Phoenix Light SF Limited et al v. U.S. Bank National Association et al

Filing 71

OPINION & ORDER re: 49 MOTION to Dismiss Defendants' Notice of Joint Motion To Dismiss Pursuant To Federal Rule of Civil Procedure 12(b)(1)&(6) filed by Bank of America, NA: For the reasons set forth above, defendants' motion to dismiss is GRANTED. Should plaintiffs seek to amend, they must file any proposed amendment-along with a motion pursuant to Rule 15 of the Federal Rules of Civil Procedure-within 21 days from the date of this Opinion & Order. To allow for careful review of those allegations necessary to state a claim, any proposed Second Amended Complaint shall be not more than 75 pages in length. (Additional background materials may be in an appendix.) The Clerk of Court is directed to terminate the motion at ECF No. 49. (Signed by Judge Katherine B. Forrest on 5/18/2015) (tn)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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PHOENIX LIGHT SF LIMITED, in its own
:
right and in the right of BLUE HERON
:
FUNDING VI LTD., BLUE HERON
:
FUNDING VII LTD., KLEROS PREFERRED :
FUNDING V PLC, SILVER ELMS CDO PLC, :
SILVER ELMS CDO II LIMITED, C-BASS
:
CBO XIV LTD., and C-BASS CBO XVII LTD., :
and each of BLUE HERON FUNDING VI
:
LTD., BLUE HERON FUNDING VII LTD.,
:
KLEROS PREFERRED FUNDING V PLC,
:
SILVER ELMS CDO PLC and SILVER ELMS :
CDO II LIMITED, in their own right,
:
:
Plaintiffs,
:
:
-v:
:
:
U.S. BANK NATIONAL ASSOCIATION and
BANK OF AMERICA, NA,
:
:
:
Defendants.
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: May 18, 2015

14-cv-10116 (KBF)
OPINION & ORDER

KATHERINE B. FORREST, District Judge:
Plaintiffs—foreign entities incorporated under the laws of Ireland and the
Cayman Islands—allege that they are assignees of a now-defunct German
corporation’s claims with regard to certificates in residential mortgage-backed
securities (“RMBS”) trusts with face value in excess of $510 million. (See Amended
Complaint (“Am. Compl.”) ¶¶ 3, 22, ECF No. 36.) The certificates are alleged to
relate to 34 trusts. (See id. ¶ 1 & Ex. A.) Defendants U.S. Bank National
Association and Bank of America, NA—trustees of these 34 trusts—are alleged to
have breached their contractual, fiduciary, and statutory duties. (Id. ¶ 8.)

Before this Court is defendants’ joint motion to dismiss the Amended
Complaint on the basis that, inter alia, plaintiffs lack standing. (ECF No. 49.) For
the reasons set forth below, defendants’ motion is GRANTED on that basis.
Defendants also argue that plaintiffs’ statutory and tort claims should be dismissed.
The Court declines to resolve the remaining issues at this time, as it will provide
plaintiffs with a single opportunity to replead.1
I.

STANDARD OF REVIEW
Standing is a jurisdictional question properly raised in a motion pursuant to

Rule 12(b)(1) of the Federal Rules of Civil Procedure. Alliance for Envtl. Renewal,
Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 88 n.6 (2d Cir. 2006). “[W]here
jurisdictional facts are placed in dispute, the court has the power and obligation to
decide issues of fact by reference to evidence outside the pleadings, such as
affidavits.” Tandon v. Captain’s Cove Marina of Bridgeport, Inc., 752 F.3d 239, 243
(2d Cir. 2014) (quoting APWU v. Potter, 343 F.3d 619, 627 (2d Cir. 2003)) (internal
quotation marks omitted).
II.

FACTUAL BACKGROUND2
Plaintiffs allege that they obtained their rights as to the RMBS certificates at

issue in this action pursuant to an assignment. (Am. Compl. ¶ 22.) Plaintiffs allege
that WestLB—a German corporation with its principal place of business in
Düsseldorf, Germany—“initially purchased” the RMBS certificates. (Id.) In July

If plaintiffs decide to replead within the timeframe set forth at the end of this Opinion & Order,
defendants may seek to renew their substantive arguments pursuant to Rule 12(c).

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2

The Court sets forth only those facts that are relevant to the issue of plaintiffs’ standing.

