Pacific Life Insurance Company et al v. The Bank of New York Mellon
Filing
53
OPINION AND ORDER: re: 28 MOTION to Dismiss filed by The Bank of New York Mellon. For the foregoing reasons, Defendant's motion is GRANTED in part and DENIED in part, as described in the text of this Opinion. The Clerk of Court is directed to terminate Docket Entry 28. The parties are hereby ORDERED to file a Case Management Plan on or before April 30, 2018. SO ORDERED. (Signed by Judge Katherine Polk Failla on 3/16/2018) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
PACIFIC LIFE INSURANCE COMPANY and :
PACIFIC LIFE & ANNUITY COMPANY,
:
:
Plaintiffs,
:
:
v.
:
:
THE BANK OF NEW YORK MELLON,
:
:
Defendant. :
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: March 16, 2018
______________
17 Civ. 1388 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
The instant action is one of a growing number of cases in which
certificateholders of residential mortgage-backed securities (“RMBS”) trusts
have brought claims against their common trustees. Here, Pacific Life
Insurance Company (“PacLife”) and Pacific Life & Annuity Company (together,
“Plaintiffs”), certificateholders of 13 securitization trusts (the “Trusts”), 1 claim
that The Bank of New York Mellon (“Defendant”) breached its contractual,
fiduciary, and common law duties, as well as its duties under the federal Trust
Indenture Act of 1939 (the “TIA”), 15 U.S.C. § 77aaa, and the Streit Act, N.Y.
Real Property Law § 124. Plaintiffs also claim that Defendant was negligent in
failing to avoid conflicts of interest and to perform ministerial acts with due
care.
1
Between 2011 and 2014, Plaintiffs sold six of the thirteen certificates (the “Sold
Certificates”) at issue in this case; they continue to hold the remaining seven certificates
(the “Held Certificates”).
Defendant has moved to dismiss nearly all of the causes of action against
it for failure to state a claim. 2 For the reasons set forth below, Defendant’s
motion to dismiss Plaintiffs’ breach of contract claims is denied; its motion to
dismiss Plaintiffs’ tort claims is granted in part and denied in part; its motion
to dismiss Plaintiffs’ claim under the TIA is granted; and its motion to dismiss
Plaintiffs’ claims under the Streit Act is granted.
BACKGROUND 3
A.
Factual Background
This Court has previously explained the typical formation process and
structure of RMBS trusts. See, e.g., BlackRock Allocation Target Shares: Series
S Portfolio v. Wells Fargo Bank, Nat’l Ass’n (hereinafter, “BlackRock Series S”),
247 F. Supp. 3d 377, 383-84 (S.D.N.Y. 2017); see also BlackRock Allocation
Target Shares v. Wells Fargo Bank, Nat’l Ass’n, No. 14 Civ. 9371 (KPF) (SN),
2
Defendant does not seek dismissal of Plaintiffs’ negligence claim. (Def. Br. 27).
3
The facts in this section are drawn from Plaintiffs’ complaint (“Complaint” or “Compl.”
(Dkt. #1)). The Court takes all well-pleaded allegations therein as true, as it must at
this stage. See, e.g., Peralta v. St. Luke’s Roosevelt Hosp., No. 14 Civ. 2609 (KPF), 2015
WL 3947641, at *1 n.1 (S.D.N.Y. June 26, 2015). The Court has also reviewed the
briefing submitted by the parties. For ease of reference, the Court will refer to
Defendant’s memorandum of law in support of its motion to dismiss as “Def. Br.” (Dkt.
#30); Plaintiffs’ opposition brief as “Pl. Opp.” (Dkt. #31); Defendant’s reply brief in
further support of its motion to dismiss as “Def. Reply” (Dkt. #35); Plaintiffs’
supplemental letter brief, filed pursuant to the Court’s February 12, 2018 Order (Dkt.
#50), as “Pl. Supp.” (Dkt. #51); and Defendant’s supplemental letter brief as “Def.
Supp.” (Dkt. #52). The Court refers to declarations in support of this briefing and
exhibits attached thereto by the name of the declarant and the exhibit designation, e.g.,
“[ ] Decl., Ex. [ ].”
For future submissions to the Court, the parties are directed to refrain from employing
transparent-but-improper space-saving machinations, including the shunting of text
into small-type footnotes and the incorporation by reference of arguments made by
other litigants in other matters.
2
2017 WL 953550, at *1-3 (S.D.N.Y. Mar. 10, 2017). Accordingly, the Court
provides but a brief description for context.
1.
RMBS Trusts Generally
The Trusts in the instant action were securitized by residential mortgage
loans, and “were created to facilitate [RMBS] transactions introduced to
investors from 2005 to 2008.” (Compl. ¶ 2). Such RMBS Trusts are formed
according to the following process: First, institutions known as “sponsors” or
“sellers” acquire and pool residential mortgage loans. (Id. at ¶ 25). Once the
loans are originated and selected for securitization, the seller, through an
affiliate called the depositor, “conveys the pool of loans to a trustee, such as
[Defendant], pursuant to a [pooling and servicing agreement (‘PSA’)] that
establishes various prioritized tranches of interests in payments made by
borrowers on the loans.” (Id. at ¶ 26). Finally, the depositor sells the
certificates to an underwriter, which markets and sells them to investors. (Id.).
Pursuant to the PSA, “a servicer is appointed to manage the collection of
payments on the mortgage loans in return for a monthly fee.” (Compl. ¶ 27).
The servicer’s function is to “monitor[] delinquent borrowers, foreclos[e] on
defaulted loans, monitor[] compliance with representations and warranties
regarding loan origination, track[] mortgage documentation, and manag[e] and
sell[] foreclosed properties.” (Id.). The servicer also provides data to the
trustee, which in turn delivers monthly remittance reports to certificateholders
describing the performance of underlying loans and compliance with the PSA.
(Id. at ¶ 28).
3
2.
The Trusts, the PSAs, and Defendant’s Duties Thereunder
Plaintiffs invested in RMBS issued by twelve securitization trusts and
one resecuritization trust. Defendant served as the Trustee for each. The
twelve securitization trusts were all sponsored by Countrywide Home Loans,
Inc. (“Countrywide” or the “Sponsor”). (Compl. ¶ 2). The resecuritization trust,
CWALT 2008-1R, was “backed by RMBS certificates issued by underlying
trusts,” including by “senior tranches” of “one of the [twelve securitization]
Trusts[.]” (Id.). Plaintiffs acquired over $400 million of RMBS certificates
issued by the Trusts. (Id. at ¶ 3).
Defendant’s duties as the Trustee are set forth in the PSAs. An RMBS
trustee’s duties are “distinct from those of an ‘ordinary trustee,’ which might
have duties extending well beyond the agreement.” Phoenix Light SF Ltd.
v. Bank of N.Y. Mellon (hereinafter, “PL/BNYM”), No. 14 Civ. 10104 (VEC), 2015
WL 5710645, at *2 (S.D.N.Y. Sept. 29, 2015) (citing AG Capital Funding
Partners, L.P. v. State St. Bank & Tr. Co., 11 N.Y.3d 146, 156 (2008)); see also
Fixed Income Shares: Series M v. Citibank N.A. (hereinafter, “Fixed Income
Shares”), 130 F. Supp. 3d 842, 857-58 (S.D.N.Y. 2015). In contrast, an RMBS
trustee’s duties are “governed solely by the terms of the [agreement.]”
Blackrock Series S, 247 F. Supp. 3d at 385 (internal quotation marks and
citation omitted). “This is true regardless of whether the trust is an indenture
trust or a PSA [trust].” Royal Park Invs. SA/NV v. HSBC Bank USA, Nat’l Ass’n
(hereinafter, “RP/HSBC”), 109 F. Supp. 3d 587, 597 (S.D.N.Y. 2015) (citing
Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp.,
4
603 F.3d 23, 29 (2d Cir. 2010); Bank of N.Y. Mellon v. Walnut Place LLC, 819 F.
Supp. 2d 354, 364-65 & n.6 (S.D.N.Y. 2011)).
Plaintiffs argue that the PSAs at issue here impose four fundamental
duties on Defendant. First, Defendant was required to “take physical
possession of the mortgage loans and the accompanying mortgage files [ —
including the mortgage note, the mortgage, the assignment of mortgage, and
the title policy — ] for the exclusive use and benefit of all current and future
certificateholders.” (Compl. ¶¶ 34, 35). For “Delay Delivery Mortgage Loans,”
Defendant was required to identify which, if any, lacked necessary paperwork.
