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GSAA Home Equity Trust 2006-2 v. Wells Fargo Bank, N.A.

United States District Court, D. South Dakota, Southern Division

September 30, 2015


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          For 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.

         For 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.

         For 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.

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         Plaintiff 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.

         I. Facts

         This 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.

         The 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.

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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 Deutsche.

         Saxon's 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.

         Section 12.07 of the MSTA contains what is commonly referred to as a " no-action clause" which provides in relevant part:

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.

         LL 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.

         After Deutsche allowed more than sixty days to pass without bringing suit, LL

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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" [1] and other improper conduct in its capacity as a servicer of loans not in this particular Trust. Doc. 1 at ¶ ¶ 30-34, 40-45.

         The 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.

         Based 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.

         II. Standards of Review

         On a 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 whether to

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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 Deutsche.

         Rule 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, however,

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).

         III. Analysis

         A. Standing

         Saxon 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.

         Federal 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

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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 marks omitted).

         Although 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.

         When 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).

         In 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

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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).

         Whether 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.

         If LL 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 ...

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