The following e-filed documents, listed by NYSCEF document number (Motion 004) 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 120, 121, 122, 123, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157 were read on this motion to/for DISMISSAL.

U.S. Bank National Association's (the Trustee) motion to dismiss is denied in its entirety.

The plaintiff is entitled to a declaration that the Trustee may not indemnify itself with funds from the HEAT 2004-3 and HEAT 2004-4 Trusts. These trusts do not contain provisions permitting indemnification except for indemnification by the Depositor which the Trust is not. There simply is no basis for indemnification of the Trustee from those two Trusts.

The other trusts in this case do not permit indemnification of the Trustee by the Trust where the Trustee's conduct involves willful misfeasance, bad faith or negligence. The allegations in this case involve at a minimum, negligence. Therefore, dismissal is not appropriate.

The Trustee is also not entitled to dismissal based on the “no-action” clauses of the Governing Documents (hereinafter defined). Notice is excused because requiring the plaintiff to send notice to either the Trustee or Wells Fargo as the master servicer who is the agent would *2 amount to requiring the plaintiff to notify the Trustee to sue itself (IKB Intern., S.A. v LaSalle Bank N.A., 2021 WL 358318, * 4 [Sup Ct, NY County 2021], citing MLRN v U.S. Bank N.A., 2019 WL 5963202, * 8 [Sup Ct, NY County 2019], affd 190 AD3d 426 [1st Dept 2021]).

Finally, the well-pled complaint alleges that the Trustee failed to perform its duties under the Governing Documents by not requiring the Sellers (hereinafter defined) to repurchase the mortgage loans when the Sellers were in breach of their obligations under the PSAs because the Mortgage Files (hereinafter defined) were insufficient and therefore unenforceable. This states a claim and dismissal is not appropriate.

Simply put, despite the Trustee's arguments to the contrary, this is not imputing a duty to the Trustee that the Trustee never agreed to because, at a bare minimum, the Trustee agreed to hold the Mortgage Files for the benefit of the certificate holders (IKB, 2021 WL 358318, * 6). Inasmuch as the Trustee was bound to review the Mortgage Files, and the Sellers were required to repurchase mortgages with non-compliant Mortgage Files (i.e., Mortgage Files with inadequate or incomplete documents such that potential enforcement was in doubt), this necessarily included the duty to reject those non-conforming Mortgage Files and require the repurchase by the Sellers. The fact that this obligation is articulated differently in the PSAs and that certain of these documents contain “belt and suspender” language that specifically indicates in Section 2.02 of the PSAs that the Trustee must enforce the Sellers' obligation to repurchase and other PSAs do not contain such language is immaterial under the circumstances. The Sellers had an obligation to repurchase which only the Trustee was in a position to enforce after the Obligors failed to do so, and the Trustee was obligated to hold the Mortgage Files for the benefit of the certificate holders. Stated differently, there is no evidence that the additional language that the Trustee gloms onto was negotiated and is not merely the product of being added to a form agreement that was “duped out” as part of the deal documents in some cases but not others given their other obligations in the deal documents which cover the obligations at issue in this case. Nor are the defendants entitled to a stay of the plaintiff's non-breach of contract claims because discovery is proper as to whether the Trustee was negligent or otherwise acted in a manner that comes within the express indemnification carve-out. If this is the case, indemnification would not be available under any of the PSAs and the Trust assets would not be depleted. In such event, the Trusts should not have to wait and flip the bill litigating these claims later.

Mr. Finkelstein is a certificate holder in 29 residential mortgage-backed security (RMBS) trusts (the Trusts) for which the Trustee is the Trustee. The Trusts are governed by Pooling and Servicing Agreements (the PSAs) and other related agreements (the PSA together with the other related agreements, hereinafter, collectively, the Governing Documents). The Governing Documents required the loan sellers (the Sellers) to provide certain documents (the Mortgage Files) to the Trust, and the Trustee or someone acting on the Trustee's behalf was required to review the Mortgage Files to determine if any of the documents were missing or defective. If the documents in the Mortgage Files were missing or defective, the Trusts had rights to have such defects cured, either by having a missing document replaced or having a defective loan repurchased and replaced by a compliant loan. Mr. Finkelstein asserts that the Governing Documents required the Trustee to enforce the Trusts' right to cure such defects.