(Id. at ¶¶ 37, 38). Where paperwork was missing, Defendant was required to
issue a Delay Delivery Certification and assign back to the Seller any
incomplete loans, which the Seller would then have to substitute with loans
whose paperwork was complete. (Id. at ¶¶ 38, 39). Defendant was then
required to issue a final certification and exception report that “identified
mortgage files that were missing documentation required under the PSA” and
demand that any such defect be cured. (Id. at ¶¶ 40, 44).
Second, Defendant was obligated to provide notice of defaults and to
enforce repurchase obligations. In each PSA, Countrywide made various
representations and warranties regarding the characteristics of the mortgage
loans, including, inter alia, loan-to-value ratios; priority held by the liens on the
mortgaged properties; compliance with applicable laws; validity of the
mortgages and mortgage notes; the origination, underwriting, and collection
practices used; and the mortgage loans’ conformity with the descriptions in the
5
prospectus supplements. (Compl. ¶ 50). Upon discovery of a breach of a
representation or warranty that materially affected the investors’ interests,
Defendant was obligated to “give prompt notice thereof to the other parties.”
(Id. at ¶ 51 (citing PSA § 2.03(c))). Once notified of a breach, the Seller had 90
days to cure the breach or remove the loan from the Trust. (Id.).
Third, “[u]nder the PSAs and applicable law, [Defendant] owed a fiduciary
duty to certificateholders upon the occurrence of an Event of Default.” (Compl.
¶ 60). 4 Section 8.01 of the PSA provides that, upon an Event of Default, “the
Trustee shall exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their exercise as a
prudent person would exercise under the circumstances in the conduct of such
person’s own affairs.” (Id.).
Section 7.01 defines Events of Default to include:
[A]ny failure by the Master Servicer to observe or
perform in any material respect any other of the
covenants or agreements on the part of the Master
Servicer contained in this Agreement … which failure
materially affects the rights of [c]ertificateholders, that
failure continues unremedied for a period of 60 days
after the date on which written notice of such failure
shall have been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer and
the Trustee by the [h]olders of [c]ertificates evidencing
not less than 25% of the [v]oting [r]ights evidenced by
the [c]ertificates; provided, however, that the sixty-day
cure period shall not apply to the initial delivery of the
[m]ortgage [f]ile for Delay Delivery Mortgage Loans nor
the failure to substitute or repurchase in lieu of
delivery[.]
4
Plaintiffs argue that the TIA and the Streit Act imposed fiduciary duties upon Defendant
in the event of default. (See Compl. ¶¶ 65, 66).
6
(Compl. ¶ 61). Plaintiffs conclude that, “[u]nder Section 7.01, [Defendant] was
obligated to provide the Master Servicer notices of the Master Servicers’
breaches under the PSA.” (Id.). Defendant must also provide the Master
Servicer notice of “reportable events” under Section 11.03 of the PSA and
“provide public notice of material breaches of pool asset representations or
warranties or transaction covenants on Form 10-Ds.” (Id. at ¶ 62). Within 60
days of an uncured Event of Default (“EOD”), Defendant was required to notify
all certificateholders known to Defendant. (Id. at ¶ 64).
Some Events of Default could be triggered without written notice.
“Because the cure period shall not apply to the initial delivery of the Mortgage
File for Delay Delivery Mortgage Loans nor the failure to substitute or
repurchase in lieu of delivery, the Event of Default related to Delay Delivery
Loan failures is triggered automatically — no additional notice or opportunity
to cure is required.” (Compl. ¶ 63 (internal quotation marks omitted)).
Plaintiffs contend that, upon the occurrence of an Event of Default, a
prudent investor would have:
[i] taken appropriate steps to ensure all mortgage loan
documentation was completely and accurately
transferred to the trusts; [ii] ensured that the
appropriate parties were receiving notification of
breaches of representations and warranties or
documentation defects from servicers; [iii] enforced the
responsible parties’ repurchase obligations with respect
to breaching mortgage loans; [iv] addressed servicer
breaches; and [v] otherwise exercised all rights and
remedies under the PSA to maximize recoveries for
certificateholders[.]
(Compl. ¶ 67).
7
Fourth, and finally, Defendant had a duty to address the Servicers’
failures, if any, to meet prudent servicing standards. If “defaults were not
cured within the grace period, or if the Trustee failed to give notice, the Trustee
was required to take action to address the defaults.” (Compl. ¶ 70). It “had the
authority and obligation to ‘terminate all of the rights and obligations of the
Master Servicer … [and] assume all of the rights and obligations of the Master
Servicer.’” (Id. (citing PSA § 7.01)). And it generally “had a duty to exercise all
rights available under the PSAs to protect certificateholders’ interests and do so
with due care.” (Id.).
Defendant’s fiduciary duties only arose after an Event of Default.
Without an Event of Default, “the duties and obligations of the Trustee [were]
determined solely by the express provisions of the [PSA], [and] the Trustee
[would] not be liable except for the performance of such duties and obligations
as … specifically set forth in th[e] [PSA.]” (Compl. ¶ 72 (quoting PSA § 8.01)).
The PSA further stated that “no implied covenants or obligations shall be read
into this Agreement against the Trustee[.]” (Id. (quoting PSA § 8.01)).
3.
Defendant’s Alleged Breaches
Plaintiffs contend that while serving as Trustee, Defendant breached
contractual, fiduciary, and statutory duties. Defendant “knew that
Countrywide regularly disregarded its underwriting guidelines and
representations and warranties made to securitization trusts … long before
certificateholders learned of such problems.” (Compl. ¶ 98). In administering
various Countrywide RMBS trusts, Defendant “learned that Countrywide had
8
departed from their underwriting guidelines, engaged in predatory lending, and
failed to ensure mortgage loans complied with state and federal laws.” (Id. at
¶ 99). Defendant “received a ‘high volume’ of notices from certificateholders
and other parties notifying [Defendant] of non-compliant Countrywide loans.”
(Id. at ¶ 104). The number of “written repurchase requests for Countrywide
loans that breached their representations and warranties that [Defendant]
received became so large that [Defendant] eventually created a repurchase
tracking tool to manage the massive volume.” (Id. at ¶ 105). Yet, as Plaintiffs
would have it, Defendant failed to take any of the corrective actions required of
it by the PSA.
Plaintiffs allege that Defendant had received written notice of various
material breaches. (Compl. ¶ 106). Plaintiffs point to numerous instances
where outside parties notified Defendant of specific or systemic concerns with
Countrywide RMBS trusts. For example, on January 14, 2008, Hanover
Capital Mortgage Holders sent to Defendant repurchase requests that
highlighted Countrywide’s breaches of the origination guidelines and
misrepresentations regarding the mortgage loan schedule. (Id. at ¶ 107). On
November 9, 2010, AIG notified Defendant of breaches of representations and
warranties affecting numerous Countrywide RMBS trusts, including at least
one of the Trusts at issue here. (Id. at ¶ 108). And “[m]onoline insurers …
repeatedly sent [Defendant] notices of breaches of representations and
warranties in Countrywide RMBS trusts.” (Id. at ¶ 109).
9
The Complaint further alleges that Defendant was provided other, more
direct evidence of Countrywide’s breaches of representations and warranties.
For example, Defendant “was presented with a large number of defaulted loans,
and foreclosures were often commenced in [Defendant’s] name, including for
loans in the Covered Trusts.” (Compl. ¶ 115). In each foreclosure, Defendant
“was the named plaintiff and real party in interest as it allegedly held title to
the notes and mortgage … [and as] the real party in interest it had knowledge
of the contents of the foreclosure filings … [and] knew that the borrowers either
[i] did not qualify for the loans … ; [ii] were victims of predatory lending; or
[iii] were given … loan[s] that did not comply with state or federal law.” (Id. at
¶¶ 116-17).
