FILED: NEW YORK COUNTY CLERK 06/21/ :46 PM INDEX NO /2016 NYSCEF DOC. NO. 30 RECEIVED NYSCEF: 06/21/2017

Transcription

1 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK BLACKROCK CORE BOND PORTFOLIO, et al., -against- Plaintiffs, Index No /2016 Part 53 (Ramos, J.) Motion Sequence 001 Oral Argument Requested WELLS FARGO BANK, NATIONAL ASSOCIATION, Defendant. MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT S MOTION TO DISMISS Jayant W. Tambe, Esq. Howard F. Sidman, Esq. Jason Jurgens, Esq. JONES DAY 250 Vesey Street New York, NY Tel: (212) Fax: (212) jtambe@jonesday.com hfsidman@jonesday.com jjurgens@jonesday.com Traci L. Lovitt, Esq. JONES DAY 100 High Street, 21st Floor Boston, MA Tel: (617) Fax: (617) tlovitt@jonesday.com Attorneys for Defendant Wells Fargo Bank, N.A. 1 of 32

2 TABLE OF CONTENTS Page INTRODUCTION... 1 STATEMENT OF FACTS... 3 LEGAL STANDARD... 6 ARGUMENT... 7 I. THE NO-ACTION CLAUSES BAR THE CONTRACT AND IMPLIED DUTY CLAIMS... 7 II. PLAINTIFFS HAVE FAILED TO ADEQUATELY ALLEGE A POST-EOD BREACH OF CONTRACT CLAIM A. Plaintiffs Fail To Allege An EOD B. Plaintiffs Fail To Adequately Allege Wells Fargo s Actual Knowledge Of And/Or Written Notice To It Or A Responsible Officer Of EODs III. PLAINTIFFS PRE-EOD BREACH-OF-CONTRACT CLAIMS FAIL A. Plaintiffs Fail To State A Claim Based On Alleged R&W Breaches Plaintiffs fail to adequately plead discovery Plaintiffs purportedly loan-specific allegations similarly fail B. Plaintiffs Have Not Adequately Alleged Any Pre-EOD Breach With Regard To Servicer Performance C. Wells Fargo Has Not Breached Any Contractual Duties Relating To Delivery Of Mortgage Loan Files IV. PLAINTIFFS COMMON LAW CLAIMS FAIL AS A MATTER OF LAW A. Plaintiffs Implied Duty and Negligence Claims Are Legally Invalid B. Plaintiffs Fail To State A Fiduciary Duty Claim CONCLUSION i- 2 of 32

3 TABLE OF AUTHORITIES CASES Page ACE Sec. Corp. v. DB Structured Prods., Inc., 977 N.Y.S.2d 229 (1st Dep t 2013)...20 AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 11 N.Y.3d 146 (2008)...4, 21 AMBAC Indem. Corp. v. Bankers Tr. Co., 151 Misc. 2d 334 (Sup. Ct. N.Y. Cty. 1991)...4 Arrowgrass Master Fund Ltd. v. Bank of N.Y. Mellon, No /2010, 2012 WL (Sup. Ct. N.Y. Cty. Feb. 24, 2012)...11 Bank of N.Y. Mellon Trust Co., N.A. v. Morgan Stanley Mortgage Capital, Inc., 821 F.3d 297 (2d Cir. 2016)...18 Barber v. Deutsche Bank Securities, Inc., 938 N.Y.S.2d 225, 2011 WL (Sup. Ct. N.Y. July 14, 2011)...23 Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc., 115 A.D.3d 128 (1st Dep t 2014)...6 Beka Realty LLC v. JP Morgan Chase Bank, N.A., 41 Misc. 3d 1213(A), 2013 WL (Sup. Ct. Kings Cty. Sept. 25, 2013)...6 Blackrock Allocation Target Shares v. Deutsche Bank Nat'l Trust Co., No. 1:14-cv-9367-RMB-SN, 2016 WL (S.D.N.Y. Jan. 19, 2016)...1 Blackrock Core Bond Portfolio v. U.S. Bank Nat l Ass n, 165 F. Supp. 3d 80 (S.D.N.Y. 2016)...9 CFIP Master Fund, Ltd. v. Citibank, N.A., 738 F. Supp. 2d 450 (S.D.N.Y. 2010)...5 Christian v. Christian, 42 N.Y.2d 63 (1977)...9 -ii- 3 of 32

4 Commerce Bank v. Bank of N.Y. Mellon, 141 A.D.3d 413 (1st Dep t 2016)... passim Commerce Bank v. Bank of N.Y. Mellon, No /2014, 2015 WL (Sup. Ct. N.Y. Cty. Oct. 2, 2015)...4, 11, 14 Cruden v. Bank of N.Y., 957 F.2d 961 (2d Cir. 1992)...7, 8, 9 Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162 (S.D.N.Y. 2011)...24 Feldbaum v. McCrory Corp., No. CIV. A , 1992 WL (Del. Ch. June 2, 1992)...8 HGCD Retail Servs., LLC v Broadway Realty Co., 37 A.D.3d 43 (1st Dep t 2006)...13 Hotel 71 Mezz Lender LLC v. Mitchell, 63 A.D.3d 447 (1st Dep t 2009)...23 In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y. 2012)...18 Knights of Columbus v. Bank of N.Y. Mellon, No /2011, 2015 WL (Sup. Ct. N.Y. Cty. July 10, 2015)... passim Magten Asset Mgmt. Corp. v. Bank of N.Y., No /10, 2007 WL (Sup. Ct. N.Y. Cty. May 8, 2007)...14 Maxon Int l, Inc. v. Int l Harvester Co., 82 A.D.2d 1006 (3d Dep t 1981)...23 Millennium Partners, L.P. v. U.S. Bank Nat l Ass n, No. 1:12-cv-7581, 2013 WL (S.D.N.Y. Apr. 17, 2013)...11 Millennium Partners, L.P. v. Wells Fargo Bank, N.A., No (2d Cir. July 6, 2016)...11 Nat l Credit Union Admin. Bd. v. U.S. Bank Nat l Ass n, No. 1:14-cv-9928-KBF, 2016 WL (S.D.N.Y. Feb. 25, 2016)...23, 24 Peak Partners, LP v. Republic Bank, 191 F. App x 118 (3d Cir. 2006)...7 -iii- 4 of 32

