Phoenix Light SF Limited et al v. Deutsche Bank National Trust Company
Filing
70
OPINION AND ORDER. The Court has considered all of the arguments by the parties. To the extent not specifically addressed above, the parties' arguments are either moot or without merit. For the foregoing reasons, Deutsche Bank's motion to d ismiss is denied in part and granted in part. The Clerk of Court is directed to close all pending motions. re: 26 MOTION to Dismiss Defendant's Notice of Motion to Dismiss the Amended Complaint filed by Deutsche Bank National Trus t Company, 10 MOTION for Matthew C. Davies to Appear Pro Hac Vice . Filing fee $ 200.00, receipt number 0208-10483407 filed by Phoenix Light SF Limited, 7 MOTION for George A. Zelcs to Appear Pro Hac Vice . Filin g fee $ 200.00, receipt number 0208-10483276 filed by Phoenix Light SF Limited, 8 MOTION for John A. Libra to Appear Pro Hac Vice . Filing fee $ 200.00, receipt number 0208-10483332 filed by Phoenix Light SF Limited, 35 MOTION to Dismiss the second amended complaint filed by Deutsche Bank National Trust Company, 9 MOTION for Maximilian C. Gibbons to Appear Pro Hac Vice . Filing fee $ 200.00, receipt number 0208-10483379 filed by Phoenix Light SF Limited. (Signed by Judge John G. Koeltl on 3/28/2016) (rjm)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
────────────────────────────────────
PHOENIX LIGHT SF LTD., ET AL.,
14-cv-10103 (JGK)
Plaintiffs,
OPINION AND ORDER
- against-
DEUTSCHE BANK NATIONAL TRUST CO.,
Defendant.
────────────────────────────────────
JOHN G. KOELTL, District Judge:
This case, like many others before it, is about residential
mortgage-backed securities (“RMBS”) trusts. Phoenix Light SF
Limited (“Phoenix”) and nine other special-purpose investment
vehicles (collectively “the plaintiffs”) that invested in RMBS
Trusts filed this action against Deutsche Bank National Trust
Company (“Deutsche Bank” or the “defendant”). Deutsche Bank was
the RMBS Trustee for 55 Trusts in which the plaintiffs had
invested (the “Covered Trusts” or “Trusts”). The Second Amended
Complaint (“SAC”) alleges that Deutsche Bank violated its duties
as the RMBS Trustee to ensure that the documents relating to the
mortgage files were complete, to ensure that the servicers of
the mortgage loans were acting prudently, and to give notice to
all the parties to the Pooling and Servicing Agreements (“PSAs”)
and Indenture Agreements (together, “Agreements”) that governed
1
the Covered Trusts that there were ongoing breaches of
representations and warranties by the sponsors or originators of
the Trusts and by the servicers of the Trusts. The plaintiffs
assert, among other things, that Deutsche Bank’s conduct as RMBS
Trustee breached the PSAs and Indenture Agreements; violated the
Trust Indenture Act of 1939 (“TIA”), 15 U.S.C. § 77aaa, et seq.,
and New York’s Streit Act, N.Y. Real Prop. Law § 124, et seq.;
breached the fiduciary duty Deutsche Bank owed to the
plaintiffs; and was negligent or grossly negligent.
Deutsche Bank now moves to dismiss portions of the SAC. For
the reasons explained below, Deutsche Bank’s motion is granted
in part and denied in part.
I.
Deutsche Bank moves to dismiss parts of the SAC pursuant to
Federal Rule of Civil Procedure 12(b)(6) for failure to state a
claim upon which relief can be granted.
In deciding a motion to dismiss pursuant to Rule 12(b)(6),
the allegations in the complaint are accepted as true, and all
reasonable inferences must be drawn in the plaintiff’s favor.
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.
2007). The Court’s function on a motion to dismiss is “not to
weigh the evidence that might be presented at a trial but merely
to determine whether the complaint itself is legally
sufficient.”
Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
2
1985). The Court should not dismiss the complaint if the
plaintiff has stated “enough 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 has facial plausibility when the
plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).
While the Court should construe the factual allegations in
the light most favorable to the plaintiff, “the tenet that a
court must accept as true all of the allegations contained in
the complaint is inapplicable to legal conclusions.” Id. When
presented with a motion to dismiss pursuant to Rule 12(b)(6),
the Court may consider documents that are referenced in the
complaint, documents that the plaintiff relied on in bringing
suit and that are either in the plaintiff’s possession or that
the plaintiff knew of when bringing suit, or matters of which
judicial notice may be taken. See Chambers v. Time Warner, Inc.,
282 F.3d 147, 153 (2d Cir. 2002).
II.
The Court accepts the plaintiffs’ allegations in the SAC as
true for the purposes of this motion to dismiss. The plaintiffs
are holders of RMBS certificates issued by certain Trusts for
which Deutsche Bank served as the Trustee. The Trusts were
3
created between 2005 and 2007. The Plaintiffs currently hold
RMBS certificates with an original face value of over $935
million. SAC ¶ 3.
The main plaintiff, Phoenix, is a private limited company
incorporated under the laws of Ireland with its principal place
of business in Ireland. SAC ¶ 16. The other plaintiffs are
special purpose entities that were formed to issue securities in
securitization transactions referred to as “collateralized debt
obligations” or CDOs. SAC ¶¶ 16-25. The plaintiffs are CDO
issuers that invested in RMBS certificates and then issued notes
pursuant to an indenture or an agreement. SAC ¶ 28.
In the course of briefing the present motion, the parties
agreed to dismiss claims relating to 4 Trusts, Dkt. Nos. 60 &
61, leaving only the claims pertaining to 51 Trusts. The Trusts
were created in a mortgage loan securitization process whereby
mortgage loans were originated and pooled together in various
trusts. The sponsor of the trust acquired the mortgage loans and
then sold the large pool of loans to a depositor. The depositor
conveyed the pool of loans to a trustee pursuant to a PSA. SAC
¶¶ 50-52. Trust certificates were issued for particular tranches
in the trust and the certificates were sold to an underwriter,
which in turn sold the certificates to investors, like the
plaintiffs. SAC ¶ 52. The servicer for each trust manages the
collection of mortgage payments in return for a fee, and the
4
servicer is tasked with monitoring loan performance, the rate of
default, and compliance with representations and warranties; the
servicer is also tasked with foreclosing and disposing of
properties. SAC ¶ 53. Each tranche in an RMBS trust has a
different level of risk, and credit rating agencies assign a
particular rating to each tranche. Senior tranches receive a
greater percentage of payment compared to the payment allocated
to junior tranches. SAC ¶ 55.
Deutsche Bank is the RMBS Trustee pursuant to the PSAs or
the Indenture Agreements for the Covered Trusts. SAC ¶¶ 50, 52,
58. The RMBS Trustee delivers to the certificate holders reports
that describe the performance of the loans. SAC ¶ 54. The PSAs
set forth the process by which the loans are conveyed to a
trust, namely the process in which the sponsor conveys loans to
the depositor and the depositor conveys loans to Deutsche Bank
as Trustee. SAC ¶ 59. Among the duties set forth in the PSAs,
Deutsche Bank must acknowledge receipt of the loan documentation
and retain physical possession of the documents. SAC ¶¶ 60, 62.
Deutsche Bank or a custodian was also required to issue a final
certification and exception report that identified the files
that were missing documents. SAC ¶ 63. The SAC alleges that in
the event of documentation deficiencies, Deutsche Bank was
required to demand that the sponsor cure defects or repurchase
or substitute defective loans. SAC ¶ 65. Some of the PSAs
5
specified that repurchase was not available after a specified
period of time, typically two years after the trust closed. SAC
¶ 66.
According to the SAC, Deutsche Bank was also required to
provide notice of breaches of covenants and representations and
warranties by the sponsors or originators and by the servicers
of the mortgages in the Trusts. SAC ¶¶ 67-69. The SAC alleges
that Deutsche Bank was aware of a widespread default rate and
underperforming loans because (1) several foreclosure actions
were commenced on Deutsche Bank’s behalf, SAC ¶¶ 97-98; (2) the
mortgage industry was widely plagued by predatory lending
practices and deficient underwriting guidelines, SAC ¶ 100;
(3) there were several highly publicized RMBS lawsuits,
including Deutsche Bank’s actions against certain sponsors and
mortgage loan originators and actions brought by monoline
insurers against sponsors for breaches of representations and
warranties concerning underwriting standards, SAC ¶¶ 102, 104,
115, 143-44; and (4) there were widespread downgrades in the
credit rating of RMBS Trusts due to high rates of default and
delinquencies, SAC ¶ 109. According to the SAC, despite being
aware of the widespread breaches of representations and
warranties, Deutsche Bank did not provide notice of these
defaults to the plaintiffs. SAC ¶ 117.
