UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

BANKERS INSURANCE COMPANY, et al.,

Plaintiffs,

v. Case No.: 8:10-CV-0419-T-27EAJ

DLJ MORTGAGE CAPITAL, INC., et al.,

Defendants.

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REPORT AND RECOMMENDATION

Before the court is Defendant The Bank of New York Mellon’s Motion to Dismiss the

Amended Verified Certificateholder Derivative Complaint (Dkt. 39) and Plaintiffs’ Response

(Dkt. 42). As stated subsequently, the motion should be granted in part and denied in part. 1

Procedural Background

In May2010, Plaintiffs filed amended claims against Defendants DLJ Mortgage Capital, Inc.

(“DLJ”), Select Portfolio Servicing, Inc. (“SLS”), and The Bank of New York Mellon (“BNYM”)

(Dkt. 15). Adopting myreport and recommendation, the District Judge dismissed those claims (Dkt.

28, 34). Plaintiffs subsequently filed a four-count verified derivative complaint (Dkt. 36), invoking

this court’s diversity jurisdiction and bringing claims against BNYM for breach of contract and

breach of fiduciary duty. This is the third complaint filed by Plaintiffs in this action. 2 3

The District Judge referred the motion to the undersigned for the issuance of a report and 1

recommendation (Dkt. 41).

Although the complaint names DLJ and SLS as Defendants, BNYM is the only Defendant 2

named in the four counts. The District Judge gave Plaintiffs 150 days from November 22, 2010 to

amend their claims against SPS and DLJ (Dkt. 34 at 1).

 Plaintiffs’ first amended complaint was “corrected” twice (Dkt. 11-12, 15).

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Plaintiffs’ Allegations

DLJ purchased residential real estate mortgages which it later sold to Credit Suisse First

Boston Mortgage Securities Corp. (“CSFB Mortgage”) (Id. ¶ 11). In 2002, CSFB Mortgage issued

a series of certificates (“the Certificates”) collateralized by the mortgages (Id.).

CSFB Mortgage marketed the Certificates by: 1) creating trusts to hold the Certificates for

the benefit of the certificateholders, with Bank One as the Trustee and JP Morgan as the Trust

Administrator; 2) obtainingmortgage guarantyinsurance from Triad GuarantyInsurance Corporation

(“Triad”) for the benefit of the trusts; and 3) entering into pooling and servicing agreements

(collectively “the PSAs”) with DLJ, Bank One, and JP Morgan (Id. ¶ 14). In the PSAs, DLJ

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warranted that: 1) the mortgage loans were not delinquent or in default; 2) neither the seller nor the

mortgager had committed fraud, error, omission, misrepresentation, or negligence; and 3) it would,

upon discovering any breach materially and adverselyaffecting the certificateholders’ interests, cure

the breach or supply a substitute mortgage loan (Id. ¶ 22).

In 2004, Plaintiffs purchased tranches of the Certificates (Id. ¶ 10). In 2006, pursuant to a

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merger and subsequent acquisition, BNYM became the Trustee and Trust Administrator for the

trusts (Id. ¶¶ 15, 16). BNYM subsequently failed to notify Moody’s or Standard & Poor’s that: 1)

there were numerous loan delinquencies and defaults in the pool; 2) SPS had not enforced its rights

Copies of the PSAs are attached to the complaint (Dkt. 36 Ex. 6-11). For purposes of this 4

report and recommendation, the PSAs are practically identical. Section 12.03 of the PSAs

(“Governing Law”) provides that the agreement shall be governed by New York substantive law. 

The parties have not suggested that the law of any other jurisdiction is relevant to the issues

presented in the motion to dismiss. 

A tranche is “[a] bond issue derived from a pooling of similar debt obligations” which 5

“usually differs from other issues by maturity date or rate of return.” Black’s Law Dictionary 1535

(8th ed. 2004).