5 Phoenix Light SF Ltd. v. Deutsche Bank Nat l Tr. Co., 172 F. Supp. 3d 700 (S.D.N.Y. 2016)...18 Phoenix Light SF Ltd. v. Deutsche Bank Nat l Tr. Co., No. 1:14-cv JGK, 2016 WL (S.D.N.Y. Mar. 28, 2016)...24 Policemen s Annuity & Benefit Fund v. Bank of America, NA, 943 F. Supp. 2d 428 (S.D.N.Y. 2013)...18 Quadrant Structured Prod. Co. v. Vertin, 23 N.Y.3d 549 (2014)...10 Ret. Bd. of Policemen's Annuity & Benefit Fund of Chi. v. Bank of N.Y. Mellon, 775 F.3d 154 (2d Cir. 2014)...3, 18 Richbell Info. Servs., Inc. v. Jupiter Partners, LP, 309 A.D.2d 288 (1st Dep t 2003)...23 Robinson v. Robinson, 303 A.D.2d 234 (1st Dep t 2003)...6 Royal Park Invs. SA/NV v. HSBC Bank USA, Nat l Ass n, 109 F. Supp. 3d 587 (S.D.N.Y. 2015)...20, 22, 25 Sebastian Holdings, Inc. v. Deutsche Bank AG, 108 A.D.3d 433 (1st Dep t 2013)...24 STS Partners Fund LP v. Deutsche Bank Securities Inc., 2017 N.Y. Slip Op (1st Dep't 2017)...10, 23 Thor Props., LLC v. Chetrit Group LLC, 91 A.D.3d 476 (1st Dep t 2012)...13 U.S. Bank N.A. v. Citigroup Glob. Mkts. Realty Corp., No. 1:13-cv-6989-GBD, 2014 WL (S.D.N.Y. Nov. 14, 2014)...18 U.S. Bank, N.A. v. UBS Real Estate Sec's, Inc., 205 F. Supp. 3d 386 (S.D.N.Y. 2016)...18 Walnut Place LLC v. Countrywide Home Loans, Inc., 96 A.D.3d 684 (1st Dep t 2012) iv- 5 of 32

6 STATUTES CPLR , 6 -v- 6 of 32

7 Wells Fargo Bank, National Association ( Wells Fargo ) respectfully submits this memorandum of law in support of its Motion to Dismiss Plaintiffs Class Action Complaint (the Complaint ) pursuant to CPLR 3211(a)(1), (5) and (7). INTRODUCTION Plaintiffs have spent the past three years shopping their case around to multiple courts in an apparent effort to avoid its dismissal. Plaintiffs suit began in this Court on June 18, But after the case was assigned to Your Honor, Plaintiffs decided to move[] their dispute to federal court. See Notice of Mot. for Voluntary Dismissal, No /2014 (Sup. Ct. N.Y. Cty., filed Nov. 24, 2014). On January 19, 2016, the Southern District of New York declined to exercise supplemental jurisdiction over the majority of Plaintiffs claims, deeming them best suited for adjudication by this Court. See Blackrock Allocation Target Shares v. Deutsche Bank Nat'l Trust Co., No. 1:14-cv-9367-RMB-SN, 2016 WL , at *4 (S.D.N.Y. Jan. 19, 2016). The court noted that [t]here is some suggestion that Plaintiffs may be engaging in forum shopping, because Plaintiffs filed in federal court in direct response to the assignment of the case to an experienced New York judge who has been skeptical of claims like those asserted here. Id. at *5 (quoting defendants brief). Attempting again to duck this Court, Plaintiffs refiled their claims in California state court. On September 27, 2016, the California Superior Court granted Wells Fargo s motion to dismiss the action on forum non conveniens grounds. Ex. V. 1 Plaintiffs claims are now back where they belong. As Plaintiffs implicitly admitted when they fled from this Court three years ago, their Complaint fails under New York law. Plaintiffs are some of the world s most sophisticated institutional investors. All have considerable expertise investing in residential mortgage-backed securities ( RMBS ), and many 1 Citations to Ex. are references to exhibits to the Affirmation of Traci Lovitt, submitted herewith. 7 of 32

8 currently and actively trade in RMBS certificates. Indeed, some Plaintiffs decided to purchase RMBS certificates at issue in this case even after filing suit in Despite their undeniably extensive knowledge of RMBS and investment history, Plaintiffs seek damages against Wells Fargo as trustee for losses the trusts allegedly sustained when the housing bubble burst and the values of some homes securing the RMBS mortgages declined. According to Plaintiffs, before any servicing-related event of default ( EOD ) occurred, Wells Fargo breached contractual duties to investigate the quality of the underlying loans, give notice of breaches of representations and warranties ( R&Ws ) in order to enforce repurchase remedies, monitor the entities servicing the loans, and provide notice to Plaintiffs when the servicing parties materially breached their obligations. Post-EOD, Plaintiffs allege that Wells Fargo failed to provide notice of material servicer breaches or notice of the absence of cure. Plaintiffs variously repackage the same claims under common law theories of negligence, implied duty, and fiduciary duty. Finally, Plaintiffs claim that Wells Fargo was economically beholden to others in violation of its duty to avoid conflicts of interest. Claims against RMBS trustees, however, have been before the New York courts (including this Court) for years, and those courts have narrowed and rejected opportunistic efforts by sophisticated investors, such as Plaintiffs here, to shift their investment losses to trustees like Wells Fargo, which have only narrow, contractually-defined duties. All of Plaintiffs contract claims (including their implied duty claim) are barred by the governing agreements no action clauses, which require Plaintiffs to obtain the requisite percentage of investor support before commencing litigation. With respect to Plaintiffs post-eod claims, they are foreclosed by the First Department s July 5, 2016 decision in Commerce Bank v. Bank of N.Y. Mellon, 141 A.D.3d 413 (1st Dep t 2016) ( Commerce Bank ). Like the Commerce -2-8 of 32

