Deutsche Bank Nat'l Trust Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 14–cv–3020 (KBF)

• Decision Date: 25 January 2018
• Docket Number: 14–cv–3020 (KBF)
• Parties: DEUTSCHE BANK NATIONAL TRUST CO., solely in its capacity as Trustee FOR the MORGAN STANLEY STRUCTURED TRUST I 2007–1, Plaintiff, v. MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant.
• Court: U.S. District Court — Southern District of New York

289 F.Supp.3d 484

DEUTSCHE BANK NATIONAL TRUST CO., solely in its capacity as Trustee FOR the MORGAN STANLEY STRUCTURED TRUST I 2007–1, Plaintiff,

v.MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant.

14–cv–3020 (KBF)

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

Signed January 25, 2018

Justin Michael Ellis, Steven Francis Molo, Justin Vaun Shur, Robert Kelsey Kry, MoloLamken LLP, New York, NY, Lauren Marguerite Weinstein, Mololamken LLP, Washington, DC, for Plaintiff.

Brian Stryker Weinstein, James P. Rouhandeh, Carissa Marie Pilotti, Craig Thomas Cagney, Davis Polk & Wardwell L.L.P., Charlita Mays, David Brock Mesrobian, Spears & Imes LLP, New York, NY, for Defendant.

OPINION & ORDER

KATHERINE B. FORREST, District Judge:

This is one of a number of cases concerning residential mortgage-backed securitization trusts created in the lead-up to the financial crisis of 2007. Deutsche Bank National Trust Co. ("Deutsche Bank" or "plaintiff"), in its capacity as Trustee for the Morgan Stanley Structured Trust I 2007–1 ("MSST 2007–1" or the "Trust"), commenced this action against Morgan Stanley Mortgage Capital Holdings LLC¹ ("Morgan Stanley" or "defendant") on April 28, 2014. (See Compl., ECF No. 2.) Plaintiff alleges, in relevant part, that defendant damaged the Trust by: (1) transferring a substantial number of materially breaching loans into the Trust; and (2) failing to notify the Trustee of those breaches as required. (See id. ¶¶ 70–111.)

Currently before the Court is defendant's motion for summary judgment under Fed. R. Civ. P. 56 (" Rule 56"). (ECF No. 111.) Plaintiff opposed that motion on June 22, 2017 (ECF No. 120), and defendant replied on July 24, 2017 (ECF No. 124). This action was originally assigned to Judge Laura Taylor Swain, but was transferred to the undersigned for all purposes on September 11, 2017. On December 19, 2017, the Court requested additional briefing regarding Morgan Stanley's earlier-filed motion to dismiss (ECF No. 138); it received the parties' respective submissions on January 8, 2018 (ECF Nos. 139 and 140).

In resolving the present motion, this Court is not charting new territory—many if not all of Morgan Stanley's arguments have been considered and decided by other courts in this circuit and elsewhere. For the reasons stated below, this Court concludes that there are triable issues of fact, and therefore DENIES defendant's motion for summary judgment.

I. BACKGROUND

The following facts are drawn from the parties' respective submissions under Local Civ. R. 56.1 as well as documents submitted in connection with the pending motion for summary judgment. The facts are undisputed unless otherwise noted.

A. The MSST 2007–1 Securitization

In 2007, Morgan Stanley sponsored the creation of Morgan Stanley Structured Trust I 2007–1 ("MSST 2007–1" or the "Trust"), a residential mortgage-backed securitization trust originally containing 4,374 individual mortgage loans (the "Mortgage Loans"). (Pl.'s Resp. to Def.'s Local Civ. R. 56.1 Statement of Undisputed Material Facts and Statement of Additional Facts ("Pl.'s 56.1 Resp.") ¶¶ 1–3, 8, ECF No. 121.) Although MSST 2007–1 is the only trust at issue here, similar trusts created in the lead-up to the 2007 financial crisis (including others sponsored by Morgan Stanley) have spurred extensive litigation in this circuit and across the country.²

As sponsor of the MSST 2007–1 securitization, Morgan Stanley acquired the underlying Mortgage Loans from third-party originators (the "Originators"), and then pooled and conveyed them to the Trust through a series of transactions described infra. (Id. ¶¶ 3–6.) Although Morgan Stanley acquired, pooled, transferred, and made certain representations and warranties concerning the Mortgage Loans, it did not originate any of the Mortgage Loans.

The Mortgage Loans, once transferred to MSST 2007–1, effectively served as collateral for resulting financial instruments known as residential mortgage-backed securities ("RMBS"). (Id. ¶¶ 6–7.) Those securities (or "certificates") were sold to investors (or "certificateholders") in exchange for the right to receive future principal and interest payments as borrowers repaid their loans to the Trust. Deutsche Bank, the plaintiff herein, was party to the agreement that created the Trust, and serves as Trustee of MSST 2007–1. (Id. ¶ 1.)

B. The Governing Agreements

Like most RMBS trusts, MSST 2007–1 was created pursuant to a coordinated series of transactions involving multiple financial entities. Two of those transactions are of primary relevance here: (1) the Mortgage Loan Purchase Agreement by which Morgan Stanley (and an associated entity) sold certain mortgage loans to a depositor; and (2) the Pooling and Servicing Agreement by which the depositor transferred all right, title, and interest in those mortgage loans to the Trust in exchange for certificates.