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under the PSAs against DLJ to prevent the impairment of the collateral and its diminution in value;

3) Triad had declined to cover many of the mortgages in the pool due in part to their procurement

through fraud; and 4) neither BNYM nor SPS had sought to enforce its rights against Triad for

denying insurance coverage (Id. ¶ 44). Had BNYM satisfied this duty, the Certificates would have

been downgraded and the certificateholders would have sold their Certificates before their value

further decreased (Id. ¶ 49). Moreover, BNYM failed to provide complete and accurate monthly

statements to the certificateholders, as required by the PSAs, impeding the collection of principal

and interest payments due on the mortgages (Id. ¶¶ 27, 41, 54-55).

Analysis

Plaintiffs claim that BNYM breached the PSAs and breached its fiduciary duty as Trustee

and Trust Administrator. BNYM argues that Plaintiffs’ claims should be dismissed pursuant to Fed.

R. Civ. P. 12(b)(6).

When considering a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a court must accept

the allegations in the complaint as true and construe them in a light most favorable to the plaintiff. 

Kirby v. Siegelman, 195 F.3d 1285, 1289 (11th Cir. 1999) (citation omitted). To survive a motion

to dismiss a plaintiff’s complaint must include “enough facts to state a claim to reliefthat is plausible

on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Dismissal of a complaint is

warranted if, assuming the truth of the factual allegations of the plaintiff’s complaint, there is a

dispositive legal issue which precludes relief. Neitzke v. Williams, 490 U.S. 319, 326 (1989).

I. The “No-Action” Clause Does Not Bar Plaintiffs’ Claims Against BNYM

BNYM contends that Plaintiffs’ claims should be dismissed for failure to comply with

Section 12.07 of the PSAs, which provides that a certificateholder may not bring suit under the PSAs

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unless:

1) the certificateholder provided written notice of an “Event of Default,” and the

continuance thereof, to the trust administrator;

2) certificateholders holding at least twenty-five percent of the voting rights

evidenced bytheCertificates requested, in writing, that the trust administrator

institute suit in its own name;

3) the certificateholders offered the trust administrator “reasonable indemnity”

against the costs, expenses, and liabilities of suit; and

4) the trust administrator did not institute suit within sixty days of receiving

notice.

(Dkt. 36 Ex. 8 § 12.07).

“‘[N]o-action’ clauses,” such as Section 12.07, “typically bar bondholders from instituting

any judicial proceedings against the obligor unless the indenture trustee refuses to act after being

instructed by the requisite number of bondholders specified in the trust indenture, or, if the indenture

trustee acts in bad faith, or, has an adverse interest conflicting with its responsibilities under the trust

indenture.” Murray v. U.S. Bank Trust Nat’l Ass’n, 365 F.3d 1284, 1289 n.9 (11th Cir. 2004)

(citations omitted). Such clauses are generally upheld “in order to avoid a multiplicity of lawsuits

and to ensure that any litigation will inure for the equal and ratable benefit of all bondholders.” Id.

(citation omitted).

BNYM concedes that Plaintiffs should be excused from demanding that BNYM institute an

action against itself, but maintains that Plaintiffs should nonetheless be required to satisfy Section

12.07’s remaining prerequisites for a suit under the PSAs (Dkt. 39 at 3).6

The parties dispute whether the court resolved this issue when it dismissed the prior 6

complaint. In my report and recommendation, I found that Section 12.07 barred Plaintiffs’ claims

against DLJ and SPS (Dkt. 28 at 3-6). In recommending dismissal of Plaintiffs’ claims against

BNYM for failure to comply with Fed. R. Civ. P. 23.1 (Id. at 6-8), I did not determine whether

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The parties dispute whether this issue was resolved in Sterling Federal Bank, F.S.B. v. DLJ

Mortgage Capital, Inc., No. 09 C 6904, 2010 WL 3324705 (N.D. Ill. Aug. 20, 2010). There, a

purchaser of certificates from the same series (2002-22) as some of the Certificates at issue in this

matter brought suit against BNYM and others for beach of a pooling and servicing agreement that

included a no-action clause identical to Section 12.07 of the PSAs. Id. at *1-3 & n.1.

