Pac. Life Ins. Co. v. U.S. Bank

Decision Date19 October 2022
Docket Number16 Civ. 555 (PGG)
CourtU.S. District Court — Southern District of New York

Paul G. Gardephe United States District Judge

This action arises from Plaintiffs' purchase of more than $900 million worth of residential mortgage-backed securities certificates, for which Defendants U.S. Bank National Association and Bank of America, N.A. served as trustees. Defendants each moved to dismiss Plaintiffs' Amended Complaint in its entirety. In a previous order, the Court granted Defendants' motions in part and denied them in part. The purpose of this memorandum opinion is to explain the reasons for the Court's decision.


A. Mortgage Securitization

Residential mortgage-backed securities (“RMBS”) are financial products collateralized by residential mortgages. Securitization is the process through which thousands of individual mortgages are pooled together into discrete trusts, which then issue securities to investors in the form of certificates. (Am. Cmplt. (Dkt. No. 116) ¶¶ 27-28) As part of the securitization process, a “sponsor” or “seller” first acquires multiple mortgage loans from a mortgage “originator.” (Id. ¶ 28) The sponsor then sells a group of these loans - known as a “loan pool” - to a “depositor,” which is often a special-purpose affiliate of the sponsor. (Id. ¶¶ 27-28) The depositor conveys the loan pool to a trustee,” which holds the loan pool in trust under a “pooling and servicing agreement” (“PSA”). (Id. ¶ 29)

The PSA establishes “tranches” of the loan pool by risk level. (Id. ¶¶ 29, 32) The senior tranches contain mortgages with lower risk and lower interest rates, while the more junior tranches contain mortgages with greater risk and higher interest rates. (Id. ¶ 32) The trustee sells certificates representing these tranches to underwriters, who then sell the certificates to investors (who are known as “certificateholders”). (Id. ¶¶ 29, 39)

Pursuant to the PSA for each RMBS trust, a “servicer” is appointed to manage the collection of payments on the underlying mortgage loans, monitor delinquent borrowers, foreclose on defaulted loans, monitor compliance with representations and warranties regarding loan origination, track mortgage documentation, and manage and sell foreclosed properties. (Id. ¶ 30) Servicers also provide trustees with data about the underlying mortgage loans, which trustees then deliver in monthly remittance reports to certificate holders. (Id. ¶ 31) In some cases, the PSAs provide that servicers' activities are to be overseen by a “master servicer.” (See, e.g., id. ¶ 63)

B. The Covered Trusts

This case concerns thirty-two RMBS trusts created between 2004 and 2007 (the “Covered Trusts”). (Id. ¶¶ 4-5; Am. Cmplt., Ex. A (Dkt. No. 116-1) at 1-4)[2] Ten of these trusts were sponsored by Washington Mutual Bank or Washington Mutual Mortgage Securities Corp (the “WaMu Trusts”).[3] Eight trusts were sponsored by CitiMortgage, Inc., Citigroup Global Markets Realty Corp., or CSE Mortgage LLC.[4] Five trusts were sponsored by J.P. Morgan Acquisition Corp. or Chase Home Finance LLC.[5] Two trusts were sponsored by DLJ Mortgage Capital, Inc.[6] The following entities each sponsored one of the remaining seven trusts: Bank of America, N.A.; EMC Mortgage Corp.; Goldman Sachs Mortgage Co. (the “Goldman Trust”); UBS Real Estate Securities Inc.; Morgan Stanley Mortgage Capital, Inc. (the Morgan Stanley Trust”); Taylor, Bean & Whitaker Mortgage Corp.; and Wells Fargo Bank, N.A.[7] (Am. Cmplt. (Dkt. No. 116) ¶ 5; Am. Cmplt., Ex. A (Dkt. No. 116-1) at 1-4)

Plaintiff Pacific Life Insurance Company is an insurance company incorporated in Nebraska with its principal place of business in Newport Beach, California. (Am. Cmplt. (Dkt. No. 116) ¶ 19) Plaintiff Pacific Life & Annuity Company is an insurance company incorporated in Arizona with its principal place of business in Newport Beach, California. (Id. ¶ 20) Plaintiffs purchased RMBS certificates issued by the Covered Trusts with an original face value of approximately $900 million. (Id. ¶ 6) Plaintiffs sold approximately $400 million worth of the certificates between 2011 and 2014 but kept the rest. (Id.; Am. Cmplt., Ex. B (Dkt. No. 116-2) at 1)

Defendant U.S. Bank National Association (U.S. Bank) is the current trustee for all thirty-two Covered Trusts. (Am. Cmplt. (Dkt. No. 116) ¶ 22) Defendant Bank of America, N.A. (“BOA,” and together with U.S. Bank, Defendants or Trustees) served as the trustee for eleven of the Covered Trusts - the ten WaMu Trusts and the Morgan Stanley Trust - from October 2007 to December 2010, at which point U.S. Bank succeeded BOA as trustee for those trusts. (Id. ¶ 21)

C. Defendants' Duties as Trustees

Defendants' duties and obligations as RMBS trustees are set forth in the PSAs governing the Covered Trusts, as well as in applicable state and federal law.[8] (Id. ¶ 10) Because each of the Covered Trusts is governed by a different PSA or comparable governing agreement, Defendants' duties differ somewhat on a trust-by-trust basis. Nonetheless, because many of the PSAs share the same or substantially similar provisions, the Amended Complaint sets forth several broad categories of duties that the PSAs allegedly impose on Defendants.