The Trustee was required to execute certifications that identified defects in the Trusts' *3 Mortgage Files. To cure defects in the Mortgage Files, the Trustee was required to notify the party obligated to cure defects in the Mortgage Files (each an Obligor, and collectively, the Obligors), which Mr. Finkelstein concedes the Trustee did. This is not the basis for his complaint.

Mr. Finkelstein complaint is ground on the Trustee's alleged failure to enforce the Obligor's obligation to cure defects by requiring the repurchase of loans with inadequate Mortgage Files, including where necessary bringing a lawsuit to enforce these obligations. The well pled complaint alleges that the Trustee acted at a bare minimum negligently and otherwise breached its duties to the Trusts under the PSAs.

Each of the PSAs contains a “no-action” clause. For the majority of the Trusts, the “no-action” clauses provide the following or substantially similar language:

(ABSHE 2005-HE8 PSA, § 11.03 [NYSCEF Doc. No. 129]).¹

Under these PSAs, notice to the Trustee is required for a certificateholder to initiate an action. Seven of the PSAs contain similar language, but require notice to be given to the Trust Administrator (ARMT 2005-6A PSA, § 12.07 [NYSCEF Doc. No. 132]; ARMT 2005-7 PSA, § 12.07 [NYSCEF Doc. No. 133]; ARMT 2005-10 PSA, § 12.07 [NYSCEF Doc. No. 134]) or the Securities Administrator (BAFC 2006-I PSA, § 11.03 [NYSCEF Doc. No. 135]; BAFC 2007-C PSA, § 11.03 [NYSCEF Doc. No. 136]; BASIC 2006-1 PSA, § 11.03 [NYSCEF Doc. No. 137]; GSR 2004-14 PSA, § 13.03 [NYSCEF Doc. No. 144]). One of the PSAs requires notice to be given to either the Trustee or the Securities Administrator (BSABS 2006-AC2 PSA, § 12.08 [NYSCEF Doc. No. 138]) and one requires notice to be given to either the Trustee or the Trust Administrator (STARM 2007-SI PSA, § 11.08 [NYSCEF Doc. No. 155]).

Wells Fargo Bank, N.A. (Wells Fargo) was the Trust Administrator or the Securities Administrator for all of the Trusts that required or permitted service on those entities.

The Trustee's duty pursuant to the Governing Documents to cure document defects or enforce repurchase of loans that did not comply with the Governing Documents is written differently in the various PSAs.

For the purposes of this motion, the Trustee separates the PSAs into five groups: (i) PSAs which did not include the belt and suspender language in Section 2.02 of the PSAs requiring it specifically to enforce the Obligor's obligation to repurchase mortgages for which the Mortgage Files were inadequate, (ii) PSAs which did in fact contain this additional belt and suspender language requiring the Trustee to cure defects in Section 2.02 of the PSAs, (iii) PSAs which did in fact include this additional belt and suspender language in Section 2.02 of the PSAs pursuant to which the Trustee and another party had an explicit duty to cure, (iv) PSAs which included express belt and suspender language requiring the Trustee to enforce rights, including those related to representations and warranties, under applicable Transfer Agreements and Mortgage Loan Sale Agreements, and (v) PSAs pursuant to which the Trustee had an express duty to enforce rights for the benefit of certificateholders. For completeness, certain of the PSAs fall into more than one of the above categories. However, these differences are, at this stage of the pleadings, insignificant as it relates to the harm alleged.

For the majority of the Trusts, Section 2.02 of the PSAs did not include an express direction to the Trustee to cause the repurchase of mortgage loans with document defects. Significantly, these PSAs required the Seller to cure but did not include additional “belt and suspender” language that the Trustee had to enforce this obligation:

(ARMT 2005-6A PSA, § 2.02[a] [NYSCEF Doc. No. 132]).² Three of the PSAs fall exclusively into this first category. However, and significantly, even these three PSAs, impose the duty on the Trustee to hold these mortgage loan documents for the exclusive use and benefit of all future *4 Certificateholders:

(ARMT 2005-6A PSA, § 2.02[a]; NYSCEF Doc. No. 132 [emphasis added]; IKB, 2021 WL 358318, * 6).³

Certain other of the PSAs included an express directive requiring the Trustee to cure document defects using the following or substantially similar language:

(ABSHE 2005-HE8 PSA, § 2.03[a][i] [NYSCEF Doc. No. 129].⁴

Pursuant to one of the PSAs, Wells Fargo as the Securities Administrator was required to enforce the obligations of each Originator to repurchase any defective loans (BASIC 2006-1 PSA, § 2.03[a] [NYSCEF Doc. No. 137], but if any Originator failed to perform its obligations, “the Trustee shall require the Guarantor, pursuant to the Guaranty to perform or pay when and as if it were such Originator” (id., § 2.03[c]).