9 Bank plaintiffs, Plaintiffs have failed to allege an EOD s existence, much less Wells Fargo s actual knowledge or receipt of written notice of EODs. Id. at Plaintiffs pre-eod claims should also be dismissed under Commerce Bank and decisions from Your Honor in parallel RMBS litigation. The First Department, like this Court, has held that the trustee s pre-eod duties are not triggered unless it actually discovers R&W breaches and that nearly identical allegations fail to plead discovery. Id. at 414. While Plaintiffs now attempt to plead a different pre-eod claim based on Wells Fargo s purported duty to ensure the delivery of mortgage loan files, the relevant agreements expressly place this duty on others, and the claims are untimely. With respect to Plaintiffs remaining claims, there are no implied duties under the GAs; Plaintiffs tort claims are duplicative of the contract claims and fail under the economic loss rule; and the conflict of interest claim is inadequately alleged and time-barred. Presumably because New York law, as articulated by the courts of this State, is so unfavorable to their claims, Plaintiffs have spent the last three years steadfastly trying to avoid this Court. After multiple rounds of forum shopping, Plaintiffs can no longer avoid substantive dismissal of their claims. STATEMENT OF FACTS In an RMBS securitization, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. Ret. Bd. of Policemen's Annuity & Benefit Fund of Chi. v. Bank of N.Y. Mellon, 775 F.3d 154, 156 (2d Cir. 2014) ( PABF ) (internal quotation marks and citation omitted); see Knights of Columbus v. Bank of N.Y. Mellon, No /2011, 2015 WL , at *1 (Sup. Ct. N.Y. Cty. July 10, 2015) ( Knights of Columbus ) (describing the securitization process). The entities -3-9 of 32

10 that write the mortgages are called originators ; the entities that pool them are called sponsors or sellers ; and a depositor conveys them to an RMBS trust or trustee. At closing, a master servicer and/or servicer(s) are engaged to enforce the mortgage terms and administer payments. This case involves 261 RMBS trusts for which Wells Fargo is the current trustee. RMBS trusts are usually governed by either indenture agreements or pooling and servicing agreements. The trusts here are governed by a mix of agreements, which this brief refers to collectively as the Governing Agreements or GAs. While RMBS trusts have the word trust in their name, the RMBS trustee is unlike the ordinary trustee. AMBAC Indem. Corp. v. Bankers Tr. Co., 151 Misc. 2d 334, 336 (Sup. Ct. N.Y. Cty. 1991). In contrast to a traditional trustee, an RMBS trustee has its rights and duties defined by the terms of the agreement, not by any fiduciary relationship. Commerce Bank v. Bank of N.Y. Mellon, No /2014, 2015 WL , at *5 (Sup. Ct. N.Y. Cty. Oct. 2, 2015). His [or her] status is more that of a stakeholder than one of a trustee. Id. (internal quotation marks and citations omitted). Thus, [t]he corporate trustee has very little in common with the ordinary trustee. AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 11 N.Y.3d 146, 156 (2008) (internal quotation marks and citations omitted). The GAs significantly limit Wells Fargo s duties as trustee and distinguish between Wells Fargo s duties before and after an EOD. EODs are specific, contractually defined events that relate to a servicer s or master servicer s material failure to perform its duties. An EOD requires: (i) a material breach by a servicer or the master servicer (depending on the GA); (ii) Wells Fargo s actual knowledge of the breach and/or (depending on the GA) Wells Fargo s or a Responsible Officer s receipt of written notice of the breach; (iii) the servicer s or master servicer s receipt of written notice from a designated party of the breach; and (iv) the servicer s of 32

11 or master servicer s failure to cure the breach. See Ex. D ( 7.01(a)(ii), 8.01(b)). If any condition is absent, Wells Fargo s post-eod duties are not triggered. See Commerce Bank, 141 A.D.3d at Pre-EOD, Wells Fargo s duties are limited, administrative, and ministerial (rather than substantive) in nature. CFIP Master Fund, Ltd. v. Citibank, N.A., 738 F. Supp. 2d 450, 473 (S.D.N.Y. 2010). For example, Wells Fargo is entitled to rely on R&Ws and has no obligation to investigate their veracity. See, e.g., Ex. C ( 6.02(d)); Ex. E. Servicers not the trustee have relationships with individual borrowers, collect payments, work with borrowers upon default, modify loans, and, if necessary, foreclose. See, e.g., Ex. C (Article IX). The RMBS trustee neither services loans nor supervises servicers. See, e.g., id. ( 9.01, 6.01(f)); Ex. G. Instead the servicers annually certify that they complied with applicable servicing criteria. See, e.g., Ex. C ( 9.13). Wells Fargo may conclusively rely upon the certifications that it believes are genuine. See Ex. C ( 6.01(h), 6.02(a)); Ex. F. Indeed, pre-eod, Wells Fargo has no duty to conduct any investigations of any party to the GAs unless directed to do so by at least 25% of the holders and offered a proper indemnity. See Ex. C ( 6.01(f), 8.01(b)); Exs. E, I. As the First Department has recognized, an RMBS trustee has no obligation to monitor or investigate suspected breaches by other deal parties and does not have a duty to nose to the source to discover if Events of Default or Master Servicer Event of Defaults [sic] or other [GA] breaches had occurred. Commerce Bank, 141 A.D.3d at Even Plaintiffs have recognized in other RMBS litigation that [the trustee] is not obligated to investigate any facts unless instructed to do so by holders of 25% of the voting rights because trustees are often faced with competing demands from investors about what to do. See Ex. W 15, 16. (SDNY Settlement Statement at 14-15) of 32

