Court Opinion

ID: 4546551
Source: CourtListenerOpinion
Date Created: 2020-07-07 17:00:46.856109+00
Date Added: 2024-06-11T12:51:04.549849
License: Public Domain

FILED
                                                                       United States Court of Appeals
                      UNITED STATES COURT OF APPEALS                           Tenth Circuit

                             FOR THE TENTH CIRCUIT                              July 7, 2020
                         _________________________________
                                                                          Christopher M. Wolpert
                                                                              Clerk of Court
 AMERICAN FIDELITY ASSURANCE
 COMPANY,

       Plaintiff - Appellant,
                                                             No. 18-6210
 v.                                                   (D.C. No. 5:11-CV-01284-D)
                                                             (W.D. Okla.)
 THE BANK OF NEW YORK MELLON,

       Defendant - Appellee.
                      _________________________________

                             ORDER AND JUDGMENT *
                         _________________________________

Before LUCERO, EBEL, and HARTZ, Circuit Judges.
                  _________________________________

      This is a dispute between American Fidelity Assurance Company (“American

Fidelity”), an investor in residential mortgage-backed securities (“RMBS”), and the

Bank of New York Mellon (“BNYM”), the trustee for those securities. American

Fidelity lost millions of dollars in the wake of the 2008 financial crisis, and it seeks

to hold BNYM accountable for those losses.

      BNYM’s duties as trustee were governed by a contract called a Pooling and

Service Agreement (“PSA”). American Fidelity sued BNYM in 2011, alleging

      *
         This order and judgment is not binding precedent, except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however, for
its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
                                            1
breach of contract, breach of fiduciary duty, and a violation of the Trust Indenture

Act. 1 BNYM moved for summary judgment and the district court granted that

motion. The district court concluded that the breach of contract and breach of

fiduciary duty claims both failed because American Fidelity had not shown an “Event

of Default” that was known to BNYM, as required under the PSA to trigger

additional contractual and fiduciary duties. The court also concluded that the Trust

Indenture Act does not apply to the certificates at issue. American Fidelity

challenges both of those rulings on appeal. Exercising jurisdiction under 28 U.S.C.

§ 1291, we AFFIRM.

                                 I.   BACKGROUND

      Between 2004 and 2009, American Fidelity purchased investment-grade

certificates in dozens of securitization trusts containing pools of residential mortgage

loans. Those residential mortgages were sold and serviced by non-party Countrywide

Financial Corporation and its subsidiaries. BNYM served as securitization trustee.

      1
         American Fidelity also brought a claim for negligence against BNYM. At
oral argument American Fidelity represented that it only challenges the district
court’s rulings as to its claims for breach of contract, breach of fiduciary duty, and a
violation of the Trust Indenture Act. Counsel for American Fidelity was asked:
“Let’s assume you don’t prevail on the Event of Default part, what are your
remaining, if any, claims? You have the Trust Indenture Act; do you have any other
claims?” Counsel responded, “No.” Therefore, we restrict our discussion to whether
American Fidelity has shown an Event of Default known to BNYM, and whether the
Trust Indenture Act applies to the certificates at issue. See Towerridge, Inc. v.
T.A.O., Inc., 111 F.3d 758, 769 (10th Cir. 1997) (“Though statements in briefs or
during oral argument are not necessarily binding admissions, we may consider them
as such at our discretion.”).

                                           2
      Securitization enables lenders to turn mortgage loans into cash. The process

generally involves four entities: Seller, Depositor, Master Servicer, and Trustee. The

process begins when the Seller aggregates and sells a portfolio of mortgage loans to

the Depositor. The Depositor then sells the mortgages to a trust. The trust pays for

the mortgages by issuing certificates of beneficial ownership, which the Depositor

then sells to investors. The certificates entitle holders, like American Fidelity, to a

share of interest and principal payments from the mortgage borrowers. The Master

Servicer is responsible, in part, for collecting principal and interest payments from

borrowers, transferring collected funds to the Trustee, and foreclosing on properties

with defaulted loans. The Trustee performs specified functions in administering the

trusts and is responsible for delivering funds to certificateholders.

      The certificates are governed by Pooling and Service Agreements (“PSAs”)—

detailed contracts involved in creating and managing the certificates and underlying

loans. Under the PSA, the Trustee has certain baseline, generally ministerial,

obligations. The Trustee incurs additional obligations if an Event of Default occurs

and is known to the Trustee. Although six events can qualify as an Event of Default

under the PSA, American Fidelity only invokes the Event of Default that occurs

when (1) the Master Servicer fails to perform under the PSA, (2) that failure

materially affects the rights of certificateholders, (3) the Master Servicer receives

                                            3
notice of its failure, and (4) the Master Servicer does not cure that failure within 60

days. 2

          If an Event of Default occurs and is known to the Trustee, then the Trustee

incurs a duty of care and must satisfy additional obligations under the PSA. Under

§ 8.02(viii) of the PSA, “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 . . . .” (Aplt. App. 606).

