Policemen's Annuity & Benefit Fund v. Bank of America, NA
907 F. Supp. 2d 536
S.D.N.Y.2012Background
- PABF sues BofA and U.S. Bank as trustees for 41 WaMu-era MBS trusts alleging PSPAs, TIA, and implied covenant breaches.
- Plaintiff purchased certificates in five trusts, later sold them, and seeks damages from alleged declines in MBS value caused by Trustee inaction.
- PSAs create duties for the Trustee and Initial Custodian (WaMu fsb) regarding mortgage file review, notices, and enforcement of seller repurchase obligations.
- Key provisions: Section 2.05 limits Trustee liability for Custodian acts but preserves liability for Trustee’s own negligent action; Section 2.07 requires 45-day mortgage file review and certification if delegated; Sections 2.09, 8.01 govern notices and prudent actions; cross-collateralization links loan groups to multiple tranches.
- Court addresses standing: Article III and NECA-IBEW class standing framework; nature of injury is diminution in value from defaults within loan groups; cross-collateralization affects which tranches are within the same class.
- Court grants in part and denies in part; some breach claims dismissed without prejudice; TIA claims analyzed for applicability and scope; implied covenant claim dismissed with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether PABF has Article III and class standing | PABF has injury-in-fact from reduced MBS value; NECA-IBEW supports class standing across related trusts/loan groups. | Standing limited to purchased trusts/tranches; cross-trust injuries lack a single common set of concerns. | PABF has Article III standing for five purchased trusts and class standing for related loan groups within those trusts. |
| whether Trustee duties to review Mortgage Files and to notify for deficiencies were pled plausibly | 2.07 requires review and certification; 2.09 requires prompt notice of Seller breaches; Trustee failure harmed investors. | Duty delegated to Initial Custodian; allegations fail to connect deficiencies to Trustee actions. | Claim to review Mortgage Files dismissed without prejudice for lack of plausible pleading; claim regarding notice of deficiencies and Seller breaches denied. |
| whether Trustee duties to enforce Seller repurchase obligations are pled plausibly | Trustee should enforce repurchase obligations upon learning of breaches; failure harmed investors. | PSA assigns Servicer enforcement, not Trustee, of repurchase obligations; prudent-person standard not shown. | Dismissed breach claim to enforce repurchase obligations, with leave to replead. |
| whether the Trust Indenture Act applies and whether §315 duties were violated | TI A applies to certificates as debt instruments; fail to provide notice of defaults; prudent-person standard breached. | Some TIA theories fail on pleading; certificate nature disputed; some defenses retained. | TIA applies; §315 notice claim survives to extent of actual knowledge; prudent-person prong dismissed without prejudice. |
| whether the implied covenant claim is viable alongside breach of contract | Breached implied covenant due to inaction after knowledge of defects, frustrating holders’ rights. | Implied covenant duplicative of contract; PSA § 8.01(c)(ii) bars implied covenants; independent basis for dismissal. | Implied covenant claim dismissed with prejudice. |
Key Cases Cited
- NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012) (two-part class standing test; injury plus same set of concerns)
- LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195 (2d Cir. 2005) (bonds; debt instrument characterization of certificates)
- Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162 (S.D.N.Y. 2011) (mortgage-backed securities treated as debt instruments; PSPA-like features)
- CWCapital Asset Mgmt., LLC v. Chicago Props., LLC, 610 F.3d 497 (7th Cir. 2010) (bond-like structure; cross-collateralization considerations)
- TIFD III-E, Inc. v. U.S., 459 F.3d 220 (2d Cir. 2006) (eight-factor test for debt vs. equity; IRS Notice 94-47 factors)
- VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606 (Del. 2003) (contract interpretation; implied covenant under Delaware law)