JOHN Z. LEE, District Judge.
Pursuant to Rules 12(c) and 12(f) of the Federal Rules of Civil Procedure, LaSalle Commercial Mortgage Securities, Inc., Series 2006-MF4 Trust (the "Trust"), acting by and through its Master and Special Servicer, Midland Loan Services ("Midland"), a division of PNC Bank National Association (collectively, "Plaintiff"), moves this Court for judgment on the pleadings on certain affirmative defenses pled by Bank of America, National Association ("Defendant") in its September 23, 2014 Answer to Plaintiff's Second Amended Complaint, ECF No. 202 (the "Answer")
On the same date that Defendant filed its Answer to the operative complaint in this action, Defendant also filed its third motion seeking discovery from Spring Hill Capital Partners, LLC ("Spring Hill"), an investor in the certificates issued by the Trust. Defendant's first two attempts to seek judicial intervention in compelling discovery from Spring Hill were not successful. What seems plain from both the face of the Answer and the same-day filing of Defendant's Answer and its third discovery motion directed to Spring Hill is that the Answer has been saddled with meritless affirmative defenses that gratuitously invoke Spring Hill's name as a pretext to try again to obtain non-party discovery from Spring Hill. Defendant's assertion of meritless affirmative defenses in aid of its discovery tactics borders on vexatious.
The affirmative defenses in the Answer pertaining to Spring Hill fail as a matter of law:
First, the affirmative defense based on the "contemporaneous ownership rule" applies to shareholder derivative lawsuits. It has nothing to do with this action brought directly on behalf of a trust by the party authorized to do so under the trust's governing agreement. There is no case law to support Defendant's novel invocation of the contemporaneous ownership rule. Thus, this defense should be dismissed or struck.
Second, the affirmative defense based on the Bangor Punta doctrine, like the contemporaneous ownership rule, is an extension of derivative standing principles that apply in shareholder litigation — not in a case such as this one. As a matter of law, Defendant cannot satisfy any of the Seventh Circuit's prerequisites for the applicability of the Bangor Punta doctrine, and there is no case law to support application of that doctrine in this case. Thus, this defense should be dismissed or struck.
Finally, what Spring Hill, a non-party investor, knew (or did not know) when it purchased certificates issued by the Trust, years after the alleged breaches of representations and warranties by Defendant, cannot possibly be the basis of a defense against Plaintiff, the party specifically authorized under the governing agreement to prosecute this lawsuit. Accordingly, the defenses based on Spring Hill's knowledge also should be dismissed or struck.
In its Second Amended Complaint (ECF No. 72) (the "Complaint" (a copy of the Complaint without exhibits is annexed hereto as Exhibit 2)), Plaintiff alleges that Defendant, as successor in interest to LaSalle Bank National Association ("LaSalle"), breached representations and warranties made by LaSalle in a Mortgage Loan and Purchase Agreement dated as of December 20, 2006 (the "MLPA") in connection with the securitization of loans, and failed to pay the contractually required purchase price set forth in the Pooling and Servicing Agreement dated as of December 1, 2006 (the "PSA"). Compl. ¶ 1. The securitized loans were pooled and sold to the Trust, which, in turn, issued certificates to investors (the "Certificateholders"). Id. ¶¶ 1-2. Plaintiff further alleges that LaSalle's breaches, as of December 28, 2006 (the "Closing Date"), had a material and adverse effect on the interests of the Certificateholders because the breaches increased the riskiness of the loans beyond what was contractually bargained for, making the certificates riskier than what was represented in the MLPA and the PSA. Id. ¶ 8.
The Trust brings this action (the "Action") by and through Midland, as the Special Servicer and Master Servicer for the Trust, under the PSA. Under section 2.03(e) of the PSA:
PSA § 2.03(e) (a copy of the relevant excerpts of the PSA is annexed hereto as Exhibit 3). Under section 3.01(b) of the PSA, "the Master Servicer and the Special Servicer each shall have full power and authority, acting alone . . . to do or cause to be done any and all things in connection with such servicing and administration for which it is responsible which it may deem necessary or desirable." Id. § 3.01(b).
On September 25, 2013, Defendant filed a motion to dismiss the Complaint (ECF No. 83) which this Court denied on August 21, 2014 (ECF Nos. 176-177). Defendant filed its Answer on September 23, 2014. Before filing the Answer, Defendant sought third-party discovery from Spring Hill. Although the document discovery deadline in this case expired on February 28, 2014, Defendant waited until April 28, 2014 to first seek documents from Spring Hill, and until June 10, 2014, just weeks before the deposition deadline, to file a motion to compel discovery from Spring Hill.
As noted by Magistrate Judge Cox in her order denying Spring Hill Discovery Motion No. 1, Spring Hill is not a party to this Action. See Order 5, Aug. 12, 2014, ECF No. 169 (the "MTC Order") ("Spring Hill is indisputably a non-party.") (a copy of the MTC Order is annexed hereto as Exhibit 4). Magistrate Judge Cox rejected the argument that discovery related to Spring Hill's knowledge of the loans and certificates was relevant to Defendant's defenses to this Action. Id. at 7. Recognizing that Spring Hill Discovery Motion No. 1 was being decided before the filing of an answer, the last sentence of the MTC Order notes that Defendant's yet-to-be-filed answer and affirmative defenses "may give rise to additional bases for relevance not currently before the Court." Id. at 10. Defendant moved to clarify the MTC Order and compel the production of certain Spring Hill documents on September 8, 2014 (ECF No. 188) ("Spring Hill Discovery Motion No. 2"). Spring Hill Discovery Motion No. 2 was denied by Magistrate Judge Cox on September 24, 2014 (ECF No. 208).
Presumably attempting to exploit the last sentence in the MTC Order and try again to take non-party discovery from Spring Hill, Defendant crafted four affirmative defenses that contend, in essence, that Plaintiff lacks standing to bring the Action because of non-party Spring Hill's purported knowledge of the loans and certificates:
117. Plaintiff's claims are barred because, on information and belief, Spring Hill was aware of the alleged events giving rise to Plaintiff's Complaint prior to its acquisition of its interest in the Trust, acquired its interest in the Trust at a substantial discount when it bought the Certificates for approximately $174 million (just over 60 cents on the dollar) from the fair market value price of $290 million, and therefore it did not suffer any material adverse effect as a result of any alleged breach by LaSalle of any representation and warranty.
Answer ¶¶ 114-117 (the "Four Affirmative Defenses"). On the same day it filed the Answer, Defendant moved this Court for an order declaring certain discovery requested from Spring Hill as relevant to the Four Affirmative Defenses (defined herein) (ECF No. 204) ("Spring Hill Discovery Motion No. 3"). Plaintiff's opposition to Defendant's Spring Hill Discovery Motion No. 3 is due to be filed today.
As discussed more fully below, the Court should enter judgment on the pleadings dismissing the Four Affirmative Defenses as a matter of law, or, alternatively, strike the Four Affirmative Defenses from the Answer. The two defenses set forth in paragraphs 115 and 116 of the Answer fail as a matter of law, because they apply principles of derivative and equitable standing not relevant to a case, like this one, that is brought directly on behalf of the trust by the master and special servicer of the trust. The two other defenses at issue on this Motion (see Answer ¶¶ 114, 117) fail because they are based on Spring Hill's knowledge and conduct, which are not attributable to Plaintiff and do not estop Plaintiff from bringing the Action pursuant to the PSA. Seen in context, it appears that the Four Affirmative Defenses are not asserted as good faith defenses, but rather are part of Defendant's third attempt to obtain discovery from Spring Hill.
Rule 12(c) provides that "[a]fter the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings." Fed. R. Civ. P. 12(c). In a motion for judgment "on the pleadings, the court considers the pleadings alone, which include the complaint, the answer, and any written instruments attached as exhibits." City of Joliet v. Mid-City Nat'l Bank of Chi., No. 05 C 6746, 2012 WL 638735, at *1, *8 (N.D. Ill. Feb. 22, 2012). Affirmative defenses are pleadings governed by the pleading requirements of the Federal Rules and Rule 12(c). See Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989) (deciding Rule 12(f) motion to strike affirmative defenses); City of Joliet, 2012 WL 638735, at *1, *8 (granting, in part, plaintiff's Rule 12(c) motion as to certain of defendants' affirmative defenses).
A Rule 12(c) motion for judgment on the pleadings is subject to the same plausibility standard that applies to a motion to dismiss under Rule 12(b)(6). City of Joliet, 2012 WL 638735, at *1; see generally Ashcroft v. Iqbal, 556 U.S. 662 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). As discussed more fully below, applying the Twombly-Iqbal standard to the Four Affirmative Defenses, Plaintiff is entitled to judgment on the pleadings because Defendant has failed to plead any facts, even if taken as true, that state an affirmative defense that is plausible on its face and entitles it to relief.
Defendant's contemporaneous ownership affirmative defense fails as a matter of law. Even Defendant concedes that the contemporaneous ownership rule is a standing requirement almost exclusively applied to shareholder derivative suits. Spring Hill Disc. Mot. No. 3, at 13 ("[T]he `contemporaneous ownership' rule has traditionally been applied in the context of shareholder derivative actions. . . .") (a copy of the Spring Hill Discovery Motion No. 3 as electronically filed and without exhibits is annexed hereto as Exhibit 5); Bensen v. Am. Ultramar Ltd., No. 92 Civ. 4420 (KMW), 1996 WL 48601, at *6 (S.D.N.Y. Feb. 6, 1996) ("[T]he `contemporaneous ownership' rule applies only to a shareholder derivative suit, as its language suggests, and does not apply to a direct suit by a corporation."); Mauck v. Mading-Dugan Drug Co., 361 F.Supp. 1314, 1318 (N.D. Ill. 1973) ("The doctrine of `contemporaneous ownership' does not apply to a suit which is brought by the corporation itself to enforce its own rights."). The rule requires that a plaintiff in a shareholder derivative suit plead that it was a shareholder at the time of the transaction at issue in the lawsuit. Bensen, 1996 WL 48601, at *5.
In the Answer, Defendant asserts that the Action is barred by the contemporaneous ownership rule because Spring Hill is the only current Certificateholder and Spring Hill did not own the certificates as of the Closing Date. Defendant misapplies the contemporaneous ownership rule because the Action is not a derivative suit and has not been commenced by any Certificateholder, including Spring Hill. MTC Order 5 ("Spring Hill is indisputably a non-party."). The Action is direct in nature and was commenced by the Trust (acting through the master and special servicer), not investors in the Trust. Moreover, Certificateholders of the Trust are not shareholders. No court in any jurisdiction has applied the contemporaneous ownership rule to a case like this Action, which is direct in nature and was commenced by the master or special servicer of a commercial mortgage-backed securities trust. Thus, the contemporaneous ownership rule is inapplicable to this Action and fails as a matter of law.
Alternatively, the defense fails as a matter of law for the independent reason that material and adverse effect is determined as of the Closing Date and, therefore, events surrounding Spring Hill's investment in the certificates (years after the closing date) have no bearing on the Action whatsoever.
The Bangor Punta doctrine, which Defendant pleads as an affirmative defense in the Answer, is equally inapplicable to the Action and fails as a matter of law. Answer ¶ 116. Like the contemporaneous ownership rule, the Bangor Punta doctrine is an extension of the shareholder derivative standing requirements that equitably bars a plaintiff from bringing an action if "(1) the plaintiff is a shareholder who has acquired his shares at a fair price from those who `participated or acquiesced' in earlier acts of alleged corporate mismanagement; and (2) the claim for relief seeks damages for those same acts of alleged corporate mismanagement." Rock River Sav. & Loan Ass'n v. Am. States Ins. Co., 594 F.2d 633, 635 (7th Cir. 1979). This principle of equitable standing also precludes a corporation from asserting a cause of action if the shareholder is barred from bringing the action in its own name. Bangor Punta Operations, Inc. v. Bangor & Aroostook R.R. Co., 417 U.S. 703, 713 (1974).
Applying the standard set forth by the United States Court of Appeals for the Seventh Circuit in Rock River, Defendant's Bangor Punta defense fails on every level:
Defendant has pled no facts to support the Bangor Punta defense against Spring Hill; and the defense fails on its face. There is no plausible basis to apply the Bangor Punta defense in this Action. See Bangor Punta, 417 U.S. at 713 ("Thus, where equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded."); Bensen, 1996 WL 48601, at *4-5 (declining to apply the Bangor Punta doctrine); Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Cont'l Ill. Corp., 666 F.Supp. 1180, 1196-97 (N.D. Ill. 1987) (declining to apply the Bangor Punta doctrine). Therefore, the Bangor Punta defense fails as a matter of law.
