Bnp Paribas Mortgage Corp.. v. Bank of Am., Nos. 09 Civ. 9783 (RWS)

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtSWEET, District Judge.
Citation778 F.Supp.2d 375
PartiesBNP PARIBAS MORTGAGE CORPORATION and BNP Paribas, Plaintiffs,v.BANK OF AMERICA, N.A., Defendant.Deutsche Bank AG, Plaintiff,v.Bank of America, N.A., Defendant.
Decision Date23 March 2011
Docket NumberNos. 09 Civ. 9783 (RWS),09 Civ. 9784 (RWS).

778 F.Supp.2d 375

BNP PARIBAS MORTGAGE CORPORATION and BNP Paribas, Plaintiffs,
v.
BANK OF AMERICA, N.A., Defendant.Deutsche Bank AG, Plaintiff,
v.
Bank of America, N.A., Defendant.

Nos. 09 Civ. 9783 (RWS)

09 Civ. 9784 (RWS).

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

March 23, 2011.


[778 F.Supp.2d 380]

Boies Schiller & Flexner LLP, by: Robin A. Henry, Esq., Motty Shulman, Esq., Jack Wilson, Esq., Armonk, NY, for Plaintiffs BNP Paribas Mortgage Corporation and BNP Paribas.Williams & Connolly LLP, by: William E. McDaniels, Esq., Stephen D. Andrews, Esq., Stephen P. Sorensen, Esq., Daniel M. Dockery, Esq., Katherine O'Connor, Esq., Washington, DC, for Plaintiff Deutsche Bank AG.Munger, Tolles & Olson LLP, by: Marc T.G. Dworsky, Esq., Kristin Linsley Myles, Esq., Gregory Weingart, Esq., Richard St. John, Esq., Los Angeles, CA, King & Spalding LLP, by: Richard T. Marooney, Esq., New York, NY, for Defendant Bank of America, N.A.

OPINION
SWEET, District Judge.
+-----------------+
                ¦TABLE OF CONTENTS¦
                +-----------------¦
                ¦ ¦
                +-----------------+
                
I. PRIOR PROCEEDINGS 381
                II. THE FACTS ALLEGED 382
                
 A. Background 382
                 B. The Facility Documents 384
                
 i. The Base Indenture 385
                 ii. The Security Agreement 388
                 iii. The Depositary Agreement 389
                 iv. The Custodial Agreement 390
                 v. The March 2009 Letter 392
                
 C. Alleged Breaches 393
                
III. THE APPLICABLE STANDARD 394
                IV. THE AMENDED COMPLAINTS STATE A CLAIM FOR BREACHES OF THE BASE 394
                 INDENTURE AND BREACH OF FIDUCIARY DUTY
                
 The Complaints State a Claim under Section 10.4 of the Base
                 A. Indenture 394
                 The Amended Complaints State a Claim for Breach of Section
                 B. 9.1 of the Base Indenture 400
                 The Amended Complaints State a Claim for Breach of Fiduciary
                 C. Duty 400
                 D. DB's Claims under the Prior Version of the Base Indenture and 401
                 Other Facility Documents Fail as a Matter of Law
                
V. THE AMENDED COMPLAINTS STATE A CLAIM FOR BREACH OF THE SECURITY 402
                 AGREEMENT
                
 The Amended Complaints State a Claim that BoA Breached the
                 A. Security Agreement by Transferring Funds for Prohibited 403
                 Purposes
                 Plaintiffs State a Plausible Claim for Breach of the Security
                 B. Agreement Based on BoA's Improper Post–Event of Default 406
                 Conduct and Failure to Confirm the Borrowing Base Condition
                 C. The Amended Complaints also State a Claim that BoA Failed to 407
                 Properly Segregate Collateral
                
VI. PLAINTIFFS LACK STANDING UNDER THE DEPOSITARY AND CUSTODIAL 408
                 AGREEMENTS AND THE MARCH 2009 LETTER
                
