Nat'l Credit Union Admin. Bd. v. U.S. Bank N.A.

665 F.Supp.3d 483

NATIONAL CREDIT UNION ADMINISTRATION BOARDand Graeme W. Bush, Plaintiffs, v. U.S. BANK NATIONAL ASSOCIATION, Defendant.

18 Civ. 11366 (LLS)

United States District Court, S.D. New York

Signed March 30, 2023

Michael Charles Forrest, Korein Tillery, St. Louis, MO, John Anton Libra, Matthew Davies, Korein Tillery, LLC, Chicago, IL, Scott K. Attaway, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, DC, Steven Sanford Fitzgerald, Wollmuth Maher & Deutsch LLP, New York, NY, for Plaintiffs.

Albert J. Rota, Jones Day, New York, NY, David F. Adler, Pro Hac Vice, Michael T. Marcucci, Jones Day, Boston, MA, Elijah Stone, Josh Sherman, Jones Day, Dallas, TX, George Rae-Grant, Louis A. Chaiten, Shimshon Balanson, Jones Day, Cleveland, OH, Peter Ihrig, Robins Kaplan LLP, Minneapolis, MN, Samuel Lewis Walling, Jones Day, Minneapolis, MN, for Defendant.

OPINION & ORDER

LOUIS L. STANTON, United States District Judge

Plaintiffs National Credit Union Association Board ("NCUA") and Graeme Bush brought this action against defendant U.S. Bank National Association ("U.S. Bank") for breach of contract, alleging U.S. Bank failed to fulfill its duties as a trustee for several trusts comprised of residential mortgage-backed securities ("RMBS").

NCUA filed a motion for partial summary judgment to determine the scope U.S. Bank's duties as a trustee. (Dkt. No. 173). U.S. Bank filed a motion for partial summary judgment, arguing that NCUA's claims are time-barred, that NCUA lacks standing for some of its claims, and that several of NCUA claims fail on their merits. (Dkt. No. 154).

The motions are considered jointly.

Background

This action arises from U.S. Bank's role as trustee for fifty trusts that issued RMBS. Twenty trusts remain at issue (the "covered trusts"). U.S. Bank 56.1 Statement (Dkt. No. 156) at ¶ 1. Each trust consists of hundreds of individual residential mortgage loans pooled together and securitized for sale to investors. Id. at ¶ 2.

To securitize the loans, a lender originator issues mortgage loans to qualified borrowers, a process called underwriting. The originator then sells those loans to a sponsor, who groups the mortgage loans into a pool. That pool is then conveyed to a depositor. In connection with the conveyance of the pooled mortgage loans, the originator or sponsor (the "warrantor") makes representations and warranties ("R&W"s) regarding the quality of the mortgage loans and the nature of their underwriting. The depositor then transfers pooled loans to a trust, which is managed by a trustee. The right to receive income from the trust is divided into certificates and sold to investors, also known as "Certificateholders." The individual mortgage loans are managed by a master servicer,¹ who collects periodic loan payments from the borrowers and transfers those payments to the trustee. The trustee uses the income to make scheduled payments to the trust's investors. This securities transaction for each trust of the covered trusts closed between February 2005-June 2007. U.S. Bank (Dkt. No. 157) Ex. 1. The term "closed" designates the beginning of the trusts' existence and the trustee's duties to the trusts.

U.S. Bank is currently the trustee for all of the covered trusts. Id. at ¶ 1. For eleven of the trusts, U.S. Bank was the initial trustee. NCUA 56.1 Statement at ¶ 5. For nine trusts, U.S. Bank succeeded another bank to its role as trustee after the trust closed. Id. at ¶ 6-7.

Each trust is governed by a Pooling and Servicing Agreement ("PSA"), a contract between the depositor, master servicer or servicer, and U.S. Bank in its role as trustee. The investors are third-party beneficiaries of the PSAs. The PSAs impose duties on the trustee, which are separated into pre-Event of Default ("pre-EOD") duties and post-Event of Default ("post-EOD") duties. Unless an Event of Default ("EOD") occurs, the trustee's obligations are limited to the duties explicitly assigned in the PSA.

U.S. Bank had two pre-EOD duties. First, U.S. Bank had a "pre-EOD Mortgage File duty" to take physical possession of the mortgage files and review them for completeness. Mortgage file deficiencies are often discovered through the creation of "exception reports," which lists defective loans.² If U.S. Bank discovered any issues with the mortgage files, such as missing documents, it was required to notify the relevant parties,³ including the warrantor, who was then required to cure, substitute or repurchase the loan with the defective file. If the warranter failed to do so, under the terms of some (but not all) PSAs, U.S. Bank was required to enforce the warrantor's obligation to repurchase the loan.

