United States District Court, D. South Dakota, Southern Division
GSAA HOME EQUITY TRUST 2006-2, BY AND THROUGH LL FUNDS LLC, Plaintiff,
WELLS FARGO BANK, N.A., and SAXON MORTGAGE SERVICES, INC., Defendants
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
GSAA Home Equity Trust 2006-2, by and through LL Funds LLC
other, LL Funds LLC, Plaintiff: Scott A. Abdallah, Shannon R.
Falon, LEAD ATTORNEYS, Delia M. Druley, Johnson, Janklow,
Abdallah, Bollweg & Parsons LLP, Sioux Falls, SD; Shannon W.
Conway, Talcott J. Franklin, LEAD ATTORNEYS, PRO HAC VICE,
Talcott Franklin, P.C., Dallas, TX.
Wells Fargo Bank, N.A., Defendant: Jason R. Sutton, Thomas J.
Welk, LEAD ATTORNEYS, Boyce Law Firm, Sioux Falls, SD; Jayant
W. Tambe, PRO HAC VICE, Jones Day, New York, NY.
Saxon Mortgage Services, Inc., Defendant: Angela B. Brandt,
LEAD ATTORNEY, Larson King, LLP, St. Paul, MN; Mary Gail
Gearns, Matthew Minerva, LEAD ATTORNEYS, PRO HAC VICE,
Morgan, Lewis & Bockius LLP, New York, NY.
OPINION AND ORDER GRANTING IN PART AND DENYING IN
PART MOTIONS TO DISMISS
A. LANGE, UNITED STATES DISTRICT JUDGE.
GSAA Home Equity Trust 2006-2 (the Trust) is a residential
mortgage-backed securities trust. Defendant Wells Fargo, N.A.
(Wells Fargo) is the Master Servicer of the Trust and
Defendant Saxon Mortgage Services, Inc. (Saxon) was the
Trust's Servicer. The Trust, by and through Plaintiff LL
Funds LLC (LL Funds), filed suit in this Court, asserting
breach of contract and tort claims against both Defendants
and a claim under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § § 1961-1968,
against Wells Fargo. Doc. 1. Defendants have moved to dismiss
all of LL Funds' claims under Rules 12(b)(6) and 12(b)(1)
of the Federal Rules of Civil Procedure. Docs. 25, 28. For
the reasons explained below, this Court grants in part and
denies in part Defendants' motions to dismiss.
case involves residential mortgage-backed securities (RMBS).
RMBS are a type of asset-backed financial product created
through securitization. The securitization process begins
when the originator of a residential mortgage loan sells the
loan to a financial institution. Doc. 1 at ¶ 12. The
financial institution then pools the loan with others,
deposits the loans into a trust, and sells certificates
issued by the trust to investors. Doc. 1 at ¶ ¶ 12,
17. The certificates entitle the investors to a portion of
the mortgage payments made by the borrowers on the loans
within the trust. Doc. 1 at ¶ ¶ 15-16.
Trust in this case was established in January 2006 pursuant
to a Master Servicing and Trust Agreement (MSTA). Doc. 1 at
¶ ¶ 1-2. The parties to the MSTA were GS Mortgage
Securities Corporation as Depositor; Deutsche Bank National
Trust Company (Deutsche) as Trustee and Custodian; and Wells
Fargo as Master Servicer. Doc. 1 at ¶ 2. The MSTA
provides that it is governed by New York law.
Doc. 27-2 at 51. Saxon agreed to be the Servicer for the
loans in the Trust by entering into a Flow Servicing Rights
Purchase and Servicing Agreement (Servicing Agreement) with
Goldman Sachs Mortgage Company. Doc. 1 at ¶ 5; Doc. 27-1
at 46. The Servicing Agreement was eventually assigned to
responsibilities under the Servicing Agreement included
collecting mortgage loan payments from borrowers, Doc. 30-1
at 26, remitting the collected payments to the Trust, Doc.