 Plaintiffs Lack Standing to Sue for Breach of the Depositary
                 A. Agreement 408
                 The BNP Plaintiffs Lack Standing to Sue under the March 2009
                 B. Letter 411
                 C. Plaintiffs Lack Standing to Sue for Breach of the Custodial 413
                 Agreement
                
VII. PLAINTIFFS FAIL TO STATE A CLAIM FOR INDEMNIFICATION 415
                
 Plaintiffs' Indemnification Claims under the Custodial
                 A. Agreement Fail 416
                 B. Plaintiffs' Indemnification Claims under the Depositary and 418
                 Security Agreements Fail
                
 PLAINTIFFS LACK STANDING TO SUE BASED ON OCALA NOTES ISSUED
                VIII. BEFORE JULY 20, 2009 418
                IX. BNPP IS NOT A PROPER PARTY TO THIS ACTION 420
                X. CONCLUSION 421
                

[778 F.Supp.2d 381]

In these related actions, Defendant Bank of America, N.A. (“BoA” or “Defendant”) has moved, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the Amended Complaints filed by Plaintiffs BNP Paribas Mortgage Corporation (“BNP”) and BNP Paribas (“BNPP”) (collectively, the “BNP Plaintiffs”) and Deutsche Bank AG (“DB”). For the reasons set forth below, the motion is granted as to the claims for breach of the Depositary Agreement, Custodial Agreement, and March 2009 Letter, as to the claims for indemnification, and as to claims relating to Ocala Notes issued prior to July 20, 2009, and denied as to all remaining claims.

As will become evident from what follows, these actions involve highly sophisticated financial institutions, which participated in various capacities in the residential mortgage industry prior to its recent collapse. They were, and are, represented by some of the most prominent law firms in the country whose very skilled advocates have been of great assistance to the Court, despite the contrary conclusions they have drawn from the complicated documents that created the relationships at issue.

I. PRIOR PROCEEDINGS

BNP and DB each filed initial Complaints against BoA on November 25, 2009, and each filed Amended Complaints on March 17, 2010.1 BNP added BNPP, its parent company, as a new plaintiff in its Amended Complaint.

In its Amended Complaint, DB asserts eight causes of action for breach of contract, alleging that BoA breached the current

[778 F.Supp.2d 382]

and prior versions of four contracts that created and governed a facility for the origination, sale, and purchase of home mortgages through Taylor, Bean & Whitaker Mortgage Corp. (“TBW”) and its wholly-owned subsidiary, Ocala Funding, LLC (“Ocala”) (the facility hereafter referred to as the “Ocala Facility”). These contracts—the Security Agreement, the Depositary Agreement, the Custodial Agreement, and the Base Indenture—are described collectively as the “Facility Documents.” In addition to its breach of contract claims, DB asserts a claim for breach of fiduciary duty and seeks indemnification under the current and prior versions of the Depositary, Security, and Custodial Agreements.

BNP does not bring any claims under the prior versions of the Facility Documents, but otherwise echoes DB's claims, with the addition of a claim for “Breach of Contract/ Indemnification” under a March 27, 2009 side letter (the “March 2009 Letter”).

On August 30, 2010, BNP and DB filed new actions against BoA in the Southern District of Florida, in which BNP and DB allege two causes of action for conversion of certain mortgage loans and the sale proceeds of those loans. On November 17, 2010, the actions were transferred to the Southern District of New York and referred to this Court. On November 23, 2010, BoA filed a motion to dismiss both actions. The motion was heard on January 26, 2011, and remains sub judice.

The instant motions were heard and marked fully submitted on September 15, 2010.

