GSAA Home Equity Trust 2006-2 v. Wells Fargo Bank, N.A.

• Decision Date: 30 September 2015
• Docket Number: No. 4:14–CV–04166–RAL.,4:14–CV–04166–RAL.
• Citation: 133 F.Supp.3d 1203
• Parties: GSAA HOME EQUITY TRUST 2006–2, by and through LL FUNDS LLC, Plaintiff, v. WELLS FARGO BANK, N.A., and Saxon Mortgage Services, Inc., Defendants.
• Court: U.S. District Court — District of South Dakota

133 F.Supp.3d 1203

GSAA HOME EQUITY TRUST 2006–2, by and through LL FUNDS LLC, Plaintiff,

v.WELLS FARGO BANK, N.A., and Saxon Mortgage Services, Inc., Defendants.

No. 4:14–CV–04166–RAL.

United States District Court, D. South Dakota, Southern Division.

Signed Sept. 30, 2015.

Scott A. Abdallah, Shannon R. Falon, Delia M. Druley, Johnson, Janklow, Abdallah, Bollweg & Parsons LLP, Sioux Falls, SD, Shannon W. Conway, Talcott J. Franklin, Talcott Franklin, P.C., Dallas, TX, for Plaintiff.

Jason R. Sutton, Thomas J. Welk, Boyce Law Firm, Sioux Falls, SD, Jayant W. Tambe, Jones Day, Mary Gail Gearns, Matthew Minerva, Morgan, Lewis & Bockius LLP, New York, NY, Angela B. Brandt, Larson King, LLP, St. Paul, MN, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

ROBERTO A. LANGE, District Judge.

Plaintiff GSAA Home Equity Trust 2006–2 (the Trust) is a residential mortgage-backed securities trust. Defendant Wells Fargo, N.A. (Wells Fargo) is the Master Servicer of the Trust and Defendant Saxon Mortgage Services, Inc. (Saxon) was the Trust's Servicer. The Trust, by and through Plaintiff LL Funds LLC (LL Funds), filed suit in this Court, asserting breach of contract and tort claims against both Defendants and a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 –1968, against Wells Fargo. Doc. 1. Defendants have moved to dismiss all of LL Funds' claims under Rules 12(b)(6) and 12(b)(1) of the Federal Rules of Civil Procedure. Docs. 25, 28. For the reasons explained below, this Court grants in part and denies in part Defendants' motions to dismiss.

I. Facts

This case involves residential mortgage-backed securities (RMBS). RMBS are a type of asset-backed financial product created through securitization. The securitization process begins when the originator of a residential mortgage loan sells the loan to a financial institution. Doc. 1 at ¶ 12. The financial institution then pools the loan with others, deposits the loans into a trust, and sells certificates issued by the trust to investors. Doc. 1 at ¶¶ 12, 17. The certificates entitle the investors to a portion of the mortgage payments made by the borrowers on the loans within the trust. Doc. 1 at ¶¶ 15–16.

The Trust in this case was established in January 2006 pursuant to a Master Servicing and Trust Agreement (MSTA). Doc. 1 at ¶¶ 1–2. The parties to the MSTA were GS Mortgage Securities Corporation as Depositor; Deutsche Bank National Trust Company (Deutsche) as Trustee and Custodian; and Wells Fargo as Master Servicer. Doc. 1 at ¶ 2. The MSTA provides that it is governed by New York law.

Doc. 27–2 at 51. Saxon agreed to be the Servicer for the loans in the Trust by entering into a Flow Servicing Rights Purchase and Servicing Agreement (Servicing Agreement) with Goldman Sachs Mortgage Company. Doc. 1 at ¶ 5; Doc. 27–1 at 46. The Servicing Agreement was eventually assigned to Deutsche.

Saxon's responsibilities under the Servicing Agreement included collecting mortgage loan payments from borrowers, Doc. 30–1 at 26, remitting the collected payments to the Trust, Doc. 30–1 at 26–28, engaging in loss mitigation efforts with delinquent borrowers, Doc. 30–1 at 22–23, and, if necessary, pursuing foreclosure proceedings on the Trust's behalf, Doc. 30–1 at 24–25. Under the Servicing Agreement, Saxon had a duty to ensure that its mortgage servicing practices were in conformity with those of prudent mortgage lending institutions which service similar mortgage loans. Doc. 1 at ¶ 20; Doc. 30–1 at 7, 22, 24. As the Master Servicer, Wells Fargo had a duty under the MSTA to "monitor the performance of the Servicer under the related Servicing Agreements" and to "use its reasonable good faith efforts to cause the Servicer to duly and punctually perform their duties and obligations thereunder." Doc. 27–2 at 30; Doc. 1 at ¶ 21.

