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.
OPINION AND ORDER DENYING MOTIONS TO DISMISS CONTRACT
ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE
GSAA Home Equity Trust 2006-2 (the Trust) is a residential
mortgage-backed securities trust for which Defendant Wells
Fargo, N.A. (Wells Fargo) was the Master. Servicer and
Defendant Saxon Mortgage Services, Inc. (Saxon) was the
Servicer. LL Funds LLC (LL Funds), a Certificateholder in the
Trust, filed suit in this Court on behalf of the Trust
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. In a previous Opinion
and Order Granting in Part and Denying in Part Motions to
Dismiss, this Court dismissed LL Funds' tort and RICO
claims but declined to dismiss its contract claims. Doc. 44;
GSAA Home Equity Tr. 2006-2 ex rel. LL Funds LLC v. Wells
Fargo Bank, N.A., 133 F.Supp.3d 1203 (D.S.D. 2015).
Because there remained unanswered questions about LL
Funds' standing to sue the Defendants on behalf of the
Trust, this Court granted LL Funds leave to amend its
complaint to establish standing and allowed it to file a
supplemental brief should it chose to do so. Doc. 44. LL
Funds on behalf of the Trust filed an amended complaint, Doc.
45, and supplemental briefs, Docs. 46, 52, and, Defendants
both filed supplemental briefs in response, Docs. 49, 50. For
the reasons explained below, LL Funds has standing to sue and
can sue Saxon directly.
Trust was established in January 2006 by a Master Servicing
and Trust Agreement (MSTA). Doc. 45 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. 45 at ¶ 2. 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. 45 at
12.07 of the MSTA contains a "no-action clause"
requiring Certificateholders to satisfy several requirements
before bringing suit:
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; it being understood and intended, and being
expressly covenanted by each Certificateholder with every
other Certificateholder and the Trustee, that no one or more
Holders of Certificates shall have any right in any manner
whatever by virtue or by availing itself or themselves of any
provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates,
or to obtain or seek to obtain priority over or preference to
any other such Holder or to enforce any right under this
Agreement, except in the manner herein provided and for the
common benefit of all Certificateholders. For the protection
and enforcement of the provisions of this Section 12.07, each
and every Certificateholder and the Trustee shall be entitled
to such relief as can be given either at law or in equity.
Doc. 27-2 at 53. New York law governs the MSTA. Doc. 27-2 at
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 in December 2005. Doc. 45 at ¶ 5; Doc. 27-1 at
46. Saxon had a duty under the Servicing Agreement to ensure
that its mortgage servicing practices conformed with those of
prudent mortgage lending institutions which service similar
mortgage loans. Doc. 45 at ¶ 20; Doc. 30-1 at 7, . 22,
24. Goldman Sachs Mortgage Company eventually assigned its
rights under the Servicing Agreement to GS Mortgage
Securities Corporation (Step 1 Assignment), Doc. 51-1, who in
turn assigned these rights to Deutsche as Trustee (Step 2
Assignment), Doc. 51-2.
Funds owns and holds certificates issued under the MSTA
evidencing 25% or greater of the voting rights of the Trust.
Doc. 45 at ¶¶ 3, 10. In March 2014, after Saxon no
longer was servicing loans in the Trust, LL Funds sent a
letter to Deutsche requesting 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. 45 at ¶ 3; Doc. 45-1 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. 45 at ¶ 3; Doc.
45-1 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. 45 at ¶
3; Doc. 45-1 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. 45-1 at 2.
Deutsche allowed more than sixty days to pass without
bringing suit, LL Funds filed its complaint on behalf of the
Trust against Saxon and Wells Fargo. Doc. 1 at ¶ 3.
Saxon and Wells Fargo moved to dismiss, arguing among other
things that LL Funds lacked standing to sue. According to
Saxon and Wells Fargo, LL Funds' claims were
derivative. To have standing to bring a derivative
suit, however, a plaintiff must be a shareholder, or in this
case a certificateholder, at the time of the wrong alleged.
