W. & S. Life Ins. Co. v. Bank of New York Mellon ( 2019 )

[Cite as W. & S. Life Ins. Co. v. Bank of New York Mellon, 2019-Ohio-388.]
IN THE COURT OF APPEALS
FIRST APPELLATE DISTRICT OF OHIO
HAMILTON COUNTY, OHIO
THE WESTERN AND SOUTHERN : APPEAL NO. C-170476
LIFE INSURANCE COMPANY, TRIAL NO. A-1302490
:
WESTERN-SOUTHERN LIFE O P I N I O N.
ASSURANCE COMPANY,
:
COLUMBUS LIFE INSURANCE
COMPANY, :
INTEGRITY LIFE INSURANCE :
COMPANY,
NATIONAL INTEGRITY LIFE :
INSURANCE COMPANY,
:
and
:
FORT WASHINGTON INVESTMENT
ADVISORS, INC.,
:
Plaintiffs-Appellants,
:
vs.
:
THE BANK OF NEW YORK
MELLON, :
Defendant-Appellee.
:
Civil Appeal From: Hamilton County Court of Common Pleas
Judgment Appealed From Is: Affirmed
Date of Judgment Entry on Appeal: February 8, 2019
OHIO FIRST DISTRICT COURT OF APPEALS
Frost Brown Todd LLC, Matthew C. Blickensderfer, White, Getgey & Meyer Co.,
L.P.A., David P. Kamp, Jean Geoppinger McCoy, Wollmuth Maher & Deutsch LLP,
David H. Wollmuth and Steven S. Fitzgerald, for Plaintiffs-Appellants,
Keating, Muething & Klekamp, PLL, James E. Burke, Ice Miller LLP, John P.
Gilligan, Mayer Brown LLP, Matthew D. Ingber, Christopher J. Houpt and Michael
Martinez, for Defendant-Appellee.
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OHIO FIRST DISTRICT COURT OF APPEALS
Z AYAS , P RESIDING Judge.
{¶1} Countrywide Mortgage Loans, Park Granada Mortgage Loans, Park
Monaco Mortgage Loans, and Park Sienna Mortgage Loans (“Countrywide”) were
mortgagees that loaned money to homeowners and then pooled the mortgage loans
and sold them to a depositor, which would transfer them into trusts. These trusts
were created to facilitate residential mortgage backed securities (“RMBS”)
transactions with Countrywide as seller. The depositor then transferred them to
defendant-appellee Bank of New York Mellon (“BNYM”), which was the trustee. As
trustee, BNYM issued certificates that entitled investors, or certificateholders, to
income from the principal and mortgage payments collected by the master servicer,
which received loan payments from the borrowers and serviced the loans. In this
case, the mortgage servicer was a Countrywide affiliate, Countrywide Home Loan
Servicing LP. BNYM also held the mortgage documentation for the loans. These
mortgage files were supplied by Countrywide after the closing of the loans.
Ultimately, BNYM would distribute payments to certificateholders. Plaintiff-
appellants Western and Southern Life Insurance Company, Western-Southern Life
Assurance Company, Columbus Life Insurance Company, Integrity Life Insurance
Company, National Integrity Life Insurance Company, and Fort Washington
Investment Advisors, Inc., (“W&S”) purchased certificates representing bundles of
these mortgages with a face value of $538 million. The RMBS and the parties were
governed by a “Pooling Services Agreement” (“PSA”), which set out the rights and
obligations of the parties to the RMBS trusts.
{¶2} A substantial number of Countrywide’s homeowners defaulted on their
loans, and W&S estimated that it suffered losses of approximately $100 million.
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OHIO FIRST DISTRICT COURT OF APPEALS
W&S sued BNYM alleging that the losses resulted because BNYM had breached the
PSA.
