. 1,2006 ("PSA,,).)l
The PSAs also govern the trustee's distribution of money to certificateholders. (Compl. ~~ 1, 2.)
The Delaware trust operates similarly, with a few key differences. The Delaware trust issued
notes, subject to an indenture, for which BNYM serves as indenture trustee. (Declaration of
Matthew D. Ingber, dated Dec. 16,2011 ("Ingber Decl.") Ex A: Indenture, dated Mar. 30, 2006
("Indenture") § 3.04, Annex 1 (Glossary).) Concurrently, the Delaware trust entered into a Sale
and Servicing Agreement ("SSA") governing the sale of the underlying mortgage loans and the
The parties do not dispute that the PSA attached as Exhibit C to the Complaint is representative
of the PSAs governing all ofthe New York trusts at issue. See BlackRock, 2012 WL 611401, at
*1 n.2 ("[T]he agreements are sufficiently similar for the Court to rely on a representative
PSA[.]").
1

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master servicer's responsibilities. (Ingber Dec1. Ex. B: Sale and Servicing Agreement, dated
Mar. 30, 2006 ("SSA").) 2
The PSAs, Indenture, and SSA governing the trusts contain representations and
warranties concerning the quality ofthe underlying mortgages, the duties ofBNYM as trustee,
and the structure of the securities issued by the trusts. (Compi. ~~ 33-48; Ingber Decl. Exs. A,
R) Plaintiffs allege that BNYM's duties include perfecting the assignment of the mortgages to

the trusts, reviewing each of the loan files for the mortgages, certifying that the documentation
for each of the mortgages is accurate and complete, creating a Document Exception Report
listing any incomplete loan files, and ensuring that the master servicer cures, substitutes, or
repurchases all mortgages listed on that Report. (Compi.

~~

35-47.)

Plaintiffs claim that Countrywide breached its obligations as master servicer by
failing "to provide mortgage loan files in their possession, to cure defects in the mortgage loan
files and/or to substitute the defective loans with conforming loans." (Compi.

~

87.) They further

allege that BNYM did nothing to remedy the inadequate servicing of the mortgages undergirding
the trusts. Specifically, they contend that BNYM failed to take possession of the loan files,
review the loan files adequately, and require Countrywide and Bank of America to cure,
substitute, or repurchase the defective loans. To support these allegations, Plaintiffs cite the
bankruptcy court testimony of a Countrywide employee, who stated that it was Countrywide's
standard business practice to retain the original mortgage notes and other documentation, rather
than delivering them to BNYM as trustee. (Compi. ~~ 55-58.) Plaintiffs also cite a 2011 Joint
Report by the Federal Reserve and other agencies flagging "concerns about the prevalence of
The parties do not dispute that the Indenture and SSA attached to the Declaration of Matthew
D. Ingber govern the Delaware trust in which Plaintiffs allege holdings.
2

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irregularities in the documentation of ownership [that] may cause uncertainties for investors of
securitized mortgages." (CompI. ~ 60.) Similarly, the New York Attorney General alleged that
BNYM failed to ensure the complete transfer of mortgages and loan files from Countrywide to
the trusts. (Compi. ~ 61.)
The gravamen of the Complaint is that a prudent trustee would have remedied
these failures by requiring the master servicer to cure or repurchase the defective loans in the
trusts, and would have compelled the master servicer to comply with its servicing duties. Yet
BNYM allegedly took no action to protect investors. 3 Rather, on June 28, 2011, BNYM entered
into an agreement with Countrywide and Bank of America to settle all potential claims belonging
to the trusts for which it is trustee for $8.5 billion. See BlackRock, 2012 WL 611401, at *2.
Plaintiffs contend that-regardless of the settlement's fairness-BNYM caused them significant
losses. They allege that the value of their mortgage-backed securities plummeted as a
consequence of the underwriting defects and inadequate servicing of the underlying mortgages.
(Compi.

~~

74-76.)

DISCUSSION
I.

Legal Standard
To 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, 129 S. Ct 1937, 1949 (2009) (quoting Bell Ati. Corp. v. Twombly, 550 U.S.
3 In Walnut Place LLC v. Countrywide Home Loans, Inc., Justice Barbara R. Kapnick concluded
that BNYM "did, in fact, act upon plaintiffs' complaints, as demonstrated by the settlement
agreement reached with the defendants[.]" Index No. 650497/11, at *15 (N.V. Sup. Ct. Mar. 28,
2012). At this preliminary stage, this Court expresses no opinion regarding BNYM's diligence.