12 If an uncured EOD occurs, the GAs provide that the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. See Ex. C ( 6.01(a)); Ex. H. Accordingly, the requirements of the prudent person standard are directly informed by the circumstances of the specific, uncured EOD. Id. Plaintiffs contend that Wells Fargo breached its limited duties under the GAs and its common law duties. In reality, however, Plaintiffs are trying to change Wells Fargo s duties and create new, extra-contractual obligations. Plaintiffs attempt to rewrite the GAs should fail. For the Court s ease of reference, Wells Fargo has attached charts demonstrating the individual trusts that are impacted by each individual legal argument that follows. See Exs. A, B. LEGAL STANDARD To survive a motion to dismiss, Plaintiffs allegations must be sufficient to raise the claimed right to relief above the level of mere speculation and to state a claim for relief that is, at least, plausible on its face. Beka Realty LLC v. JP Morgan Chase Bank, N.A., 41 Misc. 3d 1213(A), 2013 WL , at *6 (Sup. Ct. Kings Cty. Sept. 25, 2013). While a complaint is to be liberally construed in favor of plaintiff on a CPLR 3211 motion to dismiss, the court is not required to accept factual allegations that are plainly contradicted by the documentary evidence or legal conclusions that are unsupportable based upon the undisputed facts. Robinson v. Robinson, 303 A.D.2d 234, 235 (1st Dep t 2003). Under CPLR 3211(a)(1), (a)(5), and (a)(7), moreover, Wells Fargo may submit and has submitted documentary evidence, which changes the standard from whether the plaintiff has stated a cause of action to whether it has one. Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc., 115 A.D.3d 128, 135 (1st Dep t 2014) of 32

13 ARGUMENT Plaintiffs attempt to plead four types of claims based on Wells Fargo s alleged conduct as RMBS trustee: (i) post-eod breach-of-contract claims; (ii) pre-eod breach-of-contract claims; (iii) implied duty and negligence claims; and (iv) fiduciary duty claims. All should be dismissed. I. THE NO-ACTION CLAUSES BAR THE CONTRACT AND IMPLIED DUTY CLAIMS. For all trusts, Plaintiffs breach-of-contract and implied duty claims are barred by the GAs no-action clause. No-action clauses generally provide that certificateholders cannot commence litigation unless they: (i) provide the trustee written notice of a continuing EOD; (ii) obtain the support of a requisite number of certificateholders, typically between 25 and 50%; (iii) provide the trustee with a written demand to act; and (iv) offer the trustee indemnity. See, e.g., Ex. 1 (AABST PSA 10.8); Ex. I. Plaintiffs make no attempt to allege compliance with these requirements, which bar their contract claims. See Peak Partners, LP v. Republic Bank, 191 F. App x 118, 126 (3d Cir. 2006) (applying New York law). Most significantly, Plaintiffs have not pled, nor could they plead, that they have satisfied the holder-support requirement for each trust at issue. Plaintiffs instead allege that the clause does not apply to suits against a trustee for its own asserted misconduct. Compl That assertion is unsupported by the plain language of the contracts and by settled law. It is also inconsistent with Plaintiffs own court submissions on the requirements of no-action clauses. Plaintiffs presumably intend to rely on Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d Cir. 1992), to argue the contrary. But, that decision is of no help to Plaintiffs because it held only that that the no-action clause s demand requirement does not apply to trustee suits, reasoning that it would be absurd to require the debenture holders to ask the Trustee to sue itself. Id. The court did not expressly consider whether the remaining of 32

14 requirements, such as the holder-support and notice requirements, are applicable, and if so, why. The demand, notice, and holder-support requirements serve separate functions. The demand requirement respects the trustee s role as the juridical entity under the GAs. The notice requirement affords the trustee the opportunity to act on its own to address the investors grievance. The holder-support requirement deter[s] individual [certificate]holders from bringing independent law suits for unworthy or unjustifiable reasons, causing expense to the [Trust] and diminishing its assets, which is exactly what is happening here. Feldbaum v. McCrory Corp., No. CIV. A , 1992 WL , at *6 (Del. Ch. June 2, 1992) (applying New York law). The demand requirement at issue in Cruden thus serves a different purpose than the holder-support requirement at issue here. Plaintiffs, themselves, have recognized the importance of the holder-support requirement in protecting investors. In connection with securing approval of an RMBS trustee s settlement of repurchase claims against Bank of America, Plaintiffs filed numerous briefs in state and federal court supporting the proposed settlement against objectors who wanted to litigate the claims. The relevant briefs are attached as Exhibits W, X, & Y. In those briefs, Plaintiffs acknowledged that the PSAs require Certificateholders to aggregate 25% of the Voting Rights.... Only then can Certificateholders file suit. See Ex. W at 4 2 (SDNY Settlement Statement) (internal citation omitted); see also Ex. X at (N.Y.S. Brief ISO Settlement); Ex. Y at 6 (N.Y.S. Resp. to Settlement Obj.). Plaintiffs acknowledged the critically important function the holdersupport requirement plays in protecting all investors from wasteful litigation favored by a minority contingent: These clauses prevent individual bondholders from pursuing an individual course of action. No-action clauses also protect against the risk of strike suits, and against the risk that a single bondholder or a small group of bondholders might otherwise bring a suit against the issuer that most bondholders would consider not of 32

15 to be in their collective economic interest. Id. (internal quotation marks, alterations and citations omitted). Plaintiffs concluded: no-action provisions preclude Certificateholders from pursuing claims on behalf of the Trusts unless they... aggregate large numbers of holders and holdings sufficient to satisfy the Voting Rights thresholds. Id. at (emphasis in original). The plain language of the no-action clauses, and Plaintiffs own prior submissions on what that language means is fatal to their attempt to avoid the critical holder-support requirement here. 2 The GAs also demonstrate the parties intent to sever invalid, individual terms from the no-action clause through severability clauses, which provide: If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or the rights of the Holders thereof. See Ex. C ( 11.08) (emphasis supplied); Ex. J. Under New York law, this broad severability clause, which extends to individual terms within a single GA provision, is conclusive evidence of the parties intent to enforce any and all valid terms of the no-action clause. See Christian v. Christian, 42 N.Y.2d 63, 73 (1977) ( Here the parties had a right to and did, by expressly stipulating that if any provision of the separation agreement be held invalid or unenforceable all other shall nevertheless continue in full force, make the agreement within reasonable limits 2 Given the independent role each term in the no-action clause plays, Wells Fargo respectfully disagrees with Judge Forrest s holding in Blackrock Core Bond Portfolio v. U.S. Bank Nat l Ass n, 165 F. Supp. 3d 80 (S.D.N.Y. 2016), in which the court held that the no-action clause is entirely inapplicable in suits against trustees, because each term builds on the other. Id. at Rather than build on each other, the demand, notice and holder-support requirements serve separate functions. While demanding that the trustee sue itself made little sense in the eyes of the Cruden court, there is no reason investors should not be protected against minority-driven litigation through strict enforcement of the no-action clause s holder-support requirement of 32

