172 F. Supp. 3d 700
S.D.N.Y.2016Background
- Phoenix Light SF Ltd. and nine special-purpose entities (plaintiffs) hold RMBS certificates issued by 51 covered trusts for which Deutsche Bank served as RMBS Trustee; plaintiffs allege >$525M in damages from trustee inaction.
- Trusts (2005–2007) governed by pooling & servicing agreements (PSAs) or indentures; trustee duties included receipt/retention of loan files, issuing exception reports, notifying parties of R&W breaches, and acting prudently after Events of Default.
- Plaintiffs allege Deutsche Bank knew of widespread underwriting and servicing misconduct (including robo‑signing, false servicer certifications, improper fees, rating downgrades) but failed to notify holders or enforce repurchase/substitution remedies.
- Plaintiffs pleaded causes of action: TIA violations (for indenture trusts), breach of contract, breach of fiduciary duty, negligence/gross negligence, Streit Act violations (for PSA trusts), and breach of implied covenant.
- Deutsche Bank moved to dismiss in part on statute‑of‑limitations, standing (negating clauses / Cede & Co.), failure to plead knowledge or Event of Default, no‑action clauses, duplication of tort and contract claims, economic‑loss doctrine, and statutory scope arguments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Time‑bar for claims (IndyMac Trusts and document‑delivery claims) | Many actionable breaches occurred within limitations; continuing violations toll accrual | Claims stemming from pre‑2008 events are time‑barred (IndyMac and initial document delivery) | IndyMac‑related claims and claims premised only on initial document delivery/certification are time barred; most servicing/notice claims survive |
| Standing where registered holder is Cede & Co. (negating clauses) | Beneficial owners can seek authorization from Cede & Co.; plaintiffs are curing authorization | PSAs limit enforcement to registered holders; negating clauses bar beneficial‑owner suits absent authorization | Plaintiffs may proceed for trusts where they obtained Cede authorization; claims for others dismissed without prejudice until cured |
| Whether plaintiffs pleaded trustee knowledge/Event of Default to trigger pre‑ or post‑Event duties | Allegations of industry litigation, rating downgrades, insurer notices, robo‑signing, and exception reports give rise to reasonable inference of knowledge and Events of Default | Plaintiffs must plead loan‑by‑loan, trust‑by‑trust actual knowledge before post‑Event duties arise | At pleading stage, plaintiffs need not allege loan‑by‑loan knowledge; allegations suffice to survive dismissal on knowledge/Event issues |
| No‑action clauses and pre‑suit demand requirements | Pre‑suit demand on trustee is futile; no‑action clauses should not bar claims against trustee itself | No‑action clauses (25% vote, written notice, demand, indemnity) require enforcement of certain pre‑suit conditions | Pre‑suit demand on trustee excused as futile; no‑action clause does not bar plaintiffs’ suit against the trustee |
| Tort claims (fiduciary duty, negligence) vs contract claims; economic‑loss doctrine | Extra‑contractual duties (ministerial care, avoid conflicts) create independent tort liability after Events of Default; conflicts/negligence pleaded | Tort claims merely duplicate contractual duties; economic‑loss doctrine bars tort recovery | Tort claims duplicative of contract obligations dismissed; but non‑duplicative tort allegations (post‑Event fiduciary duties, ministerial negligence, conflicts of interest) survive |
| TIA and Streit Act scope | TIA claims asserted for indenture trusts; Streit Act claims for PSA trusts | TIA limited by PABF; Streit Act requires only inclusion of contract terms and does not itself create extra duties | TIA claims limited to 6 indenture trusts (PSA trusts dismissed under PABF); §316(b) claim dismissed; Streit Act claim dismissed (statute requires inclusion of terms but does not independently impose extra duties) |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir.) (pleading standards on Rule 12(b)(6) — accept factual allegations as true)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S.) (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S.) (legal conclusions not presumed true at pleading stage)
- Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir.) (courts may consider documents integral to complaint)
- Golden Pac. Bancorp v. F.D.I.C., 273 F.3d 509 (9th Cir.) (open repudiation tolling doctrine limited to equitable relief contexts)
- Cruden v. Bank of N.Y., 957 F.2d 961 (2d Cir.) (pre‑suit demand/no‑action clause analysis regarding trustee suits)
- AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 11 N.Y.3d 146 (N.Y.) (indenture trustee owes duty to perform ministerial functions with due care)
- Ret. Bd. of the Policemen’s Annuity & Ben. Fund of City of Chicago v. Bank of N.Y. Mellon, 775 F.3d 154 (2d Cir.) (TIA claims available only for indenture‑governed trusts)
- BNP Paribas Mortg. Corp. v. Bank of Am., N.A., 778 F. Supp. 2d 375 (S.D.N.Y.) (trustee actual knowledge pleaded may suffice without formal written notice)