Plaintiffs allege that Defendant knew of Countrywide’s “systemic
abandonment of its underwriting guidelines,” which dereliction “had a
devastating effect on the performance of the … Trusts.” (Compl. ¶ 122). When
Plaintiffs purchased certificates in the Trusts, the certificates were rated
double-A or higher. (Id.). Eventually, after repeated downgrades, they were
considered “junk” bonds. (Id.). Plaintiffs allege that those downgrades “were
prompted by the alarming rate of defaults and delinquencies of the mortgage
loans … and the information that has emerged concerning Countrywide’s …
[failure to abide by] underwriting guidelines.” (Id.). Plaintiffs conclude that, by
October 2009, Defendant was aware that the Trusts were junk bonds and that
the “sponsors and originators had systemically failed to comply with
represented underwriting standards.” (Id. at ¶ 123).
10
Plaintiffs further allege that, pre-EOD, Defendant failed to give notice of
breaches of representations and warranties, and failed to enforce repurchase
obligations. Defendant “never so much as analyzed the many breach notices it
received, let alone attempted to enforce Countrywide’s repurchase obligations.”
(Compl. ¶ 128). And “when investors placed [Defendant] on notice of problems
with Countrywide loans, [Defendant] sat on its hands” rather than providing
notice to Countrywide and requiring it to repurchase the defective loans. (Id. at
¶ 129). Defendant “had a continuing duty to provide such notice but failed to
do so throughout its tenure as trustee.” (Id. at ¶ 130). Nor did Defendant
provide notice of and take steps to remedy the Servicers’ failure to adhere to
prudent servicing standards. (Id.).
Post-EOD, Defendant “fail[ed] to take any actions for years to exercise
rights and remedies in the PSAs for the benefit of certificateholders or to
maximize the recoveries for investors”; this conduct, in Plaintiffs’ view, “violated
[Defendant’s] post-[EOD] duty of prudence.” (Compl. ¶ 131). Plaintiffs point to
numerous EODs, including, inter alia, the Servicer’s failure to provide notice or
exercise repurchase remedies after representation and warranty violations (id.
at ¶ 132); document delivery failures (id. at ¶ 133); Countrywide’s failure to
repurchase loans with flawed documentation (id. at ¶ 136); false servicer
certifications (id. at ¶¶ 142-45); and other servicing breaches, including delayed
foreclosures, unnecessary and excessive fees, failure to “charge off” delinquent
loans, impermissible modification of loans, and forged documentation resulting
from robo-signing practices (id. at ¶¶ 151-71).
11
Plaintiffs allege that these EODs “triggered [Defendant’s] duty to act
prudently to protect the interests of the certificateholders in all respects” and
that at least some of these duties “continue[] to this day[.]” (Compl. ¶ 141). Yet
Defendant failed to provide Plaintiffs with notice, as required under
Section 7.03 of the PSA (id. at ¶ 172), or to “file Forms 8-K with the Securities
and Exchange Commission disclosing that Events of Default had occurred, as
it was required to do” (id. at ¶ 173).
4.
Defendant’s Settlement with Countrywide and the Related
Article 77 Proceeding
In October 2010, Defendant and other holders of securities worth over
$100 billion brought claims on behalf of 530 trusts against Countrywide and
its successor, Bank of America. See In re BNYM, 42 Misc. 3d 1237(A), at *6-7
(N.Y. Sup. Ct. N.Y. Cty. Jan. 31, 2014). On June 28, 2011, the parties settled
the investors’ claims for $8.5 billion (the “Countrywide Settlement”). (Def.
Br. 6; see also Houpt Decl., Ex. 5-6 (Dkt. #29-5, 29-6)). The settlement
agreement released all claims against Countrywide relating to the origination,
sale, or delivery of the mortgage loans to the Trusts; the documentation of the
mortgage loans to the Trusts; and the servicing of the mortgage loans. (Def.
Br. 7).
The settlement received court approval in March 2015, pursuant to an
Article 77 proceeding in New York state court. N.Y. C.P.L.R. 7701. Article 77
provides a mechanism by which New York courts may consider all
certificateholders’ objections to the settlement. Some objecting
certificateholders challenged the adequacy of the settlement and the manner in
12
which it was negotiated. (Def. Br. 8). After a trial and an appeal, the New York
courts approved the settlement, as well as Defendant’s actions in entering into
the agreement. (Id.).
5.
The Retirement Board of the Policemen’s Annuity Class Action
Of the 13 Trusts at issue in this case, 10 were implicated in a class
action lawsuit brought in this District in 2011. See Ret. Bd. of the Policemen’s
Annuity and Benefit Fund of the City of Chi. v. The Bank of N.Y. Mellon, No. 11
Civ. 5459 (WHP) (S.D.N.Y. Aug. 5, 2011) (the “Policemen’s Class Action”). The
class was defined to include “all current and former investors who acquired the
Countrywide Certificates for the Covered Trusts” and suffered losses “as a
result of” Defendant’s “misconduct[.]” (Kane Decl., Ex. 7 (Dkt. #32-7) ¶¶ 65,
67). Plaintiffs were “part of the class for the [10] Trusts [at issue].” (Pl.
Opp. 20). The court dismissed claims relating to nine of the Trusts on April 3,
2012, for lack of standing. Ret. Bd. of the Policemen’s Annuity & Benefit Fund
of the City of Chi. v. The Bank of N.Y. Mellon, 914 F. Supp. 2d 422, 426
(S.D.N.Y. 2012). The Second Circuit affirmed dismissal of those claims on
December 23, 2014. Ret. Bd. of the Policemen’s Annuity & Benefit Fund of the
City of Chi. v. The Bank of N.Y. Mellon, 775 F.3d 154, 161-62 (2d Cir. 2014).
B.
Procedural Background
On February 23, 2017, Plaintiff brought this action, alleging breach of
contract, breach of fiduciary duty, negligence, breach of the implied covenant of
good faith and fair dealing, and violations of the TIA and the Streit Act. (Dkt.
#1). On June 9, 2017, Defendant filed a motion to dismiss and supporting
13
papers. (Dkt. #28-30). Plaintiffs filed their opposition papers on July 10, 2017
(Dkt. #31, 32), and Defendant filed a reply in further support of its motion to
dismiss on July 28, 2017 (Dkt. #35, 36).
DISCUSSION
A.
Applicable Law
When considering a motion to dismiss under Rule 12(b)(6), a court
should “draw all reasonable inferences in [the plaintiff’s] favor, assume all
well-pleaded factual allegations to be true, and determine whether they
plausibly give rise to an entitlement to relief.” Faber v. Metro Life Ins. Co., 648
F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted) (quoting Selevan
v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009)). Thus, “[t]o survive
a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp.
v. Twombly, 550 U.S. 554, 570 (2007)). In this regard, a complaint is deemed
to include any written instrument attached to it as an exhibit or any
statements or documents incorporated by reference. See, e.g., Hart v. FCI
Lender Servs., Inc., 797 F.3d 219, 221 (2d Cir. 2015) (citing Fed. R. Civ. P. 10(c)
(“A statement in a pleading may be adopted by reference elsewhere in the same
pleading or in any other pleading or motion. A copy of a written instrument
that is an exhibit to a pleading is a part of the pleading for all purposes.”)).
“While Twombly does not require heightened fact pleading of specifics, it
does require enough facts to ‘nudge [a plaintiff’s] claims across the line from
14
conceivable to plausible.’” In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d
Cir. 2007) (per curiam) (quoting Twombly, 550 U.S. at 570). “Where a
complaint pleads facts that are ‘merely consistent with’ a defendant’s liability,
it ‘stops short of the line between possibility and plausibility of entitlement to
relief.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). Moreover,
“the tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions. Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do
not suffice.” Id.
B.
Analysis
Defendant advances various arguments in favor of dismissal, many of
which are substantially similar to ones that this Court has ruled on in another
matter. See BlackRock Series S, 247 F. Supp. 3d at 377. Defendant argues
that all of Plaintiffs’ contract-based claims are barred, under either the
applicable statute of limitations or principles of res judicata. As to the former,
Defendant argues that New York’s six-year statute of limitations applies to the
Held Certificates and that, if the Court credits the allegations in Plaintiffs’
supplemental letter brief, California’s four-year statute of limitations applies to
the Sold Certificates. As to the latter, Defendant claims that the Countrywide
Settlement covers all conduct within the limitations period, and the Article 77
judgment approving that settlement binds this Court and precludes Plaintiffs’
claims.
