Royal Park Investments SA/NV v. Deutsche Bank National Trust Company

Filing 100

MEMORANDUM AND ORDER. For the reasons in this Memorandum and Order, Defendant's motion is granted in part and denied in part. Plaintiff has withdrawn its TIA claim and its derivative claims are dismissed with prejudice. The remaining claims rema in in the case. A case management conference will be scheduled by separate order. Per the Court's April 10, 2015 Order, the parties shall submit a letter regarding settlement within three weeks of the date of this decision. See Dkt. No. 63. This resolves Dkt. No. 54. So ordered. Granting in part and denying in part 54 Motion to Dismiss. (Signed by Judge Alison J. Nathan on 4/3/2016) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

I

USDCSDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#:_.- - - - - - - DATE FILED:fJB 0 3 ZQl 6.

Royal Park Investments SA/NV,
Plaintiff,

14-CV-4394 (AJN)

-vMEMORANDUM AND
ORDER

Deutsche Bank National Trust Company,
Defendant.

ALISON J. NATHAN, District Judge:
On June 18, 2014, Royal Park Investments SA/NV ("Plaintiff') filed the above-captioned
action against Deutsche Bank National Trust Company ("Defendant") relating to ten residential
mortgage-backed securities ("RMBS") trusts for which Defendant serves as Trustee. See Dkt.
No. 1 ("Comp."). Plaintiff alleges violation of the Trust Indenture Act of 1939 ("TIA") and also
brings breach of contract and breach of trust claims. See id.

if 4. On March 2, 2015, Defendant

moved to dismiss the complaint. See Dkt. No. 54. For the reasons articulated below,
Defendant's motion to dismiss is granted in part and denied in part.
I.

LEGAL STANDARD
For a complaint to survive a motion to dismiss under Federal Rule of Civil Procedure

12(b)(6), it "must contain sufficient factual matter, accepted as true, to 'state a claim to relief that
is plausible on its face."' Aschrofl v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell At!. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). "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." Id. Insufficient are "[t]hreadbare recitals of the elements of a cause
of action, supported by mere conclusory statements." Id. For the purpose of evaluating a motion

1

to dismiss under Rule 12(b)( 6), the Court "accept[ s] as true all factual allegations in the
complaint, and draw[s] all reasonable inferences in the plaintiffs favor." Barrows v. Burwell,
777 F.3d 106, 111 (2d Cir. 2015). However, the Court is "not bound to accept as true a legal
conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S.
at 555).
In addition to the pleadings, a court evaluating a Rule 12(b)( 6) motion to dismiss "may
consider ... documents attached to the complaint as exhibits[] and documents incorporated by
reference in the complaint." DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010)
(citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)). A court may also
consider a document not incorporated by reference "where the complaint 'relies heavily upon its
terms and effect,' thereby rendering the document 'integral' to the complaint." Id. (quoting

Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006)). As a result, the Court may
consider the Pooling and Servicing Agreements ("PSAs") of the ten relevant trusts. If the PSAs
"contradict[] allegations in the complaint, the document, not the allegations, control, and the
court need not accept the allegations in the complaint as true." TufAmerica, Inc. v. Diamond, 968
F. Supp. 2d 588, 592 (S.D.N.Y. 2013) (quoting Poindexter v. EM! Record Grp. Inc., No. 11-CV559 (LTS), 2012 WL 1027639, at *2 (S.D.N.Y. Mar. 27, 2012)).

II.

FACTUAL BACKGROUND
The dispute in the above-captioned action concerns residential mortgage-backed

securities ("RMBS") trusts. As the name suggests, securities contained within an RMBS trust
derive from residential real estate financing. In connection with purchasing a home, an
individual may borrow money from a bank in the form of a mortgage loan. Comp. i! 36.
Institutional entities ("Sellers" or "Originators") group these mortgage loans into large pools and

2

sell them to other entities ("Depositors"). Id.

if 37.

Thereafter, a Depositor transfers the pool of

mortgage loans to a Trustee, who assumes certain rights and obligations to enforce the terms of
the sale. Id.

if 39.

In return, the Trustee transfers RMBS "certificates" to the Depositor. Id. The

Depositor then sells these certificates to "Certificateholders," who retain legal title of the
certificates but sell beneficial ownership rights to investors, called "Certificate Owners." Id.

if

40, 46; Dkt. No. 55 ("Br.") at 6; Beneficial Owner, Black's Law Dictionary (10th ed. 2014).
Certificate Owners have the right to a share of profits generated by the mortgage loans. Comp. if
42.
Pooling and Servicing Agreements ("PSAs") between the Seller, Depositor, Trustee, and
other interested parties govern the sale of a pool of mortgage loans. Id.

ilil 5, 37-38.

In the PSA,

the Seller or Originator makes representations and warranties ("R&Ws") concerning the quality
of mortgage loans in the pool and agrees to cure, substitute, or repurchase any individual loans
that fail to comply with these R&Ws. Id.

if 38.

The PSA also describes the obligations of the

Trustee, the Depositor, and any other parties to the agreement. Id.
Plaintiff, a Certificate Owner in ten RMBS trusts and a third-party beneficiary of their
PS As, claims that Defendant, the Trustee of the ten RMBS trusts, violated its contractual duties
under the PSAs, including its duty to enforce the Sellers' obligation to substitute or repurchase
mortgage loans breaching the R&Ws. Id.

ilil 47, 49-50.

