Ikb Int'l v. Wells Fargo Bank, N.A.

40 N.Y.3d 277

220 N.E.3d 646

197 N.Y.S.3d 719

IKB INTERNATIONAL, S.A. , et al., Respondents,

v.WELLS FARGO BANK, N.A., as Trustee (and Any Predecessors and Successors Thereto), et al., Appellants, et al., Defendants.

IKB International, S.A., et al., Respondents,

v.U.S. Bank, N.A., as Trustee (and Any Predecessors and Successors Thereto), et al., Appellants, et al., Defendants.

IKB International, S.A., et al., Respondents,

v.Deutsche Bank National Trust Company, as Trustee (and Any Predecessors and Successors Thereto), et al., Appellants, et al., Defendants.

IKB International, S.A., et al., Respondents,

v.The Bank of New York, as Trustee (and Any Predecessors and Successors Thereto), et al., Appellants, et al., Defendants.

No. 51

Court of Appeals of New York.

Decided June 15, 2023

Mayer Brown LLP, New York City (Matthew D. Ingber, Christopher J. Houpt, Rory K. Schneider and Christopher J. Mikesh of counsel), for The Bank of New York and others, Jones Day, New York City (Howard F. Sidman, Ryan J. Andreoli and Amanda L. Dollinger of counsel), for Wells Fargo Bank, N.A.and another, Jones Day, New York City (David F. Adler and Michael T. Marcucci of counsel) and Cleveland, Ohio (Louis A.Chaiten, admitted pro hac vice, and Amanda R. Parker, admitted pro hac vice, of counsel), for U.S. Bank, N.A. and another, and Morgan, Lewis & Bockius, LLP, New York City (Michael S. Kraut, Kevin J. Biron and Bryan P. Goff of counsel), for Deutsche Bank National Trust Company and another, appellants.

McFerrin-Clancy LLC, New York City (John J.D. McFerrin-Clancy of counsel), and Schlam Stone & Dolan LLP, New York City (Seth D. Allen, Richard H. Dolan, Erik S. Groothuis and David J. Goldsmith of counsel), for respondents.

Faegre Drinker Biddle & Reath LLP, New York City (Clay J. Pierce of counsel), for American Bankers Association, amicus curiae.

OPINION OF THE COURT

GARCIA, J.

Plaintiffs, commercial banks incorporated in Germany, are investors in residential mortgage-backed securities issued by securitization trusts for which defendants served as Trustees. After the securities lost much of their value in the 2008 financial crisis, plaintiffs commenced these actions alleging that defendants breached numerous contractual, fiduciary, and statutory duties, causing plaintiffs’ investments to become "essentially worthless." While we agree with the courts below that compliance with the "no action clause" in the governing agreements was not required prior to suit, we decline to recognize an implied contractual duty on the part of the Trustee to enforce the repurchase protocol obligations of other parties. In addition, plaintiffs’ duplicative tort and contract claims must be dismissed. We modify the order of the Appellate Division accordingly.

I.

We have discussed the history and operation of residential mortgage-backed securities (RMBS) and the securitization process at length in prior opinions (see generally Matter of Part 60 Put–Back Litig., 36 N.Y.3d 342, 141 N.Y.S.3d 410, 165 N.E.3d 180 [2020] ; U.S. Bank N.A. v. DLJ Mtge. Cap., Inc., 33 N.Y.3d 84, 98 N.Y.S.3d 530, 122 N.E.3d 47 [2019] ; Deutsche Bank Natl. Tr. Co. v. Barclays Bank PLC, 34 N.Y.3d 327, 117 N.Y.S.3d 137, 140 N.E.3d 511 [2019] ; Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569, 81 N.Y.S.3d 816, 106 N.E.3d 1176 [2018] ; Nomura Home Equity Loan, Inc., Series 2006–FM2 v. Nomura Credit & Cap., Inc., 30 N.Y.3d 572, 69 N.Y.S.3d 520, 92 N.E.3d 743 [2017] ; ACE Sec. Corp., Home Equity Loan Tr., Series 2006–SL2 v. DB Structured Prods., Inc., 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 [2015] ). To summarize, RMBS are financial instruments, popular in the mid–2000s, backed by individual mortgage loans ( Ambac, 31 N.Y.3d at 575, 81 N.Y.S.3d 816, 106 N.E.3d 1176, 81 N.Y.S.3d ; Nomura, 30 N.Y.3d at 577–578, 69 N.Y.S.3d 520, 92 N.E.3d 743, 69 N.Y.S.3d ; ACE, 25 N.Y.3d at 589–590, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). The securitization process involves a "sponsor" who acquires a bundle of loans from banking institutions ("originators") and sells the pooled loans to a "depositor," who places the loans into a trust ( Deutsche Bank, 34 N.Y.3d at 331, 117 N.Y.S.3d 137, 140 N.E.3d 511, 117 N.Y.S.3d ; Nomura, 30 N.Y.3d at 577–578, 69 N.Y.S.3d 520, 92 N.E.3d 743, 69 N.Y.S.3d ). The trust issues certificates purchased by investors, who are entitled to a portion of the revenue stream from the borrowers’ payments ( Deutsche Bank, 34 N.Y.3d at 331, 117 N.Y.S.3d 137, 140 N.E.3d 511, 117 N.Y.S.3d ; Nomura, 30 N.Y.3d at 577–578, 69 N.Y.S.3d 520, 92 N.E.3d 743, 69 N.Y.S.3d ). The mortgage loans in the trust are serviced by a "servicer," a party typically affiliated with the sponsor or originator. Each trust has a Trustee which acts on behalf of the Trust and whose responsibilities are prescribed by the securitization trusts’ governing agreements. While our previous RMBS cases have been brought by RMBS trustees, investors, or their insurers against RMBS sponsors, depositors, servicers, and originators (collectively, obligated parties) to recover for losses on the certificates, here the investors are suing the RMBS Trustees.