15
Defendant next asserts that Plaintiffs’ EOD-related claims fail because
they do not allege that either of two necessary conditions were met. First,
Plaintiffs do not allege that the Master Servicer received written notice of
servicing violations, which is required pursuant to Section 7.01 of the PSA, for
servicing violations to ripen into EODs. Such failure, Defendant asserts,
cannot be excused by the “prevention doctrine,” because Defendant neither
had an affirmative duty to notify the Master Servicer of violations nor actively
prevented others from providing such notice. Second, Plaintiffs have not
alleged that Defendant received written notice of an EOD, without which none
of the heightened, post-EOD duties apply.
Defendant further argues that: (i) Plaintiffs’ due care and conflict of
interest claims are barred by the economic loss doctrine; (ii) Plaintiffs’ claim
that Defendant breached the implied covenant of good faith and fair dealing
fails because implied duties were negated by the parties’ contract; (iii) Plaintiffs’
TIA claim fails because, under controlling precedent, PSA-based trusts are
exempt from the TIA; (iv) Plaintiffs’ Streit Act claims fail because the Streit Act
does not impose any affirmative duties on trustees; and (v) Plaintiffs lacked
standing to pursue claims relating to any of the Sold Certificates, under the
theory that, upon sale of the certificates, Plaintiffs automatically transferred
any potential claims against the Trustee.
The Court considers each of Defendant’s arguments in turn.
16
1.
Defendant’s Motion to Dismiss Plaintiffs’ Breach of Contract
Claims Is Denied
a.
Plaintiffs’ Pre-EOD Claims Are Not Time-Barred
In BlackRock Series S, this Court addressed statute of limitations claims
that are strikingly similar to the ones that Defendant advances here. See
generally 247 F. Supp. 3d at 377. There, this Court agreed with the plaintiffs’
argument that “any statute of limitations defense cannot be resolved at [the
motion to dismiss] stage because it involves factual questions as to when and
against whom the claims accrued, whether violations were continuing, and
whether tolling applies.” Id. at 394 (internal quotation marks and citation
omitted). This Court explained that “[e]ach of Defendant’s arguments
implicating the statute of limitations is premature; the Court cannot resolve
these issues from the face of the Complaints.” Id. (citing Staehr v. Hartford Fin.
Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008) (noting that a statute of
limitations defense may be “raise[d] … in a pre-answer Rule 12(b)(6) motion if
the defense appears on the face of the complaint”)). So too here: Because
Plaintiffs have raised the specter of ongoing breaches, the Court is unable to
determine as a matter of law that Plaintiffs have failed to allege discovery of
breaches that occurred during the limitations period. Simply put, “[a]t this
stage, Plaintiffs are not required to specify precisely when, and precisely on
what basis, Defendant breached each of its contractual obligations.” Id. at
394.
Although not necessary to resolve this issue, for the sake of
completeness the Court addresses the parties’ dispute as to whether any of
17
Plaintiffs’ claims — related to 10 of the 13 Trusts implicated in the Policemen’s
Class Action — is tolled under American Pipe & Const. Co. v. Utah, 414 U.S.
538 (1974). Under the American Pipe doctrine, “the commencement of a class
action suspends the applicable statute of limitations as to all asserted
members of the class who would have been parties,” even where the suit
ultimately is not permitted to continue as a class action. In re Initial Public
Offering Secs. Litig., 617 F. Supp. 2d 195, 198 (S.D.N.Y. 2007) (internal
quotation marks and citation omitted). As the parties have rightly identified,
there is a split in this District on whether American Pipe tolling applies where
claims in a class action are dismissed because the class representative lacked
standing. Compare N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc.,
No. 08 Civ. 5653 (PAC), 2010 WL 6508190, at *2 (S.D.N.Y. Dec. 15, 2010) (“But
the American Pipe rule should not apply where the plaintiff that brought the
dismissed claim was found by the court to lack standing.”), with In re Wachovia
Equity Sec. Litig., 753 F. Supp. 2d 326, 372 (S.D.N.Y. 2011) (“Because the
additional Plaintiffs should not be punished for their failure to anticipate or
timely remedy the standing deficiencies of the original Bond/Notes Complaint,
the Court applies the American Pipe tolling doctrine and concludes that the
claims of the additional Plaintiffs are not time-barred.”).
This Court sides with its sister courts that have applied American Pipe
tolling to putative class members even where the class representative was
found to lack standing. In American Pipe, the Court noted that failure to toll
the statute of limitations for class members would undermine the policies of
18
“efficiency and economy of litigation” underlying Rule 23, because “[p]otential
class members would be induced to file protective motions to intervene or to
join in the event that a class was later found unsuitable.” 414 U.S. at 553.
The failure to apply American Pipe tolling to the instant case would contravene
the very policies of efficiency and economy of litigation of which the American
Pipe Court spoke. As another district court observed, “[T]o withhold American
Pipe tolling in a securities action would punish class members for relying on
the very thing Rule 23 is intended to provide: an efficient method for resolving
class claims common to a class of individuals without the need for wasteful
and duplicative litigation.” In re Wachovia Equity Secs. Litig., 753 F. Supp. 2d
at 372 (internal quotation marks omitted). 5
Though the Court finds that American Pipe tolling applies, it has little
practical effect here. To begin with, the Court has already found that, even
without any tolling, Plaintiffs’ allegations are sufficient to survive — at this
stage of litigation — Defendant’s limitations claim. In addition, the amount of
time tolled under American Pipe is minimal. The Court agrees with Defendant
that tolling only applies until the date of a district court’s decision, and does
not extend through the pendency of any appeal. The Second Circuit has
instructed that American Pipe tolling “ends upon denial of class certification.”
5
It is worth noting that, of the two opinions that Defendant cites in arguing against this
more expansive understanding of American Pipe, one — written by Judge Forrest — is
factually inapposite. In that case, the “[p]roposed [i]ntervenor was never an ‘asserted
member’ of the putative class … [who] could not have thought otherwise where there
was no pleading which asserted [his] claims.” In re Direxion Shares ETF Trust, 279
F.R.D. 221, 237 (S.D.N.Y. 2012).
19
Giovanniello v. ALM Media, LLC, 726 F.3d 106, 116 (2d Cir. 2013). The Court
further explained: “We … join our sister circuits and hold that American Pipe
tolling does not extend beyond the denial of class status. Class status was
denied in this case when the Southern District of New York determined that a
class action was unavailable under New York law.” Id. Here, the case was
dismissed on the merits on April 3, 2012, “only eight months after the
complaint was filed.” (Def. Reply 3). Accordingly, the tolling period should only
be eight months.
b.
Plaintiffs’ EOD-Related Allegations Are Sufficient at the
Pleading Stage
Defendant separately argues that Plaintiffs’ pleadings are insufficient as
a matter of law because they fail to allege (i) that the Master Servicer received
written notice of its breaches from either the trustee or a sufficiently large
group of investors, and (ii) that a responsible officer of the Trustee received
notice of an EOD. (Def. Br. 17). The Court disagrees. Like many a litigant,
Defendant misperceives “the difference between sufficient pleading and
successful claims.” BlackRock Series S, 247 F. Supp. 3d at 389. At the
pleading stage, Plaintiffs “satisfy their [pleading] burden where their allegations
raise a reasonable expectation that discovery will reveal evidence proving their
claim.” Id. at 390 (quoting Phoenix Light SF Ltd. v. Deutsche Bank Nat’l Tr. Co.
(“PL/DB”), 172 F. Supp. 3d 700, 713 (S.D.N.Y. 2016) (internal quotation marks
omitted)). Plaintiffs have done so here.
Plaintiffs make numerous allegations that create a reasonable
expectation that discovery will reveal evidence of written notice. As to
20
Countrywide’s receipt of written notice, Plaintiffs have in fact made specific
allegations that Defendant provided Countrywide with written notice of
misconduct. They allege that Defendant “provided a series of notices to
Countrywide (including in its capacity as Servicer) advising Countrywide of its
failure to cure the document exceptions.” (Compl. ¶ 136). “When Countrywide
failed to repurchase the affected loans in response to this notification, an [EOD]
occurred under Section 7.01(ii) of the PSA for each Trust[.]” (Id.). They further
allege, when discussing notice that Defendant received regarding the Servicer’s
failure to charge off delinquent loans, that “it appears that [Defendant]
forwarded such notice letters to Countrywide[.]” (Id. at ¶ 168). Finally, they
allege, albeit indirectly, that Defendant notified Countrywide of its failure to
hold investor funds in bank accounts “with the credit rating required under …
the PSAs.” (Id. at ¶¶ 149-50).
