Bank of New York Mellon (“BNYM”)

SDNY Denies Royal Park’s Request to Sample in RMBS Trustee Suit

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On November 18, Judge Gregory H. Woods of the Southern District of New York denied plaintiff investor Royal Park Investments SA/NV’s (Royal Park) motion to allow Royal Park to engage sampling experts to perform analyses on samples of loans to extrapolate information about the quality of those loans to all the loans in the trusts. Royal Park brought breach of contract, breach of the duty of trust, and violations of the Trust Indenture Act (TIA) claims against Bank of New York Mellon (BNYM) as trustee for loans included in five RMBS that allegedly breached the representations and warranties made in the governing agreements. Royal Park sought to use sampling to find a breach rate that Royal Park would argue that BNYM would have uncovered if it had reasonably investigated each trust at issue. Judge Woods found that Royal Park had not established, as a threshold matter, that BNYM had a duty to investigate the quality of the loans as a prudent trustee. Therefore, under FRCP 26, which limits discovery where “the burden or expense of the proposed discovery outweighs its likely benefit,” the extensive costs both parties would incur to perform sampling-related expert discovery was not proportional to the needs of the case. Though, unlike other decisions in lawsuits against RMBS trustees, this decision did not go so far as to conclude that Royal Park must prove its damages on a loan-by-loan basis. Rather, Judge Wood ruled that sampling would only be cost-effective if Royal Park proves BNYM had a duty to investigate the collateral and noted that because discovery is ongoing it may still put forth sufficient evidence to support its theory. Royal Park Decision.

S.D.N.Y. Grants in Part and Denies in Part Trustee Bank of New York Mellon’s Motion for Summary Judgment in Suit Brought by Certificateholder Phoenix Light

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On September 7, 2017, Judge Valerie Caproni in the United States District Court for the Southern District of New York granted the majority of RMBS trustee Bank of New York Mellon’s (“BNYM“) summary judgment motion and denied certificateholder Phoenix Light SF Ltd.’s (“Phoenix Light“) cross motion in its entirety in Phoenix Light SF Ltd. v. Bank of New York Mellon. Judge Caproni’s decision significantly curtailed Phoenix Light’s Complaint, which alleged various breaches of the trustee’s duties in connection with 21 RMBS trusts. For eight of the trusts at issue, Judge Caproni rejected Phoenix Light’s breach-of-contract claims alleging that BNYM failed to notify other parties upon discovery of breaches of representations and warranties due to lack of evidence that BNYM actually discovered any breaches. Judge Caproni also rejected the breach claims in connection with another eight trusts due to Phoenix Light’s failure to support the claims with evidence on a “loan-by-loan and trust-by-trust” basis. Only Phoenix Light’s breach-of-contract claims related to trusts where BNYM had notice of a specific breach or an event of default survived, as did Phoenix Light’s Trust Indenture Act claims for three trusts (because BNYM did not address the claims in its reply brief). The Court also granted BNYM’s motion with respect to Plaintiffs’ negligence, gross negligence, and negligent misrepresentation claims, finding that Plaintiffs’ tort-based arguments were duplicative of their breach-of-contract allegations.

RMBS Claims Against Bank of New York Mellon Remain in Federal Court

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On December 18, Judge William Pauley III of the U.S. District Court for the Southern District of New York denied Bank of New York Mellon’s motion to dismiss RMBS claims regarding fourteen trusts and one indenture trust for lack of subject matter jurisdiction.  With respect to the indenture trust, the Court held that it did have original jurisdiction over that claim because the federal Trust Indenture Act (“TIA”) implicitly creates a private right of action.  Judge Pauley exercised supplemental jurisdiction over plaintiffs’ Pooling and Servicing Agreement (“PSA”) claims for the remaining fourteen trusts.  Citing Judge Shira Scheindlin’s March 31, 2015 decision in BlackRock v. HSBC, Judge Pauley held that both the TIA and PSA claims share a common nucleus of operative fact because all of the trusts at issue in the case were sponsored by Countrywide affiliates and serviced by Countrywide Home Loan Servicing.  Judge Pauley dismissed any concern that allowing a single TIA claim to create jurisdiction over fourteen state law claims would “allow a federal tail to wag a state dog,” noting Countrywide’s imprint on every transaction as sponsor and servicer.  Judge Pauley also highlighted that the case has been pending in the S.D.N.Y. for over four years and to create parallel proceedings would be both inconvenient and against the interests of judicial economy. Decision.

RMBS Contract Claims Against Trustee Dismissed in Part

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On October 2, 2015, Justice Saliann Scarpulla of the New York Supreme Court issued an Opinion and Order partially granting Bank of New York Mellon’s (“BNYM”) Motion to Dismiss an RMBS action brought by Commerce Bank and other RMBS investors (together, the “Plaintiffs”).  Justice Scarpulla dismissed Plaintiffs’ breach of fiduciary duty claim as well as Plaintiffs’ breach of contract claim to the extent it relies on allegations that BNYM failed to provide Plaintiffs with notice of events of default under the transaction documents.  Justice Scarpulla stated that a Trustee’s obligation to notify certificateholders of an event of default under the relevant Pooling and Servicing Agreements arises only upon the receipt of written notice that a default has occurred, and that Plaintiffs failed to allege that BNYM had received such written notice.  Justice Scarpulla permitted claims that BNYM had failed to notify certificateholders of breaches of representations and warranties to proceed, but noted that Plaintiffs will ultimately be required to prove the Trustees’ actual discovery of those breaches on a loan-by-loan basis.  Justice Scarpulla also permitted breach of contract claims based on BNYM’s alleged failure to properly review and examine the loan files and accurately certify what it had received, as well as claims alleging negligence by BNYM.  Order.