Additionally, Plaintiff claims that

Defendant violated its common law duty to avoid conflicts of interest. Id.
claims that Defendant violated duties imposed by the TIA. Id.
brings derivative claims on behalf of the Trusts. Id.
sufficiency of each claim in tum.

3

ilil 62, 66.

ilil 195-199.

if 61.

Plaintiff further

Alternatively, Plaintiff

The Court will address the

III.

BREACH OF CONTRACT
Defendant's contractual obligations fall into two categories: (1) obligations prior to an

"Event of Default"; and (2) obligations after an "Event ofDefault." 1 See Comp. iii! 207-210;
Dkt. No. 56 Ex. A ("FFML 2006-FF9 PSA") § 8.01. Prior to an "Event of Default," Plaintiff
alleges that Defendant has a limited obligation to enforce breaches of a Seller's R&W s by
requiring the Seller to substitute or repurchase defective or noncompliant loans. Comp. if 207(a).
After an "Event of Default," Plaintiff alleges that Defendant has a broader obligation to act as a
"reasonable, prudent person" to protect the interests of the Plaintiff. Id.

if 207(e).

In its motion

to dismiss, Defendant first argues that Plaintiff lacks standing to enforce these contractual
obligations. Second, Defendant argues that Plaintiff has failed to plead a breach of pre-Event of
Default obligations. Third, Defendant argues that Plaintiff has failed to plead a breach of postEvent of Default obligations.

A. Standing
Defendant makes two arguments that Plaintiff lacks standing. First, it argues that
"negating clauses" in three PSAs prevent Plaintiff, a third-party beneficiary of the PSAs, from
suing to enforce those agreements. Br. at 13. Second, Defendant argues that "no action" clauses
in all ten PSAs prohibit Plaintiff from suing without meeting certain conditions that are not met
here. Id. at 37.

The Court finds neither of these arguments persuasive.

1. The negating clauses do not bar Plaintiff's suit

Defendant first argues that Plaintiff, a beneficial owner ofRMBS certificates, lacks
standing to enforce the PSAs for three Trusts, HVMLT 2006-8, NHEL 2006-4, and SVHE 2007-

1
An Event of Default occurs 30 days "after the date on which written notice of[] failure [to perform contractual
duties], requiring the same to be remedied, shall have been given to the[] Servicer by the Trustee or ... by the
holders of Certificates evidencing at least 25.00% of the Voting Rights." See, e.g., FFML 2006-FF9 PSA § 9.06(b).

4

NS 1, because those PSAs contain negating clauses barring enforcement by third-party
beneficiaries. See Br. at 13-15; Dkt. No. 56 Ex E ("HVMLT 2006-8 PSA") § 12.10; Dkt. No. 56
Ex. J ("NHEL 2006-4 PSA") § 12.10; Dkt. No. 56 Ex. L ("SVHE 2007-NSl PSA") § 11.10.
Plaintiff counters that it has been authorized by the Certificateholder CEDE & Co. to bring suit
on its behalf. See Opp. Br. at 7; Dkt. No. 65 Ex. 11 at 3 ("CEDE & Co .... hereby authorizes ..
. [Plaintiff] to take any and all actions and exercise any and all rights ... that CEDE & Co .... is
entitled to take.").
Beneficial owners may "obtain[] ... permission to sue from the registered holder" even if
a negating clause would ordinarily bar such a suit. Allan Applestein TTEE FBO D. CA. v.

Province ofBuenos Aires, 415 F.3d 242, 245 (2d Cir. 2005). Defendant argues that a beneficial
owner can only obtain such permission if specifically authorized by the contract to do so. Reply
Br. at 6. However, "[u ]nder New York law, contracts are freely assignable absent language
which expressly prohibits assignment." In re Stralem, 758 N.Y.S.2d 345, 347 (App. Div. 2003)

(citingAllhusen v. Caristo Constr. Corp., 103 N.E. 2d 891, 892 (N.Y. 1952)). For this reason,
"[a] beneficial owner who lacks standing [to enforce a PSA] may receive authorization to sue
from the registered Holder," even if the PSA does not specifically provide for such authorization.

See Royal Park Investments SA/NV v. HSBC Bank USA, Nat. Ass 'n, 109 F. Supp. 3d 587, 607 &
n.111 (S.D.N.Y. 2015) ("HSBC'). As a result, Plaintiff is authorized to bring suit to enforce the
terms of the PSA.

2. The no action clauses do not bar Plaintiff's suit
Defendant further argues that Plaintiff fails to satisfy the requirements of the no action
clauses in all ten PSAs, which prohibit suing to enforce the PSA unless certain conditions are
met. Br. at 37. To properly initiate suit, a party must (1) provide "written notice of an Event of

