MBIA Insurance Corporation v. Nationstar Mortgage LLC

Filing 40

OPINION AND ORDER re: 20 MOTION to Dismiss First Amended Complaint filed by Nationstar Mortgage LLC. The motion to dismiss is GRANTED IN PART and DENIED IN PART. The breach of contract claim and declaratory relief claim will proceed. The indemnity claim is dismissed. The Clerk is directed to terminate the motion. (Doc. #20). By February 12, 2019, Nationstar shall answer the amended complaint. SO ORDERED. (Signed by Judge Vincent L. Briccetti on 1/29/2019) (mml)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------x
MBIA INSURANCE CORPORATION,
:
Plaintiff,
:
v.
:
:
NATIONSTAR MORTGAGE LLC, d/b/a Mr.
:
Cooper, n/k/a Mr. Cooper,
:
Defendant.
:
-------------------------------------------------------------x

OPINION AND ORDER
18 CV 938 (VB)

Briccetti, J.:
Plaintiff MBIA Insurance Corporation (“MBIA”) brings this action against defendant
Nationstar Mortgage LLC, doing business and now known as Mr. Cooper (“Nationstar”),
asserting state-law claims for breach of contract, indemnification, and declaratory relief.
Before the Court is Nationstar’s motion to dismiss the amended complaint pursuant to
Rule 12(b)(6). (Doc. #20).
For the reasons set forth below, the motion is GRANTED IN PART and DENIED IN
PART.
The Court has subject matter jurisdiction under 28 U.S.C. § 1332.
BACKGROUND
For the purpose of ruling on the motion to dismiss, the Court accepts as true all wellpleaded factual allegations in the amended complaint and draws all reasonable inferences in
plaintiff’s favor, as summarized below. 1

1

Nationstar has requested the Court take judicial notice of certain court filings. (Doc.
#23). The Court takes judicial notice of those materials as public records. See, e.g., Staehr v.
Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008) (collecting cases). Matters
subject to judicial notice properly are considered on a Rule 12(b)(6) motion. See id.
1

I.

The Trusts and the Parties
A.

The Trusts

This contractual dispute concerns four trust funds funded by the collection of residential
mortgage payments: CWHEQ Home Equity Loan Asset Backed Certificates, Series 2006-S8,
Series 2006-S9, Series 2007-S1, and Series 2007-S2 (collectively, the “Trusts”). The Trusts are
governed by materially identical Pooling and Servicing Agreements (“PSA”) that establish the
Trusts’ structure, operation, and administration. 2
Together, the Trusts have issued several billion dollars’ worth of residential mortgage
backed securities (“RMBS”), also known as Certificates. The Certificates are held by investors,
also known as Certificateholders, and convey an interest in the Trusts’ residential mortgage
assets.
B.

Bank of New York Mellon

Nonparty Bank of New York Mellon (“BNYM”) serves as the Trusts’ Trustee, to which
the PSAs assign authority to administer the Trusts. As Trustee, BNYM disburses funds from the
Trusts’ accounts pursuant to “distribution priorities” established by the PSAs. (Am. Compl.
¶ 24).
C.

Nationstar Mortgage LLC

Defendant Nationstar served as the Trusts’ Master Servicer at all relevant times. The
Master Servicer is responsible for the Trusts’ daily operations. Its ambit includes servicing the

2

The parties agree the PSAs are identical for purposes of this case. For ease of reference,
the Court refers to the PSA governing the Series 2007-S1 trust. Because the PSAs are integral to
the amended complaint, which “relies heavily” on the PSAs’ “terms and effect,” the Court
properly considers the PSAs’ text for purposes of the motion to dismiss. See DiFolco v.
MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).