6
The SAC further alleges that Deutsche Bank became aware of
“Events of Default” under the Agreements and did not take
action. Among the alleged events of default, Deutsche Bank
allegedly knew that servicers were engaging in “robo-signing” to
foreclose on properties. SAC ¶¶ 123, 128. The servicers were
required to provide a conforming annual certification that they
were complying with the terms of the PSA. According to the SAC,
Deutsche Bank received certifications it knew to be false
because it knew the servicers were not satisfying their duties
under the PSAs, and the failure to provide a conforming
certification is allegedly an event of default under the PSAs.
SAC ¶¶ 138-40. The SAC alleges that with respect to the Trusts
governed by Indenture Agreements, Deutsche Bank was aware that
the parties tasked with the duty of protecting the collateral of
the trusts had failed to satisfy their obligations. SAC ¶¶ 13234. This failure allegedly constituted an event of default under
the Indenture Agreements. SAC ¶ 135.
The SAC alleges additional misconduct by the servicers of
the Trusts, including allegations that the servicers charged
improper and excessive fees and purchased insurance policies for
properties that were already insured. SAC ¶ 149. According to
the SAC, this misconduct triggered Deutsche Bank’s duty to act
prudently. The SAC alleges that Deutsche Bank failed to take
action as required by the PSAs and Indenture Agreements because
7
it was constrained by a conflict of interest. Among other
things, Deutsche Bank was allegedly involved in underwriting
securities using subprime mortgage loans. SAC ¶ 154. Deutsche
Bank’s affiliates were also involved in securitizing mortgage
loans with very high non-performance rates. SAC ¶ 157.
The plaintiffs allege that they have suffered over $525
million in damages. SAC ¶ 161. The plaintiffs contend that if
Deutsche Bank had satisfied its obligations under the PSAs and
Indenture Agreements, the plaintiffs’ holdings would not have
decreased so markedly in value, and that if Deutsche Bank had
provided notice of the breaches of representations and
warranties, the sponsors or originators of the loans would have
been forced to substitute or repurchase loans. SAC ¶ 164. Of the
Trusts in this case, 45 Trusts are governed by PSAs, and 6
Trusts are governed by Indenture Agreements. Dkt. No. 60, Exs. A
& B.
The SAC alleges several causes of action against Deutsche
Bank: (1) violations of the TIA for those Trusts that are
governed by Indenture Agreements, 1 (“Count 1”) SAC ¶¶ 167-76;
(2) breach of contract because Deutsche Bank allegedly breached
several obligations under the Agreements, (“Count 2”) SAC ¶¶
1 The plaintiffs agree that TIA claims for Trusts governed by PSAs are
foreclosed by Retirement Board of the Policemen’s Annuity & Ben. Fund of the
City of Chicago v. Bank of New York Mellon, 775 F.3d 154 (2d Cir. 2014). See
Dkt. No. 60; Brody Decl., Ex. B.
8
177-86; (3) breach of fiduciary duty because Deutsche Bank
allegedly did not act in good faith and was hindered in its
performance of its duties under the PSAs and indenture
agreements by conflicts of interest, (“Count 3”) SAC ¶¶ 187-90;
(4) negligence and gross negligence, (“Count 4”) SAC ¶¶ 191-93;
(5) violation of the Streit Act, N.Y. Real Prop. Law § 124 et
seq., because Deutsche Bank allegedly did not exercise due care
in administering the mortgage trusts, (“Count 5”) SAC ¶¶ 194201; and (6) breach of the covenant of good faith, (“Count 6”)
SAC ¶¶ 202-06.
III.
The SAC sets out three basic theories of Deutsche Bank’s
liability under the various state and federal laws: (1) Deutsche
Bank failed to identify the missing documentation and to issue
the final exception reports as required by the PSAs and
consequently Deutsche Bank failed to compel the sponsors to
repurchase defective loans, SAC ¶¶ 63-66; (2) Deutsche Bank was
required to provide notice to all parties of breaches of
representations and warranties by the sponsors and servicers but
failed to do so, SAC ¶¶ 67-69; and (3) Deutsche Bank had a duty
to address the servicers’ failure to meet prudent servicing
standards. SAC ¶¶ 80-81, 86.
9
A.
Deutsche Bank moves to dismiss various claims alleged in
the SAC on the grounds that the limitations periods have expired
on those claims. Deutsche Bank argues that the claims pertaining
to the 5 IndyMac Trusts are time barred because all the facts
the SAC alleges regarding these Trusts occurred before 2008.
Deutsche Bank also argues that the claims with respect to the
other 46 Trusts are time barred because the claims arose between
2005 and 2007 when the mortgages were deposited into the Trusts.
(1)
Deutsche Bank moves to dismiss the plaintiffs’ claims
related to the IndyMac Trusts, Brody Decl., Ex. D, arguing that
the plaintiffs’ claims for breach of contract, breach of
fiduciary duty, violation of the Streit Act, negligence and
gross negligence, and violation of the TIA are all barred under
the various statutes of limitations. 2 IndyMac was placed into
receivership on July 11, 2008, and on May 29, 2009, Deutsche
2 The parties do not dispute the limitations periods for the various claims.
The longest statute of limitations is six years. An action for breach of
contract is subject to a six-year statute of limitations. N.Y.C.P.L.R.
§ 213(2). Violations of the TIA are subject to a six-year statute of
limitations. Cruden v. Bank of N.Y., 957 F.2d 961, 967 (2d Cir. 1992)
(applying the statute of limitations of a contract claim to the TIA). An
action for breach of fiduciary duty is subject to statute of limitations that
runs three years after the plaintiff suffered the alleged injury. IDT Corp.
v. Morgan Stanley, 907 N.E.2d 268, 272-73 (N.Y. 2009). Negligence actions are
subject to a three-year statute of limitations. N.Y.C.P.L.R. § 214(4). There
is no specific provision establishing a statute of limitations for a Streit
Act claim but it would be either three years under N.Y.C.P.L.R. § 214(2) (an
action to recover upon a liability created by statute) or six years under
N.Y.C.P.L.R. § 213(1) (an action for which there is no limitation
specifically prescribed by law).
10
Bank, as RMBS Trustee, initiated a lawsuit against IndyMac for
breaching the Trust Agreements. The claims pertaining to the
IndyMac Trusts are limited to Deutsche Bank’s inaction in
responding to servicing failures and breaches of the
representations and warranties in the PSA prior to the time
IndyMac was placed into receivership. The current action was
filed on December 23, 2014, more than six years after IndyMac
was placed into receivership.
According to Deutsche Bank, the plaintiffs allege that
Deutsche Bank breached its obligation pursuant to the Agreements
to cause IndyMac to repurchase allegedly defective loans and
remedy its servicing violations. Deutsche Bank contends that the
plaintiffs’ allegations stem from Deutsche Bank’s alleged
failure to take action against IndyMac before July 2008 and any
claims against Deutsche Bank are thus time barred under either
the six-year or three-year statute of limitations that apply to
the various claims. The plaintiffs argue that they do not assert
claims against Deutsche Bank for failing to put back loans to
IndyMac. The plaintiffs argue that Deutsche Bank failed to
address failures by the servicers to service the mortgage loans
prudently and failed to provide notice to the plaintiffs of
ongoing breaches. E.g., SAC ¶¶ 182, 200. However, the
plaintiffs’ claims concerning the servicing failures and
Deutsche Bank’s lack of response and notice occurred before
11
IndyMac was placed into receivership in 2008, and these claims
for servicing failures are the very claims Deutsche Bank argues
are time barred. SAC ¶¶ 86, 110.
The only argument the plaintiffs make to salvage their
claims with respect to the IndyMac Trusts is that the breach of
fiduciary duty claim is not time barred because the statute of
limitations only begins to run once the trustee has openly
repudiated its duty to challenge the sponsor or the servicer,
something Deutsche Bank has not done. See Golden Pac. Bancorp v.
F.D.I.C., 273 F.3d 509, 518 (2d Cir. 2001). However, as Deutsche
Bank points out, the open repudiation doctrine applies only when
the remedy sought is an accounting or other form of equitable
relief, not a remedy at law. Willensky v. Lederman, No. 13-cv7026 (KMK), 2015 WL 327843, at *10 & n.21 (S.D.N.Y. Jan. 23,
2015); Stern v. Barney, 12 N.Y.S.3d 74, 75 (App. Div. 2015);
Ingham ex rel. Cobalt Asset Mgmt., L.P. v. Thompson, 931
N.Y.S.2d 306, 308 (App Div. 2011). Because the tolling rule only
applies to claims for accounting or equitable relief and the
plaintiffs’ claims are claims at law for damages, the breach of
fiduciary duty claim in this case was not tolled by the open
repudiation doctrine. While the plaintiffs stated at the
argument of the motion that they also sought equitable relief,
there is no particular form of equitable relief specified in the
SAC and the plaintiffs have not explained what equitable relief
12
would be available against Deutsche Bank with respect to the
IndyMac Trusts.
