INDEX NO.

651967/2014

FILED: NEW YORK COUNTY CLERK 06/27/2014
NYSCEF DOC. NO. 2

RECEIVED NYSCEF: 06/27/2014

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK

COMMERCE BANK; AMICI ASSOCIATES, L.P.; AMICI
OFFSHORE, LTD.; AMICI QUALIFIED ASSOCIATES, L.P.;
THE COLLECTORS FUND LLC; CEDAR HILL ONSHORE
MORTGAGE OPPORTUNITY FUND, L.P.; FIRST
FINANCIAL OF MARYLAND FEDERAL CREDIT UNION;
FIRST NATIONAL BANKING COMPANY; LL FUNDS LLC;
NCMIC INSURANCE COMPANY; SBLI USA MUTUAL
LIFE INSURANCE COMPANY, INC.; THOMASTON
SAVINGS BANK; and VNB CAPITAL CORP.,

Index No.

COMPLAINT
JURY TRIAL DEMANDED

Plaintiffs,
v.
THE BANK OF NEW YORK MELLON,
Defendant.

Plaintiffs Commerce Bank, Amici Associates, L.P., Amici Offshore, Ltd., Amici
Qualified Associates, L.P., The Collectors Fund LLC, Cedar Hill Onshore Mortgage
Opportunity Fund, L.P., First Financial of Maryland Federal Credit Union, First National
Banking Company, LL Funds LLC, NCMIC Insurance Company, SBLI USA Mutual
Life Insurance Company, Inc., Thomaston Savings Bank, and VNB Capital Corp.,
(collectively, “Plaintiffs”), by their attorneys Vandenberg & Feliu, LLP, for their
Complaint against Defendant Bank of New York Mellon (“BNYM,” “Trustee,” or
“Defendant”), allege and state as follows:
NATURE AND SUMMARY OF THIS ACTION
1.

Plaintiffs are domestic banks, insurance companies, and asset management

companies with investments in residential mortgage-backed securities (“RMBS”) trusts
identified in “Exhibit C” (each a “Trust” and, collectively, “the Trusts”). The corpuses of

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the Trusts consist primarily of residential mortgage loans made by Countrywide Home
Loans, Inc.
2.

Defendant, as Trustee of RMBS Trusts in which Plaintiffs made

investments, engaged in a widespread failure to obtain and hold critical documents
evidencing the mortgage loans belonging to the Trusts, such as the promissory notes,
mortgages, and assignments. As a result, Defendant did not receive the Trust corpuses as
required by the governing contracts. Moreover, Defendant failed to provide notice of or
seek to cure the failure to deliver documents, as well as other breaches of obligations of
the parties involved in the establishment and continued servicing and administration of
the Trusts.
3.

Defendant’s breaches have caused significant damage to Plaintiffs in the

form of dramatically increased costs, reduced borrower payments, and increased losses
on distressed properties. Plaintiffs seek monetary and injunctive relief.
4.

Plaintiffs also seek an accounting as to the actions of Bank of America,

N.A. and its affiliates (as applicable, “Bank of America”) in servicing and administering
the loans in the Trusts in accordance with the action styled Knights of Columbus v. Bank
of New York Mellon, Index No. 651442/2011 (N.Y. Sup. Ct.), the second amended
complaint for which is incorporated herein by reference and attached as “Exhibit A.” On
June 29, 2011, without Plaintiffs’ knowledge or consent, Defendant commenced a special
proceeding, pursuant to N.Y. C.P.L.R. Article 77, in the Supreme Court of the State of
New York, Index No. 651786/2011, (the “Article 77 Proceeding”) that purports to settle
all of Plaintiffs’ claims against Bank of America and its affiliates. See Proposed
Settlement Agreement, attached as “Exhibit B.” If the Proposed Settlement Agreement is

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not approved or is modified to exempt Plaintiffs’ claims against Bank of America and its
affiliates, Plaintiffs preserve the claim for an accounting by pleading it here.
5.

An accounting is required because either or both of the Trustee or the

Master Servicer have: (1) been examined by the Office of Comptroller of the Currency,
the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the
Federal Reserve Board, which “found critical deficiencies and shortcomings in
foreclosure governance processes, foreclosure document preparation processes, and
oversight and monitoring of third party law firms and vendors”; (2) been found by the
Office of the Comptroller of the Currency to have “engaged in unsafe or unsound
banking practices” “[i]n connection with certain foreclosures of loans in its residential
mortgage servicing portfolio,” which is subjecting each Trust to unknown costs and
expenses; (3) been accused by the City of Buffalo, among others, for failing to properly
care for and dispose of unoccupied properties, contributing to the deterioration of
neighborhoods and increasing losses to the Trusts’ beneficiaries; (4) been accused by the
Federal Trade Commission of engaging in a deliberate strategy to “mark up” the actual
cost of services that are ultimately paid by each Trust; (5) been exposed by AMERICAN
BANKER for using affiliates to place on homes insurance costing up to ten times the price
of regular policies, which premiums are ultimately charged to the beneficiaries of each
Trust; and (6) had a court find that a practice that an employee of a Trust administrator
testified under oath was “customary” precluded a similar trust from enforcing its rights
under a mortgage.