2

Trusts’ residential mortgages (including by collecting payments, foreclosing on mortgaged
properties, and selling charged off loans) and maintaining Trust accounts into which the Master
Servicer deposits and transfers Trust funds.
Among the accounts established and maintained by the Master Servicer are each Trust’s
Certificate Account. Section 3.05(b) of the PSAs obliges the Master Servicer to deposit into the
Certificate Accounts income from the Trust’s residential mortgage assets, among other things.
Funds in the Certificate Accounts are “held in trust for the Certificateholders and the Certificate
Insurer for the uses and purposes set forth in [the PSAs].” (Doc. #22-1 (“PSA”) at 17). 3
The PSAs provide that the Trustee “shall be indemnified by the Master Servicer and held
harmless against any loss, liability or expense . . . incurred in connection with any legal action
relating to” the PSAs or Certificates. (PSA at 197). Pursuant to this obligation, Nationstar has
indemnified BNYM for the attorneys’ fees BNYM incurred in connection with three lawsuits
filed against it by Certificateholders (the “underlying lawsuits”), 4 in a total amount of at least
$6.8 million.
D.

MBIA

Plaintiff MBIA serves as the Trusts’ Certificate Insurer and is an express third-party
beneficiary to the PSAs. As Certificate Insurer, pursuant to the Trusts’ insurance policies (the
“Insurance Agreements”), MBIA must pay insurance claims filed when one or more of the

3

Citations to a PSA or Insurance Agreement refer to page numbers assigned by the Court’s
Electronic Case Filing system.
4

See W. & S. Life Ins. Co. v. Bank of N.Y. Mellon, No. A1302490 (Oh. Ct. Com. Pl.,
Hamilton Cty.); Ret. Bd. of the Policemen’s Annuity & Benefit Fund v. Bank of N.Y. Mellon,
No. 11-cv-05459 (S.D.N.Y.); Blackrock Allocation Target Shares: Series S Portfolio v. Bank of
N.Y. Mellon, No. 14-cv-9372 (S.D.N.Y.). These cases also concerned trusts not at issue in the
instant case.
3

Trusts lack sufficient funds to pay full distributions to the Certificateholders. In other words,
MBIA must compensate the Trusts’ investors when they submit valid claims for losses suffered
due to a shortfall in the Trusts’ Certificate Accounts. 5
MBIA may exercise legal rights as both a party to the Insurance Agreements and an
express beneficiary to the PSAs. In addition, when MBIA makes payments to Certificateholders
due to a shortfall caused by a third party’s wrongful conduct, MBIA assumes by subrogation the
Certificateholders’ right to sue the third party for damages.
II.

The Disputed Reimbursements
This lawsuit arises from withdrawals Nationstar made from the Trusts’ Certificate

Accounts. Specifically, Nationstar has repeatedly reimbursed itself (the “disputed
reimbursements”) for its indemnification of BNYM’s litigation expenses in the underlying
lawsuits.
Because the Certificate Accounts hold money used for distributions to Certificateholders,
the disputed reimbursements caused the Certificateholders to suffer a shortfall. In turn, the
Certificateholders submitted insurance claims to MBIA. According to the amended complaint,
MBIA has paid out approximately $6.8 million on those claims to make the Certificateholders
whole.
MBIA alleges the disputed reimbursements came to light over time. In December 2016,
while reviewing a monthly report generated by Nationstar, MBIA allegedly realized Nationstar
had deducted from the Trusts at least $2 million “connected to performing mortgage loans.”

5

As with the PSAs, the parties agree the Trusts’ Insurance Agreements are identical for
purposes of this case; the parties refer to the Insurance Agreement governing the Series 2007-S1
trust; and the Insurance Agreements are integral to the amended complaint and thus properly
considered for purposes of deciding the motion to dismiss. See DiFolco v. MSNBC Cable
L.L.C., 622 F.3d at 111.
4

