Blackrock Balanced Capital Portfolio (FI) v U.S. Bank N.A.

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Blackrock Balanced Capital Portfolio (FI) v U.S. Bank N.A. 2018 NY Slip Op 31388(U) January 12, 2018 Supreme Court, New York County Docket Number: 652204/2015 Judge: Saliann Scarpulla Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 1] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART 39 --------------------~--------------------------------------------------)( . BLACKROCK BALANCED CAPITAL PORTFOLIO (FI), ET AL., Plaintiffs, Index No.: 652204/2015 -againstU.S. BANK NATIONAL ASSOCIATION, DECISION AND ORDER Defendant. -andTHE TRUSTS IDENTIFIED IN EJCHIBIT 1, Nominal Defendants. ------------------------------------------~-----------------------------)( SALIANN SCARPULLA, J.: In this action, inter alia, to recover damages for breach of contract, defendant U.S. Bank National Association ("U.S. Bank") moves to dismiss the amended complaint. This action involves 770 mortgage backed securitization trusts, of which U.S. Bank was trustee. The 770 trusts were each governed by a pooling and servicing agreement ("PSA"). In 2008, during the financial and housing market crisis, many mortgages foreclosed, and resulted in losses for investors, including plaintiffs. Plaintiffs commenced this action alleging that U.S. Bank breached its duties as trustee. In their complaint, plaintiffs allege breach of contract, setting forth the following alleged breaches: (1) failure to ensure delivery of mortgage loan files; (2) failure to provide written notice of breaches of sellers' mortgage loan representations and 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 2 of 13 Page 2of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 2] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 warranties; (3) failure to enforce the sellers' obligation to repurchase, substitute or cure the defective mortgage loans; (4) knowledge of the servicer's failure to provide notice of any such breach of duties as specified in the PSAs; and (5) failure to provide required notice to trigger the events or default ("EOD") to the servicers, to exercise prudence following the EODs, and to provide notice of all uncured EODs to certificateholders. Plaintiffs next allege that U.S. Bank breached its fiduciary duties to the trust and certificateholders prior and post-EOD. Specifically, they claimed that U.S. Bank (1) failed promptly to enforce the sellers' obligation to cure, repurchase, or substitute mortgage loans that had defective mortgage files or were affected by breaches of the sponsors' and originators' representatfons and warranties; (2) failed to provide notice to the certificateholders of those breaches qr of its intention not to enforce the sellers' obligation to cure, repurchase, or substitute the loans with defective mortgage files and breaches of representations and warranties; (3) failed to enforce the servicers' obligations to observe and perform agreements as set forth in the PSAs; and (4) failed to provide notice to the certificateholders of the servicing violations or of its int~ntion not to enforce the servicers' obligations to observe and perform agreeitJ.ents set forth in the PSAs. Additionally, plaintiffs claim that U.S. Bank breached its fiduciary duty by failing to avoid conflicts of interest. Specifically, U.S. Bank knew that sellers were breaching· representations and warranties, and servicers were engaging in activities outside of customary and usual standards of practice of prudent mortgage servicers. However, U.S. Bank refused to take any action against the sellers or servicers, or even notify the certificateholders of seller or servicer defaults because U.S. Bank was economically 3 of 13 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 Page 3of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 3] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 obligated to the sellers, could be held liable for its own servicing violations, and faced repurchase liability for the sale and securitization of its own loan~. Plaintiffs'also assert a cause of action for breach of the implied covenant of good faith and fair dealing, in the alternative to the breach of contract claim. According to plaintiffs, U.S. Bank breached its duty to give written notice to the servicer after U.S. Bank gained actual knowledge of the servicers' failure to observe and perform pursuant to the PSAs, so as to facilitate the occurrence of an EOD. Finally, plaintiffs assert a claim for negligence in the alternative to the breach of contract claim. Plaintiffs claim that U.S. Bank