Landesbank Baden-Württemberg v. RBS Holdings USA Inc.

• Decision Date: 09 April 2014
• Docket Number: No. 12 Civ. 5476PGG.,12 Civ. 5476PGG.
• Citation: 14 F.Supp.3d 488
• Parties: LANDESBANK BADEN–WÜRTTEMBERG, Georges Quay Funding I Limited, Spencerview Asset Management Limited and Caledonian Trust (Cayman) Limited, Acting in its Capacity as Trustee of the Leveraged Accrual Asset Management Sub–Trust, A Sub–Trust of the Panacea Trust, the Leveraged Accrual Asset Management II Sub–Trust, A Sub–Trust of the Panacea Trust, and the Leveraged Accrual Asset Management XI Sub–Trust, A Sub–Trust of the Pivot Master Trust, Plaintiffs, v. RBS HOLDINGS USA INC., RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.), RBS Acceptance Inc. (f/k/a Greenwich Capital Acceptance, Inc. ) and RBS Financial Products Inc. (f/k/a Greenwich Capital Financial Products, PNC), Defendants.
• Court: U.S. District Court — Southern District of New York

14 F.Supp.3d 488

LANDESBANK BADEN–WÜRTTEMBERG, Georges Quay Funding I Limited, Spencerview Asset Management Limited and Caledonian Trust (Cayman) Limited, Acting in its Capacity as Trustee of the Leveraged Accrual Asset Management Sub–Trust, A Sub–Trust of the Panacea Trust, the Leveraged Accrual Asset Management II Sub–Trust, A Sub–Trust of the Panacea Trust, and the Leveraged Accrual Asset Management XI Sub–Trust, A Sub–Trust of the Pivot Master Trust, Plaintiffs

v.RBS HOLDINGS USA INC., RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.), RBS Acceptance Inc. (f/k/a Greenwich Capital Acceptance, Inc. ) and RBS Financial Products Inc. (f/k/a Greenwich Capital Financial Products, PNC), Defendants.

No. 12 Civ. 5476PGG.

United States District Court, S.D. New York.

Signed April 9, 2014.

Felicia Yvonne Mann, Katherine Rose Ryan, Corban Smith Rhodes, David J. Goldsmith, Joel H. Bernstein, Mark S. Arisohn, Martis Ann Alex, Labaton Sucharow, LLP, New York, NY, for Plaintiffs.

Christopher P. Malloy, Jay B. Kasner, Scott D. Musoff, Shaud Gerard Tavakoli, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants.

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, District Judge.

This action arises from Plaintiffs' investment in residential mortgage-backed securities that were issued or underwritten by RBS Holdings USA Inc., RBS Securities Inc., RBS Acceptance, Inc., and RBS Financial Products Inc. (collectively, the “Defendants” or “RBS”). Defendants have moved to dismiss the consolidated complaint (the “Complaint”) pursuant to Fed.R.Civ.P. 12(b)(1) and (6), and to strike certain paragraphs of the Complaint pursuant to Fed.R.Civ.P. 12(f). (Dkt. No. 11) On March 31, 2014, this Court issued and order granting Defendants' motion in part, and denying the motion in part. The purpose of this opinion is to explain the Court's reasoning.

BACKGROUND¹

I. MORTGAGE SECURITIZATION

Residential mortgage-backed securities (“RMBS”) are financial products collateralized by residential mortgages. Securitization is the process through which thousands of individual mortgages are pooled together into discrete trusts, which then issue securities to investors in the form of certificates. (Cmplt. (Dkt. No. 6) ¶ 34) A trustee is appointed to oversee the management of each trust, which involves, among other things, distributing revenue payments to the holders of trust certificates. (Id. ) The source of this revenue is the monthly payments made by borrowers whose mortgages are held by the trust. (Id. )

The RMBS process begins with lending institutions, or “originators,” that make home loans to consumers that are secured by mortgages. (Id. ¶ 35) In an effort to ensure that borrowers will be able to repay their loans, originators employ certain underwriting guidelines, or metrics, that they use to evaluate borrowers' creditworthiness. (Id. ¶ 47) A “sponsor” or “seller” of RMBS—usually an affiliate of an investment bank—purchases the mortgages in bulk from one or more originators. (Id. ¶ 35) Frequently, the sponsor provides “warehouse” lines of credit to originators to facilitate lending. (Id. ) The sponsor or seller then pools thousands of the mortgage loans together and transfers them to a “depositor”—usually another affiliate of the same investment bank. (Id. ¶ 36) The sponsor and depositor are both considered to be an “issuer” of the RMBS. (Id. )

The issuer typically re-underwrites the loans made by the originators; in other words, it conducts an independent assessment of the individual borrower's ability to meet the mortgage obligations. This assessment involves reviewing the loan files provided by the originators, which contain the information gathered by originators in the lending process. (Id. ¶¶ 42–43) Issuers usually delegate this work to third-party due diligence vendors, such as Clayton Holdings, LLC (“Clayton”), which verify key information contained in the loan files, including the borrower's income, assets, credit history, and employment. (Id. ¶¶ 40, 43) After review, the due diligence vendor provides the issuer with a report of its findings. (Id. ¶ 44) This report assesses the quality of the loans with reference to the originator's stated underwriting guidelines, and identifies which loans comply with the guidelines and which do not. (Id. ) The issuer then uses this report to determine which loans to pool together in a securitization. (Id. ¶¶ 44–45)