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6.

The Proposed Settlement Agreement does not purport to release any of

Plaintiffs’ claims against Defendant, other than those regarding Defendant’s entry into
the Proposed Settlement Agreement.
PARTIES
7.

Plaintiff Commerce Bank is a Missouri-state chartered bank headquartered

in Kansas City, Missouri, with branches in Missouri, Colorado, Illinois, Kansas, and
Oklahoma. Commerce Bank is owned by Commerce Bancshares, Inc.
8.

Plaintiff Amici Associates, L.P. is limited partnership incorporated in and

with its headquarters and principal place of business in New York, New York.
9.

Plaintiff Amici Offshore, Ltd. is a limited company incorporated in the

British Virgin Islands and with its headquarters and principal place of business in New
York, New York.
10.

Plaintiff Amici Qualified Associates, L.P. is a limited partnership

incorporated in and with its headquarters and principal place of business in New York,
New York.
11.

Plaintiff The Collectors Fund LLC is a limited liability company

incorporated in Delaware with its headquarters and principal place of business in New
York, New York.
12.

Plaintiff Cedar Hill Onshore Mortgage Opportunity Fund, L.P. is a limited

liability company incorporated in Delaware with its headquarters and principal place of
business in New York, New York.

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13.

Plaintiff First Financial of Maryland Federal Credit Union is a federal

credit union with its headquarters and principal place of business in Lutherville,
Maryland.
14.

Plaintiff First National Banking Company is a bank headquartered in Ash

Flat, Arkansas with branches in northern Arkansas.
15.

Plaintiff LL Funds LLC is a limited liability company incorporated in and

with its headquarters and principal place of business in Philadelphia, Pennsylvania.
16.

Plaintiff NCMIC Insurance Company is an insurance company

incorporated in and with its headquarters and principal place of business in Clive, Iowa.
17.

Plaintiff SBLI USA Mutual Life Insurance Company, Inc. is an insurance

company incorporated in and with its headquarters and principal place of business in
New York, New York.
18.

Plaintiff Thomaston Savings Bank is a Connecticut-state chartered mutual

savings bank with its headquarters and principal place of business in Thomaston,
Connecticut, and branches in various locations in Connecticut.
19.

Plaintiff VNB Capital Corp. is a corporation incorporated in New York

with its headquarters and principal place of business in Wayne, New Jersey.
20.

Plaintiffs purchased certificates evidencing beneficial interest in the Trusts

listed in “Exhibit C” (collectively referred to as “the Trusts”).
21.

Defendant BNYM, formerly named The Bank of New York, is a New

York state-chartered bank with trust powers, incorporated in Delaware, with its principal
place of business located in New York, New York. Defendant serves as Trustee for the
Trusts.

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22.

Defendant’s Chairman and Chief Executive Officer described Defendant’s

business model in his February 11, 2009 testimony before the House Financial Services
Committee as follows:
The business model of The Bank of New York Mellon is very different from a
traditional retail or commercial or investment bank. In contrast to most of the
other companies here today, our business model does not focus on the broad retail
market or products such as mortgages, credit cards or auto loans. Nor do we even
do typical lending to corporate businesses. A good way to think of The Bank of
New York Mellon is that we are a “bank for banks.” The lion’s share of our
business is dedicated to helping other financial institutions around the world. 1
JURISDICTION AND VENUE
23.

The Court has jurisdiction over this proceeding pursuant to CPLR 301 and

303. The Bank of New York Mellon is a New York state charted bank with its principal
place of business in the City of New York. Each Trust is a New York Trust formed under
the laws of the State of New York. The Bank of New York Mellon participated in the
transaction, the formation of each Trust, and other activities within the State that led to
the events forming the basis of this Complaint.
24.

Venue is proper in this Court pursuant to CPLR 503(c) and 506. The Bank

of New York Mellon’s principal office is located at One Wall Street, New York, NY
10286.
BACKGROUND – THE TRUSTS
25.

BNYM is the Trustee of each Trust for the benefit of the Trusts’ investors

(called “Certificateholders”), including Plaintiffs.
26.

