Ambac Assurance Corp. v. U.S. Bank Nat'l Ass'n

• Decision Date: 29 June 2018
• Docket Number: 17cv2614
• Citation: 328 F.Supp.3d 141
• Parties: AMBAC ASSURANCE CORPORATION, Plaintiff, v. U.S. BANK NATIONAL ASSOCIATION, Defendant.
• Court: U.S. District Court — Southern District of New York

328 F.Supp.3d 141

AMBAC ASSURANCE CORPORATION, Plaintiff,

v.U.S. BANK NATIONAL ASSOCIATION, Defendant.

17cv2614

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

Signed June 29, 2018

Stephanie Ann Teplin, William Robert Fair, Peter W. Tomlinson, Patterson, Belknap, Webb & Tyler LLP, New York, NY, for Plaintiff.

David F. Adler, Amanda Rose Parker, Emmett E. Robinson, Louis A. Chaiten, Shimshon Balanson, Jones Day, Cleveland, OH, Albert J. Rota, Andrew Steven Kleinfeld, Jones Day, New York, NY, Michael T. Marcucci, Jones Day, Boston, MA, for Defendant.

OPINION & ORDER

WILLIAM H. PAULEY III, Senior United States District Judge:

Ambac Assurance Corporation ("Ambac") filed this action to recover damages arising from U.S. Bank National Association's ("U.S. Bank") alleged failure to satisfy its contractual and fiduciary duties as trustee for five residential mortgage-backed securities ("RMBS") trusts insured that Ambac insured. U.S. Bank moves to stay this action under the Colorado River doctrine based on two sets of pending state court actions. In the alternative, it seeks to dismiss Ambac's Streit Act claims, breach of fiduciary duty claims, and any breach of contract claims that accrued prior to April 11, 2011. For the reasons that follow, U.S. Bank's motion to stay is denied, and its motion to dismiss is granted in part and denied in part.

BACKGROUND

Roughly a decade after the collapse of the U.S. housing market plunged the nation into economic crisis, litigation arising in its fallout continues to pit various permutations of parties involved with the mortgage loan securitization process against each other—whether they be investors, trustees, underwriters, originators, or other entities. The most recent iteration seeks to hold RMBS trustees responsible for defaulting on their contractual, statutory, and common-law obligations to take action against mortgage originators and sponsors for breaches of the governing trust documents.

The mortgage loan securitization process has been described in myriad New York state and federal cases. E.g., ACE Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623, 625 (2015). In broad strokes, the process begins when a lender (the "Originator") originates mortgage loans and sells its interest in those loans to another financial institution (the "Sponsor"), which pools the loans and transfers the loan pools to a special purpose vehicle (the "Depositor"). The Depositor then conveys the loan pools to a trust, which subsequently issues certificates (i.e., RMBS) backed by cashflows from payments made by borrowers of the underlying mortgage loans. Because investors who purchase the certificates essentially purchase entitlements to these payments, their rate of return ultimately turns on the creditworthiness of the loans and the borrowers' ability to repay them. The certificates are also divided into tranches, or classes, that correspond to different payment priorities. To protect investors against the risk of insufficient payments by borrowers, insurers like Ambac issued policies guaranteeing payments on those certificates in exchange for a premium.

While the passage of time has increasingly exposed the arcana of RMBS to the public eye, this Court nonetheless reviews the pertinent allegations of the Amended Complaint ("Complaint"), which are presumed true for purposes of this motion.

I. Creation and Operation of the RMBS Trusts

U.S. Bank is the trustee of the five RMBS trusts at issue in this action: Harborview Mortgage Loan Trust ("Harborview") 2005-2, Harborview 2005-8, Harborview 2005-12, Harborview 2005-13, and Harborview 2005-16 (the "Trusts"). (Compl., ECF No. 62, ¶ 1.) The Trusts are backed by loans originated and sold by Countrywide Home Loans Inc. ("Countrywide"). (Compl. ¶¶ 19, 24.) As part of the securitization process, Countrywide sold its interest in the loans for all five Trusts to the sponsor of the securitizations, Greenwich Capital Financial Products, Inc. ("Greenwich"), pursuant to a Master Mortgage Loan Purchase and Servicing Agreement ("MMLPSA"). (Compl. ¶ 24.)

In the MMLPSA, Countrywide assumed obligations to Greenwich and made a number of representations and warranties relating to the quality and characteristics of the loans, including that the loans were underwritten in accord with guidelines relating to the borrower's ability to repay and the quality of the loan collateral, that the loans were originated without fraud, that the loans were described accurately in the Mortgage Loan Schedule, and that complete loan files were delivered to the designated custodian. (Compl. ¶¶ 25-31.) If Countrywide breached its representations and warranties, the MMLPSA generally required Countrywide to cure or repurchase the breaching loan. (Compl. ¶ 29.) Finally, under the MMLPSA, Countrywide also retained the right to service the loans, although it subsequently assigned that right to Countrywide Home Loans Servicing ("Countrywide Servicing").¹ (Compl. ¶ 32.)