Thus, the plaintiffs’ claims concerning the 5 IndyMac
Trusts are time barred and should be dismissed.
(2)
Deutsche Bank also moves to dismiss portions of the
plaintiffs’ breach of contract, breach of the covenant of good
faith, TIA, and Streit Act claims as they pertain to all the
Trusts. Deutsche Bank argues that those claims are time barred
because the initial pooling of the loans and the deposit of the
underlying documents occurred before 2008, and the SAC alleges
that Deutsche Bank failed to ensure that the loan documentation
files were complete. The SAC outlines Deutsche Bank’s duties
with respect to ensuring the documents in the mortgage files
were complete, and alleges that Deutsche Bank had the duty to
certify that the documentation for the Trusts was full and
complete. SAC ¶¶ 62-63, 65, 78 (put back obligations and missing
documentation); SAC, Ex. C. The plaintiffs implicitly concede
that any claims arising from the faulty deposit of the initial
documentation of the loans would be time barred. Pls.’ Mem. of
Law in Opp. to Mot. at 12-13.
Deutsche Bank argues that the claims hinge on allegations
that Deutsche Bank breached its duties to enforce remedies when
the final exception report, detailing any missing documents, for
13
each Trust was issued. The Trusts closed between March 29, 2005
and July 12, 2007, and the final exception report was issued on
April 24, 2008. Brody Decl., Ex. V. The complaint in this case
was filed on December 23, 2014. Any claims arising from facts
prior to December 23, 2008, the longest statute of limitations
applicable to any of the claims, would be time barred. Supra
note 3.
The plaintiffs argue, however, that the allegations that
Deutsche Bank breached its duties under the Agreements to
respond to breaches of representations and warranties and under
the Agreements and state law to respond to an Event of Default
are different from claims that Deutsche Bank failed to take
physical possession of the mortgage files when the Trusts were
formed and did not deliver exception reports in 2008 flagging
missing documentation. The statute of limitations for each cause
of action does not bar the plaintiffs’ claims that pertain to
Deutsche Bank’s failure to carry out its duty to respond to
servicing failures or provide notice of breaches of
representations and warranties. The duties arising from known
servicing failures and breaches of representations and
warranties are distinct from Deutsche Bank’s document and
certification duties. See Royal Park Invs. SA/NV v. HSBC Bank
USA, Nat’l Ass’n, 109 F. Supp. 3d 587, 607-09 & n.121 (S.D.N.Y.
2015) (concluding that claims related to document delivery,
14
receiving mortgage loan files, and creating certification and
exception reports were time barred).
Claims for document delivery failures are barred by the
statute of limitations. SAC ¶¶ 121-22, 164-65. But the majority
of claims are not barred. Claims based on allegations that
Deutsche Bank discovered breaches of representations and
warranties in 2009 and 2010 and took no action, SAC ¶ 100, or
allegations that “Deutsche Bank stood by while the Sponsors,
Servicers and Master Servicers of the Covered Trusts engaged in
so called ‘robo-signing’ on a widespread basis when the missing
documents were needed to foreclose on properties” are not time
barred. SAC ¶ 123. The SAC also alleges that when borrowers
defaulted on their mortgages, the servicers began fabricating
the documents necessary to foreclose on the loans. According to
the SAC, Deutsche Bank was aware that the servicers were
fabricating the loan documentation based on Deutsche Bank’s
earlier knowledge and the exception reports. SAC ¶ 128-30; SAC,
Ex. G ¶¶ 4-5. The allegations of Deutsche Bank’s failure to
address servicing failures are also not time barred. 3
3 The claims in the sprawling SAC are not limited to claims within the statute
of limitations. The SAC begins with a description of the securitization
process that dates back to the creation of the Trusts and the document
deficiencies and then proceeds to describe the servicing failures and the
alleged breaches of the representations and warranties by the sponsors and
servicers that occurred within the statute of limitations period. When the
SAC turns to the briefly-described Causes of Action, the SAC simply repeats
and realleges “each and every allegation set forth in the preceding
paragraphs above as if fully set forth herein.” See, e.g., SAC ¶ 167.
Deutsche Bank, in turn conceded at the argument of the motion that it was not
15
Moreover, there are other bases for the servicing failures
that are based on allegations that fall within the limitations
period. The SAC alleges, for example, that the servicers
improperly charged borrowers and breached the prudent servicing
standard, thereby triggering Deutsche Bank’s duty to act
prudently. SAC. ¶ 151. The SAC also alleges that Deutsche Bank
suffered from conflicts of interest. Deutsche Bank allegedly did
not take action to protect the Trusts because it was “engaged in
the same servicing misconduct in its role as a sponsor,
originator and servicer for other mortgages and RMBS trusts.”
SAC ¶ 159.
Similarly, to the extent that the claims for breach of
contract, breach of the covenant of good faith, TIA violations,
and Streit Act violations are based on facts that took place
after the loans were in the Trusts, they are not time barred.
See SAC ¶ 86. Therefore, Deutsche Bank’s motion to dismiss these
causes of action based on the statute of limitations is granted
only to the extent that the claims are based on the failure of
Deutsche Bank to object initially to document delivery failures.
seeking to dismiss the various claims on the basis of the statute of
limitations—because the claims included allegations within as well as outside
the statute of limitations. Rather, it was simply attempting to give the
claims in the case a “haircut” by trimming off the time-barred allegations.
16
(3)
Deutsche Bank also moves to dismiss the tort claims for
breach of fiduciary duty, negligence, and gross negligence as
time barred. The applicable statute of limitations is three
years for these claims. Supra note 2. Deutsche Bank argues that
the facts underlying these claims were known to the plaintiffs
prior to December 2011 because the plaintiffs cite numerous
articles and lawsuits from 2010 that reflected the widely known
problems in mortgage loan documentation and servicing. According
to Deutsche Bank, the plaintiffs would have discovered the
injury arising from Deutsche Bank’s alleged torts and would have
been able to bring these claims before 2014 when they actually
brought the tort claims.
The plaintiffs argue that the statute of limitations for a
tort claim arising from the failure of an RMBS Trustee to assert
claims for repurchase of loans only accrues after the six-year
deadline for the RMBS trustee to bring claims has passed. The
plaintiffs cite National Credit Union Administration Board v.
HSBC Bank USA, 117 F. Supp. 3d 392 (S.D.N.Y. 2015), in which
Judge Scheindlin determined that the extender provision of 12
U.S.C. § 1787(b)(14) applied to the statute of limitations for
various breach of contract and tort claims and extended the
applicable limitations period by six years. Id. at 401-03. The
extender provision applies to claims brought by the National
17
Credit Union Administration Board (“NCUAB”) as conservator or
liquidating agent for a Federal Credit Union. While the claims
in Judge Scheindlin’s case were brought by the NCUAB as
liquidating agent for various federal credit unions, that entity
is not involved in this case and the plaintiffs fail to explain
how the extender provision has any relevance at all to this
case.
The plaintiffs argue more persuasively that the facts
alleged in the SAC are insufficient for this Court to conclude,
as a matter of law, that the plaintiffs were put on notice of
their claims before 2011. See Landesbank Baden-Wurttemberg v.
RBS Holdings USA Inc., 14 F. Supp. 3d 488, 503 (S.D.N.Y. 2014)
(collecting cases). There are questions of fact as to when the
claims accrued, whether the violations were continuing, and
whether the statute of limitations should be tolled. See NCUA,
117 F. Supp. 3d at 403. Therefore, Deutsche Bank’s motion to
dismiss the tort claims cannot be granted on the grounds they
are time barred.
(4)
The defendants move to dismiss the breach of contract
representation and warranty claims concerning MSAC 2007-NC4,
arguing that the plaintiffs acknowledge that Deutsche Bank
provided notice of alleged breaches of representations and
warranties and is presently enforcing repurchase claims against
18
the sponsor of that trust in Deutsche Bank National Trust Co v.
Morgan Stanley Mortgage Capital Holdings LLC., No. 652877/2014
(N.Y. Sup. Ct. Cnty. Jan 23, 2015). SAC ¶ 102. The plaintiffs
argue that Deutsche Bank’s suit is vulnerable to timeliness
defenses, and that the suit does not assert claims against the
servicers for failure to service the loans prudently. The motion
to dismiss cannot be granted on this basis. On a motion to
dismiss, the Court cannot gauge the success or failure of
Deutsche Bank’s efforts, whether its claims were timely, and
whether Deutsche Bank’s claims in the state court litigation
satisfy its alleged duty to enforce repurchase obligations.
