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IKB International S.A. v. Wilmington Trust Co.

United States District Court, D. Delaware

May 14, 2018

WILMINGTON TRUST COMPANY, as Trustee and any predecessors or successors thereto; M&T BANK CORPORATION as successor by merger to the WILMINGTON TRUST COMPANY, as Trustee, and any predecessors or successors thereto, Defendants, and CWABS TRUST 2005-HYB9; et al., Nominal Defendants.


          John E. Jones III United States District Judge

         The case before us arises from the smoking rubble of the epic housing market collapse in the late 2000s. Plaintiffs, IKB International, S.A. (“IKB S.A.”) and IKB Deutsche Industriebank, A.G. (“IKB A.G.”), bring this action against Defendants Wilmington Trust Company (“Wilmington Trust”) and M&T Bank Corporation (“M&T”)[1] as successor by merger to Wilmington Trust, alleging breach of contract and bad faith. Plaintiffs also name fifteen Delaware statutory trusts as nominal defendants. Presently pending before the Court is Defendants' Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. 61). For the reasons that follow, we shall grant Defendants' Motion.


         We take the facts from Plaintiffs' Complaint and assume them to be true.

         This case proceeds against the backdrop of complex investment vehicles known as residential mortgage-backed securities (“securities”). The process of creating the securities begins with the prospective homebuyer obtaining a mortgage loan. (Compl. ¶ 38).[2] The lenders who originate these loans sell them in bulk to an affiliate of the bank typically known as a “sponsor.” (Id.). The sponsor creates an entity known as a “depositor” who transfers (or “deposits”) the pool of loans into a trust. (Id.). In this case, several trusts were created in Delaware pursuant to the Delaware Statutory Trust Act, 12 Del.C. §§ 3801, et seq. (Id.). The trusts are governed by trust agreements. A trustee known as the “owner trustee” acts on behalf of those who hold certificates to the trust. To service the mortgage loans held by the trust, the sponsor and depositor appoint one or more entities to act as “servicers.” (Id. at ¶ 42). The trust, referred to as the “issuer, ” issues securities, which are essentially bonds and pay a yield out of the cash flow received from the mortgage loans. The securities are issued pursuant to indenture agreements. An “indenture trustee” is appointed and acts on behalf of the noteholders, or the investors who purchase the securities. In addition to the trust and indenture agreements, several other agreements covering sales, servicing, and administration of the loans and trusts interlock and work together as “governing agreements, ” also referred to as the “basic documents.”

         In the case before us, IKB S.A. purchased thirty-two different securities issued by various trusts between 2005 and 2007. (Id. at ¶ 15). On November 20, 2008, IKB S.A. sold four of these securities to unnamed third parties and the remaining twenty-eight securities to IKB A.G. (Id. at ¶ 16). Two weeks later, IKB A.G. sold these securities to another company, Rio Debt Holdings (Ireland) Limited (“Rio”), which then, over the next few years, sold thirteen of the securities to other, unnamed third parties. (Id. at ¶ 17). On May 9, 2012, and on December 22, 2015, Rio assigned all claims arising from the fifteen securities it still owned back to IKB A.G. (Id. at ¶ 18). The total value of these fifteen securities when they were first purchased was $168 million. (Id. at ¶ 1).

         Plaintiffs allege that Defendants breached their contractual obligation to protect the trust estates by permitting other entities, namely the Sellers, Indenture Trustees, and Servicers, to breach their duties. The Sellers made representations and warranties regarding the quality of the loans transferred to the trusts. (Id. at ¶159). The loans, however, were substantially lower quality than represented. As a result of the misrepresentations, the delinquency rates experienced by the trusts ranged from an average of 24 percent to 31 percent between 2009 and 2011. (Id. at ¶ 96). The Indenture Trustees, meanwhile, failed to ensure that the loan files for the mortgage loans in the trust were complete. (Id. at ¶ 83). Consequently, the Indenture Trustees also failed to provide notice of defaults and demand that the Sellers cure defective mortgage loans. (Id. at ¶ 72). Finally, the Servicers frequently conducted the foreclosure process imprudently, often with self-dealing, which resulted in reduced realization from the foreclosure sales. (Id. at ¶ 89). As a result of the alleged failures, the trusts collectively lost a net value of over $2.3 billion. (Id. at ¶ 95).

         Plaintiffs claim that these failures of the Sellers, Indenture Trustees, and Servicers are equally failures of Wilmington Trust. Plaintiffs allege that Wilmington Trust, as Owner Trustee of the various trusts, had a duty to protect the trust estate and ensure that the Indenture Trustees and Servicers complied with their duties. (Id. at ¶ 98). Plaintiffs claim that Wilmington Trust knew of the dire state of the trusts and took no action. (Id. at ¶ 234). Furthermore, Plaintiffs allege that Wilmington Trust failed to give notices of defaults per the governing agreements. (Id. at ¶ 315-16).


         Plaintiffs originally initiated this action by filing a Complaint in the Supreme Court of New York on May 27, 2016. (Compl.). On June 24, 2016, Defendants timely removed the matter to the United States District Court for the Southern District of New York. (Doc. 1). On September 14, 2017, upon motion of Defendants to transfer venue, the case was transferred to the District of Delaware. (Doc. 35).