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544, 570 (2007». To detennine plausibility, courts follow a "two pronged approach." Iqbal, 129
S. Ct. at 1950. "First, although a court must accept as true all of the allegations contained in a
complaint, that tenet is inapplicable to legal conclusions, and threadbare recitals of the elements
of a cause of action, supported by mere conc1usory statements, do not suffice." Harris v. Mills,
572 F.3d 66, 72 (2d Cir. 2009) (internal punctuation omitted). Second, a court detennines
''whether the 'well-pleaded factual allegations,' assumed to be true, 'plausibly give rise to an
entitlement to relief.'" Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal, 129
S. Ct. at 1950). On a motion to dismiss, courts may consider "facts stated on the face of the
complaint, in the documents appended to the complaint or incorporated in the complaint by
reference, and ... matters of which judicial notice may be taken." Allen v. WestPoint-Pepperell,
Inc., 945 F.2d 40,44 (2d Cir. 1991).
II.

Standing
A. Trusts in which No Named Plaintiff Invested

Plaintiffs allege current or fonner ownership of certificates relating to only
twenty-six of the trusts referenced in the Complaint. (CompI. ~ 1; CompI. Ex. B (listing
holdings).) BNYM argues that Plaintiffs lack standing to bring claims based on the trusts in
which no named plaintiff invested. Although this Court afforded Plaintiffs an opportunity to
amend the Complaint to add additional certificateholders, they declined to do so. (Hr'g Tr. dated
Feb. 10,2012 at 39-40.)
Standing under Article III of the Constitution is "the threshold question in every
federal case, detennining the power of the court to entertain suit." Denney v. Deutsche Bank
AG, 443 F.3d 253, 263 (2d Cir. 2006) (quoting Warth v. Seldin, 422 U.S. 490,498 (1975»

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(internal quotation marks omitted). To establish standing, "a plaintiff must have suffered an
'injury in fact' that is 'distinct and palpable'; the injury must be fairly traceable to the challenged
action; and the injury must be likely redressable by a favorable decision." Denney, 443 F.3d at
263 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555,560-61 (1992)).
In accord with these principles, Plaintiffs may not pursue claims relating to
securities in which they never invested. In re Smith Barney Transfer Agent Litig., 765 F. Supp.
2d 391, 400 (S.D.N.Y. 2011); see also In re Salomon Smith Barney Mut. Fund Fees Litig., 441
F. Supp. 2d 579, 607 (S.D.N.Y.2006) ("With regard to the sixty-eight funds of which Plaintiffs
own no shares, Plaintiffs do not have standing to assert any claims because Plaintiffs cannot
satisfy the standing requirements."). Accordingly, Plaintiffs lack standing to assert claims
regarding the trusts referenced in the Complaint in which they never invested, and those claims
are dismissed with prejudice. Plaintiffs may pursue claims relating only to the twenty-six trusts
in which they allege current or former holdings.
B. "Fully Wrapped" Delaware Trust
Plaintiffs hold notes issued by a single Delaware trust. (Compl. Ex. B.) BNYM
challenges Plaintiffs' standing to sue regarding this trust because the trust is fully guaranteed--or
"wrapped" -by a mono line insurer, and Plaintiffs do not allege that the insurer failed to
perform. (Indenture § 8.03.)
Monoline insurers provide "a guarantee to protect against credit risk, i.e. the risk
of default." In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241, 248 (S.D.N.Y. 2010).
For "fully wrapped" trusts, then, "the risk of a litigation outcome that impairs the loans in a
securitization rests solely with the insurer, not with the security holders." David Reiss, Subprime