5

Default" to the Trustee; and (2) have at least 25% of Certificateholders make a "written request
to the Trustee to initiate such action." See, e.g., FFML 2006-FF9 PSA § 12.08.
In Cruden v. Bank ofNew York, the Second Circuit held that a virtually identical no
action clause was not enforceable against a Trustee such as Defendant. See 957 F.2d 961, 968
(2d Cir. 1992). ("[T]he 'no action' clause applie[s] only to debenture holder suits against [the
issuer], not the Indenture Trustees."). Defendant argues that Cruden only bars enforcement of
the pre-suit demand requirement and not the written notice requirement. Br. at 37. In support of
this position, Defendant points to language in Cruden where the Second Circuit explains that "it
would be absurd to ... ask the Trustee to sue itself." Cruden, 957 F.2d at 968. Citing this
language and severability clauses in the PSAs, Defendant argues that Plaintiff should still be
required to comply with the written notice requirement. However, Cruden's holding was not
limited to the pre-suit demand provision; the Second Circuit held that the entire no action clause,
which included both a pre-suit demand requirement and a written notice requirement, did not
apply to the Trustee in that case. Id. In light of this holding, Defendant points to no authority
distinguishing Cruden and permitting it to sever the two subdivisions of the no action clause. In
fact, other courts to consider Defendant's argument on this point have rejected it. See HSBC,
109 F. Supp. 3d at 606; Sterling Fed. Bank, F.S.B. v. DLJ Mortg. Capital, Inc., No. 09-CV-6904
(JFG), 2010 WL 3324705, at *4 (N.D. Ill. Aug. 20, 2010). As a result, compliance with the noaction clause is excused and Plaintiff does not lack standing on this ground.
Because Plaintiff has standing to bring a breach of contract action under the PSAs, the
Court turns to Defendant's substantive challenge to Plaintiffs breach of contract allegations.

6

B. Breach of Pre-Event of Default Obligations
Plaintiff alleges that Defendant breached its obligation to require a Seller to substitute or
repurchase loans that did not comply with the Seller's R&Ws. Comp. i!il 207(a), 208. Defendant
counters that it had no such duty under the terms of the PSAs. Defendant further argues that
Plaintiff has not adequately alleged that any mortgage loans in the Trusts did not comply with
any Seller's R&Ws. Finally, Defendant argues that Plaintiff has failed to allege that Defendant
had actual knowledge that mortgage loans did not comply with a Seller's R&Ws. The Court will
address each of these arguments in turn.
1. All ten PSAs obligate Defendant to require Sellers to repurchase or

substitute defective loans
Plaintiff claims that Defendant, upon discovering that mortgage loans did not conform
with a Seller's R&Ws, had an obligation to require the Seller to substitute or repurchase
defective loans (an obligation referred to by the parties as a duty to "enforce breaches of
R&Ws"). Comp. if 207(a). Defendant argues it had no such obligation under seven of the PSAs
at issue here. Br. at 24-25. As described below, the Court has evaluated the language of each
PSA and finds Defendant's argument unpersuasive.

a. The SAST 2006-2 PSA imposes a duty to enforce breaches ofR&Ws
Defendant does not contest that§ 2.3(d) of the SAST 2006-2 Trust PSA grants it the right
to enforce breaches ofR&Ws, see Dkt. No. 65 Ex. 8 ("SAST 2006-2 PSA"), but argues that it
has no obligation to do so. Plaintiff responds by pointing to§ 2.5 of the PSA, which provides
that "[t]he Trustee agrees to ... exercise the rights referred to above for the benefit of ...
Holders of the Certificates and to perform the duties set forth in this Agreement to the best of its
ability, to the end that the interests of the Holders of the Certificates may be adequately and

7

effectively protected." Id. Citing to the New York Court of Appeals case Coley v. Cohen,
Defendant argues that this language does not create an obligation to enforce R&W s because §
2.5 is "separate and distinct ... and with no direct and evident contextual connection" to §
2.3(d). Br. at 25 (quoting Coley, 45 N.E.2d 913, 914-15 (N.Y. 1942)).
Defendant's interpretation is unavailing. Unlike the provision at issue in Coley, there is a
"direct and evident contextual connection" between§ 2.5 and§ 2.3 of the SAST 2006-2 PSA.
Section 2.5 incorporates "rights referred to above" in defining the scope of the Trustee's
obligations. Because§ 2.4 does not describe any rights of the Trustee, it cannot be the source of
rights referenced by§ 2.5. Section 2.3, and§ 2.3(d) in particular, however, describes the various
rights assigned to the Trustee by the Depositor. As a result, § 2.5 must incorporate the rights
articulated in§ 2.3. Under§ 2.5 of the PSA, then, Defendant has an obligation to "exercise [its]
rights" to enforce the substitution and repurchasing remedies described in section 2.3(d) "for the
benefit of all present and future Holders of Certificates ... to the best of its ability, to the end
that the interests of the Holders of the Certificates may be adequately and effectively protected."
SAST 2006-2 PSA § 2.5. This creates an obligation to enforce breaches of R&Ws of which
Defendant has knowledge.

b. The HASC 2007-WFl and FFML 2006-FF9 PSAs impose a duty to
enforce breaches of R&Ws
With respect to the HASC 2007-WFI and FFML 2006-FF9 Trusts, Defendant argues that
it only has an obligation to enforce breaches ofR&Ws when it receives notice of a breach from
another party. Br. at 26. In support of its position, Defendant cites§ 2.03(d) of the almost
identical PSAs governing these two trusts, which provides that the Trustee "shall give notice of
[] breach to the Originator and request the Originator to substitute ... or to repurchase" loans if it

