Iron Workers Mid-S. Pension Fund ex rel. U.S. Bancorp v. Davis

IRON WORKERS MID-SOUTH PENSION FUND,derivatively on Behalf of U.S. Bancorp, Plaintiff, v. RICHARD K. DAVIS, ANDREW CECERE, PATRICK T. STOKES,O'DELL M. OWENS, JERRY W. LEVIN, VICTORIA BUYNISKIGLUCKMAN, DAVID B. O'MALEY, ARTHUR D. COLLINS, JR.,JOEL W. JOHNSON, CRAIG D. SCHNUCK, OLIVIA F. KIRTLEY,DOUGLAS M. BAKER, JR., Y. MARC BELTON,and RICHARD D. REITEN, Defendants,andU.S. BANCORP, a Delaware Corporation, Nominal Defendant.

Civil No. 13-289 (JRT/JJG)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

DATED: December 30, 2013

MEMORANDUM OPINION

AND ORDER GRANTING

MOTION TO DISMISS

Julia M. Williams, ROBBINS ARROYO LLP, 600 B Street, Suite 1900, San Diego, CA 92101; and Henry Helgen, ANDERSON, HELGEN, DAVIS & NISSEN, LLC, 333 South Seventh Street, Suite 310, Minneapolis, MN 55402, for plaintiff.

Peter W. Carter and Hugh D. Brown, DORSEY & WHITNEY LLP, 50 South Sixth Street, Suite 1500, Minneapolis, MN 55402, for defendants.

Steve W. Gaskins, GASKINS, BENNETT, BIRRELL, SCHUPP, LLP, 333 South Seventh Street, Suite 2900, Minneapolis, MN 55402, for nominal defendant.

This is a shareholder derivative action brought by Iron Workers Mid-South Pension Fund ("Iron") on behalf of nominal defendant U.S. Bancorp ("US Bank") against several of US Bank's current and former officers and directors.¹ US Bank's largest subsidiary, U.S. Bank National Association ("US Bank NA"), served as trustee of several trusts that invested in mortgage-backed securities. US Bank NA allegedly breached various contractual and statutory duties as trustee and now faces at least two class actions brought by investors in the trusts. The present action arises as a result of those class actions. Iron alleges that US Bank's officers and directors failed to oversee US Bank NA's performance as trustee, and as a result of the lack of internal controls, US Bank faces substantial losses and has suffered reputational harm. Iron also brings claims for waste and unjust enrichment premised on the fact that Defendants received compensation from US Bank while they were allegedly breaching their fiduciary duties.

Defendants move to dismiss Iron's breach of fiduciary duty claim on the grounds that (1) Iron did not make a proper demand on the Board and therefore lacks standing to pursue this derivative action; (2) Iron fails to plausibly allege that Defendants consciously or knowingly disregarded their oversight duties; and (3) Iron's alleged damages are overly speculative. Although the Court finds that reasonable doubt exists as to the good faith and due care exhibited by the Board in response to Iron's demand, the Court willnevertheless grant Defendants' motion to dismiss Iron's breach of fiduciary duty claim because none of Iron's allegations support the reasonable inference that Defendants consciously or knowingly failed in their oversight duties. Therefore, Iron fails to state a plausible claim that Defendants are liable for a failure of oversight. The Court will also grant Defendants' motion to dismiss Iron's waste and unjust enrichment claims because Iron has not plausibly alleged that Defendants' salaries served no corporate purpose or were paid without any justification.

BACKGROUND

I. THE PARTIES

Iron is a pension fund that currently holds US Bank stock and held US Bank stock at the time of the wrongdoing alleged in the complaint. (Compl. ¶ 18, Feb. 5, 2013, Docket No. 1.) US Bank, the nominal defendant, is a Delaware corporation with its principal place of business in Minnesota. (Id. ¶¶ 17, 19.) The named Defendants are members of US Bank's Board of Directors ("the Board") and US Bank's CEO and CFO.²A number of the Defendants currently serve, or have served, on US Bank's Audit Committee and/or Risk Management Committee. (Id.)

II. THE COVERED TRUSTS

US Bank NA, a subsidiary of US Bank, served as trustee for a group of trusts holding residential mortgages as part of mortgage-backed securities transactions ("the Trusts"). (Compl. ¶¶ 1-2.) As trustee, US Bank NA owed a variety of obligations to the holders of the Trust's property. (Id. ¶ 2.) These obligations arose contractually, from the documents governing the Trust, and statutorily, from the Federal Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa, et seq. The complaint goes into great depth describing the creation of the Trusts and the duties of US Bank NA as trustee.

