SC Note Acquisitions, LLC v. Wells Fargo Bank, N.A.

• Decision Date: 27 March 2013
• Docket Number: No. 12–cv–1011 (JFB)(AKT).,12–cv–1011 (JFB)(AKT).
• Citation: 934 F.Supp.2d 516
• Parties: SC NOTE ACQUISITIONS, LLC, Plaintiff, v. WELLS FARGO BANK, N.A., Midland Loan Services, Inc., and LNR Partners, LLC, Defendants.
• Court: U.S. District Court — Eastern District of New York

934 F.Supp.2d 516

SC NOTE ACQUISITIONS, LLC, Plaintiff,

v.WELLS FARGO BANK, N.A., Midland Loan Services, Inc., and LNR Partners, LLC, Defendants.

No. 12–cv–1011 (JFB)(AKT).

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

March 27, 2013.

Russell L. Penzer and Eric J. Horbey, Lazer, Aptheker, Rosella & Yedid, Melville, NY, for Plaintiff.

Gregory A. Cross and Colleen A. Mallon, Venable, LLP, Baltimore, MD, Michael K. Madden, Venable LLP, New York, NY, for Defendants.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge.

SC Note Acquisitions, LLC (“plaintiff”) commenced this action against Wells Fargo Bank, N.A. (“Wells Fargo”), Midland Loan Services, Inc. (“Midland”), and LNR Partners, LLC (“LNR”) (collectively, “defendants”) alleging various causes of action under state law, including breach of contract, breach of the covenant of good faith and fair dealing, and negligence. The gravamen of plaintiff's complaint alleges that defendants, as Trustee, Master Servicer, and Special Servicer of a commercial mortgage-backed securities trust, adopted an interpretation of tax law that will cause the trust to lose the status that had allowed it to avoid paying certain taxes. However, plaintiff does not dispute that the Internal Revenue Service has not yet determined that the trust has lost this status, and the trust has not yet suffered any monetary harm as a result of defendants' allegedly incorrect interpretation of the tax laws.

Defendants now move to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, defendants' motion is granted. Specifically, plaintiff has not demonstrated that this case is justiciable under Article III because the IRS has not actually determined that the trust's tax status has been jeopardized. Accordingly, any injury suffered by plaintiff is purely hypothetical at this juncture. In addition, plaintiff's one claim that alleges wrongdoing not related to the trust's tax liability, a breach of contract claim solely against LNR, is also dismissed because plaintiff cannot satisfy either the contemporaneous ownership rule required to bring a derivative action, or the no-action clause contained in the Pooling and Servicing Agreement that bars lawsuits by certificateholders of the trust.

I. Background

A. Factual Background

The following facts are taken from the complaint, including documents incorporated by reference. These facts are not findings of fact by the Court. Instead, the Court assumes these facts to be true for purposes of deciding the pending motion to dismiss, and will construe them in a light most favorable to plaintiff, the non-moving party.

1. The Pooling and Services Agreement

On November 29, 2005, defendants and J.P. Morgan Chase Commercial Mortgage Securities Corporation (“J.P. Morgan”) executed a pooling and services agreement (the “PSA”). (Compl. ¶ 5.) Pursuant to the PSA, J.P. Morgan created a commercial mortgage-backed securitization trust called “J.P. Morgan Chase Commercial Mortgage Securities Corp. Commercial Mortgage Pass–Through Certificates, Series 2005–CIBC 13” (the “Trust”). ( Id. ¶ 6; Decl. of Colleen M. Mallon in Supp. of Defs.' Mot. to Dismiss Pl.'s Compl. (“Mallon Decl.”) Ex. A, Pooling and Servicing Agreement.) ¹ The Trust is assigned various mortgage loans, the principal balance of which exceed $2.7 billion. (Compl. ¶ 6.) Wells Fargo is the Trustee of the Trust, Midland is the Master Servicer, and LNR is the Special Servicer. ( Id. ¶¶ 7–9.)

2. REMIC Status

Plaintiff alleges that “[f]undamental to the economic viability of the Trust is having the Trust qualify as a Real Estate Mortgage Investment Conduit” (“REMIC”) as defined by the Internal Revenue Code. ( Id. ¶ 11.) This classification “permits the Trust to be treated as a pass-through entity for federal income tax purposes, rendering it exempt from paying income tax at the entity level on the otherwise taxable income generated from the Mortgage Loans, thus avoiding double taxation.” ( Id.) Under the PSA, two REMICs were created within the Trust, an Upper–Tier REMIC and a Lower–Tier REMIC. ( Id. ¶ 13.) Section 10.01(f) of the PSA states that neither Midland nor LNR may “knowingly or intentionally take any action” or “cause the Trust Fund to take any action” that could “endanger the status of the Lower–Tier REMIC or the Upper–Tier REMIC as a REMIC” or “result in the imposition of a tax upon the Lower–Tier REMIC or Upper–Tier REMIC.” ( Id. ¶ 49.)

