Fed. Deposit Ins. Corp. v. Bank of N.Y. Mellon, 1:15-cv-06560

Decision Date20 March 2019
Docket Number1:15-cv-06570,1:15-cv-06574,1:15-cv-06560
Citation369 F.Supp.3d 547
Parties FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Guaranty Bank, Plaintiff, v. The BANK OF NEW YORK MELLON, Defendant. Federal Deposit Insurance Corporation, as Receiver for Guaranty Bank, Plaintiff, v. U.S. Bank National Association, Defendant. Federal Deposit Insurance Corporation, as Receiver for Guaranty Bank, Plaintiff, v. Citibank, N.A., Defendant.
CourtU.S. District Court — Southern District of New York

Danielle L. Bauer, Philip Ransom Schatz, Roselind Franciska Hallinan, Sean Patrick McGonigle, Steven Sanford Fitzgerald, David H. Wollmuth, Ryan Anthony Kane, Wollmuth Maher & Deutsch LLP, New York, NY, for Plaintiff.

Christopher James Houpt, Matthew D. Ingber, Mayer Brown LLP, New York, NY, for Defendant.


ANDREW L. CARTER, JR., United States District JudgePlaintiff Federal Deposit Insurance Corporation acting as receiver for Guaranty Bank ("FDIC-R") brings this action against Defendants The Bank of New York Mellon ("BNY"), U.S. Bank National Association, and Citibank, N.A. (individually, "BNY," "U.S. Bank," and "Citi"; collectively "Defendants") for Breach of Contract, violation of the Streit Act, and violation of the Trust Indenture Act (TIA). Compl., ECF No. 1. On September 30, 2016, the Court dismissed the Complaint for lack of subject matter jurisdiction holding that Plaintiff lacked standing to sue Defendants. ECF No. 38. On October 14, 2016 Plaintiff sought reconsideration. ECF No. 39. The Court granted reconsideration in part, permitting Plaintiff to amend its complaint to resolve the standing issue. See ECF No. 47. Plaintiff filed its Amended Complaint on December 8, 2017. ECF No. 51. Defendants have now moved to dismiss the Amended Complaint. ECF No. 64. For the reasons outlined below, Defendants' Motion to Dismiss is GRANTED .

I. Securitization Generally

This matter stems from conduct of a Trustee of Residential Mortgage Backed Securities (RMBS). To create RMBS, mortgage loans are pooled together in a trust, which issues securities that represent interests in cash flows on a pool of mortgages. Am. Compl. ¶ 39, ECF No. 50. The securitization process begins when an acquirer of mortgage loans (a "sponsor" or "seller"), such as Countrywide, sells a large pool of such loans to a depositor, which is typically a special-purpose affiliate of the sponsor. Id. at ¶ 40. The depositor then conveys the pool of loans to a trustee, in this case BNY, pursuant to a Pooling and Service Agreement ("PSA"). Id. at ¶ 41. Each securitization contains "tranches" of interests in payments made by borrowers on the loan. Id. Each tranche has a different level of risk and reward, and its rating is issued by a nationally recognized credit agency. Id. at ¶ 44. The most senior tranches have higher ratings and are entitled to payment in full first, but, junior tranches, which have lower ratings and are paid after senior tranches, offer higher potential rewards. Id. Any shortfalls in principal and interest payments are allocated first to junior tranches. Id. As payments from mortgage borrowers are the source of funds to pay certificate holders, the credit quality of the security turns on the credit quality of the underlying loans. Id. at ¶ 45.

The trust is tasked with issuing certificates representing tranches, which are then sold to an underwriter who re-sells the certificates at a profit to investors. Id. at ¶ 41. The sponsor earns profit based on the excess of the proceeds of the sale of certificates to the underwriter over the cost of purchasing the mortgage loans. Id. The PSA for each trust requires a "servicer" to manage the collection of payments on the mortgage loans. Id. at ¶ 42. "The servicer's duties include monitoring delinquent borrowers, foreclosing on defaulted loans, monitoring compliance with representations and warranties regarding loan origination, tracking mortgage documentation, and managing and selling foreclosed properties." Id. The trustee is responsible for delivering monthly remittance reports to holders of certificates, which describe the performance of underlying loans and compliance with the PSA. Id. at ¶ 43. The servicer provides data for these reports.

