Phx. Light SF Ltd. v. Deutsche Bank Nat'l Trust Co.

• Decision Date: 28 March 2016
• Docket Number: 14–cv–10103 (JGK)
• Citation: 172 F.Supp.3d 700
• Parties: Phoenix Light SF Ltd., et al., Plaintiffs, v. Deutsche Bank National Trust Co., Defendant.
• Court: U.S. District Court — Southern District of New York

172 F.Supp.3d 700

Phoenix Light SF Ltd., et al., Plaintiffs,

v.Deutsche Bank National Trust Co., Defendant.

14–cv–10103 (JGK)

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

Signed March 28, 2016

David H. Wollmuth, Melissa Ann Finkelstein, Michael Ledley, Randall R. Rainer, Steven Sanford Fitzgerald, Danielle Ann D'Aquila, Roselind Franciska Hallinan, Sean Patrick McGonigle, William Andrew Maher, Wollmuth, Maher & Deutsch, LLP, New York, NY, George A. Zelcs, John Libra, Matthew Davies, Maximilian Clay Gibbons, John Libra, Korein Tillery LLC, Chicago, IL, Stephen M. Tillery, Korein Tillery, LLC, St. Louis, MO, for Plaintiffs.

Bernard J. Garbutt, III, Kevin James Biron, Michael Stephan Kraut, Regina Schaffer–Goldman, Steven G. Brody, Morgan Lewis & Bockius LLP, New York, NY, for Defendant.

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

This case, like many others before it, is about residential mortgage-backed securities (“RMBS”) trusts. Phoenix Light SF Limited (“Phoenix”) and nine other special-purpose investment vehicles (collectively “the plaintiffs”) that invested in RMBS Trusts filed this action against Deutsche Bank National Trust Company (“Deutsche Bank” or the “defendant”). Deutsche Bank was the RMBS Trustee for 55 Trusts in which the plaintiffs had invested (the “Covered Trusts” or “Trusts”). The Second Amended Complaint (“SAC”) alleges that Deutsche Bank violated its duties as the RMBS Trustee to ensure that the documents relating to the mortgage files were complete, to ensure that the servicers of the mortgage loans were acting prudently, and to give notice to all the parties to the Pooling and Servicing Agreements (“PSAs”) and Indenture Agreements (together, “Agreements”) that governed the Covered Trusts that there were ongoing breaches of representations and warranties by the sponsors or originators of the Trusts and by the servicers of the Trusts. The plaintiffs assert, among other things, that Deutsche Bank's conduct as RMBS Trustee breached the PSAs and Indenture Agreements; violated the Trust Indenture Act of 1939 (“TIA”), 15 U.S.C. § 77aaa, et seq., and New York's Streit Act, N.Y. Real Prop. Law § 124, et seq. ; breached the fiduciary duty Deutsche Bank owed to the plaintiffs; and was negligent or grossly negligent.

Deutsche Bank now moves to dismiss portions of the SAC. For the reasons explained below, Deutsche Bank's motion is granted in part and denied in part .

I.

Deutsche Bank moves to dismiss parts of the SAC pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007). The Court's function on a motion to dismiss is “not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). The Court should not dismiss the complaint if the plaintiff has stated “enough facts to state a claim to relief that is plausible on its face.” 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.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

While the Court should construe the factual allegations in the light most favorable to the plaintiff, “the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions.” Id. When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002).

II.

The Court accepts the plaintiffs' allegations in the SAC as true for the purposes of this motion to dismiss. The plaintiffs are holders of RMBS certificates issued by certain Trusts for which Deutsche Bank served as the Trustee. The Trusts were created between 2005 and 2007. The Plaintiffs currently hold RMBS certificates with an original face value of over $935 million. SAC ¶ 3.

The main plaintiff, Phoenix, is a private limited company incorporated under the laws of Ireland with its principal place of business in Ireland. SAC ¶ 16. The other plaintiffs are special purpose entities that were formed to issue securities in securitization transactions referred to as “collateralized debt obligations” or CDOs. SAC ¶¶ 16–25. The plaintiffs are CDO issuers that invested in RMBS certificates and then issued notes pursuant to an indenture or an agreement. SAC ¶ 28.

