FIXED INCOME SHARES: SERIES M et al v. Citibank N.A. et al
Filing
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OPINION AND ORDER re: 39 MOTION to Dismiss filed by Citibank N.A.: For the foregoing reasons, Citibank's motion to dismiss is GRANTED in part and DENIED in part. Specifically, the Court declines to exercise supplemental jurisdic tion over Plaintiffs' claims relating to the PSA Trusts. Further, the negligence and fiduciary duty claims alleged in the Complaint's fourth and fifth causes of action - those relating to alleged breaches of the duty of care - are also dism issed, on the ground that they are duplicative of Plaintiff's breach of contract claims. (See Compl. paragraphs 418-31). With respect to the Indenture Trusts, Plaintiffs adequately state a breach of contract claim (id. paragraphs 387-99) and a T IA claim (id. 400-408), and the motion to dismiss is denied with respect to those claims. Similarly, the negligence and fiduciary duty claims alleged in the third and sixth causes of action - those relating to the duty of independence - also survive. (See id. paragraphs 409-17, 432-40).The Clerk of Court is directed to terminate Docket No. 39. (Signed by Judge Jesse M. Furman on 9/8/2015) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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FIXED INCOME SHARES: SERIES M, et al.,
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Plaintiffs,
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-v:
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CITIBANK N.A., et al.,
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Defendants.
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09/08/2015
14-CV-9373 (JMF)
OPINION AND ORDER
JESSE M. FURMAN, United States District Judge:
This case is one of many derivative actions recently brought, in this Court and New York
state court, against trustees of trusts containing residential mortgage backed securities. In this
case, Plaintiffs sue Citibank N.A. (“Defendant” or “Citibank”) in its capacity as trustee for
twenty-seven such trusts, alleging that Citibank breached its contractual duties, committed
several state-law torts, and violated the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa, et. seq.
(“TIA”). Pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure,
Citibank now moves to dismiss the Complaint in its entirety. For the reasons explained below,
Citibank’s motion is granted in part and denied in part.
BACKGROUND
The following facts — which are taken from the Complaint, documents it incorporates,
and matters of which the Court may take judicial notice — are construed in the light most
favorable to Plaintiffs. See, e.g., Kleinman v. Elan Corp., plc, 706 F.3d 145, 152 (2d Cir. 2013);
LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009); Aurecchione v.
Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005).
Plaintiffs’ claims arise out of Citibank’s role as trustee for twenty-seven trusts (the
“Trusts”), in which Plaintiffs invested. (Compl. (Docket No. 1) ¶ 1). The Trusts are of two
types: The overwhelming majority are New York common law trusts (the “PSA Trusts”), which
are governed by Pooling and Service Agreements (“PSAs”), while the remainder are Delaware
statutory trusts (the “Indenture Trusts”), which are governed by Sale and Servicing Agreements
(“SSAs”) and Indentures (together with the PSAs and SSAs, the “Trust Documents”).
(Id. ¶ 95). 1 The Trusts consist entirely of residential mortgage backed securities (“RMBS”). (Id.
¶ 97). RMBS trusts generally operate as follows: First, an investment bank acquires mortgage
loans from loan originators, who are often themselves affiliates of, or otherwise beholden to, the
acquiring bank. (Id. ¶¶ 2, 117). These banks are known as the “sponsors” of the RMBS trust.
After acquiring the loans, the sponsor transfers them to a “depositor,” which then conveys them
to the trust. (Id. ¶¶ 118-19).
The trust holds the loans for the benefit of investors who purchase securities, which give
the investors a beneficial interest in the underlying mortgages. (Id. ¶¶ 2, 108, 159). The trust,
also known as the “issuer,” appoints a trustee — in this case, Citibank — which is the only
independent party to the transaction and which is responsible for ensuring that “each of the
mortgage loans was properly conveyed [to the trust]” and for certifying “that the documentation
for each loan was accurate and complete.” (Id. ¶ 114). In addition, the sponsor chooses an
entity, known as the “servicer,” to collect payments on the underlying loans and take any
necessary enforcement action against borrowers. (Id. ¶¶ 120-21). Like the loan originators, the
1
The precise breakdown is somewhat unclear. The Complaint states that twenty-six of the
Trusts are New York common law trusts (Compl. ¶ 95), but Defendants represent that only
twenty-four of them are (Mem. Law Supp. Citibank, N.A.’s Mot. To Dismiss (Docket No. 41)
(“Def.’s Mem.”) 3). The discrepancy is immaterial for purposes of this motion.
2
servicers are often affiliated with the sponsoring bank. (Id. ¶¶ 2, 120). The principal and interest
payments on the underlying loans are ultimately passed through to the investors. (Id. ¶ 116).
The Trusts are largely established and governed by contracts, several of which are
relevant here. The contract between the originator and the sponsor — or, alternatively, the
sponsor and the depositor — is known as a Mortgage Loan Purchase and Sale Agreement
(“MLPA”). (Id. ¶ 124). The MLPA governs the sale of the mortgage loans, and includes
representations and warranties made by the seller (either the originator or the sponsor)
“concerning the characteristics, quality, and risk profile of the mortgage loans.” (Id.).
Significantly, upon “discovery or receipt of notice of any breach” of a seller’s representations
and warranties, the seller is generally required to cure the breach or, if the breach is not cured, to
either substitute the defective loan with another loan of adequate quality or repurchase the
defective loan at a specified price. (Id. ¶¶ 126-27).
Citibank’s duties as trustee are outlined in the Trust documents. To the extent relevant
here, those duties fall into two categories: “pre-default” duties and “post-default” duties. A
trustee’s pre-default duties are largely limited to those enumerated in the trust documents. See
Elliot Assocs. v. J. Henry Schroder Bank & Tr. Co., 838 F.2d 66, 71 (2d Cir. 1988). The trustee
must, for example, accept on behalf of the Trust all right, title, and interest in and to the
mortgage loans (Compl. ¶¶ 131-32, 135-36); certify receipt of complete mortgage loan files from
the depositor (id. ¶ 136); notify all parties to the Trust documents upon discovering a breach of a
representation or warranty made by the seller with respect to any loan (id. ¶ 140); and notify a
servicer upon discovery of the servicer’s failure to comply with its obligations (id. ¶ 141).