BNYM conceded that the plaintiff was excused from demanding that BNYM sue itself, but

maintained it was not excused from complying with the no-action clause’s other requirements. Id.

at *4. Noting BNYM’s failure to cite authorities “that support parsing the no-actions clause’s

requirements in this fashion,” the court observed that BNYM relied upon authorities impliedly

rejecting that approach. Id. (citing Peak Partners, LP v. Republic Bank, 191 F. App’x 118, 126 n.11

(3d Cir. 2006) (unpublished); Cruden v. Bank of N.Y., 957 F.2d 961, 968 (2d Cir. 1992)). 

Therefore, the court excused compliance with the no-action clause as to the plaintiff’s claims against

BNYM. Id.

BNYM argues that the Sterling court “merely noted that [BNYM’s] briefing did not provide

authorities supporting the enforcement of certain provisions of a contract when one provision is

deemed invalid” (Dkt. 39 at 4). BNYM further maintains that Cruden and Peak Partners “offer no

substantive guidance” because they did not address the enforcement of provisions other than the

demand requirement (Dkt. 39 at 4 n.5).

Like Section 12.07, the no-action clause at issue in Cruden barred suit by a debenture holder

unless the holder provided written notice of default to the trustee, and holders of at least 25% of the

aggregate principal amount of the debenture asked the trustee to institute suit and agreed to

Section 12.07 barred Plaintiffs’ claims against BNYM.

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indemnify the trustee for costs. 957 F.2d at 967-68. The Second Circuit agreed with the district

court that the no-action clause did not apply to suits against the trustees “as it would be absurd to ask

[a trustee] to sue itself.” Id. at 968. Relying on Cruden, the Third Circuit reached the same

conclusion in Peak Partners, finding the plaintiff was “not required to comply with the no-action

clause with regard to its suit against [the trustee] because it would have required [the trustee], in

effect, to sue itself.” 191 F. App’x at 126 n.11 (citation and internal quotation marks omitted). 

In addition to emphasizing the absurdity of asking a trustee to sue itself, both the Cruden and

Peak Partners courts clearly excused the remaining pre-suit requirements in the no-action clauses at

issue. Although neither court explicitly held that waiver of a demand requirement excuses

compliance with the remaining provisions of a no-action clause, the undersigned agrees with the

Sterling court that they impliedly did so. Thus, any alleged failure to comply with the no-action

clause is not fatal to Plaintiffs’ claims.

BNYM next submits that the demand requirement should be severed from Section 12.07

pursuant to Section 12.06, which provides that invalid terms of the PSAs are severable from, and in

no way affect the validity or enforceability of, the remaining terms (Dkt. 36 Ex. 8 § 12.06). Neither

Cruden, Peak Partners, nor Sterling addressed the impact of a severability provision on a no-action

clause’s demand requirement where suit is brought against a trustee. However, the purpose behind

Section 12.07 confirms that it is wholly inapplicable to Plaintiffs’ claims against BNYM.

First, Section 12.07 is clearly designed to afford the trustee, not the certificateholders, an

opportunity to assess whether or not to bring suit. Second, the requirement that certificateholders

holding at least 25% of the voting rights in the Certificates offer the trustee “reasonable indemnity

... against the costs, expenses, and liabilities to be incurred” is inconsistent with a suit by

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certificateholders against the trustee. Third, although Section 12.07 requires that certificateholders

holding at least 25% of the voting rights in the Certificates make a written request for the trustee to

bring suit, it does not preclude suit by a certificateholder holding less than 25% of the voting rights

in the Certificates should the trustee decline to bring suit. Finally, providing the trustee written

notice of an Event of Default on its own part as a prerequisite for suit would not promote Section

12.07’s express purpose to prevent a minority of certificateholders from disturbing or prejudicing

the rights of other certificateholders. Because Section 12.07 is inapplicable to Plaintiffs’ claims

against BNYM, the severability of the demand requirement is a non-issue. Consequently, Plaintiffs’

claims are not barred by any failure to satisfy Section 12.07’s requirements.