The document providing for the establishment and administration of each

Trust is called a Pooling and Servicing Agreement (“PSA”).
1

http://1.usa.gov/1dVhSlU.

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27.

The corpus of each Trust consists primarily of residential mortgage loans

made by Countrywide Home Loans, Inc. and/or its affiliates Park Granada LLC, Park
Monaco Inc., and Park Sienna LLC.
28.

In the securitization context, when a borrower seeks and obtains a home

loan, the lender, called an “Originator,” typically sells the loan to an entity, called a
“Seller,” acquiring loans for the purpose of selling them into an RMBS Trust. The Seller
holds the loan for a period of time, during which either the Seller (or the Originator or
some other designee on behalf of the Seller) collects payments from the borrower.
29.

Once the Seller has obtained a sufficient number of loans, the Seller sells

those loans to an entity called a “Depositor,” which typically holds the loans for a brief
period before depositing the loans into the Trust.
30.

The Depositor in turn sells the loans to a Trust, which, in exchange for

value received from investors, issues beneficial ownership interests called “Certificates.”
31.

At the time of each transfer, the selling party is responsible for delivering

loan documents, called a “Mortgage File,” to the purchaser or its designee. If each
transfer occurs properly, the Mortgage File, including the mortgage obligation and all
documents necessary to enforce that obligation, ends up in the Trust.
32.

Based upon the assumption that the loans were deposited into each Trust,

borrowers begin making payments to each Trust through the “Master Servicer.”
33.

For the Trusts at issue in this case, Countrywide Home Loans Servicing

LP (a/k/a “Countrywide Home Loans”) was the original Master Servicer. Countrywide
Home Loans Servicing LP became BAC Home Loans Servicing, LP before merging into

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Bank of America N.A. Throughout the remainder of the Complaint, this entity and its
successors in interest will be referred to as the “Master Servicer.”
34.

When the Master Servicer collects loan payments from borrowers, the

Master Servicer transfers those payments, less allowable deductions, to the Defendant,
who, as Trustee of each Trust, distributes those payments to Trust beneficiaries, called
“Certificateholders,” such as Plaintiffs.

Thus, the Certificateholders are entitled to

participate in the cash flow the Master Servicer collects from borrowers relating to the
mortgage loans each Trust holds on behalf of Certificateholders.
35.

In summary, each Trust is administered for the Certificateholders of each

Trust primarily by two entities: Defendant “Trustee”, which is the “face” of each Trust
for Certificateholders such as Plaintiffs, and the “Master Servicer”, which as the servicer
of the Trust loans, is the “face” of each Trust with borrowers. The entire process is
illustrated graphically below:

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36.

Because the Trustee holds the Trust corpus for the beneficiaries, the

Master Servicer will act in the Trustee’s name when taking action against borrowers. This
includes bringing foreclosure actions in the Trustee’s name against borrowers who are
allegedly delinquent on their loan payments.
BACKGROUND – GENERAL ALLEGATIONS
37.

Recent revelations from a variety of credible sources indicate that the

Trustee BNYM and the Master Servicer Bank of America have been acting and continue
to act for their own benefit rather than for the benefit of Certificateholders such as
Plaintiffs. Furthermore, the acts detailed below indicate that the Trustee and the Master
Servicer may be damaging the borrowers whose loans make up each Trust’s corpus and
undermining efforts to restore economic prosperity to the United States.
THE NATIONAL FINANCIAL CRISIS AND ITS FALLOUT
38.

In 2008, the United States began experiencing a national financial crisis

because some of the nation’s largest financial institutions were engaging in irresponsible
lending practices and leveraging of debt. The financial crisis resulted in an unprecedented
federal bailout of the nation’s largest financial institutions, including Defendant Trustee
and the Master Servicer with Defendant Trustee receiving $3 billion under the Capital
Purchase Program and the Master Servicer receiving $25 billion under the Capital
Purchase Program and $20 billion under the Targeted Investment Program. A national
foreclosure crisis has accompanied the national financial crisis, bringing with it record
numbers of mortgage delinquencies and foreclosures and the resulting deleterious
impacts for borrowers, communities, and Certificateholders such as Plaintiffs.

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39.

Losing a home to foreclosure can be one of the most serious, stressful, and

devastating events in a person’s life. During the foreclosure process, borrowers should be
treated with respect, and the foreclosure process should be performed in a manner that is
honest, legal, and in compliance with due process of law.
40.