B.
Deutsche Bank moves to dismiss the plaintiffs’ breach of
contract claim on several additional bases: (1) because the
plaintiffs lack standing to enforce the PSAs under the
provisions of the Agreements in 17 Trusts; (2) because the SAC
fails to plead that Deutsche Bank knew of any breaches of
representations and warranties prior to an Event of Default; and
(3) because the SAC fails to allege a breach of Deutsche Bank’s
obligations that arose after an Event of Default.
(1)
Deutsche Bank moves to dismiss the plaintiffs’ breach of
contract claims relating to 17 Trusts because the Agreements for
19
those Trusts contain “negating clauses.” The Agreements provide
that enforcement may be sought by registered holders of the
securities. Brody Decl., Ex. M. “Certificateholder” or “Holder”
is “[t]he [p]erson in whose name a Certificate is registered in
the Certificate Register[.]” Biron Decl., Ex. 52, § 1.01.
According to the PSAs, “Nothing in this Agreement or in the
Certificates, expressed or implied, shall give to any Person,
other than the Certificateholders and the parties hereto and
their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.” Id. §
11.10; Brody Decl., Ex. M. The PSAs provide a cumbersome
mechanism by which the beneficial owners of the certificates can
be recognized as holders of the certificates, but the plaintiffs
do not argue that they have sought recognition as
certificateholders. Biron Decl., Ex 52, § 5.02(c).
According to Deutsche Bank, the plaintiffs are not
certificateholders and are at most beneficial owners of
interests in the Trusts. Deutsche Bank contends that negating
clauses in the Agreements preclude the plaintiffs from asserting
claims and thus, the plaintiffs lack standing. The parties do
not dispute that the Depository Trust Company, also known as
Cede & Co., is the registered holder of the RMBS Certificates.
But the plaintiffs respond that the term “holder” in the PSAs
was intended to include beneficial owners of the RMBS
20
certificates. The plaintiffs argue that Cede & Co. has no real
interest and has not suffered any injury in connection with the
breach of representations and warranties. This interpretation of
the Agreements, however, ignores the plain language of the PSA
provisions that treats registered holders differently from
beneficial owners and would render superfluous the provision of
the PSA that provides a mechanism for beneficial owners to
enforce the agreements. Biron Decl., Ex. 52, § 5.02(c); see
Int’l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d
76, 86 (2d Cir. 2002) (interpretations that render a contract
provision superfluous are disfavored); Two Farms, Inc. v.
Greenwich Ins. Co., 993 F. Supp. 2d 353, 360 (S.D.N.Y. 2014),
aff’d, No. 14-318-CV, 2015 WL 6079559 (2d Cir. Oct. 16, 2015)
(“Courts interpreting contracts pursuant to New York law are
required to give each word and phrase in a contract its plain
meaning and avoid rendering the terms or provisions of a
contract superfluous.”).
The plaintiffs do not point to any case law supporting
their position that Cede & Co. lacks standing to assert claims
and that beneficial owners are therefore, the rightful
plaintiffs in a case against an RMBS Trustee. The plaintiffs
argue that they can seek authorization from Cede & Co. to bring
the claims against the 17 Trusts. Courts in this district have
allowed plaintiffs to seek authorization from Cede & Co. even
21
when the contract does not specifically authorize them to do so
because under New York law, contracts are freely assignable
absent language that prohibits assignment. See Royal Park Invs.
SA/NV v. Deutsche Bank Nat’l Tr. Co., No. 14-CV-4394 (AJN), 2016
WL 439020, at *3 (S.D.N.Y. Feb. 3, 2016); HSBC, 109 F. Supp. 3d
at 607 & n.111 (the plaintiffs had already begun the process of
seeking authorization from Cede & Co.). And in similar cases,
plaintiffs have been allowed to cure their lack of standing. See
id.; One William St. Capital Mgmt. v. U.S. Educ. Loan Tr. IV,
986 N.Y.S.2d 21, 22 (App Div. 2014) (petitioner cured lack of
standing by adding Cede & Co. as a nominal plaintiff).
The plaintiffs represent that they are in the process of
obtaining Cede & Co.’s consent to bring this case as an
authorized proxy. On March 2, 2016, the plaintiffs submitted a
list of the trusts for which they received Cede & Co.’s
authorization. They received authorization for all but 3 Trusts.
The plaintiffs have cured their lack of standing with respect to
those trusts. The plaintiffs may thus pursue breach of contract
claims with respect to the trusts for which they have
authorization. The claims with respect to the other trusts for
which authorization is pending are dismissed without prejudice,
subject to the plaintiffs’ curing their lack of standing.
(2)
22
Deutsche Bank also moves to dismiss the plaintiffs’ breach
of contract claim to the extent that the plaintiffs seek to
allege a breach of a pre-Event of Default duty. The gist of some
of the allegations in the SAC is that Deutsche Bank breached its
pre-Event of Default duties by failing to investigate and give
the investors notice of breaches of the representations and
warranties. If Deutsche Bank had provided the required notices
that alerted the investors of the breaches, then the sponsors
would have been forced to repurchase the loans of lower quality
than warranted or to substitute the loans with loans that met
underwriting standards. SAC ¶ 110. The plaintiffs allege that
this was a continuing duty and that Deutsche Bank failed to
comply with that duty throughout its tenure as Trustee.
Deutsche Bank also moves to dismiss the breach of contract
claim to the extent it alleges that Deutsche Bank breached its
post-Event of Default duties. The plaintiffs allege that when
Deutsche Bank learned that the servicers failed to provide
notice of numerous breaches of representations and warranties,
Deutsche Bank failed to comply with its contractual duty to act
as a prudent person and require cures and provide notice to the
certificateholders of the defaults by the servicers.
23
i.
Deutsche Bank argues that the SAC does not allege Deutsche
Bank had knowledge of the alleged breaches of representations
and warranties. Without actual knowledge, Deutsche Bank contends
that the Agreements do not impose any obligations on Deutsche
Bank, that no post-Event of Default duties were triggered, and
that it did not have a duty to make any investigation
independent of the plaintiffs’ own obligation to bring problems
with the trusts to the Trustee’s attention. Deutsche Bank
argues, in essence, that the SAC must plead that Deutsche Bank
knew of specific breaches of representations and warranties by
the originators or servicers with respect to each loan.
To prevail ultimately on the breach of contract claim, a
plaintiff does have to demonstrate breach on a “‘loan-by-loan
and trust-by-trust basis.’” Royal Park, 2016 WL 439020, at *6
(quoting Ret. Bd. of the Policemen's Annuity & Ben. Fund of the
City of Chi. v. Bank of N.Y. Mellon (“PABF”), 775 F.3d 154, 162
(2d Cir. 2014)). But this is not a pleading requirement.
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, . . . is 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.
24
Policemen’s Annuity & Ben. Fund of City of Chi. v. Bank of Am.,
NA, 943 F. Supp. 2d 428, 442 (S.D.N.Y. 2013)(internal quotation
marks and citation omitted), abrogated in part on other grounds
by PABF, 775 F.3d 154 (2d Cir. 2014); Okla. Police Pension &
Ret. Sys. v. U.S. Bank Nat’l Ass’n, 291 F.R.D. 47, 69-70
(S.D.N.Y. 2013), abrogated in part on other grounds by PABF, 775
F.3d 154 (2d Cir. 2014); see also Royal Park Invs, SA v. The
Bank of N.Y. Mellon, No. 14-cv-6502 (GHW), 2016 WL 899320, at
*4-*5 (S.D.N.Y. Mar. 2, 2016); Blackrock Core Bond Portfolio v.
U.S. Bank Nat’l Ass’n, No. 14-CV-9401 (KBF), 2016 WL 796848, at
*15 (S.D.N.Y. Feb. 26, 2016). 4
A plaintiff is not required to plead the specific actual
knowledge of a defendant with respect to the particular
deficiencies of a particular loan. Other courts have noted that
plaintiffs can survive a motion to dismiss by alleging massive
breaches of representations and warranties and by referring to
the mortgage industry’s practices of ignoring underwriting
guidelines and engaging in predatory lending. Bank of N.Y.
Mellon, 2016 WL 899350, at *5; Blackrock, 2016 WL 796848, at
*16; HSBC, 109 F. Supp. 3d at 601-02; Policemen’s/BofA, 943 F.
Supp. 2d at 442 (“Indeed, based on the allegations of the SAC,
4
Deutsche Bank argues that the plaintiffs should not rely on Oklahoma Police
because it was decided before the decision of the Second Circuit Court of
Appeals in PABF. But PABF addressed the standards for a class action, 775
F.3d at 162-63, and did not concern the pleading requirements for actual
knowledge.
