On July 5, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed the partial grant of Bank of New York Mellon’s (“BNY”) motion to dismiss certain claims brought by RMBS investors arising from BNY’s alleged failure to perform its duties as RMBS trustee. While the court affirmed partial denial of BNY’s motion to dismiss the negligence claims as duplicative of the contract claims, it also affirmed that portion of the trial court’s order granting BNY’s motion to dismiss portions of those negligence claims to the extent they are predicated on the incorrect assumption that a trustee owes a duty to (i) monitor other PSA counterparties’ performance of basic non-ministerial tasks; and/or (ii) put its “nose to the source” to uncover improper counterparty conduct. The First Department also held that the trial court should have dismissed contract claims against BNY alleging a breach of the alleged duty to notify PSA counterparties of loan seller representation and warranty breaches, as they had not been sufficiently alleged. It also affirmed dismissal of all breach of fiduciary duty claims. Decision.
Bank of New York Mellon
New York Appellate Court Holds Repurchase Demand Analysis Is Not Protected Work Product
On June 23, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York decided an appeal in an action brought by Bank of New York Mellon, as RMBS Trustee, against WMC Mortgage and JP Morgan. In its decision, the Court held that originator WMC’s repurchase demand analysis is not protected work product because it was not primarily prepared in anticipation of litigation and was a regular part of the loan originator’s business. The court therefore affirmed the decision of the trial court, Justice Shirley Werner Kornreich, ordering WMC Mortgage to produce the repurchase demand analysis. Order.
Federal Court Permits BlackRock’s Breach of Contract Claims to Proceed against BNY Mellon
On March 28, Judge George Daniels of the U.S. District Court for the Southern District of New York granted in part and denied in part Bank of New York Mellon’s motion to dismiss an action brought by BlackRock. BlackRock, as a holder in numerous trusts for which BNY Mellon serves as trustee, alleges that BNY Mellon failed to (i) provide notice of breaches of seller representations and warranties, (ii) enforce seller repurchase obligations, (iii) provide notice of events of default, and (iv) act prudently upon learning of events of default. The court exercised supplemental jurisdiction over state law claims concerning 243 trusts, holding that the claims arise out of the same operative facts as those of the federal claims concerning 17 other trusts. The court permitted BlackRock’s breach of contract claims to proceed, but dismissed fiduciary duty claims as duplicative of the contract claims. Judge Daniels also dismissed Trust Indenture Act claims in light of the Second Circuit’s holding that the TIA does not apply to the trusts like those at issue, and dismissed negligence and conflict of interest claims for failure to adequately state a claim. Decision.
Bank of New York Mellon’s Motion to Dismiss Denied in Part in Trustee RMBS Suit by Royal Park Investments
On March 2, Judge Gregory H. Woods of the United States District Court for the Southern District of New York issued an Opinion and Order denying in part and granting in part the Bank of New York Mellon’s (“BNYM”) motion to dismiss an action brought by Royal Park Investments SA/NV (“Royal Park”) claiming damages of $1.12 billion arising from failures by BNYM, in its capacity as trustee, to protect the interests of investors in certain RMBS trusts. Judge Woods denied arguments by BNYM that Royal Park had failed to plausibly allege BNYM’s discovery and knowledge of (i) breaches of representations and warranties in securitized loans; and (ii) events of defaults committed by servicers of the relevant trusts. Judge Woods did, however, dismiss Royal Park’s claims against the bank for breach of trust, a violation of section 315(a) of the Trust Indenture Act, and the Streit Act. Opinion and Order.
FDIC Sues BNY Mellon For Alleged Failure As Trustee of RMBS
On August 19, 2015, the Federal Deposit Insurance Corp., acting as receiver for Guaranty Bank, filed suit against Bank of New York Mellon Corp. in New York federal court, alleging that BNY breached its duties as trustee of 12 RMBS trusts that issued approximately $2 billion in certificates. The trusts were sponsored by Countrywide Home Loans and EMC Mortgage Corp. The FDIC alleges that BNY breached its contractual obligations by failing to provide notice of representation and warranty violations and demand Countrywide and EMC to replace or buy back the noncompliant loans, provided false regulatory certifications and remittance reports, and failed to take possession of complete mortgage files. The FDIC asserts claims for breach of contract, the federal Trust Indenture Act, and the New York Streit Act. Complaint.