In the course of briefing the present motion, the parties agreed to dismiss claims relating to 4 Trusts, Dkt. Nos. 60 & 61, leaving only the claims pertaining to 51 Trusts. The Trusts were created in a mortgage loan securitization process whereby mortgage loans were originated and pooled together in various trusts. The sponsor of the trust acquired the mortgage loans and then sold the large pool of loans to a depositor. The depositor conveyed the pool of loans to a trustee pursuant to a PSA. SAC ¶¶ 50–52. Trust certificates were issued for particular tranches in the trust and the certificates were sold to an underwriter, which in turn sold the certificates to investors, like the plaintiffs. SAC ¶ 52. The servicer for each trust manages the collection of mortgage payments in return for a fee, and the servicer is tasked with monitoring loan performance, the rate of default, and compliance with representations and warranties; the servicer is also tasked with foreclosing and disposing of properties. SAC ¶ 53. Each tranche in an RMBS trust has a different level of risk, and credit rating agencies assign a particular rating to each tranche. Senior tranches receive a greater percentage of payment compared to the payment allocated to junior tranches. SAC ¶ 55.

Deutsche Bank is the RMBS Trustee pursuant to the PSAs or the Indenture Agreements for the Covered Trusts. SAC ¶¶ 50, 52, 58. The RMBS Trustee delivers to the certificate holders reports that describe the performance of the loans. SAC ¶ 54. The PSAs set forth the process by which the loans are conveyed to a trust, namely the process in which the sponsor conveys loans to the depositor and the depositor conveys loans to Deutsche Bank as Trustee. SAC ¶ 59. Among the duties set forth in the PSAs, Deutsche Bank must acknowledge receipt of the loan documentation and retain physical possession of the documents. SAC ¶¶ 60, 62. Deutsche Bank or a custodian was also required to issue a final certification and exception report that identified the files that were missing documents. SAC ¶ 63. The SAC alleges that in the event of documentation deficiencies, Deutsche Bank was required to demand that the sponsor cure defects or repurchase or substitute defective loans. SAC ¶ 65. Some of the PSAs specified that repurchase was not available after a specified period of time, typically two years after the trust closed. SAC ¶ 66.

According to the SAC, Deutsche Bank was also required to provide notice of breaches of covenants and representations and warranties by the sponsors or originators and by the servicers of the mortgages in the Trusts. SAC ¶¶ 67–69. The SAC alleges that Deutsche Bank was aware of a widespread default rate and underperforming loans because (1) several foreclosure actions were commenced on Deutsche Bank's behalf, SAC ¶¶ 97–98; (2) the mortgage industry was widely plagued by predatory lending practices and deficient underwriting guidelines, SAC ¶ 100; (3) there were several highly publicized RMBS lawsuits, including Deutsche Bank's actions against certain sponsors and mortgage loan originators and actions brought by monoline insurers against sponsors for breaches of representations and warranties concerning underwriting standards, SAC ¶¶ 102, 104, 115, 143–44; and (4) there were widespread downgrades in the credit rating of RMBS Trusts due to high rates of default and delinquencies, SAC ¶ 109. According to the SAC, despite being aware of the widespread breaches of representations and warranties, Deutsche Bank did not provide notice of these defaults to the plaintiffs. SAC ¶ 117.

The SAC further alleges that Deutsche Bank became aware of “Events of Default” under the Agreements and did not take action. Among the alleged events of default, Deutsche Bank allegedly knew that servicers were engaging in “robo-signing” to foreclose on properties. SAC ¶¶ 123, 128. The servicers were required to provide a conforming annual certification that they were complying with the terms of the PSA. According to the SAC, Deutsche Bank received certifications it knew to be false because it knew the servicers were not satisfying their duties under the PSAs, and the failure to provide a conforming certification is allegedly an event of default under the PSAs. SAC ¶¶ 138–40. The SAC alleges that with respect to the Trusts governed by Indenture Agreements, Deutsche Bank was aware that the parties tasked with the duty of protecting the collateral of the trusts had failed to satisfy their obligations. SAC ¶¶ 132–34. This failure allegedly constituted an event of default under the Indenture Agreements. SAC ¶ 135.

The SAC alleges additional misconduct by the servicers of the Trusts, including allegations that the servicers charged improper and excessive fees and purchased insurance policies for properties that were already insured. SAC ¶ 149. According to the SAC, this misconduct triggered...