A trustee’s duties increase following an “Event of Default,” as defined in the Trust
documents. For the PSA Trusts, an Event of Default occurs when the servicer fails to perform its
duties and — after proper notice from either a particular percentage of the investors or the trustee
3
— fails to cure that breach within a specified period of time. (Id.; see Decl. Matthew D. Ingber
(Docket No. 40) (“Ingber Decl.”), Ex. 1A (“Sample PSA”) § 7.01). For the Indenture Trusts, an
Event of Default is slightly different: For those trusts, an Event of Default occurs when the
issuing trust fails to perform its obligations under the Indenture and — again, after proper notice
from a particular number of investors or the trustee — that default is not cured. (Compl. ¶ 163;
Ingber Decl., Ex. 2 (“Sample Indenture”), App. A at 87). In any case, after an Event of Default,
the trustee must “exercise such of the rights and powers vested in it,” including the power to
terminate or otherwise take action against a servicer, “and 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.” (Sample PSA § 8.01; see also Sample Indenture § 6.01).
In this case, Plaintiffs allege that Citibank breached both its pre- and post-default duties
when, between 2009 and 2011, Citibank learned that the Trusts contained large numbers of loans
where the seller or servicer had failed to comply with its obligation, and Citibank failed to take
appropriate action. (Compl. ¶¶ 5, 12, 222, 27-76, 281, 285-303). Because of these deficiencies,
Plaintiffs allege, the Trusts have lost more than $2 billion. (Id. ¶ 97).
LEGAL STANDARDS
As noted, Citibank’s motion is brought pursuant to Rules 12(b)(1) and 12(b)(6). A Rule
12(b)(1) motion challenges the court’s subject matter jurisdiction to hear the case. “A case is
properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district
court lacks the statutory or constitutional power to adjudicate it.” Makarova v. United States,
201 F.3d 110, 113 (2d Cir. 2000). In reviewing a motion to dismiss under Rule 12(b)(1), a court
“must take all facts alleged in the complaint as true and draw all reasonable inferences in favor
of plaintiff, but jurisdiction must be shown affirmatively, and that showing is not made by
drawing from the pleadings inferences favorable to the party asserting it.” Morrison v. Nat’l
4
Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008) (internal quotation marks and citation
omitted). Moreover, a court “may consider affidavits and other materials beyond the pleadings
to resolve the jurisdictional issue, but [the Court] may not rely on conclusory or hearsay
statements contained in the affidavits.” J.S. ex rel. N.S. v. Attica Cent. Schs., 386 F.3d 107, 110
(2d Cir. 2004). “The plaintiff bears the burden of proving subject matter jurisdiction by a
preponderance of the evidence.” Aurecchione, 426 F.3d at 638.
By contrast, a Rule 12(b)(6) motion tests the legal sufficiency of a complaint and requires
a court to determine whether the facts alleged in the complaint are sufficient to show that the
plaintiff has a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). When
ruling on a Rule 12(b)(6) motion, a court must accept the factual allegations set forth in the
complaint as true and draw all reasonable inferences in favor of the plaintiff. See, e.g., Holmes v.
Grubman, 568 F.3d 329, 335 (2d Cir. 2009). To survive such a motion, however, the plaintiff
must plead sufficient facts “to state a claim to relief that is plausible on its face.” Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially 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.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
DISCUSSION
Citibank argues that Plaintiffs’ Complaint should be dismissed because (1) the TIA does
not authorize a private right of action (Def.’s Mem. 31-35); (2) the Court lacks supplemental
jurisdiction over Plaintiffs’ PSA Trust claims (id. at 12-20); and (3) Plaintiffs fail to state a claim
(id. at 20-31, 35-38). The Court will address each argument in turn.
5
A.
Private Right of Action Under the TIA
There is no dispute that federal jurisdiction exists in this case only by virtue of Plaintiffs’
TIA claims with respect to the Indenture Trusts. 2 The Court therefore begins with Citibank’s
argument that the TIA does not provide a private right of action. If Citibank is correct, then
Plaintiffs’ only federal claims must be dismissed, and there would be little or no need to consider
Citibank’s other arguments. See, e.g., Davis v. Bombardier Transp. Holdings (USA) Inc., No.
11-CV-0782 (RRM) (RER), 2013 WL 6816605, at *12 (E.D.N.Y. Dec. 24, 2013) (“Generally,
when a court dismisses a plaintiff’s federal claims, it should decline to exercise supplemental
jurisdiction over the remaining state law claims as well.” (citing cases)).
Plaintiffs bring claims pursuant to Sections 315(b) and (c) of the TIA. (Compl. ¶¶ 40306; see also Pls.’ Mem. 33 n.21). The former provides, in relevant part, that “[t]he indenture
trustee shall give to the indenture security holders . . . notice of all defaults known to the trustee,
within ninety days after the occurrence thereof.” 15 U.S.C. § 77ooo(b). The latter provides 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 skill in their exercise, as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.” Id. § 77ooo(c). Although neither provision contains an
express private right of action, courts — including those in this Circuit — have consistently
recognized an implied private right of action under both. See, e.g., Zeffiro v. First Pa. Banking
& Tr. Co., 623 F.2d 290 (3d Cir. 1980); LNC Inv., Inc. v First Fid. Bank, 935 F. Supp. 1333
(S.D.N.Y. 1996) (citing cases); see also Bluebird Partners, L.P. v. First Fid. Bank, N.A., 85 F.3d
2
As both parties acknowledge (see Def.’s Mem. 10-11; Pls’ Opp’n Def. Citibank, N.A.’s
Mot. To Dismiss (Docket No. 43) (“Pls.’ Mem.”) 33 n.20), the TIA does not apply to the PSA
Trusts. See Ret. Bd. Policemen’s Annuity & Benefit Fund of Chi., 775 F.3d 154, 170 (2d Cir.
