Commerzbank AG v. U.S. Bank Nat'l Ass'n

277 F.Supp.3d 483

COMMERZBANK AG, Plaintiff,

v.U.S. BANK NATIONAL ASSOCIATION., et al., Defendants.

16cv4569

United States District Court, S.D. New York.

Signed September 27, 2017

Ryan Anthony Kane, David H. Wollmuth, Jay Gerald Safer, Melissa Ann Finkelstein, Philip Ransom Schatz, Roselind Franciska Hallinan, Sean Patrick McGonigle, Steven Sanford Fitzgerald, Wollmuth Maher & Deutsch L.L.P., New York, NY, for Plaintiff.

David F. Adler, Louis A. Chaiten, Shimshon Balanson, Jones Day, Cleveland, OH, Chelsea Walcker, Pro Hac Vice, David Leichtman, Robins Kaplan, L.L.P., Albert J. Rota, Andrew Steven Kleinfeld, Jones Day, Jon Muenz, Pro Hac Vice, Mark C. Brown, Pro Hac Vice, Isaac S. Greaney, Pro Hac Vice, Daniel Gimmel, Pro Hac Vice, Sidley Austin L.L.P., New York, NY, Martin Richard Lueck, Michael Collyard, Thomas F. Berndt, Robins, Kaplan, Miller & Ciresi L.L.P., Samuel Lewis Walling, Pro Hac Vice, Jones Day, Minneapolis, MN, Brittany D. Parling, Jones Day, Detroit, MI, Jeffrey T. Cox, Faruki Ireland & Cox PLL–3, Dayton, OH, Michael T. Marcucci, Jones Day, Boston, MA, Adam Patrick Barry, Pro Hac Vice, Jacob Kreilkamp, Pro Hac Vice, James Rutten, Pro Hac Vice, Wesley Todd Lee Burrell, Pro Hac Vice, Jacob Samuel Kreilkamp, Matthew Kent Donohue, Munger, Tolles & Olson, Los Angeles, CA, David F. Graham, Pro Hac Vice, Frank J. Favia, Jr., Sidley Austin, L.L.P., Chicago, IL, for Defendants.

OPINION & ORDER

WILLIAM H. PAULEY III, United States District Judge:

Defendants U.S. Bank National Association and Bank of America National Association move to dismiss Commerzbank AG's claims. For the reasons that follow, Defendants' motion is granted in part and denied in part.

BACKGROUND

This action arises from the sale of residential mortgage backed securities ("RMBS"). RMBS are abstruse financial products that were integral in the rapid rise and precipitous fall of the U.S. housing market during the aughts. The collapse of the housing bubble sent the economy into a tailspin, and spawned a series of investigations into the mortgage industry that unearthed a litany of abuses—deficient underwriting standards, subprime lending, and coercive foreclosure practices, to name a few.

These discoveries ushered in a new era of mega cases. And over the past decade, RMBS litigation has been a lot like musical chairs—virtually every party in the securitization process has sued or been sued by a counterparty in an unending game of blame shifting. The latest permutation involves claims against RMBS trustees. Commerzbank, an investor in 57 trusts, sues the RMBS trustees here—U.S. Bank and Bank of America (the "Trustees")—on the theory that they had a duty to monitor, notify, and take action against the mortgage originator, sponsor, and servicer for any breaches committed under the governing trust documents.

I. The Securitization Process

An RMBS is the product of a complex process called mortgage loan securitization. The process begins when a lender (or multiple lenders) issues mortgages (the "Originator"), and sells them to another financial institution (the "Seller" or "Sponsor"). The Sponsor then pools and transfers these mortgages to an affiliated special purpose vehicle (the "Depositor"). The Depositor subsequently conveys the bundled mortgages to a trust managed by a trustee, where they are prioritized into tranches of entitlements to payments from the borrowers. Each tranche in the loan securitization reflects a different level of risk and reward.

The trust issues certificates (i.e., RMBS) representing those tranches to underwriters, who then market and sell the certificates to investors like Commerzbank. The certificateholder may pay more or less for a certificate depending on the level of risk and reward associated with each tranche. Because the certificates are secured by the mortgages held in trust, their expected rate of return hinges on the performance of the loans and the borrowers' ability to repay.

The trust is governed by a document called the Pooling and Servicing Agreement ("PSA"). Under the PSA, a servicer is appointed to manage the collection of payments on the mortgage loans (the "Servicer"). The Servicer's responsibilities consist of monitoring delinquent borrowers, foreclosing on defaulted loans, checking compliance with representations and warranties in the loans, tracking mortgage documentation, and managing and selling foreclosed properties. (Complaint ("Compl."), ECF No. 1, ¶ 31.)

II. Trustees' Duties

The PSA enumerates the Trustees' duties and obligations. Those duties are bifurcated into pre-Event of Default ("pre-EOD") and post-Event of Default ("post-EOD") duties.