(Am. Compl. ¶ 35). MBIA later learned those deductions totaled “closer to $3 million” as of
December 2016. (Id.).
MBIA alleges Nationstar tried to conceal the deductions by labelling them a “dummy
loan” in its internal accounting reports. (Am. Compl. ¶ 36). Nationstar allegedly amended those
reports after BNYM “took issue with the ‘dummy loan’ entry.” (Id.). MBIA claims Nationstar’s
remittance reports also labeled as “Additional Losses” the Trust funds with which Nationstar
reimbursed itself for its indemnity payments to BNYM, despite the fact that the term “additional
losses” does not appear in the Trusts’ governing documents. (Id. ¶ 37).
MBIA alleges it discovered that the “additional losses” entries in fact referred to
Nationstar’s self-reimbursements using Trust money. According to MBIA, it then informally
contacted Nationstar in an attempt to dissuade Nationstar from continuing to reimburse itself for
indemnifying BNYM, and to convince Nationstar to repay MBIA for its insurance claim
payments to the Certificateholders caused by Nationstar’s disputed withdrawals. MBIA’s efforts
were unsuccessful, and Nationstar continued reimbursing itself in an additional approximate
amount of $3.5 million.
At the time this action was commenced, MBIA had identified $6,794,690 that Nationstar
allegedly diverted improperly from the Trusts: $1,612,301 from each of Series 2006-S8, Series
2006-S9, and Series 2007-S1; and $1,957,787 from Series 2007-S2. MBIA claims Nationstar
also has taken additional reimbursements in unknown amounts.
In November 2017, pursuant to the PSAs, MBIA formally notified Nationstar of
numerous alleged contractual defaults related to the disputed reimbursements and demanded
Nationstar cure those defaults. In response, Nationstar asserted the PSAs afford it the right to
reimburse itself with Trust money for its indemnification of BNYM.

5

DISCUSSION
I.

Standard of Review
In deciding a Rule 12(b)(6) motion, the Court evaluates the sufficiency of the operative

complaint under the “two-pronged approach” articulated by the U.S. Supreme Court in Ashcroft
v. Iqbal, 556 U.S. 662, 679 (2009). First, a plaintiff’s legal conclusions and “[t]hreadbare
recitals of the elements of a cause of action, supported by mere conclusory statements,” are not
entitled to the assumption of truth and thus are not sufficient to withstand a motion to dismiss.
Id. at 678; Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010). Second, “[w]hen there are
well-pleaded factual allegations, a court should assume their veracity and then determine
whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. at 679.
To survive a Rule 12(b)(6) motion, a complaint’s allegations must meet a standard of
“plausibility.” Ashcroft v. Iqbal, 556 U.S. at 678; Bell Atl. Corp. v. Twombly, 550 U.S. 544,
564 (2007). A claim is facially plausible “when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. at 678. “The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted
unlawfully.” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 556).
II.

Limitation on Liability Clause
As a threshold matter, Nationstar argues a limitation on liability clause in the PSAs

renders Nationstar immune from MBIA’s claims. MBIA argues the clause does not apply here,
and that even if it does, MBIA has adequately pleaded its claims.
Assuming, without deciding, that the clause does apply, MBIA has plausibly alleged
Nationstar acted with mens rea sufficient to trigger liability.

6

Section 6.03 of the PSAs limits the Master Servicer’s liability for the Master Servicer’s
conduct pursuant to the PSAs. It provides:
[T]he Master Servicer . . . shall [not] be under any liability to . . . the Trust Fund or
the Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement, or for errors in judgment; provided
that this provision shall not protect the . . . Master Servicer . . . against any breach
of representations or warranties made by it herein or protect the . . . Master
Servicer . . . from any liability that would otherwise be imposed by reasons of
willful misfeasance, bad faith or gross negligence in the performance of duties or
by reason of reckless disregard of obligations and duties hereunder.
(PSA at 183–84). Thus, Section 6.03 does not shield the Master Servicer from liability
for willful misfeasance, bad faith, gross negligence, or reckless disregard.
The amended complaint alleges Nationstar “actively sought to conceal and cover up” the
disputed reimbursements by making “false and/or misleading entries” on remittance reports.
(Am. Compl. ¶ 74). Specifically, MBIA alleges that Nationstar’s descriptions of the disputed
reimbursements as a “dummy loan” and then as “[a]dditional [l]osses” indicate Nationstar acted
willfully or with reckless disregard for its contractual obligations. (Id. ¶¶ 36–37). MBIA also
alleges it informally invited Nationstar to cease the disputed reimbursements and to compensate
MBIA for its payouts to Certificateholders, but Nationstar refused and then deducted another
$3.5 million from the Trusts. The amended complaint further asserts MBIA then formally
notified Nationstar of its alleged defaults under the PSAs, in response to which Nationstar again
stated it had acted within its contractual rights.
Construing these assertions in the light most favorable to MBIA, the amended complaint
plausibly alleges Nationstar committed willful misfeasance or acted with bad faith, gross
negligence, or reckless disregard to its contractual obligations as Master Servicer. Cf. BNP
Paribas v. Bank of N.Y. Trust Co., N.A., 2012 WL 13059498, at *15–16 (S.D.N.Y. Mar. 28,
2012).
7