owed certificateholders an extracontractual, common law duty to perform all basic, non-discretionary, ministerial tasks with due care. U.S. Bank breached its common law duty of due care to certificateholders by negligently failing to provide written notices to the responsible servicers, which prevented the occurrence of EODs. U.S. Bank now moves to dismiss the amended complaint. Discussion Breach of Contract U.S. Bank first argues that plaintiffs have failed adequately to plead its three categories of breach-of-contract claims, which are: (i) post-EOD claims, (ii) pre-EOD claims concerning alleged seller and originator breaches of representation and warranties and servicer failures, and (iii) pre-EOD claims concerning loan documentation. U.S. Bank argues that, according to the applicable PSAs, an EOD occurs when there is a breach by a servicer or master servicer (depending on the relevant PSA) of its 4 of 13 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 . Page 4of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 4] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 obligations, written notice is given to the servicer or master Servicer by a designated deal party or the certificateholders themselves, and there is a failure to cure within a specified time. U.S. Bank contends that it was not obligated to provide the written notice, and in any event, plaintiffs did not plead that U.S. Bank itself obtained notice of any servicing breach, and did not plead any specific servicing breach sufficient to constitute an EOD. Plaintiffs allege that the PSAs oblig~ted U.S. Bank to provide the written notice to the servicer after U.S. Bank gained notice of a servicing breach. They claim that U.S. Bank had knowledge of the servicer's failure to perform its duties and obligations, and failed to provide the written notice sufficient to trigger an EOD. Plaintiffs contend that U.S. Bank knew of loan specific servicer breaches, through receipt of servicing data and preparation of remittance reports for the trust, and through specific notices. Plaintiffs submit two September 2012 letters-from Gibbs and Bruns, referring to several of the trusts, and referencing multiple servicing failures. One letter provides, "each of these failures to perform Wells Farg-o's covenants and agreements violated the prudent servicing and/or master servicing obligationsjmposed on Wells Fargo by PSA §3.01 and §9.01. Each of these failures to perform Wells Fargo's covenants and agreements has also materially affected the rights of the Certificateholders. Each of these failures to perform constitutes a continuing Event of Default." U.S. Bank notes that plaintiffs have not pied that it provided notfoe to the servicer of the alleged breach. According to U.S. Bank, plaintiffs' failure to plead its notice to the servicer or the servicer's failure to cure-both of which must occur before an EOD -is fatal to its post-EOD duty claim. Plaintiffs maintain that allegations regarding U.S. 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOciATION Motion No. 003 5 of 13 Page 5of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 5] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 Bank's notice of breach and the servicers' failure to cure are missing from ~he complaint because U.S. Bank did nothing despite allegedly knowing-.or having reason to knowabout the breaches. Plaintiffs argue that U.S. Bank cannot now rely on its failure to give notice to prevent an EOD from occurring, to argue a pleading deficiency. This "prevention doctrine," provides that "a party may not insist upon performance of a condition precedent when its nonperformance has been caused by the party [it]self." Commerzbank AG v. United States Bank NA., 2017 U.S. Dist. LEXIS 159069, * 11 (S.D.N.Y., September 27, 2017). Plaintiffs argue that even though U.S. Bank was not obligated pursuant to the PSAs to give noti~e to the servicers, it had the power to do so, and cannot now evade potential liability because it was not obligated to do so and because other deal parties could have provided notice. Plaintiffs contend that U.S. Bank cannot rely on its own failure to give notice as a shield from liability. See Phoenix.Light SF Ltd. v. Bank of NY. Mellon, 2015 U.S. Dist. LEXIS 131206 (S.D.N.Y. September 29, 2015). Based on the September 2012 letters, I find that plaintiffs have sufficiently pied that U.S. Bank had notice of facts regarding certain specific violations by servicers, constitutingEODs. Cf CommerceBankvBankofNY. Mellon, 141 A.D.3d413 (l51 Dept. 2016). Those letters only refer to a limited number of trusts at issue, however, but for those specific trusts referenced in the two September 2012 letters, plaintiffs have sufficiently stated a claim for breach of contract based on a failure to provide required notice to trigger an EOD to the servicers and failing to make prudent decisions concerning EODs. 