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Sterling Federal Bank, F.S.B., Individually, and On Behalf of v. Countrywide Financial Corporation

June 21, 2012

STERLING FEDERAL BANK, F.S.B., INDIVIDUALLY, AND ON BEHALF OF ALTERNATIVE LOAN TRUST 2004-15, CHL MORTGAGE PASS-THROUGH TRUST 2004-22, CHL MORTGAGE PASS-THROUGH TRUST 2005-HYB6, AND ALTERNATIVE LOAN TRUST 2006-26CB, PLAINTIFF,
v.
COUNTRYWIDE FINANCIAL CORPORATION, COUNTRYWIDE SECURITIES CORPORATION, COUNTRYWIDE CAPITAL MARKETS, LLC, COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE HOME LOANS SERVICING LP, CWMBS, INC., CWALT, INC., BANK OF AMERICA CORP., BAC HOME LOANS SERVICING, L.P., NB HOLDINGS CORPORATION, AND THE BANK OF NEW YORK MELLON, DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge:

MEMORANDUM OPINION AND ORDER

In this action, Plaintiff Sterling Federal Bank, F.S.B. ("Sterling") asserts two claims for breach of fiduciary duty and three claims for breach of contract against the Bank of New York Mellon (the "Bank") as Trustee of certain trusts of which Sterling is a certificateholder. This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332. The Bank has moved to dismiss Sterling's Complaint under Federal Rule of Civil Procedure ("Rule") 12(b)(6) and under the Supreme Court's decision in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976). For the following reasons, the Court denies the Bank's motion to dismiss, but stays Counts I and II pending final disposition of In re the Application of the Bank of New York Mellon (N.Y. Sup. Ct. No. 651786/2011).

INTRODUCTION

On March 23, 2011, Sterling filed a multi-count Complaint, individually, against Countrywide Financial Corporation ("Countrywide"), Countrywide Securities Corporation, Countrywide Capital Markets, LLC, Countrywide Home Loans, Inc., Countrywide Home Loans Servicing LP, CWMBS, Inc., CWALT, Inc., Bank of America Corporation, BAC Home Loans Servicing, L.P., and NB Holdings Corporation (collectively, the "Countrywide Defendants") in this Court, based on various alleged misrepresentations and omissions regarding Countrywide's mortgage-backed securities ("MBS") offerings. (R. 1, Compl., Counts I-VI.) In the same complaint, Sterling, derivatively on behalf of Alternative Loan Trust 2004-15, CHL Mortgage Pass-Through Trust 2004-22 ("2004-22"), CHL Mortgage Pass-Through Trust 2005-HYB6 ("2005-HYB6"), and Alternative Loan Trust 2006-26CB ("2006-26CB") (collectively, the "Trusts") asserted three breach of contract claims against the Bank. (Id., Counts VII-IX.) On August 15, 2011, the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") entered an order transferring Sterling's claims against the Countrywide Defendants to the United States District Court for the Central District of California. The MDL Panel simultaneously separated and remanded Sterling's claims against the Bank to this Court on the grounds that those claims are "distinct from claims made against the Countrywide [D]efendants" alleging misrepresentations and omissions in Countrywide's [MBS] offerings. (R. 33-1 at 3.)

On September 29, 2011, Sterling, derivatively on behalf of the Trusts, filed an Amended Complaint in this Court against the Bank, again asserting three breach of contract claims. (R. 46, Am. Compl.) The Bank moved to dismiss the Amended Complaint on October 12, 2011.

(R. 49.) The Court thereafter granted Sterling's request to file a Second Amended Complaint

(R. 57, 59), and accordingly denied, without prejudice, the Bank's motion to dismiss the Amended Complaint as moot. (R. 61.)

On December 5, 2011, Sterling filed a Second Amended Verified Certificateholder Derivative Complaint, and on December 8, 2011, a Corrected Second Amended Verified Certificateholder Derivative Complaint, asserting two breach of fiduciary duty claims and three breach of contract claims. (R. 60, 62.) The Bank moves to dismiss of all five claims, or, in the alternative, dismiss of the breach of contract claims and stay Sterling's fiduciary duty claims.