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Standardization, 33 Fla. St. U. L. Rev. 985, 1030 n.288 (2006). BNYM contends that this
economic reality undermines Plaintiffs' standing because where a "plaintiff suffered no injury, it
does not have standing to pursue its TIA claim." Bluebird Partners, L.P. v. First Fid. Bank:, 896
F. Supp. 152, 157 (S.D.N.Y. 1995). As the monoline guarantee is evident on the face of the
Indenture, and the Indenture is integral to the Complaint, BNYM argues that this Court may
consider the guarantee on a motion to dismiss. See United Magazine Co. v. Murdoch Magazines
Distrib., Inc., 146 F. Supp. 2d 385, 408 (S.D.N.Y. 2001) ("Although this is a motion under Rule
12(b)(6), the Court may consider the Purchase Agreement because several ofplaintiffs['] claims,
including this one, are founded upon that contract.").
Ultimately, the presence of the mono line guarantee may preclude Plaintiffs from
proving any damages resulting from their ownership ofnotes issued by the Delaware trust.
Nevertheless, Plaintiffs contend that BNYM's alleged conduct caused the value of their notes to
drop, and they claim to have sold notes issued by the Delaware trust at a significant loss.
(Compi. ~ 64; CompI. Ex. 8.) As such, Plaintiffs have alleged damages beyond those covered by
the guarantee. And whether the mono line insurer performed its obligations is a question of fact
better resolved on a more fully developed record. See Fair Hous. In Huntington Comm. Inc. v.
Town of Huntington, N.Y., 316 F.3d 357, 361 (2d Cir. 2003) ("To the degree that defendants
challenge the factual underpinnings of the allegations made by plaintiffs in support of their
standing to bring suit, the argument is premature."). Thus, Plaintiffs' damages allegations are
sufficient to confer standing, and BNYM's motion to dismiss is denied in this respect.

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III.

Trust Indenture Act Claims

A. Applicability of the Trust Indenture Act
The parties agree that the TIA applies to the mortgage-backed notes issued by the
Delaware trust, but they dispute whether the TIA applies to the certificates issued by the twenty­
five New York trusts. The TIA covers only debt securities, and does not apply to equity
securities. See 15 U.S.c. § 77ddd ("The provisions of this title shall not apply to ... any
security other than ... a note, bond, debenture, or evidence or indebtedness[.]"). BNYM argues
that certificates issued by the New York trusts are equity securities, not debt.
While it cites no case law for the proposition that some mortgage-backed
securities are exempt from the TIA, BNYM marshals several treati~es in support of its position.
BNYM also argues that the structure of the New York certificates closely resembles equity. For
example, the Delaware Indenture provides that "[a]ll Notes ... shall be valid obligations of the
Issuer, evidencing the same debt[.]" (Indenture § 2.03(d).) In contrast, the PSAs governing the
New York trusts clarify that certificates "represent[] a beneficial ownership interest in the Trust
Fund created by the Agreement." (PSA, Ex. E.) Similarly, whereas the Delaware Indenture
defines the issuer's failure to pay interest or principal to noteholders as an "event of default," the
New York PSAs do not. (Compare Indenture §§ 5.01 (i)-(ii), with PSA §§ 7.01(i)-Cii).) BNYM
asserts that these differences are dispositive because, by definition, a certificate that evidences
ownership must be equity, not debt. See Black's Law Dictionary 541 (6th ed. 1990) (defining
"equity security" as "[a] security that represents an equity ownership interest in a corporation,
rather than debt"). BNYM also contends that the PSAs' lack of language regarding payment
default or acceleration proves that the New York certificates are equity. Cf. Gilbert v. Comm'r,

-8­

248 F.2d 399, 402 (2d Cir. 1957) ("The classic debt is an unqualified obligation to pay a sum
certain at a reasonably close maturity date along with a fixed percentage in interest payable
regardless of the debtor's income or lack thereof.").
Finally, BNYM relies on interpretative guidance published on the Securities and
Exchange Commission's website. According to the SEC website, "[c]ertificates representing a
beneficial ownership interest in a trust .... are treated as exempt from the Trust Indenture Act
under Section 304(a)(2) thereof." Trust Indenture Act of 1939, Questions and Answers of
General Applicability, http://www.sec.gov/divisions/corpfinJguidance/tiainterp.htm (last visited
Apr. 3, 2012). BNYM contends that this Court should give "some deference" to the SEC's
detennination. United States v. Mead Corp., 533 U.S. 218, 234 (2001) ("[A]n agency's
interpretation may merit some deference whatever its fonn[.]").
Yet, despite BNYM's arguments, many courts suggest that certificates similar to
those issued by the New York trusts are debt, not equity. To begin with, "as many courts have
observed, pass-through certificates are structurally similar in fonn and function to bonds issued
under an indenture." Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., -nF. Supp.
2d----, 2011 WL 6034310, at *7 (S.D.N.Y. 2011). The Second Circuit has explained that "[i]t is
these stakes--the 'bonds' or 'certificates'-that are ordinarily referred to as commercial
mortgage-backed securities." LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424
F.3d 195, 200 (2d Cir. 2005); see also CWCapital Asset Mgmt., LLC

V.