30-1 at 26-28, engaging in loss mitigation efforts with
delinquent borrowers, Doc. 30-1 at 22-23, and, if necessary,
pursuing foreclosure proceedings on the Trust's behalf,
Doc. 30-1 at 24-25. Under the Servicing Agreement, Saxon had
a duty to ensure that its mortgage servicing practices were
in conformity with those of prudent mortgage lending
institutions which service similar mortgage loans. Doc. 1 at
¶ 20; Doc. 30-1 at 7, 22, 24. As the Master Servicer,
Wells Fargo had a duty under the MSTA to " monitor the
performance of the Servicer under the related Servicing
Agreements" and to " use its reasonable good faith
efforts to cause the Servicer to duly and punctually perform
their duties and obligations thereunder." Doc. 27-2 at
30; Doc. 1 at ¶ 21.
12.07 of the MSTA contains what is commonly referred to as a
" no-action clause" which provides in relevant
No Certificateholder shall have any right by virtue or by
availing itself of any provisions of this Agreement to
institute any suit, action or proceeding in equity or at law
upon or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trustee a written
notice of an Event of Default and of the continuance thereof,
as herein provided, and unless the Holders of Certificates
evidencing not less than 25% of the Voting Rights evidenced
by the Certificates shall also have made written request to
the Trustee to institute such action, suit or proceeding in
its own name as Trustee hereunder and shall have offered to
the Trustee such reasonable indemnity as it may require
against the costs, expenses, and liabilities to be incurred
therein or thereby, and the Trustee, for 60 days after its
receipt of such notice, request and offer of indemnity shall
have neglected or refused to institute any such action, suit
or proceeding . . . .
Doc. 27-2 at 53.
Funds owns and holds certificates issued under the MSTA
evidencing 25% or greater of the voting rights of the Trust.
Doc. 1 at ¶ ¶ 3, 10. The Complaint does not aver
that LL Funds owned 25% or greater of the voting rights
during the time Saxon was the Servicer. In March 2014, after
Saxon no longer was servicing loans in the Trust, LL Funds
sent a letter to Deutsche directing it to sue Saxon and
" any other parties under the MSTA . . . while Saxon was
a Servicer" for, among other things, breach of contract
and negligence. Doc. 1 at ¶ 3; Doc. 1-1 at 1. LL Funds
explained in the letter that it was making a written request
under § 12.07 of the MSTA for Deutsche to institute an
action in its own name as Trustee. Doc. 1 at ¶ 3; Doc.
1-1 at 1-2. LL Funds further explained that it had not given
a separate notice of an Event of Default under § 12.07
because Saxon was no longer the Servicer for the Trust and
could not remedy the conduct in question. Doc. 1 at ¶ 3;
Doc. 1-1 at 2. To the extent that a separate notice of an
Event of Default was necessary, however, LL Funds asked
Deutsche to consider the letter as providing such notice.
Doc. 1-1 at 2.
Deutsche allowed more than sixty days to pass without
bringing suit, LL
Funds filed the present Complaint against Saxon and Wells
Fargo. Doc. 1 at ¶ 3. Rather than focusing on Wells
Fargo's actions as the Master Servicer of the Trust, the
Complaint consists in large part of allegations concerning
Wells Fargo's conduct as the servicer for loans in other
trusts or other settings. Doc. 1 at ¶ ¶ 30-34,
40-45. According to the Complaint, Wells Fargo entered into
consent orders with various federal agencies after
investigations by these agencies revealed that Wells Fargo
had engaged in " robo-signing"  and other improper
conduct in its capacity as a servicer of loans not in this
particular Trust. Doc. 1 at ¶ ¶ 30-34, 40-45.
Complaint contains similar allegations about Saxon. LL Funds
alleged in the Complaint that Saxon entered into a Consent
Order (Saxon Consent Order) with the Board of Governors of
the Federal Reserve in April 2012. Doc. 1 at ¶ 35. The
Consent Order alleged that when foreclosing on certain
residential mortgage loans that it serviced, Saxon had filed
or caused to be filed affidavits purportedly based on the
affiant's personal knowledge when in fact they were not;
litigated foreclosure proceedings without ensuring that the
mortgage and related documents were in order; failed to
allocate proper resources to handle the increased level of
foreclosures and loss mitigation activities; and failed to
exercise adequate control over the foreclosure process. Doc.