The mortgages that composed the Trust property were primarily originated by either Bear, Stearns & Co. ("Bear Stearns") or Washington Mutual Bank ("WaMu"). (Compl. ¶¶ 54-55.) Bear Stearns would group mortgages it had originated into a large pool and transfer them to a shell entity (referred to as a Depositor), owned or controlled by Bear Stearns. (Id. ¶ 56.) This transfer would be accompanied by a Mortgage Loan Purchase Agreement that included representations and warranties concerning the quality of the mortgages in the pool, and promises from the seller to cure, substitute, or repurchase mortgages that were below the promised standards. (Id.) The agreement also indicated that US Bank NA, as trustee, would have the right to enforce the representations and promises. (Id.) The Depositor would transfer the pool of mortgagesto US Bank NA for the benefit of the Covered Trusts. (Id. ¶ 57.) Finally, the mortgage-backed securities would be marketed and sold to investors. (Id. ¶ 58.)³

Iron highlights several duties that US Bank NA allegedly breached in its role as trustee. First, US Bank NA was required to take physical possession of the underlying mortgage documents. (Id. ¶¶ 66, 74.) Second, US Bank NA was required to review the mortgage documents and certify that all required documents had been properly executed. (Id. ¶¶ 68, 78.) Third, US Bank NA was required to promptly notify the seller (Bear Stearns or WaMu) if it detected any material breaches of the representations and warranties. (Id. ¶¶ 71, 81.) Such notice would then trigger the seller's duty to cure, substitute or repurchase. (Id. ¶¶ 73, 81.) These duties arose by contract. US Bank NA also had statutory duties to ensure that the mortgages complied with the terms of the governing agreements, to perform the duties required of it under the governing agreements, and to give notice to the investors of any known defaults. (Id. ¶¶ 84-87.)

US Bank NA received fees for serving as trustee. (Carter Decl., Ex. 4 at 118-19.) US Bank reports that 5% of its revenue comes from "trust and investment management fees," and the fees US Bank NA received for serving as trustee of the Trusts are likely a fraction of that 5%. (Carter Decl., Ex. 5 at 21, 25.)

III. IRON'S ALLEGATIONS

As a result of its alleged failures as Trustee, US Bank NA is now the subject of two class actions in the Southern District of New York brought by investors. (Compl.¶ 7.) In one of these actions, the court recently denied a motion to dismiss. See Policemen's Annuity & Benefit Fund v. Bank of Am., NA, ___ F. Supp. 2d ___, 2013 WL 1877618 (S.D.N.Y. May 6, 2013). The expense, potential damages, and potential loss of goodwill caused by these class actions motivated the present derivative action against US Bank's officers and directors. (Compl. ¶¶ 112-13.)

Iron alleges that Defendants breached their fiduciary duties of loyalty and good faith by failing to prevent US Bank NA from violating its various duties as trustee. (Id. ¶ 45.) Iron points to various "red flags" that purportedly demonstrate that US Bank's officers and directors knew that there were defects in the mortgages and knew that US Bank NA was failing to comply with its duties as trustee.

First, Iron notes that after Bear Stearns' 2008 collapse, numerous investigations and news reports discovered that Bear Stearns regularly breached its warranties and representations in similar transactions. (Id. ¶ 90.) Bear Stearns' breaches have been the subject of many lawsuits. (Id. ¶¶ 90-91.) Iron points to similar warning signs relating to mortgages originated by WaMu. (Id. ¶¶ 93-96.) Mortgages originated by WaMu became delinquent at increasing rates in the summer of 2008 and ratings agencies lowered the ratings on some of the Trust's property. (Id. ¶ 94.) Like Bear Stearns, WaMu faced several lawsuits relating to its mortgage-backed securities. (Id. ¶ 95.) A Senate report found that WaMu's mortgage-backed securities were "among the worst performing in the marketplace." (Id. ¶ 96.) Iron alleges that despite the clear warnings that Bear Stearns and WaMu had breached the warranties and representations, Defendants did nothing toensure that US Bank NA, as trustee, acted to enforce the obligation to cure, substitute, or repurchase the defective loans. (Id. ¶¶ 92, 97.)

Second, Iron points to several state and federal reports on abuses by banks in foreclosure proceedings. These reports all found that banks commonly did not possess the required documents to foreclose or there were irregularities in the documentation that inhibited banks' ability to foreclose. (See id. ¶¶ 98-101.) One federal report was based on a review of mortgage documents at fourteen servicers, including US Bank, and expressed concerns about the prevalence of irregularities in the documentation. (Id. ¶ 101.)

Iron alleges that in light of the numerous federal and state reports, as well as the news coverage and litigation, Defendants therefore "knew or were recklessly unaware" of the deficiencies in the mortgages originated by Bear Stearns and WaMu. (Id. ¶ 103.) Iron then alleges that Defendants failed to ensure that US Bank NA performed its duties as trustee and failed to establish any system of oversight. (Id. ¶ 110.)

IV. IRON'S DEMAND AND THE BOARD'S RESPONSE

On February 29, 2012, three months after the first class action against US Bank NA was filed, Iron sent a letter to the US Bank board alleging that officers and directors had engaged in misconduct in relation to the company's duties as trustee for the relevant mortgage-backed securities trusts. (Compl. ¶ 118 & Ex. A.) Iron identified itself and indicated that it was a...