2014) (“Retirement Bd.”).
6
970, 974 (2d Cir. 1996) (citing Zeffiro favorably, and describing it as “establish[ing] a private
cause of action under the [TIA]”); cf. In re Bankers Tr. Co., 450 F.3d 121, 126-27 (2d Cir. 2006)
(analyzing whether a trustee had complied with Section 315(b) without suggesting that there was
no private right of action); Royal Park Investments SA/NV v. HSBC Bank USA, Nat. Ass’n, No.
14-CV-8175 (SAS), 2015 WL 3466121, at *14-15 (S.D.N.Y. June 1, 2015) (holding that the
plaintiffs stated a claim under Sections 315(b) and (c) of the TIA).
In Zeffiro, for example, the Third Circuit, relying heavily on the factors articulated by the
Supreme Court in Cort v. Ash, 422 U.S. 66 (1975), held that Congress intended to create a
private right of action under the TIA because (1) the TIA was enacted for the benefit of a special
class, namely, debenture holders; (2) legislative history revealed Congress’s intention “to
nationalize the issues of concern in the Act”; (3) the Securities and Exchange Commission
(“SEC”) has no power to enforce the terms of an indenture after it has been qualified under the
Act, leaving private lawsuits as the only possible enforcement mechanism; and (4) “[i]t is
unquestionable that Congress intended to legislate over trust indentures and deal with the
problem on a national scale.” 623 F.2d at 296-301. Similarly, in LNC Investments, a Court in
this District found that “[b]oth text and legislative history support the inference that Congress
intended to permit debenture holders to sue in federal court.” 935 F. Supp. at 1339. In so ruling,
the LNC Investments Court, like the Zeffiro Court, emphasized that the SEC is not entitled to
enforce the terms of indentures covered by the TIA. Id. at 1339-40; see 15 U.S.C. §77iii(e)
(“Nothing in this subchapter shall be construed as empowering the Commission to conduct an
investigation or other proceeding for the purpose of determining whether the provisions of an
indenture which has been qualified under this subchapter are being complied with, or to enforce
such provisions.”). The LNC Investments Court also focused on the text of Sections 315(d) and
(e), which suggest that an indenture trustee may be held liable for misconduct other than making
7
material misstatements or omissions in a report to the SEC (with respect to which the TIA
provides an express right of action, see 15 U.S.C. § 77www). See LNC Investments, 935 F.
Supp. at 1339. As the Court noted, both provisions would likely have been written more
narrowly if there were no private right of action under Sections 315(b) and (c). Id.
Notably, Citibank cites no authority to the contrary. (The closest it comes is to note that,
in 2014, the Second Circuit “expressly declined to address the scope of any private right of
action authorized by the TIA.” (Def.’s Mem. 34 n.2 (citing Retirement Bd., 775 F.3d at 170)).)
Instead, Citibank is left to argue, from first principles, that the courts recognizing a private right
of action under Sections 315(b) and (c) have all gotten it wrong. In particular, Citibank argues
that neither the TIA’s text nor its history suggests that Congress intended to create a private right
of action to enforce the provisions at issue here. (See Def.’s Mem. 34-35 & n.12). With respect
to the former, Citibank stresses that another provision of the TIA — concerning false or
misleading statements made to the SEC in connection with administration of the TIA —
expressly creates a private right of action. (Def.’s Mem. 32 (citing 15 U.S.C. §77www). And
with respect to the latter, Citibank points to statements by members of Congress at the time of
the TIA’s enactment to the effect that indentures qualified under the statute would be enforced in
the same manner as any other indenture. Insofar as indentures are contracts, Citibank argues,
those statements indicate that Congress expected indentures covered by the TIA to be enforced
only through breach of contract actions in state court. (Def.’s Mem. 33-34).
The Court is unpersuaded. To be sure, the existence of an express right of action
elsewhere in the statute cuts against a finding that Congress also intended to create an implied
right of action under the provisions at issue here. See, e.g., Touche Ross & Co. v. Redington, 442
U.S. 560, 571-72, 574 (1979). But it is not dispositive. Indeed, the TIA is not the only statute
for which courts have recognized an implied right of action under one provision even though
8
another provision of the same statute includes an express cause of action. See, e.g., Herman v.
MacLean v. Huddleston, 459 US 375, 385 (1983) (“When Congress acted, federal courts had
consistently and routinely permitted a plaintiff to proceed under Section 10(b) even where
express remedies under Section 11 or other provisions were available.”). Additionally, the
legislative history that Citibank cites does not prove its point. For one thing, given that the SEC
has no authority to enforce the terms of an indenture after it is qualified, see 15 U.S.C. § 77iii(e),
the statements at issue likely referred to the fact that the indentures could be enforced only by
private parties. Further, other legislative history unambiguously contradicts Citibank’s
interpretation: The Senate Report on the 1990 TIA amendments, for example, expressly stated
that the amendment was “intended to codify the holdings of Zeffiro . . . finding private rights of
action for enforcement of mandatory indenture terms.” (Pls.’ Mem. 34 (quoting S. Rep. No.
101-155, at 31 (1989)); Reply Mem. Law Supp. Citibank, N.A.’s Mot. To Dismiss (Docket No.
45) (“Def.’s Reply”) 14 (arguing that the Court should disregard the Senate Report)). Although
that statement is not conclusive, it is certainly persuasive evidence of Congress’s intent.