{¶3} W&S argued that sections of the PSA obligated BNYM to force
Countrywide, as seller, to cure defects in mortgage loan files and to cure breaches in
representations and warranties made about the mortgage loans it was selling. If
Countrywide did not cure the defect, it was to repurchase the loan or replace it with a
different one. W&S argues that because BNYM did not enforce the provisions
requiring Countrywide to replace or repurchase loans, W&S ended up with trusts
that had more mortgages which defaulted. BNYM argued that, as trustee, its duties
were very limited and that it did not breach any of its duties under the PSA.
{¶4} After a bench trial, the court below found that BNYM did not breach
its obligations under the PSA and that W&S did not establish its claim for damages
for the breach-of-contract claims.
{¶5} W&S presents four assignment of error in this appeal. We note that
Section 10.03 of the PSA contains a clause in which the parties agreed to a New York
choice-of-law provision, so New York law governs the substantive issues of this
appeal. In addition, the appellate briefs refer to exhibit 148 as an exemplar for the
PSAs, but the trial court refers to exhibit 147 in its decision. While the exhibits are
substantively similar, this court will reference the PSA marked as exhibit 147, as that
is the one the trial court referenced in making its determinations.
{¶6} This court reviews the interpretation of a contract de novo. Ignazio v.
Clear Channel Broadcasting, Inc., 113 Ohio St.3d 276, 2007-Ohio-1947, 865 N.E.2d
18, ¶ 19. We determine the sufficiency of the evidence to support a judgment under
Eastley v. Volkman, 132 Ohio St.3d 328, 2012-Ohio-2179, 972 N.E.2d 517, ¶ 11. See
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OHIO FIRST DISTRICT COURT OF APPEALS
Lehigh Gas-Ohio L.L.C. v. Cincy Oil Queen City, L.L.C., 1st Dist. Hamilton No. C-
130127, 2014 -Ohio- 2799, ¶ 43-44.
I. DUTIES OF THE TRUSTEE
{¶7} Section 8.01 of the PSA divides the duties of the trustee into two parts,
before an event of default and after an event of default. What constitutes an event of
default is defined by section 7.01 and includes various situations in which the master
servicer fails to perform its duties. None of the events of default are triggered by the
seller, Countrywide.
{¶8} Prior to an event of default, the trustee’s duties are limited to those
specifically delineated by the PSA in section 8.01, which states that the trustee “shall
undertake to perform such duties and only such duties as are specifically set forth in
this Agreement.”
{¶9} After an event of default, the trustee’s duties become elevated, and it
“shall exercise such of the rights and powers vested in it * * * and use the same
degree of care and skill in their exercise as a prudent person would exercise or use
under the circumstances in the conduct of such person’s own affairs.”
{¶10} Unlike common law trusts where a trustee has a fiduciary duty to act
solely in the interests of the beneficiaries, an indenture trustee’s duty is strictly
defined and limited to the terms of the agreement. Royal Park Invest. SA/NV v.
HBSC, 109 F.Supp.3d 587, 597 (S.D.N.Y.2015). This is true regardless of whether the
trust is an indenture trust or a PSA. Id. An RBMS is a type of asset-backed security
(“ABS”). An ABS is a security whose value is derived from a specified pool of
underlying assets. Gearren v. McGraw-Hill Co., Inc., 690 F.Supp.2d 254, 273,
(S.D.N.Y.2010), fn. 2. Accordingly, in reviewing the issues before us, the
development of the law governing ABSs will serve as a framework for our analysis.
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{¶11} The Trust Indenture Act of 1939 (“TIA”), 15 U.S.C. 77aaa et seq., was
enacted after reports to Congress from the Securities and Exchange Commission
found that the “national public interest and the interest of investors” in notes, bonds,
and debentures were adversely affected when trustees were not protecting and
enforcing the rights and the interests of investors. 15 U.S.C. 77bbb(a). Congress
wanted to regulate certain types of ABSs in order to provide uniformity and to
protect the public and the interests of investors. AG Capital Funding Partners, L.P.
v. State Street Bank and Trust Co., 11 N.Y.3d 146, 156, 896 N.E.2d 61 (2008).
