royal park inv. v. bank of new melon - motion to dismiss mortgage fraud claims.pdf
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8/9/2019 Royal Park Inv. v. Bank of New Melon - motion to dismiss mortgage fraud claims.pdf
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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
ROYAL PARK INVESTMENTS SA/NV,Individually and on Behalf of All OthersSimilarly Situated,
Plaintiff,
v.
THE BANK OF NEW YORK MELLON, asTrustee,
Defendant.
Case No. 14-cv-6502-GHW
MEMORANDUM OF LAW IN SUPPORT OF
THE BANK OF NEW YORK MELLON’S
MOTION TO DISMISS
MAYER BROWN LLPMatthew D. Ingber Michael MartinezChristopher J. HouptMichael Rayfield1675 Broadway
New York, New York 10019 Attorneys for Defendant
The Bank of New York Mellon
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TABLE OF CONTENTS
Page
i
PRELIMINARY STATEMENT ................................................................................................... 1
BACKGROUND ........................................................................................................................... 2
A. The Trusts And The Governing Agreements......................................................... 2
1. The Trustee’s Pre-Default Duties .............................................................. 3
2. The Trustee’s Duties Upon Discovery Of A Breach Of ARepresentation And Warranty.................................................................... 5
3. The Trustee’s Duties Upon Obtaining Actual Knowledge Of AServicer Event Of Default.......................................................................... 6
B. Royal Park’s Complaint......................................................................................... 7
LEGAL STANDARD.................................................................................................................... 8
ARGUMENT................................................................................................................................. 8
I. THE COMPLAINT FAILS TO STATE A CLAIM FOR BREACH OFCONTRACT...................................................................................................................... 8
A. Royal Park Does Not Plausibly Allege That BNYM Discovered BreachesOf Representations And Warranties ...................................................................... 9
1. “Discovery” Means Direct Knowledge Of A Specific Breach.................. 9
2. The Complaint Does Not Plausibly Allege Discovery of AnySpecific Breach ........................................................................................ 12
B. Royal Park Does Not Plausibly Allege That BNYM Had ActualKnowledge of Servicer Events of Default ........................................................... 16
1. BNYM’s Heightened Duties Are Triggered Only By KnowledgeOf Events Of Default With Respect To The Covered Trusts .................. 16
2. The Complaint Does Not Plausibly Allege That BNYM Knew Of An Event Of Default With Respect To A Particular Covered Trust........ 17
II. THE COMPLAINT FAILS TO STATE A CLAIM UNDER THE TIA......................... 21
A. The TIA Does Not Apply To The New York Trusts........................................... 21
B. The Complaint Fails To State A TIA Claim As To The Delaware Trusts .......... 21
1. Section 315(a) Does Not Impose A Duty To Comply With AnIndenture .................................................................................................. 22
2. The Complaint Does Not Allege A Default Under The Indentures......... 22
III. THE COMPLAINT FAILS TO STATE A CLAIM FOR BREACH OF ACOMMON LAW “DUTY OF TRUST.”......................................................................... 23
CONCLUSION............................................................................................................................ 25
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TABLE OF AUTHORITIES
Page(s)
CASES
ACE Sec. Corp. v. DB Structured Prods., Inc.,5 F. Supp. 3d 543 (S.D.N.Y. 2014) .........................................................................................10
ACE Sec. Corp. v. DB Structured Prods., Inc.
40 Misc. 3d 562 (N.Y. Sup. Ct. 2013) .....................................................................................13
Allstate Ins. Co. v. Credit Suisse Sec. (USA) LLC ,42 Misc. 3d 1220(A) (N.Y. Sup. Ct. 2014)..............................................................................14
Amidax Trading Grp. v. S.W.I.F.T. SCRL,671 F.3d 140 (2d Cir. 2011).......................................................................................................8
Arrowgrass Master Fund Ltd. v. BNYM , No. 651497/2010, 2012 WL 8700416 (N.Y. Sup. Ct. Feb. 24, 2012) ...............................17, 20
Ashcroft v. Iqbal ,556 U.S. 662 (2009)...................................................................................................................8
Batavia Turf Farms, Inc. v. Cnty. of Genesee,
239 A.D.2d 903 (4th Dep’t 1997)............................................................................................15
Bevilacqua v. Gilbert ,143 A.D.2d 213 (2d Dep’t 1988).............................................................................................15
CFIP Master Fund Ltd. v. Citibank, N.A.,738 F. Supp. 2d 450 (S.D.N.Y. 2010)..................................................................................4, 24
Clark-Fitzpatrick Inc. v. Long Island R.R. Co.,70 N.Y.2d 382 (1987) ........................................................................................................ 23-24
Deutsche Zentral-Genossenchaftsbank AG v. HSBC N. Am. Holdings, Inc.,
No. 12-cv-4025, 2013 WL 6667601 (S.D.N.Y. Dec. 17, 2013) ........................................12, 20
Ellington Credit Fund, Ltd. v. Select Portfolio Serv., Inc.,837 F. Supp. 2d 162 (S.D.N.Y. 2011)......................................................................................24
Elliot Assocs. v. J. Henry Schroder Bank & Tr. Co.,838 F.2d 66 (2d Cir. 1988)...................................................................................................3, 24
Excelsior Fund, Inc. v. JP Morgan Chase Bank, N.A., No. 06-cv-5246, 2007 WL 950134(S.D.N.Y. Mar. 28, 2007..........................................................................................................25
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FHFA v. HSBC N. Am. Holdings, Inc.,
No. 11-cv-6189, 2014 WL 3702587 (S.D.N.Y. July 25, 2014).................................2, 9, 11, 13
FHFA v. Nomura Holding Am., Inc., No. 11-cv-6201, 2014 WL 6462239 (S.D.N.Y. Nov. 18, 2014)..............................................11
FHFA v. UBS Ams., Inc.,858 F. Supp. 2d 306 (S.D.N.Y. 2012)......................................................................................11
FHFA v. UBS, Ams., Inc., No. 11-cv-5201, 2013 WL 3284118 (S.D.N.Y. June 28, 2013) ..........................................9, 14
HSH Nordbank AG v. Goldman Sachs Grp., Inc.,
43 Misc. 3d 1225(A) (N.Y. Sup. Ct. 2013)..............................................................................14
In re Bear Stearns Mortg. Pass-Through Certificates Litig.,851 F. Supp. 2d 746 (S.D.N.Y. 2012)......................................................................................13
In re E.F. Hutton Sw. Props. II, Ltd.,953 F.2d 963 (5th Cir. 1992) ...................................................................................................24
Magten Asset Mgmt. Corp. v. Bank of N.Y.,15 Misc. 3d 1132(A), (N.Y. Sup. Ct. 2007).........................................................................3, 17
Mass. Mut. Life Ins. Co. v. Res. Funding Co., LLC ,843 F. Supp. 2d 191 (D. Mass. 2012) ......................................................................................14
MLSMK Inv. Co. v. JP Morgan Chase & Co.,431 Fed. App’x 17 (2d Cir. 2011).......................................................................................... 8-9
Nacional Financiera, S.N.C. v. Bankers Tr. Co., No. 121131/98, 2000 WL 36564710 (N.Y. Sup. Ct. Nov. 17, 2000) ......................................19
Nichols v. Mahoney,608 F. Supp. 2d 526 (S.D.N.Y. 2009)........................................................................................9