16 divisible, and there is little room for construction. ). Thus, even if the demand requirement were not enforceable, the GAs severability clauses protect the interests of investors and the rights of the trustee by saving the other requirements of the no-action clause. 3 II. PLAINTIFFS HAVE FAILED TO ADEQUATELY ALLEGE A POST-EOD BREACH OF CONTRACT CLAIM. Plaintiffs post-eod breach-of-contract claims should be dismissed in light of the First Department s Commerce Bank decision. Plaintiffs have not alleged an EOD or Wells Fargo s actual knowledge or receipt of written notice of one. A. Plaintiffs Fail To Allege An EOD. Before Plaintiffs can recover for post-eod breaches, they must allege facts sufficient to plead an EOD that is: (i) a specific, material failure by the servicer or master servicer; (ii) the servicer s or master servicer s receipt of written notice of the material failure; and (iii) the material failure remaining uncured for a specified period of time. See, e.g., Ex. D ( 7.01, 8.01). While Plaintiffs baldly assert that servicers and master servicers failed in the performance of their duties, the alleged failings are not contractual EODs absent the allegation that the servicers and master servicers received written notice of and the opportunity to cure such failings. Plaintiffs EOD allegations concern: the servicers failure to provide notice to sellers of R&W breaches, Compl ; their failure to observe their prudent servicing obligations, id ; the servicers violation of foreclosure obligations, id ; 3 Quadrant Structured Prod. Co. v. Vertin, 23 N.Y.3d 549 (2014), fully supports this interpretation. There, the Court held that the no-action clause at issue barred contract and implied duty claims but not statutory or common-law claims. 23 N.Y.3d at & 558 n.10. Unlike the defendants in Quadrant, Wells Fargo seeks to invoke the no-action clause as to only Plaintiffs contract and implied duty claims, which all arise out of the trust agreements and amendments thereto. See Ex. DD at 45 (1st Dep t decision in STS Partners Fund, LP v. Deutsche Bank Securities, Inc.) of 32

17 the servicers violation of duties with respect to loan modifications and servicing advances, id ; and the occurrence of certain quantitative triggers and bankruptcies, id Conspicuously absent is any allegation that a servicer or master servicer received the contractually-required notice of or opportunity to cure its deficient performance. 4 To the contrary, Plaintiffs affirmatively allege that notices of default were not given to servicers; thus EODs did not occur within the meaning of the GAs. Id These omissions and admission are fatal to Plaintiffs post-eod claim. In Commerce Bank, Justice Scarpulla dismissed similar post-eod breach-of-contract claims, reasoning that: [Plaintiff] has failed to plead any specific failure by the Master Servicer, of which there was notice, written or otherwise, sufficient to constitute an Event of Default. Rather, it only refers to widespread knowledge of alleged improper servicing on the part of Countrywide, such as robosigning, and illegally foreclosing on homes owned by members of the military, of which it had general knowledge through news media reports, investigations and lawsuits. Commerce Bank, 2015 WL , at *5; see also Knights of Columbus, 2015 WL , at *4 (same); Arrowgrass Master Fund Ltd. v. Bank of N.Y. Mellon, No /2010, 2012 WL at *4 (Sup. Ct. N.Y. Cty. Feb. 24, 2012), aff d 106 A.D.3d 582 (1st Dep t 2013). 5 On appeal, the First Department affirmed, holding that Justice Scarpulla correctly dismissed so much of the contract claims as was based on defendant s failure to give notice of an Event of Default. Commerce Bank, 141 A.D.3d at 414. In the First Department s view, a letter sent by [a] nonparty... was not a notice of an Event of Default; rather, it was a notice of 4 Plaintiffs attempt to allege that Ocwen received the contractually required notice and opportunity to cure, but these allegations are insufficient for the reasons explained below. See infra pp The Second Circuit has similarly interpreted New York law. See Millennium Partners, L.P. v. U.S. Bank Nat l Ass n, No. 1:12-cv-7581, 2013 WL , at *5 (S.D.N.Y. Apr. 17, 2013), aff d sub nom., Millennium Partners, L.P. v. Wells Fargo Bank, N.A., No (2d Cir. July 6, 2016) (adopting the district s ruling and logic) (attached as Ex. EE) of 32

18 events that, with time, might ripen into Events of Default. Id. at 415. The court also rejected the argument that the trustee should have investigated whether a breach had occurred, holding that the trustee of an RMBS... trust does not have a duty to nose to the source. Id. at 416. Plaintiffs attempt to sidestep this holding by alleging that Wells Fargo breached a duty to provide such notices. See Compl ; 207, 213. But the GA provisions defining EODs provide that notice shall have been given to the servicer or master servicer by any number of parties including the Plaintiffs. See Ex. L ( 7.01(ii)). By using the phrase shall have been given, these provisions do not create an obligation that those parties provide notice; they authorize the parties to give notice sufficient to trigger the cure period. This Court has recognized exactly this point, holding that the GA provisions defining EODs place no obligation on the trustee to act and merely describe a condition necessary for an EOD to occur. Ex. Z (Ramos, J. 6/22/16 Tr. at 29). Plaintiffs would need to rewrite [the] agreements (id. at 30), which explicitly acknowledge that the right of the Trustee to perform any discretionary act enumerated in this Agreement shall not be construed as a duty. Ex. 122 (FFML 2004-FF5 PSA 8.02(a)(iii)) (emphasis supplied); see also Ex. M (rights not to be construed as duties). 6 Plaintiffs also attempt to circumvent the permissive nature of the relevant GA text by 6 Some of the GAs at issue contain a separate requirement that: [i]n the event that a Responsible Officer of the Trustee shall have actual knowledge of any action or inaction of the Master Servicer that would become an Event of Default upon the Master Servicer s failure to remedy the same after notice, the Trustee shall give notice thereof to the Master Servicer. See Ex. K. Those GAs make clear that in the absence of actual knowledge by a Responsible Officer of the Trustee, the Trustee shall not be deemed to have knowledge of any failure of the Master Servicer or any other Event of Default unless notified in writing by the Depositor, the Master Servicer or a Certificateholder. Id. (emphasis supplied). Those provisions cannot salvage Plaintiffs claims, because the elements required for an EOD remain absent. The provisions certainly do not prevent dismissal with respect to the GAs containing no such language. See Ex. L. In addition, as explained below, Plaintiffs do not sufficiently allege Wells Fargo s actual knowledge or receipt of written notice of servicer violations, and there is no allegation that a Responsible Officer as defined by the GAs had actual knowledge of a specific servicer action or inaction sufficient to allow notice to the master servicer. See infra pp of 32