{¶12} Although the TIA does not apply to RMBSs, the history of the act and
the development of the law governing ABSs are germane to our analysis here. See
Retirement Bd. of the Policemen’s Annuity and Benefit Fund of the City of Chicago
v. Bank of N.Y. Mellon, 775 F.3d 154, 162 (2d Cir.2014).
{¶13} When the TIA was introduced in the United States Senate, it provided
for the mandatory inclusion of a provision requiring the trustee to perform its
predefault duties in a manner consistent with that which a “prudent man would
assume and perform.” See Elliot Assoc. v. Henry Schroder Bank and Trust Co., 838
F.2d 66, 70-71 (2d Cir.1988). The version of the TIA introduced in the House of
Representatives, however, “excluded the imposition of a pre-default ‘prudent man’
duty on the trustee.” Id. at 71. Instead, the version of the TIA passed states that an
“indenture * * * may provide that * * * the indenture trustee shall not be liable except
for the performance of such duties as are specifically set out in such indenture.” 15
U.S.C. 77ooo(a)(1); See Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d
Cir.1985).
{¶14} The express terms of the TIA and its legislative history dictate that no
implicit duties are imposed on the trustee predefault and, as long as a trustee fulfills
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OHIO FIRST DISTRICT COURT OF APPEALS
its obligations under the express terms of the indenture, no predefault duties are
owed to debt holders except to avoid conflicts of interests. See Elliot Assoc. at 71; AG
Capital Funding Partners, L.P., 11 N.Y.3d at 156-157, 896 N.E.2d 61.
{¶15} Under New York law, the predefault duties of a trustee are limited to
the duties imposed by the indenture, and the trustee resembles a party to a contract.
LNC Invest., Inc. v. First Fid. Bank, Natl. Assn., 935 F.Supp. 1333, 1346-1347
(S.D.N.Y.1996). “New York courts have imposed only two extra-contractual pre-
default duties on indenture trustees.” Id. at 1347. The first is that an indenture
trustee must avoid conflicts of interest. The second is that the trustee may be liable
in tort for not performing its basic nondiscretionary ministerial tasks. Id.{¶16} After an event of default, however, an indenture trustee’s obligations
become more like an ordinary fiduciary. The trustee must act prudently to secure the
repayment of the underlying obligation. Id. at 1347-1348.
{¶17} An indenture trustee is not subject to the ordinary trustee's duty of
undivided loyalty. Unlike the ordinary trustee, who has historic common-law duties
imposed beyond those in the trust agreement, an indenture trustee is more like a
stakeholder whose duties and obligations are exclusively defined by the terms of the
indenture agreement. Meckel, 758 F.2d at 815.
{¶18} The language of the provisions in the PSA before us mirrors the
language approved for other ABSs and it is against this background we consider the
duties of the trustee in this appeal.
II. PRIOR TO AN EVENT OF DEFAULT
{¶19} W&S’s first assignment of error is that the trial court erred when it
found that BNYM did not breach its duty to enforce Countrywide’s obligation to
repurchase the mortgage loans. W&S argues that the PSA obligated BNYM to require
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OHIO FIRST DISTRICT COURT OF APPEALS
Countrywide to substitute or replace the loans affected by the breaches of warranties
and representations or those missing mortgage file documents. W&S also argues that
BNYM breached its duties under the PSA because it had knowledge of warranty and
representation breaches and missing loan documents but did not notify the other
parties. W&S argues that BNYM should have provided notice to Countrywide so that
it could cure the defect, or substitute or repurchase the loan.
{¶20} W&S relies on two sections of the PSA, which require Countrywide, as
seller, to substitute loans or repurchase loans. Section 2.02 requires Countrywide to
cure defects in loans with missing mortgage documents by supplementing the
mortgage files with the documents. If the missing documents are not provided,
Countrywide must substitute the loans with new ones or repurchase the loans with
incomplete mortgage files. Section 2.03 requires Countrywide to substitute or
repurchase loans with breaches of representations, warranties, or covenants. These
warranties and representations were set out in schedules attached to the PSA and
warranted, among other things, that “[t]he origination, underwriting and collection
practices used by Countrywide with respect to each Mortgage Loan have been in all
respects legal, prudent and customary in the mortgage lending and servicing
business.”
