Royal Park Investments SA/NV v. U.S. Bank National Association
MEMORANDUM AND ORDER. Royal Park is free to spend time and resources on efforts it believes will further its case. However, given the extremely low likelihood that sampling evidence will be permitted in this case, and given the burdens imposed, it is not proportionate to the needs of the case for Royal Park to pursue sampling-related discovery. Defendant's motion for a protective order is GRANTED. So ordered. Motions terminated: 371 LETTER MOTION for Discovery Renewed Motion for Protectiv e Order re Sampling addressed to Magistrate Judge Robert W. Lehrburger from Benjamin P. Smith dated March 5, 2018. Document filed by U.S. Bank National Association. (Signed by Magistrate Judge Robert W. Lehrburger on 7/9/2018). Copies transmitted to all counsel of record. (rjm)
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 1 of 13
DOC#:. _ _ _ _ _ _ __
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ROYAL PARK INVESTMENTS SA/NV,
individually and on behalf of all others similarly :
- against :
U.S. BANK NATIONAL ASSOCIATION,
DATE FILED: 7/9/2018
14 Civ. 2590 (VM) (RWL)
MEMORANDUM AND ORDER
ROBERT W. LEHRBURGER, United States Magistrate Judge.
This is a residential mortgage-backed securities (“RMBS”) case in which Plaintiff
Royal Park Investments SA/NV (“Royal Park”), an investor in the securities at issue,
claims Defendant U.S. Bank National Association (“U.S. Bank”), trustee of the trusts
holding the securities, breached its contractual and fiduciary duties. More particularly,
Royal Park alleges that it and other investors lost investment funds because U.S. Bank
failed to enforce its rights to require the RMBS issuer to repurchase defective loans
underlying the securities. The case involves more than 86,000 loans underlying 21 trusts.
U.S. Bank now moves for a protective order to preclude discovery on statistical sampling
as a means to establish liability and damages. After having considered the parties’
extensive briefing and argument, and for the reasons set forth below, U.S. Bank’s motion
Royal Park filed this putative class action on April 11, 2014. After three years of
discovery skirmishes, U.S. Bank wrote to the Court on May 2, 2017, requesting a case
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 2 of 13
management conference to “discuss whether sampling discovery and related expert
discovery is appropriate in this case.”1 After further letter briefing, on June 1, 2017, the
Honorable James C. Francis IV, United States Magistrate Judge, denied without prejudice
U.S. Bank’s motion for a protective order to prohibit sampling discovery. 2 Judge Francis
explained that the same issue addressed by U.S. Bank’s motion was the subject of two
other opinions rendered by another United States Magistrate Judge and that objections
to those opinions were under review by the United States District Judge in each case.
Judge Francis indicated that U.S. Bank could renew its motion after the District Judges’
determinations. Following entry of the District Judges’ decisions, U.S. Bank renewed its
motion, which is now before this Court.
The Trustee Sampling Decisions
As set forth above, whether parties should be permitted to develop sampling
evidence to prove liability and damages against RMBS trustees has recently been
addressed by several courts in this district. Without exception, all of them have answered
the question in the negative. See BlackRock Allocation Target Shares v. Wells Fargo
Bank, N.A. (“Wells Fargo I”), No. 14 Civ. 9371 et al., 2017 WL 953550 (S.D.N.Y. March
10, 2017), objections overruled sub nom. by BlackRock Allocation Target Shares: Series
S Portfolio v. Wells Fargo Bank, N.A. (“Wells Fargo II”), 2017 WL 3610511 (S.D.N.Y. Aug.
21, 2017); Royal Park Investments SA/NV v. HSBC Bank USA N.A. (“HSBC I”), No. 14
Civ. 8175 et al., 2017 WL 945099 (S.D.N.Y. March 10, 2017), objections overruled sub
Letter of Benjamin P. Smith dated April 25, 2017, at 1.
Order dated June 1, 2017. Judge Francis was the Magistrate Judge previously assigned
to this case. He retired in October 2017 after a long and estimable career.
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 3 of 13
nom. by Royal Park Investments SA/NV v. HSBC Bank USA, N.A. (“HSBC II”), 2018 U.S.