II. Plaintiff's Allegations

At bottom, Plaintiff alleges that BNY abdicated its duties as the trustee to certificateholders such as Plaintiff in five different ways, running afoul of both the PSAs and relevant federal law. Id. at ¶ 2. First, BNY allegedly failed to ensure that key documents for the loans were included in the mortgage files and to create an exception report identifying incomplete mortgage loan files. Id. at ¶ 10. As a result, Defendant BNY did not ensure that the rights, title, and interest in the mortgage loans were perfected and properly conveyed, and the sponsor was not required to substitute compliant loans for the loans with incomplete files or to repurchase the loans that ultimately caused Plaintiff significant losses. Id. In support of its allegations, Plaintiff notes that BNY admitted publicly that it was aware of Countrywide's pervasive failure to deliver complete mortgage files, and that BNY commenced foreclosure actions between 2005 and 2008, which highlighted pervasive document delivery issues. Id. at ¶¶ 86-88.

Second, BNY purportedly failed to notify certificateholders of any breach of mortgage loan representations that BNY discovered, which would materially and adversely affect certificateholders. Id. at ¶ 11. Plaintiff notes that BNY was "presented with a large number of defaulted loans that were originated by the Sponsors ... and foreclosures were often commenced in BNY Mellon's name." Id. at ¶ 97. Review of these fillings should have led BNY to learn that "borrowers either (i) did not qualify for the loans because they did not have the ability to repay the loans; (ii) were victims of predatory lending; or (iii) were given a loan that did not comply with state or federal law." Id. Plaintiff also alleges that BNY received notice of widespread Sponsor breaches from monoline insurers,1 and that BNY was aware of trading downgrades and the high level of defaults. Id. at ¶ 100-111. Plaintiff claims that had BNY provided adequate notice "the obligated parties would have been required to cure the breaches or repurchase mortgage loans that did not comply with the applicable underwriting guidelines, and that ultimately caused a significant portion of Plaintiff's losses." Id. Plaintiff asserts that BNY knew or should have known that these breaches had occurred, and was also required to notify servicers when servicers breached the PSAs, which would have triggered the servicer's obligation to cure the breach. Id. at ¶ 11.

Third, BNY allegedly did not prudently exercise all available remedies once it had notice of both servicers numerous defaults and Events of Default under the PSAs, as well as breaches of mortgage loan representations and warranties. Id. at ¶ 12. Plaintiff claims that BNY notified Countrywide that many of the mortgage files for loans underlying the relevant securities had document exceptions and these exceptions were not cured; but, even after this notification, Countrywide and other sponsors did not substitute or repurchase the loans. Id. at ¶ 132. Plaintiff also asserts that BNY knowingly accepted false certifications from servicers who were required under the PSA to certify annually that they met their obligations under the PSAs and applicable federal regulations. Id. at ¶ 135. Accordingly, Plaintiff concludes that had BNY "acted prudently, it would have issued repurchase demands years ago and, if necessary, commenced litigation forcing the Sponsors (or other obligated party) to repurchase defective loans or pay for losses." Id. at ¶ 12.

Fourth, BNY supposedly failed to provide accurate certifications and remittance reports, which were required under the PSAs and applicable federal law. Id. at ¶ 13. Plaintiff notes that BNY regularly made remittance reports available to certificateholders, but did not disclose any breaches it was aware of. Id. at ¶ 140. As a result, BNY mislead certificate holders and caused Plaintiff injury. Id. at ¶ 13.

Fifth, BNY purportedly failed to take steps to protect Plaintiff once it became aware of failures by servicers to cure problematic loans underlying relevant securities. Id. at ¶ 14. Plaintiff asserts that servicers engaged in improper foreclosure practices wherein borrowers were charged improper and excessive fees, which were ultimately paid by certificateholders "because when a defaulting borrower's home is foreclosed ... the Servicers deduct their fees ... and any servicing advances from sale proceeds before any funds are transferred" to the trust. Id. at ¶ 145-147. Plaintiff claims BNY was or should have been aware of these "widespread servicing abuses" and, had they investigated, would have discovered that "the serious servicing abuses impacted the loans in the Covered Trusts." Id. at ¶ 148.

Accordingly, Plaintiff asserts three causes of action: (1) breach of contract for BNY failing to meet its obligations under the PSA; (2) violation of the Streit Act for BNY failing to " ‘use the same degree of care and skill in their exercise as a prudent [person] would exercise or use under the circumstances of [their] own affairs’ "; and (3) violation of the TIA to provide certificateholders with notice of defaults within 90 days of becoming aware of such defaults and acting prudently to protect the rights of certificateholders during the period in which the default remains uncured. Id. at ¶¶ 16-18.

III. Ratification

On March 11, 2010, Plaintiff sold the relevant Certificates as part of a resecuritization transaction, SSGM 2010-S1 (the Trust), and suffered over $ 440 million in losses. Id. at ¶ 152. The sale was made pursuant to a Trust Agreement between Plaintiff, Wilmington Trust Company (the Owner Trustee), and Citibank N.A. (the indenture trustee). Id. In granting Defendants' previous Motion to...

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