                                      II.   DISCUSSION

          “We review a district court’s grant of summary judgment de novo, using the

same standard applied by the district court pursuant to Fed. R. Civ. P. 56(a).” Cillo

v. City of Greenwood Vill., 739 F.3d 451, 461 (10th Cir. 2013). Summary judgment

must be granted “if the movant shows that there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ.

P. 56(a). When applying this standard, “we view the evidence and draw reasonable

          2
              Section 7.01(ii) of the PSA states:

          [A]ny 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 . . . which failure
          materially affects the rights of Certificateholders, that failure continues
          unremedied for a period of 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 . . . .

(Aplt. App. 601).

                                                    4
inferences therefrom in the light most favorable to the nonmoving party.” T.D. v.

Patton, 868 F.3d 1209, 1219 (10th Cir. 2017). On issues for which the nonmovant

bears the burden of proof at trial, the nonmovant “must go beyond the pleadings and

designate specific facts so as to make a showing sufficient to establish the existence

of an element essential to its case in order to survive summary judgment.” Mountain

Highlands, LLC v. Hendricks, 616 F.3d 1167, 1170 (10th Cir. 2010) (internal

quotation marks and alterations omitted). “Failure of proof of an essential element

renders all other facts immaterial.” Id. (internal quotation marks and alterations

omitted).

A. Breach of Contract and Breach of Fiduciary Duty

      In support of its claims for both breach of contract and breach of fiduciary

duty, American Fidelity argues that BNYM’s additional duties under the PSA were

triggered by an Event of Default that was known to BNYM. As described above, a

trustee is only deemed to have knowledge of an Event of Default if the trustee

receives “written notice thereof.” (Aplt. App. 606).

      American Fidelity has not shown that BNYM received written notice of an

Event of Default. In arguing that BNYM did receive written notice of an Event of

Default, American Fidelity cites only one letter. The letter, dated October 18, 2010,

was sent by a group of certificateholders, via the law firm Gibbs & Bruns LLP, to

BNYM and the Countrywide subsidiary serving as Master Servicer for a group of

                                           5
trusts (the “Gibbs & Bruns Letter”). 3 The Gibbs & Bruns Letter served as a

notification that Countrywide was failing to perform its duties as Master Servicer,

and that those failures were materially affecting the rights of certificateholders. The

letter cautioned that if the failures remained uncured after 60 days, the failures would

ripen into Events of Default. In other words, no Event of Default had yet occurred,

and therefore the Gibbs & Bruns Letter could not have provided written notice to

BNYM of an Event of Default.

        Absent written notice to BNYM of an Event of Default, nothing triggered

BNYM’s heightened contractual and fiduciary duties under the PSA, upon which

American Fidelity seeks to rely. Therefore, the district court correctly concluded that

BNYM is entitled to summary judgment on American Fidelity’s breach of contract

and breach of fiduciary duty claims.

B. Trust Indenture Act

        American Fidelity also brought a claim against BNYM under the Trust

Indenture Act (“TIA”). However, the TIA exempts some investments from its scope,

including “any certificate of interest of participation in two or more securities having

substantially different rights and privileges.” 15 U.S.C. § 77ddd(a)(2). The district

court, citing Retirement Board of the Policemen’s Annuity and Benefit Fund of the

City of Chicago v. Bank of New York Mellon, 775 F.3d 154 (2d Cir. 2014) for its

        3
            The Gibbs & Bruns Letter only concerned two of the 21 trusts at issue in this
case.
                                              6
well-reasoned analysis, concluded that the RMBS certificates at issue here fall within

that exemption. We agree.

      In Retirement Board, the Second Circuit noted that the certificates at issue had

“different obligors, payment terms, maturity dates, interest rates, and collateral.” 775
F.3d at 169. The court therefore concluded that the certificates qualified under the

TIA’s exemption for securities “having substantially different rights and privileges.”

§ 77ddd(a)(2). The district court reasoned that the certificates in this case are

virtually identical to those at issue in Retirement Board, and the court therefore chose

to follow the rationale set forth in Retirement Board. 4 We agree and we affirm the

district court’s conclusion that BNYM is entitled to summary judgment because the

TIA does not apply to the certificates at issue here.

      4
        American Fidelity argues that the Second Circuit’s holding in Retirement
Board was in error because in Reves v. Ernst & Young, 494 U.S. 56 (1990), the
Supreme Court held that mortgage loans were not securities under either the 1933 or
1934 Securities Acts. BNYM responds that the Reves holding was not categorical;
the Court there simply concluded that mortgage notes typically should not be
regarded as securities under the Exchange Act or the Securities Act. We agree with
the Second Circuit that “while it might be incongruous to apply the registration
provisions of the Securities Act or the anti-fraud provisions of the Exchange Act to
residential mortgages, there is nothing odd about classifying residential mortgages
under [the] TIA.” Retirement Board, 775 F.3d at 169.
                                            7
                         III.   CONCLUSION

     We AFFIRM the district court’s order granting BNYM’s Motion for Summary

Judgment.

                                     Entered for the Court

                                     David M. Ebel
                                     Circuit Judge

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