On June 18, 2012, after the parties had fully briefed the Bank's motion, the Court ordered Sterling to file a Third Amended Complaint to properly allege diversity jurisdiction. Sterling did so on June 20, 2012. (R. 91.) The Third Amended Complaint's non-jurisdictional allegations are identical to those in the Corrected Second Amended Verified Certificateholder Derivative Complaint. The Court refers to the Third Amended Complaint throughout this Memorandum Opinion and Order as the "TAC" or the "Complaint."

FACTUAL BACKGROUND

This case involves Sterling's investment in the Trusts and the Bank's conduct as Trustee. As the Second Circuit recently explained in a case involving the very facts of this case:

To raise funds for new mortgages, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificate-holders. The trustee hires a mortgage servicer to administer the mortgages by enforcing the mortgage terms and administering the payments. The terms of the securitization trusts as well as the rights, duties, and obligations of the trustee, seller and servicer are set forth in a Pooling and Servicing Agreement.

BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169 (2d Cir. 2012). In support of its claims, Sterling makes the following allegations, which the Court accepts as true for purposes of the Bank's motion. See AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011).

I. The Parties

Sterling is a federally-chartered savings bank. (R. 62, TAC ¶ 6.) Its main office, as stated in its Articles of Incorporation, and its principal place of business are located in Sterling, Illinois. (Id.) It is a certificateholder of the Trusts. (Id. at Caption & ¶ 1.) The Bank is a state-chartered bank, incorporated in New York. (Id. ¶ 7.) Its principal place of business is located in New York, New York. (Id.) At all relevant times, the Bank served as the Trustee of the Trusts for the benefit of the certificateholders. (Id.)

II. The Mortgage Securitizations

The creation of the Trusts occurred as follows. Non-party Countrywide Home Loans, Inc. (the "Seller") originated or acquired "sub-prime" residential real estate mortgage loans. (Id. ¶ 37.) The Seller sold those loans to CWALT, Inc. and CWMBS, Inc. (collectively, the "Depositor"), which conveyed the loans to the Bank, as Trustee, for the benefit of the Trust. (Id., Ex. I, Pooling and Servicing Agreement ("PSA"), §§ 2.01(a)-(b).*fn1 ) The Depositor issued certificates to certificateholders, representing beneficial ownership in the Trusts. (TAC ¶ 37.) The collateral for the certificates is the particular Trust's sub-prime residential real estate mortgage portfolio. (Id.) The "Master Servicer," Bank of America, N.A. (formerly Countrywide Home Loans Servicing L.P.) is responsible for collecting payments from borrowers, making monthly payments to the Bank for distribution to certificateholders, and, if necessary, foreclosing on properties with defaulted loans. (Id. ¶ 46; PSA §§ 3.01, 3.11.) The Bank, as Trustee, administers the Trusts. (TAC ¶ 7.)

The Seller, the Master Servicer, and the Bank, among others, entered into certain PSAs, which set forth their respective obligations relating to the Trusts. (Id. ¶¶ 40, 45-52, 54.) Sterling alleges, and the Bank does not dispute, that it and other certificateholders are third-party beneficiaries of the PSAs. (Id. ¶ 44.)

In the PSAs, the Seller made certain representations and warranties with respect to the quality of the mortgage loans in the portfolio. (Id. ¶ 45.) The Seller represented, for example, that each mortgage loan was underwritten in accordance with Countrywide's underwriting guidelines set forth in the prospectus supplement and that no fraud or other omission had taken place with respect to the mortgages loans. (Id. ¶¶ 45(c)-(d).) The Seller further agreed that, upon discovery of any breach of a representation or warranty that materially and adversely affects the certificateholders' interests, it would cure the breach or, under certain circumstances, would have the alternative options to either purchase the loan that caused the breach or supply a substitute mortgage loan for the loan that caused the breach. (Id. ¶ 45(f).)

Moreover, the PSAs require the Master Servicer to enforce the Seller's obligation to cure, repurchase, or substitute any mortgage loan that causes a breach, as described above. (Id. ¶ 46 (citing PSA § 3.01).) The PSAs further require the Master Servicer to provide loan-level information for each mortgage loan to the Bank as set forth in Schedule VI of the PSAs. (Id. ¶ 50.) Additionally, the PSAs provide that the Bank must provide monthly statements to certificateholders and credit rating agencies,*fn2 including the Special Hazard Loss Coverage Amount,*fn3 the Fraud Loss Coverage Amount,*fn4 and the Bankruptcy Loss Coverage Amount,*fn5 based on information that the Master Servicer provides to it. (TAC ¶ 52; PSA § 4.06(xv).) The PSAs further require the Bank to "use its best efforts to promptly provide notice" to each rating agency once it has actual knowledge of an Event of Default that the Seller has not cured. (TAC ¶ 51; PSA § 10.05(2).)