Chi. Props., LLC, 610

F.3d 497, 499 (7th Cir. 2010) (Posner, l) (describing mortgage-backed securities governed by
PSAs as "giant bond[s]"). Indeed, the Second Circuit has characterized PSAs governing
securitization trusts as "similar to bond indentures in many respects." Greenwich Fin. Servs.

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Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corn., 603 F.3d 23, 29 (2d Cir. 2010).
Unsurprisingly, several courts in this district have equated mortgage-backed securities governed
by PSAs with debt securities. See Ellington, 2011 WL 6034310, at *7 (holding that a New York
statute applying to "bonds" covers pass-through certificates governed by a PSA); see also Trust
for Certificate Holders of Merrill Lynch Mortg. Passthrough Certificates Series 1999-Cl v. Love
Funding Corn., No. 04 Civ. 9890 (SAS), 2005 WL 2582177, at *1 (S.D.N.Y. Oct. 11,2005)
("These certificates are essentially bonds secured by a pool of commercial mortgages that the
Trust has purchased from lenders.").
These decisions reflect the fact that "[t]he shareholder is an adventurer in the
corporate business; he takes the risk, and profits from success. The creditor, in compensation for
not sharing the profits, is to be paid independently of the risk of success, and gets a right to dip
into the capital when the payment date arrives." Comm'r v. O.P.P. Holding Corn., 76 F.2d 11,
12 (2d Cir. 1935). It is well established that, in evaluating whether a security is debt or equity
for tax purposes, "the test cannot be merely the name given to the security." Jewel Tea Co. v.
United States, 90 F.2d 451,452-32 (2d Cir. 1937) (L. Hand, I). Rather, under the tax laws,
courts delineate "the vital difference between the shareholder and the creditor," O.P.P., 76 F.2d
at 12, by evaluating, inter alia, the factors set forth in IRS Notice 94-47, 1994-19 LR.B. 9 (Apr.
18, 1994):
(a) whether there is an unconditional promise on the part of the issuer to
pay a sum certain on demand or at a fixed maturity date that is in the
reasonably foreseeable future; (b) whether holders of the instruments
possess the right to enforce the payment of principal and interest; (c)
whether the rights of the holders of the instruments are subordinate to
rights of general creditors; (d) whether the instruments give the holders the
right to participate in the management of the issuer; (e) whether the issuer
is thinly capitalized; (f) whether there is identity between holders of the

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instruments and stockholders of the issuer; (g) the label placed upon the
instruments by the parties; and (h) whether the instruments are intended to
be treated as debt or equity for non-tax purposes, including regulatory,
rating agency, or financial accounting purposes.
TIFD III-E, Inc. v. United States, 459 F.3d 220, 235 n.13 (2d Cir. 2006).
Consistent with the case law and the IRS factors, the New York certificates
resemble debt. Unlike equity securities, the certificates entitle their holders to regular payments
of principal and interest on fixed "Distribution Date[s]." (PSA Preliminary Statement, PSA §§
1.01,3.08.) While BNYM observes that corporations typically pay dividends to stockholders on
a regular basis as well, the payment of dividends is typically "left to the discretion of the board."
eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 12 (Del. Ch. 2010). Here, by contrast,
the PSAs grant certificateholders a contractual right to receive distributions. Moreover, the New
York certificates have a fixed maturity date, further evidencing their status as debt rather than
equity. See TIFD III-E, 459 F.3d at 235 n.13. And the certificateholders have no role in
managing the trusts. Thus, the New York certificates are debt securities, not equity.
The statements on the SEC website do not compel a different conclusion. These
statements do not warrant controlling deference because "interpretations contained in policy
statements, agency manuals, and enforcement guidelines ... [are] beyond the Chevron pale."
Mead, 533 U.S. at 234 (quoting Christensen v. Harris County, 529 U.S. 576, 587 (2000»
(internal quotation marks omitted). Rather, courts afford such informal agency opinions "respect
proportional to [their] 'power to persuade[.]''' Mead, 533 U.S. at 235 (quoting Skidmore v.
Swift & Co., 323 U.S. 134, 140 (1944». More specifically, courts grant Skidmore deference to
an agency's interpretation based on "its writer's thoroughness, logic, and expertness, its fit with
prior interpretations, and any other sources of weight." Mead, 533 U.S. at 235.