The affirmative defenses found in paragraphs 114 and 117 of the Answer also fail as a matter of law. In these two paragraphs, Defendant alleges that Spring Hill was not materially and adversely affected by LaSalle's breaches of representations and warranties because the facts constituting the breaches were publicly known prior to Spring Hill's investment in the certificates (¶ 114) and because Spring Hill was aware of the events giving rise to the Complaint prior to its investment (¶ 117). Defendant alleges that because Spring Hill paid a discounted price for the certificates in October 2011, which reflected such knowledge, such breaches did not therefore materially and adversely affect Spring Hill's interest. Answer ¶¶ 114, 117.
What Defendant neglects to plead and what ultimately undercuts these two affirmative defenses is that, pursuant to the PSA and as described above, Plaintiff is empowered to pursue the Action so long as such breaches materially and adversely affected the interests of any Certificateholder. PSA § 2.03(b). As a result, Spring Hill's knowledge and investment decision are utterly irrelevant and certainly not a basis for an affirmative defense to this Action. Thus, Plaintiff is entitled to judgment on the pleadings dismissing these two affirmative defenses.
Alternatively, the Court should strike the Four Affirmative Defenses pursuant to Rule 12(f). Motions to strike, though disfavored by the courts, are granted if "it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense." FirstMerit Bank N.A. v. Wolf Prof'l Ctr., Corp., No. 13 C 2750, 2013 WL 4847491, at *2 (N.D. Ill. Sept. 10, 2013) (citation omitted) (internal quotation mark omitted). Thus, if the affirmative defenses are insufficient as a matter of law or present no questions of law or fact then the Rule 12(f) motion should be granted. Rudzinski v. Metro. Life Ins. Co., No. 05 C 0474, 2007 WL 2973830, at *1 (N.D. Ill. Oct. 4, 2007) (granting Rule 12(f) motion, in part); see also Fed. R. Civ. P. 12(f) ("The court may strike from any pleading an insufficient defense. . . .").
An affirmative defense must satisfy a three-part test to survive a motion to strike under Rule 12(f): "(1) the matter must be properly pleaded as an affirmative defense; (2) the matter must be adequately pleaded under the requirements of Federal Rules of Civil Procedure 8 and 9; and (3) the matter must withstand a Rule 12(b)(6) challenge." Sarkis' Cafe, Inc. v. Sarks in the Park, LLC, ___ F. Supp. 3d ___, 2014 WL 3018002, at *3 (N.D. Ill. July 3, 2014) (Lee, J.) (citation omitted) (internal quotation marks omitted). If any of these three requirements are not met, the affirmative defense "must be stricken." Rudzinski, 2007 WL 2973830, at *1.
This Court should apply the heightened Rule 12(b)(6) Twombly-Iqbal pleading standard discussed above to this Rule 12(f) motion, as numerous courts in this district have done. Sarkis', 2014 WL 3018002, at *4 (applying the Twombly-Iqbal standard in Rule 12(f) motion and striking defendant's affirmative defenses); Shield Techs. Corp. v. Paradigm Positioning, LLC, No. 11 C 6183, 2012 WL 4120440, at *8 (N.D. Ill. Sept. 19, 2012) (applying the "majority view that Twombly and Iqbal apply to affirmative defenses"). As discussed above, none of the Four Affirmative Defenses withstand the Rule 12(b)(6) Twombly-Iqbal pleading standard. An affirmative defense that fails to meet any one of the three parts of the Rule 12(f) test should be struck. Thus, the Court should strike the Four Affirmative Defenses from the Answer.
For the foregoing reasons, Plaintiff respectfully requests that this Court enter judgment dismissing the Four Affirmative Defenses as a matter of law or, alternatively, striking the Four Affirmative Defenses from the Answer, and granting such other and further relief this Court deems just and proper.
Bank of America, National Association ("Bank of America" or "Defendant"), successor by merger to LaSalle Bank National Association ("LaSalle"), by and through counsel, hereby responds to the second amended complaint ("Complaint") filed on September 4, 2013 by plaintiff, LaSalle Commercial Mortgage Securities, Inc., Series 2006-MF4 Trust ("MF4" or "Trust"), acting by and through its Master and Special Servicer, Midland Loan Services ("Midland"), a division of PNC Bank, National Association, and whose Trustee is Wells Fargo Bank, N.A. ("Trustee"), in paragraphs numbered to correspond to those found in the Complaint. As used herein, "Plaintiff" refers to the Trust and Midland.
1. Bank of America denies the allegations contained in Paragraph 1 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that LaSalle securitized and sold a pool of loans to the Trust; and there exists a Mortgage Loan Purchase Agreement dated December 20, 2006 ("MLPA"), a Pooling and Servicing Agreement, dated December 1, 2006 ("PSA"), and an "Offering Memorandum" dated December 20, 2006 and refers to the MLPA, PSA and Offering Memorandum for the true and complete contents thereof.
2. Bank of America denies the allegations contained in Paragraph 2 of the Complaint except admits that LaSalle Commercial Mortgage Securities Inc. ("LaSalle Commercial"), an affiliate of LaSalle, bought loans from LaSalle pursuant to the MLPA, and subsequently transferred the loans to the Trust pursuant to the PSA; and refers to the MLPA and PSA for the true and complete contents thereof.
3. Bank of America denies the allegations contained in Paragraph 3 of the Complaint except admits that LaSalle made certain representations and warranties in the MLPA and refers to the MLPA for the true and complete contents thereof.
4. Bank of America denies the allegations contained in the first sentence of Paragraph 4 of the Complaint, except admits that LaSalle made certain representations and warranties in the MLPA and refers to the MLPA for the true and complete contents thereof. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in the second sentence of Paragraph 4 of the Complaint, and therefore denies them, except to the extent the allegations therein constitute conclusions of law to which no response is required.
5. Bank of America denies the allegations contained in Paragraph 5 of the Complaint, except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that LaSalle made certain representations and warranties in the MLPA and refers to the MLPA for the true and complete contents thereof.
6. The allegations in the first and second sentences of Paragraph 6 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies these allegations except admits that LaSalle and LaSalle Commercial are both parties to both the MLPA and PSA, and Bank of America refers to the MLPA and PSA for the true and complete contents thereof.
7. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in the first and second sentences of Paragraph 7 of the Complaint, and therefore denies them. Bank of America denies the allegations contained in the third sentence of Paragraph 7 of the Complaint.
8. Bank of America denies the allegations contained in Paragraph 8 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
9. Bank of America denies the allegations contained in Paragraph 9 of the Complaint except to the extent no response is required because Paragraph 9 purports to characterize certain relief sought by Plaintiff or constitute conclusions of law.
10. Bank of America denies the allegations contained in Paragraph 10 of the Complaint except to the extent no response is required because Paragraph 10 purports to characterize certain relief sought by Plaintiff or constitute conclusions of law.
11. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 11 of the Complaint, and therefore denies them, except admits that Midland serves as Special Servicer and Master Servicer under the PSA.
12. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 12 of the Complaint, and therefore denies them.
13. Bank of America admits that select incomplete portions of the PSA are quoted in Paragraph 13 of the Complaint, and refers to the PSA for the true and complete contents thereof.
14. Bank of America admits that select incomplete portions of the PSA are quoted in Paragraph 14 of the Complaint and refers to the PSA for the true and complete contents thereof.
15. Bank of America denies the allegations contained in Paragraph 15 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
16. Bank of America admits the allegations contained in Paragraph 16 of the Complaint.
17. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegation contained in Paragraph 17 of the Complaint, and therefore denies it.
18. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegation contained in Paragraph 18 of the Complaint, and therefore denies it, except to the extent the allegations therein constitute conclusions of law to which no response is required.
19. The allegations contained in Paragraph 19 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegation contained in Paragraph 19 of the Complaint, except admits that Bank of America transacts business in and has an interest in or possesses real property in the State of Illinois, and certain events relating to Plaintiff's claims occurred in this District.
20. The allegations contained in Paragraph 20 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies the allegations contained in Paragraph 20, except admits that certain of the events relating to Plaintiff's claims occurred in this District.
21. Bank of America denies the allegations contained in Paragraph 21 of the Complaint except admits that LaSalle sold and securitized loans in three prior transactions referred to as "MF1," "MF2," and "MF3," and except admits that the Loans were sold and securitized in MF4.
22. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 22 of the Complaint, and therefore denies them.
23. Bank of America denies the allegations contained in Paragraph 23 of the Complaint.
24. Bank of America denies the allegations contained in Paragraph 24 of the Complaint, except admits there exist internal May 2007 emails written by Paul Gembara and Dale Grossman and refers to those documents for the true and complete contents thereof.
25. Bank of America denies the allegations contained in Paragraph 25 of the Complaint, except admits there exists an internal October 2006 memorandum and refers to that document for the true and complete contents thereof.
26. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 26 of the Complaint, and therefore denies them, and except admits that there exists data reported by Trepp LLC and refers to that Trepp LLC data for the true and correct contents thereof.
27. Bank of America denies the allegations contained in Paragraph 26 of the Complaint, except admits there exists a document that Christopher Callahan emailed to others at Bank of America and refers to that document for the true and complete contents thereof.
28. Bank of America denies the allegation contained in Paragraph 28 of the Complaint, except admits that the MFG loan program was discontinued.
29. Bank of America denies the allegations contained in Paragraph 29 of the Complaint, except admits that LaSalle made certain representations and warranties in the MLPA and refers to the MLPA for the true and complete contents thereof.
30. The allegations contained in Paragraph 30 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies the allegations contained in Paragraph 30 of the Complaint, except admits that 21 of the 282 loans listed in Exhibit 3 to the Complaint are located in the states of Oklahoma and Washington.
31. The allegations contained in Paragraph 31 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies the allegations contained in Paragraph 31 of the Complaint.
32. The allegations contained in Paragraph 32 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies the allegations contained in Paragraph 32 of the Complaint.
33. Bank of America denies the allegations contained in Paragraph 33 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exist mortgage documents relating to MF4 loans with collateral property located in Oklahoma and refers to those documents for the true and complete contents thereof.
34. The allegations contained in Paragraph 34 of the Complaint constitute conclusions of law to which no response is required. To the extent a response is required, Bank of America denies the allegations contained in Paragraph 34 of the Complaint, except admits that select incomplete portions of a Washington statute are quoted in Paragraph 34 of the Complaint, and refers to the Washington statute for the true and complete contents thereof.
35. Bank of America denies the allegations contained in Paragraph 35 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exist mortgage documents relating to MF4 loans with collateral property located in Washington and Oklahoma and refers to those documents for the true and complete contents thereof.
36. Bank of America denies the allegations contained in Paragraph 36 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exist mortgage documents relating to MF4 loans with collateral property located in Washington and Oklahoma and refers to those documents for the true and complete contents thereof.
37. Bank of America denies the allegations contained in Paragraph 37 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
38. Bank of America denies the allegations contained in Paragraph 38 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
39. Bank of America denies the allegations contained in Paragraph 39 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
40. The allegations contained in Paragraph 40 of the Complaint constitute conclusions of law to which no response is required, and Bank of America refers to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") for the true and complete contents thereof.
41. Bank of America denies the allegations contained in Paragraph 41 of the Complaint, except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that the Office of the Comptroller of the Currency ("OCC") regulated LaSalle, a federally insured, nationally chartered bank, and refers to § 1110 of FIRREA for the true and complete contents thereof.
42. Bank of America is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 42 of the Complaint, and therefore denies them, except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists an Interagency Statement on Independent Appraisal and Evaluation Functions, OCC: Advisory letter 2003-9, and refers to that document for the true and complete contents thereof.
43. Bank of America denies the allegations contained in Paragraph 43 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits there exists a September 2006 email between Pat Rubin and Julie Goodman and refers to that document for the true and complete contents thereof; there exists a 2010 deposition of MFG underwriter Angela Hanawa and refers to the transcript of that deposition for the true and complete contents thereof; and there exists an OCC 2005-6 Attachment "Frequently Asked Questions on the Appraisal Regulations and the Interagency statement on Independent Appraisal and Evaluation Functions," dated March 22, 2005 and refers to that document for the true and complete contents thereof.
44. Bank of America denies the allegations contained in Paragraph 44 of the Complaint, except admits that Thomas Watson was retained by LaSalle in 2006 and is without knowledge or information sufficient to form a belief as to Mr. Watson's professional background.
45. Bank of America denies the allegations contained in Paragraph 45 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits there exists a memorandum from Dale Grossman and refers to that document for the true and complete contents thereof.
46. Bank of America denies the allegations contained in Paragraph 46 of the Complaint except admits LaSalle adjusted the way that MFG appraisals were ordered in February 2007; and there exists an internal LaSalle memorandum attached as Exhibit 10 to the Complaint and refers to that document for the true and complete contents thereof.
47. Bank of America denies the allegations contained in Paragraph 47 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
48. Bank of America denies the allegations contained in Paragraph 48 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that select incomplete out of context portions of the Interagency Statement on Independent Appraisal and Evaluation Functions, OCC: Advisory letter 2003-9 are quoted in Paragraph 48 of the Complaint and refers to that document for the true and complete contents thereof.
