Royal Park Investments SA/NA v. HSBC Bank USA National Association

Filing 48

OPINION AND ORDER re: (15 in 1:14-cv-10101-SAS, 15 in 1:14-cv-10101-SAS) MOTION to Dismiss the Complaint. MOTION to Strike Document No. (1) as to Consequential Damages. filed by HSBC Bank USA, National Association, (42 in 1:14 -cv-09366-SAS, 42 in 1:14-cv-09366-SAS) MOTION to Dismiss the Complaint. MOTION to Strike Document No. (1) as to Consequential Damages. filed by HSBC Bank USA, (26 in 1:14-cv-08175-SAS, 26 in 1:14-cv-08175-SAS) MOTION to Di smiss the Complaint. MOTION to Strike Document No. (1) as to Consequential Damages. filed by HSBC Bank USA National Association. For the foregoing reasons, HSBC's motion to strike is DENIED. HSBC's motion to dismiss is GR ANTED in part and DENIED in part. Specifically, HSBC's motion to dismiss is GRANTED as to: (1) Phoenix Light's claims relating to Regulation AB; (2) Phoenix Light's claims relating to document obligations with the exception of the thre e trusts identified in footnote 120; (3) negligence claims; (4) negligent misrepresentation claims; (5) claims under section 315(a) of the TIA; and (6) all derivative claims. Further, plaintiffs must take steps to cure their lack of standing for the trusts containing Negating Clauses and provide a status update to the Court within thirty days of the date of this Order. The Clerk of the Court is directed to close this motion (Docket No. 26 in 14 Civ. 8175, Docket No. 42 in 14 Civ. 9366, Docket No. 15 in 14 Civ. 10101). A conference is scheduled for June 24, 2015 at 4:30 p.m. SO ORDERED. (See Order.) (Status Conference set for 6/24/2015 at 04:30 PM before Judge Shira A. Scheindlin.) (Signed by Judge Shira A. Scheindlin on 6/1/2015) (ajs)

fjusDCSDNY.
i

j :)OCUMENT

1 ELECTRONICALLY

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

DOC#: ______,.._~~

DATERLED: lp

Iil\?

ROY AL PARK INVESTMENTS SA/NV,
individually and on behalf of all others similarly
situated,
OPINION AND
ORDER

Plaintiffs,

14-cv-8175 (SAS)

- against HSBC BANK USA, NATIONAL ASSOCIATION,
as Trustee,
Defendant.

----------------------------------------------------------------)(
BLACKROCK BALANCED CAPITAL
PORTFOLIO (Fl), et al.,
Plain tiffs,
14-cv-9366 (SAS)
-againstHSBC BANK USA, NATIONAL ASSOCIATION,
Defendant.

----------------------------------------------------------------)(
PHOENI)( LIGHT SF LIMITED, et al.,
Plaintiffs,
-against-

14-cv-10101 (SAS)

HSBC BANK USA, NATIONAL ASSOCIATION,
Defendant.

----------------------------------------------------------------)(
1

FILED

SHIRA A. SCHEINDLIN, U.S.D.J.:
I.

INTRODUCTION
Plaintiffs in three related cases1 allege the failure of HSBC Bank

USA, National Association (“HSBC”) to discharge its duties as a trustee for
residential mortgage backed securities (“RMBS”) trusts, including trusts that issue
certificates and are governed by pooling and servicing agreements (“PSA Trusts”)
and Delaware statutory trusts that issue notes pursuant to Indentures (“Indenture
Trusts”). This Court previously determined that it has supplemental jurisdiction
over the BlackRock plaintiffs’ state law claims arising out of the PSA Trusts.2
HSBC now moves to dismiss all claims, and moves to strike plaintiffs’ demand for
consequential damages.3 For the following reasons, HSBC’s motion to dismiss is

1

Though the motion to dismiss addresses three Complaints, the same
arguments are also addressed to the Complaint in the National Credit Union
Adminsistration Board et al. v. HSBC Bank USA, N.A., No. 15 Civ. 2144
(“NCUA”) action. See 4/27/15 Letter from George A. Borden, Counsel to HSBC,
to the Court. HSBC has separately moved to dismiss the NCUA Complaint,
addressing only issues unique to that Complaint. That motion is not yet fully
submitted and is not addressed in this Opinion and Order.
2

See BlackRock Balanced Capital Portfolio v. HSBC Bank USA, Nat’l
Ass’n, No. 14 Civ. 9366, 2015 WL 1501283 (S.D.N.Y. Mar. 31, 2015).
3

See Memorandum in Support of HSBC Bank USA, N.A.’s Motion to
Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6) and Motion to Strike
Pursuant to Federal Rule of Civil Procedure 12(f) (“Def. Mem.”); 4/15/15 Letter
from Borden to the Court; 4/27/15 Letter from Borden to the Court.
2

granted in part and denied in part, and its motion to strike is denied.
II.

BACKGROUND4
Plaintiffs assert claims arising from HSBC’s role as trustee for two

hundred eighty-three trusts: two hundred seventy-one in BlackRock, three in Royal
Park, and eleven in Phoenix Light.5 Twenty-eight of the trusts are Indenture Trusts
that issued debt obligations, or notes. Indenture Trusts involve three agreements: a
trust agreement creating the Delaware statutory trust that issues the notes, an
indenture containing the terms of the notes (the “Indenture”); and a sales and
servicing agreement setting forth the servicing obligations as to the underlying
mortgage loans (the “SSA”). The remaining trusts (including all three trusts in the
Royal Park action) are PSA trusts that issued certificates, representing ownership
interests. The PSA Trusts are governed by the PSA itself, which governs the
terms of the certificates and the servicing of the loans.6 Both the PSAs and the

4

The facts below are taken from the Royal Park Investments SA/NV
Class Action Complaint and Alternative Verified Derivative Action (“RP
Compl.”), the BlackRock Balanced Capital Portfolio (FI) Verified Derivative
Complaint and Alternative Class Action (“BR Compl.”); and the Phoenix Light SF
Limited Complaint (“PL Compl.”).
5

Several of the trusts are at issue in multiple Complaints.

6

See Plaintiffs’ Joint Memorandum of Law in Opposition to
Defendant’s Motions to Dismiss Pursuant to Rule 12(b)(6) (“Opp. Mem.”) at 6.
3

Indentures provide that they are construed in accordance with New York law.7
Both the PSA Trusts and Indenture Trusts are species of RMBS
trusts.8 Investment bank entities called “Sponsors” and “Depositors” acquired the
loans generated by originators and pooled and conveyed them into the Trusts
(collectively, “Sellers”).9 The Master Servicers and their subservicers
(collectively, “Servicers”) service and administer the loans.10 The principal and
interest payments are passed through to plaintiffs and other beneficial
certificateholders and noteholders (“Holders”).11
The Sellers provide contractual representations and warranties to the
Trusts attesting to the completeness of the mortgage loan files and the credit
quality and characteristics of the loans and borrowers.12 The Sellers agree to cure,

7

See BR Compl. ¶ 212, PL Compl. ¶ 27.

8

See RP Compl. ¶ 37; BR Compl. ¶ 2; PL Compl. ¶¶ 4, 28.

9

See RP Compl. ¶ 38; BR Compl. ¶ 2; PL Compl. ¶¶ 29–30.

10

See RP Compl. ¶ 43; BR Compl. ¶ 2; PL Compl. ¶ 31.

11

See RP Compl. ¶ 43; BR Compl. ¶ 2; PL Compl. ¶¶ 33–34. The
RMBS are registered in “street name” to Cede & Co., as nominee for the
Depository Trust Company, a central securities depositary and clearing agency.
Cede & Co. has no beneficial interest in the RMBS or Trusts. See Opp. Mem. at 5
n.3.
12

See RP Compl. ¶¶ 48–51; BR Compl. ¶¶ 241–247; PL Compl. ¶¶ 35,

41, 45.
4

substitute, or repurchase mortgages that materially breach these representations and
warranties.13 Similarly, the Servicers agree to service the loans in accordance with
customary and usual standards.14
The Agreements impose limited, contractual duties on HSBC as
trustee. Except for an implied duty to avoid clear conflicts and perform its
ministerial duties with due care, the trustee’s obligations are strictly defined by the
terms of the Agreements.15 Upon the occurrence of a contractually defined Event
of Default, HSBC must exercise its rights and powers under the Agreements using
the same degree of care and skill as a prudent person would exercise under the
circumstances in the conduct of his or her own affairs.16
III.

STANDARD OF REVIEW
A.

Motion to Dismiss Under Rule 12(b)(6)
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court

must “accept[] all factual allegations in the complaint as true and draw[] all
reasonable inferences in the plaintiff’s favor.”17 The court evaluates the
13

See id.

14

See RP Compl. ¶¶ 53–54; BR Compl. ¶¶ 266–268; PL Compl. ¶ 13.

15

See RP Compl. ¶ 6; BR Compl. ¶ 213; PL Compl. ¶ 35.

16

See RP Compl. ¶ 57; BR Compl. ¶ 260; PL Compl. ¶ 49.