1.The Duty to Take Physical Possession of Complete Mortgage Files and Enforce Related Repurchase Obligations

According to Plaintiffs, under the PSAs, Defendants are “required to take physical possession of the mortgage loans and the accompanying mortgage files for the exclusive use and benefit of all current and future [c]ertificateholders.” (Id. ¶ 41 (citing Am. Cmplt., Ex. C (“PSA Provisions”) (Dkt. No. 116-3) § II)) A complete mortgage file includes, inter alia: (1) [t]he original [endorsed] [m]ortgage [n]ote”; (2) “the original recorded [m]ortgage”; (3) records of the original assignment of the mortgage and “all intervening assignments evidencing a complete chain of assignment”; and (4) originals of any document modifying a mortgage loan. (Id. ¶ 42 (citing PSA Provisions (Dkt. No. 116-3) § III) (emphasis omitted))

Plaintiffs allege that Defendants had a contractual and common law obligation under the PSAs to review each of the mortgage files for the mortgage loans and certify that the documentation for each of the loans was accurate and complete.” (Id. ¶ 44) As part of this certification process, the PSAs require Defendants to initially certify that they have “received and reviewed the two key documents for the mortgage loan”: (1) “the original mortgage note with a complete chain of endorsements from the [o]riginator to . . . the trustee[]; and (2) “a duly executed assignment of mortgage.” (Id. ¶¶ 45-46 (citing PSA Provisions (Dkt. No. 116-3) § IV)) After a designated period, Defendants must then issue a final certification that (1) attests to the completeness of the received mortgage files; and (2) specifically identifies any incomplete files in a “document exception report.” (Id. ¶ 47 (citing PSA Provisions (Dkt. No. 116-3) § V); id. ¶ 48)

The PSAs also impose certain duties on Defendants when they discover defects in mortgage files. For example, the Goldman Trust PSA provides that, [u]pon discovering or recei[ving] notice” of “any defective or missing document” in a mortgage file, the trustee must “promptly request that [the] [s]eller cure such defect” and, “if such [s]eller does not cure such defect . . . in all material respects [within a specified period],” enforce the seller's obligation to repurchase the underlying loans pursuant to the applicable mortgage loan purchase agreement. (Id. ¶ 48 (emphasis omitted) (citing PSA Provisions (Dkt. No. 116-3) § VI))

2.The Duty to Provide Notice of Breaches of Representations and Warranties and to Enforce Related Repurchase Obligations

In their mortgage loan purchase agreements with Defendants and in the PSAs, the sponsors and originators of the Covered Trusts (the “Sponsors” and “Originators,” respectively) made certain representations and warranties regarding the mortgage loans held by the Covered Trusts. (Id. ¶ 51) If Defendants become aware of breaches of these representations and warranties - for instance, if Defendants learn that the mortgage loans held by the Covered Trusts are not of the quality represented by the Sponsors or Originators - this knowledge triggers certain obligations under the PSAs. (Id.)

The scope of Defendants' obligations upon discovering such breaches differs from trust to trust. For example, certain PSAs require Defendants to provide “prompt written notice” of the breach to the other parties to the PSA. (Id. ¶¶ 52-53 (citing PSA Provisions (Dkt. No. 116-3) § VI)) Some PSAs also “explicitly provide that Defendants shall enforce the responsible parties' repurchase obligations” upon discovering breaches of representations and warranties. (Id. ¶ 54) Other PSAs do not expressly require Defendants to enforce such repurchase obligations, but instead provide that the trustee “will be reimbursed for its expenses incurred enforcing the repurchase obligation” or assign to the trustee certain “managerial functions in the repurchase protocol, such as extending the [period in which the relevant party may cure the breach].” (Id.)

3.The Duty to Address Servicers' and Master Servicers' Failure to Meet Prudent Servicing Standards

Under the PSAs, the servicers and master servicers of the Covered Trusts (the “Servicers” and “Master Servicers,” respectively) are largely tasked with the day-to-day management of the mortgage loans making up those trusts. (See id. ¶¶ 30-31) Plaintiffs allege, however,...

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