8

"receives notice of a breach ... of any of the representations and warranties." See Dkt. No. 56
Ex. D ("HASC 2007-WFl PSA") § 2.03(d); see also FFML 2006-FF9 PSA § 2.03(d). Plaintiff
counters§ 2.03(d) does not require that notice of breach come from another party ifDefendant is
the party who discovers the breach. Opp. Br. at 30 n. 34.
Again, Defendant's proposed interpretation is unpersuasive. Section 2.03(k) of the PSAs
provides that "[u ]pan the discovery by ... the Trustee [or any other party] ... of a breach of any .
. . representations and warranties ... , the party discovering the breach shall give prompt written
notice to the others." See HASC 2007-WFl PSA § 2.03(k); FFML 2006-FF9 PSA § 2.03(k).
The reference in§ 2.03(d) to receipt of "notice of a breach" reflects the parties' § 2.03(k)
obligation to notify each other upon discovering a breach. However, § 2.03(k) also contemplates
that Defendant could independently discover a breach. See, e.g., HASC 2007-WFl PSA §
2.03(k) (referencing "discovery by ... the Trustee" of breach). Reading § 2.03(d) in conjunction
with§ 2.03(k), Defendant's obligation to enforce breaches of R&Ws upon receipt of "notice"
may be triggered both when it receives notice of breach from another party and when it
independently discovers such breach. See id.§ 2.03(d); § 2.03(k); see also Notice, Black's Law
Dictionary (10th ed. 2014) ("A person has notice of a fact ... if that person ... has actual
knowledge of it [or] has received information about it."). Plaintiffs allegation that Defendant
had actual knowledge of a breach, discussed at length below, is thus sufficient to trigger
Defendant's duty to enforce breaches of the R&Ws under§ 2.03(d) of these PSAs.

c. The GSR 2007-AR2 PSA imposes a duty to enforce breaches of R&Ws
With respect to the GSR 2007-AR2 Trust, Defendant argues that the "Securities
Administrator," not the Trustee, has the obligation to enforce breaches of R&Ws. Br. at 26.

9

This argument is contradicted by the plain language of multiple provisions of the PSA that
explicitly require the Trustee to enforce breaches of R&Ws. 2

d. The MSAC 2007-NC2, MSAC 2007-NC3, and MISX 2006-1 PSAs impose
a duty to enforce breaches of R&Ws
Finally, with respect to the MSAC 2007-NC2, MSAC 2007-NC3, and MISX 2006-1
Trusts, Defendant argues that it has an obligation to enforce breaches ofR&Ws only if directed
to do so by the Depositor. Br. at 26. To support its argument, Defendant points to§ 2.07,
creating an obligation to enforce breaches of R&Ws "if the Trustee has received written notice
from the Depositor directing the Trustee to pursue such remedies." See, e.g., Dkt. No. 56 Ex. F
("MSAC 2007-NC2 PSA") § 2.07.
Plaintiff counters that the prevention doctrine precludes enforcement of this requirement.
The portion of§ 2.07 immediately preceding that cited by Defendant provides that "[u]pon
discovery by any of the parties hereto of a breach of a representation or warranty .. ., the party
discovering such breach shall give prompt written notice thereof to the other parties to this
Agreement." Id. Plaintiff argues that Defendant, despite having discovered such breaches, did
not provide the requisite notice to other parties. Comp. ii 10. As a result, the argument goes,
Defendant cannot claim that it was not "direct[ ed] ... to pursue such remedies," see § 2.07, by a
party to whom it failed to give the required notice. In sum, Plaintiff argues that the Defendant
cannot rely on the Depositor's failure to direct it to act when Defendant did not inform Depositor
of the need to act.

2
See Dkt. No. 65 Ex. 10 ("GSR 2007-AR2 PSA") § 2.03(a) ("[Up]pon discovery by ... the Trustee of any breach
by any Servicer or any representation, warranty, or covenant, ... the party discovering such breach shall give
prompt written notice thereof to the other applicable parties .... The Trustee shall enforce such Servicer's obligation
under such Servicing Agreement to purchase such Mortgage Loan from the Trustee.");§ 2.03(b) "[T]he Trustee[]
shall enforce the obligations of the Seller under the related Sale Agreement to cure such breach or to purchase the
Mortgage Loan from the Trust.").

10

As the Plaintiff notes, this quandary is contemplated by the prevention doctrine. Under
this doctrine, "a party may not insist upon performance of a condition precedent when its nonperformance has been caused by the party [it]self." Bank ofNY. v. Tyco Int'l Group, S.A., 545 F.
Supp. 2d 312, 324 n. 81 (S.D.N.Y. 2008) (quoting Lomaglio Assocs. Inc. v. LEK Mktg. Corp.,
892 F. Supp. 89, 93 (S.D.N.Y. 1995)). Under§ 2.07 of these PSAs, Defendant had an
affirmative duty to notify the Depositor of any discovery of breaches ofR&Ws. Assuming that
the Defendant did not provide the Depositor with notice of discovered breaches, see Comp. if 10,
the Depositor was unable to direct the Defendant to pursue any remedies. Defendant cannot
avoid liability by "insist[ing] upon" written notice from the Depositor when Defendant prevented
such notice from being sent. See Tyco Int 'l Group, 545 F. Supp. 2d at 324 n.81. As a result,
Defendant cannot disclaim its obligation to enforce breaches of R&W s with respect to these
Trusts.
2. Plaintiff need not allege breaches of R& W s on a "loan by loan" basis at this
stage
In addition to its arguments that the PS As do not impose a duty to enforce the Seller's
R&W s, Defendant argues that Plaintiff attacks the general quality of the pool of mortgage loans
rather than alleging breaches of R&WS on an individual "loan-by-loan" basis. Defendant
correctly notes that, to prevail on its claims, Plaintiff must demonstrate such breach on a "loanby-loan and trust-by-trust" basis. Ret. Bd. of the Policemen's Annuity & Benefit Fund of the City