17

Grant v. County of Erie, 542 Fed. App’x 21, 23 (2d Cir. 2013).
5

sufficiency of the complaint under the “two-pronged approach” set forth by the
Supreme Court in Ashcroft v. Iqbal.18 Under the first prong, a court may “begin by
identifying pleadings that, because they are no more than conclusions, are not
entitled to the assumption of truth.”19 For example, “[t]hreadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not
suffice.”20 Under the second prong of Iqbal, “[w]hen there are well-pleaded factual
allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement for relief.”21 A claim is plausible “when the
plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”22 “The
plausibility standard is not akin to a probability requirement” because it requires
“more than a sheer possibility that a defendant has acted unlawfully.”23
When deciding a motion to dismiss, “a district court may consider the
facts alleged in the complaint, documents attached to the complaint as exhibits, and
18

See 556 U.S. 662, 678–79 (2009).

19

Id. at 679.

20

Id. at 678.

21

Id. at 679.

22

Id. at 678.

23

Id. (quotation marks omitted).
6

documents incorporated by reference in the complaint.”24 A court may also
consider a document that is not incorporated by reference “where the complaint
‘relies heavily upon its terms and effect,’ thereby rendering the document ‘integral’
to the complaint.”25 In an action under the Trust Indenture Act (“TIA”), a court
may refer to the Indenture and its exhibits.26
B.

Leave to Amend
Federal Rule of Civil Procedure 15(a)(2) provides that, other than

amendments as a matter of course, “a party may amend [its pleading] only by leave
of court or by written consent of the adverse party.”27 Although “[t]he Court
should freely give leave when justice so requires,”28 it is “within the sound
discretion of the district court to grant or deny leave to amend.”29 When a motion

24

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)).
25

Id. (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.

2006)).
26

See Field v. Trump, 850 F.2d 938, 949 (2d Cir. 1988).

27

Slayton v. American Express Co., 460 F.3d 215, 226 n.10 (2d Cir.
2006) (citation and quotation marks omitted).
28

Fed. R. Civ. P. 15(a)(2).

29

McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir.
2007) (citation omitted).
7

to dismiss is granted, “‘[i]t is the usual practice . . . to allow leave to replead.’”30
Where a plaintiff inadequately pleads a claim and cannot offer additional
substantive information to cure the deficient pleading, granting leave to replead is
futile.31
IV.

APPLICABLE LAW
A.

Breach of Contract
“Under New York law, the elements of a cause of action for breach of

contract are (1) the existence of a contract, (2) performance of the contract by one
party, (3) breach by the other party, and (4) damages suffered as a result of the
breach.”32 A plaintiff “is required only to provide defendants with a ‘short, plain
notice’ of the claims against them pursuant to Rule 8.”33 Nevertheless, the
complaint must provide “specific allegations” as to the contract’s parties, terms,
and breached provisions.34
30

Schindler v. French, 232 Fed. App’x 17, 19 (2d Cir. 2007) (quoting
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991)).
31

See Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000).

32

Beautiful Jewellers Private Ltd. v. Tiffany & Co., 438 Fed. App’x 20,
21–22 (2d Cir. 2011).
33

Diesel Props S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 52
(2d Cir. 2011) (citations omitted).
34

Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 651 F. Supp.
2d 155, 173 (S.D.N.Y. 2009) (citations omitted).
8

B.

Tort Claims
1.

Fiduciary Duty of an Indenture Trustee

“‘[U]nlike the ordinary trustee, who has historic common-law duties
imposed beyond those in the trust agreement, an indenture trustee is more like a
stakeholder whose duties and obligations are exclusively defined by the terms of
the indenture agreement.’”35 This is true regardless of whether the trust is an
indenture trust or a PSA.36 Prior to an Event of Default, an indenture trustee’s duty
is governed solely by the terms of the indenture, with two exceptions: a trustee
must still “(1) avoid conflicts of interest, and (2) perform all basic,
non-discretionary, ministerial tasks with due care.”37 “These two pre-default
obligations are not construed as ‘fiduciary duties,’ but as obligations whose breach

35

Bank of N.Y. v. Tyco Int’l Grp., S.A., 545 F. Supp. 2d 312, 324 n.79
(S.D.N.Y. 2008) (quoting Meckel v. Continental Res. Co., 758 F.2d 811, 816 (2d
Cir. 1985)). Accord AG Capital Funding Partners, L.P. v. State Street Bank &
Trust Co., 11 N.Y.3d 146, 157 (2008).
36

See Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v.
Countrywide Fin. Corp., 603 F.3d 23, 29 (2d Cir. 2010). See also Bank of N.Y.
Mellon v. Walnut Place LLC, 819 F. Supp. 2d 354, 364–65 & n.6 (S.D.N.Y. 2011).
37

Ellington Credit Fund, Ltd. v. Select Portfolio Servicing Inc., 837 F.
Supp. 2d 162, 191 (S.D.N.Y. 2011). Accord LNC Invs., Inc. v. First Fidelity Bank,
Nat’l Ass’n, 935 F. Supp. 1333, 1347 (S.D.N.Y. 1996).
9

may subject the trustee to ‘tort liability.’”38
Following a contractually defined “Event of Default,” the indenture
trustee’s obligations “‘come more closely to resemble those of an ordinary
fiduciary, regardless of any limitations or exculpatory provisions contained in the
indenture.’”39 Even after the Event of Default, “[t]he scope of the trustee’s
obligation . . . is still circumscribed by the indenture. . . . The trustee is not
required to act beyond his contractually conferred rights and powers.”40 However,
though the trustee’s obligations remain limited by the scope of the indenture, it
now “‘must, as prudence dictates, exercise those singularly conferred prerogatives
in order to secure the basic purpose of any trust indenture, the repayment of the
underlying obligation.’”41
“‘[T]he existence of a conflict of interest can not be inferred solely
from a relationship between an issuer and an indenture trustee that is mutually

38

Ellington Credit Fund, Ltd., 837 F. Supp. 2d at 192 (quoting AG
Capital Funding Partners, L.P., 11 N.Y.3d at 157) (emphasis in original).
39

BNP Paribas Mortg. Corp. v. Bank of America, N.A., 778 F. Supp. 2d
375, 401 (S.D.N.Y. 2011) (quoting Beck v. Manufacturers Hanover Trust Co., 632
N.Y.S. 2d 520, 527–28 (1st Dep’t 1995)).
40

Beck, 632 N.Y.S. 2d at 528.

41

Phillip v. Rothschild, No. 90 Civ. 0708, 2000 WL 1263554, at *5
(S.D.N.Y. Sept. 5, 2000) (quoting Beck, 632 N.Y.S.2d at 528).
10

beneficial and increasingly lucrative.’”42 In considering conflict of interest claims,
the Second Circuit has disregarded “bald assertions of conflict,” and has instead
required a showing that the trustee “personally benefitted” from the disputed
action.43 A trustee must have “‘an interest [in the entities in question] of such a
substantial nature that there would be a temptation to consider its own advantage in
making the sale and not to consider solely the advantage to the beneficiaries of the
trust.’”44 A fee arrangement expressly authorized by the trust’s governing
agreements generally cannot create a conflict of interest.45
2.

Duplicative Contract Claims

“It is well settled that ‘a simple breach of contract is not to be
considered a tort unless a legal duty independent of the contract itself has been
violated.’”46 However, “under New York law, parallel fraud and contract claims
42

CFIP Master Fund, Ltd. v. Citibank, N.A., 738 F. Supp. 2d 450, 475
(S.D.N.Y. 2010) (quoting Page Mill Asset Mgmt. v. Credit Suisse First Boston
Corp., No. 98 Civ. 6907, 2000 WL 877004, at *2 (S.D.N.Y. June 30, 2000)).
43

Elliott Assocs. v. J. Henry Schroder Bank & Trust Co., 838 F.2d 66,
70 (2d Cir. 1988).
44

In re Accounts of Separate Trusts, 81 A.D.3d 456 (1st Dep’t 2011)
(alterations in original) (quoting Restatement (Third) of Trusts § 170, cmt. (1)(i)).
45

See Restatement (Third) of Trusts § 78 cmt. c(2), c(4). See also id. §

38 cmt. e.
46

OP Solutions, Inc. v. Crowell & Moring, 900 N.Y.S.2d 48, 49 (1st
Dep’t 2010) (quoting Clark-Fitzpatrick, Inc. v. Long Island R.R., 521 N.Y.S.2d
11

may be brought if the plaintiff (1) demonstrates a legal duty separate from the duty
to perform under the contract; (2) points to a fraudulent misrepresentation that is
collateral or extraneous to the contract; or (3) seeks special damages that are
unrecoverable as contract damages.”47
3.