25
it would be implausible to assume that somehow all of the
mortgage loans underlying the MBS miraculously avoided being
originated with practices generally utilized throughout WaMu and
its contracted affiliates at that time.”). In this case, the
exhibits to the SAC include specific examples of alleged
problems with origination policies. E.g., SAC, Ex. F at 6. The
SAC alleges that sponsors and originators of the loans have been
investigated for deficient underwriting practices, and that the
knowledge of these lawsuits and investigations would have
alerted Deutsche Bank to the ongoing breaches of representations
and warranties. SAC ¶ 115. The SAC also alleges that Deutsche
Bank knew the loans were underperforming. SAC ¶ 116. The
contract claims cannot be dismissed for failure to plead actual
knowledge with respect to pre-Event of Default obligations.
ii.
Deutsche Bank argues that it did not have a pre-Event of
Default obligation to enforce representations and warranties.
Deutsche Bank recognizes that the allegations in the SAC plead
that Deutsche Bank “may have been alerted to potential
misconduct by sponsors and originators and a risk of R&W
falsity.” Def.’s Mem. of Law in Supp. of Mot. at 23. Deutsche
Bank argues that it had no duty to investigate based on publicly
available information and cites to provisions in the Agreements
that indicate that Deutsche Bank could rely on the documents in
26
the trust, and that the trustee was “not to be bound to make any
investigation into the facts or matters stated in any . . .
certificate, statement, instrument, [or] opinion” unless
requested to do so in writing by a majority certificate holder.
Biron Decl., Ex. 1-a § 6.02(a), Ex. 52 § 8.02(a)(v). However, it
is clear that if the trustee discovered or received information
of any materially defective document in the mortgage file or of
a breach by the originator or seller of a representation or
warranty, then the trustee did have an obligation to notify the
servicer and take action. Biron Decl., Ex. 52 § 2.03(a). The SAC
alleges that Deutsche Bank had a duty under the Agreements to
provide notices of breaches of representations and warranties.
SAC ¶¶ 67, 110. The contract claims cannot be dismissed on the
ground that the Agreements did not trigger any obligations prior
to an Event of Default.
Deutsche Bank also argues that for 39 of the Trusts, the
PSAs did not require Deutsche Bank to enforce repurchase
obligations. For 21 of the trusts, Deutsche Bank contends that
there was no enforcement duty on the RMBS Trustee, and for 18
Trusts, Deutsche Bank contends that the enforcement duties were
only triggered by the receipt of a written notice of breach.
However, the SAC alleges that Deutsche Bank had the duty to give
prompt notice of potential breaches of representations and
warranties to the sponsors or the originators and that this
27
notice would have forced the sponsors or the originators to
repurchase or substitute other loans for the defective loans.
E.g., SAC, Ex. C at 65-66 (Trusts AABST 2006-1 and FFML 2006FF11); SAC ¶ 110. Deutsche Bank does not argue that the PSAs and
Indentures exempted it from providing this notice of the alleged
breaches. The SAC sufficiently alleges a breach of contract
based on Deutsche Bank’s failure to provide this notice. This
allegation does not depend on whether Deutsche Bank had a duty
to enforce repurchase obligations, and provisions detailing the
Trustee’s repurchase obligations do not preclude an action
against Deutsche Bank for failing to provide notice.
Thus, Deutsche Bank’s motion to dismiss the plaintiff’s
breach of contract claim based on Deutsche Bank’s pre-Event of
Default obligations cannot be granted on these grounds.
(3)
With respect to the breach of contract claims arising from
Deutsche Bank’s alleged breach of its post-Event of Default
obligations, the SAC alleges that Deutsche Bank was required to
notify investors of the occurrence of an Event of Default and
act as a prudent person in exercising its rights and powers
under the PSAs. SAC ¶¶ 70, 74, 118.
Deutsche Bank argues that the SAC fails to show that an
Event of Default ever occurred. Deutsche Bank claims that an
Event of Default only occurs after notice has been given to the
28
servicers of possible breaches and that no notice was given.
Deutsche Bank also claims that the SAC does not allege any
breaches of any particular trust agreement. Under the
Agreements, an Event of Default requires three things: (1) a
material breach by a servicer, (2) notice to the servicer of its
material breach or knowledge by a servicing officer of the
material breach, and (3) the servicer’s failure to cure the
breach. E.g., Biron Decl., Ex. 52, § 7.01(a)(ii).
There are sufficient allegations in the SAC that Deutsche
Bank was aware of breaches of representations and warranties by
the servicers and that an Event of Default occurred. The SAC
sufficiently pleads that Deutsche Bank was aware that the
servicers and sponsors of the Trusts were engaging in robosigning, attempted to cover-up massive deficiencies in the
documents in the Trusts and breached prudent servicing
standards, SAC ¶¶ 123, 128, and that Deutsche Bank was aware
that the servicers were failing to act prudently. SAC ¶ 129; see
Bank of N.Y. Mellon, 2016 WL 899320, at *6; Blackrock, 2016 WL
769848, at *18-*19; Fixed Income Shares: Series M v. Citibank
N.A., No. 14-cv-9373 (JMF), 2015 WL 5244707, at *12 (S.D.N.Y.
Sept. 8, 2015); HSBC, 109 F. Supp. 3d at 602-03; Okla. Police,
291 F.R.D. at 69-70; Ret. Bd. of the Policemen’s Annuity & Ben.
Fund of City of Chi. v. Bank of N.Y. Mellon, 914 F. Supp. 2d
29
422, 432 (S.D.N.Y. 2012), aff’d in part, rev’d in part, by,
PABF, 775 F.3d 154 (2d Cir. 2014).
Deutsche Bank also argues that the Agreements for 11 Trusts
require written notice to a sponsor of a breach of a
representation or warranty and an opportunity for the sponsor to
cure the breach before an Event of Default can occur. This
argument is unavailing. Deutsche Bank cannot take advantage of
its own failure to give notice to the sponsor of the possible
breaches of representations and warranties to argue that no
Event of Default occurred. The prevention doctrine precludes
such a defense. An RMBS Trustee cannot rely on the lack of
notice to excuse its own failure to act. Royal Park, 2016 WL
439020, at *5; Fixed Income, 2015 WL 5244707, at *11(“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.”(internal citation
and quotation marks omitted)); HSBC, 109 F. Supp. 3d at 605;
Okla. Police, 291 F.R.D. at 70-71; SAC ¶ 119. 5 Thus, Deutsche
5 Deutsche Bank argues that the prevention doctrine does not save the
plaintiffs’ claim because Deutsche Bank did not have an affirmative duty to
notify the servicers of their material breaches. But Deutsche Bank recognizes
that the district court in Fixed Income concluded that even without a
contractual requirement to give notice, the prevention doctrine would apply
to a party who insists on the performance of a condition precedent when the
non-performance is caused by the party itself. 2015 WL 5244707, at *11. This
approach is consistent with the decision of Court of Appeals in In re Bankers
Tr. Co., 450 F.3d 121, 127 (2d Cir. 2006).
30
Bank’s motion to dismiss the breach of contract claim with
respect to Deutsche Bank’s post-Event of Default duties cannot
be granted on this basis.
With respect to 38 Trusts, Deutsche Bank argues that the
Trusts require actual knowledge by a responsible officer of the
RMBS Trustee that an Event of Default occurred. The SAC alleges
actual knowledge by describing Deutsche Bank’s involvement in
RMBS litigation and receipt of notices from monoline insurers
who were pursuing actions against servicers, as well as alarming
rates of default and rating downgrades. SAC ¶¶ 100-02, 103-09.
On a motion to dismiss, these allegations are sufficient to
plead Deutsche Bank’s actual knowledge with respect to Events of
Default. See Bank of N.Y. Mellon, 2016 WL 899320, at *6
(collecting cases).
Deutsche Bank also argues that 9 Trusts require actual
receipt of a written notice of an Event of Default by a
responsible officer of the RMBS Trustee. 6 Deutsche Bank contends
that the plaintiffs did not plead receipt of a written notice
and that the breach of contract claims should therefore be
dismissed. However, the SAC alleges that the Association of
Mortgage Investors notified all major RMBS trustees, including
Deutsche Bank, about the abuses in servicing and monitoring of
6 Deutsche Bank initially argued that 12 Trusts were subject to this
requirement, but Deutsche Bank withdrew this argument as to 3 Trusts. See
Def.’s Reply at 12.