49. Bank of America denies the allegations contained in Paragraph 49 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
50. Bank of America denies the allegations contained in Paragraph 50 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
51. Bank of America denies the allegations contained in Paragraph 51 of the Complaint.
52. Bank of America denies the allegations contained in Paragraph 52 of the Complaint.
53. Bank of America denies the allegations contained in Paragraph 53 of the Complaint.
54. Bank of America denies the allegations contained in Paragraph 54 of the Complaint, except admits that on or after September 6, 2012 it received from Midland a letter dated September 5, 2012 and refers to that letter for the true and complete contents thereof.
55. Bank of America denies the allegations contained in Paragraph 55 of the Complaint except to the extent those allegations constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
56. Bank of America denies the allegations contained in Paragraph 56 of the Complaint, except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that it did not repurchase the Loans.
57. Bank of America denies the allegations contained in Paragraph 57 except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that it commenced an action in the United States District Court for the Northern District of Illinois on or about December 3, 2012 seeking, among other things, declarations pursuant to 28 U.S.C.A. § 2201.
58. Bank of America repeats and realleges its responses to Paragraphs 1-57 of the Complaint.
59. Bank of America admits the allegations in Paragraph 59 of the Complaint.
60. Bank of America denies the allegations contained in Paragraph 60 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
61. Bank of America denies the allegations contained in Paragraph 61 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that it made certain representations and warranties in the MLPA and that there exists a PSA and refers to the MLPA and PSA for the true and complete contents thereof.
62. Bank of America denies the allegations contained in Paragraph 62 of the Complaint.
63. Bank of America denies the allegations contained in Paragraph 63 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
64. Bank of America denies the allegations contained in Paragraph 64 of the Complaint except admits that on or after September 6, 2012 it received from Midland a letter dated September 5, 2012 and refers to that letter for the true and complete contents thereof.
65. Bank of America denies the allegations contained in Paragraph 65 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof; and that Bank of America has not repurchased the Loans.
66. Bank of America denies the allegations contained in Paragraph 66 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
67. Bank of America denies the allegations contained in Paragraph 67 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
68. Bank of America denies the allegations contained in Paragraph 68 of the Complaint except to the extent no response is required because Paragraph 68 purports to characterize certain relief sought by Plaintiff, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
69. Bank of America repeats and realleges its responses to Paragraphs 1-68 of the Complaint.
70. Bank of America admits the allegations in Paragraph 70 of the Complaint.
71. Bank of America denies the allegations in Paragraph 71 of the Complaint.
72. Bank of America denies the allegations contained in Paragraph 72 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that it made certain representations and warranties in the MLPA and that there exists a PSA and refers to the MLPA and PSA for the true and complete contents thereof.
73. Bank of America denies the allegations in Paragraph 73 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
74. Bank of America denies the allegations in Paragraph 74 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
75. Bank of America denies the allegations contained in Paragraph 75 of the Complaint except admits that on or around September 6, 2012 it received from Midland a letter dated September 5, 2012 and refers to that letter for the true and complete contents thereof.
76. Bank of America denies the allegations contained in Paragraph 76 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
77. Bank of America denies the allegations in Paragraph 77 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
78. Bank of America denies the allegations in Paragraph 78 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required.
79. Bank of America denies the allegations contained in Paragraph 79 of the Complaint except admits that there exists an MLPA and refers to the MLPA for the true and complete contents thereof.
80. Bank of America denies the allegations contained in Paragraph 80 of the Complaint except admits that Paragraph 80 purports to characterize certain relief sought by Plaintiff.
81. Bank of America repeats and realleges its responses to Paragraphs 1-80 of the Complaint.
82. Bank of America denies the allegations contained in Paragraph 82 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that there exists a PSA and refers to the PSA for the true and complete contents thereof.
83. Bank of America denies the allegations contained in Paragraph 83 of the Complaint, and therefore denies them.
84. Bank of America denies the allegations contained in Paragraph 84 of the Complaint except to the extent the allegations therein constitute conclusions of law to which no response is required, and except admits that Paragraph 84 purports to characterize certain relief sought by Plaintiff.
85. Bank of America denies that Plaintiff is entitled to any relief whatsoever, including the relief requested in the Prayer For Relief contained in Pages 27-28 of the Complaint.
86. Pursuant to Section 1.01 of the PSA, at any point in time one MF4 investor, the one which owns the most subordinate class of MF4 certificates (the "Certificates"), is designated as the "Controlling Class Certificateholder," and such investor may appoint and/or serve as the Controlling Class Representative.
87. The Controlling Class Representative enjoys certain rights under the PSA not afforded to other investors, including, pursuant to Sections 6.07 and 7.01 of the PSA, the right to advise the Master and Special Servicer, here Midland, with respect to the servicing of the Loans and to terminate and replace the Special Servicer.
88. At the time of the closing of the MF4 transaction, December 28, 2006 (the "Closing Date"), J.P. Morgan Capital Corporation ("JP Morgan") was the Controlling Class Certificateholder.
89. In connection with its due diligence as to the MF4 securitization, JP Morgan had access to and reviewed the loan files for the Loans and other diligence materials. JP Morgan also had the right, which it exercised, to remove loans from the final pool of loans sold and securitized in MF4.
90. On or around November 20, 2007, the special servicer for the MF2 and MF3 securitizations, Crown NorthCorp, Inc. ("Crown"), initiated a lawsuit against LaSalle seeking the repurchase of two MF2 loans. Crown subsequently brought four additional actions, all on behalf of the investors in the MF2 or MF3 securitizations (the "MF2/3 Actions"), including an action commenced on or around December 23, 2010 demanding pool-wide repurchase of all the MF2 and MF3 loans. Paul Snyder, Esq. of The Snyder Law Firm, LLC acted as counsel for Crown for each of the MF2/3 Actions.
91. On November 29, 2007, shortly after Crown commenced the first of the MF2/3 Actions, Midland's Senior Asset Manager, Jon Clark, directed Midland asset managers to review MF4 loans for potential breaches and repurchase claims in connection with MF4. On or around August 4, 2008, Crown notified Midland that LaSalle allegedly breached representations and warranties relating to LaSalle's underwriting practices, appraisals, and mortgage loan documents used for loans collateralized by properties in Oklahoma and Washington. Midland employees continued to investigate potential claims for repurchase through 2008 and 2009.
92. During the time period in which JP Morgan was the Controlling Class Certificateholder, Plaintiff elected not to seek repurchase of the MF4 loans on a pool-wide basis. As of September 8, 2008, JP Morgan was no longer the Controlling Class Certificateholder.
93. On May 4, 2010, Midland was informed by the then-current Controlling Class Certificateholder, HIMCO, that HIMCO was interested in pursuing claims against LaSalle for alleged breaches of representations and warranties in the MLPA. As of April 22, 2011, HIMCO had not directed Midland to take any action with respect to the pool-wide repurchase of the MF4 loans. At this time, another MF4 investor, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), communicated to Midland that it wished to transfer the servicing of the MF4 loans to Crown for litigation strategy purposes, and Midland notified Freddie Mac that it was not authorized to do so because Freddie Mac was not the Controlling Class Certificateholder. Freddie Mac became the Controlling Class Certificateholder on or around July 2011.
94. On several occasions between January and April 2011, Bank of America participated in court-ordered mediation sessions in connection with the MF2/3 Actions, including a settlement conference before Magistrate Judge Robert E. Bacharach on April 27, 2011 in the United States District Court for the Western District of Oklahoma. Counsel and parties with settlement authority for the MF2/3 Actions were required to attend the settlement conference. The trustee for the MF2 and MF3 trusts, Wells Fargo Bank, N.A., did not participate in any such mediation efforts or have a representative who attended the conference before Magistrate Judge Bacharach. Instead, a representative of Freddie Mac attended the settlement conference on behalf of the MF2 and MF3 trusts, along with Mr. Snyder. On information and belief, Freddie Mac had settlement authority for the MF2 and MF3 trusts. On information and belief, Freddie Mac let it be known to investors and other industry participants during May and/or June 2011 that it was looking to sell all of its interests in MF2, MF3 and MF4.
95. On information and belief, on or around June 2011 Midland provided Spring Hill Capital Partners ("Spring Hill") with access to information concerning the MF4 pool of loans. At this time, Spring Hill did not own, and had not previously owned, any interest in MF4. On information and belief, by this time Spring Hill was aware of potential pool-wide claims relating to MF4.
96. On information and belief, Spring Hill received an announcement of Freddie Mac's auction of its Certificates on or around September 16, 2011. The auction announcement stated that the owner of the Certificates would have certain control rights as the Controlling Class Certificateholder.
97. On information and belief, Spring Hill was provided information by Wells Fargo Bank, N.A., which acted as Freddie Mac's advisor for the sale of the Certificates, and Midland prior to Spring Hill's acquisition of the Certificates regarding, among other things, the Loans, the related mortgaged properties, and the performance of the MF4 pool.
98. On information and belief, Spring Hill had knowledge prior to its acquisition of the Certificates of LaSalle's alleged pool-wide breaches of representations and warranties and claims that such breaches allegedly materially adversely affected the value of the MF4 loans, the related mortgaged properties or the interests of the Trustee or any Certificateholder in the MF4 loan or related mortgaged property. On September 30, 2011, a widely read industry publication, Commercial Mortgage Alert, stated that the Certificates would be sold for approximately half of their face value and, in reference to the MF2/3 Actions, stated that other investors claimed that LaSalle's loans did not satisfy the representations and warranties provided in connection with other securitizations.
99. On information and belief, Spring Hill acquired the Certificates from Freddie Mac on or around October 18, 2011 for approximately $174 million, an approximate 40% discount on bonds with a face value of approximately $290 million. At this time, Spring Hill became the Controlling Class Certificateholder and the sole remaining economic stakeholder in MF4. On information and belief, Spring Hill was aware of the global litigation claims asserted in the MF2/3 Actions that were nearly identical to its pool-wide claims which it later brought in these MF4 Actions prior to purchasing the Certificates that made Spring Hill the Controlling Class Certificateholder.
100. On information and belief, in the summer and autumn of 2011, Spring Hill actively solicited other potential investors to make a co-investment with Spring Hill in the Certificates, in part based on the litigation value of a potential pool-wide repurchase claim against Bank of America in connection with the MF4 loans. For example, Spring Hill approached representatives of Berkadia, LLC and Leucadia National Corporation with the opportunity to invest in MF4, during which Spring Hill outlined its investment strategy in a PowerPoint presentation, pitchbook and other analytical materials.
101. On information and belief, Spring Hill became aware that the MF2/3 Actions have been resolved pursuant to a settlement agreement in January 2012. Shortly thereafter, on or around January 25, 2012, Spring Hill instructed Midland to pursue repurchase of the MF4 loans in light of the resolution of the MF2/3 Actions. On information and belief, Spring Hill was in contact with counsel for Crown, Mr. Snyder. Midland met with Mr. Snyder on or around March 19, 2012 to discuss the pool-wide repurchase of the MF4 loans.
102. On information and belief, Spring Hill directed Midland to retain Mr. Snyder for purposes of demanding the pool-wide repurchase of the MF4 loans, and on or around September 6, 2012, Bank of America received from Midland a letter dated September 5, 2012 demanding the pool-wide repurchase of the MF4 loans.
103. In asserting the following defenses, Bank of America does not concede that it has the burden of proof on any such defenses and does not assume the burden of proof on any issue, element or defense that would otherwise rest on Plaintiff.
104. The notices provided by Plaintiff under the MLPA and the PSA were not adequate, prompt or timely, and in fact were grossly and unreasonably delayed. Plaintiff failed to provide an opportunity to cure.
105. Plaintiff's demand that Bank of America repurchase all the Loans based on alleged "systemic" or "pervasive" breaches of representations and warranties is not permitted by the controlling transaction documents or by applicable law.
106. If there existed any default, breach, violation or event of acceleration under the documents evidencing or securing the Loans as of December 28, 2006, the date whereby these loans were sold by LaSalle to LaSalle Commercial and then subsequently transferred and sold by LaSalle Commercial to the Trust as part of the securitization pursuant to the PSA, which Defendant denies, then the alleged default, breach, violation or event of acceleration was not material to Defendant's performance of its obligations under the MLPA and/or PSA.
107. Plaintiff was on notice of and knew of the facts alleged to have constituted a breach at the time of the closing of the MF4 transaction, December 28, 2006 (the "Closing Date") and therefore waived any claims of breaches under the MLPA and/or PSA.
108. Even if there existed any default, breach, violation or event of acceleration under the documents evidencing or securing the Loans, which Defendant denies, the breach of Defendant's warranty is not the cause of any decline in the value of these loans, the related mortgage properties, and/or the interest of the Certificateholders, either at the time of closing or after the Closing Date for the Loans.