To complete the mortgage loan securitization process, Greenwich pooled the loans and transferred the loan pools to the depositor pursuant to a Mortgage Loan Purchase Agreement ("MLPA"), which then conveyed the loans to the Trusts pursuant to a Pooling and Servicing Agreement ("PSA"). (Compl. ¶¶ 33-34.) Under these agreements, Greenwich assigned its rights against Countrywide and Countrywide Servicing to U.S. Bank, which obliged U.S. Bank as trustee to enforce the Countrywide entities' obligations and Countrywide's representations and warranties for the benefit of the Trusts and their beneficiaries. (Compl. ¶¶ 25, 34-35.) In Reconstituted Servicing Agreements ("RSAs"), Countrywide and Countrywide Servicing acknowledged these assignments of rights to U.S. Bank, and Countrywide also restated the representations and warranties it made in the MMLPSA. (Compl. ¶ 36.) Each transaction closed between April and November of 2005. (Compl. ¶ 38.)

II. The Instant Action

Ambac is a monoline insurer that issued financial guaranty insurance policies guaranteeing principal and interest payments to certain classes of certificates in exchange for a premium. (Compl. ¶¶ 19, 38.) Ambac is an express trust beneficiary under the PSAs, which also vest Ambac with the right to exercise the rights of insured certificateholders. (Compl. ¶ 39.) In relevant part, Ambac contends that U.S. Bank, as trustee of the five Trusts, violated an array of contractual, statutory, and common-law obligations owed to Ambac as trust beneficiary, both before and after Events of Default ("EOD").² (See Compl. ¶¶ 52-90.)

A. U.S. Bank's Obligations

Prior to an Event of Default, U.S. Bank had an obligation under the PSAs to acquire and protect trust assets for the benefit of all certificateholders. (Compl. ¶ 42.) Thus, U.S. Bank was required to certify that it received complete mortgage loan files to ensure that the Trust legally owned the loan and U.S. Bank had standing to institute a foreclosure action if the borrower defaulted. (Compl. ¶¶ 28, 34, 43, 56-57.) The PSAs also imposed a duty on U.S. Bank to enforce Countrywide's obligation to cure or repurchase loans that breached its contractual representations and warranties, Greenwich's obligation to deliver complete loan files to the Trusts, and Countrywide Servicing's obligation to service the loans properly. (Compl. ¶ 44.) Finally, Ambac alleges that U.S. Bank owed a pre-EOD duty to Trust beneficiaries to fulfill its contractual obligations with due care. (Compl. ¶ 46.)

An Event of Default occurs under the Trusts' PSAs when Countrywide or Countrywide Servicing fail to observe or perform their covenants or agreements under the MMLPSA after receiving written notice of such failure. (Compl. ¶¶ 54, 63.) After an Event of Default, the PSAs impose a heightened duty on U.S. Bank to "exercise such of the rights and powers vested in it by [the PSAs], and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs." (Compl. ¶ 48 (citing language from the PSAs).) Moreover, as Ambac alleges, U.S. Bank incurred heightened post-EOD duties under New York common law to act prudently and to act with undivided loyalty, along with the post-EOD duty under New York's Streit Act to act prudently. (Compl. ¶¶ 49-50.)

B. U.S. Bank's Alleged Breaches

U.S. Bank's purported dereliction of its duties as RMBS trustee began even before Events of Default occurred. Like other financial institutions who had a hand in different parts of the RMBS securitization process, U.S. Bank originated, underwrote, and serviced mortgage loans in addition to serving as an RMBS trustee. (Compl. ¶¶ 89-90.) But U.S. Bank had also entered into agreements with federal regulators to settle allegations of its improper origination, underwriting, and servicing practices. According to Ambac, U.S. Bank's misfeasance in its loan origination, underwriting, and servicing practices incentivized inaction as trustee in enforcing the Trusts' rights against Greenwich, Countrywide, and Countrywide Servicing to avoid scrutiny of its own conduct and maintain good relationships with its counterparties. (Compl. ¶¶ 89-90.) Thus, U.S. Bank reneged on its contractual duties under the PSAs by failing to enforce Countrywide's and Greenwich's obligations to cure or repurchase breaching loans, even though Countrywide and U.S. Bank knew or should have known of deficiencies in the loans. Specifically, Countrywide had been notified of breaches in the loans backing the Harborview 2005-8 Trust, U.S. Bank had known that certain loan files were missing documents and that Greenwich failed to deliver complete mortgage loan files to the Trusts, and U.S. Bank knew or should have known about breaches in loans backing the Harborview 2005-10 trust. (Compl. ¶¶ 83-88.)

Additionally, Ambac alleges breaches of its heightened contractual and fiduciary post-EOD obligations premised on U.S. Bank's failure to...