1 at ¶ 35; Doc. 30-3 at 1-4. LL Funds alleged in the
Complaint that " [o]n information and belief, . . .
Saxon filed in county recording or land offices and in courts
flawed, misleading, improper and arguably unlawful documents
as set forth in the above-referenced [Saxon Consent Order]
with regard to the Trust." Doc. 1 at ¶ 36.
on these allegations and others, LL Funds asserted claims for
breach of contract against Wells Fargo (Count I); breach of
contract against Saxon (Count II); negligence against Wells
Fargo and Saxon (Count III); willful misfeasance/misconduct
or gross negligence against Wells Fargo and Saxon (Count IV);
and a violation of RICO against Wells Fargo (Count V). Doc.
1. Defendants offer multiple arguments in support of their
motion to dismiss, each of which is discussed below.
Standards of Review
motion to dismiss under Rule 12(b)(6), courts must accept the
plaintiff's factual allegations as true and construe all
inferences in the plaintiff's favor, but need not accept
a plaintiff's legal conclusions. Retro Television
Network, Inc. v. Luken Commc'ns. LLC, 696 F.3d 766,
768-69 (8th Cir. 2012). To survive a motion to dismiss for
failure to state a claim, a complaint must contain " a
short and plain statement of the claim showing that the
pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2).
Although detailed factual allegations are unnecessary, the
plaintiff must plead enough facts to " state a claim to
relief that is plausible on its face." Ashcroft v.
Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d
868 (2009) (quoting Bell A. Corp. v. Twombly, 550
U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
" A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged." Id. When determining
grant a Rule 12(b)(6) motion, a court generally must ignore
materials outside the pleadings, but it may " consider
'matters incorporated by reference or integral to the
claim, items subject to judicial notice, matters of public
record, items appearing in the record of the case, and
exhibits attached to the complaint.'" Dittmer
Props, L.P. v. FDIC, 708 F.3d 1011, 1021 (8th Cir. 2013)
(quoting Miller v. Redwood Toxicology Lab., Inc.,
688 F.3d 928, 931 n.3 (8th Cir. 2012)); see also Kushner
v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir.
2003) (explaining that courts may also consider "
documents whose contents are alleged in a complaint and whose
authenticity no party questions, but which are not physically
attached to the pleading" (quoting Rosenbaum v.
Syntex Corp. (In re Syntex Corp. Sec. Litig.), 95 F.3d
922, 926 (9th Cir. 1996))). In addition to the allegations in
the Complaint, this Court has considered the Saxon Consent
Order (but not for the truth of the allegations therein), the
Servicing Agreement, the MSTA, and LL Funds' letter to
12(b)(1) provides for dismissal of a suit when the court
lacks subject matter jurisdiction. The United States Court of
Appeals for the Eighth Circuit has drawn a distinction
between facial and factual 12(b)(1) motions, explaining the
applicable standard in each instance. See Osborn v.
United States, 918 F.2d 724, 728-30 (8th Cir. 1990).
Under a facial attack, " the court restricts itself to
the face of the pleadings, and the non-moving party receives
the same protections as it would defending against a motion
brought under Rule 12(b)(6)." Jones v. United
States, 727 F.3d 844, 846 (8th Cir. 2013) (quoting
Osborn, 918 F.2d at 729 n.6). Under a factual attack,
the trial court may proceed as it never could under 12(b)(6)
or Fed.R.Civ.P. 56. Because at issue in a factual 12(b)(1)
motion is the trial court's jurisdiction--its very power
to hear the case--there is substantial authority that the
trial court is free to weigh the evidence and satisfy itself
as to the existence of its power to hear the case. In short,
no presumptive truthfulness attaches to the plaintiff's
allegations, and the existence of disputed material facts
will not preclude the trial court from evaluating for itself
the merits of jurisdictional claims.
Osborn, 918 F.2d at 730 (quoting Mortensen v.