III. Sterling's Purchase of Countrywide MBS

From 2004 to 2006, Sterling purchased "a substantial portion" of four separate tranches*fn6 of certificates in the Trusts, identified as 2004-15 2A2, 2004-22 M, 2005-HYB6 5A2, and 2006-26CB A 19 (the "Tranches"). (TAC ¶ 35.) The Trusts utilize a senior/subordinated structure, whereby tranches of the certificates are layered such that each tranche benefits from the credit protection of all of the tranches subordinated to it. (Id. ¶ 36.) The Tranches that Sterling purchased were senior certificates, such that the rights of the holders of subordinated tranches of certificates were subordinate to Sterling's rights. (Id.) Accordingly, the subordinated tranches of the certificates were to provide credit support for the senior tranches. (Id.) Sterling still owns the Tranches. (Id.)

To facilitate the sale of the certificates, Countrywide and its affiliates published prospectuses and supplements thereto regarding the sale of certificates on April 23, 2004 and July 23, 2004 (as to 2004-15); on August 24, 2004 and September 27, 2004 (as to 2004-22); on July 25, 2005 and August 26, 2005 (as to 2005-HYB6); and March 27, 2006 and July 27, 2006 (as to 2006-26CB). (Id. ¶ 38.) The Bank, as Trustee, contributed to the content of the prospectuses and supplements thereto, and consented to issuing both. (Id. ¶ 39.)

IV. The Alleged Countrywide Fraud

Underlying Sterling's Complaint is an alleged massive fraud that Countrywide and certain of its officers and affiliates perpetrated. (Id. ¶ 9.) Specifically, Sterling alleges that Countrywide made false representations about its "purportedly conservative mortgage underwriting standards, the appraisals of mortgaged properties, adherence to prudent underwriting guidelines and careful credit analysis, the mortgages' loan-to-value ratios, and other facts that were material to investment decisions." (Id. ¶ 11.) According to Sterling, Countrywide had no intention of abiding by its representations and warranties to investors. (Id. ¶ 25.) Sterling avers that Countrywide's deviation from its represented underwriting practices resulted in approval of loans in cases where loan applications lacked important documentation, included an invalid or incomplete appraisal, demonstrated borrower fraud on the face of the loan application, or reflected that the borrower's financial information failed to meet stated guidelines. (Id. ¶ 31.) Relevant to its case against the Bank, Sterling alleges that the Master Servicer, among other things, did not enforce the Seller's obligations under the PSAs to cure or repurchase mortgage loans as to which a breach of a representation or warranty occurred. (Id. ¶¶ 45, 53-56; PSA § 2.03.)

V. The Bank's Relevant Conduct

A. Failure to Provide Information to Credit Rating Agencies and Certificateholders Sterling alleges that investors commonly rely on the credit rating agencies' ratings in deciding whether to maintain particular securities in their portfolios. (TAC¶ 67.) The Bank allegedly failed to provide monthly statements to the rating agencies that included the Special Hazard Loss Coverage Amount, the Fraud Loss Coverage Amount and the Bankruptcy Loss Coverage Amount. (Id. ¶¶ 132, 134.) Sterling also alleges that the Bank knew that the credit agencies' ratings of the certificates were falsely maintained and that the Seller and Master Servicer had abandoned their obligations under the PSAs. (Id. ¶ 70.)

S&P and Moody's drastically downgraded the certificates at issue years after Sterling purchased them. (Id. ¶ 68.) Below are S&P's and Moody's ratings of the certificates at issue, as alleged in the Complaint. (Id. ¶¶ 40 n.5, 68 n.7.)