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Here, the conclusory statements on the SEC website are unsupported, contrary to
the case law, and unpersuasive. Therefore, they do not merit Skidmore deference. See Walker
v. Eggleston, No. 04 Civ. 0369 (WHP), 2006 WL 2482619, at *5 (S.D.N.Y. Aug. 29, 2006)
(declining to grant Skidmore deference where agency "offered nothing more than its ipse dixit").
According to the website, "[ c]ertificates representing a beneficial ownership interest in a trust ...
are treated as exempt from the Trust Indenture Act under Section 304(a)(2) thereof." Section
304(a)(2) of the TIA exempts "any certificate of interest or participation in two or more
securities having substantially different rights and privileges, or a temporary certificate for any
such certificate[.]" 15 U.S.c. § 77ddd(a)(2). Unfortunately, the SEC supplies no analysis
supporting its conclusion that § 304(a)(2) covers mortgage-backed securities such as the New
York certificates. And the structure of the New York certificates suggests that this section does
not apply. They do not evidence "participation" in the underlying mortgage loans because the
certificateholders' rights are not wholly contingent on the performance of those loans. If, for
example, the mortgage loans generate "Excess Proceeds," the master servicer-and not the
certificateholders-receives those funds. (PSA § 3.14.) And the master servicer-not the
certificateholders-is entitled to all profits generated from investing the funds contained in the
Distribution and Certificate Accounts, but must repay any losses. (PSA § 3.05(e).) Because the
New York certificates are debt securities, the TIA applies.

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B. Trust Indenture Act Section 315{a)
Apart from arguing that the New York certificates are exempt from the TIA,
BNYM contends that various provisions of the TIA are inapplicable.
1. Breach of the PSAs, Indenture, and SSA
BNYM challenges Plaintiffs' reliance on § 315(a) of the TIA, which provides in
relevant part that an indenture "shall be deemed to provide" that "the indenture trustee shall not
be liable except for the performance of such duties as are specifically set out in such indenture."
15 U.S.C. § 77000(a)(1). Relying on this language, Plaintiffs contend that BNYM violated the
TIA whenever it failed to perform its duties under the PSAs, Indenture, or SSA. BNYM
responds that § 315(a) merely limits a trustee's duties to those performed in the indenture, and
does not impose any actionable federal duties on trustees.
By its plain language, § 315(a) requires that indentures contain language limiting
a trustee's duties to those set forth in the indenture. It does not suggest that every violation of an
indenture is a per se violation of the TIA. In 1990, Congress amended the TIA to make such
limiting language mandatory in all indentures. See Semi-Tech Litig., LLC v. Bankers Trust Co.,
353 F. Supp. 2d 460, 474 n.69 (S.D.N.Y. 2005), affd sub nom., In re Bankers Trust Co., 450
F.3d 121 (2d Cir. 2006) (per curiam). Thus, "prior to default ... a trustee's duties are limited to
what is set forth in the indenture and the statute." Semi-Tech, 353 F. Supp. 2d at 471. But the
1990 TIA amendments did not change the fact that § 315(a) limits a trustee's responsibilities to
those enumerated in the indenture, rather than imposing additional federal obligations. See 15
U.S.C. § 77000(a)(1). Accordingly, Plaintiffs' § 315(a) claims based on this theory are
dismissed with prejudice.

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2. Duty to "Examine the Evidence"
Plaintiffs also contend that BNYM violated § 315(a) of the TIA by failing to
examine the evidence provided by the master servicer certifying compliance with the PSAs and
SSA. (Compl.,-r 86.) They rely on the final clause of § 315(a), which imposes a pre-default duty
on a trustee to "examine the evidence furnished to it pursuant to section 77nnn of this title to
determine whether or not such evidence conforms to the requirements of the indenture." 15
U.S.C. § 77000(a).
Importantly, § 315(a) does not require a trustee to examine all evidence it might
receive. Rather, the trustee's duty is limited to examining evidence furnished under § 77nnn,
which requires "[e]ach person who ... is or is to be an obligor" to provide certain information to
the trustee. 15 U.S.C. § 77nnn(a). The TIA defines an "obligor," when the term is "used with
respect to any indenture security," as "every person (including a guarantor) who is liable thereon,
and, if such security is a certificate of interest or participation, such term means also every
person (including a guarantor) who is liable upon the security or securities in which such
certificate evidence an interest or participation[.]" 15 U.S.c. § 77ccc(12). Taking these
provisions together, § 315(a) requires trustees to examine evidence provided by "obligors," but
not evidence supplied by others.
BNYM contends that the "examine the evidence" provision does not apply here
because Countrywide and its successor Bank of America are not "obligors," and because its duty
to examine evidence extends only to form, not substance. Plaintiffs offer no rejoinder to this
argument. Accordingly, Plaintiffs are deemed to have abandoned this claim, and it is dismissed
with prejudice. See Lipton v. Cnty. of Orange, N.Y., 315 F. Supp. 2d 434,446 (S.D.N.Y. 2004)