First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d
Cir. 1977)). Plaintiffs faced with either a factual or facial
attack under Rule 12(b)(1) have the burden of proving subject
matter jurisdiction. V S Ltd. P'ship v. Dep't of
Hous. & Urban Dev., 235 F.3d 1109, 1112 (8th Cir. 2000).
contends that LL Funds' claims are derivative and
therefore must be dismissed for lack of standing because LL
Funds failed to comply with the contemporaneous ownership
rule embodied in Federal Rule of Civil Procedure 23.1(b)(1)
and New York Business Corporation Law § 626.
Alternatively, Saxon argues that even if LL Funds' claims
are direct rather than derivative, LL Funds still lacks
standing because LL Funds purchased its certificates on the
secondary market and further did not have a contractual
relationship with Saxon.
Rule of Civil Procedure 23.1 " applies when one or more
shareholders or members of a corporation or an unincorporated
association bring a derivative action to enforce a right that
the corporation or association may properly assert but has
failed to enforce." Fed.R.Civ.P. 23.1(a). One of the
pleading requirements of Rule 23.1 is that the plaintiff must
allege in a verified complaint that it " was a
shareholder or member at the time
of the transaction complained of." Fed.R.Civ.P.
23.1(b)(1). " Similarly, New York Business Corporation
Law § 626(b) requires that a plaintiff in a shareholder
derivative suit have been 'a [share]holder at the time of
the transaction of which he complains' in order to have
standing." Kaliski v. Bacot (In re Bank of N.Y.
Derivative Litig.), 320 F.3d 291, 297 (2d Cir. 2003)
(alteration in original) (quoting N.Y. Bus. Corp. §
626(b)). " The main purpose of this so-called
contemporaneous ownership rule is to prevent courts from
being used to litigate purchased grievances."
Id. (alterations, citation, and internal quotation
neither Rule 23.1 nor New York Business Corporation Law
§ 626 specifically mention suits by beneficiaries of a
trust, federal district courts have applied these rules to
derivative suits by certificateholders in mortgage-backed
securities trusts. See Fed. Hous. Fin. Agency v. WMC
Mortg., LLC, No. 13 Civ. 584(AKH), 2013 WL 5996530, at
*1 (S.D.N.Y. June 12, 2013); SC Note Acquisitions, LLC v.
Wells Fargo Bank, 934 F.Supp.2d 516, 528-29 (E.D.N.Y.
2013), aff'd, 548 Fed.Appx. 741 (2d Cir. 2014). The
question here, then, is whether LL Funds' claims are
direct or derivative.
analyzing whether a claim is derivative, courts " must
look to the nature of the alleged wrong rather than the
designation used by plaintiffs." Ellington Credit
Fund v. Select Portfolio Servicing, Inc., 837 F.Supp.2d
162, 188 (S.D.N.Y. 2011) (quoting Primavera
Familienstiftung v. Askin, No. 95 Civ. 8905 (RWS), 1996
WL 494904, at *14-15 (S.D.N.Y. Aug. 30, 1996)). In the past,
some federal district courts in New York followed the rule
that " an alleged injury that is 'equally
applicable' to all shareholders gives rise to a
derivative, not a direct, action." Dall. Cowboys
Football Club. Ltd. v. Nat'l Football League Tr.,
No. 95 CIV. 9426 (SAS), 1996 WL 601705, at *2 (S.D.N.Y.
Oct. 18, 1996) (quotation omitted); SC Note, 934 F.Supp.2d at
530 (quoting and applying rule announced in Dallas Cowboys).
Just this year, however, the author of Dallas Cowboys
abandoned the rule stated in that decision in favor of the
test articulated by the Supreme Court of Delaware in
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d
1031 (Del. 2004). See Royal Park Invs. SA/NV v. HSBC Bank
USA, Nos. 14-cv-8175 (SAS), 14-cv-9366 (SAS),
14-cv-10101 (SAS), 109 F.Supp.3d 587, 2015 WL 3466121, at
*15-16 (S.D.N.Y. June 1, 2015) (noting that a New York
appellate court had adopted the Tooley test and concluding
that the test was consistent with New York law); see also
Hansen v. Wwebnet. Inc., No. l:14-cv-2263 (ALC),
2015 WL 4605670, at *4 (S.D.N.Y. July 31, 2015) (applying
Tooley to determine whether claim was derivative under New
York law). A New York appellate court has adopted Tooley, so
the test in Tooley should control whether an action is direct
or derivative under New York law. See Serino v.