109. Plaintiff's claims are barred, in whole or in part, by superseding and/or intervening cause or causes, such as actions or inactions of parties other than, and/or outside the control of, Defendant.
110. Plaintiff's claims are barred, in whole or in part, because market, economic or industry events that were, likewise, outside the control of Defendant caused any injury to Plaintiff.
111. Plaintiff's claims are barred, in whole or in part, by Plaintiff's breach of contract and/or by the failure to comply with conditions precedent.
112. Plaintiff is not entitled to specific performance of the PSA including because money damages are adequate.
113. Plaintiff's claims are barred, in whole or in part, because Plaintiff entered into the MF4 securitization transaction with actual knowledge of the credit quality of the loans underlying the Trust and the underwriting and due diligence standards that were applied to those loans.
114. Even if there existed any material default, breach, violation or event of acceleration under the documents evidencing or securing the loans at issue as of the Closing Date, which Defendant denies, the alleged material default, breach, violation or event of acceleration did not materially or adversely affect the value of the loans at issue, the related mortgage properties, and/or the interest of the Certificateholders ("Material Adverse Effect"). Plaintiff's purported expert witness, Dr. Joseph R. Mason, has opined that representation and warranty breaches alleged by Plaintiff caused a Material Adverse Effect because they increased the uncertainty concerning certain attributes of the MF4 Loans and how those loans would perform in the future, and that this uncertainty rendered the MF4 Loans less valuable than they would have been if no representation and warranty breaches had occurred. Dr. Mason has also testified in his deposition in this action that if the alleged defects in the MF4 Loans were disclosed to investors prior to their purchasing the Certificates, investors would not have suffered a Material Adverse Effect because they would not have overpaid for the Certificates, but rather would have priced them accordingly. The facts allegedly constituting the pervasive breaches of representations and warranties were publicly known prior to Spring Hill's purchase of the Certificates and, under the efficient market doctrine, were priced into the Certificates at the time Spring Hill purchased them. Moreover, on information and belief, Spring Hill had actual knowledge of the facts allegedly constituting the breaches.
115. Plaintiff's claims are barred, including under the contemporaneous ownership rule, because the sole remaining beneficiary of the Trust with an economic stake in this litigation, Spring Hill, did not own the Certificates at the time of the Closing Date and did not purchase its interest in the Trust until nearly five years after the MF4 securitization closed. See Kaliski v. Bacot (In re Bank of N. Y. Derivative Litig.), 320 F.3d 291, 297 (2d Cir. 2003); see also Kreindler v. Marx, 85 F.R.D. 612, 614 (N.D. Ill. 1979). One purpose of the contemporaneous ownership rule is to prevent potential investors—such as beneficiaries of a trust, as here with Spring Hill, or corporate shareholders in a derivative action—from buying a lawsuit. See Ensign Corp., S.A. v. Interlogic Trace, Inc., No. 90 CIV. 3497, 1990 WL 213085, at *2 (S.D.N.Y. Dec. 19, 1990). Another purpose of the rule is to ensure that actions brought in the name of a fictional legal entity, such as a business trust or corporation, are initiated by investors that have actually suffered an injury. See id.; see also Midland Food Servs., LLC v. Castle Hill Holdings V, LLC, 792 A.2d 920, 921-22 (Del. Ch. 1999). The contemporaneous ownership rule has been applied in shareholder derivative actions and in actions involving business trusts for the benefit of a principal beneficiary, such as Spring Hill here. See SC Note Acquisitions, LLC v. Wells Fargo Bank, N.A., 934 F.Supp.2d 516, 528 (E.D.N.Y. 2013); see also At Home Claims, LLC v. Equinix, Inc. (In re At Home Corp.), No. 09-3205 T.C. 2010 WL 1691325, at *2 (Bankr. N.D. Cal. Apr. 26, 2010).
116. Plaintiff's claims are barred, including under the "Bangor Punta" doctrine, because Spring Hill acquired its interest in the Trust at a substantial discount nearly five years after the alleged events giving rise to Plaintiff's complaint, and any recovery here by Spring Hill as the sole remaining beneficiary of the Trust and lone remaining economic stakeholder in this litigation, would constitute a windfall and unjustly enrich Spring Hill. See Bangor Punta Operations, Inc. v. Bangor & A.R. Co., 417 U.S. 703 (1974). The Bangor Punta doctrine is a rule of equity which prevents a legal entity such as a corporation or business trust from pursuing an action on behalf of a principal beneficiary who could not bring the action in its own name. See id. This doctrine also prohibits investors that acquired control of a business trust or corporation at an arms-length price subsequent to any alleged prior wrongdoing from using its control of the trust or corporation to later sue for wrongs previously done to others. See id.; see also Midland Food Servs. LLC, 792 A.2d at 921-22; Weaver v. First Bank of Schaumburg, No. 83 C 6591, 1987 WL 10972, at *12 (N.D. Ill. May 8, 1987).
117. Plaintiff's claims are barred because, on information and belief, Spring Hill was aware of the alleged events giving rise to Plaintiff's Complaint prior to its acquisition of its interest in the Trust, acquired its interest in the Trust at a substantial discount when it bought the Certificates for approximately $174 million (just over 60 cents on the dollar) from the fair market value price of $290 million, and therefore it did not suffer any material adverse effect as a result of any alleged breach by LaSalle of any representation and warranty.
118. Plaintiff's claims are barred in whole or in part by Plaintiff's breach of the implied covenant of good faith and fair dealing.
119. Plaintiff's claims are barred under the doctrines of waiver, laches, and estoppel.
120. Plaintiff's claims are barred, in whole or in part, by Plaintiff's failure to mitigate due to its unreasonable delay in providing notice of the alleged breaches of any representation and warranty.
121. To the extent Plaintiff has received, is entitled to receive, or expects to receive payments from any other source in connection with its alleged losses, its claims are reduced or eliminated in accordance with those payments. Further, to the extent Defendant is found liable to Plaintiff (which liability is denied), Defendant is entitled to all rights of setoff for payments and other monies that Plaintiff has received.
122. The purchase price, as defined in Section 1.01 of the PSA, is not the proper measure of any damages allegedly suffered by Plaintiff, but rather, to the extent any damages are found to be warranted, any such damages should be measured by the amount of actual damages suffered by Plaintiff.
123. Plaintiff's claims are barred, in whole or in part, because any alleged damages suffered by Plaintiff are speculative.
124. The equitable relief that Plaintiff is seeking, including repurchase of all the Loans, is equivalent to a request for rescission, which is not appropriate because it is contrary to the applicable contracts and, to the extent any remedy is warranted, money damages are adequate, and equitable considerations weigh strongly against rescinding a transaction consummated over eight years ago.
125. Plaintiff's demand that Bank of America repurchase defaulted Loans that were collateralized by related mortgaged properties that have been sold in foreclosure is invalid because those Loans have been extinguished by those foreclosures and therefore cannot be repurchased.
LaSalle Commercial Mortgage Securities Inc., Series 2006-MF4 Trust (the "Trust"), acting by and through its Master and Special Servicer, Midland Loan Services ("Midland"), a division of PNC Bank, National Association (collectively, "Plaintiff"), and whose Trustee is Wells Fargo Bank, N.A. ("Wells Fargo" and, in its capacity as trustee of the Trust, the "Trustee"), files its Complaint against Defendant Bank of America, N.A., as successor in interest to LaSalle Bank National Association ("Bank of America") and pleads as follows:
1. This action arises out of Bank of America's refusal (as successor in interest to LaSalle Bank National Association ("LaSalle")) to comply with basic contractual obligations set forth in a Mortgage Loan Purchase Agreement dated as of December 20, 2006 (the "MLPA") and a Pooling and Servicing Agreement dated as of December 1, 2006 (the "PSA").
2. After LaSalle originated the Loans for securitization, pursuant to the MLPA, the Loans were pooled and sold to LaSalle Commercial Mortgage Securities, Inc. ("LaSalle Commercial"), an affiliated entity. On December 28, 2006 (the "Closing Date"), as part of the securitization pursuant to the PSA, LaSalle Commercial sold and transferred the Loans to the Trust through Wells Fargo, as Trustee of the Trust. It is common in commercial loan securitization markets for companies to form separate entities to originate loans to be securitized and to act as the depositor into the securitization.
3. In connection with the securitization process, LaSalle made dozens of representations and warranties regarding, inter alia, that the Loans met certain minimum quality standards, were acquired in accordance with sound underwriting and origination practices and applicable legal requirements, and that the loan files contained all the necessary documentation.
4. The representations and warranties were made for the benefit of the Trust and its Certificateholders, and were a risk-allocation device to make certain that LaSalle — and not the Trust — assumed any resulting risk if the loans that were selected for securitization into the Trust failed to have the represented characteristics or risk profile. These representations and warranties are a critical component of the securitization process because, without LaSalle's contractual promises and obligations, Certificateholders would not have purchased the Certificates and LaSalle would not have had the requisite capital to securitize the Loans.
5. Moreover, LaSalle was the appropriate party to bear the risks associated with any defects in the Loans by virtue of its role in originating the loans and determining which loans were selected to be included in the pool, and its unfettered access to the information contained in each and every loan file. In contrast to LaSalle's role in the securitization process, time and other constraints prevent investors from thoroughly reviewing the files for each loan. Indeed, it is for this reason that, pursuant to the express terms of the MLPA, LaSalle's liabilities and obligations associated with the representation and warranties are not relieved on the basis of any review of the loan files or other due diligence that may have been completed by the Trustee, any Certificateholders, or any other persons. "Neither the delivery by the Seller of the Mortgage Files . . . nor the review thereof or any other due diligence by the Trustee, any Master Servicer, the Special Servicer, a Certificate Owner or any other Person shall relieve the Seller of any liability or obligation with respect to any representation or warranty or otherwise under this Agreement. . . ." Ex. 2 (MLPA) § 6(c) (emphasis added).
6. To enforce LaSalle's obligations with respect to Loans that do not comply with the representations and warranties, the PSA and MLPA mandate that LaSalle cure or repurchase Loans that breach any of the representations and warranties, where such breaches materially and adversely affect the value of the Loans, the related Mortgaged Properties, or the interest of the Certificateholders in the Loans or Mortgaged Properties. Pursuant to the PSA, LaSalle Commercial assigned and transferred to Plaintiff its rights under the MLPA, including all rights to enforce any breach of LaSalle's representations and warranties contained within the MLPA. The enforcement mechanism set forth in the PSA and MLPA ensures that the Trust and the Certificateholders do not assume any risk resulting from the inclusion of defective Loans in the Trust.
7. The Certificateholders relied on the truth and accuracy of the representations and warranties made by the loan originators, mortgage loan sellers, and depositors, and the contractually mandated remedies for breach of such representations and warranties, in deciding to invest in the Trust by purchasing Certificates. The Certificates derive their value and marketability from the underlying Loans, because the payment stream on the Certificates is the cash flow generated by the Loans. Loans with less desirable characteristics, or which lack critical documentation, are worth less than the bargain struck by the parties and documented by the express representations and warranties contained in the PSA and MLPA.
8. It is now apparent that LaSalle breached on the Closing Date many representations and warranties with respect to the Loans. Instead of transferring a pool comprised of loans that complied with the representations and warranties, LaSalle frustrated the Certificateholders' benefit of the bargain by including Loans that suffered from systemic breaches of LaSalle's representations and warranties. The inclusion of such defective Loans in the pool increased the riskiness of the loan portfolios beyond what was contractually bargained for, thereby materially and adversely affecting the Certificateholders' interests at the time the securitization closed. LaSalle has subsequently refused to pay the Purchase Price for the non-compliant Loans within the applicable 90-day Initial Cure Period in violation of its contractually mandated obligation to do so.
9. LaSalle's breaches of the MLPA and PSA are so numerous and substantial that they frustrate the fundamental bargain that the parties struck: that only compliant Loans would be included in the securitization, and the risk of non-compliant Loans would be allocated to LaSalle. Accordingly, Plaintiff seeks, inter alia, enforcement of LaSalle's contractual obligation to pay the contractually required Purchase Price for all Loans, excluding those loans that have been paid in full as of the commencement of this action, at the price provided for in the PSA (the "Purchase Price"). A list of the 282 Loans is attached hereto as Exhibit 3.
10. While the Purchase Price is the correct and contractually required remedy for all Loans, to the extent the Court determines that the Purchase Price remedy is unavailable with regard to any particular Loan, then Plaintiff seeks in the alternative an appropriate measure of damages, including, but not limited to, compensatory, consequential and/or equitable damages and indemnification in an amount to be determined at trial.
11. The Trust brings this action by and through Midland, as the Special Servicer and Master Servicer for the Trust under the PSA. Midland is a division of PNC Bank, National Association ("PNC"). PNC is a Pennsylvania national banking association with its principal place of business in Pennsylvania.