2

2012, “WestLB underwent a restructuring, pursuant to which WestLB transferred
the majority of its remaining assets to a public winding-up agency known as Erste
Abwicklungsanstalt.” (Id.) “As a result of the restructuring measures, WestLB
discontinued its banking business.” (Id.) At some point, plaintiffs allegedly became
the “assignees of all rights, title, interest, causes of action and claims regarding
securities initially purchased by the assignor.” (Id. ¶ 23.) Plaintiffs allege that
“[t]he Certificates at issue in this case were severely damaged on or before the day
they were transferred to Plaintiffs, and continue to be damaged, in an amount to be
proven at trial.” (Id.)
Plaintiffs claim to have standing to bring direct claims (Am. Compl. ¶¶ 1520), and Phoenix Light SF Ltd. (“Phoenix Light”) additionally claims to have
standing to sue on behalf of its fellow co-plaintiffs and two non-plaintiff entities—CBASS CBO XIV Ltd. and C-BASS CBO XVII Ltd. (collectively, “C-BASS entities”)—
because it allegedly “holds more than 50% of the controlling class of notes” issued by
them (id. ¶ 24).
III.

DISCUSSION
No plaintiff has adequately pled or established that it has standing to bring

this action—either directly or derivatively.
A.

Direct Claims

Plaintiffs allege that they “bring their claims against Defendants as
assignees of claims regarding Certificates that were initially purchased by WestLB.”
(Am. Compl. ¶ 22.) It is unclear whether plaintiffs (except perhaps Phoenix Light)
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purchased or otherwise obtained their certificates from WestLB, Erste
Abwicklungsanstalt, or some other third party. It is unclear whether any
restrictions were imposed on plaintiffs’ rights as to these certificates at the time of
transfer—and, if so, what those restrictions were. It is unclear whether the transfer
was made pursuant to German law or some other law—and whether whatever law
applied allows the assignment of legal claims.3 Finally, it is unclear whether—if
the applicable law allows for such an assignment—the documentation here was
sufficient to effect one.
Accordingly, at the outset, there are insufficient allegations to support a
proper assignment of legal claims as to any or all time periods for the certificates at
issue. Plaintiffs are incorrect that allegations that plaintiffs are current
certificateholders that suffered damages as a result of defendants’ breaches are
sufficient to establish standing as to all claims, past and present. Standing is a
threshold question as to the Court’s power to hear the case, Warth v. Seldin, 422
U.S. 490, 498 (1975)—and plaintiffs “must allege facts that affirmatively and

Plaintiffs allege that they have standing “pursuant to Section 13-107 of the New York General
Obligations Law.” (Am. Compl. ¶ 23.) However, plaintiffs provide no explanation as to why this
New York statute applies to a transfer of certificates and/or claims from a German company in
Germany to Irish and Cayman companies in Ireland and the Cayman Islands. In fact, the RMBS
purchase agreement between Phoenix Light and WestLB—which plaintiffs have submitted as part of
their opposition to the instant motion—provides that it is governed by German law. (See
Declaration of Steven S. Fitzgerald in Support of Plaintiffs’ Memorandum of Law in Opposition to
Defendants’ Motion to Dismiss the Amended Complaint (“Fitzgerald Decl.”) Ex. 24 at 112 (§ 8.1)
(“This Agreement shall be governed by, and construed in accordance with, the laws of the Federal
Republic of Germany, except to the extent that the transfer of any Acquired Underlying Asset
forming part of the Portfolio is governed by another mandatory law due to conflict of law rules.”),
ECF No. 61.) This distinguishes Excelsior Fund, Inc. v. JP Morgan Chase Bank, N.A., 2007 WL
950134, at *6 (S.D.N.Y. Mar. 28, 2007), which plaintiffs cite in their opposition, because in that case,
there was “an express New York governing law provision,” id.
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plausibly suggest that [they have] standing to sue,” Amidax Trading Grp. v.
S.W.I.F.T. SCRL, 671 F.3d 140, 145 (2d Cir. 2011) (per curiam). Here, the
allegations leave too many questions unanswered. Plaintiffs may be
certificateholders, but what rights they have as certificateholders (and which state’s
or nation’s law governs this issue) remains unclear. This failure alone provides a
basis to dismiss plaintiffs’ direct claims.
In any event, materials appropriately reviewed on this 12(b)(1) motion4—the
Indenture governing plaintiff Blue Heron Funding VII Ltd. (the “Blue Heron VII
Indenture”) and letters from Phoenix Light’s counsel to the indenture trustees—
indicate that plaintiffs are contractually barred from directly asserting claims as to
the certificates at issue in this action, and that such claims belong to the indenture
trustees.
The Blue Heron VII Indenture—which plaintiffs do not dispute is illustrative
of the indentures governing other plaintiffs—provides:
The Issuer [plaintiff] hereby Grants to the Indenture Trustee for the
benefit of the Secured Parties, all of its right, title and interest in . . .
all Underlying Assets [e.g., the RMBS certificates]. . . . [T]he Issuer
does hereby constitute and irrevocably appoint the Indenture Trustee
the true and lawful attorney of the Issuer, with full power . . . to
exercise all rights of the Issuer . . . and to . . . file any claims or take
any action or institute any proceedings which the Indenture Trustee
may deem to be necessary or advisable.