Page Mill Asset Mgmt. v. Credit Suisse First Boston Corp., No. 98-cv-6907, 2000 WL 877004 (S.D.N.Y. June 30, 2000) ................................................24
Patterson v. Travis, No. 02-cv-6444, 2004 WL 2851803 (E.D.N.Y. Dec. 9, 2004)..................................................9
Penn. Pub. Sch. Emps.’ Ret. Sys. v. Morgan Stanley & Co.,772 F.3d 111 (2d Cir. 2014).....................................................................................................25
Phoenix Light v. Merrill Lynch, No. 653235/2013, Slip Op. at 3-4 (N.Y. Sup. Ct. Oct. 8, 2014)..............................................16
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Pub. Emps. Ret. Sys. of Miss. v. Goldman Sachs Grp., Inc.,
No. 09-cv-1110, 2011 WL 135821 (S.D.N.Y. Jan. 12, 2011) .................................................14
Ret. Bd. of Policemen’s Annuity & Benefit Fund v. BNYM ,914 F. Supp. 2d 422 (S.D.N.Y. 2012)......................................................................................22
Ret. Bd. of Policemen’s Annuity & Benefit Fund v. BNYM , __ F.3d __, No. 13-1776, 2014 WL 7272269 (2d Cir. Dec. 23, 2014)..............2, 10, 11, 16, 21
SC Note Acquisitions, LLC v. Wells Fargo Bank, N.A.,934 F. Supp. 2d 516 (E.D.N.Y. 2013) .....................................................................................25
Sterling Fed. Bank, F.S.B. v. DLJ Mortg. Capital, Inc.,
No. 09-cv-6904, 2010 WL 3324705 (N.D. Ill. Aug. 20, 2010) ...............................................24
U.S. Bank, Nat’l Ass’n v. Citigroup Global Mkts. Realty Corp. , No. 13-cv-6989, Slip Op. (S.D.N.Y. Nov. 14, 2014) ........................................................10, 11
Viacom Int’l, Inc. v. YouTube, Inc.,676 F.3d 19 (2d Cir. 2012).......................................................................................................11
Wilson v. Dantas, 746 F.3d 530 (2d Cir. 2014) ............................................................................ 25
STATUTES
15 U.S.C. §§ 77ooo(a)-(c)..............................................................................................................22
New York General Obligations Law § 13-107 ..............................................................................25
OTHER AUTHORITIES
Fed’l Sec. Code at xl (1980) ..........................................................................................................17
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Defendant The Bank of New York Mellon (“BNYM” or “the trustee”) respectfully
submits this memorandum of law in support of its Rule 12(b)(6) motion to dismiss the complaint
filed by Plaintiff Royal Park Investments SA/NV (“Royal Park”).
PRELIMINARY STATEMENT
Royal Park brought this action on behalf of a putative class of investors in residential
mortgage-backed securities issued by five securitization trusts for which BNYM is the trustee.
Each of the trusts covered by the complaint is governed by a detailed contract that defines and
limits the trustee’s obligations—and expressly disavows any duties outside of the agreement’s
express terms. Royal Park claims that BNYM breached the governing agreements by failing to
discharge certain alleged duties in two kinds of circumstances: (1) upon discovery that the sellers
of the loans underlying the securities had breached representations and warranties regarding the
underwriting of the loans; and (2) upon obtaining actual knowledge that the servicers of the loans
had engaged in improper practices qualifying as “Events of Default” under the contracts. Royal
Park further claims that BNYM’s alleged breaches violated the Trust Indenture Act of 1939
(“TIA”) and a common law “duty of trust” that required it to avoid conflicts of interest.
All of these claims depend on a fundamental premise: that BNYM knew about the alleged
defaults—breaches and servicing violations—during the relevant period. Royal Park does not
contend that BNYM failed to discharge any duties prior to obtaining such knowledge, nor could
it; it is only after the trustee obtains knowledge of a default that the contracts subject it to any of
the duties that Royal Park describes in the complaint, and the agreements expressly provide that
the trustee “has no obligation to conduct an investigation” into whether a default has occurred.
Royal Park’s premise fails as a matter of law. Although the complaint repeatedly asserts
that BNYM had knowledge of alleged defaults, it does not contain a single factual allegation
that, even credited as true, would establish such knowledge. Instead, Royal Park points to various
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facts in the public domain—primarily related to loans in other trusts—that might have suggested
a risk of seller breaches and servicer violations in the covered trusts.
That is insufficient for two reasons. First, “[k]nowledge of conditions creating a risk of
falsity . . . is not actual knowledge of falsity.” FHFA v. HSBC N. Am. Holdings, Inc., No.
11-cv-6189, 2014 WL 3702587, at *21 (S.D.N.Y. July 25, 2014). Second, the Second Circuit
recently held in a similar investor suit against an RMBS trustee that claims of seller or servicer
breaches “must be proved loan-by-loan and trust-by-trust.” Retirement Board of the Policemen’s
Annuity & Benefit Fund of the City of Chi. v. BNYM , __ F.3d __, No. 13-1776, 2014 WL
7272269, at *7 (2d Cir. Dec. 23, 2014). The complaint’s allegations—that BNYM was aware of
breaches of representations and warranties in securitizations “like the Covered Trusts,” of
servicing abuses that “likely affected the covered trusts,” and that “there might be loan servicing
misconduct” in those trusts—only underscore that Royal Park cannot plausibly allege that
BNYM “knew” of breaches of the contracts at issue here. That is fatal to the contract claims.
The TIA and breach-of-trust claims fail both because they are predicated on a breach of
the governing agreements and for additional reasons: The Second Circuit has recently held that
the TIA does not even apply to New York common law trusts governed by Pooling and
Servicing Agreements—three of the five at issue here. As to the remaining trusts, Royal Park has
not alleged the kind of “default” to which the TIA applies. And Royal Park’s allegations of a
“conflict of interest”—primarily based on BNYM’s business relationships with other contracting
parties—are either legally deficient or facially implausible. The complaint should be dismissed.
BACKGROUND
A. The Trusts And The Governing Agreements
Royal Park alleges that it invested in residential mortgage-backed securities (“RMBS”)
issued by five trusts for which BNYM is the trustee (the “covered trusts”). Three are New York
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common law trusts, governed by a Pooling and Servicing Agreement (“PSA”). Two are
Delaware trusts, governed by both a Sale and Servicing Agreement (“SSA”) and an Indenture.1
In each securitization, an entity called a “seller” aggregated and sold portfolios of
mortgage loans to a “depositor.” The depositor conveyed all “right, title and interest” in the loans
to BNYM to hold in trust “for the benefit of” investors. PSA §§ 3.01(h), 6.03(a). Through an
underwriter, investors purchased securities, called “certificates” or “notes,” from the depositor,
which entitled them to a stream of interest and principal payments from mortgage debtors. A
“servicer” collected loan payments from borrowers, provided them to BNYM for distribution to
investors, and took any necessary enforcement action against borrowers. E.g., id. §§ 8.01-02.
1. The Trustee’s Pre-Default Duties
The trustee established by the governing agreements is known generally as an “indenture
trustee.” “The role of an indenture trustee differs from that of an ordinary trustee,” Magten Asset
Mgmt. Corp. v. Bank of N.Y., 15 Misc. 3d 1132(A), at *6 (N.Y. Sup. Ct. 2007), in that its “duties
. . . are strictly defined and limited to the terms of the indenture,” Elliot Assocs. v. J. Henry
Schroder Bank & Tr. Co., 838 F.2d 66, 71 (2d Cir. 1988) (citing New York cases). Specifically,
the governing agreements provide that the “Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Agreement,” and that “no implied covenants or
obligations shall be read into this Agreement against the Trustee.” PSA § 10.01(a).