of Chi. v. Bank ofNY. Mellon, 775 F.3d 154, 162 (2d Cir. 2014) ("PABF'). This, however, is
not a pleading standard. As courts in this district have recognized, "[a]t the pleading stage, [a]
plaintiffl:] cannot be required to identify breaches of representations and warranties with respect
to the individual loans in the specific trusts [as] such information, at this stage, is uniquely in the

11

possession of defendants." Fixed Income Shares: £Series M v. Citibank NA. ("Fixed Income
Shares"), No. 14-CV-9373 (JMF), 2015 WL 5244707, at *9 (S.D.N.Y. Sept. 8, 2015) (quoting
Policemen's Annuity and Benefit Fund of Chi. v. Bank ofAm., NA, 943 F. Supp. 2d 428, 442
(S.D.N.Y. 2013) ("Policemen 's/BofA II"), abrogated on other grounds by PABF, 775 F.3d 154).
Instead, Plaintiff need only "plead[] factual content that allows the court to draw the reasonable
inference" that there were breaches of the R&Ws with respect to specific loans. See id. (quoting
Iqbal, 556 U.S. at 678).
Here, Plaintiff has alleged "widespread lending misconduct" evidenced, in part, by
"historically unprecedented default rates." Comp. iii! 69, 71. For example, all but one of the
trusts at issue here had a default rate of more than 38%, and three trusts had default rates above
58%. Id. at 37. Plaintiff also points to staggering economic losses: In just a few years, the ten
trusts lost over $545 million dollars combined. Id.

ii 71.

In addition to high default rates and

large economic losses, Plaintiff includes in its Complaint an extensive timeline of civil lawsuits,
governmental investigations, and investigative journalism revealing pervasive problems in
RMBS securitization, including information specific to Defendant. See Comp. apps. 1, 2.
Plaintiffs detailed allegations of high default rates, staggering economic losses, and
widespread investigation into RMBS securitization are sufficient to "allow[] the court to draw
the reasonable inference" that R&Ws were breached on a loan-by-loan basis. Iqbal, 556 U.S. at
678; see also Phoenix Light SF Ltd. v. Bank ofNY. Mellon, No. 14-CV-10104 (VEC), 2015 WL
5710645, at *4 (S.D.N.Y. Sept. 29, 2015); HSBC, 109 F. Supp. 3d at 602. "Indeed, it would be
implausible to assume that somehow all of the mortgage loans underlying the [Trusts]
miraculously avoided the pervasive practices of the industry at the time." Fixed Income Shares,
2015 WL 5244707, at *10 (quoting Policemen's/BofA II, 943 F. Supp. 2d at 442) (internal

12

quotation marks omitted). As a result, Plaintiff has sufficiently alleged breaches of R&Ws to
survive Defendant's motion to dismiss on this ground.
3. Plaintiff adequately pleads Defendant's actual knowledge of defective loans
Defendant further argues that even Sellers breached their R&Ws (i.e., even if mortgage
loans did not comply with Sellers' R&Ws), Plaintiff does not adequately plead that Defendant
had actual knowledge of such breaches. Br. at 27. Without actual knowledge of non-conforming
loans, Defendant would have no obligation to require a Seller to substitute or repurchase the
defective loan. See, e.g., FFML 2006-FF9 PSA § 2.03(d).
The question at this stage "is not whether in fact the Trustee had actual knowledge-that
is a factual determination left for trial. Instead, the question is whether plaintiffs have pled
plausible facts supporting allegations of actual knowledge." HSBC, 109 F. Supp. 3d at 602-03
(quoting Policemen 's/BofA II, 943 F. Supp. 2d at 442-43) (emphasis and alterations omitted);
see also Fixed Income Shares, 2015 WL 5244707, at *10 ("Although none of these allegations
demonstrates [] knowledge of deficiencies with respect to any particular loan, they are sufficient
to meet [plaintiffs] burden at the motion-to-dismiss stage."). For that reason, cases cited by
Defendant about the standard for demonstrating actual knowledge at the summary judgment
stage are inapposite. See Br. at 30-31 (citing Fed. Hous. Fin. Agency v. HSBC N Am. Holdings
Inc., 33 F. Supp. 3d 455, 459, 480 (S.D.N.Y. 2014)). As explained above, Plaintiffs allegations
of high default rates, large economic losses, and widespread investigation into RMBS
securitization "allow[] the court to draw the reasonable inference" that Defendant had actual
knowledge of breaches ofR&Ws on a loan by loan basis. Iqbal, 556 U.S. at 678; see also
Phoenix Light, 2015 WL 5710645, at *4; Fixed Income Shares, 2015 WL 5244707, at *10;

13

HSBC, 109 F. Supp. 3d at 603. For this reason, Plaintiff has adequately pled Defendant's actual
knowledge of breaches.