12. Wells Fargo is a national banking association with its principal place of business in South Dakota.
13. Under Section 2.03(e) of the PSA "[t]he Master Servicer or Special Servicer (in the case of Specially Serviced Mortgage Loans) shall, for the benefit of the Certificateholders and the Trustee . . . enforce the obligations of the Mortgage Loan Seller under the Mortgage Loan Purchase Agreement. Such enforcement, including, without limitation, the legal prosecution of claims, if any, shall be carried out in such form, to such extent and at such time as the Master Servicer or the Special Servicer, as the case may be, would require were it, in its individual capacity, the owner of the affected Mortgage Loan(s)." Ex. 1 (PSA) § 2.03(e).
14. Under Section 3.01(b) of the PSA "the Master Servicer and the Special Servicer each shall have full power and authority, acting alone ... to do or cause to be done any and all things in connection with such servicing and administration for which it is responsible which it may deem necessary or desirable." Ex. 1 (PSA) § 3.01(b).
15. Thus, pursuant to the PSA, the Special Servicer and Master Servicer are empowered to bring this action for and on behalf of the Trust to enforce rights and remedies under the MLPA and PSA.
16. LaSalle is a national banking association that had its principal place of business in Illinois. On October 1, 2007, LaSalle was acquired by Bank of America and on May 5, 2008, LaSalle assumed the name of Bank of America, N.A. Bank of America is a national banking association with its principal place of business in North Carolina.
17. No beneficiary of the Trust is a citizen of North Carolina.
18. This Court has subject-matter jurisdiction over this action pursuant to 28 U.S.C. § 1332. Complete diversity exists because Plaintiff and Bank of America are citizens of different states and the amount in controversy exceeds $75,000.00, exclusive of interest and costs.
19. This Court has personal jurisdiction over Bank of America because Bank of America transacts business in, and has an interest or possesses real property in, the State of Illinois and, more specifically, the Northern District of Illinois. Furthermore, the MF4 securitization was at least partially transacted in the Northern District of Illinois.
20. Venue is appropriate in this Court pursuant to 28 U.S.C. § 1391(b)(1) and (c)(2) because Bank of America resides in the Northern District of Illinois (the "District") based on its contacts with the District as set forth in the preceding paragraph. In addition, venue is appropriate in this Court pursuant to 28 U.S.C. § 1391(b)(2) because a substantial part of the alleged acts giving rise to the dispute occurred in this District.
21. LaSalle's Multifamily Finance Group ("MFG") originated the Loans to be sold and securitized. These Loans were known as the "MF4" series. Prior to MF4, MFG also originated a "MF1," "MF2," and "MF3" series of loans. MF2 and MF3 were also originated to be sold and securitized. The MF1 loans, however, were generally "portfolio loans," meaning loans that were originated to be kept on LaSalle's own "balance sheet" or books rather than being sold and securitized.
22. In contrast with the MF1 loans, the loans included in Real Estate Mortgage Investment Conduit ("REMIC") trusts, such as the Trust at issue in this case, are typically "conduit" loans which are originated for purposes of sale to REMIC trusts, and are then pooled in groups to collateralize the certificates the Trust issues to investors.
23. When LaSalle converted MFG from a "portfolio" lending platform to a "for sale" lending platform, LaSalle loosened MFG's underwriting and overall risk management standards. LaSalle subsequently experienced higher delinquency rates in the MF2, MF3, and MF4 Loans.
24. In 2007, MFG management became concerned regarding the high delinquency rates for MF2, MF3, and MF4, and MFG Credit Officer Paul Gembara conducted an analysis of the delinquencies. He noted in an internal May 2007 email (attached as Exhibit 4) several "major differences" between the securitized loans (MF2, MF3, and MF4) versus portfolio loans:
Ex. 4. MFG Managing Director and Chief Credit Officer Dale Grossman responded to Mr. Gembara's analysis, "Excellent analysis, great summary."
26. Data reported by Trepp LLC (attached as Exhibit 6), an industry-leading aggregator of commercial mortgage-backed securities ("CMBS") data, confirms that MFG Loans have performed significantly worse than the industry average for comparable CMBS loans. Trepp reported on the delinquency rates for MFG loans and for multifamily loans under $5 million that were originated by other lenders during the first quarter 2005 through second quarter 2006. The Loans originated by MFG suffered an overall delinquency rate of 18.07%. By contrast, all non-LaSalle loans matching these criteria, and which were originated at the same time, experienced an overall delinquency rate of just 5.66%.
27. This poor relative performance has been confirmed by Bank of America itself, which acquired LaSalle and the MFG platform. Bank of America employee Christopher Callahan analyzed the MF2, MF3, and MF4 securitizations in 2008, near the time Bank of America acquired LaSalle, and noted in an internal document that was emailed to others at Bank of America (attached as Exhibit 7):
29. Under the MLPA, LaSalle, as Seller, made dozens of representations and warranties with respect to the Loans. These representations and warranties include, inter alia:
30. LaSalle breached Representation and Warranty 10 ("Rep 10") with respect to all Loans secured by properties located in the states of Oklahoma and Washington (the "Oklahoma and Washington Loans"), which represents 21 of the 282 Loans listed on Exhibit 3. The mortgage loan documents for these loans do not include sufficient power-of-sale language to allow for a non-judicial foreclosure and practical realization against the mortgaged properties.
31. Because the pertinent language of the mortgage loan documents is identical for all Oklahoma and Washington loans, this breach of Rep 10 applies to all Oklahoma and Washington Loans.
32. Oklahoma law requires that mortgage documents contain specific power-of-sale language in a specific format to allow for non-judicial foreclosure:
Okla. Stat. tit. 46., § 43(A)(2)(a) (emphasis added).
33. LaSalle plainly attempted to include such power-of-sale language in its Oklahoma mortgage documents, but failed because the included language is not bolded, underlined, or substantially the same as set forth in the above-quoted statute. Rather, LaSalle's Oklahoma mortgage documents state:
34. Washington law requires that mortgage documents (referred to as a "deed of trust") contain specific language in order to allow for a non-judicial foreclosure: "It shall be requisite to a trustee's sale: (1) That the deed of trust contains a power of sale; (2)
35. LaSalle plainly attempted to include power-of-sale language in its Washington mortgage documents, but failed because the documents did not include language sufficient to identify that the real property conveyed is not used principally for agricultural purposes. Instead, the relevant language, Paragraph 27 of the Washington mortgage documents, is identical to the above-quoted Paragraph 27 of the Oklahoma mortgage documents.
36. LaSalle simply utilized the same form language without any regard for the specific state law requirements for non-judicial foreclosure and, as a result, neither the Oklahoma nor Washington mortgage documents contain the necessary language under state law to allow for non-judicial foreclosure.
37. Rep 10 warrants that the Mortgage Loan documents contain enforceable language so as to furnish the Mortgage Loan purchaser with the option of practical realization through judicial or non-judicial foreclosure. Because the Mortgage Loan documents do not meet the statutory requirements for non-judicial foreclosure in the states of Oklahoma and Washington, Plaintiff has been denied the option of practical realization through non-judicial foreclosure.
38. LaSalle's breaches of Rep 10 materially and adversely affected the value of the Oklahoma and Washington Loans, the related mortgaged properties, or the interests of the Trustee and Certificateholders in these Loans and related mortgaged properties, including but not limited to diminishing the value of the Loans to Certificateholders. Because the mortgage documents for these Loans did not provide the option of non-judicial foreclosure, they were worth less than identical loans that did provide this option. Thus, LaSalle's breaches of Rep 10 materially and adversely affected the value of these Loans to the Certificateholders as of the Closing Date.
39. LaSalle breached Representation and Warranty 36 ("Rep 36") with respect to all Loans because the appraisals that LaSalle obtained in connection with the origination of all Loans did not satisfy the guidelines of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA").
40. FIRREA provides protection for federal financial and public policy interests in real estate-related transactions by requiring real estate appraisals used in connection with federally related transactions to be performed in writing, in accordance with uniform standards, by appraisers whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.
41. According to § 1110 [12 U.S.C. § 3339] of FIRREA, each federal financial institution's regulatory agency shall prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of each such agency, and each such agency may require compliance with additional standards if it makes a determination in writing that such additional standards are required in order to properly carry out its statutory responsibilities. Such additional standards were in fact set forth by the Office of the Comptroller of the Currency ("OCC"), which regulates federally insured, nationally chartered banks such as LaSalle Bank.
42. In particular, in October 2003, the OCC issued an Interagency Statement on Independent Appraisal and Evaluation Functions, OCC: Advisory Letter 2003-9, quoted in part below, which applied to all real estate-related financial transactions originated or purchased by a regulated institution for its own portfolio or as assets held for sale.
43. MFG's appraisal practices were systemically flawed such that the above-quoted FIRREA requirements were violated with regard to all the Loans, in one or more of the following ways:
44. In 2006, after failing an OCC FIRREA examination, LaSalle hired Thomas Watson, a then recently retired longtime OCC examiner-in-charge with primary responsibility for oversight of the nation's largest banks, specializing in FIRREA compliance. Mr. Watson was hired by LaSalle to evaluate, among other things, FIRREA compliance within some of LaSalle's loan programs, including MFG.
45. Mr. Watson concluded as part of his work that MFG loan production personnel ordered the appraisals for all Loans, rather than an independent appraisal department, and this practice of allowing loan production personnel to order appraisals, even if from an approved list of appraisers, violated FIRREA. MFG Managing Director Dale Grossman stated in an internal e-mail (attached as Exhibit 9) that he agreed with Mr. Watson that the MFG appraisal ordering process violated FIRREA.
46. Notably, following the receipt and review of Mr. Watson's final report, LaSalle in February 2007 changed the way that MFG appraisals were ordered such that an independent appraisal group started to order them, thereby removing that responsibility from the MFG production group. This change, which took place long after all of the Loans had been originated, and after they had been securitized in late December 2006, was discussed in an internal LaSalle memorandum that was emailed within MFG (attached as Exhibit 10).
47. Therefore, by its own admissions, LaSalle violated FIRREA for all of the appraisals on all Loans due to a lack of independence in the appraisal ordering process. LaSalle's systemic violations of FIRREA for all Loans is a breach of Rep 36. Because LaSalle's appraisal ordering process violated the independence requirement of FIRREA, all appraisals ordered for the Loans failed to satisfy FIRREA guidelines, and this same breach of Rep 36 applies to all Loans.
48. As stated in the referenced OCC document, "[t]hese independence concerns include the risk that improperly prepared appraisals may undermine the integrity of credit underwriting processes. . . . [And] an institution's lending functions should not have undue influence that might compromise the program's independence." Since the appraisals were improperly ordered, with undue influence from loan production, violating numerous provisions of FIRREA, the integrity of MFG's credit underwriting process was compromised.
49. LaSalle's breaches of Rep 36 materially and adversely affected the value of the Loans, the related mortgaged properties, or the interests of the Trustee and Certificateholders in the Loans and related mortgaged properties, including but not limited to diminishing the value of the Loans to Certificateholders. Because the Loans lacked FIRREA-compliant appraisals, they were worth less than identical loans that did have FIRREA-compliant appraisals. Thus, LaSalle's breaches of Rep 36 materially and adversely affected the value of the Loans to the Certificateholders as of the Closing Date.
50. LaSalle breached Representation and Warranty 24 ("Rep 24") with respect to all Loans because LaSalle's origination and servicing of the Loans did not meet customary industry standards in many ways, including, inter alia:
51. Many of the above-mentioned flaws are confirmed by LaSalle's own internal analyses. (
52. Because LaSalle failed to meet customary industry standards in many ways, as described above, with respect to each of the Loans, LaSalle breached Rep 24 with respect to all Loans.
53. LaSalle's breaches of Rep 24 materially and adversely affected the value of the Loans, the related mortgaged properties, or the interests of the Trustee and Certificateholders in the Loans and related mortgaged properties, including but not limited to diminishing the value of the Loans to Certificateholders. Because the Loans were not originated according to customary industry standards, they were worth less than identical Loans that were originated according to such standards. Thus, LaSalle's breaches of Rep 24 materially and adversely affected the value of the Loans to the Certificateholders as of the Closing Date.
54. On September 6, 2012, pursuant to Section 2.03(b) of the PSA, Midland provided to Bank of America detailed written notice of the breaches of representations and warranties, as just described, and demanded that Bank of America pay the Purchase Price the Loans in conformity with the MLPA and PSA.
55. Pursuant to the PSA, Bank of America had 90 days (the "Initial Cure Period") following written notice to determine if it would pay the Purchase Price the Loans.
56. Bank of America failed and refused to pay the Purchase Price for the Loans following the expiration of the Initial Cure Period as it was required to do under the PSA and MLPA.
57. Rather, on December 3, 2012, which was several days prior to the expiration of the Initial Cure Period, and before Plaintiff had the contractual ability to commence this litigation, Bank of America filed a preemptive and wholly improper declaratory judgment action in a different jurisdiction.