The trustee’s obligations differ depending on whether the trustee has become aware of a
default under the governing agreements. Magten, 15 Misc. 3d 1132(A), at *7. Before a default,
1 The complaint incorporates by reference all of the governing agreements. Like RoyalPark ( see Compl. ¶ 5), we use the PSA governing the NSTR 2007-C trust as an illustrative modelwhen the differences between the agreements are immaterial; unless otherwise indicated,citations to “PSA” refer to that agreement. But as explained in Part II.B.2 below, Royal Park ignores differences between the governing agreements that are critical to its TIA claims.
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the trustee is obligated to perform a distinct set of ministerial tasks in return for modest
compensation. In addition to requiring BNYM to collect and distribute loan payments, the
governing agreements require BNYM to hold and inventory the mortgage files and release them
either upon repayment of the loan or to facilitate foreclosures if there is a default on the loan.
Each month, based solely on data received from the servicer (who certifies its accuracy), BNYM
posts data regarding the mortgage loans to a public investor reporting website, including the
loans’ outstanding principal balance and the number of delinquent loans. BNYM also responds
to inquiries from investors and prepares various regulatory filings. E.g., PSA § 7.10(c).
BNYM is empowered to take certain other actions that it deems to be in the interest of
investors, including suing to enforce duties of the other contracting parties. See id. § 6.03(b).
But the agreements state that “[t]he permissive right of the Trustee to take actions enumerated in
this Agreement shall not be construed as a duty.” Id. § 10.01(f) (emphases added).
Further, “in the absence of bad faith,” the trustee may “conclusively rely” on the “truth”
and “correctness” of any “statements” provided to it “by the Servicer, the Sellers or the
Depositor,” and “shall not be responsible for the[ir] accuracy or content.” Id. § 10.01(a); see also
id. § 10.03(a). The trustee is not “bound to make any investigation into the facts or matters” in
any such statement unless the investors with the economic interest in the trusts (1) direct it to do
so “in writing” and (2) offer it adequate indemnity. Id. § 10.03(f). This makes economic sense:
the relatively miniscule fee received by the trustee could not come close to compensating it for
(on top of its express contractual responsibilities) monitoring the other parties. See CFIP Master
Fund Ltd. v. Citibank, N.A., 738 F. Supp. 2d 450, 474 (S.D.N.Y. 2010) (rejecting argument that
investors expected the trustee to protect their financial interests; the trustee’s compensation was
“pocket change in comparison to all other economic aspects of [the] transaction”).
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In short, prior to becoming aware of a default, the trustee is obligated to perform only the
limited set of ministerial tasks set forth in the governing agreements, and is entitled (so long as it
acts in good faith) to accept as true what it is told by the other contracting parties.
2. The Trustee’s Duties Upon Discovery Of A Breach Of A
Representation And Warranty
The seller made various representations and warranties regarding the quality of each loan
underlying the securities—for example, that they were originated in accordance with the lender’s
underwriting guidelines. PSA § 3.04(b)(xxxviii). As discussed, the trustee may rely on these
statements and has no duty to investigate them. Id. §§ 3.04(e), 3.06(b), 10.01(a), (f).
The agreements do provide that “[u]pon discovery . . . of a breach of any of the
representations and warranties . . . which materially and adversely affects the interests of the
Owners,” the trustee (or any party that discovers such a breach) must “give prompt written notice
to the other parties.” Id. § 3.02 (final paragraph). At that point, the breaching seller is required to
“promptly cure such breach” within a certain period by either substituting an equivalent loan or
repurchasing the defective loan at its unpaid principal balance. Id. § 3.04(a). If the seller fails to
cure the breach, the trustee has “the power to enforce” the seller’s repurchase obligations,
including through litigation, and “shall enforce” those obligations, but if—and only if—it has
“first” been offered “indemnity satisfactory to it.” Id. § 6.03(b); see also id. § 10.01(e) (“No
provision of this Agreement shall require the Trustee to expend or risk its own funds . . . if it
shall have reasonable grounds for believing that repayment of such funds or indemnity
reasonably satisfactory to it against such risk or liability is not reasonably assured to it.”); id.
§ 10.01(g) (“The Trustee shall be under no obligation to institute any suit, or to take any
remedial proceeding under this Agreement . . . until it shall be indemnified to its satisfaction.”).
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3. The Trustee’s Duties Upon Obtaining Actual Knowledge Of A
Servicer Event Of Default
The agreements require the servicer to “service and administer the [loans] . . . with
prudent and reasonable care,” according to customary practices. PSA § 8.01. This includes
collecting payments, modifying loans, and foreclosing on property. See, e.g., id. §§ 8.01-02.
The trustee has no duty to “perform, or be responsible for the manner of performance of,
any obligations of the Servicer.” Id. § 10.01(e); see GSCC 2006-1 SSA § 3.03 (trustee is not
“obligated to supervise the performance of the Master Servicer”). Rather, the agreements require
the servicer to conduct an annual “review” of its own activities and its “performance under this
Agreement,” and then to either certify that it has complied with the applicable servicing criteria
or to identify any breaches and the steps taken to correct them. PSA § 8.16. The trustee is not
“bound to make any investigation into the facts or matters stated in” those certifications, and is
“not [ ] responsible for the[ir] accuracy or content.” Id. §§ 10.03(f); see 10.01(a)(ii). It is instead
entitled to “conclusively rely” on these statements. Id. §§ 10.01(a)(ii), (f), 10.03(a), (c), (f).
Certain serious failures by the servicer can become “Events of Default” (at times called
“Servicer Termination Events”2) warranting replacement of the servicer: primarily, a “fail[ure] to
perform any one or more of [the servicer’s] obligations” that “materially and adversely affects
the owners.” Id. § 8.20(a)(iii). When a trustee becomes “aware” of an Event of Default, it must
notify all parties, including the investors. Id. § 8.20(m). If the default is not cured, the trustee
may terminate or replace the servicer, or take over its servicing duties. Id. § 8.20(b). The trustee
then must also “exercise such of the rights and powers vested in it by th[e] Agreement, and use
the same degree of care and skill in their exercise, as a prudent person would exercise or use
under the circumstances in the conduct of the person’s own affairs.” Id. § 10.01(a). This
2 Like Royal Park, we use the term “Event of Default” for the sake of consistency.
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heightened duty applies only in limited circumstances: “The Trustee shall not be required to take
notice or be deemed to have notice or knowledge of any default unless an Authorized Officer of
the Trustee shall have received written notice thereof or an Authorized Officer shall have actual
knowledge thereof.” Id. § 10.01(c)(iv) (emphases added). “In the absence of receipt of such
notice, the Trustee may conclusively assume that there is no default.” Id . (emphasis added).
B. Royal Park’s Complaint3
Royal Park brought this action on behalf of a class of investors in the covered trusts, and
alternatively as a derivative action for the benefit of the covered trusts. Compl. ¶¶ 2-3. The
complaint seeks “over $1 billion in damages” (id. ¶ 26) based on claims for breach of contract,
violation of the TIA, and breach of a common law “duty of trust” to avoid “conflicts of interest.”