That said, the Supreme Court’s decision in Alexander v. Sandoval, 532 U.S. 275 (2001),
does give this Court some pause. In that case, the Supreme Court held that there was no implied
private right of action to enforce disparate impact regulations promulgated to effectuate Title VI
that went beyond the conduct prohibited by Title VI itself. Key to the Court’s analysis was the
fact that the regulations were enacted pursuant to a provision authorizing federal agencies to
“effectuate provisions of [the statute] . . . by issuing rules, regulations, or orders of general
applicability.” Sandoval, 532 U.S. at 285-89. The Court reasoned that “[s]tatutes that focus on
the person regulated rather than the individuals protected create no implication of an intent to
confer rights on a particular class of persons,” and found that the statute at issue was “yet a step
further removed” because it “focuse[d] neither on the individuals protected nor even on the
9
[entities] being regulated, but on the agencies that . . . [did] the regulating.” Id. at 288-89. In
this case, there is no dispute that the TIA provisions at issue are phrased in terms of the trustee’s
duties rather than the investors’ entitlement. Nevertheless, their focus “is not solely on the
[trustee], but also on the individuals [they] protect[].” Zatuchni v. Richman, No. 07-CV-4600,
2008 WL 3408554, at *9 (E.D. Pa. Aug. 12, 2008) (finding that a provision providing that a
“State plan for medical assistance must . . . provide that all individuals wishing to make
application for medical assistance under the plan shall have opportunity to do so” did not focus
on the regulated entity, so as to preclude the inference that Congress intended to create a private
right of action). That is, Sections 315(b) and (c) impose specific duties that the trustee must
perform to protect investors, and “a statute that imposes fiduciary duties necessarily implies
corresponding rights in the beneficiaries.” Int’l Union of Operating Eng’rs, Local 150, AFLCIO v. Ward, 563 F.3d 276, 286 (7th Cir. 2009) (finding that a statute “articulat[ing] a series of
specific fiduciary duties” for union officers created an implied right of action for unions). Thus,
Sandoval does not persuade the Court to depart from the longstanding view that a private right of
action exists to enforce Sections 315(b) and (c). See Touche Ross & Co., 442 U.S. at 577 n.19
(noting that in approving a private right of action under Section 10(b) of the Securities Exchange
Act of 1934, the Court had “explicitly acquiesced in the 25-year-old acceptance by the lower
federal courts” of such an action). Accordingly, Plaintiffs’ TIA claims may go forward.
B.
Supplemental Jurisdiction
The next question is whether the Court may (and, if so, should) exercise jurisdiction over
Plaintiffs’ claims with respect to the PSA Trusts, which are not covered by the TIA. Plaintiffs
invoke the Court’s supplemental jurisdiction, which extends to state-law claims that are “so
related to claims” within the Court’s original jurisdiction (in this case, Plaintiffs’ TIA claims)
“that they form part of the same case or controversy.” 28 U.S.C. § 1367(a). Relying principally
10
on the Second Circuit’s decision in Retirement Board, which held that claims against a trustee
must be proved “loan-by-loan and trust-by-trust,” 775 F.3d at 162, Citibank argues that the Court
lacks supplemental jurisdiction over the PSA Trust claims because they will require “loan and
trust-specific evidence.” (Def.’s Mem. 12-13). Thus, Citibank maintains, “the nucleus of
‘operative fact’ actually giving rise to the claim relating to any one trust (e.g., an [Indenture]
trust) is wholly different from that giving rise to the claims against the others (e.g., each of the
PSA trusts).” (Id.). Alternatively, Citibank contends that, even if the Court can exercise
supplemental jurisdiction with respect to the PSA Trust claims, it should decline to do so
because, among other things, issues of state law would predominate over the federal questions in
the case. (Id. at 14-20).
As a threshold matter, the Court concludes that it can exercise supplemental jurisdiction
over the PSA Trust claims. As Judge Scheindlin recently held in a case substantially similar to
this one, the fact that Plaintiffs will have to present loan-specific evidence to prevail at trial or on
summary judgement does not mean that there is no common nucleus of operative fact between
the PSA Trust claims and the Indenture Trust claims. See Blackrock Balanced Capital Portfolio
v. HSBC Bank USA, Nat’l Assoc., No. 14-CV-9366 (SAS), — F. Supp. 3d —, 2015 WL
1501283, at *4-5 (S.D.N.Y. Mar. 31, 2015). But see Blackrock Allocation Target Shares: Series
S Portfolio v. U.S. Bank Nat’l Ass’n, No. 14-CV-9401 (KBF), 2015 WL 2359319, at *4
(S.D.N.Y. May 18, 2015) (finding that PSA Trust claims and Indenture Trust claims did not arise
from a common nucleus of operative fact). To the contrary, the contractual provisions governing
both types of trusts impose similar obligations on the trustee, and Plaintiffs’ “allegations arise
from the common conduct of [Citibank] in systematically failing to perform its duties as trustee”
as required by those contractual provisions. Blackrock Balanced Capital Portfolio, 2015 WL
1501283, at *4. Plaintiffs will therefore ultimately be required to “prove their claims under
11
substantially similar agreements with substantially the same burden of proof.” Id. at *4. Further,
as Plaintiffs point out in their memorandum of law, many of the entities involved with the
Indenture Trusts are also involved with the PSA Trusts. American Home, for example, served as
an originator for both the Indenture Trusts and the PSA Trusts, and two sponsors for the
Indenture Trusts are also sponsors for PSA Trusts. (Decl. Timothy A. Delange Supp. Pls.’
Opp’n Def. Citibank, N.A.’s Mot. To Dismiss (Docket No. 44) (“DeLange Decl.”), Ex. 1, Chart
1; id., Chart 2). That is sufficient to demonstrate that the claims relating to the PSA Trusts form
part of the same case or controversy as those relating to the Indenture Trusts.