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION 6 of 13 Motion No. 003 Page 6of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 6] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 As to pre-EOD claims, Plaintiffs maintain that U.S. Bank breached its duty to identify in final certifications and exception reports, mortgage files that were missing documentation required to be delivered under the PSAs, which included documents to prove ownership of the note and mortgage. U.S. Bank argues that the pre-EOD loan documentation claims are based on duties that terminated soon after a trust's closing and are time barred, and in any event, U.S. Bank did not have a contractual obligation to deliver the loan files, review mortgage files, prepare exception reports, or oversee servicers and master servicers. I agree that claims for document delivery failures and creating certifications and exception reports are time.,.barred by the six'"'.year statute of limitations. 1 See Royal Parklnvs. SAINVv. HSBC Bank USA, NA., 109 F. Supp. 3d 587 (S.D.N.Y. 2015); Fixed Income Shares: Series M v. Citibank, NA., 56 Misc.3d 1205(A) (Sup. Ct. N.Y. Co. June 26, 2017). U.S Bank next argues that plaintiffs fail to allege facts to support an inference that U.S. Bank discovered or received written notice of loan specific breaches of representations and warranties, and fail to. allege breaches by many of the sponsors and for the trusts. Plaintiffs argue that U.S. Bank discovered seller representation and warranty breaches and plaintiffs properly pled the specific representations and warranties breached - regarding the mortgage loan files, originators' compliance with underwriting standards and practices, owner occupancy statistics, appraisal procedures, LTV and combined loan-to-value ratios, and U.S. Bank's discovery of those breaches .. Further, U.S. Bank concedes that this claim regarding one of the trusts (SASCO 2007-BC4), which closed in January 2008, is not time barred and may proceed. 1 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION /" Motion No. 003 7 of 13 Page 7of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 7] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 U.S. Bank received written notice from monoline insurers and investors concerning breaches by these same sellers in its capacity as trustee to other trusts. In addition, discovery was based on information from certificateholders themse~ves, internal documents, remittance reports, and "document exception reports," which identified many incomplete mortgage loans that were not timely cured. Plaintiffs maintain that U.S. Bank failed to see that the defects were cured or that the defective loans were repurchased, and did nothing while servicers engaged in "robosigning" even though the missing documents were needed to foreclose on the properties. The complaint sufficiently states that there were breaches of the sellers' representations and warranties with respect to the loans included in the trusts at issue and that U.S. Bank had actual knowledge of these breaches and,failed to take appropriate action. See Fixed Income Shares: Series M v. Citibank, N.A., 56 Misc.3d 1205(A) (Sup. Ct. N.Y. Co. June 26, 2017). The factual allegations are sufficient at this pleading stage, where the pleadings are afforded a liberal construction and the plaintiffs are given the benefit of every favorable inference. See Warberg Opportunistic Trading Fund, L.P. v GeoResources, Inc., 112 A.D.3d 78 (l51 Dept. 2013). Breach of Implied Covenant of Good Faith and Fair Dealing Plaintiffs ·contend that U.S. Bank breached its _implied duty of good faith and fair dealing by not giving notice to the servicers, and thus preventing an EOD from being triggered. U.S. Bank argues that this claim must be dismissed because the trusts' governing agreements prohibit the imposition of implied covenant claims. As properly noted by U.S. Bank, the applicable agreements expressly disclaim implied obligations. 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 8 of 13 Page 8of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 8] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 Specifically, "no implied covenants or obligations shall be read into this Agreement against the Trustee" prior to the occurrence of an EOD of which trustee shall have actual knowledge, and this disclaimer is binding. See Nat'/ Credit Union Adm in. Bd. v. US. Bank Nat'/ Ass 'n, No. 14-cv-9928(KBF), 2016 WL 796850 (S.D.N.Y. Feb. 25, 2016). 