Triaxx Prime CDO 2006-1 Ltd. v. U.S. Bank

1

TRIAXX PRIME CDO 2006-1 LTD., et al., Plaintiffs, v. U.S. BANK NATIONAL ASSOCIATION, Defendant.

No. 21-CV-11019 (BCM)

United States District Court, S.D. New York

March 31, 2024

OPINION AND ORDER

BARBARA MOSES, United States Magistrate Judge.

Six years ago, in Triaxx Prime CDO 2006-1, Ltd. v. Bank of New York Mellon, 2018 WL 1417850 (S.D.N.Y. Mar. 8, 2018) (Triaxx II), aff'd sub nom. Triaxx Prime CDO 2006-1, Ltd. v. U.S. Bank Nat'l Ass'n, 741 Fed.Appx. 857 (2d Cir. 2018) (Triaxx III), Judge Buchwald observed that this District was "awash in suits seeking redress for and attempting to apportion liability for" the losses incurred by residential mortgage-backed securities (RMBS), and collateralized debt obligations (CDOs) backed by RMBS, in the wake of the 2008-09 financial crisis. Triaxx II, at *1.

This case, filed in state court in late 2021, is yet another such suit. In fact, as discussed in more detail below plaintiffs' current claims, which seek damages from defendant U.S. Bank National Association (U.S. Bank) in its capacity as the Trustee of three related RMBS-backed CDOs are based on the same core factual allegations, and rely on the same theories of wrongdoing, as the equitable claim they brought against the same defendant - and lost - in Triaxx II. Although plaintiffs have narrowly escaped the bar of collateral estoppel (because Judge Buchwald rested her dismissal of the equitable claim on grounds not applicable to damages claims), this case must also be dismissed, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief may be granted.

I. BACKGROUND

A. The Parties and the Triaxx CDOs

Plaintiffs Triaxx Prime CDO 2006-1 Ltd., Triaxx Prime CDO 2006-2, Ltd., and Triaxx Prime CDO 2007-1, Ltd. (collectively, the Issuers) are special-purpose vehicles, incorporated in the Cayman Islands, formed for the purpose of issuing notes (the Notes or CDO Notes) in "three eponymous CDOs" known as Triaxx Prime CDO 2006-1, Triaxx Prime CDO 2006-2, and Triaxx Prime CDO 2007-1 (collectively the CDOs or the Triaxx CDOs). See Compl. (Dkt. 11) ¶¶ 4, 11, 18; Triaxx II, 2018 WL 1417850, at *1. Plaintiff Triaxx Asset Management, LLC (TAM or the Collateral Manager) has served at all relevant times as the Collateral Manager of the Triaxx CDOs. Compl. ¶ 12. Defendant U.S. Bank (the Trustee or CDO Trustee) has served at all relevant times as the Trustee of all three Triaxx CDOs. Id. ¶¶ 1, 13.

When the Triaxx CDOs were formed, in 2006 and 2007, the Issuers "purchased 144 RMBS having a notional value of approximately $11.74 billion," collateralized by pools of residential mortgages, and issued the Notes to investors (the Noteholders or CDO Noteholders), collateralized by the RMBS. Compl. ¶¶ 4, 18. The RMBS are evidenced by certificates (Certificates) entitling their holders to "the cash flows associated with the [underlying] mortgage loans." Id. ¶ 28. The CDO Notes, in turn, entitle the Noteholders to the cash flows generated by the RMBS. Id. ¶ 24.^[1] The Triaxx CDOs are governed by three substantially identical indentures (the Indentures), each running between the relevant Issuer and the Trustee, Compl. ¶ 19; Lorenzo Decl. (Dkt. 18), Exs. A-C, and three substantially identical Collateral Management Agreements (the CMAs), each running between the relevant Issuer and the Collateral Manager. Compl. ¶ 20; Lorenzo Decl. Exs. D-F.

Under the Indentures, the Issuers are not permitted to engage in any business "other than issuing and selling the Notes." Indentures (Ind.) § 7.12(a). To that end, pursuant to the Granting Clause of each Indenture, the Issuers granted their RMBS Certificates, and other Collateral underlying the Notes,^[2] to the CDO Trustee, "for the benefit and security of" the CDO Noteholders and other secured parties, thereby constituting and irrevocably appointing the CDO Trustee their "true and lawful attorney," with:

full power (in the name of the Issuer or otherwise), to exercise all rights of the Issuer with respect to the Collateral held for the benefit and security of the Secured Parties and to ask, require, demand, receive, settle, compromise, compound and give acquittance for any and all moneys and claims for moneys due and to become due under or arising out of any of the Collateral held for the benefit and security of the Secured Parties, to endorse any checks or other instruments or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Trustee may deem to be necessary or advisable in the premises.