The contract and TIA claims are based on the same two sets of allegations. First, Royal
Park alleges that, “by no later than April 13, 2011” ( id. ¶ 10), BNYM “absolutely knew, without
any doubt,” that the sellers of the mortgage loans had breached representations and warranties,
but that BNYM failed to notify the parties to the agreements of such breaches and failed to
“enforce” the sellers’ obligations to cure, substitute, or repurchase the defective loans. Id. ¶¶ 70,
179, 184. Second, Royal Park alleges that by the same time, BNYM had “actual knowledge” of
Events of Default under the governing agreements, but failed to notify the parties and exercise its
powers as a “prudent person” would. Id . ¶¶ 106, 179, 184. Royal Park further claims that
BNYM’s failures to act were motivated by two “conflicts of interest”: it wanted to (1) protect its
“business relationships” with the contracting parties and (2) conceal its “participation” and
“acquiescence” in the alleged Events of Default. Id. ¶¶ 19-21, 24, 192-93.4
3 When quoting from the complaint, we omit all bold and/or italicized emphases.
4 Despite the fact that Royal Park (and not BNYM) is the party with the economic interestin the trusts, and despite the clear entitlement of investors to instruct the trustee to act under
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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, 678 (2009) (internal quotation marks omitted). “Where a complaint pleads facts that are
merely consistent with a defendant’s liability, it stops short of the line between possibility and
plausibility.” Id. And critically, where an “allegation in the complaint is contradicted by a
document attached to the complaint, the document controls and the allegation is not accepted as
true.” Amidax Trading Grp. v. S.W.I.F.T. SCRL, 671 F.3d 140, 147 (2d Cir. 2011).
ARGUMENT
I. THE COMPLAINT FAILS TO STATE A CLAIM FOR BREACH OF
CONTRACT.
Royal Park does not allege that BNYM received written notice of any default (cf. PSA
§ 10.01(c)(iv)) or breached any pre-default duty. Nor does it allege that BNYM breached (or
even had) a duty to determine whether defaults had occurred. Instead, Royal Park puts all its
eggs in one basket: it claims that BNYM actually knew about (1) breaches of representations and
warranties and (2) what it describes as Events of Default. See, e.g., Compl. ¶ 69 (“BNY Mellon
knew there were massive breaches”); id. ¶ 70 (“BNY Mellon absolutely knew, without any
doubt, that the Warrantors had breached their R&Ws”); id. ¶ 15 (“BNY Mellon obtained actual
knowledge of widespread, rampant Events of Default . . . no later than April 13, 2011, if not
earlier.”); id. ¶ 186 (“BNY Mellon knew of uncured and ongoing Events of Default”).
It is not enough, however, to assert that BNYM had knowledge. Royal Park must make
factual allegations that, if true, could establish such knowledge. See, e.g., MLSMK Inv. Co. v. JP
certain circumstances, Royal Park does not allege that it took any actions in the face of what itdescribes as publicly available evidence of pervasive seller breaches and servicing violations.
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Morgan Chase & Co., 431 Fed. App’x 17, 20 (2d Cir. 2011) (“Because the allegation that
Appellees had actual knowledge . . . is purely conclusory, it is insufficient to support a cause of
action.”); Nichols v. Mahoney, 608 F. Supp. 2d 526, 535, 537 (S.D.N.Y. 2009) (“purely
conclusory allegations about defendants’ knowledge . . . [are] insufficient” to survive a motion to
dismiss absent “factual allegations tending to show that defendants in fact had such
knowledge”); Patterson v. Travis, No. 02-cv-6444, 2004 WL 2851803, at *4 (E.D.N.Y. Dec. 9,
2004) (“Examples of conclusory allegations are statements that defendants knew that harm was
occurring . . . without any specific evidence demonstrating the defendants’ knowledge.”).
Royal Park’s allegations of actual knowledge are insufficient as a matter of law.
A. Royal Park Does Not Plausibly Allege That BNYM Discovered Breaches Of
Representations And Warranties.
1. “Discovery” Means Direct Knowledge Of A Specific Breach.
Courts have established two related principles to determine whether a party has
“discovered” a breach of a representation and warranty. First , because the agreements “contain[]
specific representations about particular sets of Mortgage Loans,” a party is aware of a breach
only if it has “actual, specific knowledge of the falsity of [ ] particular statements.” FHFA v.
HSBC , 2014 WL 3702587, at *17, *20 (emphases added). “Knowledge of conditions creating a
risk of falsity”—or “[e]ven suspicion of falsity”—“is not actual knowledge of falsity.” Id. at *21
(emphasis added). And “[i]t is not enough that certain information permitted inferences . . . to be
drawn; the question is whether the [party] did, in fact, draw these inferences.” Id. at *24; see also
FHFA v. UBS, Ams., Inc., No. 11-cv-5201, 2013 WL 3284118, at *19 (S.D.N.Y. June 28, 2013)
(“[T]here is no authority for the proposition that evidence of generalized knowledge necessarily
qualifies as circumstantial evidence of particularized, actual knowledge.”).
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For just that reason, a court in this District recently dismissed a claim by a trustee that a
servicer had discovered underwriting breaches in the course of its duties, because the complaint
“merely provide[d] facts supporting the responsibilities [the servicer] undertook and conclusorily
allege[d] that these tasks should have alerted [the servicer of] the alleged breaches.” U.S. Bank,
Nat’l Ass’n v. Citigroup Global Mkts. Realty Corp., No. 13-cv-6989, Slip Op. at 15 (S.D.N.Y.
Nov. 14, 2014) (Ex. 1 to Rayfield Decl.). Naturally, if this kind of information is not enough to
establish knowledge of a servicer (a party that has substantial contact with individual loans and
wide-ranging duties to act for investors), it surely cannot support “discovery” by a trustee.
Second , the trustee’s knowledge must be at the level of a particular mortgage loan in the
relevant trusts. As the Second Circuit has recently explained, contract claims of the type asserted
by Royal Park “must be proved loan-by-loan and trust-by-trust.” Retirement Board , 2014 WL
7272269, at *7; see also ACE Sec. Corp. v. DB Structured Prods., Inc., 5 F. Supp. 3d 543, 560
(S.D.N.Y. 2014) (plaintiff has “burden of proving” knowledge of “loan-by-loan breaches”).
The agreements impose this requirement by their plain terms. The trustee is required to
give notice only of a breach of a representation and warranty that materially and adversely
affects “the interests of the Owners in the . . . Loan.” PSA § 3.04(a) (emphasis added). And the
trusts’ “sole remedy” for a breach is for the seller to either (1) substitute a new loan for “each
. . . Loan which has given rise to the requirement for action”—one that is the same price,
balance, and interest rate—or (2) “purchase such . . . Loan from the Trust” at its original balance.
Id. Because the seller’s repurchase obligation applies only to specific loans, the question of
“whether [the seller] breached its obligations under the governing agreements (thus triggering
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BNYM’s duty to act) requires examining . . . which loans, in which trusts, were in breach of the
representations and warranties.” Retirement Board , 2014 WL 7272269, at *7.5
For these reasons, discovery of “the routine abandonment of . . . underwriting
guidelines,” without reference to a particular loan (Complaint ¶ 69), is not a “breach” that the
trustee had to, or could, give notice of under the agreements. Nor will a party’s “kn[owledge] of
problems with [a particular] [o]riginator” or seller “establish that the [party] had actual
knowledge that specific representations . . . were false.” FHFA v. HSBC , 2014 WL 3702587, at
*20. “[T]here is no necessary relationship between deficiencies in an Originator’s underwriting
practices and the falsity of . . . particular representations . . . about a set of particular Mortgage
Loans.” Id. at *24; see FHFA v. Nomura Holding Am., Inc. , No. 11-cv-6201, 2014 WL 6462239,
at *22 (S.D.N.Y. Nov. 18, 2014) (“[T]here was no necessary connection between an Originator’s
general way of doing business, or general market trends in the performance of [RMBS], and the
characteristics of a particular group of loans.”); U.S. Bank , Slip Op. at 13 (dismissing claim
based on alleged breaches of representations and warranties because “[p]laintiff ha[d] not alleged
a single . . . loan that was subsequently determined to be in breach of the [agreement], nor how
or when [defendant] discovered the breaches pertaining to the . . . [l]oans.” (emphases added));
FHFA v. UBS Ams., Inc., 858 F. Supp. 2d 306, 321 (S.D.N.Y. 2012) (“The truth of the matter is
that when the [plaintiff] learned of the loan originators’ dubious underwriting practices says little
about when [it] discovered the facts that form the basis of this complaint.”).