C. Breach of Post-Event of Default Obligations
In addition to alleging that Defendant breached its limited obligation to enforce R&Ws,
Plaintiff further alleges that Defendant breached its obligation under the PSA to act as a prudent
person to protect investors' interests after an "Event of Default" had occurred. Comp. iii! 207(e),
210; see also FFML 2006-FF9 PSA § 8.01 ("In case a Master Servicer Event of Default has
occurred and remains uncured, the Trustee shall exercise such of the rights and powers vested in
it by this Agreement, and use the same degree of care and skill in their exercise as a prudent
person would exercise ... under the circumstances .... "). Defendant first argues that no Event
of Default, as that tennis defined in the PSAs, has occurred. Defendant further argues that
Plaintiff has not alleged Defendant's actual knowledge of an Event of Default. The Court will
address each of these arguments in tum.

1. Defendant's failure to provide the requisite written notice of breach did not
prevent an "Event of Default" from occurring
Under the PS As, an Event of Default occurs 30 days "after the date on which written
notice of ... failure [to perform contractual duties], requiring the same to be remedied, shall
have been given to the ... Servicer by the Trustee or ... by the holders of Certificates
evidencing at least 25.00% of the Voting Rights." See, e.g., FFML 2006-FF9 PSA § 9.06(b).
Thus, in order to trigger Defendant's obligation to "exercise ... [its] rights and powers ... [with]
the same degree of care and skill ... as a prudent person would exercise,'' see id.§ 8.01, the
Trustee or 25% of Certificateholders must provide written notice of breach to the Servicer.

14

Defendant argues that Plaintiff's failure to allege that such notice was provided precludes it from
stating a breach of contract claim related to its post-Event of Default obligations. Br. at 19.
Plaintiff counters this argument by again invoking the prevention doctrine. As noted
above, "a party may not insist upon performance of a condition precedent when its nonperformance has been caused by the party [it]self." Tyco Int'! Group, 545 F. Supp. at 324 n. 81
(quoting Lomaglio, 892 F. Supp. at 93). In other words, a party may not circumvent its
obligations by preventing the conditions in which it is obligated to act from occurring. Because
Defendant was one of two parties responsible for providing written notice to the Servicer upon
discovering a breach, Plaintiff argues, Defendant's failure to provide such notice despite
possessing the requisite knowledge excuses noncompliance with the condition. Opp. Br. at 1617. Defendant argues that the prevention doctrine does not apply first because it had no duty to
provide such notice and second because another party could have provided notice. Br. at 19;
Reply Br. at 7-8.
Several courts in this district have considered the arguments currently advanced by
Defendant. For example, the court in HSBC considered a very similar provision. 3 See HSBC,
109 F. Supp. 3d at 605 (Scheindlin, J.). As Judge Scheindlin pointed out, "[t]he implied
covenant of good faith and fair dealing requires a promisor to reasonably facilitate occurrence of
a condition precedent by either refraining from conduct which would prevent or hinder the
occurrence of the condition, or by taking positive action to cause its occurrence." Id. (citing

Caujf, Lippman & Co. v. Apogee Fin. Grp., Inc., 807 F. Supp. 1007, 1022 (S.D.N.Y. 1992)).
She further noted that the defendant in that case "took no steps to fulfill the condition, though it

3

Under§ 8.0l(b)(i) of that agreement, an Event of Default occurred 30 days "after the date on which written notice
of such failure, requiring the same to be remedied, shall have been given to the Master Servicer by the Depositor or
the Trustee or ... the Holders of Certificates entitled to at least ... 25%[] of the Voting Rights." See 14-CV-9366,
Dkt. No. 44 Ex. 9 at 3.

15

had the power and (plaintiffs allege) the knowledge to do so." Id. For this reason, Judge
Scheindlin held that the defendant's failure to provide written notice did not prevent the
occurrence of an Event of Default. Id.
Another court in this district considered a similar provision4 in Oklahoma Police Pension
& Ret. Sys. v. US. Bank Nat. Ass 'n, 291 F.R.D. 47 (S.D.N.Y. May 31, 2013) (Koeltl, J.),

abrogated on other grounds by PABF, 775 F.3d 154 (2d Cir. 2014). Like the provision at issue

here, the Oklahoma Police Pension PSA provided that written notice to trigger an Event of
Default could be provided by the Trustee or 25% of Certificateholders. Id. at 70. Judge Koetl
nevertheless held that a "trustee cannot rely on its own failure to give notice to escape its own
liability." Id.
Responding to these two cases, Defendant points to Millennium Partners, L.P. v. US.
Bank National Ass 'n, where the court held that "Plaintiffs [] d[id] not plead that the requisite

written notice was given to trigger an Event of Default," necessitating dismissal. No. 12-CV7581 (HB), 2013 WL 1655990, at *4 (S.D.N.Y. Apr. 17, 2013). The plaintiffs in that case did
not raise the prevention doctrine argument, see 12-CV-7581, Dkt. No. 20, at 16, and as a result,
this case is not helpful in evaluating Plaintiffs prevention doctrine claim here.
The Court finds the analysis in the cases cited by Plaintiff to be persuasive. Defendant
was one of only two parties authorized to provide written notice to the Servicer to trigger an
Event of Default. See FFML 2006-FF9 PSA § 9.06(b). Plaintiff alleges that Defendant had
actual knowledge of widespread improprieties on the part of Servicers that continued

4
Under that agreement, an Event of Default occurred if"[t]he Master Servicer fail[ed] to ... perform ... any other
material covenants and agreements ... and such failure continue[d] umemedied for a period of 60 days after the date
on which written notice of such failure ... shall have been given ... by the Trustee or ... by the Holders of
Certificates evidencing Fractional Undivided Interests aggregating not less than 25% of the Trust Fund." Oklahoma
Police Pension, 291 F.R.D. at 70.