Lipper, 123 A.D.3d 34, 994 N.Y.S.2d 64, 69 (N.Y.App.Div.
2014) (acknowledging adoption of the Tooley test and
explaining that the test is consistent with existing New York
law); Yudell v. Gilbert, 99 A.D.3d 108, 949 N.Y.S.2d
380, 384 (N.Y.App.Div. 2012) (adopting Tooley).
Tooley, the Supreme Court of Delaware explained that the test
for determining whether a stockholder's claim is direct
or derivative must be based " solely on the
following questions: (1) who suffered the alleged harm (the
corporation or the suing stockholders, individually); and (2)
who would receive the benefit of any recovery or other remedy
(the corporation or the stockholders, individually)?"
Tooley, 845 A.2d at 1033. To be considered direct
under the Tooley test, a stockholder's " injury must
be independent of any
alleged injury to the corporation. The stockholder must
demonstrate that the duty breached was owed to the
stockholder and that he or she can prevail without showing an
injury to the corporation." Id. at 1039. The
stockholder's injury need not be distinct from the injury
suffered by other stockholders to be direct, however. The
Supreme Court of Delaware in Tooley " expressly
disapprove[d]" of " the concept that a claim is
necessarily derivative if it affects all stockholders
equally." Id.; see also Blackrock Allocation
Target Shares: Series S Portfolio v. U.S. Bank Nat'l
Ass'n, No. 14-cv-9401 (KBF), 2015 WL 2359319, at *6
n.12 (S.D.N.Y. May 18, 2015) (concluding an allegation that
all certificateholders would suffer harm equally was "
immaterial" under Tooley).
LL Funds' claims are direct or derivative under Tooley is
a difficult question, which the parties have not analyzed.
Compounding the difficulty of that question, the Supreme
Court of Delaware in NAF Holdings, LLC v. Li & Fung (Trading)
Ltd., 118 A.3d 175 (Del. 2015), recently deemed Tooley
to have " no bearing on whether a party with its own
rights as a signatory to a commercial contract may sue
directly to enforce those rights." NAF Holdings, 118
A.3d at 176. The facts of NAF Holdings are distinguishable,
and none of the parties briefed whether LL Funds is suing
" directly to enforce those rights" LL Funds (as
opposed to the Trust) has under a commercial contract.
Instead of addressing Tooley, LL Funds argued in its brief
that its claims are direct because it " seeks to recover
its own unique losses within the waterfall," because the
Complaint states that the claims are direct, and because it
is suing on behalf of the Trust and in the name of the
Trustee. These arguments are not satisfactory; whether LL
Funds' injuries are unique from other Certificateholders
is irrelevant under Tooley, the labels LL Funds applies to
its claims are not determinative, and LL Funds has not
provided any legal authority in support of its contention
that a certificateholder's action on behalf of a trust or
in the name of the trustee is direct. This entire question
may be academic if in fact LL Funds owned the requisite
certificates at the time of the transactions complained of,
and thus this Court will allow LL Funds twenty-one days to
file an Amended Complaint to satisfy the contemporaneous
ownership rule. Alternatively, LL Funds may file a
supplemental brief with citation to legal authority
explaining why and how this is a direct action. Saxon and
Wells Fargo then will be given an opportunity to respond
within twenty-one days, and LL Funds may file a reply brief
within fourteen days thereafter.
Funds establishes that it may bring a direct action, this
leaves Saxon's alternative argument that LL Funds lacks
standing. Saxon contends that LL Funds does not have standing
to sue it directly because LL Funds " necessarily
purchased its Certificates in the secondary market" and
any causes of action against Saxon did not transfer from the
prior Certificateholder to LL Funds. See Ellington, 837
F.Supp.2d at 180-83 (holding that plaintiff did not have
standing to assert claims against servicer that accrued prior
to plaintiff's purchase of certificates because New York
General Obligation Law § 13-107 did not provide for the
transfer of such claims). The viability of this argument
depends on when Saxon's alleged breach of contract
occurred and when LL Funds purchased its Certificates. LL
Funds failed to plead when it became a ...