The Court therefore declines to dismiss the amended complaint on the ground that the
PSAs’ limitation on liability clause bars MBIA’s claims.
III.

Interpreting the Indemnity Clauses
The parties also dispute the standard by which the Court, applying New York law, 6 must

interpret the contractual indemnity clauses on which MBIA’s claims rest.
Generally, New York courts interpret a contractual indemnity clause in light of its
ordinary meaning and the contracting parties’ intent. See, e.g., JFURTI, LLC v. First Capital
Real Estate Advisors, L.P., 165 A.D.3d 419, 420–21 (1st Dep’t 2018). However, MBIA invokes
the more exacting legal standard established by the New York Court of Appeals in Hooper
Associates v. AGS Computers, 74 N.Y.2d 487 (1989), which held certain indemnity agreements
should be enforced as between contracting parties only when it is “unmistakably clear” the
contracting parties so intended. See id. at 491–92.
The Court finds the “unmistakably clear” standard inapplicable. “[T]he Hooper
Associates standard does not apply” to “attorneys fees incurred in underlying litigation with third
parties.” CBS Corp. v. Eaton Corp., 2010 WL 1375169, at *4 (S.D.N.Y. Mar. 30, 2010).
Rather, Hooper Associates applies to indemnity provisions that shift “legal expenses for a suit
between the contracting parties,” in contravention of the “American Rule” that litigating parties
ordinarily must bear their own litigation expenses. See In re Refco Securities Litig’n, 890 F.
Supp. 2d 332, 340–44 (S.D.N.Y. 2012) (emphasis added).
Here, each of the underlying lawsuits pitted Certificateholders against BNYM as Trustee.
Because the Certificateholders are not parties to the PSAs at issue in the instant lawsuit,

6

The PSAs and Insurance Agreements provide they are to be governed by New York law.
(PSAs at 221; Ins. Agmt. at 37). The parties agree New York law applies.
8

BNYM’s litigation expenses in the underlying lawsuits are not “legal expenses for a suit between
the contracting parties.” In re Refco Securities Litig’n, 890 F. Supp. 2d at 344. Instead, the
underlying lawsuits were third-party actions. See Homeward Residential, Inc. v. Sand Canyon
Corp., 298 F.R.D. 116, 133 (S.D.N.Y. 2014) (citing Ret. Bd. of Policemen’s Annuity & Benefit
Fund v. Bank of N.Y. Mellon, No. 11-cv-5459 (S.D.N.Y.)) (labelling one of the underlying
lawsuits against BNYM a third-party action for purposes of Hooper Associates). Such actions
do not trigger Hooper Associates’s “unmistakably clear” standard.
The Court therefore will not apply the “unmistakably clear” standard to the indemnity
provisions contested in this case.
IV.

Breach of Contract Claim
MBIA alleges the PSAs do not authorize the disputed reimbursements. Nationstar,

however, contends the PSAs do authorize the disputed reimbursements, and that MBIA therefore
fails plausibly to allege those reimbursements constituted a breach of contract.
Nationstar offers two arguments in support of its position, both of which the Court rejects
at this early procedural stage.
A.