{¶21} While the PSA clearly obligates Countrywide to substitute or
repurchase nonconforming loans, the PSA does not clearly assign any party the duty
to enforce Countrywide’s obligation. Accordingly, the PSA contains no delineated
obligation of the trustee to enforce remedies against the seller, Countrywide.
{¶22} W&S points to section 2.06 of the PSA as requiring the trustee not only
to hold the trust, but to also “exercise the Trusts’ right to enforce Countrywide’s
repurchase obligations.” That section states:
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OHIO FIRST DISTRICT COURT OF APPEALS
SECTION 2.06. Execution and Delivery of Certificates.
The Trustee acknowledges the transfer and assignment to it of the
Trust Fund and, concurrently with such transfer and assignment, has
executed and delivered to or upon the order of the Depositor, the
Certificates in authorized denominations evidencing directly or
indirectly the entire ownership of the Trust Fund. The Trustee agrees
to hold the Trust Fund and exercise the rights referred to above for
the benefit of all present and future Holders of the Certificates and to
perform the duties set forth in this Agreement, to the end that the
interests of the Holders of the Certificates may be adequately and
effectively protected.
(Emphasis added.) W&S argues that “the rights referred to above” are rights
acquired by the trustee in section 2 from the depositor.
a. Representations and Warranties
{¶23} Attached to the PSA are several schedules. Schedules II and III contain
warranties and representations which are incorporated into the PSA in section 2.03.
The schedule II warranties contain representations that Countrywide and its
affiliates are duly authorized as New York or Delaware corporations, that they are in
good standing, and that they have full corporate power to sell the loans, and to
execute the PSA. The schedule III warranties certify that the mortgage loans are not
delinquent, and are valid and enforceable first liens, that there are no delinquent tax
liens or mechanics’ liens, that improvements of the properties are covered by hazard
insurance and that “[t]he origination, underwriting and collection practices used by
Countrywide with respect to each Mortgage Loan have been in all respects legal,
prudent and customary in the mortgage lending and servicing business.”
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶24} Two sections of the PSA transfer the depositor’s right to require the
seller to repurchase or substitute loans with breaches of representations or
warranties.
SECTION 2.01. Conveyance of Mortgage Loans.
(b) Immediately upon the conveyance of the Mortgage Loans referred
to in clause (a), the Depositor sells, transfers, assigns, sets over and
otherwise conveys to the Trustee for the benefit of the
Certificateholders, without recourse, all the right, title and interest of
the Depositor in and to the Trust Fund together with the
Depositor's right to require each Seller to cure any breach of
a representation or warranty made herein by such Seller,
or to repurchase or substitute for any affected Mortgage
Loan in accordance herewith.
SECTION 2.04. Representations and Warranties of the
Depositor as to the Mortgage Loans.
The Depositor hereby assigns, transfers and conveys to the Trustee all
of its rights with respect to the Mortgage Loans including, without
limitation, the representations and warranties of each Seller
made pursuant to Section 2.03(a)(ii) hereof, together with all
rights of the Depositor to require each Seller to cure any
breach thereof or to repurchase or substitute for any
affected Mortgage Loan in accordance with this Agreement.
(Emphasis added.)
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶25} These provisions give BNYM the right to enforce the repurchase or
substitution of mortgage loans in the event of a breach of the warranties or
representations. W&S argues that they created an obligation that BNYM require
Countrywide to substitute or repurchase loans. However, that interpretation
contradicts the language of section 8.01(i) of the PSA, which explicitly provides that,
prior to an event of default, “the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Agreement, the Trustee shall not
be liable except for the performance of such duties and obligations as are specifically
set forth in this Agreement, no implied covenants or obligations shall be read into
this Agreement against the Trustee * * *.” (Emphasis added.) The PSA is a contract,
and when interpreting a contract, if any inconsistency exists between a general
provision and a specific provision, the specific provision applies. DeWitt v. DeWitt,
62 A.D.3d 744, 745, 879 N.Y.S.2d 516 (2009), citing Aguirre v. City of New York,
214 A.D.2d 692, 693, 625 N.Y.S.2d 597 (1995).
{¶26} The language “exercise the rights referred to above for the benefit of all
present and future Holders of the Certificates” and “to the end that the interests of
the Holders of the Certificates may be adequately and effectively protected,” does not
clearly set out the detail required to impose a duty on BNYM. If the trustee’s duties
included the obligation to require Countrywide to substitute or repurchase mortgage
loans, those duties would have had to have been specifically set forth in the PSA.