II. THE FACTS ALLEGEDA. Background

This dispute arises generally from the multi-billion dollar collapse of TBW in late summer 2009. According to the Amended Complaints, TBW was “the largest non-depositary residential mortgage lender in the United States” and the “twelfth-largest mortgage originator.” (BNP AC ¶ 25; DB AC ¶ 2.) Its core business was “(i) originating, underwriting, processing and funding conforming, conventional, government-insured residential mortgage loans; (ii) the sale of mortgage loans into the ‘secondary market’ to government-sponsored enterprises such as Federal Home Loan Mortgage Corporation (“Freddie Mac”); and (iii) mortgage payment processing and loan servicing.” (BNP AC ¶ 26.) In 2008, TBW was responsible for originating approximately $30 billion in new loans. ( Id.) As of June 2009, it was servicing mortgages with unpaid principal balances in excess of $80 billion. ( Id.)

TBW created Ocala in 2005 to provide short-term liquidity to TBW between the time of TBW's origination or purchase of mortgages and the sale of those mortgages, principally to Freddie Mac. ( Id. ¶ 28.) Ocala raised cash by issuing liquidity notes in two series—Series 2005–1 Secured Liquidity Notes (the “2005–1 Notes”) and Series 2008–1 Secured Liquidity Notes (the “2008–1 Notes”) (collectively, the “Ocala Notes”)—which were, at all times, secured by the cash proceeds of those notes and mortgages. ( Id. ¶¶ 39, 43; DB AC ¶¶ 3, 7, 34.) BNP purchased $480.7 million of the Ocala Notes, and DB purchased $1.2 billion. ( See BNP AC ¶¶ 2, 40; DB AC ¶¶ 4, 11.) The Ocala Notes “rolled over” at least once per month up to and through July 20, 2009, the date of the final rollover before TBW's collapse. ( Id. ¶ 5.)

Ocala's assets were cash and mortgages, and its liabilities were the Ocala Notes and subordinated notes, totaling approximately $1.75 billion. (DB AC ¶¶ 11, 12, 47, 124.) The proceeds of the Ocala Notes were used to purchase mortgages originated by

[778 F.Supp.2d 383]

TBW, which Ocala would in turn sell to Freddie Mac or other mortgage purchasers. ( Id. ¶ 40.) All mortgages acquired from TBW and all proceeds from the sale of those mortgages served as collateral securing the Ocala Notes. ( Id.) If certain conditions were satisfied, the proceeds could be used by Ocala to purchase additional mortgages from TBW, which it would then resell. ( Id.)

TBW was Ocala's sole owner, its only member with an economic interest, and the servicer of Ocala's loans. Notices provided to Ocala were to be sent to TBW, and TBW signed the Facility Documents on Ocala's behalf. (BoA Mem. 11.)

BoA served in several distinct but related capacities for the Ocala Facility: as Indenture Trustee, Collateral Agent, Depositary and Custodian. In its various capacities, BoA agreed to administer and regulate the flow of mortgages and cash in and out of Ocala, certify the solvency of Ocala prior to its issuance of Ocala Notes, promptly notify the Ocala noteholders of any Event of Default or Potential Event of Default, as defined in the Facility Documents, and shut down the Ocala Facility upon certain Events of Default. (DB AC ¶ 23.)

On or about August 3, 2009, TBW's offices were raided by law enforcement authorities, TBW stopped originating mortgages, and Freddie Mac terminated TBW's eligibility to sell and service Freddie Mac loans. ( See DB AC ¶¶ 207–08.) On August 10, 2009, BoA declared an Event of Default under the Base Indenture. In the wake of TBW's collapse, Ocala has failed to repay, and indeed cannot repay, the money owed to DB and BNP, in their capacity as holders of the Ocala Notes. ( See DB AC f 214; BoA Mem. 1)

DB, BNP, and BNPP also served in multiple roles in TBW's mortgage operations, not just as holders of the Ocala Notes, but also as Swap Counterparties, Note Dealers, Qualified Counterparties and investment bankers for TBW....