Dist. LEXIS 31157 (S.D.N.Y. Feb. 23, 2018); BlackRock Balanced Capital Portfolio (FI)
v. Deutsche Bank National Trust Company (“Deutsche Bank”), No. 14 Civ. 9367, 2018
Dist. LEXIS 83405 (S.D.N.Y. May 17, 2018) (following Wells Fargo I and II and HSBC I
and II). This opinion refers to those decisions collectively as the Trustee Sampling
The principal reason given by each of the Trustee Sampling Decisions for
precluding the use of sampling is that under the language of the relevant agreements
governing the trusts, the sole remedy provided to the trustee with regard to breaching
loans is to seek repurchase on a loan-by-loan, trust-by-trust basis. In other words,
whether and to what extent a trustee can obtain repurchase of breaching loans must be
determined separately for each specific loan. Wells Fargo I, 2017 WL 953550, at *4-5
(section titled “Plaintiffs Must Proceed Loan by Loan”); HSBC I, 2017 WL 945099, at *45 (same); Wells Fargo II, 2017 WL 3610511, at *7 (“[I]t remains the law in RMBS cases
of this kind that ‘to prevail on the breach of contract claim, a plaintiff does have to
demonstrate breach on a loan-by-loan and trust-by-trust basis.’”) (quoting BlackRock
Allocation Target Shares: Series S. Portfolio v. Wells Fargo Bank, National Association,
247 F. Supp. 3d 377, 389 (S.D.N.Y. 2017)); HSBC II, 2018 U.S. Dist. LEXIS 31157, at
*35 (“The requirement that HSBC have information on a loan-by-loan basis to trigger its
duties comports with the structure of [the contractual language] and the limited duties
imposed on HSBC as trustee.”); Deutsche Bank, 2018 Dist. LEXIS 83405, at *22-23
(“Plaintiffs need to prove liability and damages on a trust-by-trust and loan-by-loan
basis . . . .”).
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 4 of 13
Sampling, however, cannot identify which specific loans were in breach (other than
those in the sample itself), cannot determine what would have happened had the trustee
attempted to seek repurchase of the loans, and cannot determine the damages
associated with any specific loan. See, e.g., HSBC II, 2018 U.S. Dist. LEXIS 31157, at
*36 (“Sampling cannot provide loan-specific information as to any loan outside the
sample . . . .”). Accordingly, as the Trustee Sampling Decisions hold, sampling would
have little to no relevance, and as a result, engaging in sampling-related discovery would
not be proportional to the needs of the case under Federal Rule of Civil Procedure
26(b)(1). The judges in each case thus exercised their discretion, or affirmed the exercise
of that discretion, to preclude sampling discovery. See, e.g., Deutsche Bank, 2018 U.S.
Dist. LEXIS 83405, at *23-24 (“In short, because Plaintiffs cannot avoid the need for loanspecific evidence, there is nothing to be gained from allowing statistical sampling per se
and much to be lost, in time if not money. Accordingly, and for the reasons more
thoroughly explained by Judges Netburn, Failla, and Schofield, the Court concludes that
‘the burden or expense of the proposed discovery outweighs its likely benefit.’”) (quoting
Fed. R. Civ. P. 26(b)(1)). 3
The Trustee Sampling Decisions, as well as U.S. Bank in this case, rely in part on
the Second Circuit Court of Appeals’ opinion in Retirement Board of the Policemen’s
Annuity and Benefit Fund of the City of Chicago v. Bank of New York Mellon, 775 F.3d
154 (2d Cir. 2014). In that case, the court stated that “[the Trustee]’s alleged misconduct
Sampling is expensive and time-consuming. See, e.g., Wells Fargo I, 2017 WL 953550,
at *4 (“[T]he contemplated sampling will cost hundreds of thousands, if not millions, of
dollars, will require months to conduct, and will likely result in challenges to the
admissibility of the evidence.”). Plaintiffs and U.S. Bank acknowledge that sampling in
this case would cost millions of dollars.
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must be proved loan-by-loan and trust-by-trust.” Id. at 162. This language, however,
should be understood in context. The issue addressed by the court was the plaintiff’s
proposed use of sampling to establish class standing to sue over RMBS trusts in which
the plaintiff did not invest (along with trusts in which it did invest). Id. at 159. The plaintiff
sought to sample loans from across the various trusts to establish that loans in all trusts
were defective. Id. at 162. The court held that sampling could not be used to establish
class standing because even if sampling showed that each trust had breaching loans, it
would not demonstrate the plaintiff’s stake in each trust. Id. at 163. In so holding, the
court highlighted the absence of any case in which “a single sample of loans taken from
hundreds of trusts was used to prove a defendant’s liability with respect to each of those
trusts” but “acknowledge[d] that district courts have sometimes permitted plaintiffs to use
statistical sampling to prove the incidence of defects within individual trusts.” Id. at 162
n.6. The court thus did not directly address the propriety of sampling to prove liability
against a trustee where the sample includes only loans from that trust rather than across
trusts. That said, there is no reason to believe that the Second Circuit would depart from
its “loan-by-loan” incantation with respect to use of sampling to prove liability or damages
specifically against a trustee.
