United States District Court for the Southern District of New York

S.D.N.Y. Allows NCUA to Amend RMBS Suit Against Deutsche Bank and Grants in Part and Denies in Part Motion to Dismiss

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Judge Sidney H. Stein in the United States District Court for the Southern District of New York allowed the National Credit Union Administration (NCUA) to amend its complaint to add a new plaintiff to attempt to establish standing and proceed with its lawsuit against Deutsche Bank National Trust Company (DBNTC), while granting in part DBNTC’s motion to dismiss, which limited the proceeding to NCUA’s breach of contract claims.

Originally filed November 10, 2014 (as covered here), NCUA’s complaint alleges that DBNTC failed in its duties as trustee for 37 RMBS trusts, resulting in losses to those trusts and their investors, including five failed credit unions that were taken over by NCUA. Judge Stein allowed NCUA to amend its complaint to insert a different plaintiff—Graeme W. Bush, a specially-appointed trustee selected by Bank of New York Mellon—with direct standing for a variety of NCUA Guaranteed Note Trusts (NGN Trusts) that were created from the assets of five failed credit unions after the financial crisis. Because Bank of New York Mellon serves as the trustee for the NGN Trusts, NCUA does not have direct standing, and courts had not settled on whether NCUA had derivative standing on behalf of the NGN Trusts. The NCUA’s substitution followed a Second Circuit decision in a similar case affirming the dismissal of NCUA’s derivative claims for lack of standing. NCUA also successfully substituted itself as a direct plaintiff for NGN Trusts that have “unwound” and whose underlying certificates have been returned to NCUA.

After allowing the amendment, Judge Stein went on to grant in part and deny in part DBNTC’s motion to dismiss the amended complaint. While Judge Stein found that NCUA had stated a claim for breach of contract, he found that NCUA’s negligence and breach of fiduciary duty claims were barred by the economic loss doctrine. Further, Judge Stein stayed NCUA’s claims regarding DBNTC’s use of trust funds for indemnification, finding that DBNTC may be required to return the trust funds if there is a negligence finding against it, pursuant to the terms of the governing agreements. Opinion & Order.

Bank of New York Mellon’s Motion to Dismiss Denied in Part in Trustee RMBS Suit by Royal Park Investments

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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.

Judge Mostly Denies Deutsche Bank National Trust Co.’s Motion to Dismiss in RMBS Class Action

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On February 3, Judge Alison Nathan of the United States District Court for the Southern District of New York largely denied Deutsche Bank National Trust Co.’s (the “Trustee’s”) motion to dismiss in a proposed class action brought by Royal Park Investments SA/NV over $3.1 billion in losses in residential mortgage-backed securities.  Royal Park alleged that the Trustee failed to require the loan sellers to repurchase or substitute loans when it became aware that the underlying mortgages were defaulting.  Judge Nathan rejected the Trustee’s argument that Royal Park failed to make a written demand to initiate a repurchase action as required in the trusts’ pooling and service agreements, holding that the Trustee had an obligation to provide notice to the other parties when it independently discovered breaches of representations and warranties.  Judge Nathan did, however, dismiss Royal Park’s derivative claims on behalf of 10 trusts that held the loans because the suit was direct rather than derivative in nature.  Order.

RMBS Trustee Wins Partial Dismissal of Investor Claims

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On September 29, 2015, Judge Valerie Caproni of the United States District Court for the Southern District of New York partially granted RMBS trustee Bank of New York Mellon’s (“BNYM”) motion to dismiss claims brought by Phoenix Light SF Ltd., and certain other RMBS investors (together, the “Plaintiffs”).  Judge Caproni dismissed Plaintiffs’ breach of fiduciary duty claims as duplicative of Plaintiffs’ breach of contract claims, whose viability Judge Caproni also appeared to doubt in her decision, noting that “[t]he low bar at the motion to dismiss stage salvage[d] Plaintiffs’ claims for now.”  Judge Caproni explained that to survive summary judgment, Plaintiffs would need to demonstrate that BNYM possessed actual knowledge of events of default on a loan-by-loan basis.  Judge Caproni denied BNYM’s motion to dismiss Plaintiffs’ negligence, gross negligence, and negligent misrepresentation claims.  Order.

Court Denies Motion for Partial Summary Judgment in RMBS Repurchase Litigation

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On May 22, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York denied defendants WMC Mortgage, LLC and GE Mortgage Holding, L.L.C.’s motion for partial summary judgment to dismiss certain loan repurchase claims asserted by Bank of NewYork Mellon in its capacity as RMBS Trustee for GE-WMC Mortgage Securities Trust 2006-I.  Defendants argued that because certain loans in the trust had been foreclosed-upon and liquidated, the terms of the operative Pooling and Service Agreement barred recovery.  Judge Cote rejected this argument.  Following New York State courts construing prevailing New York law, Judge Cote held that money damages could be awarded in lieu of the PSA’s “sole remedy” of loan repurchase for a breaching loan where the granting of equitable relief appears to be impossible or impracticable.  The court held that the liquidation of a breaching loan presents such a circumstance, and permitted Bank of New York Mellon’s claims as to foreclosed-upon loans to go forward.  Order.

US Bank and Bank of America Prevail on Motions to Dismiss

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On May 18, 2015, Judge Katherine Forrest of the United States District Court for the Southern District of New York dismissed claims in two suits brought by private investors and the National Credit Union Association, respectively, against U.S. Bank and Bank of America in their capacity as trustees for RMBS trusts.  The lawsuits asserted several causes of action arising out of the trustees’ alleged failure to fulfill their contractual, statutory, and fiduciary obligations to hundreds of RMBS trusts.

