IKB International, S.A. v. Wells Fargo Bank, N.A.

• Docket Number: 16049-16050-16051-16052-16053,Index Nos. 654443/15, 654442/15, 654440/15, 654439/15, 654436/15, 654438/15,Case Nos. 2021-01661, 2021-01667, 2021-01680, 2021-01813, 2021-01816, 2021-01988
• Decision Date: 30 August 2022
• Citation: 208 A.D.3d 423,175 N.Y.S.3d 5
• Parties: IKB INTERNATIONAL, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. WELLS FARGO BANK, N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, ABFC 2006–OPT1 Trust et al., Nominal Defendants. IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. U.S. Bank, N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, Asset Backed Securities Corp. et al., Nominal Defendants. IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. HSBC Bank USA N.A., as Trustee (and any predecessors and successors thereto), Defendant–Appellant–Respondent, Ace Securities Corp. et al., Nominal Defendants. IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. Deutsche Bank National Trust Company, as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, Accredited Mortgage Loan Trust 2004–3, et al., Nominal Defendants. IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. LaSalle Bank N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, Accredited Mortgage Loan Trust 2005–3, et al., Nominal Defendants. IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants, v. The Bank of New York, as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, Centex Home Equity Loan Trust 2004–B, et al., Nominal Defendants.
• Court: New York Supreme Court — Appellate Division

208 A.D.3d 423

175 N.Y.S.3d 5

IKB INTERNATIONAL, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.WELLS FARGO BANK, N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents,ABFC 2006–OPT1 Trust et al., Nominal Defendants.

IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.U.S. Bank, N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents,Asset Backed Securities Corp. et al., Nominal Defendants.

IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.HSBC Bank USA N.A., as Trustee (and any predecessors and successors thereto), Defendant–Appellant–Respondent,Ace Securities Corp. et al., Nominal Defendants.

IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.Deutsche Bank National Trust Company, as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents,Accredited Mortgage Loan Trust 2004–3, et al., Nominal Defendants.

IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.LaSalle Bank N.A., as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents, Accredited Mortgage Loan Trust 2005–3, et al., Nominal Defendants.

IKB International, S.A. etc., et al., Plaintiffs–Respondents–Appellants,

v.The Bank of New York, as Trustee (and any predecessors and successors thereto), et al., Defendants–Appellants–Respondents,Centex Home Equity Loan Trust 2004–B, et al., Nominal Defendants.

16049-16050-16051-16052-16053

Index Nos. 654443/15, 654442/15, 654440/15, 654439/15, 654436/15, 654438/15

Case Nos. 2021-01661, 2021-01667, 2021-01680, 2021-01813, 2021-01816, 2021-01988

Supreme Court, Appellate Division, First Department, New York.

Entered August 30, 2022

Jones Day, New York (Howard F. Sidman of counsel), for Wells Fargo Bank, N.A. and Wells Fargo Bank, N.A. as successor by merger to Wells Fargo Bank Minnesota, N.A., appellants-respondents.

Jones Day, New York (David F. Adler and Michael T. Marcucci of counsel), for U.S. Bank National Association and U.S. Bank Trust National Association, appellants-respondents.

Morgan Lewis & Bockius, LLP, New York (Michael S. Kraut of counsel), for Deutsche Bank National Trust Company and Deutsche Bank National Trust Company Americas and Deutsche Bank Trust Company Americas appellants-respondents.

Winston & Strawn LLP, New York (Alan A. Stevens of counsel), and Munger, Tolles & Olson LLP, Los Angeles, CA (Jacob S. Kreilkamp, of the bar of the State of California, admitted pro hac vice, of counsel), for Bank of America N.A., and Bank of America, N.A., as successor to LaSalle Bank, N.A., appellants-respondents.

Mayer Brown LLP, New York (Christopher J. Houpt of counsel), for The Bank of New York, BNY Western Trust Company, The Bank of New York Trust Company, N.A., The Bank of New York Mellon Corporation, N.A., and The Bank of New York Mellon Trust Company, N.A., appellants-respondents.

Schlam Stone & Dolan LLP, New York (Seth D. Allen of counsel), and John J.D. McFerrin–Clancy, New York for respondents-appellants.

Acosta, P.J., Renwick, Singh, Moulton, Kennedy, JJ.

Order, Supreme Court, New York County (Marcy S. Friedman, J.), entered on or about January 28, 2021, which, insofar as appealed from as limited by the briefs, denied defendants’ motions to dismiss the pre-Event of Default representation and warranty repurchase enforcement breach of contract claims, the post-Event of Default breach of contract claims, and the breach of conflict of interest and post-Event of Default breach of fiduciary duty claims, and granted the motions as to the pre-Event of Default document defect repurchase enforcement claims, modified, on the law, to grant the motions as to the post-Event of Default breach of contract claims insofar as related to the subset of trusts governed by pooling and servicing agreements (PSAs) requiring written notice from an authorized party to constitute an event of default and the post-Event of Default breach of fiduciary duty claims insofar as based on alleged failures to act as contractually required, and to deny the motions as to the pre-Event of Default document defect repurchase enforcement claims, and otherwise affirmed, without costs.¹

Plaintiffs purchased residential mortgage-backed securities (RMBS) certificates issued by RMBS trusts for which defendants served as the trustees. In six separate actions brought in May 2016, plaintiffs allege that their investments are almost worthless as a result of defendants’ breaches of their contractual, fiduciary, and statutory duties.