Plaintiffs also allege that there were documentation defects in numerous
mortgage loan files of which Defendant regularly notified Countrywide. (Compl.
¶¶ 33-49, 61, 133-41). They further allege that failure to cure those defects
constituted an automatic EOD under Section 7.01(ii) of the PSA, which states:
[A]ny failure by the Master Servicer to observe or
perform in any material respect any other of the
covenants or agreements on the part of the Master
Servicer contained in this Agreement … which failure
materially affects the rights of Certificateholders, that
failure continues unremedied for a period of 60 days
after the date on which written notice of such failure
shall have been given to the Master Servicer or the
Depositor … ; provided, however, that the sixty-day cure
period shall not apply to the initial delivery of the
21
Mortgage File for Delay Delivery Mortgage Loans nor the
failure to substitute or repurchase in lieu of delivery[.]
(Id. at ¶ 61 (emphasis added)). These allegations suffice at the pleading stage.
Plaintiffs’ allegations of Defendant’s receipt of notice are similarly
sufficient. Though Plaintiffs do not specifically allege that one of Defendant’s
Responsible Officers received written notice of an EOD, the well-pleaded
allegations create a reasonable expectation that discovery will produce evidence
of such notice. Plaintiffs allege that Defendant “knew that Countrywide
regularly disregarded its underwriting guidelines and representations and
warranties made to securitization trusts … long before certificateholders
learned of such problems.” (Compl. ¶ 98). They state that Defendant “learned
that Countrywide had departed from their underwriting guidelines, engaged in
predatory lending, and failed to ensure mortgage loans complied with state and
federal laws.” (Id. at ¶ 99). By July 2007, they allege, Defendant had raised
internal red flags due to Defendant’s exposure to Countrywide (id. at ¶ 100),
and “received a ‘high volume’ of notices from certificateholders and other
parties notifying [Defendant] of non-compliant Countrywide loans” (id. at ¶
104). And “[t]he volume of written repurchase requests for Countrywide loans
that breached their representations and warranties that [Defendant] received
became so large that [Defendant] eventually created a repurchase tracking tool
to manage the massive volume.” (Id. at ¶ 105).
Plaintiffs also allege that Defendant “received written notice from
investors and other parties specifically notifying [it] of breaches with respect to
the [] Trusts[.]” (Compl. ¶ 106). They point to instances in which outside
22
parties notified Defendant of specific or systemic concerns with Countrywide
RMBS trusts. (See, e.g., id. at ¶¶ 107-08). They observe that “[m]onoline
insurers … repeatedly sent [Defendant] notices of breaches of representations
and warranties in Countrywide RMBS trusts.” (Id. at ¶ 109). These allegations
create a reasonable expectation that Defendant’s Responsible Officers had
received written notice of Events of Default in accordance with Section 8.02(viii)
of the PSA. Though they do not prove that Responsible Officers at Defendant
had received written notice, such proof is not required at the pleading stage,
particularly where — as here — the information may well be “uniquely in the
possession of defendants.” PL/DB, 172 F. Supp. 3d at 713 (quoting
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)). Accordingly, the Court rejects Defendant’s argument that Plaintiffs
have failed to allege adequately that Defendant received written notice.
Finally, the prevention doctrine bars Defendant from seeking to dismiss
Plaintiffs’ EOD-based claims on the grounds that Countrywide did not receive
the requisite notice. Courts in this District have consistently held that trustees
“cannot take advantage of [their] own failure to give notice … of the possible
breaches of representations and warranties to argue that no Event of Default
occurred.” PL/DB, 172 F. Supp. 3d at 715; see also RP/HSBC, 109 F. Supp.
3d at 605; Royal Park Investments SA/NV v. Deutsche Bank Nat’l Tr. Co.
(hereinafter “RP/DB”), No. 14 Civ. 4394 (AJN), 2016 WL 439020, at *8 (S.D.N.Y.
Feb. 3, 2016); Okla. Police Pension & Ret. Sys. v. U.S. Bank Nat. Ass’n, 291
23
F.R.D. 47 (S.D.N.Y. May 31, 2013), abrogated on other grounds, 775 F.3d 154
(2d Cir. 2014). An RMBS Trustee “cannot rely on the lack of notice to excuse
its own failure to act.” PL/DB, 172 F. Supp. 3d at 715 (citing RP/DB, 2016 WL
439020, at *5; Fixed Income Shares, 130 F. Supp. 3d at 855. Here, Defendant
was one of only two parties authorized to provide written notice to Countrywide
to trigger an Event of Default.
Defendant argues that these decisions, however numerous, are
nonetheless wrong because they overlook controlling precedent — namely, In re
Bankers Trust Co., 450 F.3d 121 (2d Cir. 2006). (Def. Br. 17-20). In fact, it is
Defendant that is wrong. The courts in this District that have applied the
prevention doctrine to RMBS trustees have not overlooked Bankers Trust; some
even cite directly to Bankers Trust. See, e.g., Fixed Income Shares, 130 F.
Supp. 3d at 855; PL/DB, 172 F. Supp. 3d at 715 n.5; Okla. Police Pension and
Ret. Sys., 291 F.R.D. at 70; BNP Paribas Mortg. Corp. v. Bank of Am., N.A., 778
F. Supp. 2d 375, 398 (S.D.N.Y. 2011).
Bankers Trust requires that this Court apply the prevention doctrine. As
Defendant correctly notes, Bankers Trust stands for the proposition that the
prevention doctrine applies where the party seeking to rely on the nonexistence of a condition precedent (i) had a duty to bring about the condition
precedent or (ii) actively frustrated its occurrence. Bankers Trust, 450 F.3d at
128. Here, Plaintiffs have alleged that Defendant did have a contractual duty
to notify Countrywide of various breaches. As Plaintiffs note, “Section 7.01 of
the PSA provides that [Defendant] ‘shall’ give notice of Master Servicer
24
breaches, and the use of the word ‘shall’ clearly imports a mandatory
obligation[.]” (Pl. Opp. 13 (citing the PSA) (internal quotation marks omitted)).
And they have also alleged that Defendant actively delayed Events of Default
by, inter alia, filing false trustee certifications (Compl. ¶ 139), accepting
“servicer certifications it knew to be false” (id. at ¶¶ 142-45), and allowing
foreclosures to proceed “using forged and robo-signed documents” (id. at
¶ 171).
This Court adheres to the standards that its sister courts have
consistently upheld. Under those standards, Plaintiffs’ allegations suffice to
state a claim for breach of contract.
c.
The Countrywide Settlement and Article 77 Proceeding
Do Not Bar Plaintiffs’ Claims
Defendant next argues that, by operation of res judicata, the
Countrywide Settlement and related Article 77 proceeding bar any claims
arising from conduct after February 2011. (Def. Br. 10-14)). “By ‘preclud[ing]
parties from contesting matters that they have had a full and fair opportunity
to litigate,’” claim preclusion and issue preclusion “protect against ‘the expense
and vexation attending multiple lawsuits, conserv[e] judicial resources, and
foste[r] reliance on judicial action by minimizing the possibility of inconsistent
decisions.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008). It is settled law “that a
federal court must give to a state-court judgment the same preclusive effect as
would be given that judgment under the law of the State in which the judgment
was rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81
(1984). That means this Court “must use the res judicata doctrine of” New
25
York to determine whether Plaintiffs are precluded from suing Defendant.
Logan v. Maveevskii, 175 F. Supp. 3d 209, 233 (S.D.N.Y. 2016) (emphasis
added) (citation omitted).
Res judicata refers both to claim preclusion and issue preclusion. For
the former, New York courts have adopted a “transactional approach” to res
judicata, which bars “a later claim arising out of the same factual grouping as
an earlier litigated claim even if the later claim is based on different legal
theories or seeks dissimilar or additional relief.” Burgos v. Hopkins, 14 F.3d
787, 790 (2d Cir. 1994) (citing Smith v. Russell Sage Coll., 54 N.Y.2d 185
(1981)). This approach “prevents piecemeal litigation, so that a decision is
dispositive not only of the theory of recovery alleged, but also of all other
theories that might have been cited in support against the same wrong.” Bd. of
Mgrs. of the 195 Hudson St. Condo. v. Jeffrey M. Brown Assocs., Inc., 652 F.