While the courts below addressed numerous disputed issues in resolving defendants’ motion to dismiss plaintiffs’ complaint, the parties have narrowed the questions on appeal before us following the Appellate Division's modification of Supreme Court's order below (see IKB Intl., S.A. v. LaSalle Bank N.A., 2021 N.Y. Slip Op. 30265[U], 2021 WL 358318 [Sup. Ct., N.Y. County 2021] ; IKB Intl., S.A. v. Wells Fargo N.A., 208 A.D.3d 423, 175 N.Y.S.3d 5 [1st Dept. 2022] ; 2022 N.Y. Slip Op. 74224[U] [1st Dept. 2022] [Appellate Division granting leave to appeal and certifying question to this Court]). The following issues remain: whether plaintiffs’ suit is barred for noncompliance with the governing agreements’ "no-action clauses;" whether, for 25 of the Trusts, plaintiffs’ claims that defendants breached the governing agreements by failing to enforce the pre-event of default (EOD) repurchase obligations of the obligated parties must be dismissed because those governing agreements do not impose an enforcement duty on the Trustee; and whether plaintiffs’ remaining tort claims are duplicative of their breach of contract claims.

II.

Standard no-action clauses in trust agreements provide "that a shareholder must satisfy certain requirements before bringing a lawsuit on behalf of the shareholders, including giving a trustee an opportunity to bring a lawsuit on behalf of the trust" ( SC Note Acquisitions, LLC v. Wells Fargo Bank, N.A., 934 F.Supp.2d 516, 531 [S.D.N.Y.2013] ). The specific clause at issue is found in section 10.08 of the governing agreements and provides that

"No Certificateholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of an Event of Default and of the continuance thereof, as herein provided, and unless the Holders of Certificates evidencing not less than 25% of the Voting Rights evidenced by the Certificates shall also have made written request to the Trustee to institute such action, suit or proceeding ...."¹

Supreme Court rejected defendants’ argument that the action was barred because plaintiffs did not comply with the notice and demand requirements of the no-action clauses, holding that compliance was excused " ‘because it would be futile to demand that the trustee commence an action against itself for breaches of the [governing agreements’]’ " and that " ‘[o]nce performance of the demand requirement in the no-action clause is excused, performance of the entire provision is excused, including the requirement that demand be made by 25% of the certificate holders’ " ( 2021 WL 358318, at *4–5, quoting Blackrock Balanced Cap. Portfolio [FI] v. U.S. Bank N.A., 165 A.D.3d 526, 528, 86 N.Y.S.3d 484 [1st Dept. 2018] ). The Appellate Division affirmed (208 A.D.3d at 424, 175 N.Y.S.3d ). We agree that compliance with the no-action clause was unnecessary here.

As we have previously noted, in dicta, "claims against the trustee ... cannot be prohibited by a no-action clause" ( Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 566, 992 N.Y.S.2d 687, 16 N.E.3d 1165 [2014] ). "Because a standard no-action clause vests in the trustee all of the securityholders’ rights to bring suit, making the trustee the only path to a remedy, courts have been unwilling to enforce such clauses when the trustee's conflicts or irrationality bar that path to relief" ( Akanthos Capital Mgmt. v. CompuCredit Holdings Corp., 677 F.3d 1286, 1294–1295 [11th Cir. 2012] [reviewing New York law]). A request by plaintiffs that the Trustee sue itself would have been futile, because, as defendants have acknowledged, the Trustee cannot not sue itself, and therefore compliance was not required.

Defendants attempt to parse the language of the clause and read the request by holders of at least 25 percent of the voting rights as a distinct, and enforceable, condition. We reject that contention. The 25 percent approval requirement is inextricably intertwined with the initial notice requirement, as well as with the trustee's status as "interested." Once a certificateholder is absolved of the requirement to provide written notice to the Trustee, separately maintaining the requirement that additional certificateholders make an equally futile demand for suit is illogical (see Blackrock Core Bond Portfolio v. U.S. Bank N.A., 165 F.Supp.3d 80, 96 [S.D.N.Y.2016] ["There is no principle of contract interpretation that allows the 25% as used here to be divorced from the act of demand"]). Accordingly, failure to comply with the no-action clause does not bar suit against the Trustee.

III.

Defendants moved to dismiss plaintiffs’ claims that they breached the governing agreements by...