         Defendants filed the instant Motion to Dismiss, with supporting brief, on January 19, 2018. (Docs. 61, 62). Pursuant to a stipulated modified briefing schedule, Plaintiffs timely filed their answering brief on March 20, 2018. (Doc. 67). Defendants filed their reply brief on April 19, 2018. (Doc. 72). Having been fully briefed, the Motion is ripe for our review.


         In considering a motion to dismiss pursuant to Rule 12(b)(6), courts “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)). In resolving a motion to dismiss pursuant to Rule 12(b)(6), a court generally should consider only the allegations in the complaint, as well as “documents that are attached to or submitted with the complaint, . . . and any matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, [and] items appearing in the record of the case.” Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006).

         A Rule 12(b)(6) motion tests the sufficiency of the complaint against the pleading requirements of Rule 8(a). Rule 8(a)(2) requires that a complaint contain a short and plain statement of the claim showing that the pleader is entitled to relief, “in order to give the defendant fair notice of what the claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). While a complaint attacked by a Rule 12(b)(6) motion to dismiss need not contain detailed factual allegations, it must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level. . . .” Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d Cir. 2007) (quoting Twombly, 550 U.S. at 555). Accordingly, to satisfy the plausibility standard, the complaint must indicate that defendant's liability is more than “a sheer possibility.” Iqbal, 556 U.S. at 678. “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557).

         Under the two-pronged approach articulated in Twombly and later formalized in Iqbal, a district court must first identify all factual allegations that constitute nothing more than “legal conclusions” or “naked assertions.” Twombly, 550 U.S. at 555, 557. Such allegations are “not entitled to the assumption of truth” and must be disregarded for purposes of resolving a 12(b)(6) motion to dismiss. Iqbal, 556 U.S. at 679. Next, the district court must identify “the ‘nub' of the . . . complaint - the well-pleaded, nonconclusory factual allegation[s].” Id. Taking these allegations as true, the district judge must then determine whether the complaint states a plausible claim for relief. See id.

         However, “a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits.” Phillips, 515 F.3d at 231 (citing Twombly, 550 U.S. at 556-57). Rule 8 “does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.” Id. at 234.


         Plaintiffs' sprawling Complaint, consisting of 329 paragraphs across 106 pages, alleges four claims against Wilmington Trust: (1) that Wilmington Trust failed to enforce the obligations of the various parties under the governing agreements with respect to the mortgage loan files; (2) that Wilmington Trust was aware of breaches of representations and warranties by the Sellers and failed to provide notice of those breaches or demand that the breaches and defaults be cured; (3) that Wilmington Trust failed to protect investors with respect to breaches by the Servicers by not compelling the Indenture Trustees' obligation to enforce the trusts' rights; and (4) that Wilmington Trust acted in bad faith by failing to protect the trust estate and give notice of defaults. Plaintiffs refer to the first three claims in their single count for breach of contract. Plaintiffs' bad faith claim also incorporates the first three breaches.

         Wilmington Trust argues that it was not responsible for any of the duties Plaintiffs allege it breached. Wilmington Trust further argues that Plaintiffs have failed to specify an implied duty that Wilmington Trust breached in bad faith, and that the bad faith claim itself is duplicative of the breach of contract claim. Finally, Wilmington Trust suggests that three bars to litigation necessarily limit Plaintiffs' claims: (1) that IKB S.A. has no standing to assert claims, (2) that certain claims are barred by a contractual provision known as the “no action” clause, and (3) that certain claims are barred by the statute of limitations. We will begin with the three purported bars to litigation.

         A. Bars to Litigation

         1. Standing

         Wilmington Trust argues that IKB S.A. lacks standing to bring any claims because it sold all of its securities to IKB A.G. and other unnamed third parties. Wilmington Trust contends that the securities are governed by New York state law, and that under New York law, any claims related to the securities passed to the buyer upon their sale. Plaintiffs counter that the law of Luxembourg applies because the sale of IKB S.A.'s assets “would have occurred” in Luxembourg. (Doc. 67, p. 21). Plaintiffs further assert that, under Luxembourg law, claims accruing to a seller prior to the sale remain with the seller even after the sale.

         The securities here were issued pursuant to the indenture agreements, which all contain a choice of law provision stating that the agreements are governed by New York law. (Doc. 63-17). By including the choice of law provision, the parties clearly intended to avoid a conflict-of-laws analysis and apply New York law in determining parties' “obligations, rights and remedies.” See Ministers and Missionaries Ben. Bd. v. Snow, 45 N.E.3d 917, 918 (N.Y. 2015) (“where parties include a New York choice-of-law clause in a contract, such a provision demonstrates the parties' intent that courts not conduct a conflict-of-laws analysis”). Plaintiffs' claims here arise under the indenture agreements and the duties pursuant to those agreements that Plaintiffs allege were breached. By the express terms of the agreements, these claims are governed by the law of New York. To find otherwise would be to obliterate the choice-of-law provision and allow any noteholder to circumvent the express terms of the indenture agreements by selling its notes outside of New York. “In interpreting a contract under New York law, words and phrases . . . should be given their ...

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