Nat'l Credit Union Admin. Bd. v. Deutsche Bank Nat'l Trust Co., 14-cv-8919 (SHS)

• Decision Date: 15 October 2019
• Docket Number: 14-cv-8919 (SHS)
• Citation: 410 F.Supp.3d 662
• Parties: NATIONAL CREDIT UNION ADMINISTRATION BOARD, et al., Plaintiffs, v. DEUTSCHE BANK NATIONAL TRUST COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

410 F.Supp.3d 662

NATIONAL CREDIT UNION ADMINISTRATION BOARD, et al., Plaintiffs,

v.DEUTSCHE BANK NATIONAL TRUST COMPANY, Defendant.

14-cv-8919 (SHS)

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

Signed October 15, 2019

David Charles Frederick, Wan Joo Kim, Pro Hac Vice, Frederick Gaston Hall, Matthew Michael Duffy, Kellogg, Hansen, Todd, Figel & Frederick PLLC, Scott K. Attaway, Pro Hac Vice, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Benjamin Philip Taibleson, Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC, Washington, DC, David H. Wollmuth, Ryan Anthony Kane, Steven Sanford Fitzgerald, William Andrew Maher, Danielle Ann D'Aquila, Melissa Ann Finkelstein, Roselind Franciska Hallinan, Sean Patrick McGonigle, Wollmuth Maher & Deutsch LLP, New York, NY, George A. Zelcs, Pro Hac Vice, John Anton Libra, Matthew Davies, Maximilian Clay Gibbons, Korein Tillery LLC, Chicago, IL, Stephen M. Tillery, Pro Hac Vice, Steven Michael Berezney, Korein Tillery, LLC, St. Louis, MO, for Plaintiffs.

Ashley Anelcha Krupski, Dennis Sinclitico, Jr., Morgan, Lewis & Bockius LLP, San Francisco, CA, Bernard J. Garbutt, III, Grant R. MacQueen, Jawad B. Muaddi, Regina Schaffer-Goldman, Morgan Lewis & Bockius, LLP, New York, NY, for Defendant.

OPINION & ORDER

SIDNEY H. STEIN, U.S. District Judge.

Before the Court is (1) a motion from plaintiff National Credit Union Administration Board ("NCUA") for leave to file a Proposed Second Amended Complaint ("PSAC") and to substitute a Separate Trustee as plaintiff pursuant to Rules 15 and 17 of the Federal Rules of Civil Procedure ; (2) a motion to dismiss the PSAC from defendant Deutsche Bank National Trust Company ("Deutsche Bank") pursuant to Rule 12 of the Federal Rules of Civil Procedure ; (3) Deutsche Bank's motion to stay plaintiff's claims related to indemnification; and (4) NCUA's motion to strike certain portions of Deutsche Bank's reply memorandum of law.

These motions followed a Court-imposed 2-day stay where the Court dismissed defendant's then-pending motion to dismiss plaintiff's amended complaint without prejudice in anticipation of a decision from the United States Court of Appeals for the Second Circuit in National Credit Union Admin. Bd. v. U.S. Bank Nat'l Ass'n , No. 17-756. As discussed further below, this case was set to, and did, clarify some of the outstanding issues with plaintiff's standing.

For the reasons set forth below, plaintiff's motion for leave to amend and to substitute is granted; defendant's motion to dismiss is granted in part and denied in part; defendant's motion to stay plaintiff's indemnification claims is granted; and plaintiff's motion to strike is denied.

Table of Contents

I. BACKGROUND ...668

A. Factual Background ...668

B. Procedural History ...670

II. OVERVIEW ...672

III. DISCUSSION ...673

A. Plaintiff's Motion for Leave to Amend the First Amended Complaint and Substitute a Separate Trustee is Granted ...673

1. Legal Standard ...673

2. NCUA's Proposed Amendment and Substitution is Timely and There Has Been No Undue Delay ...674

3. NCUA's Proposed Amendment and Substitution is Not Too Broad in Scope. ...675

4. NCUA May Substitute Itself as Plaintiff for the "Unwound" Certificates ...678

5. Deutsche Bank Does Not Have Standing to Challenge the Separate Trustee Agreement ...678

6. The Separate Trustee Benefits From NCUA's Extender Statute ...680

7. Conclusion ...681

B. Defendant's Motion to Dismiss the Proposed Second Amended Complaint is Granted in Part and Denied in Part ...681

1. Legal Standard ...681

2. Deutsche Bank's Motion to Dismiss NCUA's Breach of Contract Claims is Denied ...681

3. Deutsche Bank's Motion to Dismiss NCUA's Tort Claims is Granted ...687

4. Deutsche Bank's Motion to Dismiss NCUA's Indemnification Claims is Denied ...690

C. Defendant's Motion to Stay NCUA's Indemnification Claims is Granted ...692

D. Plaintiff's Motion to Strike is Denied ...693

IV. CONCLUSION ...693

I. BACKGROUND

A. Factual Background¹

NCUA is an independent federal agency in the executive branch that regulates federal credit unions pursuant to the Federal Credit Union Act, 12 U.S.C. § 1751 et seq. One of NCUA's powers is to place failed credit unions into liquidation. Id. § 1787. Upon liquidation, NCUA succeeds to "all rights, titles, powers, and privileges of the credit union, and of any member, accountholder, officer, or director of such credit union with respect to the credit union and the assets of the credit union." Id. § 1787(b)(2)(A)(i). According to NCUA, in 2009 and 2010, in the aftermath of the financial crisis, it placed several failed corporate credit unions into liquidation and thus succeeded those entities. (PSAC ¶¶ 18-26.) The failed corporate credit unions had assets which included residential mortgage-backed securities ("RMBS") in trusts for which Deutsche Bank serves as trustee.