Retirement Board does not compel a different result. (Def.’s Mem. 13-14). In that case,
the Second Circuit held that a named plaintiff does not have class standing to assert, on behalf of
absent class members, breach-of-duty claims against the trustee of an RMBS trust in which the
plaintiffs did not invest. In so ruling, the Second Circuit did indeed emphasize that the trustee’s
“alleged misconduct must be proved loan-by-loan and trust-by-trust,” preventing the named
plaintiffs from having a sufficient personal stake in proving claims arising out of the other trusts.
Ret. Bd., 775 F.3d at 162-63. But the Court said nothing about whether the claims formed part of
the same case or controversy, and the fact that a plaintiff would have an insufficient personal
stake to pursue a particular claim does not necessarily mean that that claim would lack a
common nucleus of operative fact with a claim in which the plaintiff does have a sufficient stake.
The Court therefore finds that it can exercise jurisdiction over all of Plaintiffs’ claims.
That conclusion, however, does not end the Court’s inquiry. Under Section 1367, a
district court has discretion over whether to exercise jurisdiction over state-law claims, even if
they, like the ones at issue here, “are so related to claims in the action within [the district court’s]
original jurisdiction that they form part of the same case or controversy under Article III of the
United States Constitution.” Under that provision, a court may decline to exercise supplemental
12
jurisdiction if “(1) the claim raises a novel or complex issue of State law, (2) the claim
substantially predominates over the claim or claims over which the district court has original
jurisdiction, (3) the district court has dismissed all claims over which it has original jurisdiction,
or (4) in exceptional circumstances, there are other compelling reasons for declining
jurisdiction.” 28 U.S.C. § 1367(c). With respect to the second prong, state-law claims may
predominate over federal claims “in terms of proof, of the scope of the issues raised, or of the
comprehensiveness of the remedy sought.” Dedalus Found. v. Banach, No. 09-CV-2842 (LAP),
2009 WL 3398595, at *5 (S.D.N.Y. Oct. 16, 2009) (quoting United Mine Workers of America v.
Gibbs, 383 U.S. 715, 726 (1966)); see also Giordano v. City of N.Y., 274 F.3d 740, 754 (2d Cir.
2001). Further, even where “at least one of the subsection 1367(c) factors is applicable, a district
court should not decline to exercise supplemental jurisdiction unless it also determines that doing
so would not promote the values articulated in United Mine Workers of America v. Gibbs, 383
U.S. 715, 726 (1966): economy, convenience, fairness, and comity.” Shahriar v. Smith &
Wollensky Rest. Group, Inc., 659 F.3d 234, 245 (2d Cir. 2011) (internal quotation marks
omitted).
Here, because Plaintiffs will ultimately have to prove their claims loan-by-loan and trustby-trust, the Court concludes that the state-law claims do “substantially predominate[]” over the
federal claims. It is true that, as Plaintiffs argue, the “relevant issue” for the predominance
inquiry is generally “the type of claims, not the number of complaints or damages involved.”
(Pls.’ Mem. 20). See Shahriar, 659 F.3d at 246 (finding that “the fact that there are more class
members in the state law class action than those in the FLSA collective action should not lead a
court to the conclusion that a state claim ‘substantially predominates’ over the FLSA action”).
But, despite that general rule, courts have recognized that a “disparity in numbers” between state
and federal claims “may be so great that it becomes dispositive by transforming the action to a
13
substantial degree by causing the federal tail represented by a comparatively small number of
plaintiffs to wag what is in substance a state dog.” De Asencio v. Tyson Foods, Inc., 342 F.3d
301, 311 (3d Cir. 2003); accord Panam Mgmt. Grp., Inc. v. Pena, No. 08-CV-2258 (JFB)
(ARL), 2010 WL 3708656, at *5 (E.D.N.Y. Sept. 14, 2010) (declining to exercise jurisdiction
over state-law claims where the state-law claims involved “25 different investors,” and the
federal claim involved only a single contract, and where, although all of the claims involved
breach of contract, they related to different contracts). That is the case here. Given that only
three (if not fewer) of the twenty-seven Trusts at issue here are Indenture Trusts, it is plain that
the time and resources spent on the PSA Trust claims, were the Court to retain jurisdiction over
them, would far outweigh the time and resources devoted to the Indenture Trust claims.
Further, the traditional “values of judicial economy, convenience, fairness, and comity”
that the Court must consider do not counsel in favor of exercising jurisdiction. Carnegie–Mellon
Univ. v. Cohill, 484 U.S. 343, 350 (1988). This case is still in its early stages, and an action
involving many Trusts — each of which requires individualized proof — would plainly be more
complex than an action involving only a few Trusts. There is therefore no indication that either
judicial economy or convenience would be advanced by the Court’s exercise of supplemental
jurisdiction. See Blackrock Allocation Target Shares, 2015 WL 2359319, at *4 (“Ultimately,
these numbers suggest that state law claims substantially predominate over the TIA claim — and
that exercising supplemental jurisdiction would create difficult management issues that would
not otherwise arise.”). But see Blackrock Balanced Capital Portfolio, 2015 WL 1501283, at *4.
Further, there is at least some evidence that Plaintiffs may be engaging in forum shopping;
Citibank claims that Plaintiffs, who first filed their case in state court, re-filed in federal court “in
direct response to the assignment of the case to an experienced New York judge who has been
skeptical of claims like those asserted here.” Notably, Plaintiffs do not dispute those allegations.
14
(Def.’s Mem. 19-20; see also Def.’s Reply 8 (stating that Plaintiffs do not dispute that their
“attempted judge- and forum-shopping strongly support dismissal”)). Courts have recognized
that it is “particularly appropriate to decline to exercise supplemental jurisdiction” where a party
invokes federal jurisdiction as part of “an effort in forum shopping.” See Solid State Logic, Inc.
v. Terminal Marketing Co., Inc., No. 02-CV-1378 (DLC), 2002 WL 1586977, at *5 (S.D.N.Y.
July 18, 2002). Accordingly, the Court declines to exercise supplemental jurisdiction over
Plaintiffs’ PSA Trust claims, and those claims are dismissed.