Second Circuit Holds that Trust Indenture Act Does Not Apply and Dismisses RMBS Investor Claims Against BNY Mellon
On December 23, the United States Court of Appeals for the Second Circuit dismissed claims against Bank of New York Mellon, as trustee, by four pension funds in a putative class action relating to 530 Countrywide RMBS trusts worth $424 billion. The Second Circuit affirmed the district court’s holding that the plaintiffs did not have standing to assert claims related to certificates issued by trusts in which no plaintiff ever invested. The court further held that the Trust Indenture Act (TIA) does not apply to the trusts because they are “certificate[s] of interest or participation in two or more securities having substantially different rights and privileges” and therefore within an exemption to the TIA. As a result, the court reversed the district court’s decision denying the bank’s motion to dismiss claims under the TIA. Decision.
N.Y. Federal Court Allows RMBS Trustee Suit Against GE Mortgage to Proceed
On January 14, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York denied a motion for judgment on the pleadings in an action brought by the Bank of New York Mellon as Trustee for GE-WMC Mortgage Securities Trust 2006-1 against GE Mortgage and WMC Mortgage. Judge Forrest rejected the argument that, as a matter of law, the Pooling and Servicing Agreement (PSA) limited the Trustee’s remedies for breaches of representations and warranties to WMC Mortgage only, because this interpretation conflicted with the contemporaneous agreements signed between the parties as well as the PSA itself. Instead, the Court held that the PSA was ambiguous regarding which entities the Trustee could assert claims against, and accordingly the Trustee’s action against GE Mortgage was not barred by the agreement. Decision.
Walnut Place LLC Withdraws Opposition to $8.5 Billion Bank of America Settlement
On July 23, Judge Barbara Kapnick of the Supreme Court of the State of New York approved the withdrawal of Walnut Place LLP’s opposition to Bank of America’s $8.5 billion settlement with holders of Countrywide RMBS. In its motion to intervene in the settlement, Walnut Place alleged that the trustee, Bank of New York Mellon, had not properly disclosed the settlement negotiations or kept the investors informed, and that the investors who took the lead in negotiating the settlement were improperly biased due to “substantial ongoing business relationships” with Bank of America. Decision.
Federal Court Dismisses Claims Against Bank of New York Mellon
On April 3, 2012, Judge William H. Pauley of the U.S. District Court for the Southern District of New York dismissed with prejudice nearly all claims against Bank of New York Mellon, as trustee, by four plaintiff pension funds in a putative class action relating to 530 Countrywide RMBS trusts worth $424 billion. Plaintiffs allege that Bank of New York Mellon violated the Trust Indenture Act and breached its contractual and fiduciary duties by failing to remedy the allegedly inadequate servicing of the mortgages underlying the trusts. The court found the plaintiffs lacked standing to bring claims under the Trustee Indenture Act relating to trusts in which they did not actually invest. As a result of the decision, only 26 trusts worth $30 billion remain in the litigation. Decision.
Walnut Place Files Derivative Suit Against Bank of New York Mellon and Countrywide in Response to Recent Settlement
On August 2, 2011, several investment entities under the name Walnut Place (“Plaintiffs”) filed a derivative complaint against Countrywide Home Loans on behalf of Bank of New York Mellon (“BNYM”) in New York State Court. Plaintiffs allege that Countrywide breached representations and warranties concerning the mortgage loans underlying Countrywide RMBS that Plaintiffs purchased. According to the Complaint, upon realization of the breach, Plaintiffs demanded in May 2011 that Countrywide repurchase the loans, which Countrywide allegedly refused to do. Plaintiffs are now suing Countrywide on behalf of BNYM, the Trustee to the RMBS that Plaintiffs purchased, to enforce the rights of the Trust on behalf of themselves and other RMBS certificateholders. According to Plaintiffs, because Countrywide and BNYM have since announced a proposed settlement that would extinguish Plaintiffs’ claims against Countrywide, it is futile to expect BNYM to sue Countrywide to enforce its repurchase obligations and Plaintiffs therefore bring their suit in a derivative action. Complaint.