Sections 6.03 and 3.08(a)(viii)

First, Nationstar argues Sections 6.03 and 3.08(a)(viii) of the PSAs together authorize the
disputed reimbursements.
The Court is not persuaded.
Section 6.03 of the PSAs requires the Trusts to indemnify the Master Servicer for
any loss, liability or expense incurred in connection with . . . any legal action
relating to this Agreement or the Certificates, other than . . . any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties [under the PSAs] or by reason of reckless disregard of
obligations and duties [under the PSAs].

9

(PSA at 184). The PSAs also specify the funds used to provide this indemnity: Section
3.08(a)(viii) authorizes the Master Servicer to reimburse itself with money from the Certificate
Accounts for its expenses “reimbursable pursuant to Section 6.03.” (Id. at 133).
MBIA plausibly alleges these provisions, by their plain meaning, grant the Master
Servicer an indemnity right triggered only when the Master Servicer directly participates in and
spends money on a lawsuit. Here, Nationstar was not a party to the underlying lawsuits, nor did
the underlying lawsuits concern expenses Nationstar incurred in connection with its obligations
respecting the Trusts’ mortgages or certificates.
Further, to the extent Sections 6.03 and 3.08(a)(viii)’s plain meaning does not resolve the
breach of contract claim, the amended complaint alleges it “has always been understood by all
parties” that the PSAs do not authorize the Master Servicer to reimburse itself for indemnity
payments to the Trustee, as evidenced by the conduct of a prior Master Servicer that did not
reimburse itself for such indemnity payments. (Am. Compl. ¶ 45). Taking these allegations as
true, they plausibly evidence a course of performance that supports MBIA’s breach of contract
claim—and under New York law, course of performance serves as persuasive evidence of the
contracting parties’ intent. See Haughton v. Cognisight, LLC, 953 F. Supp. 2d 478, 487–88
(W.D.N.Y. 2013) (collecting cases) (applying New York law).
B.

Section 3.08(a)(vi)

Second, Nationstar argues Section 3.08(a)(vi) of the PSAs independently authorizes the
disputed reimbursements, rendering MBIA’s breach of contract claim implausible.
The Court disagrees.
Section 3.08(a)(vi) entitles the Master Servicer to make withdrawals from the Certificate
Accounts to reimburse itself for “unreimbursed Servicing Advances” (PSAs at 132). The PSAs

10

require the Master Servicer to “keep and maintain [a] separate accounting” justifying each such
withdrawal “on a Mortgage Loan by Mortgage Loan basis.” (Id. at 134).
Nationstar contends the disputed reimbursements meet the “Servicing Advances”
definition and thus are proper. “Servicing Advances” means
[a]ll customary, reasonable and necessary “out of pocket” costs and expenses
incurred in the performance by the Master Servicer of its servicing obligations
hereunder, including, but not limited to, the cost of (i) the preservation, restoration
and protection of a Mortgaged Property, (ii) any enforcement or judicial
proceedings, including foreclosures, (iii) the management and liquidation of any
REO Property, (iv) auction costs and expenses in connection with Charged-off
Mortgage Loans and (v) compliance with the [Master Servicer’s] obligations under
Section 3.10 [to maintain hazard insurance for each Mortgage Loan].
PSAs at 61–62 (emphasis added). The phrase “servicing obligations” is not defined in the PSAs.
However, the Master Servicer’s servicing obligations are set forth in Article III of the PSAs.
Section 3.01 speaks of the Master Servicer’s duty to “service and administer the [Trusts’]
Mortgage Loans” (id. at 118), and Section 3.02 authorizes the Master Servicer to “arrange for the
subservicing of any Mortgage Loan by a subservicer” (id. at 121). Each of the five enumerated
categories of costs listed in the “Servicing Advances” definition arises directly from the Master
Servicer’s conduct respecting individual mortgages or mortgaged properties. (See id. at 61–62).
And the Master Servicer must justify any withdrawal taken under Section 3.08(a)(vi) by
referencing in a “separate accounting” the specific mortgage loan or loans to which each such
withdrawal corresponds. (Id. at 134).
These provisions plausibly suggest the Master Servicer’s “servicing obligations” pertain
only to individual mortgages or mortgaged properties owned by the Trusts. Because the disputed
reimbursements did not arise from Nationstar’s servicing of individual mortgages or mortgaged
properties, those reimbursements plausibly are not “Servicing Advances” under the PSAs.
Accordingly, the Court will not dismiss MBIA’s breach of contract claim.
11

V.