Supp. 2d 463, 472 (S.D.N.Y. 2009). Claim preclusion “will not apply … if the
parties intended to settle only one part of a single claim and intended to leave
another part open for future litigation.” Building Serv. 32BJ Health Fund
v. Nutrition Mgmt. Servs. Co., No. 15 Civ. 3598 (KBF), 2017 WL 946331, at *3
(S.D.N.Y. Feb. 10, 2017) (internal quotation marks and citation omitted).
Issue preclusion, also referred to as collateral estoppel, bars relitigation
of an issue when “[i] the identical issue necessarily was decided in the prior
action and is decisive of the present action, and [ii] the party to be precluded
from relitigating the issue had a full and fair opportunity to litigate the issue in
the prior action.” Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006). Under
26
New York law, the party invoking issue preclusion bears the burden of
establishing that the same issue was decided in the prior action. In re Sokol,
113 F.3d 303, 306 (2d Cir. 1997). The opposing party must then establish the
absence of a “full and fair opportunity to litigate the issue in the prior action.”
Id. Whether an opposing party had a full and fair opportunity to litigate
requires an analysis of several factors, including “[i] the nature of the forum
and the importance of the claim in the prior litigation; [ii] the incentive to
litigate and the actual extent of litigation in the prior forum; and [iii] the
foreseeability of future litigation (because of its impact on the incentive to
litigate in the first proceeding).” Id. (quoting Ryan v. N.Y. Tel. Co., 62 N.Y.2d
494, 501 (1984)).
Here, Defendant argues that res judicata bars Plaintiffs’ claims in light of
the Countrywide Settlement and the ensuing Article 77 proceeding. As an
initial matter, the Court finds that it may consider the Countrywide Settlement
and the Article 77 proceeding in deciding the instant motion. As Defendant
rightly notes, the relevant documents are court records of which the Court may
take judicial notice for purposes of ruling on a motion to dismiss pursuant to
Rule 12(b)(6). See, e.g., Halebian v. Berv, 644 F.3d 122, 130 n.7 (2d Cir. 2011)
(on a motion to dismiss, a court may consider “matters of which judicial notice
may be taken”); Toliver v. City of N.Y., No. 10 Civ. 3165 (PAC)(JCF), 2011 WL
4964919, at *3 (S.D.N.Y. Sept. 15, 2011) (“federal courts are empowered to take
judicial notice of state court records and decisions”). Of course, the Court is
limited in its consideration of such documents: It does so merely to establish
27
the existence of the documents, not to establish the truth of their contents.
Global Network Communications, Inc. v. City of New York, 458 F.3d 150, 157
(2d Cir. 2006).
Yet the Court is unpersuaded that the Countrywide Settlement and the
Article 77 proceeding preclude Plaintiffs’ claims. Plaintiffs here allege injuries
over and above whatever injuries were directly caused by Countrywide and its
successor, Bank of America, and whatever injuries may have been covered by
the Countrywide Settlement. And they assert claims against Defendant not for
the Trustee’s conduct in negotiating and executing the Settlement Agreement,
and not for Countrywide’s own misconduct, but rather for the Trustee’s
conduct in performing its substantive duties under the PSA. Plaintiffs’ claims
were not extinguished by the Countrywide Settlement, and the damages sought
are distinct from those for which Plaintiffs have recovered. Critically, the
present action pertains to conduct not directly at issue in the Countrywide
Settlement; accordingly, the facts necessary for Plaintiffs to substantiate their
claims are distinct from those that were relevant to the Countrywide
Settlement. There, it was Countrywide’s conduct that was primarily at issue.
Here, by contrast, Defendant’s own performance under the PSA is squarely at
issue.
2.
Defendant’s Motion to Dismiss Plaintiffs’ Fiduciary Duty
Claims Is Granted in Part and Denied in Part
Defendant seeks to dismiss Plaintiffs’ breach of fiduciary duty claim for
alleged failures to avoid conflicts of interest and to perform ministerial acts
with due care. (Def. Br. 17-27). The claim divides temporally into pre- and
28
post-default claims. As it did in another case involving substantially similar
claims, this Court will consider the claims chronologically. See Blackrock
Series S, 247 F. Supp. 3d at 395.
a.
Defendant’s Motion to Dismiss Plaintiffs’ Pre-Default
Fiduciary Duty Claims Is Granted
“Prior to an Event of Default, the Trustee has only the contractual duties
specified in the [governing agreements], which include providing notice to all
parties to the [agreements] upon certain breaches of a representation or
warranty.” Phoenix Light SF Ltd. v. Bank of N.Y. Mellon, No. 14 Civ. 10104
(VEC), 2017 WL 3973951, at *2 (S.D.N.Y. Sept. 7, 2017) (citing PL/BNYM, 2015
WL 5710645, at *2); see also Ellington Credit Fund, Ltd. v. Select Portfolio
Servicing, Inc., 837 F. Supp. 2d 162, 192 (S.D.N.Y. 2011). These pre-default
obligations are not construed as fiduciary duties but rather “as obligations
whose breach may subject the trustee to ‘tort liability.’” Ellington Credit Fund,
Ltd., 837 F. Supp. 2d at 192 (citing AG Capital Funding Partners, L.P. v. State
Street Bank and Tr. Co., 11 N.Y.3d 146, 157 (2008)); see also PL/DB, 172 F.
Supp. 3d at 719 (“[C]onflict of interest claims and the claims that [Defendant]
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.”). Therefore, insofar as Plaintiffs’ conflict-of-interest and
due-care claims are pleaded as violations of Defendant’s fiduciary duties,
Plaintiffs fail to state a claim and Defendant’s motion to dismiss is granted.
29
b.
Defendant’s Motion to Dismiss Plaintiffs’ Post-EOD
Fiduciary Duty Claims Is Denied
An Event of Default transforms a trustee’s fiduciary duties. As a sister
court in this District has noted, a trustee’s “duties are considerably different
prior to a so-called Event of Default than after.” PL/BNYM, 2015 WL 5710645,
at *2. And as this Court has previously explained, a trustee’s obligations “come
more closely to resemble those of an ordinary fiduciary, regardless of any
limitations or exculpatory provisions contained in the [agreement].” Blackrock
Series S, 247 F. Supp. 3d at 395-96 (internal citations omitted). Under the
relevant PSA, after an EOD occurred, Defendant was required to “exercise such
of the rights and powers vested in it by this Agreement, and use the same
degree of care and skill in their exercise as a prudent person would exercise
under the circumstances in the conduct of such person’s own affairs.” (Compl.
¶ 60).
As described above, Plaintiffs have alleged that EODs occurred when the
Master Servicer:
(i) fail[ed] to provide notice and to enforce repurchase of
numerous loans that breached representation and
warranty provisions[]; (ii) submit[ted] false servicer
certifications[]; (iii) fail[ed] to maintain eligible certificate
accounts
for
holding
investor
funds[];
and
(iv) breach[ed] the applicable servicing standards by,
among other things, fabricating loan documents,
delaying foreclosures, and overcharging borrowers for
default services[].
(Pl. Opp. 6 (citing Compl. ¶¶ 132, 142-45, 148-71)). Plaintiffs also allege that
“failures to deliver complete mortgage files and to repurchase loans in lieu of
delivery for all the Trusts” constituted events of default that “require[d] no
30
notice and ha[d] no cure period.” (Id.). And Defendant breached its post-EOD
duty to act as would a prudent person by failing to (i) protect the interests of
the beneficiaries of the Covered Trusts, (ii) cause Countrywide to repurchase
loans eligible for repurchase and pursue remedies against parties that
breached their contractual duties, (iii) give notice to all parties to the PSA of the
breach of representations and warranties relating to the mortgage loans upon
discovery, (iv) provide certificateholders notice of Events of Default, and
(v) provide notice of Servicers’ failure to adhere to prudent servicing standards.
(Compl. ¶ 227).
Just as these allegations sufficed to support a post-EOD claim for breach
of contract, they also suffice to support Plaintiffs’ post-EOD claim for breach of
fiduciary duty. However, for the reasons explained more fully below, the
portion of this claim that is duplicative in its remedy with Plaintiffs’ breach of
contract claims is ultimately barred by the economic loss doctrine, and
Defendant’s motion to dismiss that portion of the claim is granted.
c.