Section 12.07 of the MSTA contains what is commonly referred to as a "no-action clause" which provides in relevant part:

No Certificateholder shall have any right by virtue or by availing itself of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of an Event of Default and of the continuance thereof, as herein provided, and unless the Holders of Certificates evidencing not less than 25% of the Voting Rights evidenced by the Certificates shall also have made written request to the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses, and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity shall have neglected or refused to institute any such action, suit or proceeding....

Doc. 27–2 at 53.

LL Funds owns and holds certificates issued under the MSTA evidencing 25% or greater of the voting rights of the Trust. Doc. 1 at ¶¶ 3, 10. The Complaint does not aver that LL Funds owned 25% or greater of the voting rights during the time Saxon was the Servicer. In March 2014, after Saxon no longer was servicing loans in the Trust, LL Funds sent a letter to Deutsche directing it to sue Saxon and "any other parties under the MSTA ... while Saxon was a Servicer" for, among other things, breach of contract and negligence. Doc. 1 at ¶ 3; Doc. 1–1 at 1. LL Funds explained in the letter that it was making a written request under § 12.07 of the MSTA for Deutsche to institute an action in its own name as Trustee. Doc. 1 at ¶ 3; Doc. 1–1 at 1–2. LL Funds further explained that it had not given a separate notice of an Event of Default under § 12.07 because Saxon was no longer the Servicer for the Trust and could not remedy the conduct in question. Doc. 1 at ¶ 3; Doc. 1–1 at 2. To the extent that a separate notice of an Event of Default was necessary, however, LL Funds asked Deutsche to consider the letter as providing such notice. Doc. 1–1 at 2.

After Deutsche allowed more than sixty days to pass without bringing suit, LL Funds filed the present Complaint against Saxon and Wells Fargo. Doc. 1 at ¶ 3. Rather than focusing on Wells Fargo's actions as the Master Servicer of the Trust, the Complaint consists in large part of allegations concerning Wells Fargo's conduct as the servicer for loans in other trusts or other settings. Doc. 1 at ¶¶ 30–34, 40–45. According to the Complaint, Wells Fargo entered into consent orders with various federal agencies after investigations by these agencies revealed that Wells Fargo had engaged in "robo-signing"¹ and other improper conduct in its capacity as a servicer of loans not in this particular Trust. Doc. 1 at ¶¶ 30–34, 40–45.

The Complaint contains similar allegations about Saxon. LL Funds alleged in the Complaint that Saxon entered into a Consent Order (Saxon Consent Order) with the Board of Governors of the Federal Reserve in April 2012. Doc. 1 at ¶ 35. The Consent Order alleged that when foreclosing on certain residential mortgage loans that it serviced, Saxon had filed or caused to be filed affidavits purportedly based on the affiant's personal knowledge when in fact they were not; litigated foreclosure proceedings without ensuring that the mortgage and related documents were in order; failed to allocate proper resources to handle the increased level of foreclosures and loss mitigation activities; and failed to exercise adequate control over the foreclosure process. Doc. 1 at ¶ 35; Doc. 30–3 at 1–4. LL Funds alleged in the Complaint that "[o]n information and belief, ... Saxon filed in county recording or land offices and in courts flawed, misleading, improper and arguably unlawful documents as set forth in the above-referenced [Saxon Consent Order] with regard to the Trust." Doc. 1 at ¶ 36.

Based on these allegations and others, LL Funds asserted claims for breach of contract against Wells Fargo (Count I); breach of contract against Saxon (Count II); negligence against Wells Fargo and Saxon (Count III); willful misfeasance/misconduct or gross negligence against Wells Fargo and Saxon (Count IV); and a violation of RICO against Wells Fargo (Count V). Doc. 1. Defendants offer multiple arguments in support of their motion to dismiss, each of which is discussed below.

II. Standards of Review

On a motion to dismiss under Rule 12(b)(6), courts must accept the plaintiff's factual allegations as true and construe all inferences in the plaintiff's favor, but need not accept a plaintiff's legal conclusions. Retro Television Network, Inc. v. Luken Commc'ns, LLC, 696 F.3d 766, 768–69 (8th Cir.2012). To survive a motion to dismiss for failure to state a claim, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are unnecessary, the plaintiff must plead enough facts to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. When determining whether to grant a Rule 12(b)(6) motion, a court generally must ignore materials outside the pleadings, but it may "consider ‘matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, items appearing in the record of the case, and exhibits attached to the complaint.’ " Dittmer Props., L.P. v. FDIC, 708 F.3d 1011, 1021 (8th Cir.2013) (quoting Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928, 931 n. 3 (8th Cir.2012) ); ...