Borrowers losing homes to foreclosure fall into a number a categories,

including borrowers working to save their homes from foreclosure such as: (1) honest
borrowers experiencing difficult life events (“Good Faith Borrowers”); and (2) victims of
predatory lending activities who were misled or defrauded outright into obtaining loans
they could not afford (“Predatory Lending Victims”). The Master Servicer should provide
Good Faith Borrowers a reasonable opportunity to stay in their homes when that result
exceeds the net present value of foreclosing. The entity (or its successor in interest) that
sold a Trust a loan made to a Predatory Lending Victim, by contrast, should repurchase
the loan from the Trust as it warranted at the time of sale and face the legal consequences
of its wrongful acts.
41.

Borrowers losing homes to foreclosure also fall into other categories,

including the following: (1) borrowers who cannot make net present value positive
payments under any circumstances and/or have abandoned the premises (“Abandoned
Properties”); and (2) borrowers who engaged in property-flipping schemes, straw-man
purchases, or other fraudulent acts, which often are accompanied by a failure to make any
payments to a Trust (“Fraudulent Borrowers”). Abandoned Properties and Fraudulent
Borrowers (who typically either abandon the property or start to destroy it) are a source
of great concern to local governments charged with maintaining quality of life in these
neighborhoods. There is virtually no dispute that some foreclosures – including those

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involving Abandoned Properties and Fraudulent Borrowers – are necessary from both a
lending and societal perspective (“Valid Foreclosures”). Valid Foreclosures should be
done quickly to reduce the decay and decimation to a neighborhood that accompanies
abandoned or vandalized properties.
BACKGROUND – DEFENDANT’S OBLIGATION TO ACQUIRE THE TRUST CORPUS
42.

Each Trust PSA contained express terms providing for delivery of the

loans into the Trust. 2 Specifically, each PSA contained language stating that the
Depositor would deliver certain critical documents evidencing and supporting each loan
to the Trustee:
In connection with the transfer and assignment set forth in clause (b)
above, the Depositor has delivered or caused to be delivered to the Trustee
(or, in the case of the Delay Delivery Mortgage Loans that are Initial
Mortgage Loans, will deliver or cause to be delivered to the Trustee within
thirty (30) days following the Closing Date and in the case of the Delay
Delivery Mortgage Loans that are Supplemental Mortgage Loans, will
deliver or cause to be delivered to the Trustee within twenty (20) days
following the applicable Supplemental Transfer Date) for the benefit of
the Certificateholders the following documents or instruments with respect
to each Mortgage Loan so assigned:
(i) the original Mortgage Note endorsed by manual or
facsimile signature in blank in the following form: “Pay to
the order of ____________ without recourse,” with all
intervening endorsements showing a complete chain of
endorsement from the originator to the Person endorsing
the Mortgage Note (each such endorsement being sufficient
to transfer all right, title and interest of the party so
endorsing, as noteholder or assignee thereof, in and to that
Mortgage Note); or
[…]
(iii) in the case of each Mortgage Loan that is not a MERS
Mortgage Loan, a duly executed assignment of the
2

Because PSA language is substantially identical across the Trusts, Plaintiffs will
quote the language in CWALT 2007-25 PSA, attached as “Exhibit D,” for purposes of
illustration.

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Mortgage, (which may be included in a blanket assignment
or assignments), together with, except as provided below,
all interim recorded assignments of such mortgage (each
such assignment, when duly and validly completed, to be in
recordable form and sufficient to effect the assignment of
and transfer to the assignee thereof, under the Mortgage to
which the assignment relates); provided that, if the related
Mortgage has not been returned from the applicable public
recording office, such assignment of the Mortgage may
exclude the information to be provided by the recording
office; provided, further, that such assignment of Mortgage
need not be delivered in the case of a Mortgage for which
the related Mortgaged Property is located in the
Commonwealth of Puerto Rico;
PSA § 2.01(c).
43.

As part of the delivery process, the Trustee acknowledged receipt of these

critical documents and promised to hold them “in trust for the exclusive use and benefit
of all present and future Certificateholders.” The Trustee further acknowledged that “it
will maintain possession of the Mortgage Notes in the State of California”:
The Trustee acknowledges receipt of the documents identified in the
Initial Certification in the form annexed hereto as Exhibit F-1 and declares
that it holds and will hold such documents and the other documents
delivered to it constituting the Mortgage Files, and that it holds or will
hold such other assets as are included in the Trust Fund, in trust for the
exclusive use and benefit of all present and future Certificateholders. The
Trustee acknowledges that it will maintain possession of the Mortgage
Notes in the State of California, unless otherwise permitted by the Rating
Agencies.
PSA § 2.02(a).
44.