C.
Failure To State a Claim
Finally, Citibank argues that Plaintiffs fail to state a plausible claim with respect to the
Indenture Trusts. In particular, Citibank argues that Plaintiffs’ breach of contract claim fails
because Plaintiffs do not allege that Citibank actually knew about breaches of any parties’
representations and warranties or Events of Default; that their TIA claims fail for similar reasons;
and that their negligence and fiduciary duty claims fail because they are duplicative of Plaintiffs’
contract claims and because Plaintiffs do not adequately plead a conflict of interest.
1. Breach of Contract
Citibank argues first that Plaintiffs’ breach of contract claims fail as a matter of law
because the Complaint alleges neither that Citibank actually knew about a particular seller’s
breach of its representations and warranties nor that it actually knew that an Event of Default had
occurred, as required by the Trust Documents. (Def.’s Mem. 20-31). With respect to the former,
Citibank argues that the Complaint falls short because Plaintiffs “do not plead any facts showing
that statements regarding any specific loan in one of the Trusts breached the seller’s
representations and warranties — let alone that Citibank had knowledge of such a breach.” (Id.
at 23). But, as several courts have recognized, “[a]t the pleading stage, plaintiffs cannot be
required to identify breaches of representations and warranties with respect to the individual
15
loans in the specific trusts [as] such information, at this stage, is uniquely in the possession of
defendants.” Policemen’s Annuity and Ben. Fund of Chi. v. Bank of Am., NA, 943 F. Supp. 2d
428, 442 (S.D.N.Y. 2013) (“Policemen’s/BofA II”), abrogated on other grounds by Retirement
Bd., 775 F.3d 154; see also Okla. Police Pension & Ret. Sys. v. U.S. Bank Nat. Ass’n, 291 F.R.D.
47, 70 (S.D.N.Y. 2013) (same), abrogated on other grounds by Retirement Bd., 775 F.3d 154.
Instead, Plaintiffs only have to plead “factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. They
more than do so here.
First, Plaintiffs allege “pervasive breaches of representations and warranties,” including
that “the representations and warranties regarding the originators’ compliance with underwriting
standards and practices, owner occupancy statistics, appraisal procedures, [loan-to-value ratios]
and combined loan-to-value . . . ratios were systematically and pervasively false.” (Compl. ¶
168). According to the Complaint, this falsity was evident from, among other red flags, high
default rates, declines in credit ratings, and government and newspaper reports that uncovered
the pervasive abandonment of underwriting standards — including reports about the major
originators and sponsors of loans in the Trusts. (Id. ¶¶ 169-221). In light of such allegations,
Plaintiffs’ claims that the sellers breached their representations and warranties are certainly
plausible. 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.
Policemen’s/BofA II, 943 F. Supp. 2d at 442; see also Royal Park Investments, 2015 WL
3466121, at *6 (finding that Plaintiffs had met their burden of alleging breaches of the sellers’
representations and warranties where the complaint described the “routine abandonment of their
underwriting guidelines; the routine fabrication of borrower and loan information; massive
16
breaches of their representations and warranties; and the engagement in predatory and abusive
lending”).
Plaintiffs’ allegations regarding Citibank’s knowledge of these breaches and warranties
are similarly sufficient. Plaintiffs support their claims that Citibank knew about the sellers’
breaches with allegations that: (1) the Trusts had “extremely high mortgage loan delinquency
rates,” as well as high rates of loan modification (Compl. ¶¶ 223-27); (2) Citibank learned about
widespread breaches of representations and warranties because of its involvement with other
RMBS trusts in various capacities, including serving as one of the largest RMBS servicers, being
named in RMBS litigation involving similar allegations to those made here, and receiving notice
of breaches with respect to other trusts for which it served as trustee (id. ¶¶ 230-54); and (3)
other high profile litigation and settlements regarding the same originators and sponsors as those
involved with the Trusts (id. ¶¶ 255-61). Although none of these allegations demonstrates
Citibank’s knowledge of deficiencies with respect to any particular loan, they are sufficient to
meet Plaintiffs’ burden at the motion-to-dismiss stage. See Royal Park Investments, 2015 WL
3466121, at *7 (finding allegations of the high number of defaults, “enormous” trust losses,
declining credit ratings, reports and litigation regarding improper underwriting practices,
litigation concerning loans in some of the specific trusts, and the trustee’s involvement in
“putback” efforts involving the same sellers were sufficient to allege the trustee’s actual
knowledge); Policemen’s/BofA II, 943 F. Supp. 2d at 442 (“While it is possible that the Trustees
merely reported on increasing credit losses but did not actually know that these losses indicated
that the loans did not meet the represented credit standards, it is certainly plausible that they
actually knew that the representations had been breached.”). But see Knights of Columbus v.
Bank of N.Y. Mellon, Index No. 651442/2011, slip op. at 6-9 (N.Y. Supp. Ct. July 10, 2015)
(dismissing a claim against a trustee because the plaintiffs had not adequately pleaded that the
17
trustee had notice of an event of default where they had alleged only “widespread knowledge of
improper servicing . . . of which [the trustee] had general knowledge through news media
reports, investigations and lawsuits”).