Economic Loss Doctrine

“Plaintiffs who enter into transactions that are of a contractual nature
— even if no contract exists — are limited to ‘the benefits of their bargains’ unless
they can show ‘a legal duty separate and apart from obligations bargained for and
subsumed within the transaction.’”48 This doctrine “serves two purposes: (1) it
protect[s] defendants from disproportionate, and potentially limitless, liability; and
(2) it disentangles contract and tort law by restricting plaintiffs who suffer
economic losses to the benefits of their bargains.”49 Therefore, deciding whether

653, 656 (1987)).
47

Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 183 (2d
Cir. 2007) (citing Bridgestone/Firestone Inc. v. Recovery Credit Servs., 98 F.3d 13,
20 (2d Cir. 1996)). Accord Clark-Fitzpatrick, Inc., 521 N.Y.S.2d at 656.
48

In re MF Global Holdings Ltd. Inv. Litig., 998 F. Supp. 2d 157, 185
(S.D.N.Y. 2014) (quoting King Cnty., Wash. v. IKB Deutsche Industriebank AG,
863 F. Supp. 2d 288, 304–05 (S.D.N.Y. 2012), amended in part, 2012 WL
11896326 (S.D.N.Y. Sept. 28, 2012). Accord Hydro Investors, Inc. v. Trafalgar
Power Inc., 227 F.3d 8, 18 (2d Cir. 2000).
49

King Cnty., Wash., 863 F. Supp. 2d at 302.
12

the doctrine applies encompasses a “focused duty analysis” that is a “policy-driven
scrutiny of whether a defendant had a duty to protect a plaintiff against purely
economic losses.”50 “The fact that the duty breached [] is independent of any
contract . . . does not allow evasion of the economic loss rule, which presents a
second, distinct barrier.”51 However, “in claims against professionals, ‘[a] legal
duty independent of contractual obligations may be imposed by law as an incident
to the parties’ relationship. Professionals . . . may be subject to tort liability for
failure to exercise reasonable care, irrespective of their contractual duties,’” and
irrespective of the economic loss doctrine.52
C.

Streit Act
Article 4A of the New York Real Property Law, or the “Streit Act”

was enacted to regulate “all mortgage investments” where: (i) all or part of the
underlying properties are located in the state, (ii) the trustee transacts business with
respect to the investments in New York, or (iii) the trustee is authorized to do

50

Id.

51

Manhattan Motorcars, Inc. v. Automobili Lamborghini, S.p.A., 244
F.R.D. 204, 220 (S.D.N.Y. 2007).
52

Hydro Investors, Inc., 227 F.3d at 18 (quoting 17 Vista Fee Assocs. v.
Teachers Ins. and Annuity Ass’n of America, 693 N.Y.S.2d 554, 560 (1st Dep’t
1999)).
13

business in the state.53 It dictates that “in the case of an event of default (as such
term is defined in such instrument),” the indenture trustee is obligated to “exercise
such of the rights and powers vested in the trustee by such instrument, and to use
the same degree of care and skill in their exercise as a prudent man would exercise
or use under the circumstances in the conduct of his own affairs.”54 The Streit Act
“does not apply to collateral trusts.”55 Rather, it applies only to direct investments
in real estate mortgages.56 Furthermore, any trust that is qualified with the
Securities and Exchange Commission (“SEC”) and to which the TIA applies is
exempt from the Streit Act.57
D.

The Trust Indenture Act
The TIA provides that instruments to which it applies must be issued

under an indenture that has been qualified by the SEC.58 The requirements of such
53

54

See N.Y. Real Prop. Law § 124.
Id. § 126(1).

55

Prudence Realization Corp. v. Atwell, 35 N.Y.S.2d 1001, 1005 (1st
Dep’t 1942), aff’d, 290 N.Y.597 (1943).
56

See id.

57

See N.Y. Real Prop. Law § 130-k.

58

See generally 15 U.S.C. §§ 77eee-77ggg. “A ‘trust indenture’ is a
contract entered into between a corporation issuing bonds or debentures and a
trustee for the holders of the bonds or debentures, which, in general, delineates the
rights of the holders and the issuer.” Upic & Co. v. Kinder-Care Learning Ctrs.,
14

indentures are “designed to vindicate a federal policy of protecting investors.”59
Because the interests of a PSA Trust are “‘certificate[s] of interest or participation
in two or more securities having substantially different rights and privileges,’
namely, the numerous mortgage loans held by each trust,” PSA Trusts are
exempted from the TIA and are instead governed by New York State law.60
Section 315 of the TIA sets out the duties and responsibilities of the
indenture trustee.61 Section 315(a) states the indenture trustee “shall not be liable
except for the performance of such duties as are specifically set out in such
indenture” and, with some exceptions, may accept as true the statements given to it
in certificates conforming with the Indenture.62 However, it also states a trustee
“shall examine the evidence furnished to it . . . to determine whether or not such

Inc., 793 F. Supp. 448, 450 (S.D.N.Y. 1992).
59

Bluebird Partners, L.P. v. First Fid. Bank, N.A. New Jersey, 85 F.3d
970, 974 (2d Cir. 1996) (explaining that the law was “enacted because previous
abuses by indenture trustees had adversely affected ‘the national public interest and
the interest of investors in notes, bonds[, and] debentures . . . .’”) (quoting 15
U.S.C. § 77bbb(a)).
60

Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the
City of Chicago v. Bank of New York Mellon, 775 F.3d 154, 166–70 (2d Cir. 2014)
(quoting 15 U.S.C. § 77ddd(a)(2)).
61

See 15 U.S.C. § 77ooo.

62

Id. § 77ooo(a).
15

evidence conforms to the requirements of the indenture.”63
Section 315(b) states that the “trustee shall give to the indenture
security holders . . . notice of all defaults known to the trustee, within ninety days
after the occurrence thereof.”64 However, “except in the case of default in the
payment of the principal of or interest on any indenture security” the trustee is
protected in withholding that information if the indenture trustee believes
withholding such notice is in the best interests of the Noteholders.65
Section 315(c) states that an indenture trustee is to “exercise in case of
default (as such term is defined in such indenture)” all of the powers available to it
under the indenture agreement, using “the same degree of care and skill in their
exercise, as a prudent man would exercise” in conducting his own affairs.66
Section 323(b) limits a plaintiff’s recovery to actual damages.67 In

63

Id. Accord Semi-Tech Litig., LLC v. Bankers Trust Co., 353 F. Supp.
2d 460, 474 (S.D.N.Y. 2005) (plain language of statute and legislative history
imply this is a separate duty).
64

15 U.S.C. § 77ooo(b).

65

Id.

66

Id. § 77ooo(c).

67

See id. § 77www(b) (“[N]o person permitted to maintain a suit for
damages under the provisions of this subchapter shall recover, through satisfaction
of judgment in one or more actions, a total amount in excess of his actual damages
on account of the act complained of.”).
16

general, courts have held this language to mean victorious plaintiffs would be
entitled “to recover only their out-of-pocket losses, or the difference between what
they paid for the certificates and what they received for them.”68
V.

DISCUSSION
A.

Sufficiency of Allegations (Contract Claims)
HSBC asserts that plaintiffs’ contract claims fail for numerous

reasons. With regard to plaintiffs’ claims relating to the Sellers’ breaches of
representations and warranties, HSBC argues that plaintiffs (1) fail to allege
specific breaches of representations and warranties; (2) fail to allege that HSBC
had actual knowledge of such breaches; and (3) fail to allege that HSBC had
enforcement obligations for all trusts. With regard to plaintiffs’ claims relating to
HSBC’s post-Event of Default duties, HSBC contends that plaintiffs (1) fail to
allege the occurrence of Events of Default, as defined in the various Agreements;
and (2) fail to allege HSBC’s responsible officers’ knowledge of such Events of
Default.
1.

Claims Relating to Sellers’ Breaches of Representations and
Warranties
a.

Allegations of Breaches of Representations and

68

LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 1997
WL 528283, at *34 (S.D.N.Y. Aug. 27, 1997) (citing Barr v. McGraw-Hill, Inc.,
710 F. Supp. 95, 98 (S.D.N.Y. 1989)).
17

Warranties
HSBC argues that the plaintiffs have failed to allege any “breaches of
specific representations and warranties made in connection with specific loans in
specific trusts.”69 The Second Circuit has required plaintiffs to prove their claim
“loan-by-loan and trust-by-trust.”70 Thus, according to HSBC, plaintiffs’ claims
fail because instead of alleging specific representations and warranties in
connection with specific loans that were breached, plaintiffs instead “detail . . .
systemic and widespread breaches.”71
In Retirement Board of the Policemen’s Annuity and Benefit Fund of
the City of Chicago v. Bank of New York Mellon, the Second Circuit held that
named plaintiffs in a putative class action did not have standing to assert claims on
behalf of absent class members relating to trusts in which the named plaintiff had
not invested. The test for class standing includes asking whether the trustee’s
conduct “‘implicate[d] the same set of concerns’ as [the trustee’s] alleged failure to

69

Def. Mem. at 14.

70

Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the
City of Chicago, 775 F.3d at 162.
71

Opp. Mem. at 12. However, Royal Park plaintiffs have alleged
specific examples of loans within the trusts with breaches of representations and
warranties and provided specific representations and warranties that were
breached. See RP Compl. ¶¶ 95–104.
18

take action with respect to defaults in other trusts in which Plaintiffs did not
invest.”72 The court noted that the trustee’s alleged misconduct would need to be
proved “loan-by-loan and trust-by-trust,” which would require “examining its
conduct with respect to each trust.”73 Thus, “even proof that [the trustee] always
failed to act when it was required to do so would not prove [plaintiffs’] case,
because they would still have to show which trusts actually had deficiencies that
required [the trustee] to act in the first place.”74 Because of the “significant
differences in the proof that will be offered for each trust,” the court held that
plaintiffs did not have the “necessary stake in litigating” claims related to trusts in
which they did not invest.75 The court therefore concluded that the plaintiffs’
claims did not implicate the “same set of concerns” as those of absent class
members, and affirmed the district court’s dismissal of those claims for lack of
standing.76
HSBC attempts to use this decision to import a heightened pleading
72

Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the
City of Chicago, 775 F.3d at 161 (quoting NECA-IBEW Health & Welfare Fund v.
Goldman Sachs & Co., 693 F.3d 145, 162 (2d Cir. 2012)).
73

Id. at 162.