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("This Court may, and generally will, deem a claim abandoned when a plaintiff fails to respond
to a defendant's arguments that the claim should be dismissed.").
C. Trust Indenture Act §§ 315(b)-(c)
Section 315(b) of the TIA requires trustees to provide security holders with notice
of defaults. See 15 U.S.C. § 77000(b). Section 315(c) imposes heightened duties on trustees
following an "event of default." See Semi-Tech, 353 F. Supp. 2d at 478-80 (citing 15 U.S.C. §
77000(c)). The term "default" as used in TIA derives its meaning from the indenture. See 15
U.S.C. § 77000(c). Plaintiffs allege that BNYM violated these requirements by failing to give
notice of Countrywide'S and Bank: of America's repeated breaches of their duties as master
servicer, and by failing to act prudently after these alleged defaults.
BNYM does not dispute that the TIA imposes a duty to provide notice of defaults,
nor does it disagree that "after default (as such term is defined in the indenture) a trustee is held
to a prudent person standard." Semi-Tech, 353 F. Supp. 2d at 471-72 (quoting 15 U.S.c.
§77000(c» (internal punctuation omitted). Rather, BNYM counters that the Indenture governing
the Delaware trust limits "defaults" to breaches by the issuer, and Plaintiffs only allege breaches
by the master servicer. BNYM further argues that the TIA's focus on "indenture[s]" dictates that
the Delaware Indenture, and not the SSA, must provide the controlling definition of "default."
1. Events of Default Under the PSAs
The PSAs governing the New York trusts define an "event of default" to include
"any failure by the Master Servicer to deposit in the Certificate Account or remit to the Trustee
any payment required to be made under the terms of this Agreement[.]" (pSA § 7.01(i).) The
PSAs' definition of "event of default" also encompasses "any failure by the Master Servicer to

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observe or perfonn in any material respect any other of the covenants or agreements on the part
of the Master Servicer contained in this Agreement[.]" (PSA § 7.01(ii).)
As these provisions make clear, a "default" occurs under the PSAs when the
master servicer-here, Countrywide-fails to perfonn certain contractual obligations. Under the
TIA, such master servicer defaults trigger the trustee's duty to give notice, and subject the trustee
to the "prudent person" standard. See 15 U.S.C. §§77ooo(b)-(c). Plaintiffs allege that
Countrywide and Bank of America breached the PSAs by failing ''to provide mortgage loan files
in their possession, to cure defects in the mortgage loan files and/or to substitute the defective
loans with confonning loans." (Compl. ~ 87.) As such, Plaintiffs plead "defaults" of the PSAs
sufficient to trigger BNYM's duties under §§ 315(b) and (c) of the TIA. Accordingly, BNYM's
motion to dismiss these claims is denied.
2. Events of Default Under the Delaware Indenture

In contrast to the PSAs, the Indenture underlying the Delaware notes defines an
"event of default" to include certain failures of the issuer, rather than the master servicer. The
Indenture provides that an "event of default" occurs when the issuer fails to pay interest or
principal to the noteholders. (Indenture §§ 5.01(i)-(ii).) More broadly, an "event of default"
occurs under the Indenture if there is a "default in the perfonnance of any obligation of the Issuer
under this Indenture ... or [if] any representation or warranty of the Issuer made in this
Indenture or in any certificate or other writing delivered in connection with this Indenture proves
to have been materially incorrect as ofthe time when it was made[.]" (Indenture § 5.01(iii).)
Under §§ 3.05(iv) and 3.05(v) of the Indenture, the issuer-Le., the trust-is obligated to
"enforce any rights with respect to any ofthe Collateral, [i.e., the underlying mortgages]" and is