Plaintiff claims that Wells Fargo, acting through LNR, caused the Trust to transfer certain mortgage loans to special purpose entities (“SPEs”). ( Id. ¶ 50.) The ownership interests in these SPEs became property of the Lower–Tier REMIC. ( Id. ¶ 51.) Plaintiff alleges that the Internal Revenue Code does not permit a REMIC to own these types of assets ( id. ¶ 53), and therefore, the REMICs lost their REMIC status and the Trust was rendered “economically non-viable” ( id. ¶ 55). Defendants claim that plaintiff erroneously interprets the Internal Revenue Code and that the SPEs have no effect on the Trust's status as a REMIC. (Defs.' Mem. at 1.) Plaintiff does not dispute that the Trust has not currently had any tax imposed on it by the IRS due to the transfer of certain loans to SPEs. Moreover, plaintiff concedes that the IRS may never determine that the Trust no longer qualifies for REMIC status.

3. Other Alleged Misconduct

The PSA also obligates defendants to administer the Trust in certain other ways. For example, LNR and Midland are required to:

service the Mortgage Loans in accordance with the higher of the following standards of care: (1) in the same manner in which, and with the same care, skill, prudence and diligence with which the Master Servicer or the Special Servicer, as the case may be, services and administers similar mortgage loans for other third party portfolios and (2) the same care, skill, prudence and diligence with which the Master Servicer or the Special Servicer, as the case may be, services and administers similar mortgage loans owned by the Master Servicer or the Special Servicer, as the case may be, with a view to the maximization of timely recovery of principal and interest on a net present value basis on the Mortgage Loans or the Specially Serviced Mortgage Loans, as applicable, and the best interests of the Trust and the Certificate holders ....

(Mallon Decl. Ex. A, Pooling and Servicing Agreement, at 119; see also Compl. ¶ 25.)

Plaintiff claims that LNR's interests conflict with the best interests of the Trust. (Compl. ¶ 26.) The complaint alleges that LNR has serviced the loans “in such a manner so as to maximize its fees regardless of the best interests of the Trust or the Certificateholders.” ( Id. ¶ 32.) For example, plaintiff claims that LNR rejected an $80 million offer to purchase the two underlying notes in a property, although LNR now anticipates that the Trust will recover less than $78 million through foreclosure or sale to another entity. ( Id. ¶ 41.)

4. Plaintiff's Interest in the Trust

Plaintiff owns a minority share in a company that holds a minority interest in Philips South Beach, LLC, owner of The Shore Club Hotel in Miami. ( Id. ¶ 20.) The Trust held two promissory notes, which were secured by a mortgage on the hotel. ( Id.) The mortgage went into default. ( Id. ¶ 22.) On approximately September 14, 2009, LNR assigned all of the Trust's interest in the loan to J.P. Morgan, thereby divesting the Trust of any interest in this loan. ( Id. ¶¶ 22, 38.) In November 2010, J.P. Morgan filed a foreclosure action on this loan in Florida state court. ( See Mallon Decl. Ex. C, Docket Sheet of JPMCC 2005–CIBC13 Collins Lodging, LLC v. Philips South Beach, LLC, No. 10–61128 CA 06, 2010 WL 4317000 (Fla. 11th Judicial Circuit).) ²

According to defendants, plaintiff was formed as an LLC on October 26, 2011. ( See Mallon Decl. Ex. B, Articles of Organization of SC Note Acquisitions LLC.) ³ Plaintiff thereafter purchased a single certificate in the Trust. Plaintiff admitted at oral argument that it purchased an interest in the trust for the purpose of bringing this lawsuit. (Oral Arg., Jul. 17, 2012, at 19 (The Court: “On the contemporaneous ownership doctrine, I don't think you dispute the fact that essentially what your client did was purchase this interest for purposes of the lawsuit. Isn't that pretty much—” [Plaintiff]s Counsel]: “That's correct.”).)

B. Procedural History

Plaintiff commenced this action in New York State Supreme Court, Suffolk County, on January 30, 2012. On March 1, 2012, defendants removed the case to this Court. On April 2, 2012, defendants filed a motion to dismiss plaintiff's complaint. Plaintiff filed its opposition on May 2, 2012, and defendants replied on May 16, 2012. The Court held oral argument on July 17, 2012. The Court has fully considered all of the submissions of the parties.

II. Standard of Review

In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir.2006); Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 100 (2d Cir.2005). “In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must allege a plausible set of facts sufficient ‘to raise a right to relief above the speculative level.’ ” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir.2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). This standard does not require “heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.

The Supreme Court clarified the appropriate pleading standard in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), setting...