Royal Park Invs. Sa/NV v. Deutsche Bank Nat'l Trust Co.

ROYAL PARK INVESTMENTS SA/NV, Plaintiff, v. DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee, Defendant.

14-CV-04394 (AJN) (BCM)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 28, 2018

MEMORANDUM AND ORDER

BARBARA MOSES, United States Magistrate Judge.

Plaintiff Royal Park Investments SA/NV (RPI) is the holder of thirteen residential mortgage-backed securities (RMBS) certificates (Certificates) that derive their value from pools of mortgage loans held in ten RMBS trusts (Trusts) for which defendant Deutsche Bank National Trust Company (Deutsche Bank) serves as the trustee (Trustee). See Compl. (Dkt. No. 1) ¶ 2.¹ In the aggregate, the Trusts hold approximately 50,000 loans. See Chippey Decl. dated July 17, 2017 (Dkt. No. 425), ¶ 16; Transcript of April 3, 2018 Oral Argument (Tr.) (Dkt. No. 617) at 24:15. Each Trust is governed by a multi-party contract, typically called a Pooling and Service Agreement (PSA), which outlines the Trustee's obligations with respect to that Trust and its constituent loans.²In this action, RPI alleges that Deutsche Bank breached its contractual obligations under the PSAs - principally by failing to insist that other parties to the PSAs honor their own contractual obligations - thereby diminishing the value of RPI's Certificates. Certificates are "bond-like instruments," Compl. ¶ 35, entitling the holder to a portion of the cash flows generated by the mortgage loans underlying the issuing Trust. Id. ¶ 42.

Now before the Court is plaintiff's Motion Regarding Sampling-Related Expert Discovery, (Dkt. No. 453), in which RPI seeks an order "allowing the parties to conduct sampling-related expert discovery." Pl. Mot. at 1. In its accompanying memorandum of law (Pl. Mem.) (Dkt. No. 474), RPI explains that it wishes to engage one or more as-yet unidentified experts to use "reliable statistical sampling and extrapolation methods as part of its proof of liability and damages across the thousands of loans backing the . . . Trusts." Pl. Mem. at 1. For the reasons that follow, the motion is DENIED.

I. BACKGROUND

A. Procedural History

Plaintiff filed this action on June 18, 2014, asserting direct claims on behalf of itself and a putative class of "all RMBS investors" in the Trusts, as well as derivative claims on behalf of the Trusts themselves. Compl. ¶¶ 2-3, 189-99. On February 3, 2016, the Honorable Alison J. Nathan, United States District Judge, dismissed the derivative claims, and RPI withdrew its claims under the Trust Indenture Act. See Royal Park Investments SA/NV v. Deutsche Bank Nat'l Tr. Co., 2016 WL 439020 (S.D.N.Y. Feb. 3, 2016) (2/3/16 Mem. & Order) (Dkt. No. 100).³ Plaintiff's survivingclaims allege that Deutsche Bank breached its contractual obligations under the PSAs and its common-law duty to avoid conflicts of interest. See Compl. ¶¶ 206-219.

On August 18, 2017 - shortly before the then-scheduled close of fact discovery - the parties advised me that they "may wish to litigate whether and/or to what extent sampling will be permitted in this case," and jointly requested a schedule under which they would brief that question, and the Court would decide it, prior to the preparation of expert reports and the completion of expert discovery. See Joint Ltr. dated Aug. 18, 2017 (Dkt. No. 440), at 1. By Order dated August 25, 2017 (Dkt. No. 443), I directed "the party seeking a ruling" on sampling to "file the appropriate motion" by September 8, 2017. Id. at 3.

As it turned out, the moving party was plaintiff RPI, which styled its motion as one seeking permission to conduct "sampling related expert discovery." RPI's moving brief, and the accompanying Declaration of Lucas Olts, dated September 8, 2017 (Olts Decl.) (Dkt. No. 475), were filed (in redacted form) on September 18, 2017. Deutsche Bank filed its opposition memorandum (Def. Opp. Mem.) (Dkt. No. 490), accompanied by the Biron Declaration, on October 16, 2017. Plaintiff filed its reply memorandum (Pl. Reply Mem.) (Dkt. 496) on October 30, 2017. Thereafter, from November 17, 2017 through March 12, 2018, the parties filed a series of follow-up letter-briefs concerning supplemental authority and related matters. (Dkt. Nos. 509, 516, 542, 559.) Throughout this period (and beyond) the parties also filed a variety of other discovery motions, most of which have now been resolved. (See Dkt. Nos. 462, 478, 524, 526, 544, 551, 621, 626, 630, 644, and 645.)

On March 29, 2018, the District Judge denied plaintiff's motion for class certification. See Royal Park Investments SA/NV v. Deutsche Bank Nat'l Tr. Co., 2018 WL 1750595 (S.D.N.Y. Apr.11, 2018) (3/29/18 Op. & Order) (Dkt. No. 607).⁴ On April 3, 2018, I heard oral argument on the sampling motion. See Tr. at 8-61.

