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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

August 8, 2016

GSAA HOME EQUITY TRUST 2006-2, BY AND THROUGH LL FUNDS LLC, Plaintiff,
v.
WELLS FARGO BANK, N.A., AND SAXON MORTGAGE SERVICES, INC., Defendants.

          OPINION AND ORDER DENYING MOTIONS TO DISMISS CONTRACT CLAIMS

          ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE

         Plaintiff 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.

         I. Facts

         The 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 ¶ 21.

         Section 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 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 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.

         LL 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.

         After 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.[1] 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.

         This 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.

         In 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).

         Wells 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.

         II. ...


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