Defendant’s Motion to Dismiss Plaintiffs’ Claim for
Breach of the Implied Covenant of Good Faith and Fair
Dealing Is Granted
Plaintiffs’ claim sounding in breach of the implied covenant of good faith
and fair dealing fails, as it is based on the same facts and seeks the same
remedies as the breach of contract claim. “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.” PL/DB, 172 F. Supp. 3d at 721 (omission in original) (quoting Harris v.
31
Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002)). A plaintiff
may prosecute “a 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.’” Id. (quoting
Page Mill Asset Mgmt. v. Credit Suisse First Bos. Corp., No. 98 Civ. 6907 (MBM),
2000 WL 335557, at *8 (S.D.N.Y. Mar. 30, 2000)).
Here, because Defendant’s pre-EOD duties were coextensive with its
contractual duties, the claim cannot stand. PL/BNYM, 2015 WL 5710645, at
*9. Nor can the claim stand with respect to any post-EOD duties: Plaintiffs
argue only that Defendant breached this covenant in failing to fulfill its
contractual obligations. (See Compl. ¶¶ 230-32). Plaintiffs’ breach of contract
and breach of implied covenant claims are based on the same alleged facts,
and therefore the latter must fail.
d.
The Economic Loss Doctrine Bars Plaintiffs’
Extra-Contractual Claims That Seek Only the Benefit of
Plaintiffs’ Contract
Plaintiffs’ fiduciary duty claims do not “allow evasion of the economic loss
rule, which presents a second, distinct barrier” to extra-contractual claims
stemming from contractual relationships. RP/HSBC, 109 F. Supp. 3d at 599.
Under the economic loss rule, “a contracting party seeking only a benefit of the
bargain recovery may not sue in tort notwithstanding the use of familiar tort
language in its pleadings.” Phoenix Light SF Ltd. v. U.S. Bank Nat’l Ass’n,
No. 14 Civ. 10116 (KBF), 2016 WL 1169515, at *9 (S.D.N.Y. Mar. 22, 2016)
32
(quoting 17 Vista Fee Assocs. v. Teachers Ins. & Annuity Ass’n of Am., 693
N.Y.S.2d 554, 559 (1st Dep’t 1999)). Yet “the rule allows such recovery in the
limited class of cases involving liability for the violation of a professional duty.”
Hydro Inv’rs, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 18 (2d Cir. 2000) (citing
17 Vista Fee Assocs., 693 N.Y.S.2d at 554; Robinson Redev. Co. v. Anderson,
547 N.Y.S.2d 458, 460 (3d Dep’t 1989)). In applying this doctrine, a court
must therefore scrutinize with care a plaintiff’s proffered extra-contractual
claims.
Courts in this District “have split with regard to the application of the
economic loss doctrine to tort claims brought against an RMBS trustee.”
Blackrock Series S, 247 F. Supp. 3d at 399. In each case, the applicability of
the economic loss doctrine turned on the nature of the plaintiff’s claims,
whether alleging damages that flow from the violation of a professional duty, or
merely from the violation of the governing agreements. Id. Courts have denied
motions to dismiss where plaintiffs have pleaded tort claims grounded in extracontractual duties. See, e.g., PL/DB, 172 F. Supp. 3d at 719; RP/HSBC, 109 F.
Supp. 3d at 608-10. By contrast, motions to dismiss have been granted where
plaintiffs alleged only damages arising from a defendant’s contractual
obligations. See, e.g., PL/U.S. Bank, 2016 WL 1169515, at *9.
This Court draws the same line. Just as was true in Blackrock Series S,
247 F. Supp. 3d at 400, here the economic loss doctrine does not require
dismissal of Plaintiffs’ due care and conflict of interest claims because Plaintiffs
have pleaded that Defendant breached extra-contractual duties for which
33
Plaintiffs are owed damages that do not lie simply in the enforcement of
Defendant’s contractual obligations. But “insofar as Plaintiffs have pleaded
that Defendant breached, for example, its post-EOD fiduciary duty in failing to
act as it was contractually required to, the economic[ ]loss doctrine does bar
Plaintiffs’ claims.” Id. The Court grants Defendant’s motion to dismiss the
subset of Plaintiffs’ tort claims that allege damages that flow from the violation
of the governing agreements.
3.
Defendant’s Motion to Dismiss Plaintiffs’ TIA Claim Is Granted
Plaintiffs assert claims under the TIA, though they “acknowledge[] that
the Second Circuit has held that the TIA does not apply to RMBS similar to
certain of the RMBS at issue here.” (Compl. ¶ 235 n.7). They pursue the claim
only “to the extent there are any further developments in the law and for
purposes of preserving any rights on appeal.” (Id.). In fact, the law continues
to be that claims under the TIA can only be asserted with respect to trusts
governed by indenture agreements, such that any claims brought under the
TIA with respect to the PSA-governed Trusts must be dismissed. See Ret. Bd.
of Policemen’s Annuity & Benefit Fund of City of Chi., 775 F.3d at 155 (holding
that the TIA does not “impose obligations on the trustees of RMBS trusts
governed by pooling and servicing agreements”); Commerzbank AG v. U.S. Bank
Nat’l Ass’n, No. 16 Civ. 4569 (WHP), 2017 WL 4318065, at *11 (S.D.N.Y.
Sept. 27, 2017); PL/DB, 172 F. Supp. 3d at 721 (dismissing TIA claims with
respect to PSA-governed trusts on this basis). Accordingly, the Court dismisses
Plaintiffs’ claims under the TIA.
34
4.
Defendant’s Motion to Dismiss Plaintiffs’ Streit Act Claims Is
Granted
Plaintiffs allege that Defendant violated Section 126(1) of the Streit Act
when it failed to:
[i] protect the interests of the beneficiaries of the
Covered Trusts; [ii] take steps to cause Countrywide to
repurchase loans eligible for repurchase and to pursue
remedies against parties that breached their duties in
connection with the collateral backing the Covered
Trusts; [iii] give notice to all parties to the PSAs of the
breach of representations and warranties relating to the
mortgage loans upon discovery; [iv] exercise prudence
concerning the exercise of appropriate remedies
following Events of Default; [v] provide certificateholders
notice of Events of Default; and [vi] provide notice of and
take steps to remedy the Servicers’ failure to adhere to
prudent servicing standards and otherwise perform
their obligations under the PSAs.
(Compl. ¶ 227). Plaintiffs misconstrue the requirements of Section 126(1),
which. as numerous courts in this District have held, “requires only that trust
instruments include certain provisions, and does not itself impose any
affirmative duties on trustees.” Commerzbank AG v. HSBC Bank USA, N.A.
(hereinafter, “CB/HSBC”), No. 15 Civ. 10032 (LGS), 2016 WL 3211978, at *2
(S.D.N.Y. June 8, 2016); see also id. at 2-3 (collecting cases holding the same,
and noting the dearth of support for argument to the contrary); PL/DB, 172 F.
Supp. 3d at 723 (“Section 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.”); accord, e.g., Blackrock
Series S, 247 F. Supp. 3d at 404; PL/U.S. Bank, 2016 WL 1169515, at *10-11;
RP/BNYM, 2016 WL 899320, at *11; PL/BNYM, 2015 WL 5710645, at *11.
35
Plaintiffs here have failed to plead a claim under Section 126(1) of the Streit Act
because they have not alleged that Defendant accepted a deficient trust
instrument. Section 126(1) imposes no further duty.
Plaintiffs also cite Section 130-e of the Streit Act in their pleadings,
which provides that:
[a] trustee, committee or any member thereof and a
depositary may be removed by the court for cause
shown upon the application of any person aggrieved by
the act or omission to act of such trustee … after such
notice and opportunity to be heard in his or its defense
as the court shall direct.
(Compl. ¶ 226 (emphasis omitted) (quoting N.Y. Real Prop. Law § 130-e)).
Plaintiffs do not seek equitable relief contemplated by Section 130-e (i.e., the
removal of the Defendant as trustee of the Trusts). Instead, they appear eager
to “bypass the available equitable relief … to seek money damages[.]”
Commerzbank AG v. Deutsche Bank Nat’l Trust Co. (hereinafter “CB/DB”), 234
F. Supp. 3d 462, 474 (S.D.N.Y. 2017). In doing so, they seek “to read a broad
statutory private right of action for money damages into Section 130-e.” Id.
This Court has previously expressed skepticism about claims under
Section 130-e where the plaintiff has failed to seek the equitable relief afforded
by the statute. See Blackrock Series S, 247 F. Supp. 3d at 405 n.11 (“[T]he
Court is skeptical that such a claim could succeed even if pleaded properly.”).