Ind. at 2. The Granting Clause continues:

The power of attorney granted pursuant to this Indenture and all authority hereby conferred are granted and conferred solely to protect the Trustee's interest in the Collateral held for the benefit and security of the Secured Parties and shall not impose any duty upon the Trustee to exercise any power.

Id.; see also id. § 6.3(m) ("the permissive right of the Trustee to take or refrain from taking any actions enumerated in this Indenture shall not be construed as a duty"). Although the Indentures impose no general duty on the CDO Trustee to exercise any of its powers, a "Majority of the Controlling Class" of the CDO Noteholders "have the right to direct the Trustee in the conduct of any proceeding for any remedy available to the Trustee for exercising any trust, right, remedy, or power conferred on the Trustee," provided, among other things, that the Trustee is afforded sufficient indemnity. Ind. § 5.13.^[3]

TAM, as Collateral Manager, is responsible for "the day-to-day management of the Collateral." Compl. ¶ 26. It was engaged by the Issuers, pursuant to the CMAs, as their "true and lawful agent and attorney-in-fact, with full power of substitution and full authority in the Issuer's name, place, and stead" to perform various enumerated duties with respect to the Collateral. CMAs at 1. Although TAM is not a signatory to the Indentures, it must, "subject to and in accordance with the Indenture and this [CMA], take on behalf of the Issuer or direct the Trustee to take" certain actions with respect to the Collateral, id. § 2(d), including exercising the Issuers' rights with respect to that Collateral or "or tak[ing] any other action consistent with the terms of the Indenture which the Collateral Manager reasonably believes to be in the best interests of the Noteholders." Id. § 2(d)(xi); see also id. § 9 ("The Collateral Manager shall perform its duties hereunder in accordance with the terms of this Agreement and the terms of the Indenture applicable to it.").

The RMBS underlying the Triaxx CDOs were themselves issued by trusts (the RMBS Trusts), which are "governed by their own set of governing agreements," typically called pooling and servicing agreements (PSAs), and have their own trustees (the RMBS Trustees). Compl. ¶¶ 1, 28.^[4] In addition to serving as the CDO Trustee for the Triaxx CDOs, U.S. Bank serves as RMBS Trustee for "at least 24" of the RMBS Trusts underlying the Triaxx CDOs. Compl. ¶¶ 5, 28.

Plaintiffs allege that the RMBS Trustees owed the holders of the RMBS Certificates (Certificateholders) "certain contractual and common law duties with respect to the mortgage loans held by the [RMBS] Trusts." Compl. ¶ 29. Among other things, plaintiffs assert, the RMBS Trustees were required, by the PSAs governing the RMBS Trusts, to "provide notice of breaches of representations and warranties" by the sponsors and originators concerning the quality and characteristics of the loans sold to the trusts; to "enforce" the obligations of the originators and sponsors "to repurchase loans that breached representation and warranty provisions or that were missing required documentation"; and to "address" defaults by the servicers, who were supposed to engage in "prudent servicing and loss mitigation practices," and by the master servicers, who were supposed to "supervise the servicers." Id.

B. Triaxx I, II, and III

The 2008-09 financial crisis revealed that "many of the loans collateralizing RMBS . . . were not accurately represented and/or were not properly serviced." Compl. ¶ 4. This in turn led to a wave of RMBS-related lawsuits, many of them alleging that "the trustees and servicers of those RMBS failed to perform their contractual and extra-contractual duties for the benefit of the RMBS [Certificateholders]." Id. Two of those lawsuits - one begun in this District and one in Florida - involved the Triaxx CDOs and, according to U.S, Bank, foreclose the present action. The Court summarizes those actions, and the resulting decisions, in some detail.

1. Triaxx I

In 2016, the Issuers sued two RMBS Trustees - U.S. Bank and Bank of New York Mellon (BNYM) - for breach of contract and breach of fiduciary duty. See Triaxx Prime CDO 2006-1, Ltd. v. Bank of New York Mellon, 2017 WL 1103033, *1 (S.D.N.Y. Mar. 21, 2017) (Triaxx I). The Issuers alleged that the RMBS Trustees breached various duties under the relevant PSAs, including the duty to "provide notice" to "all parties" of breaches by the sponsors (or "sellers") of their representations and warranties concerning the "quality and characteristics" of the mortgages underlying the RMBS, and the duty to "effect seller obligations to cure, substitute, or repurchase" nonconforming loans. Id. at *2. According to the Issuers, the defendant RMBS Trustees were "liable to them for $371 million" due to their beaches of these duties. Id.

Judge Buchwald dismissed the contract claims on standing grounds holding that when the Issuers transferred the RMBS to the CDO Trustee under the Granting Clause of the Indentures, they also transferred the right to bring contract claims founded on the underlying PSAs. Triaxx I, 2017 WL 1103033, at *3. The Collateral Manager...