16

unremedied, plausibly establishing a breach of the Master Servicers obligations under§ 9.06(b).
Comp. if 15. Defendant's failure to provide written notice despite its knowledge of the Master
Servicer' s default constitutes, at best, a violation of the implied covenant of good faith and fair
dealing, 5 which requires that the Defendant "refrain from hinder[ing] the occurrence of the"
Event of Default. HSBC, 109 F. Supp. 3d at 605 (citing Cauff, 807 F. Supp. at 1022). Because a
"trustee cannot rely on its own failure to give notice to escape its own liability," Defendant's
failure to provide written notice to the Servicer did not prevent an "Event of Default" from
occurring. Oklahoma Police Pension, 291 F.R.D. at 70; see also Phoenix Light, 2015 WL
5710645, at *5; HSBC, 109 F. Supp. 3d at 605.

2. Plaintiff adequately pleads Defendant's actual knowledge of Servicer default
Defendant's final argument on the breach of contract claim is that Plaintiff fails to plead
Defendant's actual knowledge of Servicer default. Br. at 20. As discussed at length above, the
question at the motion to dismiss stage "is not whether in fact the Trustee had actual
knowledge-that is a factual determination left for trial. Instead, the question is whether
plaintiffs have pled plausible facts supporting allegations of actual knowledge." HSBC, 109 F.
Supp. 3d at 602-03 (quoting Policemen 's/BofA II, 943 F. Supp. 2d at 442-43) (emphasis and
alterations omitted); see also Fixed Income Shares, 2015 WL 5244707, at *10. Plaintiff's
allegations of widespread RMBS abuse detailed above are sufficient to "allow[] the court to draw
the reasonable inference" that Defendant had knowledge of events which would trigger its duty
to provide notice and adequately plead the requisite knowledge. Iqbal, 556 U.S. at 678.

5

Although no court has definitively answered the question, it does not appear that the implied covenant of good
faith and fair dealing can be waived under New York law. See In Touch Concepts, Inc. v. Cellco P'ship, 788 F.3d
98, 102 (2d Cir. 2015); In Touch Concepts, Inc. v. Cellco P'ship, 949 F. Supp. 2d 447, 467 (S.D.N.Y. 2013).

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IV.

BREACH OF TRUST
In addition to its breach of contract claim, Plaintiff brings a common law breach of trust

claim predicated on a violation of the duty to avoid conflicts of interest. Comp. ifif 215-216.
Defendant argues that this claim is duplicative of Plaintiffs breach of contract claim.
Additionally, Defendant argues that Plaintiff fails to adequately allege a conflict of interest.
Neither of these arguments is persuasive.

A. Plaintiff's Breach of Trust Claim is Not Duplicative
Defendant argues that dismissal of Plaintiffs breach of trust tort claim is appropriate
because that claim is duplicative of Plaintiffs contract claim. Br. at 38-39. If "the basis of a
party's claim is a breach of solely contractual obligations, such that the plaintiff is merely
seeking to obtain the benefit of the contractual bargain through an action in tort, the claim is
precluded as duplicative." Bayerische Landesbank, NY. Branch v. Aladdin Capital Mgmt. LLC,
692 F.3d 42, 58 (2d Cir. 2012). However, "[w]here an independent tort duty is present, a
plaintiff may maintain both tort and contract claims arising out of the same allegedly wrongful
conduct." Id. Thus, whether Plaintiffs tort claim is duplicative turns on whether Plaintiffs
conflict of interest involves a contractual or extra-contractual duty. See Fixed Income Shares,
2015 WL 5244707, at *13.
"It is [] well-established under [New York] common law that the duties of an indenture

trustee are strictly defined and limited to the terms of the indenture, although the trustee must
nevertheless refrain from engaging in conflicts of interest." Elliott Assocs. v. J Henry Schroder

Bank & Trust Co., 838 F.2d 66, 71 (2d Cir. 1988) (citations omitted). For this reason, breach of
the duty to avoid conflicts of interest "may subject [a] trustee to tort liability" in addition to
contract liability. Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d

18

162, 192 (S.D.N.Y. 2011) (citing AG Capital Funding Partners, L.P. v State St. Bank & Trust
Co., 896 N.E. 2d 61, 68 (N.Y. 2008). This demonstrates that the duty to avoid conflicts of
interests is independent of contractual obligations under the terms of the PSA. As a result, the
allegation of a conflict of interest is not duplicative of the contract claim and the breach of trust
claim need not be dismissed on that ground. See Fixed Income Shares, 2015 WL 5244707, at
*13; HSBC, 109 F. Supp. 3d at 610.
B. Plaintiff Adequately Alleges a Conflict of Interest
Defendant further argues that Plaintiff has not adequately pied a conflict of interest.
Although Plaintiff pleads a number of conflicts of interest, see Comp. iii! 20-23, Plaintiff focuses
on the "ongoing and prospective business relationships with" its various counterparties related to
Defendant's role as a Seller of other mortgage loan pools. Id.