Citibank’s argument with respect to Plaintiffs’ allegations that Citibank did not
appropriately respond to Events of Default similarly fails. First, Citibank argues that Plaintiffs
do not actually allege that any Event of Default occurred. (Def.’s Mem. 28-29). Under the
Indentures, an “Event of Default” occurs when the Issuer materially breaches its obligations, is
notified of the breach by the Trustee or by a certain percentage of investors, and fails to cure the
material breach for a period of thirty days. (Sample Indenture, App. A at 87). Citibank argues
that Plaintiffs fail to plead that any Issuer in fact received notice of a default. (Def.’s Mem. 2829). 3 But Citibank may not excuse its failure to perform the additional duties required of it after
an Event of Default by pointing to its own failure to give notice; that is, Citibank “is not
permitted to take advantage of its own wrong.” In re Bankers Trust Co., 450 F.3d at 129
(internal quotation marks and alteration omitted); see, e.g., Okla. Police Pension & Ret. Sys.,291
F.R.D. at 70-71 (holding that “the trustee cannot rely on its own failure to give notice to escape
its own liability” even though an event of default could be triggered by notice either from the
trustee or from twenty-five percent of the security holders). This principle holds true even if
Citibank was not contractually required to give notice. (See Def.’s Reply 11-12). Whether or
not Citibank had a contractual duty to give notice, it certainly had the power to do so, and it “has
been established for over a century that a party may not insist upon performance of a condition
3
Because Citibank’s briefing focused principally on the PSA Trusts, it frames its argument
in terms of a lack of notice to the servicers, as required under the PSAs, rather than the issuers,
as required under the Indentures. (Def.’s Mem. 28-29). The same principle, however, applies to
both types of Trusts. Accordingly, the Court construes Citibank’s argument to encompass also a
lack of notice to the issuers, as required for Indenture Trusts.
18
precedent when its non-performance has been caused by the party itself.” Royal Park
Investments, 2015 WL 3466121, at *9 (internal quotation marks omitted).
Citibank also argues that Plaintiffs do not adequately plead the existence of an Event of
Default because the Indenture Trusts define an Event of Default in terms of the issuer’s breach of
its duties, while the Complaint alleges only servicer misconduct. (Def.’s Mem. 35-36). 4 But, as
Plaintiffs point out in their memorandum of law, the Indenture requires the Issuer to “take such
. . . action necessary or advisable to . . . cause the Issuer or Master Servicer to enforce any of the
rights of the Mortgage Loans” or to “preserve and 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.” (Sample Indenture 17 (emphasis added); see Compl. ¶ 161). As noted
above, each Indenture Trust also entered into an SSA and MLPA with the relevant sellers and
servicers. Those documents required the sellers and servicers to perform certain duties. (Compl.
¶¶ 162, 165-67). Thus, if the sellers or servicers violated those warranties or failed to cure or
repurchase defective mortgages, “the issuer similarly failed to ‘enforce any rights with respect to
[the Trust], as the Indenture required it to do.” Royal Park Investments, 2015 WL 3455121, at
*9; see also Ret. Bd. of the Policemen’s Annuity & Benefit Fund Chi. v. Bank of N.Y. Mellon
(“Policemen’s/BNYM”), 914 F. Supp. 2d 422, 432 (S.D.N.Y. 2012) (same), abrogated on other
grounds by Ret. Bd., 775 F.3d 154 (2d Cir. 2014). Citibank argues that the Indenture provisions
apply only to enforcement of the Trust’s ownership rights, but “nothing in the language of that
clause limits this obligation to ownership interests — in fact, the language is sweepingly broad
4
Strictly speaking, Citibank makes this argument only in the section of its memorandum
concerning Plaintiffs’ TIA allegations. (Def.’s Mem. 35-36). Nevertheless, the Court addresses
it here because it applies equally to Plaintiff’s breach of contract arguments.
19
and by its plain terms encompasses any rights with respect to the Trust.” Royal Park
Investments, 2015 WL 3455121, at *17 n.94.
Further, Plaintiffs adequately plead Citibank’s actual knowledge of the Events of Default.
At bottom, Citibank makes the same argument with regard to its knowledge (or lack thereof)
about the Events of Default as it made with regard to its knowledge of the breaches of the sellers’
representations and warranties: “Just as ‘actual knowledge’ of a seller’s breach of representations
and warranties must be loan-specific, the Trustee’s knowledge of a servicer’s breach of its
obligations under the contracts giving rise to an Event of Default must be trust-specific.” (Def.’s
Mem. 29-30). Again, however, Citibank mistakes the facts that Plaintiffs would have to prove at
trial (or on summary judgment) with the allegations that they must include in their Complaint; in
the Complaint, Plaintiffs must demonstrate only that it is plausible that Citibank knew that the
servicers had breached their obligations to particular trusts. Here, Plaintiffs allege that Citibank
had such actual knowledge based on (1) Citibank’s involvement in enforcement actions and
other litigation stemming from servicers’ violations with respect to other trusts (Compl. ¶¶ 30409); (2) Citibank’s receipt of written notice from investors in other trusts, for which it also served
as the trustee, of the systemic servicing violations by the same entities that service the Trusts at
issue here (id. ¶¶ 310-12); and (3) Citibank’s publishing of the servicers’ servicing reports and
monthly remittance reports, which “detailed the Trusts’ increasing loan modifications, staggering
losses, and write-downs due to the poor credit quality of the loans, but did not reflect the
servicers’ actions to enforce the sellers’ repurchase obligations” (id. ¶ 313). Those allegations
are sufficient at this stage. See, e.g., Royal Park Investments, 2015 WL 3455121, at *10 (finding
that the plaintiffs had sufficiently pleaded actually knowledge of Events of Default based on
allegations that the trustee “was the target of government investigations, prosecutions and
settlements with many of the Servicers to the Trusts for the same alleged improper servicing
20
practices,” and received “written notice from Holders to other RMBS trusts regarding the same
servicing violations by the same servicers to the Trusts [at issue]”). Accordingly, Plaintiffs’
breach of contract claims with respect to the Indenture Trusts survive.
2. TIA Claims
In light of the foregoing, Citibank’s argument for dismissal of Plaintiffs’ TIA claims is
easily rejected. As noted, Plaintiffs bring claims pursuant to Sections 315(b) and (c) of the TIA,
which impose duties on a trustee that arise after a default. See 15 U.S.C. § 77ooo(b), (c). 5
Citibank argues that “default” under the statute means default as defined in the Indenture and
that Plaintiffs fail to state a claim because they do not allege that any default occurred. (Defs.’