Second, if U.S. Bank discovered a breach of the loans R&W, it was required to notify the relevant parties, including the warrantor, who was required to cure, substitute or repurchase the loan. If the warrantor failed to do so, under the terms of some (but not all) PSAs, U.S. Bank was required to enforce the warrantor's obligation to repurchase the loan with the breached R&W. This is U.S. Bank's "pre-EOD R&W duty."

If an Event of Default ("EOD") occurred and U.S. Bank had actual knowledge or written notice of the EOD, it had a "post-EOD duty" to exercise its rights and powers as a prudent person would. An EOD has three steps; it occurs when a master servicer breaches its servicing duties, the trustee gives the master servicer written notice of its breach, and the master servicer fails to cure that breach. A master servicer's duties include tasks such as monitoring delinquent borrowers, foreclosing defaulting loans, managing compliance with warranties regarding loan origination, and managing foreclosed properties.

NCUA brings this action against U.S. Bank for breach of contract on behalf of three liquidated federal credit unions that invested in the covered trusts. U.S.B. 56.1 Statement at ¶ 20-21. NCUA alleges that U.S. Bank was aware of mortgage file deficiencies (the "pre-EOD Mortgage File claims") and breaches of the loan's R&Ws (the "pre-EOD R&W claims") yet failed to notify the relevant parties or enforce the repurchase of loans and that following EODs, U.S. Bank failed to act as a prudent investor (the "post-EOD claims").

NCUA moves for summary judgment for a declaration that, as a matter of law, U.S. Bank's Pre-EOD Mortgage File and Pre-EOD R&W duties to enforce the warrantor's repurchase of loans required U.S. Bank as trustee to initiate a lawsuit against the warrantor without the prior direction of and indemnification from the trusts' investors.

U.S. Bank moves for summary judgment, arguing that all of NCUA's claims are barred by the statute of limitations, that NCUA lacks standing to sue for some of the certificates in the trusts, and that many of NCUA's claims fail on the merits.

Legal Standards

Summary judgment is warranted if, based upon admissible evidence, "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where "the burden of proof at trial would fall on the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence." In re Lehman Bros. Sec. & ERISA Litig., 131 F. Supp. 3d 241, 249 (S.D.N.Y. 2015). In that event, the opposing party must establish a genuine issue of fact by "citing to particular parts of materials in the record" and may not rely on "mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Fed. R. Civ. P. 56(c)(1)(A); Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010). In cases regarding RMBS, NCUA must have evidence to support its claims "loan-by-loan and trust-by-trust." Phoenix Light SF Ltd. v. Bank of New York Mellon, 2017 WL 3973951, at *9 (S.D.N.Y. Sept. 7, 2017).

Discussion

I. Statute of Limitations

The statute of limitations for breach of contract in New York is six years. N.Y. C.P.L.R. 213 (McKinney). This action was effectively filed⁴ on October 26, 2017, so any claims that accrued before October 26, 2011, are time-barred.

A. Pre-EOD Claims

Under the terms of most PSAs, U.S. Bank had two pre-EOD duties following the discovery of mortgage file deficiencies or an R&W breach: to notify relevant parties of the breach and request that the warrantor cure that breach (the "duty to notify") and to enforce the warrantor's obligation to repurchase the defective mortgage loan (the "duty to enforce").

In summary judgment briefing, U.S. Bank and NCUA agreed that NCUA's claims accrued when U.S. Bank learned of deficient mortgage files or R&W breaches and failed to act, and that failure to act was before October 26, 2011. However, after that briefing was completed, the Appellate Division, First Department of the New York Supreme Court held the timeliness of Pre-EOD claims applies not to U.S. Bank's duty to identify deficient documents and notify the relevant parties, but to its follow-on duty to enforce. IKB Int'l, S.A. v. Wells Fargo Bank, N.A., 208 A.D.3d 423, 429, 175 N.Y.S.3d 5 (1st Dep't 2022); Ambac Assurance Corp. v. U.S. Bank Nat'l Ass'n, 632 F.Supp.3d 517, 530-31 (S.D.N.Y. Sept. 30, 2022) (citing IKB, 208 A.D.3d at 429, 175 N.Y.S.3d 5).

Under that ruling, the "duty to enforce is controlling for the purposes of measuring the timeliness" of NCUA's claims to trusts with PSAs that include a duty to enforce. Ambac, 632 F.Supp.3d at 530. However, some PSAs do not include a duty to enforce, so the statute of limitations differs for trusts that contain a Pre-EOD duty to enforce (the applicable six-year statute of limitations starts running when the event calling for enforcement occurs without corrective enforcement and the power to enforce it is lost) and those that do not, in which the usual state statute of limitations applies.

1. Trusts with a Duty to Enforce

Following IKB, for trusts with a duty to enforce, NCUA's claims...