Certificates/Tranches S&P Moody's 2004-15 2A2 April 23, 2004: AAA ("an Not alleged extremely strong capacity to meet financial commitments")

December 30, 2009: CCC ("currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments") 2004-22 M August 24, 2004: AA ("a August 24, 2004: Aa2 (an very strong capacity to meet Aa rating indicates "high financial requirements") quality" and "subject to very low credit risk" and a modifier of 2 indicates a midrange ranking of the generic category)

December 9, 2009: B- (a B April 15, 2010: Caa1*-rating means "more favorable ("judged to be of poor to adverse business, financial standing" and "subject to and economic conditions but very high credit risk" with currently has the capacity to the modifier of 1 indicating meet financial commitments" that the obligation ranks in and a (-) denotes a lower the higher end of its generic relative standing within the rating category and the (*-) rating category) indicating that the obligation has been placed on "Credit Watch Negative" and will likely suffer more ratings downgrades)

2005-HYB6 5A2 September 25, 2005: AAA September 25, 2005: Aa1 (modifier of 1 indicates that the obligation ranks in the higher end of its generic rating category) July 1, 2009: CCC April 15, 2010: C ("the lowest rated class and are typically in default, with little prospect for recovery of principal or interest") 2006-26CB A19 July 28, 2006: AAA July 28, 2006: Aa1 August 15, 2010: D July 12, 2010: C (indicates "payment default on financial commitments")

Sterling alleges that had the rating agencies gradually downgraded the certificates earlier to reflect the problems with loan delinquencies and insurance, it and other certificateholders would have sold the securities before their value further decreased. (Id. ¶ 69.)

According to Sterling, the Bank also failed to provide information to certificateholders that it was permitted to request from the Master Servicer and which the Master Servicer had an obligation to provide. (Id. ¶¶ 52, 64.) The Bank did not provide monthly statements to certificateholders regarding the Special Hazard Loss Coverage Amount, Fraud Loss Coverage Amount and the Bankruptcy Loss Coverage Amount. (Id. ¶¶ 142-44.)

B. Event of Default

Sterling further alleges that the Bank failed to provide certificateholders with notice of an "Event of Default" under § 7.01 of the PSAs, despite knowing that several defaults had occurred. (Id. ¶¶ 77-79, 119-22.) On October 18, 2010, a group of certificateholders (the "Institutional Investors") holding at least 25% of the voting rights in certificates issued by 115 trusts, including 2004-22, provided the Bank and the Master Servicer notice of the Master Servicer's material failures to perform its obligations under the PSAs (the "Notice"). (Id. ¶¶ 75-76.) The Notice listed several specific failures and noted that each failure was continuing and materially affected the certificateholders' rights. (Id. ¶ 77.) Additionally, the Notice stated that if the failures continued for 60 days from the date of the Notice, each of them--independently--would constitute an Event of Default under the PSAs. (Id.) Nevertheless, the failures continued for an additional 60 days from the Notice date. (Id. ¶ 78.)

Sterling contends that the Bank knew that the Master Servicer failed to (1) enforce the Seller's obligations under the PSAs; (2) use reasonable efforts to foreclose upon defaulted mortgage loans, and (3) supply it with complete information regarding the mortgage loans. (Id. ¶ 60.) Sterling further alleges that assuming the Bank made the requisite demands on the Master Servicer, then the Bank knew that the Master Servicer's inactions continued despite the Bank's demands, thereby creating an Event of Default under § 7.01(ii) of PSAs. (Id. ¶ 61.) Alternatively, Sterling avers that if the Bank failed to make the requisite demands on the Master Servicer, then the Bank failed to comply with the PSAs. (Id.)

VI. The Countrywide Settlement Agreement and the Article 77 Proceeding

On June 29, 2011, the Bank announced that it had entered into a settlement agreement with Countrywide to settle, for $8.5 billion, "all potential claims belonging to" 530 trusts for which the Bank serves as trustee (the "Settlement Agreement").*fn7 (TAC ¶ 80.) Prior to that time, the Bank had not notified certificateholders or rating agencies of an Event of Default. (Id. ¶ 81.)

The certificates that Sterling holds are part of the 530 trusts that are the subject of the Settlement Agreement. (Id. ΒΆ 82.) Sterling alleges that the Bank negotiated the Settlement Agreement "in secret" without Sterling's knowledge or consent, and that, if approved, it would "extinguish claims the Bank could bring against Countrywide and its affiliates and Bank of America and its affiliates as ...


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