{¶27} We agree with the trial court’s interpretation of the language in section
2.06. The phrase that requires the trustee to “exercise the rights referred to above for
the benefit of all present and future Holders of the Certificates,” delineates that the
trustee holds the trust fund for the benefit of the investors rather than for the
trustee’s own benefit or the benefit of any other party to the PSA. This is also
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OHIO FIRST DISTRICT COURT OF APPEALS
consistent with New York laws that require indenture trustees to avoid conflicts of
interest. See LNC Invest., Inc., 935 F.Supp. at 1347.
{¶28} W&S relies on Royal Park Invest. SA/NV v. Deutsche Bank Natl.,
Trust Co., S.D.N.Y. No. 14-CV-4394, 2016 WL 439020 (Feb. 3, 2016), to support the
argument that BNYM had a duty to enforce repurchases of loans for breaches of
representations and warranties. The PSA in that case, however, provided “that the
Trustee ‘shall give notice of [] breach to the Originator and request the Originator to
substitute * * * or to repurchase’ loans if it ‘receives notice of a breach * * * of any of
the representations or warranties.' ” Id. at *4. In that case, the trustee was
specifically designated as the party to request substitution and repurchase.
{¶29} W&S also relies on section 2.03(c) of the PSA for its argument. Section
2.03(c) states:
Upon discovery by any of the parties hereto of a breach of a
representation or warranty with respect to a Mortgage Loan made
pursuant to Section 2.03(a) that materially and adversely affects the
interests of the Certificateholders in that Mortgage Loan, the party
discovering such breach shall give prompt notice thereof to the other
parties.
(Emphasis added.)
{¶30} W&S argues that BNYM knew that Countrywide had breached the
representations and warranties in the PSA and did not give prompt notice to the
other parties after discovering it. Its argument is that BNYM had knowledge of
breaches, that BNYM was required to give notice, and if Countrywide failed to cure
such breach, Countrywide was required to “repurchase the affected Mortgage Loan
or Mortgage Loans from the trustee at the purchase price.”
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶31} The evidence at trial showed that BNYM was sent letters and emails
notifying it that a large number of Countrywide’s loans were defaulting. Some of
these allegations were based on the poor performance of the loans, which
“evidenc[ed] breaches,” public information about the residential mortgage crisis, and
a settlement between Countrywide and several states’ Attorneys General. Exhibit 311.
None, however, informed BNYM of specific breaches of representations and
warranties related to a particular loan. Under New York law, general allegations are
insufficient to find that a trustee has violated a duty to notify the other parties to the
PSA. Breaches must be proven loan-by-loan and trust-by-trust, not just by general
allegations. Retirement Bd. of the Policeman’s Annuity and Benefit Fund of the City
of Chicago, 775 F.3d at 162. Under this provision of the PSA, a party only has a duty
to notify the other parties to the PSA if it has actual knowledge of a breach of a
representation or warranty with respect to an individual loan. See Royal Park
Invest. SA/NA v. HSBC Bank USA Natl. Assn., S.D.N.Y. Nos. 14-CV-08175, 14-CV-
09366, 14-CV-10101, 15-CV-02144, 15-CV-10032 and 15-CV-10096, 2017 WL
945099, *6 (Mar. 10, 2017); FHFA v. HSBC N. Am. Holdings, Inc., 33 F.Supp.3d
455, 477 (S.D.N.Y.2014). W&S’s failure to prove at trial that BNYM had any
knowledge of a specific breach of a representation or warranty related to any
particular loan in a trust was fatal to its claim. See Phoenix Light SF Ltd. v. BNYM,
S.D.N.Y. No. 14-CV-10104, 2017 WL 3973951, *8 (Sept. 7, 2017).