In connection with standing motions, this Court may consider documents outside the pleadings and
make appropriate findings. See Tandon, 752 F.3d at 243 (“[W]here jurisdictional facts are placed in
dispute, the court has the power and obligation to decide issues of fact by reference to evidence
outside the pleadings, such as affidavits.” (quoting APWU, 343 F.3d at 627) (internal quotation
marks omitted)).
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(Declaration of Jacob S. Kreilkamp in Support of Defendants’ Joint Motion to
Dismiss (“Kreilkamp Decl.”) Ex. 3 (Blue Heron Indenture) at 2-3, ECF No. 51.)
Assignment of “all . . . right, title and interest” in the certificates—and the
conveyance to the trustee of the “full power” to file actions as it deems necessary or
advisable—constitutes a full assignment of the right to commence litigation as well
as the discretion as to when any such suit should be brought. See Banque Arabe et
Internationale D’Investissement v. Maryland Nat. Bank, 57 F.3d 146, 152 (2d Cir.
1995) (under New York law, a contract granting all “rights, title and interest” to
another results in a “transfer” of claims).5 A full assignment of this type divests
plaintiffs of any rights they otherwise may have had to commence litigation on their
own behalf. See Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, Nat. Ass’n,
731 F.2d 112, 125 (2d Cir. 1984) (“An unequivocal and complete assignment
extinguishes the assignor’s rights . . . and leaves the assignor without standing to
sue.” (citation omitted)).
The letters that Phoenix Light’s counsel sent to the indenture trustees
shortly before this case was filed suggest that plaintiffs recognize that they are
contractually barred from filing claims. These letters request that the trustees

Plaintiffs argue that “as strangers to the CDO indentures, Defendants have no basis to invoke
provisions of those agreements to challenge the right of CDO trust beneficiaries to pursue claims.”
(Plaintiffs’ Memorandum of Law in Opposition to Defendants’ Motion to Dismiss the Amended
Complaint (“Pls.’ Opp.”) at 2, ECF No. 60.) As the Court must independently satisfy itself that
plaintiffs have standing to pursue the claims before the Court, the fact that defendants are not
parties to the Indentures is irrelevant. Rajamin v. Deutsche Bank National Trust Co., 757 F.3d 79
(2d Cir. 2014), which plaintiffs cite (see Pls.’ Opp. at 13-14), is inapposite because in that case, it was
the plaintiffs who sought to assert claims based on contracts to which they were not parties.
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assign their claims to Phoenix Light so that Phoenix Light could commence
litigation:
[W]e write to set forth . . . why, as Indenture Trustee for the CDOs,
[you] . . . [should] step aside and assign to our client the right to
commence litigation on behalf of the CDOs against the trustees . . . of
certain residential mortgage-backed security . . . trusts that issued
certificates purchased by the CDOs.
and
[You] should consent to Phoenix Light asserting the subject claims on
behalf of the CDOs and assign to Phoenix Light any rights [you have]
to pursue such claims.
and
[Your] broad power to exercise any and all rights with respect to the
CDOs’ collateral . . . plainly include[s] the power to assign legal claims
of the CDOs to another entity. . . . Phoenix Light directs [you] to
exercise [this] power to assign to Phoenix Light the claims described
above.
(Fitzgerald Decl. Ex. 15 at 2-4; see also id. Exs. 16-17.) This letter suggests that
plaintiffs themselves hold the view that the right to commence suit resides with the
indenture trustees—and that only by way of assignment (which is not alleged to
have occurred) would it vest in plaintiffs.
Accordingly, there is no basis for this Court to find that plaintiffs have
standing to bring the instant claims on their own behalf.
B.

