410 F.Supp.3d 662
S.D.N.Y.2019Background
- NCUA, as liquidating agent for failed corporate credit unions, succeeded to RMBS certificates held in trusts for which Deutsche Bank served as trustee and re‑securitized many into NCUA Guaranteed Notes (NGN) Trusts; BNYM served as NGN Indenture Trustee.
- NCUA sued Deutsche Bank (original complaint 2014) alleging breaches of Pooling & Servicing Agreements (PSAs) and trustee duties (contract and tort claims); many NGN claims depended on derivative standing that BNYM, as Indenture Trustee, declined to pursue.
- Multiple SDNY decisions split on NCUA’s derivative standing; the Second Circuit in U.S. Bank affirmed dismissal of derivative claims and denied leave to substitute in that separate case, but left open district courts’ discretion in similar circumstances.
- Since the FAC, some NGN trusts unwound and certificates reconveyed to NCUA; NCUA moved to file a Second Amended Complaint (PSAC), appoint Graeme W. Bush as Separate Trustee for NGN claims, and added claims that Deutsche Bank used trust funds to pay its defense (indemnification claims).
- The Court granted leave to amend and to substitute the Separate Trustee (and to substitute NCUA for unwound certificates), held Deutsche Bank’s challenge to the Separate Trustee agreement lacked standing, denied dismissal of the contract claims, dismissed tort claims (economic‑loss/duplication), allowed indemnification claims to proceed but stayed discovery on them pending resolution of the underlying claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Leave to amend & substitute under Rules 15 and 17 (timeliness/bad faith) | NCUA argued split authority justified repleading; offered substitution after courts weighed in and after some trusts unwound | Deutsche Bank argued NCUA unreasonably delayed and acted tactically after multiple decisions flagged standing defects | Court allowed amendment/substitution: no undue delay or bad faith here; District court had not precluded repleading and law split in SDNY. |
| Validity / challenge to Separate Trustee appointment | Separate Trustee agreement (Bush) properly appoints a trustee to pursue NGN claims; substitution is formal after Rule 15 amendment | Deutsche Bank contended the Separate Trustee Agreement violates NGN Indenture terms and is invalid; also argued assignment/champerty defects | Court: Deutsche Bank lacks standing to challenge Separate Trustee Agreement (not a party); even on merits, ambiguities prevent dismissal at pleading stage. |
| Breach of contract claims — trustee notice/obligation (pre‑ and post‑EOD) | NCUA alleges Deutsche Bank had notice of R&W breaches, high defaults, rating downgrades, settlements, reports, servicer defaults; thus obligations to act arose | Deutsche Bank contended no duty to investigate, insufficient notice alleged, First Department decisions undermine SDNY approach | Court denied dismissal: pleadings sufficiently alleged notice of breaches and EODs; SDNY precedent controls over limited First Department authority at this stage. |
| Tort claims (negligence, fiduciary duty) | NCUA asserted extracontractual duties (conflicts, good faith, loyalty) separate from PSAs | Deutsche Bank argued economic loss doctrine bars tort recovery and tort counts duplicate contract remedies | Court dismissed tort claims: economic‑loss doctrine bars them and they are duplicative of contractual claims (conflict‑of‑interest theory not saved). |
| Indemnification (trustee drawing from trust to pay defense) | NCUA argued Hooper presumption bars first‑party indemnity absent unmistakable contract language; seeks declaratory relief and breach for withdrawals | Deutsche Bank argued PSAs permit indemnification for trustee expenses incurred in administration unless due to negligence/misconduct; discovery on indemnity should be stayed until underlying liability resolved | Court: Hooper inapplicable because certificateholders are not PSA parties; PSAs on their face permit indemnification unless misfeasance/bad faith/negligence; indemnity claims allowed but discovery on them stayed pending resolution of underlying merits. |
Key Cases Cited
- Nat'l Credit Union Adm. Bd. v. U.S. Bank Nat'l Ass'n, 898 F.3d 243 (2d Cir. 2018) (Second Circuit affirmed dismissal of NCUA's derivative claims and reviewed timeliness of substitution under Rule 17)
- Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11 (2d Cir. 1997) (Rule 17(a) substitution may be liberally allowed where change is formal and does not alter substantive allegations)
- Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Sec., 797 F.3d 160 (2d Cir. 2015) (district court's denial of leave to amend improper when plaintiff forced to choose before full briefing)
- Rajamin v. Deutsche Bank Nat'l Tr. Co., 757 F.3d 79 (2d Cir. 2014) (party not a contracting party lacks standing to challenge validity of trust agreements to which it is not a party)
- Hooper Assocs. v. AGS Computers, Inc., 74 N.Y.2d 487 (N.Y. 1989) (indemnity presumptively applies to third‑party claims; first‑party indemnity requires unmistakable contractual language)
- BlackRock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank, Nat'l Ass'n, 247 F. Supp. 3d 377 (S.D.N.Y. 2017) (SDNY decision allowing similar NCUA RMBS claims to proceed)
- Phoenix Light SF Ltd. v. Deutsche Bank Nat'l Tr. Co., 172 F. Supp. 3d 700 (S.D.N.Y. 2016) (distinguishes document‑delivery claims and discusses limitations issues in RMBS suits)
- Triaxx Prime CDO 2006-1, Ltd. v. Bank of N.Y. Mellon, [citation="741 F. App'x 857"] (2d Cir. 2018) (summary order affirming dismissal of tort claims as barred under economic‑loss doctrine)