58. Plaintiff realleges and incorporates this Complaint's preceding paragraphs.
59. The PSA and MLPA are valid and enforceable contracts.
60. Plaintiff has performed all of its obligations under the PSA and MLPA.
61. In the MLPA, LaSalle made numerous representations and warranties concerning the Loans. Ex. 2 (MLPA) § 6, Ex. B. Such representations and warranties are incorporated by reference into the PSA. Ex. 1 (PSA) § 2.03(b). Pursuant to the PSA, LaSalle Commercial assigned and transferred to Plaintiff its rights under the MLPA, including all rights to enforce any breach of LaSalle's representations and warranties contained within the MLPA. Thus, Plaintiff may enforce LaSalle's representations and warranties.
62. Each noticed Loan had at least one breach of a representation and warranty that materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property.
63. Section 2.03 of the PSA requires LaSalle to pay the Purchase price for any Loan within 90 days of discovery or notice of any breach of representations and warranties made in the MLPA with respect to such Loan, which breach materially and adversely affects the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, and which breach has not been cured by LaSalle within the aforementioned 90-day period.
64. On September 5, 2012, Midland, as Special Servicer, notified Bank of America of systemic breaches of the representations and warranties affecting the 282 Loans set forth on Exhibit 3, which have materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, and demanded that LaSalle pay the Purchase Price for the Loans in accordance with the PSA and MLPA.
65. Bank of America was required to pay the Purchase Price for the Loans within 90 days of its receipt of initial notice of the breach, as defined in the PSA (which includes, inter alia, the unpaid principal balance, accrued interest, unreimbursed servicing advances and expenses, including legal fees, incurred out of enforcement of Bank of America's contractual obligations), regardless of whether the Loans were defaulted, delinquent or had been foreclosed upon. However, Bank of America has refused to pay the Purchase Price for a single Loan or otherwise comply with its contractual obligations.
66. Thus, Bank of America has breached the PSA and MLPA through its breach of representations and warranties, including, but not limited to, its breach of Rep 10 with respect to the Oklahoma and Washington Loans, its breach of Rep 36 with respect to all Loans, and its breach of Rep 24 with respect to all Loans. Bank of America has also breached its contractual obligation pay the Purchase Price for the Loans. Given the systemic, pervasive nature of the breaches at issue, Plaintiff anticipates that additional review of the complete loan files, once obtained through discovery, will uncover even more breaches of representations and warranties applicable to each Loan in addition to the breaches set forth above.
67. The breaches set forth above materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, because the inclusion of such defective Loans in the pool increased the riskiness of the loan portfolios beyond what was contractually bargained for at the time the securitization closed.
68. Pursuant to the PSA and MLPA, Plaintiff is entitled to the liquidated Purchase Price amount for the Loans, as defined in the PSA (which includes, inter alia, the unpaid principal balance, accrued interest, unreimbursed servicing advances, and expenses, including legal fees, incurred out of enforcement of Bank of America's contractual obligations).
69. Plaintiff realleges and incorporates this Complaint's preceding paragraphs.
70. The PSA and MLPA are valid and enforceable contracts.
71. Plaintiff has performed all of its obligations under the PSA and MLPA.
72. In the MLPA, LaSalle made numerous representations and warranties concerning the Loans. Ex. 2 (MLPA) § 6, Ex. B. Such representations and warranties are incorporated by reference into the PSA. Ex. 1 (PSA) § 2.03(b). Pursuant to the PSA, LaSalle Commercial assigned and transferred to Plaintiff its rights under the MLPA, including all rights to enforce any breach of LaSalle's representations and warranties contained within the MLPA. Thus, Plaintiff may enforce LaSalle's representations and warranties.
73. Each noticed Loan had at least one breach of a representation and warranty that materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property.
74. Section 2.03 of the PSA requires LaSalle to pay the Purchase Price for any Loan within 90 days of discovery or notice of any breach of representations and warranties made in the MLPA with respect to such Loan, which breach materially and adversely affects the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, and which breach has not been cured by LaSalle within the aforementioned 90-day period.
75. On September 5, 2012, Midland, as Special Servicer, notified Bank of America of systemic breaches of the representations and warranties affecting the 282 Loans set forth on Exhibit 3, which have materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, and demanded that LaSalle pay the Purchase Price for the Loans in accordance with the PSA and MLPA.
76. Bank of America was required to pay the Purchase Price for the Loans within 90 days of its receipt of initial notice of the breach, as defined in the PSA (which includes, inter alia, the unpaid principal balance, accrued interest, unreimbursed servicing advances and expenses, including legal fees, incurred out of enforcement of Bank of America's contractual obligations), regardless of whether the Loans were defaulted, delinquent or had been foreclosed upon. However, Bank of America has refused to pay the Purchase Price for a single Loan or otherwise comply with its contractual obligations.
77. Thus, Bank of America has breached the PSA and MLPA through its breach of representations and warranties, including, but not limited to, its breach of Rep 10 with respect to the Oklahoma and Washington Loans, its breach of Rep 36 with respect to all Loans, and its breach of Rep 24 with respect to all Loans. Bank of America has also breached its contractual obligation to pay the Purchase Price for the Loans. Given the systemic, pervasive nature of the breaches at issue, Plaintiff anticipates that additional review of the complete loan files, once obtained through discovery, will uncover even more breaches of representations and warranties applicable to each Loan in addition to the breaches set forth above.
78. The breaches set forth above materially and adversely affected the value of the Loan, the related mortgaged property, or the interests of the Trustee and Certificateholders in the Loan and related mortgaged property, because the inclusion of such defective Loans in the pool increased the riskiness of the loan portfolios beyond what was contractually bargained for at the time the securitization closed.
79. The MLPA specifically states that, while the Purchase Price remedy is the sole remedy in connection with breaches of representations and warranties, "no limitation of remedy is implied with respect to [LaSalle's] breach of its obligation to cure, repurchase or substitute" in accordance with the terms and conditions of this Agreement. Ex. 2 (MLPA) § 6(g). The MLPA further states that LaSalle Commercial's rights under the MLPA have been assigned, in accordance with the PSA, to the Trustee for the benefit of the Certificateholders. Id. § 13.
80. Thus, while the Purchase Price is the contractually required remedy for all Loans, to the extent the Court determines that the Purchase Price remedy is unavailable with regard to any particular Loan, then Plaintiff pleads Claim II as an alternative claim regarding any such Loan, and seeks an appropriate measure of damages, including, but not limited to, compensatory, consequential and equitable damages in an amount to be determined at trial based upon Defendant's breach of its obligation to cure, repurchase or substitute the Loans.
81. Plaintiff realleges and incorporates this Complaint's preceding paragraphs.
82. The PSA provides that Bank of America must reimburse the Master or Special Servicer for any costs incurred in enforcing LaSalle's obligations under the PSA. Ex. 1 (PSA) § 2.03(e).
83. Plaintiff has incurred and will continue to incur expenses in enforcing LaSalle's obligations under the PSA.
84. Plaintiff will recover the expenses it has incurred and will continue to incur as part of the liquidated Purchase Price formula, which is the contractually required remedy for all Loans. To the extent the Court determines that the Purchase Price remedy is unavailable with regard to any particular Loan, then Plaintiff pleads Claim III as an alternative claim because it independently is entitled to be reimbursed for its expenses in enforcing its remedies under the PSA and MLPA, including the costs of prosecuting this action, attorneys' fees and other expenses in an amount to be determined at trial.
WHEREFORE, Plaintiff respectfully requests that this Court enter judgment in its favor and against Bank of America as follows:
Plaintiff hereby demands a trial by jury pursuant to Rule 38(b) of the Federal Rules of Civil Procedure.
Avenue Companion Loan (collectively, the
In consideration of the mutual agreements herein contained, the Depositor, the Master Servicer, the Special Servicer, the Trustee, the Paying Agent and the Custodian agree as follows:
Section 1.01
Section 2.03
(b) If any Certificateholder, the Master Servicer, the Special Servicer, the Paying Agent, the Custodian or the Trustee discovers (without implying any duty of such person to make, or to attempt to make, such a discovery) or receives notice of a Defect in any Mortgage File (subject to
Any of the following will cause a document in the Mortgage File to be deemed to have a
(c) In connection with any repurchase of, or substitution of a Qualified Substitute Mortgage Loan for, a Mortgage Loan contemplated by this
(d) Section 6(e) of the Mortgage Loan Purchase Agreement provides the sole remedy available to the Certificateholders (subject to the limitations on the rights of the Certificateholders under this Agreement), or the Trustee on behalf of the Certificateholders, with respect to any Defect in a Mortgage File or any Breach of any representation or warranty with respect to a Mortgage Loan set forth in or required to be made pursuant to Section 6 of the Mortgage Loan Purchase Agreement.
(e) The Master Servicer or Special Servicer (in the case of Specially Serviced Mortgage Loans) shall, for the benefit of the Certificateholders and the Trustee (as holder of the Uncertificated Lower-Tier Interests), enforce the obligations of the Mortgage Loan Seller under the Mortgage Loan Purchase Agreement. Such enforcement, including, without limitation, the legal prosecution of claims, if any, shall be carried out in such form, to such extent and at such time as the Master Servicer or the Special Servicer, as the case may be, would require were it, in its individual capacity, the owner of the affected Mortgage Loan(s). Any costs incurred by the Master Servicer and the Special Servicer with respect to the enforcement of the obligations of the Mortgage Loan Seller under the Mortgage Loan Purchase Agreement shall be deemed to be Servicing Advances to the extent not otherwise provided herein (including, without limitation, pursuant to the immediately following sentence). The Master Servicer and the Special Servicer, as the case may be, shall be reimbursed for the reasonable costs of such enforcement:
(f) If the Mortgage Loan Seller incurs any expense in connection with the curing of a Breach, which also constitutes a default under the related Mortgage Loan and is reimbursable thereunder, the Mortgage Loan Seller shall have a right, and shall be subrogated to the rights of the Trustee and the Trust Fund under the Mortgage Loan, to recover the amount of such expenses from the related Mortgagor;
Section 2.04
Section 3.01
Without limiting the foregoing, subject to
(b) Subject only to the Servicing Standard and the terms of this Agreement and of the respective Mortgage Loans and, if applicable, the Companion Loans, and any applicable Intercreditor Agreements, and applicable law, the Master Servicer and the Special Servicer each shall have full power and authority, acting alone or, in the case of the Master Servicer, subject to
(c) To the extent the Master Servicer is permitted pursuant to the terms of the related Mortgage Loan documents or Companion Loan documents (including the related Intercreditor Agreement) to exercise its discretion with respect to any action which requires a confirmation of the Rating Agencies that such action will not result in the downgrade, withdrawal or qualification of the ratings of any Class of Certificates, the Master Servicer shall require the costs of such written confirmation to be borne by the related Mortgagor to the extent permitted under the Mortgage Loan documents. To the extent the terms of the related Mortgage Loan documents or Companion Loan documents require the Mortgagor to bear the costs of any confirmation of the Rating Agencies that an action will not result in the downgrade, withdrawal or qualification of the ratings of any Class of Certificates, the Master Servicer shall not waive the requirement that such costs and expenses be borne by the related Mortgagor. To the extent that the terms of the related Mortgage Loan documents or Companion Loan documents are silent as to who bears the costs of any confirmation of the Rating Agencies that an action will not result in the downgrade, withdrawal or qualification of the ratings of any Class of Certificates, the Master Servicer shall use reasonable efforts to have the Mortgagor bear such costs and expenses. The Master Servicer shall not be responsible for the payment of such costs and expenses out of pocket.
(d) The relationship of each of the Master Servicer and the Special Servicer to the Trustee, the Custodian and the Paying Agent under this Agreement is intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent.
(e) The Master Servicer shall, to the extent permitted by the related Mortgage Loan documents or Companion Loan documents and consistent with the Servicing Standard, permit Escrow Payments to be invested only in Permitted Investments.
(f) Within 60 days (or such shorter time period as is required by the terms of the applicable Mortgage Loan documents) after the later of (i) the receipt thereof and (ii) the Closing Date, the Mortgage Loan Seller pursuant to the Mortgage Loan Purchase Agreement shall notify each provider of a letter of credit for each Mortgage Loan identified as having a letter of credit on the Mortgage Loan Schedule, that the Trust (in care of the Master Servicer) for the benefit of the Certificateholders shall be the beneficiary under each such letter of credit. If the Mortgage Loan documents do not require the related Mortgagor to pay any costs and expenses relating to any modifications to the related letter of credit, then the Mortgage Loan Seller shall pay such costs and expenses. If a letter of credit is required to be drawn upon earlier than the date the Mortgage Loan Seller has notified the provider of such letter of credit pursuant to clause (i) of the immediately preceding sentence, the Mortgage Loan Seller shall cooperate with the reasonable requests of the Master Servicer or Special Servicer in connection with making a draw under such letter of credit. If the Mortgage Loan documents require the related Mortgagor to pay any costs and expenses relating to any modifications to the related letter of credit, and such Mortgagor fails to pay such costs and expenses after the Master Servicer has exercised reasonable efforts to collect such costs and expenses from such Mortgagor, then the Master Servicer shall give the Mortgage Loan Seller notice of such failure and the amount of costs and expenses, and the Mortgage Loan Seller shall pay such costs and expenses. Neither the Master Servicer nor the Special Servicer shall have any liability for the failure of the Mortgage Loan Seller to perform its obligations under the Mortgage Loan Purchase Agreement.