In the first case, brought by a number of institutional investors led by BlackRock, Judge Forrest dismissed claims brought under the federal Trust Indenture Act as to 810 of the 843 trusts at issue because they were governed by Pooling and Servicing Agreements (“PSAs”), rather than indentures, and the TIA does not apply to PSA trusts.  She declined to exercise supplemental jurisdiction over the state law claims asserted in connection with the 810 PSA Trusts, holding that allowing 33 indenture trusts to pull in another 810 would allow “a federal tail to wag a state dog.”  For the remaining 33 indenture trusts, Judge Forrest dismissed the claims because the plaintiffs failed to make a demand on the proper party (the “Owner Trustee”) or allege any that such demand would have been futile.  Judge Forrest granted plaintiffs leave to amend as to the indenture trusts.  Order.

In the second case, brought by NCUA, Judge Forrest dismissed claims as to 74 out of the 82 Trusts at issue on standing grounds.  Judge Forrest held that the Amended Complaint failed to demonstrate that NCUA retained any right to sue when it re-securitized its certificates in the 74 trusts as part of the NCUA Guaranteed Note Program.  She rejected NCUA’s statutory standing argument, holding that 12 U.S.C. § 1787 does not authorize NCUA to sue on behalf of separate statutory trusts created to re-securitize the CCUs’ assets.  Additionally, Judge Forrest held that the PSAs did not allow third party beneficiary status to extend beyond direct certificateholders, meaning that NCUA no longer had standing once it ceased being a certificateholder following the re-securitization.  Order.

Court Enters $806 Million Judgment in FHFA v. Nomura

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On May 16, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York entered a judgment requiring Nomura and RBS to buy back, at a total cost of $806 million, seven RMBS certificates sold to Fannie Mae and Freddie Mac from 2005 to 2007.  The judgment stemmed from Judge Cote’s May 11, 2015 Opinion finding Nomura and RBS liable for violations of the Securities Act of 1933, the D.C. Securities Act, and the Virginia Securities Act.  For those certificates for which FHFA prevailed under multiple statutes, FHFA was permitted to, and did, elect the maximum available remedies.  Judge Cote also ordered that FHFA is entitled to post-judgment interest, reasonable attorneys’ fees, and costs.  Judgment.

Nomura Found Liable in RMBS Trial

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On May 11, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York found Nomura Holdings Inc. liable for inaccurately characterizing the mortgage loan collateral backing seven RMBS certificates it sold to Fannie Mae and Freddie Mac between 2005 and 2007.  The suit against Nomura is the last that remains of sixteen lawsuits originally filed against by FHFA against RMBS issuers and sellers alleging violations of Sections 12(a)(2) and 15 of the 1933 Securities Act and state securities laws.  Judge Cote’s decision followed a nearly 4-week bench trial that concluded on April 9, 2015.

In a 361-page decision, Judge Cote found, among other things, that 45% to 59% of the sample loans were materially defective insofar as they deviated from relevant underwriting guidelines, and that 27% of the sample loans were subject to inflated appraisals.  Judge Cote treated this as strong circumstantial evidence that the appraisers did not believe in the credibility of their appraisals at the time that they were made.  Additionally, Judge Cote found that inadequacies in credit ratings of the offered certificates were due to inaccurate loan tapes Nomura provided to the rating agencies.  Finally, Judge Cote found that Nomura’s due diligence practices were insufficient, and rejected Nomura’s argument that market conditions, and not the misrepresentations, caused the losses alleged.  Judge Cote did not specify the amount of damages and asked the parties to submit a proposed judgment by May 15, 2015.  Opinion and Order.

Court Dismisses FDIC’s Amended Complaint for Untimeliness

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On March 24, Judge Laura Taylor Swain of the United States District Court for the Southern District of New York granted Defendants’ motion to dismiss an action filed by the FDIC, as receiver for two failed banks, related to RMBS certificates that the banks purchased.  The court held the FDIC’s federal Securities Act claims to be untimely because they were filed outside of the statute of repose period provided by Section 13 of the Securities Act.  The court further held that the “Extender Provision” of FIRREA does not preempt the statute of repose set forth in Section 13.  The court held that the Extender Provision was indistinguishable from a similar provision in CERCLA that the Supreme Court recently held, in CTS Corp. v. Waldburger, did not preempt statutes of repose.  Order.

US Bank Cannot Revive Majority of MBS Suit Against Citigroup

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U.S. Bank NA v. Citigroup Global Markets Realty Corp., No. 1:13-cv-06989 (S.D.N.Y. Oct. 1, 2013)

On March 16, 2015, Judge George B. Daniels of the United States District Court for the Southern District of New York denied the majority of claims in U.S. Bank’s attempt to refile an amended complaint against Citigroup Global Markets Realty Corp. and CitiMortgage, Inc.  U.S. Bank, as RMBS trustee, had sued Citigroup in October 2013, alleging that it breached representations and warranties in a $832 million RMBS deal.  In November 2014, Judge Daniels dismissed most of the claims, but permitted leave to amend.  In addressing U.S. Bank’s proposed amendments, Judge Daniels first held that the cause of action for breach of representations and warranties was untimely as to certain loans under the six-year statute of limitations.  Next, it dismissed U.S. Bank’s second claim that Citigroup independently discovered defects in the loan pool through due diligence or government investigations, because U.S. Bank failed to allege non-speculative facts plausibly showing such discovery.  These rulings were substantially similar to those set forth in the November 2014 order.  Finally, Judge Daniels permitted U.S. Bank’s third cause of action to proceed, holding that the plaintiff sufficiently pleaded that CitiMortgage discovered breaches of representations and warranties during its servicing of the securitized loans, and did not fulfill its contractual duties to notify the parties of the breaches and to enforce Citigroup’s cure or repurchase obligation.  Order.