5 The Second Circuit has established a similar rule in the copyright context. In Viacom
Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012), the court held that the knowledge neededto trigger a duty to remove copyright-infringing material from a website must be of a similar scope to the duty itself. Id. at 30 (“the nature of the removal obligation itself contemplatesknowledge or awareness of specific infringing material, because expeditious removal is possibleonly if the service provider knows with particularity which items to remove”).
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2. The Complaint Does Not Plausibly Allege Discovery Of Any Specific
Breach.
The complaint does not allege a single fact showing that a particular loan in the covered
trusts was in breach of a seller’s representation and warranty, let alone that BNYM knew about
it. Instead, Royal Park offers a hodgepodge of information from which, it alleges, BNYM’s
knowledge can be inferred: (a) the poor performance of the loans in the covered trusts;
(b) government and news reports purportedly showing pervasive abandonment of underwriting
guidelines; (c) lawsuits alleging breaches of representations and warranties with respect to loans
in the covered trusts; and (d) BNYM’s alleged participation in bankruptcy proceedings for
borrowers of the loans in the covered trusts. See Compl. ¶ 150. None is sufficient.
a. Poor performance. Royal Park alleges that the “poor performance of the Mortgage
Loans in the Covered Trusts[] made it clear” that the sellers “had breached their R&Ws . . . , thus
causing BNY Mellon to have actual knowledge of such breaches.” Id. ¶ 68. Its critical error is the
assertion that “if the R&Ws were true, such heavy losses would not have occurred.” Id.
Courts in RMBS cases have held the opposite: “value declines and downgrades d[o] not
speak to why the investments were performing poorly.” Deutsche Zentral-Genossenchaftsbank
AG v. HSBC N. Am. Holdings, Inc., No. 12-cv-4025, 2013 WL 6667601, at *13 (S.D.N.Y. Dec.
17, 2013). Courts have also observed that blindly linking poor performance to breaches would
radically shift the agreements’ deliberate allocation of risk of loss from sellers to investors. As
one New York court has explained with respect to a lawsuit brought against a seller:
[The seller] does not bear the risk of loss on all loans that default.Conforming loans, where the Representations are true, willsometimes default for reasons that have nothing to do with
borrowers lying or underwriter fraud. If “good” mortgages did nothave real default risk, mortgage interest rates would be even lower than their current historically depressed levels. In reality,
borrowers will occasionally default due to myriad unexpected
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circumstances, such as losing their job. In those cases, theCertificateholders bear the risk of loss.
ACE Sec. Corp. v. DB Structured Prods., 40 Misc. 3d 562, 569 (N.Y. Sup. Ct. 2013), rev’d on
other grounds, 112 A.D.3d 522 (1st Dep’t 2013).
The fact that pools of second-lien (subordinate) loans performed badly during a severe
recession and unprecedented housing market collapse comes nowhere near a plausible allegation
that BNYM “discovered” breaches. See In re Bear Stearns Mortg. Pass-Through Certificates
Litig., 851 F. Supp. 2d 746, 766 (S.D.N.Y. 2012) (“[A] downgrade can occur for any number of
reasons—for example, a recession or a collapse in housing practices—that are unrelated to the
problematic underwriting and quality control practices that form the basis of [the] complaint.”).
Thus, the FHFA v. HSBC court squarely rejected a theory just like Royal Park’s, holding that
knowledge of “a rise in early payment defaults . . . will not establish that [a party] had actual
knowledge that specific representations . . . were false.” 2014 WL 3702587, at *20.
b. Allegations of improper underwriting and lending. Royal Park points next to various
government reports and articles purportedly showing that the sellers of the loans in the covered
trusts were commonly securitizing loans that did not comply with underwriting guidelines. See,
e.g., Compl. ¶¶ 66, 69. According to the complaint, these reports describe a “systemic,”
“virtually universal” “breakdown in residential loan underwriting standards during the time
period when the Mortgage Loans were originated, warranted and transferred to the Covered
Trusts” (id. ¶ 71), and “revealed . . . that it was a customary and regular business practice” for the
sellers in the covered trusts to breach representations and warranties (id. ¶ 82). Royal Park
concludes from these sources that “extraordinary numbers of R&W breaches . . . occurred with
respect to mortgage loans that were originated at the same time the Covered Trusts’ Mortgage
Loans were originated”; that “massive R&W breaches by many of the Warrantors to the Covered
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Trusts” occurred; and that “RMBS securitizations like the Covered Trusts had been deliberately
filled with loans that breached their R&Ws.” Id. ¶¶ 72-73, 82 (emphases added).
Without exception, these allegations relate to loan originators or sellers, not to specific
loans or even to the covered trusts. Numerous cases hold that such claims are insufficient to
establish knowledge of loan-level breaches, “because there is no necessary connection between
an Originator’s general way of doing business and the characteristics of a particular group of
loans that have been examined and assembled into a securitization by a defendant entity.” FHFA
v. UBS , 2013 WL 3284118, at *19; see also, e.g., Allstate Ins. Co. v. Credit Suisse Sec. (USA)
LLC , 42 Misc. 3d 1220(A), at *6 (N.Y. Sup. Ct. 2014) (“general allegations of misconduct in the
subprime industry [a]re insufficient to show knowledge . . . by the defendants with respect to the
particular loan pools at issue”); HSH Nordbank AG v. Goldman Sachs Grp., Inc., 43 Misc. 3d
1225(A), at *4 (N.Y. Sup. Ct. 2013) (while the plaintiff “may have had notice . . . that loan
originators were not following their underwriting guidelines, there [wa]s nothing to suggest that
[plaintiff] knew or should have known that the Offering Materials for each of the Certificates it
had purchased contained false statements, and critically, that Goldman Sachs knew about them”);
Mass. Mut. Life Ins. Co. v. Res. Funding Co., LLC , 843 F. Supp. 2d 191, 208 (D. Mass. 2012)
(publicly available reports did not put plaintiff on notice because they “did not directly relate to
the misrepresentations . . . alleged in the complaints” and did not show “that the specific
underwriting and appraisal practices represented in the offering materials were false”); Pub.
Emps. Ret. Sys. of Miss. v. Goldman Sachs Grp., Inc., No. 09-cv-1110, 2011 WL 135821, at *9
(S.D.N.Y. Jan. 12, 2011) (“publicly available documents generally related to the weakening and
outright disregard for underwriting guidelines by subprime originators” could not establish actual
knowledge because they were not “directly related to the Goldman Sachs issuing trusts”).
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c. Litigation. Royal Park next discusses “lawsuits [ ] filed by purchasers of certificates in
the Covered Trusts alleging that numerous misrepresentations had been made about the specific
[loans] in the specific covered trusts.” Compl. ¶ 95. It also cites an $8.5 billion settlement of
claims that Countrywide (one of the warrantors for the covered trusts) breached representations
and warranties as to loans in 530 other trusts for which BNYM is trustee. Id. ¶ 94.
The allegations in these lawsuits were just that—allegations—and BNYM was under no
obligation to investigate them. See PSA § 10.03. The pre-default limitations on the trustee’s
duties would be meaningless if BNYM could be deemed to “discover” a default based on the
mere fact that it is alleged in a lawsuit against the seller—while being unable to discover the
absence of a default based on the seller’s denial of those allegations. Moreover, Royal Park does
not allege that even the complaints it cites contain loan-specific information.
