Portfolio v. Wells Fargo Bank, Nat'l Ass'n

247 F.Supp.3d 377

BLACKROCK ALLOCATION TARGET SHARES: SERIES S. PORTFOLIO, et al., Plaintiffs,

v.WELLS FARGO BANK, NATIONAL ASSOCIATION, et al., Defendants.

Royal Park Investments SA/NV, Individually and on Behalf of all Others Similarly Situated, Plaintiffs,

v.Wells Fargo Bank, N.A., as Trustee, Defendant.

National Credit Union Administration Board, as Liquidating Agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Constitution Corporate Federal Credit Union, Plaintiff,

v.Wells Fargo Bank, National Association, Defendant.andNCUA Guaranteed Notes Trust 2010–R1, NCUA Guaranteed Notes Trust 2010–R2, NCUA Guaranteed Notes Trust 2010–R3, NCUA Guaranteed Notes Trust 2011–R2, NCUA Guaranteed Notes Trust 2011–R4, NCUA Guaranteed Notes Trust 2011–R5, and NCUA Guaranteed Notes Trust 2011–M1, Nominal Defendants.

Phoenix Light SF Limited, et al., Plaintiffs,

v.Wells Fargo Bank, N.A., Defendant.

Commerzbank AG, Plaintiffs,

v.Wells Fargo Bank N.A., Defendant.

14 Civ. 9371 (KPF) (SN)

14 Civ. 9764 (KPF) (SN)

14 Civ. 10067 (KPF) (SN)

14 Civ. 10102 (KPF) (SN)

15 Civ. 10033 (KPF) (SN)

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

Signed March 30, 2017

Benjamin Galdston, Brett M. Middleton, Rachel Felong, Richard David Gluck, Timothy Alan DeLange, Blair Allen Nicholas, Robert Steven Trisotto, David R. Kaplan, Lucas E. Gilmore, Niki L. Mendoza, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, Jai Kamal Chandrasekhar, Jeroen Van Kwawegen, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, for Plaintiffs.

Jayant W. Tambe, Amanda Leigh Dollinger, Eric Peter Stephens, Harold Keith Gordon, Howard Fredrick Sidman, Jason Jurgens, Joseph James Boylan, Michael James Dailey, Michael O. Thayer, Robert Harrison Golden, Sevan Ogulluk, Thomas E. Lynch, Traci Leigh Lovitt, Tracy V. Schaffer, Jones Day, Dennis Michael Slater, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY, Allison Fuller, Katherine Lyons Wall, Jones Day, Dallas, TX, Chris Waidelich, Jones Day, San Diego, CA, Jeffrey Baltruzak, Laura Meaden, Rebekah B. Kcehowski, Jones Day, Pittsburgh, PA, Paul Bartholomew Green, Jones Day, Irvine, CA, for Defendants.

OPINION AND ORDER

KATHERINE POLK FAILLA, United States District Judge

In the near-decade since the collapse of the United States real-estate market, this District has been inundated with lawsuits brought by putative victims of that collapse against those they blame for it. As time has lapsed, and with it various statutes of limitation, the targets of these lawsuits—as well as the proffered bases of liability—have evolved. The instant cases represent the latest wave: They are brought by and on behalf of certificateholders ("Plaintiffs") of 53 residential-mortgage-backed securities ("RMBS") trusts (the "Trusts") against the Trusts' common Trustee, Wells Fargo Bank, National Association ("Wells Fargo" or "Defendant"). Plaintiffs allege that Defendant failed to discharge its duties as Trustee. More specifically, Plaintiffs claim that Defendant discovered pervasive documentation errors, breaches of seller representations and warranties ("R&Ws"), and systemic loan-servicing violations, but disregarded its contractual obligations to protect Plaintiffs therefrom because, among other consequences, doing so would have exposed Defendant to liability for its own RMBS–related misconduct.

Defendant has moved to dismiss each of the above-captioned related actions for failure to state a claim.¹ For the reasons set forth below, Defendant's motion is granted in part and denied in part. In brief, Defendant's motion to dismiss Plaintiffs' breach of contract claims is denied; its motion to dismiss Plaintiffs' tort claims is granted in part and denied in part; its motion to dismiss Plaintiffs' claims under the Trust Indenture Act is granted in part and denied in part; its motion to dismiss Plaintiffs' claims under the Streit Act is granted; its motion to dismiss Plaintiff NCUAB's derivative claims is granted without prejudice to NCUAB's ability to move for leave to replead; its motion to dismiss NCUAB's direct claims is denied; and its motion to dismiss Commerzbank's claims on timeliness grounds is denied.

BACKGROUND²

A. Factual Background

Explanations of the typical formation process and structure of RMBS trusts abound in this District, and this Court will not here reinvent the wheel. Only a brief description is provided for context. See also BlackRock Allocation Target Shares v. Wells Fargo Bank, Nat'l Ass'n , No. 14 Civ. 9371 (KPF) (SN), 2017 WL 953550, at *1–3 (S.D.N.Y. Mar. 10, 2017) (describing the background of this consolidated action).

