Ret. Bd. of the Policemen's Annuity & Benefit Fund of Chi. v. Bank of N.Y. Mellon

• Decision Date: 03 April 2012
• Docket Number: No. 11 Civ. 5459 (WHP).,11 Civ. 5459 (WHP).
• Parties: RETIREMENT BOARD OF the POLICEMEN'S ANNUITY AND BENEFIT FUND OF the CITY OF CHICAGO, et al., Plaintiffs, v. The BANK OF NEW YORK MELLON, Defendant.
• Court: U.S. District Court — Southern District of New York

914 F.Supp.2d 422

RETIREMENT BOARD OF the POLICEMEN'S ANNUITY AND BENEFIT FUND OF the CITY OF CHICAGO, et al., Plaintiffs,

v.The BANK OF NEW YORK MELLON, Defendant.

No. 11 Civ. 5459 (WHP).

United States District Court,

S.D. New York.

April 3, 2012.

Max R. Schwartz, Esq., Beth A. Kaswan, Esq., Joseph P. Guglielmo, Esq., Scott & Scott, LLC, New York, NY, for Plaintiffs.

Matthew D. Ingber, Esq., Mayer Brown LLP, New York, NY, for Defendant.

MEMORANDUM & ORDER

WILLIAM H. PAULEY III, District Judge.

Plaintiffs—suing individually, on behalf of a putative class, and derivatively—own mortgage-backed securities issued by trusts for which Defendant, The Bank of New York Mellon (“BNYM”), serves as trustee. They allege that BNYM violated several provisions of the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa, et seq. (the “TIA”), and breached its contractual and fiduciary duties. BNYM moves to dismiss the Class Action and Derivative Complaint in its entirety. For the following reasons, BNYM's motion to dismiss is granted in part and denied in part.

BACKGROUND

This case is another installment in litigation over BNYM's obligations as trustee for hundreds of securitization trusts. The structure of the underlying residential mortgage securitization transactions is familiar: “To raise funds for new mortgages, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificateholders.” BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169, 173 (2d Cir.2012). Here, the mortgage lenders are Countrywide Home Loans, Inc. and various affiliates (“Countrywide”). (Class Action and Derivative Complaint, dated Aug. 31, 2011 (“Compl.” or the “Complaint”) ¶ 35.) Bank of America Corporation (“Bank of America”) now owns Countrywide. (Compl. ¶ 15.)

Plaintiffs hold securities issued by twenty-five New York trusts and one Delaware trust. (Compl. Ex. B.) BNYM is trustee for the New York trusts, and Countrywide (now Bank of America) is the “master servicer.” (Compl. ¶¶ 1, 15, 96 n. 2.) As in BlackRock, 673 F.3d at 172–73, the terms of the New York trusts as well as the rights, duties, and obligations of the trustee and the master servicer are set forth in Pooling and Servicing Agreements (“PSAs”). (Compl. ¶ 2; Compl. Ex. C: Pooling and Servicing Agreement dated Sept. 1, 2006 (“PSA”).) ¹ The PSAs also govern the trustee's distribution of money to certificateholders. (Compl. ¶¶ 1, 2.) The Delaware trust operates similarly, with a few key differences. The Delaware trust issued notes, subject to an indenture, for which BNYM serves as indenture trustee. (Declaration of Matthew D. Ingber, dated Dec. 16, 2011 (“Ingber Decl.”) Ex A: Indenture, dated Mar. 30, 2006 (“Indenture”) § 3.04, Annex 1 (Glossary).) Concurrently, the Delaware trust entered into a Sale and Servicing Agreement (“SSA”) governing the sale of the underlying mortgage loans and the master servicer's responsibilities. (Ingber Decl. Ex. B: Sale and Servicing Agreement, dated Mar. 30, 2006 (“SSA”).) ²

The PSAs, Indenture, and SSA governing the trusts contain representations and warranties concerning the quality of the underlying mortgages, the duties of BNYM as trustee, and the structure of the securities issued by the trusts. (Compl. ¶¶ 33–48; Ingber Decl. Exs. A, B.) Plaintiffs allege that BNYM's duties include perfecting the assignment of the mortgages to the trusts, reviewing each of the loan files for the mortgages, certifying that the documentation for each of the mortgages is accurate and complete, creating a Document Exception Report listing any incomplete loan files, and ensuring that the master servicer cures, substitutes, or repurchases all mortgages listed on that Report. (Compl. ¶¶ 35–47.)