19 invoking the prevention doctrine, see Compl. 163, which applies only when nonperformance of a condition precedent was caused by the party insisting that the condition be satisfied. Walnut Place LLC v. Countrywide Home Loans, Inc., 96 A.D.3d 684, 685 (1st Dep t 2012). That doctrine did not persuade the First Department in Commerce Bank, even though some plaintiffs invoked it. See Ex. AA (Knights Reply at 9). For good reason. The doctrine is simply a variant of the implied covenant of good faith and fair dealing and is only applicable when it is consistent with the intent of the parties to the agreement. Thor Props., LLC v. Chetrit Group LLC, 91 A.D.3d 476, 477 (1st Dep t 2012); HGCD Retail Servs., LLC v Broadway Realty Co., 37 A.D.3d 43, 53 (1st Dep t 2006) (same). The First Department rejected plaintiffs argument that the trustee had an implied duty to provide notice of breaches because such a duty would be non-ministerial. See 141 A.D.3d at 415. Here, implying such a duty would be inconsistent with the GA provisions stating that Wells Fargo s rights do not equate to duties and with express the GA provisions barring the implication of duties that are not set forth explicitly. See Ex. H, M. In all events, the trustee (like Wells Fargo here) could not have prevented notice being delivered to the servicers, as numerous other deal parties (including Plaintiffs) were contractually permitted to provide the notice necessary to trigger EODs. See Ex. D ( 7.01(ii)). B. Plaintiffs Fail To Adequately Allege Wells Fargo s Actual Knowledge Of And/Or Written Notice To It Or A Responsible Officer Of EODs. Even if Plaintiffs had adequately pled the existence of EODs, Plaintiffs post-eod contract claims would still fail. Wells Fargo has no duties with respect to EODs unless it or a Responsible Officer receives written notice of the EOD and/or has actual knowledge of it. See Exs. N, O, P. Plaintiffs do not sufficiently plead either. Plaintiffs allege that actual knowledge can be inferred from the steady stream of public disclosures, highly publicized government investigations, reports and enforcement actions, of 32

20 high profile litigation involving the servicers, and Wells Fargo s own involvement in government investigations and litigation involving trusts not at issue here. Compl. 137, , Compl New York law is clear and to the contrary: general knowledge of servicer issues does not equate to written notice or actual knowledge of a specific EOD. 7 Indeed, these are exactly the kinds of allegations that the First Department held insufficient in Commerce Bank, because such generalized information constitutes notice of events that, with time, might ripen into Events of Default, but not notice of an EOD. Commerce Bank, 141 A.D.3d at Plaintiffs also misplace reliance on monthly servicing data received by Wells Fargo, which allegedly showed foreclosure delays. See Compl Information about lengthy foreclosures does not constitute actual knowledge of a material servicer breach, because foreclosures are influenced by many factors having nothing to do with servicer performance, such as state foreclosure laws and court backlogs. See, e.g., Exhibit FF. In addition, Wells Fargo would have had to analyze and monitor servicer reports over time to track the status of foreclosures and then determine the cause of foreclosure delays before it could conclude that a servicer or master servicer had materially breached a duty. But, without question, Wells Fargo had no duty to undertak[e] a complicated and unavoidably speculative investigation in order to decide whether there was or would be an event of default. Magten Asset Mgmt. Corp. v. Bank 7 See, e.g., Ex. Z (Ramos, J., 6/22/16 Tr. at 38-43, Fixed Income Shares: Series M., et al v. Citibank N.A., No /2015 (Sup. Ct. N.Y. Cty. June 22, 2016)); Commerce Bank, 141 A.D.3d at ; Commerce Bank, 2015 WL , at *5; Knights of Columbus, 2015 WL , at *4. 8 Plaintiffs also allege that Wells Fargo obtained actual knowledge of EODs from an October 2010 Deutsche Bank memorandum that confirmed its awareness of ongoing government investigations. Compl This is more of the same generalized information that does not satisfy the actual knowledge/written notice requirement. In addition, the memorandum relates to no trusts here and was sent to Wells Fargo Home Mortgage, as servicer (Compl. 145), not the RMBS trustee or a Responsible Officer of 32

21 of N.Y., No / WL , at *7 (Sup. Ct. N.Y. Cty. May 8, 2007); Ex. E. Finally, Plaintiffs claim that certain communications provided Wells Fargo and its Responsible Officers with specific notice of allegedly pervasive and systemic servicer breaches. Compl None of the cited letters, however, constitutes written notice or actual knowledge of an EOD. As a preliminary matter, the three groups of letters collectively relate to only 12 of the 261 trusts at issue. Exs. GG-KK. The December 2011 and January 2012 letters relating to only four trusts at issue merely request an investigation into possible servicer misconduct and are therefore not notices of EODs. See Exs. GG, HH. The September 2012 letter, which relates to just one trust, purports to constitute notice of an EOD. See Ex. II. But the letter did not provide adequate notice of an EOD because it was conclusory and did not identify the particular breach to be cured. See Ex. JJ. The January 2015 letter, which relates to nine trusts at issue here, fails to support Plaintiffs claims. Importantly, the investors sending the letter (many of which are Plaintiffs here) themselves characterized their letter not as a notice of event of default, but rather a notice of potential servicer non-performance. See Ex. KK. The letter contains only allegations and assertions, not factual statements regarding the servicer s (Ocwen s) action or inaction. Id. Following the January 2015 letter, Wells Fargo and other trustees commissioned an independent investigation of certain Ocwen practices. Ex. LL (CTS Link Notice); compare Compl with Blackrock v. U.S. Bank, Index No /2015, Am. Compl. 149 (noting that U.S. Bank conducted an investigation of Ocwen s servicing activities, including... a detailed forensic accounting review of Ocwen s practices ). Even if this letter were notice of an EOD, which it is not, it could trigger post-eod duties only as to the nine Ocwen trusts following the of 32