II. Count III Does Not State a Claim for Breach of Contract

In Count III, Plaintiffs claim that BNYM, as Trustee, breached Section 9.01 of the PSAs by

failing to examine information that it received from the Trust Administrator pursuant to Section 4.04

(Dkt. 36 ¶ 91). However, Plaintiffs also allege that BNYM was both the Trustee and the Trust 7

Administrator and that the duties of these roles “effectively merged by virtue of a single corporate

entity being responsible for serving in both important roles” (Id. ¶ 17). Emphasizing this allegation,

BNYM argues that Plaintiffs have failed to state a plausible claim that BNYM breached Section 9.01

by failing to review information it “received” from itself.

Plaintiffs respond that the allegation “was simply to demonstrate that [BNYM] is the same

Section 9.01 provides that “[t]he Trustee, upon receipt of all resolutions, certificates, 7

statements, opinions, reports, documents, orders or other instruments furnished to the Trustee that

are specifically required to be furnished pursuant to any provision of this Agreement shall examine

them to determine whether they conform to the requirements of this Agreement” (Dkt. 36 Ex. 7 §

9.01). Section 4.04 requires the Trust Administrator to prepare monthly statements with specific

information and provide them to the Trustee (Id. § 4.04).

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entity performing all the functions of the Trustee and Trust Administrator and that it would be futile

for [Plaintiffs] to make a demand on BNYM to sue BNYM in either of its capacities” (Dkt. 42 at 8-

9). Plaintiffs maintain there is a factual issue as to whether BNYM has separate departments

corresponding to each role, which were required to exchange information under Section 9.01.

As neither party supports its argument with citation to pertinent legal authority, and given 8

Plaintiffs’ allegation that BNYM’s duties under both roles “effectively merged by virtue of a single

corporate entity being responsible for serving in both important roles” (Dkt. 36 ¶ 17), the court

agrees with BNYM that the complaint, on its face, does not state a plausible claim that BNYM failed

to examine information that it “received” from itself. Thus, Count IIIshould be dismissed for failure

to state a claim.

III. Count IV States a Claim Under New York Common Law

In Count IV, Plaintiffs allege that BNYM had a duty to provide the certificateholders with

monthly statements incorporating information enumerated in Exhibit U to the PSAs. This

information includes “the number and principal amount of claims submitted under the Mortgage

Guaranty Insurance Policy, as applicable” (Dkt. 36 Ex. 8 Ex. U). Plaintiffs maintain that BNYM

failed to seek information from SPS regarding the number and status of Triad insurance claims (Dkt.

36 ¶¶ 101-03). 

Although Plaintiffs style their claim as a breach of a “fiduciary” duty, Plaintiffs concede that

Count IV is based on BNYM’s duty to perform basic, non-discretionary, ministerial tasks, as

required by New York common law (Dkt. 42 at 10). See Peak Partners, 191 F. App’x at 122. That

BNYM cites authority for the general proposition that a claim must be plausible. Plaintiffs 8

cite no legal authority whatsoever.

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duty, however, is not a “fiduciary” duty. See AG Capital Funding Partners, L.P. v. State St. Bank

& Trust Co., 866 N.Y.S.2d 578, 584 (N.Y. 2008). 

BNYM submits that Count IV should be dismissed “to the extent [it] is styled as a breach of

a fiduciary duty” (Dkt. 39 at 8-9). Plaintiffs ask the court to “disregard the label and focus on the

substance of the claim” (Dkt. 42 at 10). So long as Count IV states a claim under New York

common law, it should not be dismissed for failure to state a claim for breach of a fiduciary duty. 

See Brooks v. Blue Cross & Blue Shield of Fla., 116 F.3d 1364, 1369 (11th Cir. 1997) (“A

complaint may not be dismissed because the plaintiff’s claims do not support the legal theory he

relies upon since the court must determine if the allegations provide for relief on any possible

theory.”) (citation omitted).