Mem. 35). But even assuming arguendo that Sections 315(b) and 315(c) come into play only
after a default as defined in the Indenture, Citibank’s argument fails because, as discussed above,
Plaintiffs adequately allege that such a default occurred.
3. Negligence and Breach of Fiduciary Duties
Lastly, Plaintiffs bring two negligence claims — one for breach of the “pre-default duty
of independence” and one for breach of the “duty of care” — and two breach of fiduciary duty
claims — one for breach of the “duty of care” and one breach of the “post-default duty of
independence.” Citibank argues that they should be dismissed as duplicative of Plaintiffs’
contract claims. (Def.’s Mem. 37). It is well established that where “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.”
5
The Complaint also mentions Section 315(a) (see Compl. ¶ 403), but to the extent
Plaintiffs ever intended to bring claims pursuant to that provision, such claims have been
abandoned. (See Pls.’ Mem. 33 n.21 (stating that “Citibank’s challenge to Plaintiffs’ TIA
Section 315(a) claim is misplaced” because Plaintiffs TIA claim “is predicated on . . .
violation[s] of 315(b) and (c)”). The Court therefore need not address Citibank’s argument that
Plaintiffs fail to state a claim under Section 315(a). (See Def.’s Mem. 35).
21
Bayerische Landesbank, N.Y. Branch v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 58 (2d Cir.
2012); see also Northern Shipping Funds I, LLC v. Icon Capital Corp., 921 F. Supp. 2d 94, 106
(S.D.N.Y. 2013) (dismissing a breach of fiduciary duty claim as duplicative of a contract claim).
In this case, that principle compels dismissal of Plaintiffs’ second negligence claim and their first
fiduciary duty claim — that Citibank breached its “duty of care.” (Compl. ¶¶ 418- 431). The
negligence claim alleges that, after Events of Default occurred, Citibank failed to notify investors
of the originators’ and sponsors’ breaches of their obligations, to enforce sellers’ obligation to
cure, or to enforce servicers’ obligations. (Id. ¶¶ 425-29). Those alleged deficiencies, however,
are essentially the same ones that give rise to Plaintiffs’ breach of contract claims. The fiduciary
duty claim is also duplicative; it alleges that Citibank breached its fiduciary duty “to exercise its
contractually conferred rights and powers in good faith and to bring all available claims for the
benefit of the Trusts and the Certificateholders following an Event of Default.” (Id. ¶ 419).
Accordingly, those claims must be and are dismissed.
Plaintiffs’ other negligence and fiduciary duty claims, however, allege the violation of
extra-contractual duties — namely, pre- and post-default duties of independence. (Id. ¶¶ 409-17
(negligence); id. ¶¶ 432-40 (fiduciary duty)). “Where an independent tort duty is present, a
plaintiff may maintain both tort and contract claims arising out of the same allegedly wrongful
conduct.” Bayerische Landesbank, N.Y. Branch, 692 F.3d at 58. Citibank argues that it did not
have any pre-default extra-contractual duties (Def.’s Mem. 37), but even it admits that New
York courts have recognized an implied, extra-contractual duty “to avoid direct conflicts of
interest with notesholders.” (Def.’s Mem. 4 n.3 (citing Ellington Credit Fund, Ltd. v. Select
Portfolio Serv., Inc., 837 F. Supp. 2d 162, 191-92 (S.D.N.Y. 2011)). Citibank argues that the
claims also fail because “[i]t is settled that a ‘conflict of interest cannot be inferred solely from a
relationship between [a securities issuer] and an indenture trustee that is mutually beneficial and
22
increasingly lucrative.” (Def.’s Mem. 37 (quoting Page Mill Asset Mgmt. v. Credit Suisse First
Boston Corp., No. 98-CV-6907 (MBM), 2000 WL 877004, at *2 (S.D.N.Y. June 30, 2000)).
That may well be true, but Plaintiffs allege more than that. Among other things, they allege that
Citibank itself engaged in the type of wrongful conduct alleged here in its capacity as an
originator and sponsor with respect to other trusts for which many of the same sellers and
servicers at issue here served as trustee. (Compl. ¶¶ 414, 437). Thus, 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. (Compl. ¶¶ 414-15; 437-38). Drawing all inferences in Plaintiffs’ favor, as the
Court must, Plaintiffs essentially allege that Citibank did not take action against the sellers and
servicers who violated their obligations to the Trusts because it feared retaliation from those
same servicers and sellers with respect to other loans. That allegation adequately pleads a
conflict of interest. See Royal Park Investments, 2015 WL 3466121, at *13 (finding that the
plaintiffs had adequately pleaded a trustee’s conflict of interest when they alleged that the trustee
“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”). Accordingly, Plaintiffs’ duty-of-independence negligence and fiduciary duty claims
survive Citibank’s motion to dismiss.
CONCLUSION
For the foregoing reasons, Citibank’s motion to dismiss is GRANTED in part and
DENIED in part. Specifically, the Court declines to exercise supplemental jurisdiction over
Plaintiffs’ claims relating to the PSA Trusts. Further, the negligence and fiduciary duty claims
alleged in the Complaint’s fourth and fifth causes of action — those relating to alleged breaches
of the duty of care — are also dismissed, on the ground that they are duplicative of Plaintiff’s
23
breach of contract claims. (See Compl. ¶¶ 418-31). With respect to the Indenture Trusts,
Plaintiffs adequately state a breach of contract claim (id. ¶¶ 387-99) and a TIA claim (id. ¶¶ 400408), and the motion to dismiss is denied with respect to those claims. Similarly, the negligence
and fiduciary duty claims alleged in the third and sixth causes of action — those relating to the
duty of independence — also survive. (See id. ¶¶ 409-17, 432-40).
The Clerk of Court is directed to terminate Docket No. 39.
SO ORDERED.
Date: September 8, 2015
New York, New York
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