(g) The Depositor agrees that it shall pay the annual surveillance fees of the Rating Agencies.
(h) Servicing and administration of each Companion Loan shall continue hereunder for so long as the corresponding AB Mortgage Loan or any related REO Property is part of the Trust Fund or for such longer period as any amounts payable by the related Companion Holder to or for the benefit of the Trust or any party hereto in accordance with the related Intercreditor Agreement remain due and owing.
Section 3.02
IN WITNESS WHEREOF, the parties hereto have caused their names to be signed hereto by their respective officers thereunto duly authorized, in each case as of the day and year first above written.
IN WITNESS WHEREOF, the parties hereto have caused their names to be signed hereto by their respective officers thereunto duly authorized, in each case as of the day and year first above written.
IN WITNESS WHEREOF, the parties hereto have caused their names to be signed hereto by their respective officers thereunto duly authorized, in each case as of the day and year first above written.
Before the Court is Bank of America's motion to compel responses to Subpoena Duces Tecum and Subpoenas Ad Testificandum by non-party Spring Hill Capital Partners, LLC [dkts. 113 and 121]. The Court finds the theories advanced by Bank of America to enforce these subpoenas are not persuasive and, therefore, sustains the objections to them by Spring Hill. Bank of America's motion is hereby denied.
The two cases which give rise to the instant motion arise out of a dispute concerning the sale and securitization of mortgage loans. The movant, Bank of America "(BOA"), is the successor in interest to LaSalle Bank National Association ("LaSalle"), which is alleged to have breached various representations and warranties contained in a Mortgage Loan Purchase Agreement ("MLPA"). Under this agreement, executed in December 2006, LaSalle Bank agreed to sell a pool of residential mortgages loans to LaSalle Commercial Mortgage Securities ("LaSalle Commercial'). These parties, along with Midland Loan Services ("Midland"), as the Master Servicer for these loans, and Wells Fargo Bank, as Trustee of the LaSalle Commercial Mortgage Trust 2006-MF4 (the "Trust"), had entered into a separate Pooling and Servicing Agreement ("PSA"). In that agreement the mortgage loans were transferred to the Trust, which then issued certificates to investors, thereby securitizing the mortgage loans.
Whether BOA breached its warranties and representations in 2006 (when the transaction closed) is at the heart of the two pending actions: one, an action by BOA that it did not, in fact, do so, and one by Midland, in its capacity as Master Servicer, in which it claims BOA breached the MLPA and demands that BOA repurchase all of the loans. (This Second Amended Complaint is the subject of a pending motion to dismiss.)
About two months before the close of discovery in this case, BOA served several subpoenas on Spring Hill Capital Partners, LLC. Although a non-party to the actions, Spring Hill is not a stranger to this litigation. Spring Hill is the only certificate holder for the loans in question and, unlike Midland who is the named plaintiff by virtue of its role as Master Servicer for the Trust, Spring Hill is the party who will benefit if a material breach of the MLPA is established and BOA has to repurchase the loans. Not surprisingly, then, Spring Hill, which acquired its interest in the certificates in 2011, has closely monitored the instant litigation and undoubtedly communicated with the plaintiff, Midland. (However, communications between these two entities about the allegations of this lawsuit are not at issue in this motion.)
It is Spring Hill's objection to the subpoenas that forms the basis of this dispute. BOA has served three subpoenas ad testificandum and one subpoena duces tecum. After a round of negotiation, BOA has narrowed the time frame of the subpoena to January 1, 2011 to the present. The subject matters it seeks include non-privileged testimony/documents and internal communications/analyses and its communications with parties other than Midland regarding:
1. the quality or value of the MF4 Loans or Mortgaged Properties;
2. La Salle's origination, underwriting, appraisal, and/or closing practices generally or with respect to MF4 Loans;
3. sending the Repurchase Demand or commencing the Repurchase Action;
4. allegations in the Repurchase Demand or Repurchase Action Complaint supporting the alleged breaches of the representations and warranties in the MLPA;
5. Spring Hill's interpretation of the RW's in the MLPA and the repurchase provisions of the PSA and MLPA;
6. the prices at which Spring Hill acquired, or the amounts paid by Spring Hill to acquire, the MF4 Certificates;
7. Spring Hill's investigation, evaluation, analysis or due diligence with respect to its investment in the MF Certificates; and
8. Spring Hill's evaluation of its actual or potential profits or losses in connection with its investment in MF4 Certificates.
Spring Hill objects to producing any of this information, although it is apparently willing to produce those documents that it reviewed prior to investing in the MF4 certificates and documents it reviewed as part of its "investment surveillance." The basis for the objection is that the subpoenas place an undue burden on Spring Hill to comply because the information sought has little to no relevance to the claims asserted in this case. Spring Hill argues that its decision to invest in this transaction in 2011, as well as any of its internal analysis about the underlying loans either before or after they purchased the securities, do not bear on the allegations Midland has made in the Complaint, which charge that LaSalle breached several warranties and representations back in 2006 when it pooled these particular mortgage loans and sold them to LaSalle Commercial. LaSalle Commercial then, in turn, transferred them to the Trust, which securitized the investment by issuing certificates now held by Spring Hill. Spring Hill contends that its analysis of its investment does not inform on the question of whether there was a breach at the time the transaction closed, which it contends is the time frame relevant to the analysis. Accordingly, it argues that the subpoenas place an undue burden on it to comply.
The Federal Rules of Civil Procedure provide that parties "may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense."
But this dispute also is governed by Rule 45 because, regardless of its status as an investor here, Spring Hill is indisputably a non-party. As many courts have held, that non-party status is a significant factor to be considered in determining whether the burden imposed by a subpoena is undue.
In this case, although Spring Hill also contends that the documents would be difficult for it to access and would reveal proprietary information, its primary argument is that the information is irrelevant because the issue of whether LaSalle breached representations and warranties will be determined at the time of securitization (2006) and not when it acquired its investment in the certificate (2011).
Of course, as BOA points out, courts frequently find a basis to permit post-closing discovery between parties in a breach of contract suit and the Court agrees that a temporal line in the sand is not appropriate if the discovery sought is likely to lead to admissible evidence. But none of the cases cited by BOA in support of this very basic proposition create a basis for a finding that the particular evidence it seeks here is relevant. In Cerabio TLC v. Wright Medical Technology, the Seventh Circuit held that the pre-closing discussion between the parties to the underlying contract at issue was relevant to the issue of what constituted a reasonable time for contract and that post-closing conversations could be admitted to show the agreement had been modified.
BOA makes a variety of different arguments about the relevance of this information. The first, and superficially the most appealing, is that Spring Hill's potential knowledge of the alleged breach and failure to give prompt notice as defined by the operative agreement might support BOA's potential defense in this case. Indeed, the cases cited by BOA state that documents relevant to this defense are discoverable in a repurchase case when the issue of prompt notice is raised as a defense. The cases it cites clearly hold that such post-closing analyses are relevant when done by a party to the agreement or its agent.
The second argument which BOA makes is that Spring Hill's assessments of and communications concerning the loans and LaSalle's underwriting practices in general are relevant to the issue of whether in fact they met "industry standards" or are consistent with the custom and practice in the industry. But the issue framed in the Second Amended Complaint is not whether LaSalle's loan programs met "industry standards" but, whether, at the time that the securitization occurred, LaSalle breached specific representations and warranties. Spring Hill's analyses/monitoring of its own investment five years later do not inform on this question. And the cases that BOA cites in support of this argument are clearly distinguishable from the case at bar.
The same can be said of BOA's third contention which is that it is entitled to know what Spring Hill believes different terms in the agreements mean. BOA does not cite a specific section of the operative agreements, which it contends are ambiguous and about which discovery concerning these terms' meaning is necessary. But, accepting at face value that there will be disputed contractual provisions, the notion that this entitles BOA to obtain discovery from a third party that acquired the certificates several years after the documents were executed, rather than from the parties that negotiated and closed this transaction, does not make sense. Spring Hill's post-closing opinions of what the agreements mean are no more relevant about what they actually mean than those of any other potential investor or other player in the securitization game. Further, its reasons for acquiring this investment and its opinions of its performance are not likely to lead to admissible evidence about whether, five years earlier, BOA breached its warranties and representations when these loans were securitized. BOA has not cited a single case in which a party was permitted to seek this kind of lay opinion evidence from a non-party by way of subpoena.
Nor are Spring Hill's opinions of the allegations made by Midland in the Second Amended Complaint — or its view of Midland's decision to seek the Repurchase Demand — likely to lead to admissible evidence which will prove or disprove those allegations or whether, as BOA contends, Midland's Repurchase Demand was inadequate. (BOA does not articulate this purported defense other than to mention it in passing in its reply brief ) To the extent that Spring Hill communicated its views on either subject to Midland (and Midland was influenced thereby), those communications already have been explored in party discovery from Midland.
Finally, BOA makes a very general argument that the discovery is relevant to "impeachment." BOA claims that it is entitled to know whether Spring Hill's opinions and views about this transaction differ from Midland's. Regarding the first contention, assuming that Spring Hill's internal analyses about the case differ from Midland's, that contrary view does not impugn Midland's credibility unless Midland knew that view, agreed with it and filed the lawsuit anyway. In that case, documents and testimony obtained from Midland would reveal this. Spring Hill's credibility as the investor five years after the alleged breach of warranties occurred is not at issue in this case. BOA has not suggested that Midland possessed an improper motive for the lawsuit.
In conclusion, the theories advanced by BOA to enforce these subpoenas are not persuasive and the Court sustains the objections to them by Spring Hill. The Court notes, however, that an answer and affirmative defenses to the Second Amended Complaint have not been filed. That pleading may give rise to additional bases for relevance not currently before the Court.
Bank of America, N.A. ("Bank of America"), as successor by merger to LaSalle Bank National Association ("LaSalle"), respectfully moves the Court for the entry of an Order declaring that limited categories of documents and information being sought by Bank of America from Spring Hill Capital Partners LLC ("Spring Hill") are relevant to the defenses asserted in Bank of America's Answer to the Second Amended Complaint filed on September 23, 2014 [Dkt. # 202]
On December 28, 2006 (the "MF4 Closing Date"), in connection with the securitization transaction at issue ("MF4"), LaSalle deposited 374 small-balance multifamily mortgage loans (the "MF4 Loans") underwritten by its Multifamily Finance Group ("MFG") into a securitization trust (the "MF4 Trust"), the beneficial ownership of which was represented by various classes of certificates (the "MF4 Certificates") purchased by sophisticated institutional investors ("Certificateholders"). Spring Hill purchased all of the MF4 Certificates in October 2011 from the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which was then the Controlling Class Certificateholder ("CCH") of MF4, at approximately 60% of their original cost. See Ex. 1 at 8. Spring Hill is now the CCH, the lone MF4 Certificateholder, and the sole beneficiary of the MF4 Trust. See Halper Decl., Ex. Cat 57:10-13.
The timing of Spring Hill's purchase of the MF4 Certificates is extremely significant in this case. Spring Hill purchased the MF4 Certificates five years after the MF4 Closing Date, which is when Midland Loan Services ("Midland"), the special servicer acting on behalf of the MF4 Trust (and, on information on belief, at Spring Hill's direction), claims that the alleged Material Adverse Effect
On information and belief, Spring Hill purchased the MF4 Certificates with an eye toward pursuing a lawsuit similar to the MF2/MF3 Global Action against LaSalle's successor, Bank of America, in the hope of obtaining a windfall recovery that would generate additional large profits. (On information and belief, Spring Hill has already profited without regard to any recovery in this lawsuit because of improved market conditions since it acquired the MF4 Certificates). Indeed, prior to purchasing the MF4 Certificates, Spring Hill actively solicited other investment firms to make co-investments in the MF4 Certificates, including by meeting with representatives of Berkadia LLC ("Berkadia") and Leucadia National Corporation ("Leucadia"), during which Spring Hill outlined its investment strategy in a PowerPoint presentation, pitchbook, and other materials. On further information and belief, significant selling points for Spring Hill were that (i) the MF4 Loans were selling at a significant discount (see, e.g., Ex. 4 at 2), and (ii) there was "litigation value" of a repurchase claim against Bank of America for the MF4 Loans based on the allegations made in the MF2/MF3 Global Action. In effect, Spring Hill was telling investors to get in on the opportunity to buy the MF4 Certificates cheaply and then profit by recovering additional profits through repurchase litigation.