74

Id.

75

Id. at 163.

76

Id.
19

requirement into the RMBS context, but nothing in this decision implicates
plaintiffs’ burden at the pleading stage. Plaintiffs’ claims are contract and tort
claims governed by Rule 8, as interpreted by Twombly and Iqbal. Thus, the
applicable standard is whether plaintiffs have pleaded “factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.”77 Certainly, at trial or summary judgment, plaintiffs must
prove their claims “loan-by-loan and trust-by-trust.”78 But at the pleading stage,
plausibility will suffice.
Plaintiffs’ complaints are replete with allegations of pervasive
breaches of representations and warranties by the Sellers.79 Each complaint details
the “routine abandonment of their underwriting guidelines; the routine fabrication
of borrower and loan information; massive breaches of their [representations and
warranties]; and the engagement in predatory and abusive lending.”80 These
factual allegations raise a plausible inference that there were in fact breaches of the

77

Iqbal, 556 U.S. at 678 (quotation marks omitted).

78

Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the
City of Chicago, 775 F.3d at 162.
79

See RP Compl. ¶¶ 67–94; BR Compl. ¶¶ 285–380, 421–461; PL
Compl. ¶¶ 168, 178–399.
80

RP Compl. ¶ 70.
20

Sellers’ representations and warranties with respect to the loans included in the
trusts at issue in each of these cases. As Judge Katherine Forrest concluded,
Indeed, based on the allegations of the [Complaint], it would be
implausible to assume that somehow all of the mortgage loans
underlying the MBS miraculously avoided being originated with
practices generally utilized [by the seller] and its contracted
affiliates at that time.
At the pleading stage, plaintiffs cannot be required to identify
breaches of representations and warranties with respect to the
individual loans in the specific trusts—such information is, at this
stage, [] uniquely in the possession of defendants. Rather,
plaintiffs satisfy their burden where their allegations “raise a
reasonable expectation that discovery will reveal evidence proving
their claim.”81
Therefore, plaintiffs have sufficiently alleged breaches of representations and
warranties with respect to the loans in the trusts in each case.
b.

Allegations of Actual Knowledge of Breaches of
Representations and Warranties

HSBC argues that all of plaintiffs’ allegations amount only to
constructive knowledge of breaches, and not actual knowledge, as required by the
Agreements. Plaintiffs, again, contend that HSBC confuses the standard of proof
with the plausibility requirement at the pleading stage. Plaintiffs in all actions have
81

Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank
of America, NA (“Policemen’s/BofA II”), 943 F. Supp. 2d 428, 442 (S.D.N.Y.
2013) (quoting Swierkiewicz v. Sorema N.A., 534 U.S. 506, 511 (2002)), abrogated
on other grounds sub nom. by Retirement Bd. of the Policemen’s Annuity and
Benefit Fund of the City of Chicago, 775 F.3d 154.
21

pleaded HSBC’s actual knowledge of the Sellers’ breaches of representations and
warranties by alleging
(1) the high number of borrower defaults; (2) the enormous losses
to the Trusts; (3) the collapse of the certificates’ and notes’ credit
ratings; (4) reports and litigation concerning common originators’
systemic abandonment of underwriting standards, as well as
common Sponsors’ pervasive disregard of prudent securitization
standards; (5) litigation contending the specific loans in some of
the specific Trusts had been misrepresented; and (6) HSBC’s
involvement in putback efforts involving the same Sellers.82
“[T]he question 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.83 Based on plaintiffs’ detailed allegations, it is indeed plausible to
infer that HSBC had actual knowledge of breaches in representations and
warranties in the specific loans at issue. How HSBC gained this actual knowledge,
or whether in fact it had actual knowledge, may be determined through discovery.
If, after discovery, plaintiffs cannot prove that HSBC had actual knowledge
regarding the loans at issue here, HSBC may move for summary judgment. But at

82

Opp. Mem. at 14. See also RP Compl. ¶¶ 67–104; BR Compl. ¶¶
381–420, 462–472; PL Compl. ¶¶ 155–175.
83

Policemen’s/BofA II, 943 F. Supp. 2d at 442–43.
22

this time, plaintiffs’ allegations will suffice.84
c.

Allegations of Enforcement Obligations Relating to
Breaches of Representations and Warranties

HSBC argues that for thirteen trusts, it had no enforcement
obligations with respect to Sellers’ breaches of representations and warranties.85
Plaintiffs point to language in two of those trusts suggesting that HSBC did have
such an obligation.86 For the remaining eleven, plaintiffs acknowledge that another
party had the initial enforcement obligation, but argue that after an Event of
Default, HSBC’s “prudent person” obligations were triggered. HSBC responds
that even if the “prudent person” standard was triggered, that standard does not
create new contractual duties, but only describes the standard of care with which it
must perform already existing contractual duties.

84

HSBC’s argument that it had no obligation to undertake an
investigation to discover if there were loan-level, trust-specific breaches is beside
the point. Even assuming arguendo that it had no duty to investigate, it is plausible
to infer that HSBC in some way gained actual knowledge of breaches based on
plaintiffs’ allegations.
85

See Def. Mem. at 13 & nn.16–17.

86

Plaintiffs are correct only with respect to one trust, FHLT 2006-C.
With respect to WFHET 2006-2, however, plaintiffs misread the contractual
language. Though the first sentence sets out HSBC’s duty to “enforc[e] the
Depositor’s obligations,” the following sentences describe the manner of this
enforcement — after receiving written notice from the Custodian or the Securities
Administrator. Plaintiffs do not allege that HSBC received such notice.
23

For example, in one of the Indentures, section 5.03(c) states that once
an Event of Default has occurred, HSBC “may . . . proceed to protect and enforce
its rights and the rights of the Noteholders, by such appropriate Proceedings as the
Indenture Trustee shall deem most effective to protect and enforce any such rights .
. . .”87 Section 6.01(a) of the same Indenture then states that “[i]f an Event of
Default has occurred and is continuing, the Indenture Trustee shall exercise the
rights and powers vested in it by this Indenture and use the same degree of care and
skill in its exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person’s own affairs.”88 The first section
gives HSBC the right to enforce the Noteholders’ rights using appropriate
proceedings, and the second section obligates HSBC to exercise its rights as a
prudent person would. It is certainly plausible, as plaintiffs allege, that a prudent
person would have taken actions to enforce the Sellers’ repurchase obligations.
HSBC had the right to do so, under section 5.03(c), but failed to “exercise the . . .
power[] vested in it by [the] Indenture” as a prudent person would have done in the

87

Indenture Prudent Person Clauses, FMIC 2004-3 Indenture, Ex. 9,
Chart 9 to Declaration of George A. Borden in Support of Defendant HSBC Bank
USA, N.A.’s Motion to Dismiss and Motion to Strike (“Borden Decl.”) at 1.
88

Id.
24

conduct of that person’s own affairs.89 Thus, plaintiffs have sufficiently alleged
that, by failing to enforce these repurchase obligations, HSBC failed to act as a
prudent person and breached the contract.
2.

Claims Relating to HSBC’s Post-Event of Default
Obligations

Plaintiffs allege that after a contractually defined Event of Default, the
Agreements require HSBC to (1) notify Holders of its occurrence and (2) act as a
prudent person in the exercise of its rights and powers under the Agreements.
HSBC contends that plaintiffs have failed to allege Indenture Events of Default,
SSA Services Events of Default, or PSA Events of Default. HSBC further argues
that plaintiffs have failed to allege HSBC’s actual knowledge of such Events of
Default.
a.

Allegations of Events of Default

HSBC first argues that plaintiffs have failed to allege an Indenture
Event of Default. The Indentures define an Event of Default to implicate only the
conduct of the Issuer (i.e., the Trust itself). Because the BlackRock plaintiffs do
not allege any duties that the Issuer breached, and the Phoenix Light plaintiffs
assert only “a single conclusory allegation of an alleged Issuer breach,” HSBC
contends that neither Complaint adequately pleads an Indenture Event of Default.
89

Id.
25

In response, plaintiffs highlight language in the Indenture obligating the Issuer to
“enforce any rights to the mortgage loans” and “preserve or defend title to the
Trust Estate and the rights of the Indenture Trustee and the Noteholders in such
Trust Estate against the claims of all persons and parties.”90 As such, “known and
unremedied Seller and Servicer defaults constitute . . . a violation of the issuer’s
duties under the Indenture.”91
The Indentures define an “Indenture Event of Default” to occur upon,
among other events, a default in the performance of the Issuer or any
representation or warranty of the Issuer proving to be materially incorrect.92
The Indentures also require the Issuer to “enforce any rights with respect to the
Trust Fund” and “preserve and defend title to the Trust Fund and the rights of the
Indenture Trustee, the Noteholders and the Note Insurer in such Trust Fund against
the claims of all persons and parties.”93

90

BR Compl. ¶ 278. See also PL Compl. ¶ 418.