2 In any event, plaintiffs essentially argue that U.S. Bank breached this covenant by failing to fulfill its contractual' obligations. The breach of contract and breach of implied covenant claims are based on the same alleged facts, and as such, this claim must be dismissed. See Blackrock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank, 247 F. Supp. 3d 377 (S.D.N.Y. 2017); CommerzbankAGv. HSBC Bank USA, NA., No. 15 Civ. 10032 (LGS), 2016 U.S. Dist. LEXIS 75028 (S.D.N.Y. June 8, 2016); Policemen's Annuity & Benefit Fund of City of Chicago v. Bank ofAm., NA, 907 F. Supp. 2d 536 (S.D.N.Y, 2012); Netologic, Inc. v Goldman Sachs Group, Inc., 110 A.D.3d 433 (1st Dept. 2013). Negligence.and Breach of Fiduciary Duty Plaintiffs argue that prior to an EOD, a' trustee's duty is governed solely by the terms of the PSA, with two exceptions: a trustee-must still "(1) avoid conflicts of interest, and (2) perform all basic, non-discretionary, ministerial tasks with due care." Ellington Credit Fund, Ltd. v. Select Portfolio Servicing Inc., 83 7 F. Supp. 2d 162, 191-92 (S.D.N.Y. 2011). Plaintiffs allege that U.S. Bank is liable in tort for both. Plaintiffs further allege that post-EOD, U.S. Bank's conflict of interest prevented it from enforcing 2 Cf Fixed Income Shares: Series Mv. Citibank, NA., 56 Misc.3d 1205(A) (Sup. Ct. N.Y. Co. June 26, 2017). 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 9 of 13 Page 9of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 9] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 rights against sellers and servicers, as a prudent trustee would have done. Plaintiffs also argue that U.S. Bank breached its duty of care to certificateholders by knowing of the servicers' failure to observe and perform covenants set forth in the PSAs and then negligently failing to provide written notices to the responsible servicers. In AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., (11 N.Y.3d 146, 157 [2008]), the Court of Appeals agreed with other courts that had "held that prior to default, indenture trustees owe note holders an extracontractual duty to perform basic, nondiscretionary, ministerial functions." In Commerce Bank v. Bank ofNY Mellon, (141A.D.3d413 [Pt Dept. 2016]), the plaintiffs alleged that the defendant had the duty to notify them th~t other parties to the PSA had. failed to perform their obligations. The First Department held that to give plaintiffs such notice, defendant would have had to monitor other parties, and a failure to monitor other parties does not involve the performance of basic non..,discretionary ministerial tasks. In addition, the court explained that a trustee does not owe a duty to "nose to the source" Id. at 416. Similarly, here, plaintiffs' negligence claim is deficient because it contains allegations that do not involve the performance of basic non-discretionary ministerial tasks. U.S. Bank maintains that the breach of fiduciary duty claims must be dismissed because ( 1) the economic loss doctrine bars them; (2) they are duplicative of the breach of contract claims; (3) plaintiffs fails to allege an EOD in connection with their post-BOD fiduciary duty claim. Plaintiffs allege that U.S. Bank failed to protect the trusts and certificateholders by (1) not exercising its rights to enforce sellers' repurchase obligations, and servicers' prudent servicing obligations; (2) not recovering payment of 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 10 of 13 Page 10of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 10] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 the underlyin,g obligations owed to the trusts; and (3) avoiding conflids of interest. They maintain that these claims are distinct from the contractual duties. A trustee under a corporate indenture has its rights and duties defined by the terms of the agreement, not by any fiduciary relationship. See AMBAC Indem. Corp. v. Bankers Trust Co., 151 Misc. 2d 334 (Sup. Ct. N.Y. Co. 1991); Hazzard v. Chase Nat'! Bank, 159 Misc. 57 (Sup. Ct. N.Y. Co. 1936). "The.duties of an indenture trustee can be limited to those set forth in the indenture and, as a result, the trustee doe~ not owe the broad fiduciary duties of an ordinary trustee prior to an event of default, except that the trustee is at all times obligated to avoid conflicts of interest with the beneficiaries." AMBAC Indem. Corp. v. Bankers Trust Co., 151 Misc. 2d 334, 338-339 (Sup. Ct. N.Y. Co., 