Indeed, in the case cited by the Second Circuit as one in which a district court
approved sampling as a basis of proof in an RMBS case, the defendant acted as the
issuer of RMBS securities, not a trustee. See Assured Guaranty Municipal Corp. v.
Flagstar Bank, FSB, 920 F. Supp. 2d 475, 486-87 (S.D.N.Y. 2013). The distinction is
important for the reasons provided by the Trustee Sampling Decisions: the contractual
language governing the trustees is couched in terms of loan-by-loan evaluation and
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remedy; and, unlike a trustee, an RMBS issuer or sponsor securitizes the loans, conducts
due diligence on the loans (or at least is in a position to do so), and makes representations
and warranties about the loans. See, e.g., HSBC II, 2018 U.S. Dist. LEXIS 31157, at *37
(“These cases [in which sampling was allowed] are inapposite because the duty of an
originator or sponsor to underwrite each loan before issuing or purchasing it is not
comparable to the limited and loan-specific nature of the trustee’s duties under the
[relevant contracts].”); HSBC I, 2017 WL 945099, at *6 (distinguishing and finding
inapposite cases approving use of sampling in cases against RMBS issuers and
Application to this Case
Although this case involves different trusts than those in the other Trustee
Sampling Decisions, the contractual language at issue is not materially different. 4 If there
is anything about this case that distinguishes it from the others so as to merit a different
outcome, it is to be found elsewhere besides the contract.
Royal Park has identified at least three differences between this case and the
previous Trustee Sampling Decisions – one procedural, and two substantive.
Procedurally, the Trustee Sampling Decisions responded to motions by the plaintiffs to
obtain the Court’s stamp of approval to develop and use statistical sampling evidence. In
contrast, Defendant U.S. Bank, who is seeking a protective order against samplingrelated discovery, made the motion here. Royal Park argues that this is an important
See Transcript of Oral Argument dated April 23, 2018, at 47 (in response to the Court’s
question as to whether there is anything about this case different from the other Trustee
Sampling Decision cases that would merit a different outcome, Royal Park’s attorney
answered, “Well I think that, you know, the facts are generally the same,” and proceeded
to address issues not having anything to do with the contract language).
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 7 of 13
difference because there is no discovery burden to protect against. Royal Park has not
issued any sampling-related discovery to U.S. Bank and does not plan to do so. Rather,
the information necessary to conduct sampling is already available to the parties. All that
need be done, so the argument goes, is for Royal Park to have its sampling expert draw
a statistical sample for each trust and then extrapolate results of reunderwriting the loans
in the sample to that trust’s larger universe of loans. U.S. Bank need not do anything. 5
Royal Park’s argument theoretically is correct. But it is not realistic. In a litigation
with as much at stake as this one, no responsible defense attorney would move forward
without at least analyzing plaintiff’s sampling expert report, deposing the expert, preparing
to cross-examine the expert at trial, and retaining an expert to potentially rebut the
plaintiff’s expert. A reasonable defense attorney also would likely reunderwrite or at least
critique the reunderwriting of the sampled loans. U.S. Bank posed the prospect of even
conducting its own counter-sampling and having its reunderwriting expert analyze the
loans in both its and Royal Park’s samples. 6
A facile retort to this purported burden would be that if U.S. Bank is so certain that
sampling is not relevant to a trustee case such as this, then it need not conduct any expert
discovery. And, by acknowledging that it would be irresponsible for U.S. Bank not to
conduct its own sampling discovery in the face of Royal Park’s sampling evidence, U.S.
See Letter of Hillary B. Stakem dated May 2, 2017, at 2 (U.S. Bank “has no obligation
to conduct any particular expert or fact discovery”).
As U.S. Bank puts it, “To the extent sampling is allowed, U.S. Bank will face a Hobson’s
choice. If U.S. Bank elects not to engage in sampling discovery, it takes the risk that
sampling as a means of proof might be allowed. . . . Alternatively, if U.S. Bank engages
in sampling discovery, it risks the expenditure of millions of dollars for no purpose.” (Letter
of Benjamin P. Smith dated June 18, at 2 n.1.)