Derivative Claims

Phoenix Light additionally claims to have standing to sue on behalf of its coplaintiffs and two non-plaintiff C-BASS entities because it allegedly “holds more

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than 50% of the controlling class of notes” issued by them.6 (Am. Comp. ¶ 24.) Does
Phoenix Light mean that it has sufficient independent interest in the certificates by
virtue of its ownership of the other entities that it can assert their claims directly?
Or, does it really mean that it is suing—and may sue—derivatively? Clarity on this
point is required in order to properly assess standing. In any event, the Amended
Complaint must be dismissed under either theory.
To the extent Phoenix Light relies on its ownership of its co-plaintiffs and the
C-BASS entities, the law is clear that the mere fact that a company owns a
significant part of another does not give it an independent basis to bring suit on the
other’s behalf. See Hudson Optical Corp. v. Cabot Safety Corp., No. 97-9046, 1998
WL 642471, at *3 (2d Cir. Mar. 25, 1998) (summary order) (a subsidiary is a
“separate corporation,” and thus the parent company “has no standing to assert [the
subsidiary’s] legal rights”); New Castle Siding Co. v. Wolfson, 468 N.Y.S.2d 20, 21
(N.Y. App. Div. 1983) (“Generally, corporations have an existence separate and
distinct from that of their shareholders, and an individual shareholder cannot
secure a personal recovery for an alleged wrong done to a corporation. The fact that
an individual closely affiliated with a corporation (for example, a principal
shareholder, or even a sole shareholder), is incidentally injured by an injury to the
corporation does not confer on the injured individual standing to sue on the basis of

The reason that Phoenix Light elected to assert claims “on behalf of” other entities is unclear:
perhaps Phoenix Light initially acquired certain certificates by assignment, but later transferred
them to the other entities without retaining specific rights—or perhaps Phoenix Light never
acquired these certificates, and relies solely on its ownership interest in the other entities to assert
claims as to these certificates.
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either that indirect injury or the direct injury to the corporation.” (citations
omitted)), aff’d, 470 N.E.2d 868 (N.Y. 1984); cf. W.R. Huff Asset Mgmt. Co., LLC v.
Deloitte & Touche LLP, 549 F.3d 100, 109 (2d Cir. 2008) (“[Plaintiff’s] power-ofattorney is not purported to be a valid assignment and does not confer a legal title
to the claims [plaintiff] brings. While [plaintiff] enjoys the authority to make some
decisions concerning litigation, it does not have an ownership stake in any claims
its clients might pursue against defendants.”).
To the extent that Phoenix Light—or any other plaintiff—seeks to assert
derivative claims, it must comply with Rule 23.1 of the Federal Rules of Civil
Procedure by alleging “with particularity” either that it demanded that the suit be
brought and the demand was wrongfully refused, or that it did not make a demand
because doing so would have been futile. See Fed. R. Civ. P. 23.1(b). Plaintiffs have
done neither.
Plaintiffs argue in their opposition that demand would have been futile
because the indenture trustees “have been sued for [alleged] dereliction of their
legal duties in lawsuits asserting the very same claims.” (Pls.’ Opp. at 15.) To
start, plaintiffs have not pled this theory in the Amended Complaint. In any event,
the fact that the indenture trustees may be parties to litigation similar to the
instant action does not excuse demand. See Ellington Credit Fund, Ltd. v. Select
Portfolio Servicing, Inc., 837 F. Supp. 2d 162, 186 (S.D.N.Y. 2011) (“[T]here is an
important difference between asking the trustee to sue itself . . . and asking it to sue
a third party.” (citation and internal quotation mark omitted)). There is no
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necessary reason why the indenture trustees acting in their fiduciary capacity
would affirmatively choose to take (or not take) an action based solely on their own
corporate self-interest.
Plaintiffs also contend—pointing to Phoenix Light’s letters to the indenture
trustees—that they are entitled to bring this action because the indenture trustees
“have failed to act following a demand by Plaintiffs to do.” (Pls.’ Opp. at 16.) Once
again, plaintiffs have not pled this theory in the Amended Complaint. In any event,
Phoenix Light’s letters to the indenture trustees did not demand that the indenture
trustees bring suit; rather, the letters asked the indenture trustees to “step aside
and assign to [Phoenix Light]” the right to sue defendants. (Fitzgerald Decl. Ex. 15
at 2.)
IV.

CONCLUSION
For the reasons set forth above, defendants’ motion to dismiss is GRANTED.

Should plaintiffs seek to amend, they must file any proposed amendment—along
with a motion pursuant to Rule 15 of the Federal Rules of Civil Procedure—within
21 days from the date of this Opinion & Order. To allow for careful review of those
allegations necessary to state a claim, any proposed Second Amended Complaint
shall be not more than 75 pages in length. (Additional background materials may
be in an appendix.)

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The Clerk of Court is directed to terminate the motion at ECF No. 49.
SO ORDERED.
Dated:

New York, New York
May 18, 2015

______________________________________
KATHERINE B. FORREST
United States District Judge

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