A. Pre–EOD Duties

Prior to an Event of Default, the Trustee must receive a complete set of files associated with each mortgage in the trust. Because physical possession of the mortgage documents is necessary to transfer ownership rights to the mortgage loans from the Sponsors and Depositors to the trusts, the Trustee must review the file for each mortgage and certify that the loan documentation is accurate and complete. (Compl. ¶ 43.) After a designated period, the Trustee must provide a final certification and document exception report identifying any missing documents required by the PSA. (Compl. ¶ 46.) If the mortgage file has any defects, the Trustee and the Servicer must demand that the Sponsor cure the defect (within a prescribed period), or repurchase or substitute the defective loan. (Compl. ¶ 47.)

The Trustee also has a duty to notify all parties of a Sponsor or Originator's breach of any representations and warranties that the loans complied with applicable origination guidelines. (Compl. ¶¶ 49, 69.) A breach of representations and warranties arises, for example, when the Sponsor or Originator disregards its underwriting guidelines and issues loans to borrowers who lack the ability to repay. (Compl. ¶ 78.) If the Trustee discovers a breach, it must provide notice and force the Sponsor or Originator to repurchase or replace the defective loan. (Compl. ¶ 93.)

Finally, the Trustee has a duty to provide notice of a Servicer's breach and initiate corrective action. (Compl. ¶¶ 50, 59.) A servicing breach can arise, for example, when the Servicer fails to provide notice of a breach of representations and warranties (Compl. ¶ 101), or improperly forecloses on a defaulted mortgage using false documents. (Compl. ¶ 106.)

B. Event of Default

While many of the PSAs at issue in this action have varying definitions of what constitutes an Event of Default, it generally arises when the Servicer materially breaches a servicing duty, a designated party provides written notice of the breach to the Servicer, and the Servicer fails to cure within a specified period of time.¹

C. Post–EOD Duties

Post–EOD duties arise after an Event of Default has occurred. The Trustee must "exercise such of the rights and powers vested in it by th[e] [PSA], and use the same degree of care and skill in [its] exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs." (See, e.g., Compl., Ex. C, § VII, Barclays PSA, § 8.01.) This duty is owed to all certificateholders.

DISCUSSION

I. Statute of Limitations

The Trustees seek to dismiss a number of claims on the basis that they are barred by the various statutes of limitations. At issue are (1) all tort claims as to thirty certificates sold before December 28, 2012; (2) all contract claims as to fifteen certificates sold before December 31, 2011; (3) all Streit Act claims; (4) all claims against Bank of America as to seven certificates (and tort claims as to two more certificates); and (5) all claims against U.S. Bank as to one particular certificate. (Defendants' Joint Motion to Dismiss ("MTD"), ECF No. 89, at 37–38.) Essentially, the Trustees contend that these claims were filed more than a decade after many of the trusts were closed, and at least five years after the details relating to the alleged misconduct emerged.

Generally, a federal court sitting in diversity must apply the forum state's statute of limitations and any other provisions governing the tolling of the limitations period. Diffley v. Allied–Signal, Inc., 921 F.2d 421, 423 (2d Cir. 1990). But "when a case is transferred pursuant to 28 U.S.C. § 1404(a), the transferee court must apply the choice-of-law rules that the transferor court would have applied." Mopex, Inc. v. Am. Stock Exch., LLC, 2002 WL 342522, at *4 (S.D.N.Y. Mar. 5, 2002) (citing Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964) ); Berger v. Cushman & Wakefield of Penn., Inc., 2013 WL 4565256, at *12 n.6 (S.D.N.Y. Aug. 28, 2013). The exception to this rule is that "[w]hen the action could not have been maintained in the transferor court, the applicable law, including choice of law rules, is the state law of the transferee court." Mopex, 2002 WL 342522, at *4. This exception applies most commonly "where the transferor court lacked personal jurisdiction over the defendant." Mopex, 2002 WL 342522, at *5.

Here, the Southern District of Ohio transferred this action pursuant to § 1404(a), explaining that transfer would "promote efficiencies through the potential for coordinated schedules and discovery among the parties, witnesses, and judges in [the Southern District of New York]." Commerzbank AG v. U.S. Bank N.A., 2016 WL 3255071, at *5 (S.D. Ohio June 14, 2016). Thus, Ohio's statute of limitations and choice-of-law rules apply unless the Ohio court lacked jurisdiction over the Trustees.

As a resident of Ohio, U.S. Bank is subject to the Ohio court's general jurisdiction. Thus, Commerzbank's claims against U.S. Bank under Ohio's applicable limitations period—based on the date the Trustees contend these claims began to accrue—are timely. See Fordham Fin. Serv., Inc. v. Ventramex S.A. De C.V., 137 F.Supp.3d 1023, 1027 (S.D. Ohio 2015) (eight years for breach of contract); Chateau Estate Homes, LLC v. Fifth Third Bank, ––– N.E.3d ––––, ––––, 2017...