Plaintiffs’ noncompliance with the no-action clauses in the governing agreements is not a ground for dismissal of the complaints. Plaintiffs’ compliance was excused because "it would be futile to demand that the trustee commence an action against itself," and "[o]nce performance of the demand requirement in the no-action clause is excused, performance of the entire provision is excused, including the requirement that demand be made by 25% of the certificate holders" ( Blackrock Balanced Capital Portfolio (FI) v. U.S. Bank N.A., 165 A.D.3d 526, 528, 86 N.Y.S.3d 484 [1st Dept. 2018] ).

Supreme Court correctly declined to dismiss the pre-Event of Default (EOD) representations and warranties repurchase enforcement claims involving those governing agreements where the repurchase protocol is silent as to any enforcement mechanism, including specifying the party responsible for its enforcement.

Defendants’ duties as trustees arise solely from contract. Accordingly, whether a duty exists depends on interpreting the relevant agreements. "The best evidence of what parties to a written agreement intend is what they say in their writing" ( Slamow v. Del Col, 79 N.Y.2d 1016, 1018, 584 N.Y.S.2d 424, 594 N.E.2d 918 [1992] ). A contract should be read as a "harmonious and integrated whole," and each and every part should be given "effect" ( Nomura Home Equity Loan, Inc., Series 2006–FM2 v. Nomura Credit & Capital, Inc., 30 N.Y.3d 572, 581, 69 N.Y.S.3d 520, 92 N.E.3d 743 [2017] [internal quotation marks omitted]). "Courts may not, through their interpretation of a contract, add or excise terms or distort the meaning of any particular words or phrases" ( id. ). Nor should an agreement be read to produce a result that is "absurd, commercially unreasonable or contrary to the reasonable expectations of the parties" ( Matter of Lipper Holdings v. Trident Holdings, 1 A.D.3d 170, 171, 766 N.Y.S.2d 561 [1st Dept. 2003] [internal citations omitted]; see also Matter of Provident Loan Socy. of N.Y. v. 190 E. 72nd Corp., 173 A.D.3d 531, 531, 100 N.Y.S.3d 517 [1st Dept. 2019] ).

Contrary to the partial dissent's view, Supreme Court correctly found that the provision that "[t]he Trustee agrees to ... exercise the rights referred to above for the benefit of all present and future [certificateholders]" imposed an express duty on the trustees to enforce the repurchase protocol for the benefit of the investors (see Royal Park Invs. SA/NV v. Deutsche Bank Natl. Trust Co., 2016 WL 439020, *4, 2016 U.S. Dist. LEXIS 12982 [S.D.N.Y., Feb. 3, 2016, No. 14–CV–4394 (AJN)] ; but see Commerzbank AG v. U.S. Bank N.A., 457 F Supp 3d 233, 257–258 [S.D.N.Y.2020] ; Western & S. Life Ins. Co. v. Bank of N.Y. Mellon, 2019-Ohio-388, 129 N.E.3d 1085, 1093–1094 [2019] ). Notably, defendants do not dispute plaintiffs’ assertion that "the rights referred to above" include the right to have noncompliant loans repurchased, nor do they attempt to otherwise explain what rights are "referred to above."

Moreover, this express language is not discretionary, as defendants and our partially dissenting colleagues maintain. As our colleagues point out, the provision does not use the language "shall" or "must." However, the provision employs the language "agrees to," which is also language of commitment (see Davies, Hardy, Ives & Lawther v. Abbott, 38 N.Y.2d 216, 219, 379 N.Y.S.2d 686, 342 N.E.2d 490 [1975] ["[i]t is even clearer, in our view, that the use of the verbal phrase, ‘agrees to assume’ can only be understood as manifesting a commitment to some obligation"]). Notably, the provision could have, but did not, provide that the trustee "may" or "has the discretion to" exercise the rights (see e.g. Freedom Mtge. Corp. v. Engel, 37 N.Y.3d 1, 21, 169 N.E.3d 912 [2021] [where "mortgages provide that the noteholder ‘may ’ require immediate payment of the outstanding debt ... [i]t is plain from this language that whether to exercise this contractual right is a matter within the noteholder's discretion"]). Nor can we add such discretionary language to the governing agreements where none exists (see Nomura, 30 N.Y.3d at 581, 69 N.Y.S.3d 520, 92 N.E.3d 743 ).² Because we find this duty is specifically set forth in the agreements, we read this provision in harmony with Section 8 and do not ignore that section, contrary to the partial dissent's assertion.

The partial dissent incorrectly contends that we conflate duties and rights. Rather, the two are distinct in our analysis. In the language quoted above, "agrees to" imposes a duty on the trustees. The right of the investors is embodied in the repurchase protocol. The partial dissent's analysis denies the duty and orphans the right.

The partial dissent cites ( Prickett v. New York Life Ins. Co., 896 F.Supp.2d 236, 251–252 [S.D.N.Y.2012] ) to support its argument that certain rights are discretionary. While we agree that discretionary language cannot create an affirmative duty, we disagree with the conclusion that the language here is discretionary, as it was in Prickett . Notably, Prickett is inapposite because the relevant agreement gave the defendant New York Life the "discretion" to "deem investments inappropriate for its policyholders" ( id. at 242 ). Thus, the federal court correctly rejected the plaintiff's duty argument on the basis that "the contract says that New York...