31
RMBS. SAC ¶ 142. The SAC further alleges that Deutsche Bank
received instructions from institutional investors in 2011 about
the need to investigate loan pools. SAC ¶¶ 143-44. These
allegations sufficiently plead that Deutsche Bank received
actual notice of alleged Events of Default. See BNP Paribas
Mortg. Corp. v. Bank of Am., N.A., 778 F. Supp. 2d 375, 399
(S.D.N.Y. 2011) (concluding that formal written notices are not
required unless the indenture explicitly sets out the format of
the notice).
Moreover, in BNP Paribas, the court concluded that based on
the applicable indentures, an allegation that a trustee had
actual knowledge was sufficient to state a claim for breach of
the indenture even in the absence of a written notice. 778 F.
Supp. 2d at 397-98. In this case, the PSAs require the Trustee
to act if it has actual knowledge of an event of default. E.g.,
Biron Decl., Ex. 41, § 8.01 (“In case of an Event of Default has
occurred and remains uncured, the Trustee shall exercise such of
the rights and powers vested in it by this Agreement, and use
the same degree of care and skill in their exercise as a prudent
person.”). Therefore, the contract claims cannot be dismissed
based on Deutsche Bank’s argument that Deutsche Bank did not
receive notice.
32
(4)
Deutsche Bank also argues that the plaintiffs’ contract
claims are barred by no-action clauses contained in the
Agreements of all the Trusts. A “no-action” clause requires a
certificate holder to provide the Trustee with a written notice
of an Event of Default, prove that the suit is supported by
twenty-five percent of the voting rights in the trust, and make
a written request to the Trustee to file suit, indemnify the
Trustee, and give the Trustee time to act. E.g., Biron Decl.,
Ex. 52 § 11.03; Ex. 41 § 10.08. Deutsche Bank does not seek to
enforce all aspects of the no-action clauses. Deutsche Bank only
argues that the requirements of attaining a twenty-five percent
pre-suit consensus and providing written notice to the RMBS
Trustee of an event of default should be enforced because they
are intended to avoid duplicative litigation.
The plaintiffs correctly point out the futility of making a
request to Deutsche Bank because Deutsche Bank, as the RMBS
Trustee, is the target of the plaintiffs’ lawsuit. See Cruden,
957 F.2d at 968. Deutsche Bank recognizes that a pre-suit demand
on Deutsche Bank is unnecessary but argues that severability
provisions in the Agreements require enforcing the other aspects
of the no action clause. Deutsche Bank does not point to any
precedent supporting dismissal based on severing certain noaction clause requirements. Indeed, Cruden has been interpreted
33
by several courts to preclude the outcome Deutsche Bank seeks.
See Royal Park, 2016 WL 439020, at *3 (“However, Cruden’s
holding was not limited to the pre-suit demand provision; the
Second Circuit held that the entire no action clause, which
included both a pre-suit demand requirement and a written notice
requirement, did not apply to the Trustee in that case.”) ;
HSBC, 109 F. Supp. 3d at 606; Sterling Fed. Bank, F.S.B. v. DLI
Mortg. Capital, Inc., No. 09-cv-6904 (JFG), 2010 WL 3324705, at
*4 (N.D. Ill. Aug. 20, 2010). Cf. Blackrock, 2016 WL 796848, at
*13-*14 (concluding that Cruden did not answer the issue of
severability but determining that “when a demand requirement
falls, the entire provision falls, including the written-notice
requirement”). Therefore, the no action clause does not provide
a basis for dismissing the plaintiffs’ breach of contract
claims.
In sum, Deutsche Bank’s motion to dismiss Count 2, the
contract claim, is granted only to the extent the plaintiffs
lack standing to pursue claims with respect to the 3 Trusts that
contain negating clauses and for which they have not yet
received authorization from Cede & Co., see Brody Decl., Ex. E,
and is denied in all other respects.
34
C.
Deutsche Bank moves to dismiss all the tort claims in the
SAC, Counts 3 and 4, for breach of fiduciary duty and for
negligence and gross negligence, respectively.
The SAC alleges that Deutsche Bank breached its fiduciary
duty to the Certificateholders upon the occurrence of an Event
of Default. According to the SAC, Deutsche Bank, as RMBS
Trustee, was bound to act prudently to protect the plaintiffs’
interests. SAC ¶¶ 74-76. The SAC alleges that Deutsche Bank did
not perform its duties under the PSAs and Indenture Agreements
competently and was negligent in failing to exercise due care in
performing its ministerial duties in the administration of the
trusts. SAC ¶¶ 13, 88-89.
Deutsche Bank makes several arguments in support of its
motion to dismiss the tort claims: (1) the tort claims are
duplicative of the contract claims; (2) the economic loss
doctrine bars the tort claims; (3) Deutsche Bank does not owe a
fiduciary duty to the plaintiffs; (4) Deutsche Bank did not have
a conflict of interest; (5) the Trusts bar claims against
Deutsche Bank for tort liability and the SAC fails to state a
claim for negligence or gross negligence.
(1)
With respect to Deutsche Bank’s argument that the tort
claims are duplicative, it is well established that if “the
35
basis of a party’s claim is a breach of solely contractual
obligations, such that the plaintiff is merely seeking to obtain
the benefit of the contractual bargain through an action in
tort, the claim is precluded as duplicative.” Bayerische
Landesbank, N.Y. Branch v. Aladdin Capital Mgmt. LLC, 692 F.3d
42, 58 (2d Cir. 2012). However, “[w]here an independent tort
duty is present, a plaintiff may maintain both tort and contract
claims arising out of the same allegedly wrongful conduct.” Id.
Under New York law, “an indenture trustee owes a duty to perform
its ministerial functions with due care, and if this duty is
breached the trustee will be subjected to tort liability.” AG
Capital Funding Partners, L.P. v. State St. Bank & Tr. Co., 896
N.E.2d 61, 67 (N.Y. 2008). Moreover, after an Event of Default,
an indenture trustee’s fiduciary duties expand under the New
York common law such that “‘fidelity to the terms of an
indenture does not immunize an indenture trustee against claims
that the trustee has acted in a matter inconsistent with his or
her fiduciary duty of undivided loyalty to trust
beneficiaries.’” BNP Paribas, 778 F. Supp. 2d at 401 (quoting
Beck v. Mfr. Hanover Tr. Co., 632 N.Y.S.2d 520, 527-28 (App.
Div. 1995)).
Some of the plaintiffs’ negligence claims appear to be the
type of claims that courts have dismissed as duplicative. In
Fixed Income, the district court dismissed as duplicative a
36
negligence claim alleging 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.” Fixed Income, 2015 WL 5244707, at *13.
In this
case, the negligence claims in the SAC are based in large part
on the requirements of the PSAs, namely the duties set forth in
the PSAs requiring that Deutsche Bank give notice to all parties
of breaches of representations and warranties and provide
notices of servicing related breaches. SAC ¶ 89.
These claims are not distinct from the duties in the PSAs
and the Indenture Agreements and do not provide an independent
basis for tort liability. See Phoenix Light SF Ltd. v. Bank of
N.Y. Mellon, No. 14-cv-10104 (VEC), 2015 WL 5710645, at *7
(S.D.N.Y. Sept. 29, 2015) (concluding that allegations that
heightened duties including a duty to make prudent decisions
were triggered by an event of default were duties that were
subsumed within the language of the PSAs and indentures and did
not give rise to a separate breach of fiduciary duty claim);
HSBC, 109 F. Supp. 3d at 609 (concluding that an allegation that
the RMBS trustee failed to perform or performed its
responsibilities in a grossly inadequate and negligent manner
was only actionable in contract).
37
However, the other tort allegations in the SAC that Deutsche
Bank did not avoid conflicts of interest, breached its fiduciary
duty after an Event of Default, and did not take due care in
performing ministerial acts are not duplicative. 7 See Nat’l
Credit Union Admin. V. U.S. Bank Nat’l Ass’n, No. 14-cv-9928
(KBF), 2016 WL 796850, at *11 (S.D.N.Y. Feb. 25, 2016); Phoenix
Light, 2015 WL 5710645, at *7 (recognizing that the duty to
avoid conflicts of interest is an extra-contractual duty that
should be pleaded as a negligence action); HSBC, 109 F. Supp. 3d
at 609 n.127 (recognizing a post-Event-of-Default fiduciary duty
and distinguishing between negligently performing contractual
duties and the “independent duty to perform [] nondiscretionary
ministerial duties with due care and to avoid conflicts of
interest”). 8
7 In the SAC, the plaintiffs appear to conflate the duty to perform
ministerial acts with due care with their allegations that Deutsche Bank
negligently performed or failed to perform certain duties under the contract.