BNYM further argues that, even if treated as a claim for failure to perform basic, nondiscretionary, ministerial tasks, Count IV should be dismissed because any duty to perform such

tasks is circumscribed by the PSAs. See Peak Partners, 191 F. App’x at 125 (recognizing that the

duty to perform basic administrative obligations under New York law “can be limited by the

provisions of the Indenture”). BNYM relies on Section 10.02(a)(v), which relieves the Trust

Administrator from investigating facts or matters unless requested to do so by certificateholders

holding more than 50% of the voting rights in the Certificates (Dkt. 36 Ex. 7 § 10.02(a)(v)). As

Plaintiffs point out, Section 10.02(a)(v) does not relieve the Trustee of any duties, and applies to the

Trust Administrator “[e]xcept as otherwise provided in Section 10.01” (Id. § 10.02(a)). Section

10.01, in turn, requires the Trust Administrator to examine all documents furnished to it pursuant

to the PSAs and determine whether they conform to the requirements of the PSAs (Id. § 10.01). 

Whether BNYM’s duty, as Trust Administrator, to perform basic, non-discretionary, ministerial

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tasks required it to seek information from SPS regarding the number and status of Triad insurance

claims, and whether any such requirement is governed by Section 10.01 or Section 10.02(a)(v), is

beyond the scope of a motion to dismiss. Moreover, BNYM has not argued that the PSAs

circumscribe its common law duties as Trustee. Consequently, Count IV should not be dismissed.

IV. Plaintiffs Have Sufficiently Pleaded Damages Caused By BNYM’s Conduct

Plaintiffs allege that BNYM’s failure to provide complete information to ratings agencies

prevented earlier downgrades of the Certificates that would have alerted the certificateholders to

problems with the mortgages (Dkt. 36 ¶¶ 51, 75, 84). Plaintiffs contend that such downgrades would

have prompted them to sell their Certificates before their value further decreased or to make earlier

demands on BNYM, thus preserving the trust assets (Id. ¶¶ 49, 76, 84, 93, 109). Plaintiffs further

allege that full and timely disclosures to the ratings agencies and the certificateholders would have

caused improved collection of principal and interest on the mortgage loans and prevented the

principal amounts of various classes of bonds from being “wiped out” (Id. ¶¶ 51, 55, 77-78, 81-82,

85-86, 94-95, 110-11).

BNYM submits that Plaintiffs’ alleged damages were caused by “the performance of the loan

pool and the supposed actions or inactions of other parties, which has nothing to do with [BNYM’s]

obligations as Trust Administrator” (Dkt. 39 at 10). Although Plaintiffs’ damages ultimately

stemmed from problems in the mortgage pool, Plaintiffs plausibly state that BNYM’s failure to

provide information to ratings agencies and the certificateholders impeded Plaintiffs’ ability to

mitigate those damages. Therefore, Plaintiffs’ complaint should not be dismissed for failure to

allege a causal link between BNYM’s actions and Plaintiffs’ damages.

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Conclusion

Plaintiffs’ claims against BNYM are not barred by the no-action clause in the PSAs. 

Moreover, Plaintiffs have sufficiently pleaded that they were harmed byBNYM’s failure to provide

information to ratings agencies and the certificateholders, and that BNYM breached its duty to

perform basic, non-discretionary, ministerial tasks, as required by New York common law. 

However, Count III should be dismissed as Plaintiffs’ claim that BNYM breached the PSAs by

failing to review information it “received” from itself is not plausible given the allegations in the

complaint.

Accordingly and upon consideration, it is RECOMMENDED that:

(1) Defendant The Bank of New York Mellon’s Motion to Dismiss the Amended

Verified Certificateholder Derivative Complaint (Dkt. 39) be GRANTED IN PART

AND DENIED IN PART.

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Date: March 17, 2011

 

 

BNYM contends that Plaintiffs’ complaint should be dismissed with prejudice “[b]ecause 9

Plaintiffs now have received five opportunities to plead their case properly” (Dkt. 39 at 11). 

Plaintiffs’ response consists of a mere request that any dismissal be without prejudice and with leave

to amend (Dkt. 42 at 1, 13). Whether Plaintiffs should be permitted to amend their complaint is an

issue better resolved by the District Judge, as the issue has not been fully argued at this time.

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NOTICE TO PARTIES

Failure to file written objections to the proposed findings and recommendations contained

in this report within fourteen (14) days from the date of this service shall bar an aggrieved party from

attacking the factual findings on appeal. See 28 U.S.C. § 636(b)(1).

Copies to:

Counsel of Record

District Judge

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