iJ 20. Plaintiff alleges that this

created a conflict because Defendant feared that requiring a Seller to substitute or repurchase
loans would cause those Sellers to retaliate by forcing Defendant to substitute or repurchase
loans it had sold. Id. This particular conflict of interest has previously been credited in this
district. See Fixed Income Shares, 2015 WL 5244707, at *13 ("Plaintiffs allege that Citibank
was 'economically beholden' to those sellers and servicers because it 'faced repurchase liability
for the sale and securitization of its own loans' if Citibank took action against them."); HSBC,
109 F. Supp. 3d at 610 (describing alleged conflict as Defendant's hope that its actions would
cause counterparties to "return the favor when the roles were reversed"). The alleged quid pro
quo system where Defendant turns a blind eye to breaches ofR&Ws in the hopes that
counterparties would later "return the favor," if true, would demonstrate that the Defendant
"received a[] benefit from its decision" not to act on the breaches of R&Ws, constituting a
conflict of interest. Ellington Credit Fund, 837 F. Supp. 2d at 193 (S.D.N.Y. 2011); HSBC, 109

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F. Supp. 3d at 610. As a result, this allegation is sufficient to "allow[] the court to draw the
reasonable inference" of a conflict of interest and adequately allege breach of trust. Iqbal, 556
U.S. at 678.

V.

TIA CLAIMS
In its complaint filed June 18, 2014, Plaintiff raises claims under the Trust Indenture Act

("TIA"). Dkt. No. 1. On December 23, 2014, the Second Circuit held that the TIA does not
apply to trusts governed by PSAs. See PABF, 775 F.3d at 169. In light of this development,
Plaintiff concedes that its TIA claims are not actionable and has withdrawn them. Opp. Br. at 51
n. 62. As a result, the Court denies Defendant's motion to dismiss the TIA claim as moot.

VI.

DERIVATIVE CLAIMS
As an alternative to the claims discussed above, Plaintiff brings a derivative action

against Defendant "in the right and for the benefit of the Covered Trusts to redress losses
suffered ... by the Covered Trusts." Comp. if 195. Defendant argues that the true nature of
Plaintiff's action is direct rather than derivative in nature.
The New York Appellate Division has adopted the test articulated by the Delaware
Supreme Court for distinguishing between derivative and direct actions. See Yudell v. Gilbert,
949 N.Y.S.2d 380, 381 (App. Div. 2012). Under that test, a court should look to "[w]ho suffered
the alleged harm---the corporation or the suing stockholder individually---and who would
receive the benefit of the recovery or other remedy" in determining whether an action is direct or
derivative. Tooley v. Donaldson, Lufkin &Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004);

Yudell, 949 N.Y.S.2d at 384. A district court is "bound ... to apply the law as interpreted by
New York's intermediate appellate courts ... unless [there is] persuasive evidence that the New
York Court of Appeals, which has not ruled on this issue, would reach a different conclusion."

20

Pahuta v. Massey-Ferguson, Inc., 170 F.3d 125, 134 (2d Cir. 1999). Plaintiff does not point to
and the Court does not see any reason why the Court of Appeals would reach a different
conclusion on this issue. As a result, the Tooley test governs the distinction between direct and
derivative actions under New York law. See HSBC, 109 F. Supp. 3d at 613.
Under the Tooley test, Plaintiff's claims are not derivative, because investors, not the
Trusts, suffered the alleged harm and would receive the benefit of recovery. In its opposition
brief, Plaintiff concedes that investors, not the Trust, are the injured party. See Opp. Br at 48
("[A]ny conduct by the trustee that violates the [PSA] necessarily harms all bondholders ...
through an increased risk of default and a corresponding reduction in the market value of the
bonds.") (internal quotation marks omitted). This is further demonstrated by the fact that the
R&Ws in question "inure to the benefit of Certificateholders," not the trusts. See, e.g., HVMLT
2006-8 PSA § 2.04. This makes clear that Certificateholders, not the Trust, suffered the alleged
harm. See HSBC, 109 F. Supp. 3d at 613-14.
Relatedly, Plaintiff admits that any recovery would "ultimately belong to those who have
a beneficial interest in" the trusts rather than the trusts themselves. Opp Br. at 48; see also Reply
Br. at 21 (recovery "would not belong to the Trusts because the Trusts themselves do not own
assets and because the Trusts are REMIC pass-through vehicles that cannot hold cash and would
merely pass on any cash received"); HSBC, 109 F. Supp. 3d at 614 (recovery "would simply pass
through the trusts" to investors). Because investors and not the trusts themselves "stand to
receive the benefit" of the lawsuit, the suit is direct rather than derivative in nature. HSBC, 109
F. Supp. 3d at 614. For these reasons, the Plaintiff's derivative claims are dismissed.

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VII.

CONCLUSION

For the foregoing reasons, Defendant's motion is granted in part and denied in part.
Plaintiff has withdrawn its TIA claim and its derivative claims are dismissed with prejudice. The
remaining claims remain in the case. A case management conference will be scheduled by
separate order. Per the Court's April 10, 2015 Order, the parties shall submit a letter regarding
settlement within three weeks of the date of this decision. See Dkt. No. 63.
This resolves Dkt. No. 54.

SO ORDERED.

Dated: February'} , 2016
New York, New York

United States District Judge

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