So too have sister courts in this District. See CB/DB, 234 F. Supp. 3d at 474;
Commerzbank AG v. Bank of N.Y. Mellon (hereinafter “CB/BNYM”), No. 15 Civ.
10029 (GBD), 2017 WL 1157278, at *6 (S.D.N.Y. Mar. 21, 2017). The Court
36
now joins its sister courts in holding that “[t]he exclusive remedy to an
aggrieved party under Section 130-e is the removal of the trustee.” CB/DB,
234 F. Supp. 3d at 474; accord CB/BNYM, 2017 WL 1157278, at *6. Because
Plaintiffs have not pleaded that they are entitled to such relief, their claim
under Section 130-e fails.
For the foregoing reasons, Defendant’s motion to dismiss Plaintiffs’ Streit
Act claims is granted.
5.
Plaintiffs Have Standing to Bring Claims Relating to the Sold
Certificates
Finally, in a single paragraph at the end of its opening brief, Defendant
argues that Plaintiffs lack standing to pursue claims associated with six of the
Trusts because “Plaintiffs do not even currently hold certificates in [those
T]rusts[.]” (Def. Br. 29). 6 Indeed, between 2011 and 2014, Plaintiffs sold
certificates in six of the Trusts at issue here. (Compl. ¶ 198). Defendant
asserts that, under New York law, “when an investor sells a security, it
6
In its supplemental letter brief, Defendant “respectfully request[ed] permission to
withdraw this portion of its motion to dismiss” because (i) “standing implicates
potentially disputed facts” such that “discovery would be necessary to evaluate
plaintiffs’ allegations of standing” and (ii) “related issues have become the subject of two
pending appeals in the Second Circuit.” (Def. Supp. 1-2). The Court declines
Defendant’s request. Faced with Defendant’s assertion that Plaintiffs lack standing to
bring claims related to the Sold Certificates, this Court will not ignore the issue.
Standing is a “threshold question in every federal case.” Leibovitz v. N.Y. City Transit
Auth., 252 F.3d 179, 184 (2d Cir. 2001); cf. Adarand Constructors, Inc. v. Mineta, 534
U.S. 103, 110 (2001) (holding that courts are “obliged to examine standing sua sponte
where standing has erroneously been assumed below”); Thompson v. Cty. of Franklin, 15
F.3d 245, 248 (2d Cir. 1994) (noting that the court has an independent obligation to
examine standing because it implicates the court’s subject-matter jurisdiction).
Accordingly, this Court analyzes Plaintiffs’ standing to assert claims relating to the Sold
Certificates. In so doing, the Court considers material outside the pleadings, including
the parties’ supplemental letter briefs. See Makarova v. U.S., 201 F.3d 110, 113 (2d Cir.
2000) (“In resolving a motion to dismiss for lack of subject matter jurisdiction … , a
district court … may refer to evidence outside the pleadings.”).
37
automatically sells any claims against the trustee.” (Def. Br. 29 (citing N.Y.
G.O.L. § 13-107(1) (1963)).
Plaintiffs, for their part, claim that Defendant “incorrectly presumes that
New York law governs [Plaintiffs’] sale of the six sold Certificates.” (Pl.
Opp. 28). Instead, they argue that California law applies to determine whether,
in selling the certificates, Plaintiffs also assigned their rights to bring the
present claims against Defendant. (Id. at 29). They further argue that, under
California law, “a transfer of securities, like the Certificates, does not
automatically transfer legal claims.” (Id.). Instead, “the assignment, to be
effectual, must be a manifestation to another person by the owner of the right
indicating his intention to transfer[.]” Cockerell v. Title Ins. & Tr. Co., 42 Cal.2d
284, 291 (1954); Sunburst Bank v. Exec. Life Ins. Co., 24 Cal. App. 4th 1156,
1164 (Cal. Ct. App. 2d Dis. 1994).
Although the PSA contains a governing law clause applying New York law
to the agreement, that clause has “no relevance to the question whether the
contracts of sale … operated to assign certain rights of action.” Semi-Tech
Litig., LLC v. Bankers Tr. Co., 272 F. Supp. 2d 319, 330 (S.D.N.Y. 2003)
(internal quotation marks and citation omitted). Instead, that question is
controlled by New York choice of law principles. Id.; see also Royal Park
Investments SA/NV v. Deutsche Bank Nat’l Tr. Co., No. 14 Civ. 4394 (AJN),
2017 WL 1331288, at *7 (S.D.N.Y. Apr. 4, 2017). For contract disputes, New
York courts have adopted a “center of gravity” or “grouping of contacts”
approach designed “to establish which State has the most significant
38
relationship to the transaction and the parties.” Zurich Ins. Co. v. Shearson
Lehman Hutton, Inc., 84 N.Y.2d 309, 317 (1994); see also In re Liquidation of
Midland Ins. Co., 16 N.Y.3d 536 (2011). That analysis requires the Court to
consider (i) the places of contracting, negotiation, and performance; (ii) the
location of the subject matter of the contract; and (iii) the domicile or place of
business of contracting parties. See Zurich Ins. Co., 84 N.Y.2d at 317; Integon
Ins. Co. v. Garcia, 721 N.Y.S.2d 660, 661 (2d Dep’t 2001); Matter of Allstate Ins.
Co. (Stolarz), 81 N.Y.2d 219, 227 (1993).
The pleadings, as supplemented by Plaintiffs’ letter brief, strongly
suggest that California law applies, and that Plaintiffs have standing to pursue
claims relating to the Sold Certificates. Plaintiffs’ principal place of business is
in Newport Beach, California. (Compl. ¶¶ 16-17). PacLife “was the original
purchaser for all the Sold Certificates, and managed its RMBS portfolio,
including the Sold Certificates, from the Newport Beach Office.” (Pl. Supp. 2).
It “conducted all activities in connection with the sales of the Sold Certificates
through employees at the Newport Beach Office.” (Id.). The purchasers were
located in California at the time of the sale. (Id.). The business records
regarding the sale are located in California. (Id.). And the transactions were
“market sales without sale contracts,” such that they “did not involve any
contract provisions assigning PacLife’s legal claims to the buyers[.]” (Id.).
On this record, applying the “center of gravity” test, the Court finds that
California law governs the relevant sales. The contracting, negotiation, and
performance of the sales all appear to have occurred in California, which is also
39
the domicile or place of business of the contracting parties. The records of the
relevant transactions are all located in California. And there is no
countervailing evidence that the center of gravity for these transactions was
New York.
Under California law, absent a manifestation of intent, a seller does not
transfer legal claims to the buyer. See, e.g., Cockerell v. Title Ins. & Tr. Co., 42
Cal.2d 284, 291 (1954) (“[w]hile no particular form of assignment is necessary,
the assignment, to be effectual, must be a manifestation to another person by
the owner of the right indicating his intention to transfer”); Heritage Pacific Fin.,
LLC v. Monroy, 156 Cal. Rptr. 3d 26, 40 (Cal. Ct. App. 2013) (“the assignment
of this contract right did not carry with it a transfer of [seller’s] tort rights”); cf.
Royal Park Investments SA/NV v. HSBC Bank USA, N.A., No. 14 Civ. 8175
(LGS), 2018 WL 679495, at *4 (S.D.N.Y. Feb. 1, 2018) (“Consistent with
common law principles, many jurisdictions do not recognize an assignment of a
litigation right or claim when an underlying property is transferred unless the
assignor manifests an intention to transfer the right.” (internal quotation
marks, alteration, and citations omitted)). Nothing submitted to this Court
suggests that Plaintiffs manifested an intent to transfer their legal claims along
with the sale of the relevant certificates. For that reason, the Court rejects
Defendant’s argument that Plaintiffs lack standing to bring claims relating to
the Sold Certificates, though Defendant is free to renew the argument, as
appropriate, upon discovery of facts to the contrary.
40
CONCLUSION
For the foregoing reasons, Defendant’s motion is GRANTED in part and
DENIED in part, as described in the text of this Opinion. The Clerk of Court is
directed to terminate Docket Entry 28. The parties are hereby ORDERED to
file a Case Management Plan on or before April 30, 2018.
SO ORDERED.
Dated:
March 16, 2018
New York, New York
__________________________________
KATHERINE POLK FAILLA
United States District Judge
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