Indemnity Claim
As an alternative to its breach of contract claim, MBIA alleges the Insurance Agreements

require Nationstar to indemnify MBIA for MBIA’s $6.8 million insurance claim payments to
Certificateholders.
Nationstar argues MBIA fails adequately to plead this indemnity claim.
The Court agrees.
The Insurance Agreements’ indemnity clause requires the Master Servicer to indemnify
the Certificate Insurer for
any and all reasonable charges, fees, costs and expenses that the Insurer may
reasonably pay or incur . . . in connection with . . . any action, proceeding or
investigation that could reasonably be expected to have material adverse effect
on . . . the rights or obligations of the Insurer under the Policy or the Transaction
Documents.
(Doc. #22-2 (“Ins. Agmt.”) at 25). 7
The Court finds implausible MBIA’s allegation that its insurance payments to
Certificateholders qualify as expenses “incur[red] in connection with” the underlying lawsuits
against BNYM as Trustee. (Ins. Agmt. at 25). To the contrary, the relationship between the
underlying lawsuits and MBIA’s insurance payments is highly attenuated: the insurance
payments occurred because (i) BNYM incurred litigation expenses that (ii) triggered Nationstar’s
indemnity payments to BNYM, for which (iii) Nationstar reimbursed itself using money from the
Certificate Accounts, which in turn (iv) caused Certificateholders to suffer a shortfall, as a result
of which (v) the Certificateholders’ submitted insurance claims to MBIA, generating (vi)

7

The Insurance Agreements’ indemnity clause in fact imposes obligations on both the
Master Servicer and “the Seller,” here Countrywide Home Loans, Inc. (“Countrywide”). (Ins.
Agmt. at 25). The parties do not address Countrywide’s potential obligations as Seller under the
Insurance Agreements’ indemnity clause.

12

MBIA’s insurance claim payouts to Certificateholders. The Court finds that the Insurance
Agreements’ indemnity clause, by its plain meaning, does not cover expenses so distantly
removed from a lawsuit of the type the indemnity clause describes. 8
Accordingly, MBIA’s indemnity claim under the Insurance Agreements is dismissed for
failure to state a claim. 9
CONCLUSION
The motion to dismiss is GRANTED IN PART and DENIED IN PART. The breach of
contract claim and declaratory relief claim will proceed. The indemnity claim is dismissed.
The Clerk is directed to terminate the motion. (Doc. #20).
By February 12, 2019, Nationstar shall answer the amended complaint.
Dated: January 29, 2019
White Plains, NY
SO ORDERED:

____________________________
Vincent L. Briccetti
United States District Judge

8

To be sure, Nationstar’s indemnity payments for BNYM’s litigation expenses also did
not arise directly from a Trust-related lawsuit. Rather, they arose from Nationstar’s contractual
indemnity obligation to BNYM as Trustee. But Nationstar’s indemnity payments bear a much
closer relationship to the underlying lawsuits, and thus plausibly are described as incurred “in
connection with” those lawsuits. Nationstar indemnified BNYM for its litigation expenses;
MBIA paid insurance claims submitted by Certificateholders for losses caused by Nationstar’s
withdrawals from the Trusts to reimburse itself for indemnifying BNYM for its litigation
expenses.
9

Nationstar asserts in a footnote that MBIA’s claims for indemnification and declaratory
relief are “duplicative and derivative” of the breach of contract claim. (Br. at 25). Nationstar
offers no further explanation and provides no supporting citations. Accordingly, the Court
denies Nationstar’s request that the declaratory and indemnity claims be dismissed as
duplicative.
13