Only tort claims premised on the former survive because New York recognizes a
duty to perform ministerial acts as an extra contractual duty. AG Capital,
896 N.E.2d at 67.
8 The SAC includes a discursive history of the actions of Deutsche Bank as
Trustee and then includes all of those allegations by incorporation in all
the specific causes of action including Counts 3 and 4 for breach of
fiduciary duty and for negligence and gross negligence. It is not possible
therefore to dismiss those causes of action even though they incorporate some
references that are not actionable because they include some allegations that
are actionable as torts. See supra note 3. This form of pleading is not ideal
and leaves to further motion practice a realistic determination of the scope
of the tort claims in this case.
38
(2)
Deutsche Bank also argues that the plaintiffs’ tort claims
are barred by the economic loss doctrine. A plaintiff cannot
seek damages by bringing a tort claim when the injury alleged is
primarily the result of economic injury for which a breach of
contract claim is available. BNP Paribas Mortg. Corp. v. Bank of
Am., N.A., 949 F. Supp. 2d 486, 505 (S.D.N.Y. 2013). The
dispositive issue is whether Deutsche Bank owed duties to the
plaintiffs that were separate from the duties set forth in the
PSAs and the Indenture Agreements. Several of the plaintiffs’
arguments supporting the negligence, gross negligence, and
breach of fiduciary claims are not duplicative of the breach of
contract claim. Thus, the motion to dismiss the tort claims
cannot be granted on this basis. See Royal Park, 2016 WL 439020,
at *9 (allowing tort claims to proceed where the alleged duty
was extra-contractual); but see Blackrock, 2016 WL 796848, at
21; U.S. Bank, 2016 WL 796850, at *11 (dismissing a breach of
fiduciary claim under the economic loss doctrine because the
damages arising from the claim “sound in defendants’ failure to
take contractual actions”).
(3)
Deutsche Bank argues that an RMBS trustee does not owe a
fiduciary duty to investors and thus Count 3 should be
dismissed. The plaintiffs counter that the breach of fiduciary
39
duty claim focuses on the alleged failure to act prudently to
protect the certificateholders after an Event of Default. The
plaintiffs appear to recognize that the conflict of interest
claims and the claims that Deutsche Bank did not perform
ministerial acts with due care are not proper breach of
fiduciary claims under New York law, and can only be pleaded in
the complaint as negligence claims. See AG Capital, 896 N.E.2d
at 67; Ellington Credit Fund, Ltd. v. Select Portfolio
Servicing, Inc., 837 F. Supp. 2d 162, 192 (S.D.N.Y. 2011).
Breach of fiduciary duty claims may be brought for acts that are
outside the scope of contractual duties after an Event of
Default. See Phoenix Light, 2015 WL 5710645, at *7; HSBC, 109 F.
Supp. 3d at 609 (“[I]nsofar as plaintiffs allege a post-Event of
Default breach of fiduciary duty, they properly state a
claim[.]”); BNP Paribas, 778 F. Supp. 2d at 401. As discussed
above, the plaintiffs sufficiently pleaded an Event of Default.
Supra pp. 28-31. Thus, the motion to dismiss Count 3 for breach
of fiduciary duty cannot be granted on this basis.
(4)
Deutsche Bank also argues that the SAC fails to plead that
Deutsche Bank was subject to a conflict of interest. The SAC
alleges that Deutsche Bank had a duty to avoid conflicts of
interest and did not provide undivided loyalty to investors. SAC
¶ 90. The SAC alleges that “Deutsche Bank conducted repeated
40
business with the same Originators and Servicers and refused to
take action in order to gain return favors when the roles were
reversed.” SAC ¶ 153. The plaintiffs also allege that Deutsche
Bank was engaged in the same improper securitization processes,
and that an affiliate of Deutsche Bank had been sued by RMBS
trustees. SAC ¶¶ 153, 157.
Various courts have allowed similar conflict of interest
allegations to survive in the RMBS trust context, when pleaded
as a tort claim, as the plaintiffs have done. In its reply
Deutsche Bank argues that several courts have dismissed
“identical breach of fiduciary duty claim[s]” as duplicative,
but Deutsche Bank misreads the cases. In Fixed Income Shares,
the plaintiffs’ breach of the duty of independence, negligence,
and fiduciary duty claims survived a motion to dismiss because
the plaintiffs’ allegations that Citibank was beholden to
servicers because it faced possible liability for the sale of
its own loans were separate from the breach of contract claims.
2015 WL 5244707, at *13. A claim for breach of the duty to avoid
conflicts of interest is therefore distinct from contract
liability, and the SAC’s allegations satisfy the requirements of
a conflict of interest negligence claim. See Bank of N.Y. Mellon,
2016 WL 899320, at *7; Royal Park, 2016 WL 439020, at *9 (“The
alleged quid pro quo system where Defendant turns a blind eye to
breaches of [representations and warranties] in the hopes that
41
counterparties would later return the favor, if true, would
demonstrate that the Defendant received a[ ] benefit from its
decision not to act on the breaches of [representations and
warranties], constituting a conflict of interest.” (internal
quotation marks and citation omitted)); HSBC, 109 F. Supp. 3d at
610; see also Phoenix Light, 2015 WL 5710645, at *7(concluding
that conflict of interest allegations could be properly pleaded
as a negligence action, not as a breach of fiduciary duty
claim).
On the merits of the claims, Deutsche Bank argues that it
was not subject to a conflict of interest based on Deutsche
Bank’s own involvement in mortgage loan securitization. Deutsche
Bank contends that the conflict of interest theory relies only
on a hypothetical conflict of interest. The plaintiffs point out
that one of the mortgage loan originators was a Deutsche Bank
affiliate. Whether Deutsche Bank was in fact subject to a
conflict of interest arising from its own actions and
association with mortgage loan originators is an issue that
cannot be resolved on a motion to dismiss.
Therefore, Deutsche Bank’s motion to dismiss the conflict of
interest negligence claim cannot be granted on the basis that
the SAC fails to plead the existence of a conflict of interest.
42
(5)
Deutsche Bank also argues that the Agreements bar an action
for negligence based on duties that are not set forth in the
Agreements. Biron Decl., Ex. 52 § 8.01(i) (no implied covenants
shall be read into the Agreement prior to the occurrence of an
event of termination). However, as the plaintiffs point out, the
Agreements also include a provision stating that no provision in
the agreement relieves the Trustee of liability for its own
negligent actions. Id. § 8.01 (“No provision of this Agreement
shall be construed to relief the Trustee from liability for its
own negligent action, its own negligent failure to act or its
own misconduct[.]”); SAC ¶ 88. The plaintiffs specifically point
out that while the Trustee’s liability may be limited to its
negligence after an Event of Default, the Agreements do not
appear to restrict actions alleging that the Trustee is liable
for negligence in performing extra-contractual duties. Other
courts have similarly allowed negligence claims to proceed
despite the presence of exculpatory provisions in the PSAs
because the PSAs did not unambiguously bar a negligence action.
Phoenix Light, 2015 WL 5710645, at *8 (citing Fixed Income, 2015
WL 5244707, at *13). On a motion to dismiss, the negligence
claim cannot be dismissed based on an argument that the
Agreements bar a negligence action related to Deutsche Bank’s
43
alleged conflicts of interest or duty of care with respect to
ministerial acts in administering the trust.
Deutsche Bank also argues that the SAC fails to plead gross
negligence or negligence with respect to Deutsche Bank’s
ministerial duties. Deutsche Bank contends that determining
whether a servicer breached its obligations and whether to
provide a notice of breach are not ministerial tasks. Whether
the tasks were in fact ministerial or not is also not an issue
that can be resolved on a motion to dismiss.
Therefore, Deutsche Bank’s motion to dismiss Counts 3 and 4
is granted only with respect to claims that Deutsche Bank
negligently failed to carry out the Trustee duties set forth in
the Agreements that are duplicative of the breach of contract
claim and is denied in all other respects.
D.
Deutsche Bank also argues that Count 6, the claim for breach
of the covenant of good faith, should be dismissed as
duplicative of the breach of contract claim and because
provisions of the Agreements bar any liability.
“New York law . . . does not recognize a separate cause of
action for breach of the implied covenant of good faith and fair
dealing when a breach of contract claim, based upon the same
facts, is also pled.” Harris v. Provident Life & Accident Ins.
Co., 310 F.3d 73, 81 (2d Cir. 2002). A plaintiff can maintain a
44
claim for breach of the implied covenant of good faith and fair
dealing simultaneously with a breach of contract claim “only if
the damages sought by the plaintiff for breach of the implied
covenant are not intrinsically tied to the damages allegedly
resulting from breach of contract.” Page Mill Asset Mgmt. v.
Credit Suisse First Bos. Corp., No. 98-cv-6907 (MBM), 2000 WL
335557, at *8 (S.D.N.Y. Mar. 30, 2000) (internal quotation marks
and citation omitted); see also Okla. Police, 291 F.R.D. at 72.