1991 ). Prior to an event of default, an indenture trustee owes a duty to perform its non-discretionary, ministerial functions with due care, and if this duty is breached the trustee will be subjected to tort liability. However, such action does not give rise to a claim for breach o,f fiduciary duty. AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 11 N.Y.3d 146 (2008). After an event of default, the indenture trustee's obligations come more closely to resemble those of an ordinary fiduciary. See LNC Invs., Inc. v. First Fid. Bank, NA., 935 F. Supp. 1333 (S.D.N.Y. 1996). Any claim that U.S. Bank breached a fiduciary duty in failing to act as it was i ·I contractually required to do is barred by the economic loss doctrine. See Nat'! Credit Union Admin. Bd. v. US. Bank Nat'! Ass 'n, No. 14-cv-9928 (KBF), 2016 WL 796850 (S:D.N.Y. Feb. 25, 2016); Fixed Income Shares: Series M v. Citibank, NA., 56 Misc.3d 1205(A) (Sup. Ct. N.Y. Co. June 26, 2017). Pursuant to the e_conomic loss doctrine, "a 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 11 of 13 Page 11of13 ' [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 11] NYSCEF DOC. NO. 211 INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 contracting party seeking only a benefit of the bargain recovery may not sue in tort notwithstanding the use of familiar tort language in its pleadings." 17 Vista Fee Associates v. Teachers Ins. & Annuity Ass 'n ofAm., 259 A.D.2d 75, 83 (1999). The damages that the plaintiffs seek on the breach of fiduciary duty claims flow from U.S. Bank's obligations under the PSAs. The alleged injury, the way in which the injury occurred, and the damages sought indicate that plaintiffs' actual remedy is found in the enforcement of contractual obligations. See Blackrock Core Bond Portfolio v. US. Bank NA., 165 F. Supp. 3d 80 (S.D.N.Y. 2016). As such, the breach of fiduciary duty claim is barred by the economic loss doctrine. Further, to properly plead a conflict-of-interest claim, a plaintiff must allege more than the existence of a relationship between an issuer and an indenture trustee that is mutually beneficial and increasingly lucrative. Plaintiff must allege that a trustee personally benefitted from the alleged misconduct. See Blackrock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank, 247 F. Supp. 3d 377, 397 (S.D.N.Y. 2017). Here, plaintiffs allege that U.S. Bank failed and unreasonably refused to act to protect the trusts and certificateholders against seller breaches and servicer violations, because it would have revealed that U.S. Bank itself w;:ts engaged in the same servicing misconduct in its role as servicer for other mortgages and RMBS trusts. Plaintiffs also claim that U.S. Bank was incentivized to prevent servicers from taking necessary and prudent action because the servicers were affiliated with the sponsors that provided U.S. Bank with valuable trustee appointments. Nevertheless, the damages that plaintiffs allege on this claim arise entirely from U.S. Bank's contractual 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 12 of 13 Page 12of13 [*FILED: NEW YORK COUNTY CLERK 01/17/2018 02:37 PM 12] NYSCEF DOC. NO. 211 obligations. INDEX NO. 652204/2015 RECEIVED NYSCEF: 01/17/2018 Beca~se plaintiffs' allegations for damages arising from a conflict of interest come from U.S. Bank's alleged failure to take contractual actions -for example, its failure to prevent the servicers from engaging in activities outside of customary and usual standards of practice of prudent mortgage service - the claim is barred by the economic loss doctrine. Blackrock Core Bond Portfolio v. US. Bank NA., 165 F. Supp. 3d 80 (S.D.N.Y. 2016). In accordance with the foregoing; it is hereby ORDERED that defendant U.S. Bank National Association's motion to dismiss the complaint is granted to the extent that the cause of action for breach of fiduciary duty, the cause of action for negligence, the cause of action for breach of the implied covenant of good faith and fair dealing, and the cause of action for breach of contract insofar as it is premised on pre-Event of Default issues concerning loan documentadon, and as otherwise set forth above, are dismissed, and the remaining causes are severed and shall continue; and it is further ORDERED that defendants answer the complaint within twenty days of this decision. This constitutes the decision and order of the court. Dated: January 12, 2018 New York, New York ON. 652204/2015 BLACKROCK vs. U.S. BANK NATIONAL ASSOCIATION Motion No. 003 13 of 13 SAt!tA·N Page 13of13

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