{¶32} As W&S was unable to establish that BNYM had knowledge of loan-
specific breaches, W&S attempted to establish the breaches by sampling. The trial
court found sampling to be an inappropriate method to establish representation and
warranty breaches. Its decision was supported by prevailing law, because W&S was
required to show specific loans, specific breaches, and whether or not the breaches
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OHIO FIRST DISTRICT COURT OF APPEALS
were material because “the cure and repurchase remedies * * * are themselves loan-
specific.” Royal Park Invest. SA/NA at *5-6 (court did not require the plaintiff to
allege loan-by-loan breaches for the motion to dismiss, but stated that, ultimately,
“to prevail on its claims Plaintiff must demonstrate such breach on a ‘loan-by-loan
and trust-by-trust’ basis.”). In addition, sampling does not “adequately distinguish
between breaches that are material and adverse as to a particular loan and those that
are not.” Id.b. Incomplete Mortgage Files
{¶33} W&S argues that BNYM was also obligated to enforce Countrywide’s
duty under section 2.01 to repurchase loans with missing documents. It bases its
argument on a prospectus (exhibit 2657), which listed the mortgage documents to be
provided to the trustee to hold, such as the original mortgage note, the original
instrument creating a first lien, an assignment in recordable form of the mortgage,
the original or a copy of the title policy and, if applicable, all recorded intervening
assignments and any riders or modifications. W&S refers to sections 36 and 43 of
schedule III-A, which warrants that mortgage loans were “accurately described in the
prospectus” arguably making this a claim for a breach of a representation or
warranty, but the parties have addressed it separately.
{¶34} W&S argues that BNYM had an obligation to make Countrywide
repurchase loans, not substitute them. The PSA, however, specifically states that the
loans are to be repurchased or substituted. The PSA leaves the decision to
Countrywide, and even specifies a preference for substitution. PSA section
2.01(c)(vi)(F) (“Countrywide * * * shall use its best reasonable efforts to effect a
substitution, rather than a repurchase * * *.”). Testimony at trial established that
mortgage servicers would not have replaced a performing loan because it had
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OHIO FIRST DISTRICT COURT OF APPEALS
missing documents. Other testimony at trial also showed that any incomplete
mortgage files would have been substituted with another, similar mortgage.
Evidence also showed that replacement loans were just as likely to default, and that
loans with complete mortgage files were just as likely to fail as loans with incomplete
files. There was no correlation between complete and incomplete mortgage files and
defaults. Therefore, even if BNYM could have forced Countrywide to replace the
loans, the evidence below showed that the certificateholders would not have been
“adequately and effectively protected” from the defaulting loans because it would not
have made a difference.
{¶35} W&S’s first assignment of error is overruled because the PSA did not
obligate BNYM to effectuate the substitution or repurchase of loans, and BNYM did
not have actual knowledge of a loan-specific breach of the representations and
warranties.
III. EVENT OF DEFAULT
{¶36} W&S’s second assignment of error is that the trial court erred when it
held that BNYM did not breach its duty to act prudently under section 8.01 of the
PSA. Section 8.01 states:
SECTION 8.01. Duties of Trustee.
The Trustee, prior to the occurrence of an Event of Default and after
the curing of all Events of Default that may have occurred, shall
undertake to perform such duties and only such duties as are
specifically set forth in this Agreement. In case an Event of
Default has occurred and remains uncured, the Trustee shall
exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their
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OHIO FIRST DISTRICT COURT OF APPEALS
exercise as a prudent person would exercise or use under
the circumstances in the conduct of such person's own
affairs.
(Emphasis added.)