1. RMBS Trusts Generally

The Trusts in the instant action were originally securitized by residential mortgage loans, and created to facilitate the sale of those loans to investors. (BR Compl. ¶¶ 3–4).³ Such RMBS Trusts are formed according to the following process:

First, institutions known as "sponsors" or "sellers" acquire and pool residential mortgage loans. (Id. at ¶¶ 5, 43). Each sponsor also selects the loans' "servicer," "often an affiliate of the seller or originator, to collect payments on the loans." (Id. at ¶ 5). "Once the loans are originated, acquired and selected for securitization, the seller, through an affiliate called the depositor, creates a trust where the loans are deposited for the benefit of the Noteholders." (Id. ). Then the depositor "segments the cash flows and risks in the loan pool among different levels of investment or 'tranches.' " (Id. at ¶ 44). Typically, "cash flows from the loan pool are applied in order of seniority, going first to the most senior tranches[,] [and] ... any losses to the loan pool due to defaults, delinquencies, foreclosure or otherwise, are applied in reverse order of seniority." (Id. ). Next, "the depositor conveys the mortgage pool to the trust in exchange for the transfer of the RMBS to the depositor." (Id. at ¶ 45). "Finally, the depositor sells the RMBS to an underwriter, and provides the revenue from the sale to the seller. The underwriter markets and sells the RMBS to investors." (Id. at ¶ 46).

It is the sponsor-selected servicer's responsibility to collect loan principal and interest ("P&I") payments from the underlying borrowers. (BR Compl. ¶ 47). "After collection, the servicer sends the funds to the trust, which then makes payments to the noteholders. Mortgage delinquencies and defaults reduce the available P&I payments to be paid to the trust and passed through to investors." (Id. ). Therefore, "proper loan origination and underwriting of the mortgages underlying the RMBS, and proper and timely loan servicing and oversight" are of critical importance to investors, directly dictating their timely receipt of passed-through payments. (Id. at ¶ 48).

2. The Trusts, the Governing Agreements, and Defendant's Duties Thereunder

The 53 Trusts at issue here are of two kinds: Pooling and Service Agreement ("PSA") Trusts and Indenture Trusts.⁴ 41 of the 53 Trusts at issue in this case are PSA Trusts. (Def. Br. 5). PSA Trusts "are organized under New York [common] law." Ret. Bd. of Policemen's Annuity & Benefit Fund of City of Chi. v. Bank of N.Y. Mellon (hereinafter, " PABF III "), 775 F.3d 154, 156 (2d Cir. 2014). In a PSA trust, "[t]he right to receive trust income is parceled into certificates and sold to investors," who are called "certificateholders." Id. (quoting BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp. (hereinafter, " Ambac "), 673 F.3d 169, 173 (2d Cir. 2012) ). "The terms of the securitization trusts as well as the rights, duties, and obligations of the trustee, seller, and servicer are set forth in [governing agreements, frequently styled as PSAs]." Id. (alteration in original) (quotation mark omitted) (quoting Ambac , 673 F.3d at 173 ).

12 of the 53 Trusts at issue in this case are Indenture Trusts. (Def. Br. 5). Indenture Trusts are governed by their Trust Agreements, Mortgage Loan Purchase and Sale Agreements ("MPLAs"), and Sale and Service Agreements ("SSAs"). (See BR Compl. ¶ 49). See generally BlackRock Allocation Target Shares , 2017 WL 953550, at *1–3. As Defendant explains,

Indenture Trusts differ from PSA Trusts in that the Depositor conveys ownership of the pooled loans to the Issuer, which in turn issues its own notes pursuant to the indenture. Under the indenture, the Issuer collateralizes the notes by pledging the mortgage loans to the indenture trustee, which holds the pledge on behalf of the noteholders.

(Def. Br. 5).

The PSAs, Trust Agreements, MPLAs, and SSAs (together, the "Governing Agreements") are of critical importance to Defendant's motion; they dictate the scope of Defendant's duties to Plaintiffs. The duties of an RMBS trustee are "distinct from those of an 'ordinary trustee,' which might have duties extending well beyond the agreement." Phoenix Light SF Ltd. v. Bank of N.Y. Mellon (hereinafter, " PL/BNYM "), No. 14 Civ. 10104 (VEC), 2015 WL 5710645, at *2 (S.D.N.Y. Sept. 29, 2015) (citing AG Capital Funding Partners, L.P. v. State St. Bank & Tr. Co. , 11 N.Y.3d 146, 156, 866 N.Y.S.2d 578, 896 N.E.2d 61 (2008) ); see also Fixed Income Shares: Series M v. Citibank N.A. (hereinafter, " Fixed Income Shares "), 130 F.Supp.3d 842, 857–58 (S.D.N.Y. 2015). In contrast, "the duties of an indenture trustee ... [are] governed solely by the terms of the indenture[.]" Millennium Partners, L.P. v. U.S. Bank Nat'l Ass'n , No. 12 Civ. 7581 (HB), 2013 WL 1655990, at *3 (S.D.N.Y. Apr. 17, 2013) (quotation mark omitted), aff'd sub nom. Millennium Partners, L.P. v. Wells Fargo Bank, N.A. , 654 Fed.Appx. 507 (2d Cir. 2016) (summary order), and aff'd sub nom. Millennium Partners, L.P. v. Wells Fargo Bank, N.A. , 654 Fed.Appx. 507 (2d Cir. 2016) (summary order). "This is true regardless of whether the trust is an indenture trust or a PSA [trust]." Royal Park Invs. SA/NV v. HSBC Bank USA,...