Royal Park’s reliance on the Countrywide settlement fares no better. Even if BNYM had
discovered that specific loans in the trusts in that settlement were in breach of representations
and warranties (which Royal Park does not allege), that would not establish knowledge about
loans in the covered trusts; those trusts were excluded from the settlement, which covered
first-lien loans securitized between 2004 and 2008. And regardless, there is no basis for treating
a willingness by Countrywide to settle as “discovery” of breaches by BNYM. See Batavia Turf
Farms, Inc. v. Cnty. of Genesee, 239 A.D.2d 903, 905 (4th Dep’t 1997) (“a settlement may not
be regarded as . . . an admission”); Bevilacqua v. Gilbert , 143 A.D.2d 213, 213 (2d Dep’t 1988)
(“acceptance of [a] settlement offer[] d[oes] not establish any admissions”).
d. Borrower Bankruptcies. Finally, Royal Park alleges that BNYM obtained knowledge
of breaches through its participation in the bankruptcy proceedings of individual mortgage loan
borrowers. Compl. ¶¶ 97-104. Royal Park’s conclusory and unsupported allegation that BNYM
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“was aware of” bankruptcy filings because it “monitored” bankruptcies (id.) is implausible: the
agreements make the servicer, not the trustee, responsible for such default-related tasks, and
provide that the trustee need not monitor the servicer. PSA §§ 8.01, 10.01(e).
But even if BNYM had received the filings, the information they contained could not
give it knowledge of loan-level breaches. Royal Park provides examples of borrowers whose
monthly debt payments, according to the self-serving filings, exceeded their monthly income.
Compl. ¶ 98. The sellers, however, made no representation about the relationship between the
borrower’s income and debt payments. Cf. PSA § 3.04(b). Whether a breach occurred would
depend on whether—in the originator’s judgment and in light of the borrower’s home equity,
other assets, debt levels, and expenses—the borrower was able to repay the loan. See, e.g., NSTR
2007-C ProSupp at 258. Without such information, which BNYM is not alleged to have had and
had no duty to obtain, it could not have discovered any breach. See, e.g., Phoenix Light v. Merrill
Lynch, No. 653235/2013, Slip Op. at 3-4 (N.Y. Sup. Ct. Oct. 8, 2014) (Ex. 2 to Rayfield Decl.).
B. Royal Park Does Not Plausibly Allege That BNYM Had Actual Knowledge of
Servicer Events of Default.
The second primary basis for Royal Park’s contract claim is that BNYM had “actual
knowledge” of servicer Events of Default but failed to notify the contracting parties and exercise
its powers as a “prudent person.” Compl. ¶ 184. This theory fails for similar reasons to the first.
1. BNYM’s Heightened Duties Are Triggered Only By Knowledge Of
Events Of Default With Respect To The Covered Trusts.
Much like a trustee’s knowledge of a breach of a representation and warranty must be
loan-specific ( see Part I.A.1 supra), its knowledge of an Event of Default must be trust -specific.
See Retirement Board , 2014 WL 7272269, at *7 (plaintiff alleging failure of trustee must “show
which trusts actually had deficiencies that required [it] to act in the first place”). An Event of
Default occurs upon “[f]ailure of the Servicer duly to observe or perform in any material respect
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any [ ] covenants or agreements of the Servicer set forth in this Agreement .” NHEL 2006-3 PSA
§ 7.01(a)(ii) (emphasis added). Thus, to obtain the knowledge that could, if other conditions were
satisfied, require BNYM to give notice of an Event of Default or replace a servicer ( see PSA
§§ 8.20(b), (m)), it must first be aware that the loans in that trust were serviced in violation of the
governing agreements; until that time, BNYM is permitted to “conclusively assume that there is
no default” (id. § 10.01(c)(iv) (emphasis added)); see Arrowgrass Master Fund Ltd. v. BNYM ,
No. 651497/2010, 2012 WL 8700416, at *9 (N.Y. Sup. Ct. Feb. 24, 2012), aff’d in part , 106
A.D.3d 582 (1st Dep’t 2013); Magten, 15 Misc. 3d 1132(A), at *7 (“BNY’s duty did not extend
to undertaking a complicated and unavoidably speculative investigation in order to decide
whether there was or would be an event of default.”); see also PSA § 10.01(e).6
2. The Complaint Does Not Plausibly Allege That BNYM Knew Of An
Event Of Default With Respect To A Particular Covered Trust.
Royal Park alleges that BNYM obtained such knowledge through several sources:
(a) government actions against the servicers of the covered trusts and resulting settlements;
(b) certain “difficulties” BNYM was having in “foreclosing on defaulted mortgage loans”; (c) an
instruction by investors to investigate Events of Default for one covered trust; and (d) news
stories about general servicing problems combined with the poor performance of the loans.
a. Government regulatory actions and settlements. Royal Park first points to several
instances in which the servicers of the covered trusts were charged with various servicing
violations and then entered into “consent orders” with the government in which they “did not
deny or contest” the government’s allegations. Compl. ¶¶ 109-10, 126-29, 135, 140, 141.
6 The American Law Institute acknowledged the purpose of this rule in declining torecommend amending the TIA to impose a pre-default duty on the trustee to determine whether adefault existed: “It has been persuasively urged that extension of the ‘prudent man’ test for
purposes of ascertaining the occurrence of a default . . . would be impracticable and prohibitivelyexpensive in terms of increased trustees’ fees. Fed’l Sec. Code at xl (1980).
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These allegations are plainly insufficient. First, they do not address the loans in the
covered trusts. Second, as the complaint recognizes, the government’s charges were nothing
more than unconfirmed allegations; the servicers made no admissions in the settlements.7 Third,
Royal Park alleges nothing to show that BNYM knew that the government’s allegations were
true, let alone true of the covered trusts; it only speculates that “[t]he foregoing events put
BNYM on notice that there might be loan servicing conduct by the Covered Trust Servicers as to
the Mortgage Loans in the Covered Trusts as well.” Id. ¶ 111 (emphasis added).
b. Foreclosure actions. Royal Park claims that BNYM was having “difficulties
foreclosing on defaulted mortgage loans” as a result of “shoddy foreclosure practices and other
misconduct by loan servicers.” Id. ¶ 112. It further alleges that BNYM was “actively
participating in such misconduct,” and “was sometimes accused” by courts of engaging in
“fraud, sanctionable misconduct or contempt in connection with the foreclosures.” Id. ¶ 114. In
support, Royal Park provides four pages of citations to decisions in foreclosure actions. Id. ¶ 113
n.14, ¶ 114 n.15. These include, for example, several reversals on procedural grounds of
decisions in favor of BNYM and an accusation by Royal Park (in the guise of explaining a
ruling) that BNYM’s decision to “file[] a notice of voluntary dismissal ” in one action was “an
obvious attempt to avoid confirmation of [a] fraud.” Id. (emphasis added).
Histrionics aside, Royal Park makes no serious attempt to connect its allegations to either
the covered trusts or the servicers’ obligations under the contracts governing those trusts. Indeed,
its allegations have little to do with actual servicing practices; they reflect little more than the
7 Although Royal Park asserts that the servicers “essentially admitted” to the government’scharges by entering into the consent orders (Compl. ¶¶ 126, 130), it acknowledges that theysimply declined to “deny or contest” the charges (id. ¶ 126). Similarly, Royal Park alleges thatJPMorgan Chase—the owner of EMC, one of the servicers of the covered trusts—“essentiallyadmitt[ed]” that EMC engaged in Events of Default by settling certain loan servicing claims.This again ignores the very nature of a settlement. See p. 15 supra.