Once the desired pool of loans is assembled, the depositor transfers the loans into an “issuing trust.” (Id. ¶ 37) It then securitizes the loan pool so that the rights to the cash flow from the loans can be sold to investors. The loan pool is securitized in “tranches,” each of which has a different risk profile. (Id. ) The most senior tranches are the least risky—they enjoy first priority in claiming payments from mortgagors. (Id. ) Conversely, the junior tranches are the last to receive their share of borrowers' repayments, and thus carry more risk and a higher return; they are also the first to be impacted by losses in the loan pool. (Id. ) Once this process is completed, the depositor passes the certificates to underwriters, who offer them for sale to investors. (Id. ¶ 38) Investors interested in purchasing the certificates are provided “Offering Materials,” prepared by the issuer, which make representations regarding important characteristics of the loan pool. (Id. ¶ 45) Offering Materials include the loan-to-value (LTV) and combined loan-to-value (CLTV) ratios of the mortgages, the originators' adherence to underwriting standards, and the owner-occupancy status of the mortgaged properties. (Id. ) The Offering Materials also certify that the mortgages and all necessary underlying documentation will be transferred to the trust. (Id. )

II. THE PARTIES

Plaintiff Landesbank Baden–Württemberg (“LBBW”) is a commercial bank incorporated in Germany. (Id. ¶ 19) LBBW's claims relate to certificates it acquired in connection with its 2008 acquisition of another German bank, Sachsen LB, and that bank's subsidiary, Sachsen LB Europe Plc. (I d. ¶ 20) Plaintiff Georges Quay Funding I Limited (“Georges Quay”) is a special purpose vehicle incorporated in Ireland and formerly managed by Sachsen LB Europe. It purchased and holds RMBS certificates issued by one or more of the Defendants. (Id. ¶ 24) Plaintiff Spencerview Asset Management Limited (“Spencerview”) is a special purpose vehicle set up by LBBW and incorporated in Ireland. LBBW transferred to Spencerview some of the certificates that it acquired from Sachsen LB Europe. (Id. ¶ 22) Plaintiff Caledonian Trust (Cayman) Limited (“Caledonian”) serves as Trustee for the following trusts: the Leveraged Accrual Asset Management Sub–Trust (“LAAM I”), a sub-trust of the Panacea Trust; the Leveraged Accrual Asset Management XI Sub–Trust (“LAAM II”), a sub-trust of the Panacea Trust; and the Leveraged Accrual Asset Management XI Sub–Trust (“LAAM XI”), a sub-trust of the Pivot Master Trust. (Id. ¶ 25) LBBW became sole investor in LAAM I, LAAM II, and LAAM XI upon its acquisition of Sachsen LB. (Id. )

Defendant RBS Holdings USA Inc. (“RBS Holdings”), RBS Securities Inc. (“RBS Securities”), RBS Acceptance Inc. (“RBS Acceptance”), and RBS Financial Products (“RBS Financial Products”), are Delaware corporations headquartered in Stamford, Connecticut. (Id. ¶¶ 27–30) RBS Holdings is a wholly owned subsidiary of The Royal Bank of Scotland Group PLC, and was known as Greenwich Capital Holdings, Inc. until April 2009. (Id. ¶ 27) RBS Holdings is the parent company of Defendants RBS Securities Inc., RBS Acceptance Inc., and RBS Financial Products Inc. (Id. ) RBS Securities is a registered broker-dealer and was an active underwriter of RMBS. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. (Id. ¶ 28) RBS Acceptance served as a depositor for RMBS securitizations and was known as Greenwich Capital Acceptance, Inc. until August 2007. (Id. ¶ 29) RBS Financial Products was the sponsor for certain securitizations at issue and was known as Greenwich Capital Financial Products, Inc. prior to April 2009. (Id. ¶ 30)

III. THE COMPLAINT

Plaintiffs allege various improprieties by Defendants in connection with the creation, offering, and sale of certain RMBS.

Plaintiffs assert against all Defendants causes of action for common law fraud, fraudulent concealment, and, in the alternative, negligent misrepresentation. (Id. ¶¶ 325–44, 351–358) Against Defendant RBS Securities only, Plaintiffs assert claims of aiding and abetting fraud or, alternatively, a claim of rescission based on mutual mistake. (Id. ¶ 345–350, 359–365)

In 2006 and 2007, Plaintiffs purchased more than $243 million worth of RMBS certificates from Defendants (the “Certificates”). (Id. ¶ 1) These Certificates were issued, marketed, and sold by Defendants in three separate RMBS securitizations: MHL 2006–1, HVMLT 2006–12, and HVMLT 2007–5 (collectively, the “Securitizations”). (Id. at 11, Table (“tbl.”) 1) Defendants acquired the loans underlying these Certificates from third-party mortgage originators (and non-parties to this action) Countrywide Homes Loans, Inc. (“Countrywide”), American Home Mortgage Corp. (“American Home”) and MortgageIT, Inc. (“MortgageIT”). (Id. ¶ 32) Plaintiffs allege numerous knowing misrepresentations of material fact made by Defendants through the Offering Materials for the Securitizations, which included registration statements, prospectuses, prospectus supplements, and other filings. (Id. ¶ 4) Each Securitization had its own set of Offering Materials.

The misrepresentations alleged by Plaintiffs relate to different stages of the securitization process. At the origination stage, Plaintiffs allege that Defendants failed to reveal in the Offering Materials that originators systematically abandoned their underwriting standards, thereby reducing the quality of loans in the securitization pool by making it less likely that borrowers would be able to repay. (Id. ¶¶ 75–81)...