Other PSAs which did not contain the express directive identified above and set forth in Section 2.02 of the PSAs, contained provisions requiring the Trustee to enforce rights under applicable Transfer Agreements and Mortgage Loan Sale Agreements with the following or substantially similar language:

(FFML 2006-FF2 PSA, § 2.04 [NYSCEF Doc. No. 139]).⁵

Finally, certain of the PSAs contain provisions with the following or substantially similar language pursuant to which the Trustee is required to enforce rights for the benefit of certificateholders:

(BSABS 2006-AC2 PSA, § 2.06[a] [NYSCEF Doc. No. 138).⁶

The majority of the PSAs allow the Trustee to indemnify itself for losses except to the extent that such losses arise out of their willful misfeasance, bad faith or negligence in the performance of their duties:

(ABSHE 2005-HE8 PSA, § 8.05[a] [NYSCEF Doc. No. 129].⁷

Two of the PSAs contain similar provisions except, and significantly, provide that the Trustee shall be indemnified by the Depositor, not the Trust (HEAT 2004-3 PSA, § 10.08 [NYSCEF Doc. No. 145]; HEAT 2004-4 PSA, § 10.08 [NYSCEF Doc. No. 146]). These PSAs do not in any manner provide a basis for indemnification by the Trust.

Mr. Finkelstein brought this lawsuit (NYSCEF Doc. No. 61) asserting two causes of action: breach of contract for failure to enforce the Trusts' rights to cure defects in the Mortgage Files as required under the Governing Documents (first cause of action) and a declaratory judgment that the Trustee is not entitled to indemnification or reimbursement from the Trusts' funds for any fees, expenses, or losses incurred in this action (second cause of action).

The Trustee moved to dismiss, arguing that (i) the Governing Documents contain “no-action” clauses which bar Mr. Finkelstein's claims, (ii) the duties that Mr. Finkelstein alleged the Trustee violated are not actually specifically imposed on the Trustee under the Governing Documents, and (iii) if the court does not dismiss the breach of contract claims, the indemnification claims should be stayed because they are reliant on the outcome of the breach of contract claims.

Discussion

On a motion to dismiss, the pleading must be afforded a liberal construction, and the court must accept the facts as alleged as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory (Leon v Martinez, 84 NY2d 83, 97-88 [1994]).

The Trustee's argument that Mr. Finkelstein's claims are barred by the “no-action” clauses of the Governing Documents fails. As indicated above, requiring Mr. Finkelstein to give notice to the Trustee or Wells Fargo would be, in effect, requiring Mr. Finkelstein to ask a party to sue itself or admit its own wrongdoing. Wells Fargo as master servicer is the agent of the Trustee. Requiring them to notify the Trustee necessarily would implicate potential misconduct on their part (IKB, 2021 WL 358318, *4). The requirement therefore must be excused. This Court previously held that such excuse is appropriate, where, as here, a party serves as both a securities/trust administrator and the master servicer (IKB, 2021 WL 358318, *4, citing MLRN, 2019 WL 5963202, * 8). For the majority of the Trusts, the “no-action” clauses name the Trustee as the, or one of the, notice parties. It is beyond cavil that compliance with “no-action” clauses that require that notice be given to the Trustee must be excused because it would be futile to demand that the Trustee commence an action against itself (Blackrock Balanced Capital Portfolio [FI] v U.S. Bank National Association, 165 AD3d 526, 528 [1st Dept 2018]; Velez v *5 Feinstein, 87 AD2d 309 [1st Dept 1982]). Because compliance with the demand requirement is excused, performance under the entire “no-action” clause must be excused. This includes the requirement that certificateholders holding 25% of the voting rights make a demand (Blackrock, 165 AD3d at 528 [“[o]nce performance of the demand requirement in the no-action clause is excused, performance of the entire provision is excused, including the requirement that demand be made by 25% of the certificate holders”]).