B. The PSAs

The Court assumes familiarity with the factual background in this matter,⁵ but briefly reviews the relevant terms of the governing PSAs.

1. R&W Breaches

All of the PSAs required the originators, sponsors, sellers, and/or other warrantors of the loans collateralizing the Certificates (collectively the Warrantors) to make detailed representations and warranties (R&Ws) regarding the credit quality and other characteristics of those loans and the accuracy of the information they provided concerning each loan. Compl. ¶¶ 7, 38, 47; see also, e.g., FFML 2006-FF9 PSA § 2.03 & Sched. IV.⁶ "[O]ver fifty different Warrantors" made such R&Ws concerning the 50,000 loans in the Trusts. Chippey Decl. ¶ 16.

Under the PSAs, the Trustee is ordinarily entitled to rely "conclusively" on the R&Ws, and is not required to investigate their accuracy or reliability. See FFML 2006-FF9 PSA §§ 8.01(a), 8.02(d). Nor is the Trustee required to undertake any duties other than those "specifically set forth" in the contract. Id. § 8.01; see also id. § 8.01(a) ("no implied covenants or obligations shall be read into this Agreement against the Trustee").

However, the Trustee must take certain measures upon "discovery" or receipt of written notice of an R&W breach that "materially and adversely affects the value" of the relevant mortgage loan or the interests of the Certificate-holders in that loan. See FFML 2006-FF9 PSA §§ 2.03(c)-(d). In some Trusts, breaches of certain specified R&Ws, as well as breaches that cause the loan not to constitute a "qualified mortgage" under § 860G(a)(3) of the Internal Revenue Code, will be "deemed automatically to materially and adversely affect the value of such Mortgage Loan and the interests of the Trustee and Certificate-holders in such Mortgage Loan, thus requiring the repurchase or substitution of such Mortgage Loan by the Mortgage Loan Seller." FFML 2006-FF9 PSA § 2.03(d).⁷ In the GSR 2007-AR2 Trust, it is "understood" that a breach "shall be deemed to have materially and adversely affected the value of the related Mortgage Loan . . . if the Trust incurs a loss as a result of such defect or breach." GSR 2007-AR2 PSA § 2.03(b), (c), (d). Otherwise, however, the PSAs do not appear to contain any guidelines for determining whether anR&W breach may be deemed to have "materially and adversely affect[ed]" the value of the relevant loan or the interests of the Trustee and Certificate-holders therein.

When the Trustee discovers or receives written notice of a breach meeting the "material and adverse" standard, it must "promptly provide notice of the breach to the offending Warrantor and the other parties" to the PSA. Compl. ¶ 8; see also FFML 2006-FF9 PSA § 2.03(c). Thereafter, if the breach is not timely cured, the Trustee must "enforce the breaching Warrantor's obligation to either substitute or repurchase" the defective loan, sometimes known as a "put-back" remedy. Compl. ¶ 8; see also FFML 2006-FF9 PSA § 2.03(d). The "Repurchase Price" for a put-back loan is calculated based on the unpaid principal balance of the defective loan, "as of the date of repurchase," together with other factors specific to that loan, including the Trustee's expenses incurred in enforcing the repurchase obligation as to that loan. FFML 2006-FF9 PSA at 44.

In addition, some of the PSAs require the Trustee to act upon "discovery" or receipt of written notice of a "materially defective" document in - or a document missing from - the mortgage file delivered to the Trustee as to each loan. See, e.g., HVMLT 2006-8 PSA §§ 2.03(a)-(b). As in the case of an R&W breach, if the defect (known as a Document Exception) "materially adversely affects the value of that Mortgage Loan or the interest therein of the Certificate-holders," the Trustee must "promptly notify" the responsible party of the defective or missing document and thereafter - if the deficiency is not timely cured - must "enforce such Originator's obligation . . . and cause such [originator or seller] to repurchase that Mortgage Loan from the Trust . . ." Id.⁸

The PSAs also contain "sole remedy" provisions, typically stating that the breaching Warrantor's obligation to "cure, repurchase, or substitute any Mortgage Loan as to which a breach of a representation and warranty has occurred and is continuing . . . shall constitute the soleremedies against such Person respecting such breach available to Certificate-holders . . . or the Trustee on their behalf." FFML 2006-FF9 PSA §§ 2.03(j), (k).

2. Events of Default

The PSAs further require the Trustee to take certain steps when it acquires actual knowledge of an event of default (EOD) by a Master Servicer or (in some Trusts) any Servicer; that is, misconduct by the entities responsible for "ensur[ing] the legal and proper servicing of the Mortgage Loans." Compl. ¶ 11; see also id. ¶¶ 52-58. Among other things, the Trustee must notify the offending Servicer or Master Servicer of the EOD, demand that it cure the default, and then - if the EOD remains uncured - "act as a quasi-fiduciary for [the Certificate-holders] and protect them as if Deutsche Bank is protecting its own interests." Id. ¶ 13; see FFML 2006-FF9 PSA § 8.01 ("In case a Master Servicer Event of Default has occurred...