91

Opp. Mem. at 20.

92

See, e.g., Indenture Event of Default Definitions, MLCC 2005-2
Indenture, Ex. 8 Chart 6 to Borden Decl., at 2
93

Issuer Protection of Trust Fund Provisions, FBRSI 2005-1 Indenture,
Ex. E Chart 22 to Declaration of Andrew W. Rudge in Support of Defendant
HSBC Bank USA, N.A.’s Motion to Dismiss and Motion to Strike (“Rudge
Decl.”), at 2.
26

Each Indenture Trust also entered into an SSA with, among others, the
Sellers and Servicers of the Trust. The SSA required the Seller and Servicer to
make certain representations and warranties, and to cure or repurchase defective
loans. As discussed previously, plaintiffs have sufficiently alleged breaches in
representations and warranties and the Sellers’ and Servicers’ failure to cure these
breaches. “While these alleged failures constitute[] direct breaches of the SSA,
they also violate[] the issuer’s duties under the Indenture. After all, if [Sellers]
failed to cure or repurchase defective mortgages, the issuer similarly failed to
‘enforce any rights with respect to [the Trust Fund],’ as the Indenture required it to
do.”94 Thus, plaintiffs have adequately alleged an Indenture Event of Default.
The PSAs and SSAs define an Event of Default to occur after the
Servicer (1) materially breaches its contractual obligations, (2) is notified in
writing of its breach by specified parties, including HSBC, and (3) does not cure

94

Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the
City of Chicago v. Bank of New York Mellon (“Policemen’s/BNYM”), 914 F. Supp.
2d 422, 432 (S.D.N.Y. 2012), abrogated on other grounds by 775 F.3d 154 (2d
Cir. 2014). HSBC’s argument that the Issuer’s obligation to “enforce any rights”
was limited to ownership interests fails. Nothing in the language of that clause
limits this obligation to ownership interests — in fact, the language is sweepingly
broad and by its plain terms encompasses any rights with respect to the Trust Fund.
Moreover, the clause is included in a section entitled “Protection of Trust Fund,”
which is similarly not limited to protection of ownership rights.
27

the breach within a specified time.95 HSBC argues that because plaintiffs have not
alleged the second element, written notice to the Servicer, they have failed to allege
an Event of Default under the PSAs and SSAs. Plaintiffs respond that, as one of
the parties who was required to give this notice to the Servicer, HSBC cannot rely
on its own failure to give notice to escape liability.
While it is unclear whether HSBC had a duty to give notice, the
Agreements specifically designate HSBC as one of the parties who could give the
required notice to trigger an Event of Default. As such, HSBC is insisting on the
performance of a condition that HSBC itself had the power to satisfy. “‘[I]t has
been established for over a century that a party may not insist upon performance of
a condition precedent when its non-performance has been caused by the party
itself.’”96 Under New York law “[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

95

See SSA Servicer Event of Default Definitions, Ex. 8 Chart 7 to
Borden Decl.; PSA Event of Default Definitions, Ex. 9 Chart 8 to Borden Decl.
96

Bank of New York, 545 F. Supp. 2d at 324 n.81 (quoting Lomaglio
Assocs. v. LBK Marketing Corp., 892 F. Supp. 89, 93 (S.D.N.Y. 1995)). Accord
Oklahoma Police Pension and Ret. Sys. v. U.S. Bank Nat’l Ass’n, 291 F.R.D. 47,
70 (S.D.N.Y. 2013) (“[T]he trustee cannot rely on its own failure to give notice to
escape its own liability.”), abrogated on other grounds sub nom. by Retirement Bd.
of the Policemen’s Annuity and Benefit Fund of the City of Chicago, 775 F.3d 154.
28

occurrence of the condition, or by taking positive action to cause its occurrence.”97
HSBC took no steps to fulfill the condition, though it had the power and (plaintiffs
allege) the knowledge to do so. As HSBC failed to act in good faith to facilitate
the occurrence of a condition precedent — the requirement of written notice — the
condition is excused.98 Therefore, plaintiffs have sufficiently alleged an Event of
Default under the PSAs and SSAs.99
b.

Allegations of Actual Knowledge of Events of Default

HSBC also contends that plaintiffs have failed to allege HSBC’s
responsible officers’ actual knowledge of Events of Default, as required by the
Agreements. For the reasons discussed above regarding HSBC’s actual knowledge
of breaches of representations and warranties, this argument fails. Plaintiffs have
alleged HSBC’s responsible officers’ receipt of written notice of Seller breaches

97

Cauff, Lippman & Co. v. Apogee Fin. Grp., Inc., 807 F. Supp. 1007,
1022 (S.D.N.Y. 1992).
98

See id.

99

HSBC also argues that for twenty-seven trusts, SSA Servicer Events
of Default do not trigger prudent person obligations, but, as to those trusts, prudent
person obligations attach upon an Issuer Event of Default. As discussed above,
plaintiffs have sufficiently alleged Issuer Events of Default. HSBC also argues
that for twelve trusts, SSA Servicer Events of Default do not trigger notice
requirements. Though HSBC has listed the trusts in a footnote, it has not provided
the Court with a reference to the actual language of the trusts. Therefore I cannot
address this argument at this time.
29

from monoline insurers100 and Holders.101 Plaintiffs have alleged HSBC was the
target of government investigations, prosecutions, and settlements with many of
the Servicers to the Trusts for the same alleged improper servicing practices.102
Plaintiffs also allege HSBC’s responsible officers’ receipt of written notice from
Holders to other RMBS trusts regarding the same servicing violations by the same
servicers to the Trusts here.103 Again, at trial or summary judgment, plaintiffs must
produce proof of actual knowledge with regard to these trusts on the part of
HSBC’s responsible officers. At the pleading stage, however, plaintiffs have met
their burden.
B.

Matters of Law (Contract Claims)
1.

No-Action Clauses

Each Agreement at issue includes a No-Action Clause. This clause
prohibits Holders from pursuing any action unless (1) the Holder has provided

100

“Monoline insurance is a form of credit enhancement that involves
purchasing insurance to cover losses from any defaults. . . . [M]onoline insurers
must provide notice of a breach of representation and warranty to the responsible
loan sponsor and parties to the agreement, including the trustee.” PL Compl. ¶
171.
101

See BR Compl. ¶¶ 398–403, 411–413; PL Compl. ¶¶ 170–175.

102

See RP Compl. ¶¶ 115, 188; BR Compl. ¶¶ 463–467; PL Compl. ¶¶

160, 429.
103

See BR Compl. ¶¶ 468–471.
30

notice of default to the Trustee and (2) some percentage, usually twenty-five
percent, of Holders make a written request on HSBC to file suit against a third
party and offer HSBC reasonable indemnity for its costs in pursuing the suit.
Plaintiffs do not allege that they met these conditions. Rather, plaintiffs point to
authority that holds that the pre-suit requirements of a No-Action Clause may not
be construed to bar a Holder’s claims against an indenture trustee, because it would
be “absurd to require the debenture holders to ask the trustee to sue itself.”104
Though HSBC argues that Cruden v. Bank of New York is
distinguishable on its facts, the Second Circuit’s holding is clear: a No-Action
Clause does not apply to debenture holder suits against the indenture trustee, as it
would make little sense to ask the trustee to sue itself. The same logic holds true in
these cases. HSBC appears to be making a policy argument that excusing
compliance with the No-Action Clause provides an end-run around the requirement
and effectively nullifies the clause. But HSBC has not provided any authority that
would permit the Court to ignore Cruden. Therefore, plaintiffs’ noncompliance
with the No-Actions Clauses is excused.
2.

Standing

104

Cruden v. Bank of New York, 957 F.2d 961, 968 (2d Cir. 1992).
Accord Ellington Credit Fund, Ltd., 837 F. Supp. 2d at 186 (excusing
noncompliance with no action clause in a suit against trustee of mortgage-backed
securities trusts).
31

Twenty-five Agreements contain Negating Clauses that limit the
parties who may enforce the Agreement. Only the parties to the Agreement and
named third-party beneficiaries, including “Certificateholders” and “Noteholders”
are entitled to rights under the Agreements.105 A Certificateholder or Noteholder is
defined as the person in whose name a Certificate or Note is registered.106 By
contrast, a Certificate or Note Owner is defined as the beneficial owner of a
certificate or note.107 Here, plaintiffs are the certificate and note owners, while
Cede & Co., the nominee of The Depository Trust Company (“DTC”) is the holder
of record.
Plaintiffs contend that “‘Holder’ was intended to include the
beneficial Holders of RMBS (i.e., ‘Owners’),”108 but the plain terms of the
Agreements belie this claim. “[U]nder New York law, the effectiveness of a
negating clause to preclude third-party beneficiary status is well-established . . .
.”109 Plaintiffs further argue that they have standing as Cede & Co.’s principals, or

105

See Negating Clauses, Ex. 10 Chart 13 to Borden Decl.

106

See Certificateholder/Noteholder vs. Certificate Owner/Note Owner
Definitions, Ex. 10 Chart 14 to Borden Decl.
107

See id.