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unsurprising reality that foreclosures—which are carried out by the servicer on behalf of the
trust , not by or in the name of the trustee ( see, e.g., PSA § 8.01)—are sometimes unsuccessful.
The only incident that Royal Park even claims to be related to the covered trusts is a
claim that Saxon (a servicer of the NHEL 2006-3 trust) filed one foreclosure action against a
borrower but failed to attach documents “establishing that the borrower had an obligation to pay”
BNYM. Compl. ¶ 116. According to Royal Park, the trial court “inexplicably . . . granted BNY
Mellon’s summary judgment motion” but an appellate court reversed and remanded for further
proceedings. Id. ¶ 118. Remarkably, Royal Park does not discuss the result of this proceeding on
remand. Nor does it explain how Saxon’s conduct violated the contracts, much less in a material
way—apart from the bald assertion that Saxon’s “grossly negligent errors . . . were obvious
Events of Default.” Id. ¶ 119. Royal Park’s reliance on this incident—a foreclosure action
against a single borrower that might eventually be unsuccessful—only highlights how fruitlessly
it is straining to support its claims.
c. Instruction to investigate. Royal Park claims next that BNYM “obtained actual
knowledge of Events of Default . . . when a group of RMBS investors in the SAMI 2006-AR4
Covered Trust publicly announced that they had instructed BNY Mellon to investigate defective
loan servicing in that Covered Trust and other RMBS trusts.” Id . ¶ 120. But by definition, a
request to investigate whether a default has occurred does not show BNYM’s knowledge that it
had occurred. And BNYM had no duty to conduct this investigation absent a request “in writing”
and an offer of indemnity (PSA § 10.03(f)), which the complaint does not allege. See Nacional
Financiera, S.N.C. v. Bankers Tr. Co., No. 121131/98, 2000 WL 36564710, at *7 (N.Y. Sup. Ct.
Nov. 17, 2000) (“The fact that . . . an investigation might have been an ‘inordinately simple’ one
to perform . . . is irrelevant, since [trustee] had no express or implied duty to investigate.”).
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Further, the Court may take judicial notice that BNYM, with the support of the investors who
made that request, entered into a settlement of servicing claims on that trust, approval of which is
pending in New York state court. See Sup. Ct. N.Y. Cnty. Index No. 652382/2014.
d. News stories and the poor performance of the loans . Finally, Royal Park points to “a
flood of news stories and other events” purportedly showing “the mass signing and filing of false
affidavits” by servicers. Compl. ¶ 123. Royal Park claims that these revelations, coupled with
“the dismal performance” of the loans, gave BNYM knowledge of Events of Default. Id. ¶ 124.
Our response is by now familiar. The news stories are indisputably unconfirmed
allegations about servicing practices generally; they could not possibly have provided BNYM
with actual knowledge of Events of Default with respect to the particular trusts at issue here. See
Arrowgrass, 2012 WL 8700416, at *9 (rejecting argument that plaintiff’s “allegations
. . . concerning BNY’s knowledge of facts from news reports” were “sufficient to put BNY on
notice that an event of default had occurred and was continuing,” and chastising the plaintiff for
“blatantly attempting to excise [the] ‘actual knowledge’ requirement and replace it with ‘notice’
as that term is defined in contexts outside of a trust indenture” (internal quotation marks
omitted)). And Royal Park makes no attempt to connect the default rates of the loans and losses
suffered by the covered trusts to servicing failures. Again, “value declines and downgrades d[o]
not speak to why the investments were performing poorly.” Deutsche Zentral , 2013 WL
6667601, at *13. Nothing in the complaint indicates that they resulted from poor servicing.
In sum, the complaint does not plausibly allege that BNYM had knowledge of either
(1) breaches of representations and warranties with respect to particular loans in the covered
trusts or (2) Events of Default with respect to the covered trusts. The complaint therefore fails to
state a claim for breach of contract, and this claim should be dismissed.
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II. THE COMPLAINT FAILS TO STATE A CLAIM UNDER THE TIA.
Royal Park claims that BNYM violated the TIA by failing to perform the same alleged
duties discussed above. Compl. ¶¶ 8-11, 61-62, 105-06, 179-81. 8 If the Court concludes that
Royal Park has not stated a claim for breach of the agreements, its TIA claims necessarily fail as
well. But they also fail for additional reasons: the TIA does not even apply to the New York
trusts, and even as to the Delaware trusts, Royal Park’s allegations do not state a claim.
A. The TIA Does Not Apply To The New York Trusts.
A decision by the Second Circuit issued after Royal Park’s complaint forecloses its TIA
claims as to the NHEL 2006-3, NSTR 2007-C, and SAMI 2006-AR4 trusts. In Retirement
Board , the Second Circuit held that the TIA does not “impose[] obligations on the trustees of
RMBS trusts governed by pooling and servicing agreements.” 2014 WL 7272269, at *1. It
“agree[d] with BNYM” that “New York certificates” are “exempt” from the TIA. Id. at *9.
B. The Complaint Fails To State A TIA Claim As To The Delaware Trusts.
Royal Park alleges that BNYM violated three provisions of the TIA: Section 315(a)—
which applies “prior to default”—and Sections 315(b) and (c)—which apply “in case of a
default.” Compl. ¶¶ 59-62; 15 U.S.C. §§ 77ooo(a)-(c). None supports Royal Park’s claim.
8 The TIA, codified at 15 U.S.C. §§ 77aaa-77aaaa, was enacted in 1939 “to address perceived abuses in the bond market,” whereby “companies that issued bonds to the publicfrequently failed to provide trustees to represent the bondholders’ interests,” or did not obligateor empower trustees “contractually to take action on bondholders’ behalf.” Retirement Board ,2014 WL 7272269, at *8. “[T]he TIA provides that instruments to which it applies must beissued under an indenture that has been ‘qualified’ by the SEC,” which generally means that theindenture must “provide for an independent trustee” and “require the trustee to provideinformation to investors and to take certain actions on their behalf.” Id.
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1. Section 315(a) Does Not Impose A Duty To Comply With An
Indenture.
Section 315(a) of the TIA provides that “prior to default . . . the indenture trustee shall
not be liable except for the performance of such duties as are specifically set out in such
indenture.” 15 U.S.C. § 77ooo(a). Royal Park alleges that this provision “requires BNY Mellon
to perform the duties assigned to it by the Governing Agreements.” Compl. ¶ 60. Not so: Section
315(a) does nothing more than “limit[] a trustee’s responsibilities to those enumerated in the
indenture, rather than imposing additional federal obligations.” Ret. Bd. of Policemen’s Annuity
& Benefit Fund v. BNYM , 914 F. Supp. 2d 422, 430 (S.D.N.Y. 2012) (emphasis added), aff’d in
part, rev’d in part on other grounds, 2014 WL 7272269.
2. The Complaint Does Not Allege A Default Under The Indentures.
Royal Park relies on two TIA provisions imposing post-default duties. Section 315(b)
provides that “[t]he indenture trustee shall give to the indenture security holders . . . notice of all
defaults known to the trustee, within ninety days after the occurrence thereof.” 15 U.S.C.
§ 77ooo(b). Section 315(c) states that “[t]he indenture trustee shall exercise in case of default (as
such term is defined in such indenture) such of the rights and powers vested in it by such
indenture, [with] the same degree of care and skill . . . as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.” Id. § 77ooo(c) (emphasis added).