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 8 of 13
Bank implicitly concedes that sampling potentially can be relevant and viable admissible
proof. 7 Even accepting the implicit concession for argument’s sake, however, Royal Park
overlooks the applicable standard for discovery; that is, that the discovery pursued is
relevant and proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1).
Every judge in this district to have considered the issue to date has found sampling
discovery unwarranted in cases against trustees. The reasoning of those decisions is
sound. Accordingly, the relevance of sampling evidence to prove the investors’ claims
against the trustee is slim to none, while the burdens remain high, again leading to the
conclusion that sampling discovery should not be pursued in this case. See Royal Park
Investments SA/NV v. Deutsche Bank National Trust Co., No. 14 Civ. 4394, 2018 WL
1088020, at *8 (S.D.N.Y. Feb. 12, 2018) (“[P]roportionality and relevance are conjoined
concepts; the greater the relevance of the information in issue, the less likely its discovery
will be found to be disproportionate, and vice versa.”) (internal quotation marks omitted)
(quoting Vaigasi v. Solow Management Corp., No. 11 Civ. 5088, 2016 WL 616386, at *14
(S.D.N.Y. Feb. 16, 2016)). In short, the fact that the sampling discovery issue comes
before the Court on the Defendant’s motion for protective order, rather than Plaintiff’s
motion to pursue sampling, is of no consequence to the issue at hand.
Oral argument of the motion also elucidated a potential substantive difference
between this case and the other trustee cases, or at least a material feature of Royal
Park’s proposed sampling that directly addresses half of the “trust-by-trust, loan-by-loan”
issue. Specifically, the sampling proposed by Royal Park in this case would draw a
See Transcript of Oral Argument dated April 23, 2018, at 36 (Royal Park attorney
arguing that U.S. Bank attorney “said, well, it’s too big a risk. And that’s precisely the
problem, it’s too big of a risk because it’s not so open and shut as they argue . . . .”).
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 9 of 13
separate sample of loans for each trust rather than a single sample from across all 21
trusts. 8 Those samples, taken together, would total 2,800 loans. 9 Reliance on this
potential point of difference, however, makes no difference to the final analysis. Even
with a “trust-by-trust” approach, sampling will not overcome the loan-by-loan rubric
imposed by the trust agreements and underscored in the Trustee Sampling Decisions.
Royal Park contends that sampling nevertheless is proportionate because of the
far larger number of loans it would expect to reunderwrite if sampling is not permitted. By
Royal Park’s estimate, it would need to reunderwrite more than 30,000 loans – more than
ten times the loans required for its preferred sampling regime. 10 U.S. Bank tenders a
number of reasons why it believes Royal Park’s 2,800 loan number is artificially low (such
as the sample sizes being too small) and why the 30,000 loan estimate is highly
exaggerated (such as because many of those loans would not be actionable due to
statute of limitations or other issues). 11
Regardless, and notwithstanding that the
monetary amount potentially at stake in this case is hundreds of millions of dollars,
spending millions of dollars, expending court resources and introducing additional expert
It is unclear from the previous Trustee Sampling Decisions whether the sampling
proposed by plaintiffs in those cases contemplated a single sample across multiple trusts
or a separate sample for each trust.
Letter of Darryl J. Alvarado dated June 11, 2018 (“6/11/18 Alvarado Letter”), at 1. More
specifically, a 100-loan sample would be drawn from each of fifteen trusts, while thirteen
100-loan samples would be drawn from the six other trusts that have non-overlapping
loan groups. (6/11/18 Alvarado Letter at 1.)
6/11/18 Alvarado Letter at 2.
Letter of Benjamin P. Smith dated June 18, 2018, at 2-4. For purposes of this opinion,
U.S. Bank’s arguments about under or over estimating the number of loans are not a
factor influencing the Court’s decision.
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subject matter, all to conduct sampling discovery with even as few as 2,800 loans, is not
proportionate to the needs of the case when every court to address the issue has
concluded sampling is not viable proof against trustees.
Royal Park says that a third difference in this case makes all the difference when
combined with the fact that separate samples will be drawn from each trust. In the other
Trustee Sampling Decision cases, as here, the plaintiff proposed using sampling to
establish both liability and damages. Unlike in this case, however, the plaintiffs in those
cases purportedly sought to use sampling to prove two important liability prongs: both
discovery of materially breaching loans or events of default and the fact of material breach
or default. Breaching loan and event of default refer to the events giving rise to the
trustee’s obligation to act. Discovery refers to when that obligation arises – that is, when
the trustee discovers a breaching loan or event of default.