{¶37} W&S argues that there was an event of default because the master
servicer, Countrywide Home Loans Servicing LP, was not providing complete
mortgage files. As an indenture trustee, under New York law, BNYM’s duties are
governed solely by the PSA. See Ellington Credit Fund, Ltd. v. Select Portfolio
Servicing, Inc., 837 F.Supp.2d 162, 191 (S.D.N.Y.2011). In addition, section 8.01(i)
provides that “unless an Event of Default known to the Trustee shall have occurred
and be continuing, the duties and obligations of the Trustee shall be determined
solely by the express terms of the Agreement * * *.” In an event of default, however,
the trustee’s duties become elevated to that of a prudent person under the
circumstances. W&S claims that BNYM was aware of an event of default and should
have investigated and acted to protect the certificateholders. An event of default by
the mortgage servicer is defined in section 7.01.
SECTION 7.01. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events:
ii) any failure by the Master Servicer to observe or perform in any
material respect any other of the covenants or agreements on the part
of the Master Servicer contained in this Agreement (except with
respect to a failure related to a Limited Exchange Act Reporting
Obligation), which failure materially affects the rights of
Certificateholders, that failure continues unremedied for a period of
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OHIO FIRST DISTRICT COURT OF APPEALS
60 days after the date on which written notice of such failure shall
have been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer and the Trustee by the Holders of
Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates; provided, however, that the sixty day
cure period shall not apply to the initial delivery of the Mortgage File
for Delay Delivery Mortgage Loans nor the failure to substitute or
repurchase in lieu of delivery.
(Emphasis added.)
{¶38} W&S argues that BNYM knew the master servicer was not providing
complete mortgage files and was not requiring Countrywide to substitute or
repurchase loans. W&S argues that “no additional notice to the Master Servicer or
opportunity to cure is required under section 7.01(ii)” because “the sixty-day cure
period does not apply to the initial delivery of the Mortgage File for Delay Delivery
Mortgage Loans nor the failure to substitute or repurchase in lieu of delivery.” That
interpretation ignores the plain language of section 7.01(ii), which waives the sixty-
day cure period but not the notice requirement.
{¶39} W&S also argues that BNYM should have sent the required notice to
the master servicer and should not be able to avoid its duty to act prudently because
of its failure to send notice to the master servicer. However, when a condition
precedent is required to trigger a duty to perform, a party’s nonperformance is
charged to the party when the party’s “active conduct” prevented or hindered the
fulfillment of the condition. Fixed Income Shares: Series M v. Citibank, N.A., 157
A.D.3d 541, 69 N.Y.S.3d 288 (2018). A party’s failure to send notice to cure to a
master servicer is not “active conduct”. See id. at 542. Accordingly, BNYM’s failure
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OHIO FIRST DISTRICT COURT OF APPEALS
to send notice to cure to the master servicer is not “active conduct,” and the record
does not show any active conduct by BNYM. Therefore, BNYM is not barred from
asserting that notice was not properly sent. Moreover, the “Holders of Certificates
evidencing not less than 25% of the Voting Rights” could have sent notice of the
servicer’s failure. In addition, W&S would impose on BNYM duties outside those
delegated by the express language of the PSA in section 7.01(ii) and 8.01. See
Argonaut Partnership L.P. v. Bankers Trustee Co. Ltd, S.D.N.Y. Nos. 96 CIV.1970
and 00 CIV.42344, 2001 WL 585519, *1 (May 30, 2001) (trustee was not responsible
for supervising the other parties and was not required to monitor them).
{¶40} Significantly, the evidence at trial also established that BNYM did not
receive notice of an event of default. Notice to a responsible officer of the trustee of
an event of default is required by the PSA before the trustee’s duty becomes that of a
prudent person under the circumstances. Section 8.02(viii) provides that “the
Trustee shall not be deemed to have knowledge of an Event of Default until a
Responsible Officer of the Trustee shall have received written notice thereof.” BNYM
had no duty to act as a prudent person until it was given written notice of the event of
default. See id. at *2; Commerce Bank v. Bank of New York Mellon, 141 A.D.3d 413,
35 N.Y.S.3d 63 (2016).
{¶41} W&S argues that BNYM had to act prudently whether or not there was
written notice of an event of default, because an event of default was known to the
trustee. However, an event of default is defined by the PSA and required written
notice to the master servicer. As written notice was never sent to the master servicer,
there was no event of default. In addition, BNYM’s duty was not elevated because it
was not sent the required notice to trigger it. W&S’s second assignment of error is
overruled.