1. The Mortgage Loan Purchase Agreement

By agreement dated May 1, 2007, Morgan Stanley sold an initial pool of mortgage loans to EMC Mortgage Corporation ("EMC"), a wholly-owned subsidiary of Bear, Stearns & Co., Inc. ("Bear Stearns"). (Id. ¶ 4.) Morgan Stanley and EMC then sold that pool, along with other mortgage loans, to Bear Stearns Asset Backed Securities I LLC ("BSABS") pursuant to a Mortgage Loan Purchase Agreement ("MLPA") dated July 6, 2007. (Id. ¶ 5.) The MLPA explicitly anticipated that BSABS would concurrently "deposit the Mortgage Loans into a trust fund ... and create [MSST 2007–1] ... under a pooling and servicing agreement, to be dated as of June 1, 2007." (Decl. of Brian S. Weinstein ("Weinstein Decl.") Ex. F ("MLPA") at 1, ECF No. 114–10.)

As relevant here, the MLPA contains a number of representations and warranties ("R&Ws") that Morgan Stanley made regarding the included loans. Although the parties disagree about the meaning, scope, and application of certain R&Ws, the language itself is certain and undisputed. Below is a brief summary of the R&Ws most relevant to the current motion:

• First, in § 10(a), Morgan Stanley made three R&Ws "[w]ith respect to each Mortgage Loan" included in the MLPA. (Id. § 10(a) at 12–13.) Specifically, Morgan Stanley represented and warranted that: (1) the information set forth in the attached "Mortgage Loan Schedule" was "complete, true and correct as of the Cut-off Date"; (2) it had complied with "[a]ny and all requirements of any federal, state or local law" applicable to the loan; and (3) no Mortgage Loan was a "High Cost Loan" or "Covered Loan," as those terms were defined in the MLPA. (Id. )

• Second, in § 10(b), Morgan Stanley made twenty-four additional R&Ws with respect to "MSMCH Represented Mortgage Loans," defined to include all loans originated by one of eight originators.³ (Id. § 10(b) at 13–17.)

Of note, Morgan Stanley represented and warranted that: (1) "[n]o fraud, error, omission, misrepresentation, negligence or similar occurrence ... has taken place on the part of MSMCH, or, to the knowledge of MSMCH ... or any other party involved in the origination of the [loan]" (Id. § 10(b)(5) at 14); (2) each mortgage file contains a property appraisal that satisfies certain regulatory requirements (Id. § 10(b)(20) at 17); and (3) "[n]o MSMCH Represented Mortgage Loan has an LTV greater than 100%" (Id. § 10(b)(21) at 17).

The MLPA also contains a "Repurchase Protocol" that sets out a procedure for addressing potential breaches of the various R&Ws:

Upon discovery or receipt of notice by MSMCH or the Purchaser of a breach of any representation or warranty of MSMCH set forth in this Section 10 which materially and adversely affects the value of the interests of the Purchaser in any of the MSMCH Represented Mortgage Loans ... the party discovering or receiving notice of such breach shall give prompt written notice to the others. In the case of any such breach ... within 90 days from the date of discovery by MSMCH, or the date MSMCH is notified ... of such breach ... MSMCH will, (i) cure such breach in all material respects, (ii) purchase the affected Mortgage Loan at the applicable Purchase Price or (iii) if within two years of the Closing Date, substitute a qualifying Replacement Mortgage Loan in exchange for such MSMCH Represented Mortgage Loan.⁴

(Id. § 10 at 18.) Although loans originated by Accredited Home Lenders, Inc. ("Accredited") are not "MSMCH Represented Mortgage Loans," Morgan Stanley further agreed to "cure, substitute or repurchase" any Accredited-originated loan that breached "a representation or warranty set forth in this Section 10 made by Accredited with respect to an Accredited Mortgage loan" in the event Accredited failed to do so (the "Backstop Provision"). (Id. )

Additionally, the MLPA includes the following "Sole Remedy Provision" (or "SRP"):

[t]he obligations of MSMCH to cure, purchase or substitute a qualifying Replacement Mortgage Loan shall constitute the Purchaser's, the Trustee's and the Certificateholder's sole and exclusive remedy under this Agreement or otherwise respecting a breach of representations or warranties hereunder with respect to the MSMCH Represented Mortgage Loans.

(Id. (emphasis added).)

2. The Pooling and Servicing Agreement

Concurrently with execution of the MLPA (and as specifically contemplated by that agreement), BSABS transferred "all right, title and interest" in the Mortgage Loans to the Trust pursuant to a Pooling and Servicing Agreement ("PSA") dated June 1, 2017, thereby creating MSST 2007–1. (Pl.'s 56.1 Resp. ¶¶ 1, 6.) Deutsche Bank and Wells Fargo Bank, National Association ("Wells Fargo") were parties to the PSA as "Trustee" and "Master Servicer and Securities Administrator," respectively. (Id. ¶ 1.) The transaction closed on July 6, 2007. (Weinstein Decl. Ex. B ("PSA") at § 1.01, ECF No. 114–2.)

C. Pre–Litigation History

1. Accredited's Bankruptcy Proceedings

In 2009, Accredited—the originator of certain loans included in MSST 2007–1—filed for bankruptcy in the United...