22 applicable cure periods and cannot be the basis for any pre-2015 claims. 9 III. PLAINTIFFS PRE-EOD BREACH-OF-CONTRACT CLAIMS FAIL. Plaintiffs pre-eod claims fare no better. Plaintiffs assert pre-eod breach-of-contract claims based on Wells Fargo s asserted: (i) failure to provide notice of R&W breaches and failure to enforce repurchase obligations; (ii) failure to provide notice of and take steps to remedy pre-eod servicing breaches; and (iii) failure to ensure the delivery of mortgage loan files. Compl Each claim is contrary to the GAs express language. A. Plaintiffs Fail To State A Claim Based On Alleged R&W Breaches. Plaintiffs claim that Wells Fargo breached a duty to provide notice of R&W breaches and enforce repurchase claims is doomed by the First Department s decision in Commerce Bank. Wells Fargo s duties with respect to R&W breaches are triggered only by its actual discovery of, or (for some trusts) its receipt of written notice of, specific R&W breaches in identified loans. See Ex. R ( 2.03). Plaintiffs do not come close to alleging these facts. 1. Plaintiffs fail to adequately plead discovery. Plaintiffs attempt to plead discovery of R&W breaches almost exclusively through publicly-available reports of generalized servicer, sponsor, and originator misconduct; government investigations and news reports of those investigations; increased mortgage default rates; RMBS certificate credit rating downgrades and trust performance; public information about breaches in various trusts (most of which are not at issue here); and RMBS-related litigation (only some of which involved Wells Fargo). See Compl ; , Plaintiffs theory is that the pervasive nature of alleged industry problems meant that Wells 9 In all events, the post-eod breach-of-contract claims should be dismissed with respect to the 28 trusts identified in Exhibit Q. Plaintiffs make no specific allegations as to any of the servicers for those trusts, much less allegations of material breaches of 32

23 Fargo should have discovered R&W breaches as to specific loans in specific trusts. Indeed, Plaintiffs use the term pervasive more than thirty-six times in their Complaint to make the point. They fail, however, to identify a single R&W breach as to a specific loan that was actually discovered by Wells Fargo. Plaintiffs claim that a trustee can be liable based on constructive knowledge was rejected by the First Department in Commerce Bank. There, the Supreme Court had accepted the plaintiffs position that the trustee discovered R&W breaches based on the same public information about lawsuits, settlements, government investigations, general certificateholder notices, downgrades, and delinquency rates. See Ex. C (Commerce Bank Complaint). The First Department, however, reversed, reasoning that R&Ws are loan-specific, addressing topics like loan-to-value ratio, whether there are other liens on a property, whether a loan was underwritten pursuant to [the]... underwriting guidelines, and the like. 141 A.D.3d at 414. The generalized information on which plaintiffs relied did not provide such loan-specific information. The same is true here. See, e.g., Ex. C (Schedule B) (representing, among other things, that each mortgage "is a valid, subsisting, enforceable and perfected first lien" and did not have "a LTV greater than 95%"). The court rejected the argument that the defendant had the duty to nose to the source of the systematic improper servicing and administration conduct, holding that the trustee does not have a duty to nose to the source. 141 A.D.3d at (alterations in original). 10 Because Wells Fargo did not have a duty to nose to the source, Plaintiffs allegations of 10 Justice Scarpulla recently recognized the scope and import of the First Department s holding at oral argument on U.S. Bank s motion to dismiss similar claims filed by the same Plaintiff groups. Ex. BB (Scarpulla, J., 5/3/17 Tr. at 19, Blackrock Balanced Capital Portfolio (FI) v. U.S. Bank, N.A., No /2015 (Sup. Ct. N.Y. Cty.) (in response to argument that trustee has no duty to investigate: I agree with that. I absolutely agree. ); id. at 6 ( [I]n Commerce and Knights of Columbus I said clearly, fraud is in the air isn t going to cut it. The First Department [in Commerce Bank] agreed. ); id. at 36 ( I keep asking you to give me specific information about these trusts rather than nose to the source information. ) of 32

24 generalized information does not adequately plead Wells Fargo s actual discovery of R&W breaches. Indeed, New York courts have long recognized that RMBS trustee duties are triggered only upon the trustee s actual awareness of breaches, not its constructive knowledge or inquiry notice of them. 11 As this Court has recognized, Plaintiffs must allege that Wells Fargo had sufficient specific knowledge to be able to go to these issuers and say this loan or these loans were in violation of the reps and warranties. Ex. Z (Ramos, J., 6/22/16 Tr. at 41). With respect to Plaintiffs allegations regarding trust performance and credit rating downgrades, see Compl , 73-77, both have been consistently rejected as sufficient to plead discovery. See, e.g., Ex. Z (Ramos, J. 6/22/16 Tr. at 41) ( You can t just say generally speaking, there are a lot of bad loans out there. There are always bad loans. ). Downgrades and losses can occur for any number of reasons for example, a recession or a collapse in housing prices that are unrelated to the problematic underwriting and quality control practices. In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746, 766 (S.D.N.Y. 2012); see also U.S. Bank N.A. v. Citigroup Glob. Mkts. Realty Corp., No. 1:13-cv-6989-GBD, 2014 WL , at *7 (S.D.N.Y. Nov. 14, 2014) (same). Plaintiffs allegation that the historical delinquencies and collateral losses were so severe as to trigger Wells Fargo s prudent person obligations, see Compl. 77, is no different. Even severe poor performance can be caused by economic conditions and other innocuous facts that do not establish Wells 11 See Bank of N.Y. Mellon Trust Co., N.A. v. Morgan Stanley Mortgage Capital, Inc., 821 F.3d 297, (2d Cir. 2016) (rejecting the possibility of discovery without awareness ); Policemen s Annuity & Benefit Fund v. Bank of America, NA, 943 F. Supp. 2d 428, (S.D.N.Y. 2013) (holding that actual notice is not constructive notice ), abrogated on other grounds by PABF, 775 F.3d 154; U.S. Bank N.A. v. UBS Real Estate Sec s, Inc., 205 F. Supp. 3d 386, (S.D.N.Y. 2016) (rejecting a knew or should have known standard); Phoenix Light SF Ltd. v. Deutsche Bank Nat l Tr. Co., 172 F. Supp. 3d 700, (S.D.N.Y. 2016) (same) of 32