Plaintiffs claim that Countrywide breached its obligations as master servicer by failing “to provide mortgage loan files in their possession, to cure defects in the mortgage loan files and/or to substitute the defective loans with conforming loans.” (Compl. ¶ 87.) They further allege that BNYM did nothing to remedy the inadequate servicing of the mortgages undergirding the trusts. Specifically, they contend that BNYM failed to take possession of the loan files, review the loan files adequately, and require Countrywide and Bank of America to cure, substitute, or repurchase the defective loans. To support these allegations, Plaintiffs cite the bankruptcy court testimony of a Countrywide employee, who stated that it was Countrywide's standard business practice to retain the original mortgage notes and other documentation, rather than delivering them to BNYM as trustee. (Compl. ¶¶ 55–58.) Plaintiffs also cite a 2011 Joint Report by the Federal Reserve and other agencies flagging “concerns about the prevalence of irregularities in the documentation of ownership [that] may cause uncertainties for investors of securitized mortgages.” (Compl. ¶ 60.) Similarly, the New York Attorney General alleged that BNYM failed to ensure the complete transfer of mortgages and loan files from Countrywide to the trusts. (Compl. ¶ 61.)

The gravamen of the Complaint is that a prudent trustee would have remedied these failures by requiring the master servicer to cure or repurchase the defective loans in the trusts, and would have compelled the master servicer to comply with its servicing duties. Yet BNYM allegedly took no action to protect investors.³ Rather, on June 28, 2011, BNYM entered into an agreement with Countrywide and Bank of America to settle all potential claims belonging to the trusts for which it is trustee for $8.5 billion. See BlackRock, 673 F.3d at 173–75. Plaintiffs contend that—regardless of the settlement's fairness—BNYM caused them significant losses. They allege that the value of their mortgage-backed securities plummeted as a consequence of the underwriting defects and inadequate servicing of the underlying mortgages. (Compl. ¶ 74–76.)

DISCUSSION

I. Legal Standard

To survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 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)). To determine plausibility, courts follow a “two pronged approach.” Iqbal, 129 S.Ct. at 1950. “First, although a court must accept as true all of the allegations contained in a complaint, that tenet is inapplicable to legal conclusions, and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Harris v. Mills, 572 F.3d 66, 72 (2d Cir.2009) (internal punctuation omitted). Second, a court determines “whether the ‘well-pleaded factual allegations,’ assumed to be true, ‘plausibly give rise to an entitlement to relief.’ ” Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir.2010) (quoting Iqbal, 129 S.Ct. at 1950). On a motion to dismiss, courts may consider “facts stated on the face of the complaint, in the documents appended to the complaint or incorporated in the complaint by reference, and ... matters of which judicial notice may be taken.” Allen v. WestPoint–Pepperell Inc., 945 F.2d 40, 44 (2d Cir.1991).

II. Standing

A. Trusts in which No Named Plaintiff Invested

Plaintiffs allege current or former ownership of certificates relating to only twenty-six of the trusts referenced in the Complaint. (Compl. ¶ 1; Compl. Ex. B (listing holdings).) BNYM argues that Plaintiffs lack standing to bring claims based on the trusts in which no named plaintiff invested. Although this Court afforded Plaintiffs an opportunity to amend the Complaint to add additional certificateholders, they declined to do so. (Hr'g Tr. dated Feb. 10, 2012 at 39–40.)

Standing under Article III of the Constitution is “the threshold question in every federal case, determining the power of the court to entertain suit.” Denney v. Deutsche Bank AG, 443 F.3d 253, 263 (2d Cir.2006) (quoting Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)) (internal quotation marks omitted). To establish standing, “a plaintiff must have suffered an ‘injury in fact’ that is ‘distinct and palpable’; the injury must be fairly traceable to the challenged action; and the injury must be likely redressable by a favorable decision.” Denney, 443 F.3d at 263 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)).

In accord with these principles, Plaintiffs may not pursue claims relating to securities in which they never invested. In re Smith Barney Transfer Agent Litig., 765 F.Supp.2d 391, 400 (S.D.N.Y.2011); see also In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F.Supp.2d 579, 607 (S.D.N.Y.2006) (“With regard to the sixty-eight funds of which Plaintiffs own no shares, Plaintiffs do not have standing to assert any claims because Plaintiffs cannot satisfy the standing requirements.”). Accordingly, Plaintiffs lack standing to assert claims regarding the trusts referenced in the Complaint in which they never invested, and those claims are dismissed with prejudice. Plaintiffs may pursue claims relating only to the twenty-six trusts in which they allege current or former holdings.

B. “Fully Wrapped” Delaware Trust

Plaintiffs hold notes issued by a single Delaware trust. (Compl. Ex. B.) BNYM challenges Plaintiffs' standing to sue regarding this trust because the trust is fully guaranteed—or “wrapped”—by a monoline insurer, and Plaintiffs do not allege that the insurer failed to perform. (Indenture § 8.03.)

Monoline insurers provide “a guarantee to protect against credit risk, i.e. the risk of default.” In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F.Supp.2d 241, 248 (S.D.N.Y.2010). For “fully wrapped” trusts, then, ...