108

Pl. Opp. at 34.

109

India.Com, Inc. v. Dalal, 412 F.3d 315, 321 (2d Cir. 2005).
32

as third-party beneficiaries of last resort. However, plaintiffs have cited no
authority in which a court allowed these arguments to overcome a clear negating
clause barring enforcement by unnamed third-party beneficiaries.
Nevertheless, plaintiffs’ lack of standing can be cured. A beneficial
owner who lacks standing may receive authorization to sue from the registered
Holder, and that authorization may be granted subsequent to the filing of the
lawsuit.110 Indeed, Royal Park plaintiffs have already begun this process.111 In
order to cure plaintiffs’ lack of standing for the twenty-five Agreements at issue,
plaintiffs must obtain authorizations to sue from the registered Holder, at plaintiffs’
expense.
3.

Claims Relating to HSBC’s Breach of Document Delivery
and Servicing Related Certifications (Phoenix Light)

Phoenix Light plaintiffs plead additional breaches relating to HSBC’s

110

See Applestein v. Province of Buenos Aires, 415 F.3d 242 (2d Cir.

2005).
111

See The Bank of New York Mellon’s Letter to The DTC, Ex. 6 to
Declaration of Timothy A. Delange in Support of Plaintiffs’ Joint Memorandum of
Law in Opposition to Defendant’s Motions to Dismiss Pursuant to Rule 12(b)(6).
HSBC responds that the Agreements do not allow the registered Holders to
authorize other parties to sue, but has not cited any clause of the Agreement to
support this contention. Therefore this argument fails, as contract rights are freely
assignable unless there is a specific clause prohibiting assignment. See, e.g.,
Corbett v. Firstline Sec., Inc., 687 F. Supp. 2d 124, 129 (E.D.N.Y. 2009).
33

alleged duties to make certifications pursuant to Regulation AB,112 taking physical
possession of mortgage loan files, and preparing and delivering certification and
exception reports. HSBC argues that these claims must be dismissed. First, HSBC
contends that the obligations to take physical possession of complete mortgage
files and the obligations to prepare and deliver certification and exception reports
are contractually assigned to the Custodian, and not HSBC.113 Second, HSBC
argues that even if it had these obligations, the claims are time barred by the statute
of limitations, which is at most six years.114
According to HSBC, all of these obligations ended in 2006 or 2007.
The reporting obligation under Regulation AB terminated in the fiscal year after
the trust closed in 2006, when HSBC filed the relevant suspension notice.115
Similarly, all alleged breaches relating to receiving mortgage loan files and
creating certification and exception reports occurred at or near the time the trusts

112

See 17 C.F.R. § 229.1100 et seq. HSBC argues, and plaintiffs do not
contest, that this regulation applies only to four of the eleven trusts in the Phoenix
Light Complaint. See 70 Fed. Reg. 1506-01 (applying regulation only to public
deals issued after December 31, 2005).
113

See Other Party Document Receipt and Review Obligations (Phoenix
Light), Ex. 11 Chart 16 to Borden Decl.
114

See N.Y. CPLR § 213.

115

See 17 C.F.R. § 249.323 (notice of suspension of duty to file reports).
34

closed. Plaintiffs respond that the statute of limitations is not a bar because “where
a contract provides for continuing performance over a period of time, each breach
may begin the running of the statute anew such that accrual occurs continuously
and plaintiffs may assert claims for damages occurring up to six years prior to
filing of the suit.”116 Phoenix Light plaintiffs argue that the Complaint adequately
alleges continuing duties relating to document delivery and servicing certifications.
The claims relating to Regulation AB are time-barred. This
Regulation creates an obligation that terminated in 2007. Thus, the cause of action
accrued no later than 2007, and the six-year statute of limitations bars any action
based on the breach of this regulation. With respect to document obligations, most
(but not all) of the claims fail because the relevant contractual language states that
these obligations belong to the Custodian, and not HSBC.117 Only five trusts
assign these duties to HSBC.118 Nevertheless, the clauses in these trusts relating to
initial document obligations set a time period during which HSBC must undertake

116

Airco Alloys Div. v. Niagara Mohawk Power Corp., 430 N.Y.S.2d
179, 186 (4th Dep’t 1980).
117

See Document Obligations (All Trusts), Ex. I Chart 21 to Rudge Decl.

118

See id. at 7–10 (FHLT 2006-C PSA § 2.03(c); OWNIT 2005-4 PSA
§§ 2.02, 2.03; OWNIT 2005-2 PSA §§ 2.02, 2.03; OWNIT 2005-3 PSA §§ 2.02,
2.03; STALT 2006-1F PSA § 2.02(a)).
35

these duties — within 60 to 90 days after the closing date of the trusts.119 Only
three trusts contain language that plausibly gives rise to a continuing obligation
with respect to document obligations.120 Thus, plaintiffs’ document delivery and
certification claims are dismissed with the exception of claims relating to the three
trusts listed above.121
C.

Tort Claims (Matters of Law)
Plaintiffs assert claims for (1) breach of trust/fiduciary duty (all

plaintiffs), (2) negligence (BlackRock and Phoenix Light), (3) negligent
misrepresentation (Phoenix Light), and (4) failing to avoid conflicts of interest (all
plaintiffs). HSBC argues that these causes of action fail as a matter of law. For the
reasons below, HSBC’s motion to dismiss is granted as to claims (2) and (3), and
denied as to claims (1) and (4).
1.

Fiduciary Duty Claims

HSBC argues that it was not in a fiduciary relationship with the

119

See id.

120

See id. at 8 (OWNIT 2005-4 PSA § 2.03; OWNIT 2005-2 PSA § 2.03;
OWNIT 2005-3 PSA § 2.03).
121

Plaintiffs make broad arguments regarding their allegations of
HSBC’s breach of fiduciary duties. Because these arguments are not related to the
specific allegations of HSBC’s document delivery and certification obligations,
they are addressed elsewhere in this Opinion.
36

plaintiffs. This is correct before an Event of Default, as HSBC’s duty to avoid
conflicts of interests and duty to perform its functions with due care are not
considered fiduciary duties under New York law.122 However, after an Event of
Default, an indenture trustee takes on a special fiduciary duty to exercise its powers
in order to secure the trust.123 Thus, insofar as plaintiffs allege a post-Event of
Default breach of fiduciary duty, they properly state a claim, in that “fidelity to the
terms of an indenture does not immunize an indenture trustee against claims that
the trustee has acted in a manner inconsistent with his or her fiduciary duty of
undivided loyalty to trust beneficiaries.”124 To the extent that plaintiffs plead a
post-Event of Default breach of HSBC’s duty of loyalty, HSBC’s motion to
dismiss these claims is denied.
2.

Negligence Claims

HSBC argues that each of plaintiffs’ tort claims fail because they are
duplicative of the plaintiffs’ contract claims. HSBC is correct only with regard to
plaintiffs’ negligence claims. BlackRock plaintiffs claim that HSBC “negligently
failed to promptly enforce the sellers’ obligations,” which is effectively a claim

122

See AG Capital Funding Partners, L.P., 11 N.Y.3d at 157.

123

See Beck, 632 N.Y.S.2d at 528.

124

BNP Paribas Mortg. Corp., 778 F. Supp. 2d at 401.
37

that HSBC violated its contractual obligation to force others to cure.125 Similarly,
Phoenix Light plaintiffs allege that “HSBC owed . . . Plaintiffs[] duties under the
PSA . . . [and] HSBC performed or failed to perform its responsibilities in a
grossly inadequate and negligent manner.”126 These are again better defined as
claims that HSBC was negligent in performing its duties under the contracts.
Therefore, both claims are dismissed.127
3.

Negligent Misrepresentation Claim

Because plaintiffs allege only monetary losses, without property
damage or physical injury, the negligent misrepresentation claim is barred by New
York’s economic loss doctrine. There is no special duty for HSBC to refrain from
negligently making misrepresentations to Certificateholders. Plaintiffs are
sophisticated commercial parties who can bargain over what information HSBC

125

BR Compl. ¶ 550. See also id. ¶ 545.

126

PL Compl. ¶ 500.

127

Plaintiffs’ remaining tort claims are not duplicative as they arise out
of a separate, extra-contractual duty. See Sommer v. Federal Signal Corp., 583
N.Y.S.2d 550, 551 (3d Dep’t 1992). HSBC had an independent duty to perform its
nondiscretionary ministerial duties with due care and to avoid conflicts of interest.
See Ellington Credit Fund, Ltd. 837 F. Supp. 2d at 191. It also had a post-Event of
Default fiduciary duty. See id. It is irrelevant that plaintiffs claim that while
violating these duties, HSBC was also breaching the contracts. The fiduciary
duties were independently created by New York courts for fear that “broad
exculpatory provisions” would excuse indenture trustees from operating in the best
interest of the certificateholders. Beck, 632 N.Y.S.2d at 527.
38

must reveal and may then sue for breach of contract if such information is not
provided.128 This is especially true in the indenture trust context, where the
trustees’ duties are circumscribed by contract, with a few narrow exceptions.
Therefore, Phoenix Light’s negligent misrepresentation claim is dismissed.
4.