25 Fargo s knowledge of specific R&W breaches. These holdings are consistent with the GA s terms, which universally provide that Wells Fargo shall not be bound to make any investigation unless instructed to do so by at least 25-50% of certificateholders and offered adequate indemnification. Ex. E (no duty to investigate). Indeed, Plaintiffs have recognized exactly this point in other filings involving RMBS settlements. Ex. W at (S.D.N.Y. Settlement Statement). For Plaintiffs to prevail on their inquiry notice theory, the Court must excise this important protection from the GAs. Accordingly, Plaintiffs allegations regarding widespread breaches by originators and sponsors, poor loan performance generally, credit downgrades, government investigations and RMBS-related litigation and settlements are irrelevant, as the issue is not [whether] there was a problem being reported in the newspapers. Ex. Z (Ramos, J., 6/22/16 Tr. at 38). Even where Wells Fargo was allegedly involved in litigation and settlements (see Compl ), Plaintiffs do not, and cannot, allege that Wells Fargo discovered R&W breaches in the loans and trusts at issue here or received written notice of such breaches. Rather, Plaintiffs attempt to use litigation involving other loans and other trusts merely to establish Wells Fargo s general knowledge of systemic and pervasive misrepresentations... involving the same sponsors to the Trusts, same RMBS labels, same RMBS shelves, same vintage, same loan product type, or the same originators. Compl. 95. Wells Fargo s supposed discovery of breaches through its selective assertion of particular trusts rights in bankruptcy, Compl , involve unrelated trusts. 12 As set forth in the GAs, Wells Fargo had no duty to nose to the source to 12 With respect to the New Century bankruptcy, Plaintiffs primary complaint is that Wells Fargo did not pursue additional R&W breach claims based on public reports of New Century s purported breaches. Compl As for the Lehman bankruptcy, Plaintiffs acknowledge that those claims were pursued by Law Debenture Trust Company of New York, a judicially-appointed separate trustee with no relationship to Wells Fargo. Id Neither of 32

26 investigate whether R&Ws were breaches as to specific loans in the trusts at issue. 2. Plaintiffs purportedly loan-specific allegations similarly fail. The Complaint contains only a handful of allegations that even purport to involve Wells Fargo s or a Responsible Officer s actual discovery or receipt of written notice of specific R&W breaches (see Compl , ), and those allegations are also insufficient. Any claims arising from Wells Fargo s alleged duty to repurchase loans where there are missing or defective material documents are time-barred. See Compl Wells Fargo s obligation to review mortgage files for complete documentation begins at closing and ends with the issuance of the final exception report, which ranges from 90 days to one year after closing. See Ex. S. Plaintiffs therefore would have had to initiate their claims within six years of the issue of the final exception report for the trusts at issue. For at least 256 trusts, Plaintiffs did not do so. Id. Accordingly, all claims that accrued before June 18, 2008 are time-barred. See Royal Park, 109 F. Supp. 3d at 608 (dismissing document obligation based claims on this ground); ACE Sec. Corp. v. DB Structured Prods., Inc., 977 N.Y.S.2d 229, 231 (1st Dep t 2013), aff'd ACE Sec. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 599 (2015). In addition, a missing document is not even circumstantial evidence of an R&W breach. By themselves, exception reports and missing documents say nothing about whether the seller breached R&Ws as to the loan pool s quality. Similarly, the alleged breach notices Wells Fargo received from certificateholders and guarantors, Compl , , are insufficient to plead actual knowledge. Wells Fargo was not given specific information, such as the loan number, the R&W breached or the manner in which the breach occurred to be able to go to these issuers and say this loan or these loans New Century nor Law Debenture/Lehman can establish Wells Fargo s discovery of specific R&W breaches of 32

27 were in violation of the reps and warranties. Ex. Z (Ramos, J. 6/22/16 Tr. at 41). Indeed, many notices focus on loans and trusts not at issue here. Compl. 79, Likewise, the alleged putback initiatives, Compl , restate the same publicly available information already rejected by this and other courts. See Exs. GG, HH. B. Plaintiffs Have Not Adequately Alleged Any Pre-EOD Breach With Regard To Servicer Performance. Plaintiffs also argue that Wells Fargo breached its pre-eod duties by failing to provide notice of and take reasonable steps to remedy the Servicers failure to perform their obligations under the [GAs]. Compl But Wells Fargo has its rights and duties defined... exclusively by the terms of the agreement governing the trusts, AG Capital Funding, 866 N.Y.S.2d at 583, and the GAs impose no pre-eod duties to monitor or oversee servicers, see Commerce Bank, 141 A.D.3d at 415. Wells Fargo is not contractually required to investigate servicer conduct absent direction from a certain percentage of certificateholders and an offer of indemnity. Exs. E, W, X, Y. 13 Instead, the trustee may conclusively rely on information provided to it by the Servicer. See Ex. F. C. Wells Fargo Has Not Breached Any Contractual Duties Relating To Delivery Of Mortgage Loan Files. Plaintiffs claim that Wells Fargo fail[ed] to ensure delivery of the mortgage files. Compl But, as Plaintiffs inconsistently allege (id. 40), the GAs actually place that obligation on the Depositor, not Wells Fargo. See Ex. U ( [T]he Depositor does hereby deliver to, and deposit with the Trustee... the following documents or instruments with respect to each 13 In seeking approval of RMBS repurchase and servicing claims against Countrywide, Plaintiffs acknowledged that: The PSAs significantly limit the Trustee s obligations to pursue [repurchase or servicing-related] claims. Ex. W at (SDNY Settlement Statement). Under the PSAs, the Trustee... is not obligated to investigate any facts unless instructed to do so by the holders of 25% of the Voting Rights... ; and, it is not under any obligation to exercise any of the trusts, rights or powers vested in it absent indemnity. Id of 32