Fed.R.Civ.P. 23.1(b)(1); N.Y. Bus. Corp. Law § 626(b);
Kaliski v. Bacot (in re Bank of N.Y. Derivative
Litig.) 320 F.3d 291, 297 (2d Cir. 2003) (explaining
that under both Rule 23.1 of the Federal Rules of Civil
Procedure and New York Business Corporation Law §
626(b), a plaintiff must have owned stock at the time of the
transaction complained of to have standing to bring a
shareholder derivative action); 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) (applying Rule 23.1 to
derivative suit by certificateholders in mortgage-backed
securities trusts); SC Note Acquisitions, LLC v. Wells
Fargo Bank, N.A., 934 F.Supp.2d 516, 528-29 (E.D.N.Y.
2013) (applying Rule 23.1 and New York Business Corporation
Law § 626(b) to derivative suit brought by
certificateholder in mortgage-backed securities trust),
aff'd, 548 F.App'x 741 (2d Cir. 2014).
Because LL Funds had failed to allege that it owned
certificates at the time of the wrongs it complained of,
Saxon and Wells Fargo argued that LL Funds' complaint had
to be dismissed. Saxon argued in the alternative that even if
LL Funds' claims were direct rather than derivative, LL
Funds still lacked standing under New York General Obligation
Law § 13-107 and did not have a contractual relationship
with Saxon in any event.
Court in its previous opinion noted that whether LL
Funds' claims were direct or derivative was a difficult
question which the parties had failed to analyze under the
appropriate test and that LL Funds had failed to allege
whether it was a Certificateholder during the time Saxon was
the Trust's Servicer. Accordingly, this Court gave LL
Funds an opportunity to amend its complaint to aver that it
owned certificates in the Trust at the time of the alleged
wrongdoing. Alternatively, this Court allowed LL Funds to
file a supplemental brief "explaining why and how this
is a direct action" such that LL Funds would not need to
comply with Rule 23.1 and New York Business Corporation Law
§ 626 to establish its standing to sue. Doc. 44 at 10.
This Court gave all parties an opportunity to further brief
the issues framed by this Court.
response, LL Funds submitted an amended complaint alleging
that it purchased certificates in the Trust on December 17,
2009, and that it owned these certificates when
Defendants' alleged breaches of contract occurred. Doc.
45 at ¶¶ 10, 84. Like LL Funds' initial
complaint, the amended complaint states that LL Funds seeks
damages for the entire Trust. See, e.g., Doc. 45 at
¶ 3 ("LL Funds brings this action in the name of
the Trust for the 'common benefit of all
Certificateholders' affected by the actions of the
Defendants."); Doc. 45 at ¶ 72 ("Plaintiff
[meaning the Trust] and its Certificateholders who have
suffered and continue to suffer damages as a result of Wells
Fargo's breach of contract should be compensated.").
LL Funds also submitted a supplemental brief asserting that
its claims are direct under the test articulated in
Tooley v. Donaldson. Lufkin & Jenrette, Inc.,
845 A.2d 1031 (Del. 2004) (en banc).
Fargo responded by arguing that LL Funds cannot seek damages
for the entire Trust in a direct action. According to Wells
Fargo, allowing such a claim would permit LL Funds to obtain
the benefit of damages under Rules 23 and 23.1 without having
to meet the procedural requirements of those rules. Wells
Fargo asked this Court either to limit LL Funds' damages
claim to any damages incurred by LL Funds or to direct LL
Funds to amend its complaint to reflect such a limit. Saxon
seconded Wells Fargo's argument that LL Funds cannot seek
Trust-wide damages in a direct suit, but also claimed that LL
Funds' direct claim against it must fail for lack of a
contractual relationship. As for the standing issue, however,
Saxon conceded that LL Funds has alleged facts sufficient to
establish its standing at the pleading stage. This Court
addresses Saxon's contract argument first before turning
to the Defendants' arguments about damages.