Conflict of Interest Claims

HSBC argues that plaintiffs fail to properly allege a conflict of interest
between HSBC and the Sellers of the Trusts. Plaintiffs first claim that (1) the
Agreements provided HSBC would be paid a flat fee regardless of how much work
it did for the trusts and (2) the Agreements provided that if the Master Servicer
defaulted HSBC may have been required to assume the Master Servicer’s duties
without additional compensation. Plaintiffs’ second contention is incorrect as a
factual matter, as HSBC would have been allowed to take the Master Servicer’s
fees as payment for additional work.129 Regardless, the fee arrangements were
expressly disclosed to plaintiffs,130 and therefore cannot sustain a conflict of

128

Manhattan Motorcars, Inc., 244 F.R.D. at 220.

129

See Replacement Master Servicer Compensation, Ex. 12 Chart 18 to
Borden Decl.
130

See BR Compl. ¶ 504; RP Compl. ¶ 144.
39

interest claim.131 Plaintiffs may argue that these fee arrangements induced HSBC
to commit a breach of contract or a tort, but they may not argue that the fee
arrangements alone constitute a conflict of interest.
Plaintiffs also allege that HSBC was conflicted because it had
repeated business with the Master Servicers and therefore was beholden to them.132
The mere fact that an indenture trustee does repeat business with an entity does not
create a conflict of interest.133 However, plaintiffs’ allegations go further. They
plead that HSBC was involved with the Master Servicers’ misconduct, helped
facilitate it, or looked the other way in these cases so that the Master Servicers
would return the favor when the roles were reversed.134 Viewing the allegations of
the Complaints as a whole,135 plaintiffs have raised the plausible inference that
HSBC was beholden to the Master Servicers and therefore conflicted, and it would
be premature to dismiss these claims at this stage. Therefore, HSBC’s motion with
respect to these claims is denied.
131

See Restatement (Third) of Trusts § 78 cmt. c(2), c(4). See also id. §

38 cmt. e.
132

See BR Compl. ¶ 490; RP Compl. ¶¶ 142–143.

133

See CFIP Master Fund, Ltd. 738 F. Supp. 2d at 475.

134

See RP Compl. ¶¶ 145–146; BR Compl. ¶¶ 491–502.

135

See National Credit Union Admin. Bd. v. Wachovia Capital Mkts., No.
13 Civ. 6719, 2014 WL 1795294, at *2 (S.D.N.Y. May 6, 2014).
40

D.

Streit Act Claims (Phoenix Light)
Phoenix Light plaintiffs bring a claim under the Streit Act, arguing

that HSBC failed to uphold its statutorily defined duty to act as a prudent person
upon the occurrence of an Event of Default.136 As a preliminary matter, HSBC
argues that Phoenix Light’s claims arising from section 124 of the Streit Act fail,
because that is a preliminary section that does not create any duties.137 This is
correct, and any claims arising from that section of the Streit Act are dismissed.
HSBC also argues that the Streit Act does not apply to any of the
trusts because they are collateral trusts.138 The Streit Act defines “mortgage
investments” to include “bonds, notes, or other evidence of indebtedness . . .
secured by a mortgage or mortgages on real property . . . .”139 A PSA Trust is
formed when mortgage loans are pooled into a trust and shares representing
certificates of participation in the underlying mortgage loans are issued to
investors.140 Prudence Realization Corp. has no bearing on the question, because
136

See PL Compl. ¶ 515.

137

See New York Real Prop. Law § 124.

138

See Def. Mem. at 44 (citing Prudence Realization Corp. v. Atwell, 35
N.Y.S.2d 1001, 1005 (1st Dep’t 1942)).
139

New York Real Prop. Law § 125(1).

140

See Retirement Bd. of the Policemen’s Annuity & Benefit Fund of the
City of Chicago, 775 F.3d at 165.
41

the trust there held shares in another entity, which in turn held property, including
mortgages. Because of the degree of separation, the court held that the trust was a
collateral trust that did not “deal[] directly with real estate,” and therefore the Streit
Act did not apply.141 By contrast, the trusts here directly hold mortgages on real
property, and therefore the Streit Act applies.
HSBC also argues that the Streit Act exempts any trust indenture that
is qualified upon filing a registration statement with the SEC under the TIA.142
Despite plaintiffs’ complaints that this issue should not be adjudicated on a motion
to dismiss, determining which trusts fall under the TIA is a matter of law that can
be decided as a preliminary matter. Trusts FBR 2005-2 and FBR 2005-4 are
therefore exempt from the Streit Act for this reason and Phoenix Light’s claims
under the Act are dismissed as to these Trusts.143 However, HSBC has not pointed
to any other Phoenix Light trust that falls under this exception, and therefore
HSBC’s motion to dismiss Phoenix Light’s Streit Act claim is denied with respect
to the remaining Trusts.
E.

TIA Claims

141

Prudence Realization Corp., 35 N.Y.S.2d at 1005.

142

Def. Mem. at 44. See also New York Real Prop. Law § 130-k; 15
U.S.C. § 77iii(a).
143

See SEC filings, Exs. K and L to Rudge Decl.
42

Plaintiffs allege violations stemming from Sections 315(a), 315(b) and
315(c) of the TIA.144 As a preliminary matter, the Second Circuit has held that the
TIA does not apply to PSA Trusts.145 Therefore, all claims arising under the TIA
with regard to those Trusts are dismissed.
1.

Section 315(a)

Plaintiffs argue that because the TIA requires the indenture trustee to
abide by the terms of the Indenture, HSBC violated the TIA every time it failed to
uphold its duties under the contract.146 As HSBC argues, this contention misreads
the TIA. Section 315(a)(1) does not impose any additional duties upon the trustee;
it merely requires the indenture to contain language limiting the trustee’s duties to
those in the indenture.147 Because plaintiffs have no right of action under this
section based solely on HSBC’s violation of the Indenture, the section 315(a)
claims are dismissed.
2.

144

Sections 315(b) and (c)

See RP Compl. ¶ 179; BR Compl. ¶ 526.

145

See Retirement Bd. of the Policemen’s Annuity and Benefit Fund of
the City of Chicago, 775 F.3d at 166–70.
146

See RP Compl. ¶ 179; BR Compl. ¶ 526; PL Compl. ¶ 179.

147

See Policemen’s/BNYM, 914 F. Supp. 2d at 429. See also 15 U.S.C. §

77ooo(a).
43

HSBC first argues that these claims should be dismissed because
plaintiffs have not properly alleged a default under the TIA. Section 315(b)
requires the indenture trustee to give “notice of all defaults known to the
trustee.”148 No further description of “default” is provided in that section. By
contrast, section 315(c) states that “[t]he indenture trustee shall exercise in case of
default (as such term is defined in such indenture) such of the rights and powers
vested in it by such indenture, and to use the same degree of care and skill in their
exercise, as a prudent [person] would exercise or use under the circumstances in
the conduct of [her] own affairs.”149 By its plain terms, and unlike section 315(c),
section 315(b) does not limit defaults to those Events of Default defined in the
Indenture.150 Thus, the notice provision of section 315(b) is triggered by any
default, meaning any “omission or failure of a legal or contractual duty.”151 As
detailed above, plaintiffs have adequately alleged such defaults. Section 315(c)’s
prudent person obligations are triggered upon defaults as defined by the
Indentures. As discussed above, plaintiffs have adequately alleged an Indenture

148

15 U.S.C. § 77ooo(b).

149

Id. § 77ooo(c).

150

See Policemen’s/BofA II, 943 F. Supp. 2d at 441.

151

Id. (citing Black’s L. Dict., 9th Ed. (2009)).
44

Event of Default, and therefore the prudent person obligations of section 315(c)
apply.
HSBC next argues that plaintiffs have not properly alleged damages
under the Act. HSBC contends that the TIA requires plaintiffs to allege “actual
damages,” meaning out-of-pocket losses, and plaintiffs allege only diminution in
the value of notes they still own.152 Though the TIA does indeed limit plaintiffs’
eventual recovery to their actual damages, nothing in this section bears on the type
of damages that must be alleged in the Complaint. The method for measuring
recoverable damages will be determined at a later date, as is customary in
securities actions.153 The parties have not cited any case that delineates the
pleading requirements for damages under the TIA, but in securities actions alleging
a violation of Section 10(b) of the Securities and Exchange Act of 1934, “‘decades
of precedent’ . . . [hold] that plaintiffs holding shares at the time of suit ‘have not
been precluded from maintaining securities fraud actions.’”154 Similarly, plaintiffs

152

See BR ¶¶ 509, 530–531; PL Compl. ¶¶ 465–470, 485; RP Compl. ¶¶

157, 182.
153

See LNC Invs. Inc., 1997 WL 528283, at *34 (discussing the TIA in
relation to the “broad federal securities scheme” of which the TIA is a part).
154

Varghese v. China Shenghuo Pharm. Holdings, Inc., 672 F. Supp. 2d
596, 611 (S.D.N.Y. 2009) (quoting In re Royal Dutch/Shell Transport Sec. Litig.,
404 F. Supp. 2d 605, 611 (D.N.J. 2005)).
45

should not be precluded from maintaining an action under the TIA, though they
have failed to allege selling the notes at a loss. If plaintiffs ultimately prevail, any
recovery will certainly be limited to the actual damages plaintiffs suffered.
In sum, with regard to the Indenture Trusts, plaintiffs have adequately
alleged violations of the TIA under sections 315(b) and 315(c).
F.