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53 practice notes
  • Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., No. 08 Civ. 2437 (RJS).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • December 5, 2011
    ...v. Mfrs. Hanover Trust Co., 218 A.D.2d 1, 632 N.Y.S.2d 520, 527 (1995); see also BNP Paribas Mortg. Corp. v. Bank of America, N.A., 778 F.Supp.2d 375, 401 (S.D.N.Y.2011). Consistent with other courts that have addressed this issue, the Court here finds that these constraints apply with simi......
  • Portfolio v. Wells Fargo Bank, Nat'l Ass'n, 14 Civ. 9371 (KPF) (SN)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 30, 2017
    ...undivided loyalty to trust beneficiaries.' " PL/DB , 172 F.Supp.3d at 717–18 (quoting BNP Paribas Mortg. Corp. v. Bank of Am., N.A. , 778 F.Supp.2d 375, 401 (S.D.N.Y. 2011) ); see also Beck v. Mfrs. Hanover Tr. Co. , 218 A.D.2d 1, 632 N.Y.S.2d 520, 527–28 (1995). A trustee's obligations "co......
  • Bank of Am., N. A. v. Fed. Deposit Ins. Corp., Civil Action No. 10–CV–1681 (BJR).
    • United States
    • United States District Courts. United States District Court (Columbia)
    • December 10, 2012
    ...also the subject of a pending case in the Southern District of New York. See BNP Paribas Mortgage Corporation v. Bank of America, N.A., 778 F.Supp.2d 375 (S.D.N.Y.2011). 8. If Ocala was operating as it was supposed to, TBW's notification of the purchase should have been accompanied by a cor......
  • Monk v. Bradt, No. 09–CV–0932(VEB).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Western District of New York
    • April 22, 2011
    ...argues that these claims are unexhausted because they were not included in Petitioner's letter application seeking leave to appeal [778 F.Supp.2d 375] to the New York Court of Appeals and thus they have not been through one complete round of New York's established appellate review procedure......
  • Request a trial to view additional results
52 cases
  • Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., No. 08 Civ. 2437 (RJS).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • December 5, 2011
    ...v. Mfrs. Hanover Trust Co., 218 A.D.2d 1, 632 N.Y.S.2d 520, 527 (1995); see also BNP Paribas Mortg. Corp. v. Bank of America, N.A., 778 F.Supp.2d 375, 401 (S.D.N.Y.2011). Consistent with other courts that have addressed this issue, the Court here finds that these constraints apply with simi......
  • Portfolio v. Wells Fargo Bank, Nat'l Ass'n, 14 Civ. 9371 (KPF) (SN)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 30, 2017
    ...undivided loyalty to trust beneficiaries.' " PL/DB , 172 F.Supp.3d at 717–18 (quoting BNP Paribas Mortg. Corp. v. Bank of Am., N.A. , 778 F.Supp.2d 375, 401 (S.D.N.Y. 2011) ); see also Beck v. Mfrs. Hanover Tr. Co. , 218 A.D.2d 1, 632 N.Y.S.2d 520, 527–28 (1995). A trustee's obligations "co......
  • Bank of Am., N. A. v. Fed. Deposit Ins. Corp., Civil Action No. 10–CV–1681 (BJR).
    • United States
    • United States District Courts. United States District Court (Columbia)
    • December 10, 2012
    ...also the subject of a pending case in the Southern District of New York. See BNP Paribas Mortgage Corporation v. Bank of America, N.A., 778 F.Supp.2d 375 (S.D.N.Y.2011). 8. If Ocala was operating as it was supposed to, TBW's notification of the purchase should have been accompanied by a cor......
  • Monk v. Bradt, No. 09–CV–0932(VEB).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Western District of New York
    • April 22, 2011
    ...argues that these claims are unexhausted because they were not included in Petitioner's letter application seeking leave to appeal [778 F.Supp.2d 375] to the New York Court of Appeals and thus they have not been through one complete round of New York's established appellate review procedure......
  • Request a trial to view additional results

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