Each trust consists of hundreds of individual residential mortgage loans that were pooled together and securitized for sale to investors. Originators of the residential mortgage loans underwrite individual loans, and the securitization process begins with a sponsor who purchases loans in bulk from one or more originators. (Id. ¶¶ 48-49.) The sponsor transfers title of the loans to an entity called a depositor, who in turn transfers the loans to a trust that issues notes and/or certificates, providing certificateholders scheduled principal and interest payments derived from the cash flow from the mortgage pool underlying the securities. (Id. ¶¶ 49-51.) Once the loans are deposited into a trust, a master servicer or servicer is tasked with the collection of payments from borrowers; monitoring the loans, and bringing any necessary foreclosure actions against delinquent borrowers who are late on payments. (Id. ¶ 56.) The servicers transfer the loan payments from the borrowers to the trusts and the trustee uses those payments to make scheduled principal and interest payments to certificateholders. (Id. ¶ 57.)

Deutsche Bank serves as trustee for the RMBS trusts at issue in this litigation and these trusts are governed by agreements called Pooling and Servicing Agreements ("PSAs").² (Id. ¶ 55.)

Under pressure to stabilize the crashing credit union system, NCUA re-securitized many of the distressed RMBS trust assets it succeeded to from the failed credit unions pursuant to its Guaranteed Notes Program. (Id. ¶ 29.) It formed several trusts known as NCUA Guaranteed Notes Trusts ("NGN Trusts"), which pooled the RMBS certificates, along with other securitized assets, to issue new NGN Trust certificates, or notes, valued at approximately $28.3 billion. (Id. ) The holders of these certificates would receive payments from the underlying assets' cash flows. (Id. ) These new NGN Trusts were guaranteed by NCUA and backed by the full faith and credit of the U.S. Treasury. (Id. ¶ 34.) They were structured to last for a period of years and then unwind after all certificate holders were paid, with the underlying RMBS certificates returned to NCUA after the unwinding as a result of NCUA retaining what it calls "Owner Trust Certificates." (Id. ¶ 32.)

The NGN Trusts issued notes pursuant to a set of three agreements: (1) Trust Agreements that conveyed the relevant assets from NCUA as liquidating agent of the credit unions to the NGN Trusts and caused Owner Trust Certificates to be issued to NCUA through Wells Fargo acting as "Owner Trustee"; (2) Indenture Agreements between the NGN Trusts and The Bank of New York Mellon ("BNYM") that appointed BNYM as the Indenture Trustee responsible for holding the NGN Trusts' assets as collateral and caused the NGN Trust certificates to issue; and (3) Guarantee Agreements between NCUA, acting in a capacity as executive agency guarantor, the NGN Trusts, and BNYM.³ (Id. ¶¶ 30-31.) Under the agreements governing the creation of the NGN Trusts, BNYM had the exclusive right to bring suit on behalf of the NGN Trusts. (Id. ¶ 35.)

The substance of plaintiff's claims against Deutsche Bank revolve around Deutsche Bank's duties as Trustee to the original RMBS trusts. According to the PSAC, Deutsche Bank had both common law and contractual duties as Trustee to, inter alia , (1) review the underlying mortgage files for completeness and accuracy, (2) notify appropriate parties and take various actions should it discover breaches of representations and warranties ("R & Ws") concerning the mortgage loans, and (3) take similar protective actions upon learning of events of default concerning the trust. (Id. ¶¶ 5-7.) NCUA alleges that Deutsche Bank was derelict in its duties and failed to perform its obligations. According to plaintiff, reports of systemic problems with the mortgages and the trusts as well as Deutsche Bank's own involvement in the RMBS market support the likelihood that Deutsche Bank had notice of these issues with the underlying mortgages, and yet it allegedly took no remedial action. (Id. ¶¶ 8-15.) In addition, NCUA claims that Deutsche Bank is using funds from the trusts to fund its defense of this lawsuit. (Id. ¶ 16) As discussed further below, this is a new allegation not contained in the previous complaint. Plaintiff brings claims for:

• Count One – Breach of Contract for Deutsche Bank's breaches of the PSAs that govern the RMBS trusts;

• Count Two – Negligence and Gross Negligence under tort law for Deutsche Bank's neglect of its duties as trustee;

• Count Three – Breach of Fiduciary Duty under tort law;

• Count Four – Declaratory Judgment that defendant is not permitted to use trust funds to pay its litigation costs; and

• Count Five – Breach of Contract for Deutsche Bank's unlawful withdrawals from the trust funds to pay its litigation costs.

(Id. ¶¶ 523-58.)

B. Procedural History

NCUA filed its original complaint in this action on November 7, 2014. (Doc. 1.) In NCUA's amended complaint filed in March 2015, it brought claims on behalf of 97 trusts for which Deutsche Bank served as trustee. (First Amended Complaint ("FAC"), Doc. 38.) Of those 97, NCUA only had a direct...