Two elements of these provisions are critical: both apply only after a “default,” and they
refer to the “indenture” definition of a default—that is, the contract under which the securities
are issued . The Delaware trusts are governed by both an SSA and an Indenture. The SSAs, which
are never mentioned in the TIA, are contracts for loan servicing and define Events of Default
much like the PSAs: as failures by the servicer to perform certain duties. See, e.g., GSCC 2006-1
SSA § 6.01. By contrast, the Indentures define Events of Default as failures by the issuer —an
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entity formed by statute under Delaware law for the specific purpose of making trust payments;
they make no mention of the servicer, which is not even a party to the Indenture. See, e.g., GSCC
2006-1 Indenture App’x A (defining “Event of Default” to include “failure by the Issuing Entity
to pay interest and principal” to investors in a timely manner); id . (defining “Issuing Entity” as
“GSC Capital Corp. Mortgage Trust 2006-1, a Delaware statutory trust, or its successor in
interest”); id. (defining “Master Servicer” as “Countrywide Home Loans Servicing LP”).
Royal Park does not even acknowledge the existence of the issuers, much less allege that
they committed defaults under the Indentures. Its allegations pertain only to the servicers—that
is, to defaults under the PSAs and SSAs, neither of which can give rise to Section 315 liability.
Indeed, the complaint affirmatively denies any meaningful differences among the governing
agreements, asserting that “[a]ll of the Governing Agreements for the [ ] Covered Trusts are
substantially similar.” Compl. ¶ 5. For purposes of the TIA, that is incorrect.
In sum, (1) the TIA applies only to Events of Default under the Indentures, (2) the
Indentures define Events of Default as failures by the issuer, (3) Royal Park mentions neither the
issuer nor the provisions of the Indentures governing Events of Default, and (4) it certainly does
not allege that BNYM had knowledge of any such Event. The TIA claims must be dismissed.
III. THE COMPLAINT FAILS TO STATE A CLAIM FOR BREACH OF A
COMMON LAW “DUTY OF TRUST.”
Royal Park’s third cause of action is that BNYM’s alleged failures to act breached a
“common law ‘duty of trust,’” under which BNYM “was required to avoid conflicts of interest
with plaintiff and the class.” Compl. ¶ 19. Like the TIA claim, this claim is expressly predicated
on alleged breaches of contractual obligations, and thus fails with the contract claims. 9
9 Indeed, the breach of trust claim is essentially duplicative of the contract claim, andshould be dismissed for that reason as well. See, e.g., Clark-Fitzpatrick Inc. v. Long Island R.R.
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In any event, Royal Park’s allegations of a conflict are legally insufficient. It first asserts
that BNYM “refrained from discharging its duties” to avoid disrupting its “ongoing business
relationships” with the sellers and servicers. Id. ¶¶ 145, 156. Courts have held consistently that a
trustee’s relationship with other transaction parties—a relationship that exists by virtue of the
trusteeship itself—is not actionable: “the existence of a conflict of interest cannot be inferred
solely from a relationship between [a securities issuer] and an indenture trustee that is mutually
beneficial and increasingly lucrative.” Page Mill Asset Mgmt. v. Credit Suisse First Boston
Corp., No. 98-cv-6907, 2000 WL 877004, at *2 (S.D.N.Y. June 30, 2000); see, e.g., Elliot
Assocs., 838 F.2d at 73 (affirming motion to dismiss on this basis); In re E.F. Hutton Sw. Props.
II, Ltd., 953 F.2d 963, 972 (5th Cir. 1992) (“A mere hypothetical possibility that the indenture
trustee might favor the interests of the issuer merely because the former is an indenture trustee
does not suffice.”); Ellington Credit Fund, Ltd. v. Select Portfolio Serv., Inc. , 837 F. Supp. 2d
162, 193 (S.D.N.Y. 2011) (granting motion to dismiss claims based on conflict of interest
because “[t]he Complaint entirely fail[ed] to allege that [the trustee] conspired with [the
servicer]”); CFIP , 738 F. Supp. 2d at 475 (rejecting allegations that trustee “was conflicted
because it served as indenture trustee for other . . . transactions, thus generating [significant]
revenues”). Under Royal Park’s logic, essentially every indenture trustee would be conflicted,
and the trusts could not have been properly established in the first place. See, e.g., Sterling Fed.
Bank, F.S.B. v. DLJ Mortg. Capital, Inc., No. 09-cv-6904, 2010 WL 3324705, at *5 (N.D. Ill.
Aug. 20, 2010) (granting motion to dismiss claim that “BNYM ha[d] a conflict of interest
because it ‘regularly acts and is appointed as a trustee”; “if this is a conflict of interest, then it is
inherent in the office of trustee”).
Co., 70 N.Y.2d 382, 389-90 (1987) (dismissing tort allegations that were “merely a restatement”of the “contractual obligations asserted in the cause of action for breach of contract”).
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Royal Park’s second alleged conflict of interest is that BNYM “was either acquiescing in
or actively participating in [the] Events of Default,” and did not want to “expose[]” its
participation in that alleged misconduct. Compl. ¶ 24; see id. ¶¶ 147, 156. This theory assumes
that BNYM not only was aware of, but also was responsible for , servicer breaches—which is
legally incorrect. See Part I.B.2 supra; PSA § 10.01(e); see also SC Note Acquisitions, LLC v.
Wells Fargo Bank, N.A., 934 F. Supp. 2d 516, 532 (E.D.N.Y. 2013) (claim that servicer
maximized fees at investors’ expense “does not implicate [the trustee] in any wrongdoing”).
Royal Park’s claim is that BNYM deliberately breached its own duties in order to avoid a legally
baseless claim of vicarious liability for another party’s breaches. That is facially implausible.10
CONCLUSION
The complaint should be dismissed.
10 Finally, Royal Park has not adequately pleaded that it has standing to assert certain of itsclaims. It alleges that the original purchasers of the securities “transferred” “all litigation rightsand claims” to it pursuant to New York General Obligations Law § 13-107. Compl. ¶ 31. But“the right to sue” under the TIA “is not automatically assigned upon transfer of thenote.” Excelsior Fund, Inc. v. JP Morgan Chase Bank, N.A., No. 06-cv-5246, 2007 WL 950134,at *4 (S.D.N.Y. Mar. 28, 2007). And “it is unclear whether the intent of parties to transfer awhole interest . . . suffices to transfer an assignor’s tort claims, or whether an additional, morespecific statement of an intent to transfer tort claims is required.” Penn. Pub. Sch. Emps.’ Ret.
Sys. v. Morgan Stanley & Co., 772 F.3d 111, 123 (2d Cir. 2014) (emphasis added) (certifyingthis question to the New York Court of Appeals). Because Royal Park’s complaint does noteven specify the language of the transfer documents, it has not alleged standing. It also has notalleged standing to enforce those agreements that have express “negation” clauses restricting theenforcement right to “Owners” “in whose name a Certificate is registered in the Register.” E.g.,PSA §§ 1.01, 11.09; see Wilson v. Dantas, 746 F.3d 530, 537 (2d Cir. 2014) (“[E]ven where acontract expressly sets forth obligations to specific individuals or categories of individuals, thoseindividuals do not have standing to enforce those obligations by suing as third-party beneficiarieswhen the contract contains a negating clause.”). Royal Park does not mention the Register, letalone allege that it is designated therein, and thus has not adequately pleaded standing.
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Dated: January 22, 2015 New York, New York
MAYER BROWN LLP
By: /s/ Matthew D. Ingber____________ Matthew D. Ingber Michael MartinezChristopher J. HouptMichael Rayfield1675 Broadway
New York, New York 10019Tel.: (212) 506-2500
Attorneys for Defendant
The Bank of New York Mellon
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