As discussed above, the Trustee's obligation to cure document defects or enforce repurchase of loans that did not comply with the Governing Documents was articulated differently in the PSAs. The defendants make too much of the differences and argue that courts do not impose duties on trustees that are not set forth in the governing documents. Relying on certain non-binding authority (Commerzbank AG v US Bank National Association, 457 F.Supp.3d 233 [SD NY 2020]; CFIP Master Fund, Ltd. v Citibank, N.A., 738 F.Supp.2d 450 [SD NY 2010]; Western and Southern Life Insurance Company v Bank of New York Mellon, 129 NE3d 1085 [Ohio Ct Appeals 2019], the Trustee argues that without a specific direction to require repurchase by the Sellers, the Trustee can do nothing and remain free from liability. Stated differently, the Trustee argues that the Sellers have an obligation to repurchase the mortgage loans where the Trustee reviewed the loan documents and found them to be deficient and the Trustee has an obligation to hold the mortgage loans for the benefit of the certificate holders, but the Trustee has no duty or obligation to enforce the Sellers' obligation to repurchase those PSAs where the extra “belt and suspenders” language was not included.

Aside from being non-binding, this authority is at odds with other cases from the same court and the Commercial Division in New York County which has held that (i) where a PSA is silent as to which party is obligated to enforce repurchase rights, the Trustee is not relieved of the obligation under broader charges of the Governing Documents, and (ii) because the PSAs required that the Trustee be given notice of deficient Mortgage Files, it cannot avoid the duty to enforce repurchase rights under the PSAs (see, IKB, 2021 WL 358318, *11; Royal Park Investments SA/NV v Deutsche Bank National Trust Company, 2016 WL 439020, * 4 [SD NY 2016]; Western and Southern Life Insurance Company v U.S. Bank National Association, 69 Misc 3d 1213[A], * 5 [Sup Ct, NY County 2020]) . In IKB, the plaintiffs were certificateholders of various RMBS trusts (IKB, 2021 WL 358318, * 3). They sued the trustees of the trusts, alleging, among other things, breach of contract under the relevant PSAs, including for failure to enforce repurchase rights. The defendants in that case, as here, argued that dismissal was appropriate because the plaintiffs were seeking to impose on the Trustee liability for contractual and legal obligations that were broader than those set forth in the Governing Documents, common law, or statute (id.). The court in that case (Friedman, J.) disagreed:

(IKB, 2021 WL 358318, * 11 [emphasis added]). This reasoning is more persuasive. Otherwise, in effect, the certificateholders are out of luck and the Trustee's obligations to review the mortgage loan documents and to hold the loans for the benefit of the certificate holders are meaningless covenants.

The fact is that, at a bare minimum, the PSAs required the Trustee to review the Mortgage Files and to hold the Mortgage Files for the benefit of the certificateholders. These obligations they breached if the Mortgage Files were deficient and they did not require the Sellers to meet their obligation because the Mortgage Files would be unenforceable. Holding otherwise makes zero sense. This does not otherwise impute a duty to which the Trustee did not agree (ARMT 2005-6A, ARMT 2005-7, and ARMT 2005-10). Stated differently, the Trustee could not simply review the Mortgage Files, find problems and do nothing while still meeting their obligations. The argument to the contrary twists logic beyond all recognition.

For the avoidance of doubt, the motion must be denied as to the PSAs which provide that the Trustee “shall enforce its rights” or “agrees to exercise the rights” given it for the protection of the certificateholders (the so-called fourth and fifth categories). That language clearly creates a duty that the Trustee cannot now disavow.

The motion to dismiss also must be denied as to (i) PSAs which had the express direction to the Trustee to enforce the repurchase obligation (the so-called second category) and (ii) PSAs which had the express direction to the Trustee to enforce the repurchase obligation where Well Fargo did not enforce the repurchase obligation (the so-called third category).

As discussed above, Mr. Finkelstein is entitled to a declaratory judgment that US Bank may not indemnify itself with respect to the HEAT 2004-3 and HEAT 2004-4 Trusts, because, as Trustee, US Bank is to be indemnified by the Depositor, not the Trust.

Lastly, the defendants request that the Court follow certain federal courts in staying discovery on the non-contract claims to promote efficiency is denied. Following consideration of the request, the Court declines to bifurcate this lawsuit. Discovery in this case will necessarily include why the Trustee did not enforce the obligation to repurchase as it was required to do.

The Court has considered the parties' remaining arguments and finds them unavailing.

It is hereby ADJUDGED and DECLARED that US Bank may not indemnify itself from funds from the HEAT 2004-3 and HEAT 2004-4 Trusts; and it is further

ORDERED that the motion to dismiss is denied in its entirety; and it is further

ORDERED that discovery is not stayed.

DATE 5/2/2022

ANDREW BORROK, JSC