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IV. DAMAGES
{¶42} W&S’s third assignment of error is that the trial court erred when it
held that W&S was not entitled to an award of substantial damages even if BNYM
breached the PSA.
{¶43} This is a breach-of-contract claim. Under New York law there must be
proof of (1) a contract; (2) performance by one party; (3) breach by the other party;
and (4) damages. First Investors Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 168
(2d Cir.1998).
{¶44} Our determination of the first and second assignments of error
established that BNYM did not breach its duties as set forth in the PSA because it
was not required to enforce Countrywide’s obligations to substitute or repurchase
loans. Failure to prove the essential element of damages is also fatal to a cause of
action for breach of contract. Fellion v. Darling, 14 A.D.3d, 904, 907, 789 N.Y.S.2d
541 (2005); First Investors Corp. at 162.
{¶45} The trial court found that W&S did not establish that it suffered
damages due to any breach of the contract. Specifically, “Plaintiffs presented no
evidence that document defects caused losses on any single loan.” The court also
based its decision on expert testimony which demonstrated that W&S’s other
investment securities experienced a 97 percent loss, which was roughly the same as
its 98 percent loss with Countrywide. In addition, W&S had experts testify as to its
damages based on repurchases of the defective loans, which was not favored or
required of Countrywide. The trial court’s determination that W&S did not establish
its claim for damages was supported by the evidence. We overrule the third
assignment of error.
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OHIO FIRST DISTRICT COURT OF APPEALS
V. STANDING FOR SOLD CERTIFICATES
{¶46} W&S’s fourth and final assignment of error is that the trial court erred
when it ruled that W&S lacked standing because it sold five certificates. New York
and Ohio laws are similar on this issue and both states have statutes that give the
purchaser or the transferee all rights or claims in the security. See New York General
Obligations Law 13-107(1); R.C. 1308.16.
{¶47} Under New York law, once a holder of certificates transfers them, it
loses standing to bring claims arising out of the certificates. FDIC v. Citibank, N.A.,
S.D.N.Y. Nos. 1:15-cv-6574, 1:15-cv-6560 and 1:15-cv-6570, 2016 WL 8737356, *5
(Sept. 30, 2016), citing Oklahoma Police Pension & Ret. Sys. v. U.S. Bank Natl.
Assn., 986 F.Supp.2d 412, 415 (S.D.N.Y.2013) (applying New York General
Obligations Law 13-107). Even if W&S had standing to bring these claims, our
determination of the first and second assignments of error would prevent them from
recovering on the five certificates. The fourth assignment of error is overruled.
VI. CONCLUSION
{¶48} We find that the PSA did not obligate BNYM to enforce Countrywide’s
duty to repurchase or substitute mortgages with breaches of warranties or missing
documents because, prior to an event of default, it did not have a specific duty set
forth in the PSA to do so. BNYM also did not fail to give notice to the other parties,
as it did not have actual knowledge of a loan-specific breach of a warranty or
representation. We also find that there was no event of default because notice was
not provided to the master servicer or to a responsible officer of BNYM, both of
which were required under the PSA. Because we find that BNYM did not breach the
PSA, W&S was not entitled to damages. In addition, W&S did not have standing to
pursue the claims for five of its previously-owned certificates, because it sold them
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OHIO FIRST DISTRICT COURT OF APPEALS
and transferred any rights to the new certificateholders. The judgment of the trial
court is affirmed.
Judgment affirmed.
HANDWORK, J., concurs.
DETERS, J., concurs in judgment only.
PETER M. HANDWORK, retired, from the Sixth Appellate District, sitting by assignment.
Please note:
This court has recorded its own entry on the date of the release of this opinion.
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