The plaintiffs argue that, under New York law, causes of
action for breach of the implied covenant of good faith may be
brought in the alternative when there is a dispute about the
scope of the contract and the contractual duties. Because
Deutsche Bank disputes that it owed the plaintiffs pre and postEvent of Default duties to provide notice and ensure that the
servicers were acting prudently, the plaintiffs argue that the
claim for breach of the implied covenant of good faith must
survive the motion to dismiss. However, there is no dispute that
the Agreements in this case are valid contracts and govern the
parties’ relations. Because the SAC’s allegations supporting a
breach of the implied covenant of good faith and fair dealing
arise from the same facts as the breach of contract claim, Count
6 should be dismissed. See SAC ¶¶ 202-05, 177-84; U.S. Bank,
2016 WL 796850, at *12; Okla. Police, 291 F.R.D. at 72.
45
E.
The parties agree that under the decision of the Court of
Appeals in PABF, 775 F.3d at 154, TIA claims can only be
asserted with respect to the 6 Trusts that are governed by
Indenture Agreements. 9 The TIA claims with respect to the 45
Trusts that are governed by PSAs are therefore dismissed.
The SAC alleges that pursuant to § 315(b) of the TIA,
Deutsche Bank was required to give the plaintiffs notice of a
default under the Indenture Agreements within 90 days of
learning of a default. SAC ¶ 72; 15 U.S.C. § 77ooo(b). The
plaintiffs argue that because Deutsche Bank failed to give
notice of defaults and breaches of representations and
warranties, Deutsche Bank violated the TIA. Deutsche Bank argues
that the allegations that the RMBS Trustee violated TIA § 315(b)
fail because the trustee did not have knowledge of a default. As
discussed above however, there are sufficient allegations in the
SAC to plead that Deutsche Bank had actual knowledge of
defaults. SAC ¶¶ 94-97, 100-02, 103-08, 128, 137. 151.
Therefore, the § 315(b) claims cannot be dismissed for failure
to allege Deutsche Bank’s actual knowledge.
9
One of the 6 Indenture Trusts is also an IndyMac Trust, INABS 2006-H1. See
Brody Decl., Exs. B and D. Because the claims as to all the IndyMac Trusts
are time barred, the TIA claim for this Trust is dismissed on the basis that
it is time barred.
46
Deutsche Bank also argues that the plaintiffs’ § 315(c)
claim fails because the SAC does not allege that a “default”
occurred. Under § 315(c) of the TIA: “The 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 man would exercise or use under the
circumstances in the conduct of his own affairs.” 15 U.S.C. §
77ooo(c) (emphasis added). Deutsche Bank argues that the
definition of “Events of Default” in the Indenture Agreements
controls the definition of the term “default” and an Event of
Default never occurred. The TIA places duties on a trustee in
case of default and leaves the definition of “default” to the
parties. The term “default” means what the Indenture Agreements
say it means, namely “[a]ny occurrence that is, or with notice
or the lapse of time or both would become, an Event of Default.”
Fitzgerald Decl., Ex. 3; see Okla. Police, 291 F.R.D. at 67.
Under the Indenture Agreements, a “default” is a prelude and
precondition for an “event of default.” The Indenture Agreements
define an “Event of Default” differently from a “default” and
Deutsche Bank’s arguments to the contrary are unavailing. Thus,
Deutsche Bank’s motion to dismiss the plaintiffs’ § 315(c)
claims is denied. Moreover, the plaintiffs have sufficiently
alleged that Deutsche Bank had knowledge of Events of Default
47
under the Indenture Agreements. See Bank of N.Y. Mellon, 2016 WL
899320, at *9 n.11.
Deutsche Bank also moves to dismiss the plaintiffs’ claims
under Section 316(b), which provides that “[T]he right of any
[certificate]holder . . .to receive payment of the principal of
and interest . . . shall not be impaired or affected without the
consent of such holder.” 15 U.S.C. § 77ppp(b); SAC ¶ 174. The
plaintiffs argue that if Deutsche Bank had satisfied its duties,
the plaintiffs would not have incurred the losses attributable
to the defaults of the defective loans. District courts in this
Circuit have rejected similar arguments, concluding that
§ 316(b) only addresses changes to the holder’s legal rights in
the form of involuntary debt restructurings or modifications to
the terms of the indenture. Phoenix Light, 2015 WL 5710645, at
*10; Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., 75 F. Supp. 3d
592, 614 (S.D.N.Y. 2014) (discussing the statutory history and
purpose of § 316(b)). The SAC does not allege any involuntary
restructuring conduct by Deutsche Bank. Thus, Deutsche Bank’s
motion to dismiss the TIA claim, Count 1, is granted to the
extent that the TIA claims with respect to the 45 Trusts covered
by the PSAs are dismissed and the plaintiffs’ TIA § 316(b) claim
is dismissed with respect to the 6 Trusts covered by Indentures.
48
F.
Deutsche Bank moves to dismiss Count 5, the plaintiffs’
claim under the Streit Act. The Streit Act regulates “all
mortgage investments” where the properties are located in the
state, the trustee does business with respect to the investments
in New York, or the trustee is authorized to do business in New
York. N.Y. Real Prop. Law § 124. The Streit Act provides that no
Trustee shall accept a Trust under an indenture or mortgage
unless it contains various provisions including a provision
that, in the case of an event of default, the Trustee has a duty
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.” Id.
§ 126(1). The SAC alleges that Deutsche Bank violated the Streit
Act by failing to exercise all its rights under the PSAs to
ensure that defaulted loans or loans for which representations
and warranties were breached were repurchased or substituted.
SAC ¶ 78. The parties agree that only the 45 PSA Trusts are
potentially subject to the Streit Act because they are not
covered by the TIA. See N.Y. Real Prop. Law § 130-k.
Deutsche Bank contends that the plaintiffs’ Streit Act
claim fails as a matter of law because the SAC alleges that
Deutsche Bank violated post-Event-of-Default duties when in
49
fact, the Streit Act does not impose any post-Event-of-Default
duties on a trustee. 10 Section 126(1) states that:
No trustee shall hereafter accept a trust under any
trust indenture or mortgage within the contemplation
of this article or act as trustee thereunder unless
the instrument creating the trust shall contain the
following provisions, among others, which confer the
following powers and impose the following duties
upon the trustees . . . 1. In the case of an event
of default (as such term is defined in such
instrument), 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.
N.Y. Real Prop. Law § 126(1). Deutsche Bank argues that New York
Real Property Law § 126(1) does not create any additional duties
for trustees beyond the duties in the PSAs, and only requires
that certain types of provisions be included in the indenture
agreement. Deutsche Bank is plainly correct.
In Phoenix Light, the district court concluded that the
plaintiffs failed to state a claim under the Streit Act because
the complaint did not allege that the trustee had accepted a
deficient indenture. 2015 WL 5710645, at *11; Bank of N.Y.
Mellon, 2016 WL 899320, at *11 (“Thus, while section 126
outlines duties and obligations that a trustee must undertake,
it does not impose those duties; instead, it mandates that those
10
Deutsche Bank also argues that the RMBS trusts are not “mortgage
investments” under the Streit Act and that there is no private cause of
action under the Streit Act for damages. It is unnecessary to reach these
arguments.
50
terms be included in the indenture.”); U.S. Bank, 2016 WL
796850, at *12. 11 On its face, § 126 requires only that a trust
indenture contain certain provisions, such as the provision
requiring a trustee to exercise rights and powers prudently in
the case of an event of default. See N.Y. Real Prop. Law §
126(1). The PSAs at issue in this case included such provisions.
E.g., Biron Decl., Ex. 52, § 8.01. The Streit Act does not
address compliance with the provision that is required to be
included in the indenture agreement. The SAC does not allege
that the PSAs omitted any of the provisions that the Streit Act
requires. Therefore, Count 5 of the SAC, the plaintiffs’ Streit
Act claim, should be dismissed.
11 The plaintiffs submitted a letter arguing that there was a split of
authority in this District on this issue. However, HSBC, on which the
plaintiffs rely, does not address whether the Streit Act requires more than
the inclusion of various terms in an indenture. 109 F. Supp. 3d at 610-11.
51
CONCLUSION
The Court has considered all of the arguments by the
parties. To the extent not specifically addressed above, the
parties’ arguments are either moot or without merit. For the
foregoing reasons, Deutsche Bank’s motion to dismiss is denied
in part and granted in part. The Clerk of Court is directed to
close all pending motions.
SO ORDERED.
Dated:
New York, New York
March 28, 2016
____________/s/______________
John G. Koeltl
United States District Judge
52
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