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required to "preserve and defend title to the Collateral and the rights ofthe Indenture Trustee, the
Credit Enhancer, and the Noteholders in the Collateral against all adverse claims."
Together with the Indenture, the Delaware trust entered into an SSA-a contract
with Countrywide-whereby Countrywide, as master servicer, agreed to "service and administer
the Mortgage Loans[.]" (SSA § 3.0l(a).) As in the PSAs, Countrywide also assumed the
responsibility of curing or repurchasing defective loans. (SSA § 3.06.) Plaintiffs allege that
Countrywide and Bank of America failed to furnish mortgage loan files to the trustee, failed to
cure any defects in those mortgage loan files, and failed to replace defective loans with
conforming loans. (Compi. '87.) While these alleged failures constituted direct breaches of the
SSA, they also violated the issuer's duties under the Indenture. After all, if Countrywide and
Bank of America failed to cure or repurchase defective mortgages, the issuer similarly failed to
"enforce any rights with respect to any of the Collateral," as the Indenture required it to do.
(Indenture § 3.05(iv).) Under the Indenture, an "event of default" occurs when there is a "default
in the performance of any obligation of the Issuer under this Indenture." (Indenture § 5.01 (iii).)
Thus, Plaintiffs allege "defaults" of the Indenture sufficient to impose heightened duties on
BNYM under TIA §§ 315(b) and (c). BNYM's motion to dismiss these claims is denied.
D. Trust Indenture Act § 316(b)
BNYM also attacks Plaintiffs' reliance on § 316(b) of the TIA, which provides
that "the right of any indenture security to receive payment of the principal ... and interest ...
shall not be impaired or affected without the consent of such holder." 15 U.S.C. § 77ppp(b).
According to BNYM, § 316(b) only prevents non-consensual impairments to certificateholders'
right to demand payment of interest and principal. See In re Nw. Corp., 313 B.R. 595,600

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(Bankr. D. Del. 2004) ("[Section 316(b») applies to the holder's legal rights and not the holder's
practical rights to the principal and interest itself.") (emphasis in original).
Plaintiffs do not respond to BNYM's arguments. Accordingly, the § 316(b)
claim is deemed abandoned, and it is dismissed with prejudice. See Lipton, 315 F. Supp. 2d at
446.
IV.

Supplemental Jurisdiction
This Court may exercise supplemental jurisdiction over Plaintiffs' state law

claims if they "fonn part of the same case or controversy" as the remaining TIA claims. 28
U.S.c. § 1367(a). Exercising supplemental jurisdiction is appropriate where state and federal
claims "derive from a common nucleus of operative fact." Shahriar v. Smith & Wollensky
Restaurant Oro., Inc., 659 F.3d 234,245 (2d Cir. 2011) (quoting Briaroatch Ltd. v. Phoenix
Pictures, Inc., 373 F.3d 296, 208 (2d Cir. 2004» (internal quotation marks omitted). Here,
Plaintiffs' state law claims are based on the same alleged failures ofBNYM and Countrywide
underlying the remaining TIA claims. As such, this Court retains supplemental jurisdiction over
the state law claims.

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CONCLUSION

For the foregoing reasons, BNYM's motion to dismiss the Complaint is granted in
part and denied in part. Because Plaintiffs lack standing to pursue claims regarding trusts in
which they never invested, all such claims are dismissed with prejudice. Further, BNYM's
motion to dismiss Plaintiffs' claims under TIA §§ 315(a) and 316(b) is granted, and those claims
are also dismissed with prejudice. BNYM's motion to dismiss Plaintiffs' claims under TIA §§
315(b) and 315(c) is denied. This Court exercises supplemental jurisdiction over Plaintiffs' state
law claims.
The Clerk of the Court is directed to terminate the motion pending at ECF No. 18.

Dated: April 3, 2012
New York, New York
SO ORDERED:

~ WILlJAMH.PAULEYIII a,..'k 'r-"'~ ~ SL
Q, )

U.S.DJ.

Counsel ofRecord:
Max R. Schwartz, Esq.

Beth A. Kaswan, Esq.

Joseph P. Guglielmo, Esq.

Scott & Scott, LLC

500 Fifth A venue, 40th floor

New York, NY 10110

Counsel for Plaintiffs
Matthew D. Ingber, Esq.
Mayer Brown LLP
1675 Broadway
New York, NY 10019
Counsel for Defendant

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