Derivative Claims
HSBC argues that the Royal Park and BlackRock plaintiffs’ claims

should be dismissed because they are pleaded as derivative claims, instead of as
direct claims. HSBC contends that under the test articulated in Tooley v.
Donaldson, Lufkin & Jenrette, Inc.,155 the claims can only be brought as direct
claims. Plaintiffs respond that under Dallas Cowboys Football Club, Ltd. v.
National Football League Trust,156 the claims are properly brought derivatively,
and the Tooley test does not change that result.
In Dallas Cowboys, I held that the claims brought by trust
beneficiaries must be brought as derivative actions. I reviewed New York law and
determined that an action “must be asserted derivatively if the injury was suffered
by the corporation and thus by stockholders only through dimunition in the value

155

845 A.2d 1031 (Del. 2004).

156

No. 95 Civ. 9426, 1996 WL 601705 (S.D.N.Y. Oct. 18, 1996).
46

of their shares, and directly if the injury was suffered in some fashion separately
and distinctly from injury to the corporation.”157 I also concluded that “an alleged
injury that is ‘equally applicable’ to all shareholders gives rise to a derivative, not a
direct, action.”158
In Tooley, the Delaware Supreme Court clarified the test to distinguish
between direct and derivative actions. “The analysis must be based solely on the
following questions: Who suffered the alleged harm — the corporation or the suing
stockholder individually — and who would receive the benefit of the recovery or
other remedy?”159 The court expressly disapproved of previous cases using the
concept of “special injury” to distinguish between the two types of actions, stating
that the concept was confusing and inaccurate “because a direct, individual claim
of stockholders that does not depend on harm to the corporation can also fall on all
stockholders equally, without the claim thereby becoming a derivative claim.”160
Instead, for a direct claim, “the court should look to the nature of the wrong and to
whom the relief should go.”161
157

Id. at *2.

158

Id.

159

Tooley, 845 A.2d at 1035.

160

Id. at 1037.

161

Id. at 1039.
47

The Tooley test was subsequently adopted by a New York
intermediate appellate court, which found it “consistent with New York law.”162 A
federal court will follow an intermediate appellate court decision unless it “find[s]
persuasive evidence that the New York Court of Appeals, which has not ruled on
this issue, would reach a different conclusion.”163 Because the Tooley test is
consistent with New York law, it is likely that the New York Court of Appeals
would follow this test.
Under both prongs of Tooley, plaintiffs’ claims are direct, not
derivative. The first prong asks who suffered the injury. Plaintiffs allege that
HSBC breached duties running to the holders of the notes and certificates. For
example, the breaches relating to failure to give notice are duties owed to
Noteholders and Certificateholders.164 The Agreements likewise recognize that,
during an Event of Default, HSBC may “proceed to protect and enforce its rights
and the rights of the Noteholders.”165 HSBC’s alleged breach of this duty,

162

Yudell v. Gilbert, 949 N.Y.S.2d 380, 381 (1st Dep’t 2012).

163

10 Ellicott Square Corp. v. Mountain Valley Indem. Co., 634 F.3d
112, 120 (2d Cir. 2011).
164

See BR Compl. ¶ 284 (“HSBC must also give prompt written notice to
all Noteholders of Servicer Event of Defaults.”); RP Compl. ¶ 184(c).
165

FMIC2004-3 Indenture, §§ 5.03(c), Indenture Prudent Person Clauses,
Ex. 9 Chart 9 to Borden Decl.
48

therefore, injured the plaintiffs directly. The second prong asks who would receive
the benefit of the recovery. Plainly, the plaintiffs themselves stand to receive the
benefit. Though any recovery would initially go to the trusts, it would simply pass
through the trusts and be distributed to the Noteholders and Certificateholders —
the trusts themselves would not retain any payments.
Plaintiffs principally argue, relying on Dallas Cowboys, that they do
not assert unique injuries and that all Noteholders and Certificateholders have been
equally injured. In light of Tooley, this contention fails. The court expressly
rejected the “special injury” test and stated that “a direct, individual claim of
stockholders that does not depend on harm to the corporation can also fall on all
stockholders equally, without the claim thereby becoming a derivative claim.”166
Because plaintiffs directly suffered the injury, and because plaintiffs would receive
the benefit of any recovery, the claims are direct, and plaintiffs’ derivative claims
are dismissed.
G.

Consequential Damages
HSBC moves to strike the Complaints’ demand for damages to the

extent that they seek to recover consequential damages in the sixteen trusts with
provisions specifically precluding recovery of such damages. HSBC contends that

166

Tooley, 845 A.2d at 1037.
49

the plaintiffs seek investment losses that qualify as consequential damages because
they go beyond the value of the performance promised. However, HSBC has not
cited any cases that characterize investment losses as consequential damages, and
relies instead on cases that conclude that lost business profits are consequential
damages that may be struck where the contract includes a limitation on such
damages. Here, HSBC’s role was to protect the Trusts’ assets. The extent of what
HSBC was required to do to protect those assets raises issues of fact. As such, as
this stage in the litigation, I cannot conclude as a matter of law that losses sustained
by the trust assets qualify as consequential damages. Therefore HSBC’s motion to
strike is denied.
H.

Leave to Amend
Though plaintiffs have not requested it, leave to amend should be

freely given “when justice so requires.”167 Therefore, I grant plaintiffs leave to
amend if they can correct the deficiencies noted in this Opinion in compliance with
their obligations under Rule 11. Any repleading must be made within thirty days
of the date of this Order.
VI.

CONCLUSION
For the foregoing reasons, HSBC’s motion to strike is DENIED.

167

Fed. R. Civ. P. 15(a)(2).
50

HSBC's motion to dismiss is GRANTED in part and DENIED in part.
Specifically, HSBC's motion to dismiss is GRANTED as to: (1) Phoenix Light's
claims relating to Regulation AB; (2) Phoenix Light's claims relating to document
obligations with the exception of the three trusts identified in footnote 120; (3)
negligence claims; (4) negligent misrepresentation claims; (5) claims under section
315(a) of the TIA; and (6) all derivative claims. Further, plaintiffs must take steps
to cure their lack of standing for the trusts containing Negating Clauses and
provide a status update to the Court within thirty days of the date of this Order.
The Clerk of the Court is directed to close this motion (Docket No. 26 in 14 Civ.
8175, Docket No. 42 in 14 Civ. 9366, Docket No. 15 in 14 Civ. 10101). A
conference is scheduled for June 24, 2015 at 4:30 p.m.

Dated:

June_, 2015
New York, New York

51

- Appearances For BlackRock Plaintiffs:
Blair A. Nicholas, Esq.
Benjamin Galdston, Esq.
David R. Kaplan, Esq.
Lucas E. Gilmore, Esq.
Timothy A. Delange, Esq.
Bernstein Litowitz Berger & Grossmann LLP
12481 High Bluff Drive, Suite 300
San Diego, CA 92130
[phone]
Jeroen Van Kwawegen, Esq.
Hannah E. Ross, Esq.
Bernstein Litowitz Berger & Grossmann LLP
1285 Avenue of the Americas, 38th Fl.
New York, NY 10019
[phone]

Christopher M. Wood, Esq.
Robbins Geller Rudman & Dowd LLP
One Montgomery Street, Suite 1800
San Francisco, CA 94104
[phone]
For Phoenix Light Plaintiffs:
David H. Wollmuth, Esq.
Melissa A. Finkelstein, Esq.
Randall R. Rainer, Esq.
Steven S. Fitzgerald, Esq.
Danielle A. D’Aquila, Esq.
William A. Maher, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Ave., Suite 1200
New York, NY 10110
[phone]
George A. Zelcs, Esq.
Matthew Davies, Esq.
Maximilian C. Gibbons, Esq.
Korein Tillery, LLC
205 North Michigan Ave., Suite 1950
Chicago, IL 60601
[phone]

For Royal Park Plaintiffs:
Arthur C. Leahy, Esq.
Ashley M. Robinson, Esq.
Jennifer Nunez Caringal, Esq.
Steven W. Pepich, Esq.
Robbins Geller Rudman & Dowd LLP
655 West Broadway, Suite 1900
San Diego, CA 92101
[phone]

John A. Libra, Esq.
Korein Tillery, LLC
505 North 7th Street, Suite 3600
St. Louis, MO 63101
[phone]

Samuel H. Rudman, Esq.
Robbins Geller Rudman & Dowd LLP
58 South Service Road, Suite 200
Melville, NY 11747
[phone]

For Defendant:
Andrew W. Rudge, Esq.
52

George A. Borden, Esq.
Kevin M. Hodges, Esq.
Vidya Atre Mirmira, Esq.
Williams & Connolly LLP
725 Twelfth Street, N.W.
Washington, DC 20005
[phone]
Michael Orth Ware, Esq.
Mayer Brown LLP
1675 Broadway
New York, NY 10019
[phone]
Jennifer M. Rosa, Esq.
Mayer Brown LLP
1999 K Street, N.W.
Washington, DC 20006
[phone]

53