In the MF2/MF3 Global Action, which was brought against Bank of America in December 2010,
This, of course, should come as no surprise, as the same attorney who represented Crown in the MF2/MF3 Global Action (Paul Snyder) also represented Midland in connection with making the repurchase demand for the MF4 Loans and instituting this litigation. In fact, Spring Hill directed Midland to retain Mr. Snyder to make the repurchase demand at issue, and Mr. Snyder's firm drafted the repurchase demand and original complaint. See Ex. 6 [REDACTED/] On information and belief, Spring Hill directed Midland to retain Mr. Snyder because Spring Hill was aware, prior to purchasing the MF4 Certificates, of the allegations in the MF2/MF3 Global Action of "systemic flaws" in the MFG program that supposedly tainted the MF2/MF3 loans, and that comparable allegations could be asserted with respect to the MF4 Loans. A declaration filed by Mr. Snyder earlier in this litigation strongly suggests this to be the case, as he represented that:
Decl. of Paul D. Snyder in Opp. to Def.'s Mot. to Transfer to the N. Dist. of Ill. [Dkt. # 25] (emphasis added).
Spring Hill saw the settlement of the MF2/MF3 Global Action as a template for pursuing its plan (conceived prior to purchasing the MF4 Certificates) to obtain a windfall by purchasing the MF4 Certificates at a significant discount and then demanding pool-wide repurchase of the MF4 Loans. Spring Hill contacted Midland in January 2012 about pursuing a claim against Bank of America for repurchase of the MF4 Loans. See Halper Decl., Ex. L at MIDLAND 01488909-10. On September 5, 2012, at Spring Hill's behest, Midland demanded that Bank of America repurchase all of the MF4 Loans that had not been paid in full as of that date. See id., Ex. D at MIDLAND 01294032-37. After Bank of America refused Midland's repurchase demand, Midland, at Spring Hill's direction, filed the MF4 Repurchase Action, alleging that LaSalle breached RWs regarding the MF4 Loans. As in the MF2/MF3 Global Action, Midland alleges here that LaSalle breached RWs, not by virtue of any issue specific to any particular MF4 Loan, but rather because of alleged "pervasive" or "systemic" flaws in LaSalle's underwriting practices generally. See Compl. ¶ 66.
Bank of America filed its Motion to Compel, which this Court denied on August 12, 2014. See MTC Order. At the time of that Order, however, Bank of America had not yet filed its Answer to the MF4 Complaint. In recognition of this fact, the Court stated in its Order as follows:
On September 23, 2014, Bank of America filed its Answer. The Answer does, in fact, justify compelling Spring Hill to produce the discovery requested by Bank of America as described herein. The Answer asserts the following defenses to the claims in the MF4 Complaint:
These defenses are directly relevant to the discovery sought from Spring Hill. Moreover, as further discussed below, the depositions of Midland's experts, which occurred subsequent to this Court's MTC Order, disclosed additional bases for certain of the foregoing defenses, further supporting an order compelling production of the discovery described herein.
Under the MLPA and PSA, Bank of America is obligated to repurchase an MF4 Loan if Midland establishes that (1) LaSalle breached an RW with respect to that loan, and (2) the breach caused the requisite Material Adverse Effect. See Ex. 2 § 2.03(b). Establishing a breach of an RW is not enough to trigger Bank of America's repurchase obligation under the MLPA and PSA; Midland must also establish that the breach caused the requisite Material Adverse Effect. It is Midland's burden to prove Material Adverse Effect, and Bank of America has asserted as a defense in its Answer that, even assuming there was a breach of an RW with respect to the MF4 Loans, Midland cannot establish the requisite Material Adverse Effect.
What constitutes a Material Adverse Effect and whether any of the alleged RW breaches alleged by Midland caused a Material Adverse Effect are critical and hotly-contested issues as to which both parties have offered expert testimony. Judge Lee recently confirmed that this issue remains undecided here. See Ex. 7 at 19:3-13. Bank of America contends that, to establish a Material Adverse Effect, a Certificateholder must prove that it has suffered an actual, realized loss that was caused by a breach of an RW. See Answer ¶¶ 114, 117. During expert discovery, which did not commence until well after the parties had briefed Bank of America's Motion to Compel, Bank of America learned that Midland's expert on Material Adverse Effect, Dr. Joseph R. Mason, takes the position that the alleged RW breaches caused a Material Adverse Effect as of the MF4 Closing Date because they increased the uncertainty concerning certain attributes of the MF4 Loans and how those loans would perform in the future, and that this uncertainty rendered the MF4 Loans less valuable than they would have been if no RW breaches had occurred (i.e., investors therefore overpaid for the MF4 Certificates). See Ex. 8 at ¶ 14 (opining that the "uncertainty about the [MF4 Loans'] probable performance and the proper structure of the MF4 Certificates [resulting from the alleged RW breaches] materially and adversely affected Investors' value in the MF4 Deal"). Dr. Mason also conceded, however, that if the alleged defects in the MF4 Loans were disclosed to investors prior to their purchasing the MF4 Certificates, investors would not have suffered a Material Adverse Effect because they would not have overpaid for the MF4 Certificates, but rather would have priced them accordingly. See Ex. 3 at 87:8-88:8.
Documents produced by Midland during fact discovery support the fact that Spring Hill, prior to purchasing the MF4 Certificates in October 2011, was aware of the lawsuits brought against Bank of America arising out of the MF2 and MF3 securitizations that predated MF4. See Halper Decl., Ex. L at MIDLAND 01488910. In the MF2/MF3 Global Action, Crown made identical allegations to those made on Spring Hill's behalf here. For instance, Crown alleged, inter alia, that LaSalle's MFG, which underwrote the MF2 and MF3 loans at issue in the MF2/MF3 Global Action and the MF4 Loans at issue in this case, loosened its underwriting and risk management standards for conduit loans and had a lax underwriting culture. See Ex. 5 ¶¶ 19-21. As in the MF4 Repurchase Action here, Crown also alleged that LaSalle (i) breached RW-10 by failing to include sufficient power-of-sale language in the mortgage documents for Oklahoma and Washington loans in the MF2 and MF3 pools, (ii) breached RW-36 by violating Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 because, inter alia, loan production personnel ordered appraisals rather than an independent appraisal department and such personnel provided appraisers with broker opinions of value, and (iii) breached RW-24, which warranted that the MF2 and MF3 loans were originated according to customary industry standards, because LaSalle relied on broker-prepared spreadsheets and summaries of operating statements and rent rolls rather than source operating statements from the borrower. Like Crown in the MF2/MF3 Global Action, Midland also contends in the MF4 Complaint that LaSalle had a policy of awarding "top 10" brokers with additional leniency via exceptions to underwriting guidelines and emphasized speed and volume of loans over quality. See Ex. 5 ¶¶ 25-46.
These are only a sample of the alleged underwriting defects in LaSalle's MFG program that were cited in the MF2/MF3 Global Action, and these allegations are identical to Midland's allegations with respect to the MF4 Loans. The very fact that Crown alleged in the MF2/MF3 Global Action that loans underwritten by LaSalle's MFG program were "systemically" and "pervasively" flawed suggests that Spring Hill, prior to purchasing the MF4 Certificates, was aware that the MF4 Loans would, in the view of its lawyers, suffer from the very same defects that were alleged to have tainted the MF2 and MF3 loans. Indeed, deposition testimony from one of Midland's employees supports the fact that Spring Hill was aware of the MF2/MF3 litigation prior to purchasing the MF4 Certificates, as Spring Hill was already actively engaged with Midland in monitoring how that litigation might influence a potential MF4 repurchase claim in the earliest months of Spring Hill's ownership of the MF4 Certificates. See Ex. 9 at 53:6-14 [REDACTED/] see also id. at 53:15-54:11 [REDACTED/] Because the evidence to date suggests that Spring Hill was aware of the alleged "pervasive" and "systemic" flaws in LaSalle's underwriting processes prior to purchasing the MF4 Certificates, and since Midland's expert, Dr. Mason, has opined that a Material Adverse Effect could not be claimed by a purchaser that was aware of the alleged defects in the MF4 Loans prior to its purchase of the MF4 Certificates, the following documents are clearly relevant and important to enable Bank of America to support its defenses at summary judgment and at trial:
While this litigation is ostensibly being brought by Midland on behalf of the MF4 Trust, Spring Hill is the CCH, the lone MF4 Certificateholder, and the sole remaining beneficiary of the MF4 Trust. As this Court recognized, "Spring Hill is the only [Certificateholder] for the loans in question and, unlike Midland who is the named plaintiff by virtue of its roles as Master Servicer for the [MF4] Trust, Spring Hill is the party who will benefit if a material breach of the MLPA is established and [Bank of America] has to repurchase the [MF4 Loans]." MTC Order at 3. That Spring Hill is the lone economic stakeholder in this litigation, and the entity that not only drives Midland's litigation strategy but also controls whether to settle, is confirmed by the fact that Freddie Mac, the former CCH from which Spring Hill acquired all of its interest in the MF4 Trust, was also the CCH in the MF2/MF3 trusts. It was Freddie Mac, not Crown, that appeared as the decision-maker when the parties were directed by the court in the MF2/MF3 Global Action to participate in a settlement mediation attended by those with authority to settle the case. There can be no doubt that Spring Hill is the party who is, in reality, bringing the claims at issue in this litigation and the one who stands to benefit from them.
Both federal and New York law require that, in order to have standing, a shareholder seeking to pursue a claim on the corporation's behalf must own stock in the corporation at the time that the alleged wrongdoing occurred and at the time litigation is commenced. See In re Bank of N. Y. Deny. Ling., 320 F.3d at 296; see also Kreindler, 85 F.R.D. at 614 (to pursue a derivative suit, the plaintiff must have been "a stockholder at the time of the transaction involved in the litigation"). This requirement, which is known as the "contemporaneous ownership rule," bars shareholders from maintaining such suits where the wrongs complained of occurred prior to the shareholder's purchase of stock in the corporation. See id. "The policies underlying the requirement are twofold: (1) to prevent potential derivative plaintiffs from `buying a lawsuit' by purchasing stock; and (2) to insure that derivative actions are brought by shareholders who have actually suffered injury and have an interest in the outcome of the case." Ensign, 1990 WL 213085, at *2 (citation omitted).
While the "contemporaneous ownership" rule has traditionally been applied in the context of shareholder derivative actions, a court has dismissed a
Like the certificateholder in SC Note Acquisitions, Spring Hill, on information and belief, purchased the MF4 Certificates after it was aware of the alleged "systemic flaws" in LaSalle's MFG program that form the basis for the MF4 Complaint. By commencing the MF4 Repurchase Action based on claims known at the time of its investment in the MF4 Certificates, Spring Hill is trying to "litigate [a] purchased grievance[]" and obtain an unfair windfall on its investment. 934 F. Supp. 2d at 529. This invest-to-litigate strategy never was contemplated by the parties to the MLPA and PSA as warranting the repurchase remedy. As a result, Bank of America has asserted a defense in its Answer that "Plaintiff's claims are barred, including under the contemporaneous ownership rule, because the sole remaining beneficiary of the [MF4] Trust with an economic stake in this litigation, Spring Hill, did not own the [MF4] Certificates at the time of the [MF4] Closing Date and did not purchase its interest in the [MF4] Trust until nearly five years after the MF4 securitization closed." Answer ¶ 115.
Similar to the "contemporaneous ownership rule," the Bangor Punta doctrine bars claims by a purchaser who acquires all, or substantially all, of the shares of a corporation at a fair price from those who participated or acquiesced in prior alleged wrongs cannot now use its control of the corporation to sue it directly for prior wrongs done to others. See Bangor Punta 417 U.S. at 704; see also Weaver, 1987 WL 10972, at *11-14. "Where equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded." Bangor Punta, 417 U.S. at 713. "[T]he Bangor Punta Doctrine implements the policy embodied in the [contemporaneous] ownership requirement." Midland Food Servs., 792 A.2d at 929.
Here, Spring Hill acquired the MF4 Certificates at a substantial discount nearly five years after the alleged events giving rise to the MF4 Complaint from Freddie Mac (which Freddie Mac was aware of, but elected not to sue on) based on the allegations made in the MF2/MF3 Global Action. Any recovery here by Spring Hill, as the sole beneficiary of the MF4 Trust and lone remaining economic stakeholder in this litigation therefore would unjustly enrich Spring Hill. Indeed, Spring Hill "sustained no injury" and thus "any recovery on their part would constitute a windfall" and "would in effect allow [Spring Hill] to recoup a large part of the price they agreed to pay for their shares, notwithstanding the fact that they received all they had bargained for." Bangor Punta, 417 U.S. at 711.
Bank of America is therefore entitled to the following discovery of Spring Hill that is relevant to its "contemporaneous ownership rule" and Bangor Punta doctrine defenses:
