IKB International, S.A. and related plaintiffs are appealing a decision from the Supreme Court of New York County, which denied motions to dismiss several claims against multiple banks and trusts, including Wells Fargo Bank, U.S. Bank, HSBC Bank, Deutsche Bank, and LaSalle Bank. The court upheld claims related to pre-Event of Default representation and warranty repurchase enforcement, post-Event of Default breach of contract, and breach of fiduciary duty due to conflict of interest. However, the court granted motions to dismiss the pre-Event of Default document defect repurchase enforcement claims. The decision was issued on August 30, 2022, and the appeal involves multiple index and case numbers. Legal counsel for the various parties is identified, indicating a complex litigation environment involving numerous defendants and nominal defendants. The opinion is subject to revision prior to its publication in the Official Reports.
The court granted motions concerning post-Event of Default breach of contract claims related to trusts requiring written notice for an event of default and breach of fiduciary duty claims based on alleged contractual failures. It denied motions regarding pre-Event of Default document defect repurchase enforcement claims, affirming the decision without costs. Plaintiffs, having purchased residential mortgage-backed securities (RMBS) certificates from trustees, claimed that their investments became nearly worthless due to defendants' breaches of duties. The court found that plaintiffs' failure to comply with no-action clauses did not warrant dismissal, as demanding action from a trustee against itself would be futile. Compliance with the no-action clause was excused, affecting the requirement for a demand by 25% of certificate holders. The court ruled that the enforcement of repurchase claims was permissible due to the absence of a specified enforcement mechanism in the governing agreements. It emphasized that trustees' duties arise from contracts, highlighting that contract interpretation should reflect the parties' written intentions without adding or distorting terms. The court affirmed that the trustees had an express duty to enforce the repurchase protocol for the benefit of all certificate holders, rejecting dissenting views that the language lacked mandatory force.
The phrase "agrees to assume" clearly indicates a commitment to an obligation rather than discretionary rights, as evidenced by a failure to include terms like "may" or "has the discretion to." The language in question imposes a duty on the trustees, consistent with the agreements and in harmony with Section 8, contrary to claims made in a partial dissent that conflates duties and rights. The rights of investors are defined in the repurchase protocol, and the dissent's argument overlooks these obligations. The dissent's reference to Prickett v. New York Life Ins. Co. to suggest that certain rights are discretionary is misplaced, as that case involved explicit discretionary language absent here. Additionally, the assertion that the provision merely clarifies the trustee's role under trust law lacks merit since it already states the trustee holds the Trust Fund for the benefit of certificateholders. The absence of an enforcement mechanism in the repurchase protocol does not negate the existence of rights. Separate agreements that specify enforcement responsibilities do not affect the interpretation of the agreements at issue, which do not interlink or create a unified contract. The partial dissent's approach incorrectly relies on other agreements that do not meet the criteria for being read together, as they involve different parties and purposes.
The interpretation of the trustee's duties cannot rely on other agreements, as they are deemed irrelevant to understanding the phrase "agrees to." The dissent's argument, which cites Quadrant Structured Prods. Co. Ltd. v Vertin, is flawed since it presupposes ambiguity in the contracts, while the plaintiffs assert there is none. The dissent's use of dissimilar contracts undermines its position. Interpreting the provision as imposing an express duty on trustees is necessary to avoid an unreasonable outcome that nullifies the repurchase protocol, which would leave no party responsible for enforcement. The dissent’s suggestion that the repurchase protocol could be interpreted to lack consequences is deemed nonsensical. The discussion also addresses the partial dissent's push for a remand regarding the plaintiffs' post-EOD breach claims based on U.S. Bank, N.A. v DLJ Mtge. Capital, Inc. However, the defendants did not previously raise this issue during the trial or appeal, nor did they reference relevant precedents. The court emphasizes that it does not initiate arguments on behalf of parties that have failed to raise them. Lastly, the Supreme Court's dismissal of the pre-EOD repurchase enforcement claims as time-barred is criticized for misapplying the timing of defendants' obligations concerning document defect identification versus enforcement.
The determination of the accrual for certain claims cannot be resolved solely based on the pleadings. The agreements do not define a timeline for initiating a putback action after sellers fail to cure, leaving the reasonableness of timing undetermined at this stage. The court should have dismissed post-EOD breach of contract claims for trusts requiring written notice for an Event of Default (EOD), as plaintiffs failed to sufficiently allege that written notice was provided by an authorized party. The prevention doctrine, which prevents a party from claiming nonperformance due to a condition precedent when caused by its own actions, is not applicable in this case. Claims regarding defendants avoiding EOD declarations lack supporting allegations in the complaints. However, the court rightly chose not to dismiss post-EOD breach claims for indenture trusts, as plaintiffs adequately alleged breaches of representations and warranties, as well as unaddressed servicer failures. The allegations that trustees received written notice of servicing breaches from various sources, including investors and insurers, are deemed sufficient, aligning with findings from other courts.
The court upheld the breach of conflict of interest and post-Event of Default (post-EOD) breach of fiduciary duty claims, rejecting the application of the economic loss doctrine to these claims, except for those related to the defendants' contractual obligations. Claims stemming from breaches of extracontractual professional duties were allowed to proceed, as they alleged damages distinct from those arising from contractual breaches, notwithstanding that the damages might be of a similar nature. Dissenting opinions, particularly from Judge Singh, argued that the agreements did not impose an affirmative duty on the trustee to enforce seller repurchase obligations pre-EOD. Singh also contended that the motion court's decision regarding the specificity of written notice required for post-EOD claims should be vacated and remanded for further examination. Singh criticized the majority for not adhering to established precedent, emphasizing the importance of stability in contractual law and the necessity of maintaining sound judicial reasoning. The dissent expressed concern that the majority's interpretation of the financial agreements was flawed and could lead to confusion in future cases. The cardinal rule of contract interpretation, which mandates that all parts of an agreement be given effect, was underscored as essential for maintaining coherence in contractual obligations.
The court in Macy's Inc. v. Martha Stewart Living Omnimedia, Inc. emphasizes that contract interpretation must ensure every provision holds meaning, without adding or altering terms to effectively create a new agreement. It highlights that the trustee's duties are strictly defined by the contract, particularly in section 8, which states that the trustee only undertakes duties explicitly outlined in the agreement and is not liable for any implied obligations. The majority's ruling attempts to impose a pre-EOD repurchase duty on the trustee based on section 2.06, which is vague and does not specifically mention such a duty. Previous cases have established that the lack of explicit language regarding the trustee's responsibilities in enforcing repurchase obligations indicates that no such duty exists. Courts have consistently ruled that duties must be clearly delineated in the Pooling and Servicing Agreement. The absence of specific language regarding the enforcement of the repurchase protocol suggests that the drafters did not intend to impose this pre-EOD duty on the trustee, as evidenced by other agreements where such duties were explicitly stated.
Section 2.06 lacks clarity regarding the conditions for triggering the repurchase protocol, leading to a flawed interpretation by the majority that conflates the trustee's rights with duties. This interpretation disregards the specific language of the agreement, particularly Section 8, which states that the trustee is obligated only to perform duties explicitly outlined in the agreement, emphasizing that permissive rights do not equate to duties. The majority's reasoning fails to identify any explicit provision requiring the trustee to enforce pre-EOD repurchase obligations. The sophisticated parties involved in these transactions intentionally omitted a pre-EOD duty from the trustee's responsibilities. Furthermore, established contractual principles indicate that omissions in agreements suggest intentional exclusion of certain terms. The majority's reliance on the Nau v. Vulcan Railway Construction Co. case is misapplied, as it does not support their position that unrelated agreements cannot inform the interpretation of the current contract. The principle that contracts should be interpreted based on their language and the intent of the parties is overlooked, leading to a creation of a duty not expressly stated in the agreements. Current RMBS litigation practices emphasize comparing similar agreements to clarify meanings, reinforcing that the omission of certain language in the current agreement was deliberate.
Commerzbank AG granted summary judgment on some claims while denying it on others, highlighting differences in language within the Pooling and Servicing Agreements (PSAs). The court compared these contracts to those in separate litigation, asserting that the majority's claim of dissimilarity lacks substantial support, as all agreements aim for the same commercial purpose: the securitization of mortgage loans. Key provisions, particularly section 8 regarding trustee duties and repurchase protocols, demonstrate that the drafters clearly defined affirmative duties using terms like "shall" and "must."
Concerns that the enforcement mechanism is compromised if the trustee fails to act on the repurchase protocol are deemed unfounded. The agreements specify the enforcers of repurchase obligations, indicating that the parties intentionally chose to assign these duties to others, suggesting that if the drafters had wished to impose a duty on the trustee, they would have explicitly stated so in the agreements. The majority's reliance on unrelated matrimonial case law to support a pre-event of default (pre-EOD) duty interpretation is criticized as inappropriate, as the current matter involves distinct RMBS contract principles.
The trustee did not execute an assignment to adopt the repurchase protocol, and the RMBS agreements, which define the parties' obligations, do not create a risk of duplicating or invalidating valid duties. Unlike cases that interpret assignment agreements, the agreements here are clear and drafted by commercially sophisticated parties. The trustee acknowledges its duties arise solely from the explicit terms of the agreements, which specify that prior to an Event of Default (EOD), the trustee is only required to perform duties expressly stated, with no implied obligations. The agreements reflect the intent that the trustee's duties are clearly outlined, and the majority incorrectly interprets them to impose a pre-EOD duty for repurchasing defective loans, contrary to the parties' intentions.
Furthermore, the agreements stipulate that the trustee must have actual knowledge or written notice of an EOD. Citing precedents from DLJ Mortgage Capital and Western Southern, it is established that any notice must be specific to the breach, and general notice is insufficient. The majority's decision ignores established legal standards and fails to adhere to the law as it existed at the time of the decision. As the parties have not fully briefed this specific issue, it should be remanded for further consideration rather than being decided prematurely.
A remand to the Supreme Court is proposed to avoid prematurely deciding on the applicability of DLJ, as the majority opinion suggests that DLJ does not apply without allowing the parties to fully brief the matter. The dissenting opinion expresses disagreement with the majority's affirmation of the Supreme Court's denial concerning breach of contract claims related to pre-Event of Default representations and warranties, as well as post-Event of Default claims based on a trustee's actual knowledge or written notice.
The document notes that on May 10, 2022, defendants indicated that certain claims by IKB International, S.A. were moot due to a stipulation of voluntary discontinuance. Additionally, a stipulation dated July 19, 2022, confirmed the withdrawal and discontinuance of HSBC's appeal and the plaintiffs' cross appeal.
A separate panel recently reached a differing conclusion on a similar provision, emphasizing that the language implies a discretionary action rather than an obligation. This dissent disagrees with the previous panel's interpretation that the provision lacks explicit enforcement obligations. The dissent references several cases, including Nomura and Ambac Assur. Corp., and notes that defendants failed to present specific arguments related to the requirement of written notice to trustees in their case. The defendants also attempted to introduce judicial notice of two Southern District cases post-briefing but did not address DLJ in this context. Lastly, the agreements involved contain provisions similar to section 8 mentioned in the dissent, often under different section numbers, typically titled "Duties of Trustees."