The sampling dispute in the other cases has, to some extent, focused on the
discovery prong – that is, whether sampling can be used to show that the trustee
“discovered” breaching loans, and, to complicate matters further, whether discovery can
be constructive or some other variant that would avoid the need to demonstrate actual
discovery with respect to any particular loan. 12 Here, however, Royal Park represents
that it will not use sampling as evidence of U.S. Bank’s discovery of breaching loans.
Instead, Royal Park plans to demonstrate discovery “through direct and circumstantial
evidence unrelated to sampling.” 13
See, e.g., Wells Fargo I, 2017 WL 953550, at * 7-8; HSBC I, 2017 WL 945099, at * 6-
Letter of Darryl J. Alvarado dated May 22, 2018 (“5/22/18 Alvarado Letter”), at 1.
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 11 of 13
Royal Park states that, with respect to liability, it will use sampling to prove only
“the scope of breaches” that U.S. Bank would have uncovered had it carried out its duties
triggered by discovery or notice. 14 In other words, Royal Park intends to use sampling in
the same way it has been used in other cases in which sampling has been used to
demonstrate the extent of materially breaching loans within a given trust. As Royal Park
points out, even U.S. Bank, acting as trustee in another case, advocated for use of
sampling to demonstrate the extent of breaching loans, “a practice which the court then
Royal Park’s pledge to prove discovery by means other than sampling removes
one of the issues that call into question the relevance and proportionality of sampling in
this case. That, however, does not cure the problem. While sampling has been accepted
in some cases to prove rates of materially breaching loans, those cases, as explained
earlier, were against sponsors or issuers of the securities who had a direct relationship to
the mortgages underlying them. U.S. Bank, as trustee, stands in different shoes subject
to trustee-specific contractual terms.
As has been consistently held to date, that
contractual language dictates a “loan-by-loan” analysis, a standard that cannot be met
with sampling. The same problem extends to Royal Bank’s intended use of sampling to
prove damages. As U.S. Bank explained at oral argument, there are relevant questions
5/22/18 Alvarado Letter at 1.
5/22/18 Alvarado Letter at 2 (first citing Home Equity Mortgage Trust Series 2006-1 v.
DLJ Mortgage Capital, Inc., Index No. 156016/2012 (N.Y. Sup. Ct. Nov. 18, 2013); then
citing Deutsche Bank National Trust Co. v. Morgan Stanley Mortgage Capital Holdings
LLC, No. 14 Civ. 3020, 2018 WL 583116, at *6 (S.D.N.Y. Jan. 25, 2018) (permitting
plaintiff-trustee to use loan sampling).
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that sampling cannot answer. 16 For instance, with respect to each breaching loan, Royal
Park would need to establish which entity originated the loan and whether that entity was
solvent at the time that U.S. Bank would have demanded that the originator repurchase
the loan. Sampling cannot answer those questions.
In sum, while this case may differ in certain respects from other cases against
trustee defendants, those differences do not warrant a different outcome. Samplingrelated discovery is not proportional to the needs of this case.
Royal Park is free to spend time and resources on efforts it believes will further its
However, given the extremely low likelihood that sampling evidence will be
permitted in this case, and given the burdens imposed, it is not proportionate to the needs
of the case for Royal Park to pursue sampling-related discovery. Defendant’s motion for
a protective order is GRANTED. 17
See Transcript of Oral Argument dated May 3, 2018 at 5, 12-13, 17-18, 21-22.
To be clear, as with the opinions issued by the Magistrate Judge in HSBC I and Wells
Fargo I, this Memorandum and Order addresses only, and is limited to, a discovery issue
within this Court’s discretion. See HSBC I, 2017 WL 945099, at *4; Wells Fargo I, 2017
WL 953550, at *4. Royal Park questions the practical effect of this qualification: if the
parties cannot adduce sampling evidence during discovery, then they will have no
opportunity to submit sampling evidence in the (unlikely) event Royal Park were to prevail
on the issue at a future juncture. Not so. For example, if this decision stands but on
appeal the Second Circuit were to reverse on the sampling issue, Royal Park could seek
on remand to reopen discovery for purposes of developing sampling evidence.
Case 1:14-cv-02590-VM-RWL Document 391 Filed 07/09/18 Page 13 of 13
ROBERT W. LEHRBURGER
UNITED STATES MAGISTRATE JUDGE
July 9, 2018
New York, New York
Copies transmitted to all counsel of record.
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