The Trustee was required to execute “the Initial Certification in the form

annexed hereto as Exhibit F-1”, in which it was to state that it had both received a Note
and an assignment, and that it had undertaken a “review and examination” of those
documents:
In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement (the “Pooling and Servicing Agreement”), the
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undersigned, as Trustee, hereby certifies that, as to each Initial Mortgage
Loan listed in the Mortgage Loan Schedule (other than any Initial
Mortgage Loan paid in full or listed on the attached schedule) it has
received:
(i) (a) the original Mortgage Note endorsed in the following
form: “Pay to the order of __________, without recourse”
or (b) with respect to any Lost Mortgage Note, a lost note
affidavit from Countrywide stating that the original
Mortgage Note was lost or destroyed; and
(ii) a duly executed assignment of the Mortgage (which
may be included in a blanket assignment or assignments).
Based on its review and examination and only as to the foregoing
documents, such documents appear regular on their face and related to
such Mortgage Loan.
PSA Form F-1.
45.

The Trustee subsequently had to issue a Final Certification with respect to

the loans:
Not later than 90 days after the Closing Date, the Trustee shall deliver to
the Depositor, the Master Servicer and Countrywide (on its own behalf
and on behalf of Park Granada, Park Monaco and Park Sienna) a Final
Certification with respect to the Initial Mortgage Loans in the form
annexed hereto as Exhibit H-1, with any applicable exceptions noted
thereon. If, in the course of such review, the Trustee finds any document
constituting a part of a Mortgage File which does not meet the
requirements of Section 2.01, the Trustee shall list such as an exception in
the Final Certification [….]
PSA § 2.02(a).
46.

It was also the Trustee’s duty to affix certain language to each assignment

of Mortgage:
As promptly as practicable subsequent to such transfer and assignment,
and in any event, within one-hundred and twenty (120) days after such
transfer and assignment, the Trustee shall (A) as the assignee thereof, affix
the following language to each assignment of Mortgage: “CWALT Series
2007-25, The Bank of New York, as trustee”, (B) cause such assignment
to be in proper form for recording in the appropriate public office for real
property records and (C) cause to be delivered for recording in the
appropriate public office for real property records the assignments of the
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Mortgages to the Trustee, except that, (i) with respect to any assignments
of Mortgage as to which the Trustee has not received the information
required to prepare such assignment in recordable form, the Trustee’s
obligation to do so and to deliver the same for such recording shall be as
soon as practicable after receipt of such information and in any event
within thirty (30) days after receipt thereof and (ii) the Trustee need not
cause to be recorded any assignment which relates to a Mortgage Loan,
the Mortgaged Property and Mortgage File relating to which are located in
any jurisdiction (including Puerto Rico) under the laws of which in the
opinion of counsel the recordation of such assignment is not necessary to
protect the Trustee’s and the Certificateholders’ interest in the related
Mortgage Loan.
PSA § 2.01(c).
47.

Furthermore, numerous provisions of the PSA made clear that the Trustee

was required to maintain possession of the Mortgage File, which contained, among other
things, the Note and any assignments, and that possession of the Mortgage File by any
other entity was to be a closely guarded and monitored exception rather than the rule.
For example:
a.

“The Trustee shall retain possession and custody of each Mortgage
File in accordance with and subject to the terms and conditions set
forth herein. The Master Servicer shall promptly deliver to the
Trustee, upon the execution or receipt thereof, the originals of such
other documents or instruments constituting the Mortgage File as
come into the possession of the Master Servicer from time to time.”
PSA § 2.02(d) (emphasis added).

b.

“With respect to any Substitute Mortgage Loan or Loans, sold to
the Depositor by a Seller, Countrywide (on its own behalf and on
behalf of Park Granada, Park Monaco and Park Sienna) shall
deliver to the Trustee for the benefit of the Certificateholders the
Mortgage Note, the Mortgage, the related assignment of the
Mortgage, and such other documents and agreements as are
required by Section 2.01, with the Mortgage Note endorsed and the
Mortgage assigned as required by Section 2.01.” PSA § 2.03(c)
(emphasis added).

c.

“Upon the payment in full of any Mortgage Loan, or the receipt by
the Master Servicer of a notification that payment in full will be
escrowed in a manner customary for such purposes, the Master
Servicer will immediately notify the Trustee by delivering, or
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causing to be delivered a “Request for Release” substantially in the
form of Exhibit N. Upon receipt of such request, the Trustee shall
promptly release the related Mortgage File to the Master Servicer,
and the Trustee shall at the Master Servicer’s direction execute and
deliver to the Master Servicer the request for reconveyance, deed
of reconveyance or release or satisfaction of mortgage or such
instrument releasing the lien of the Mortgage in each case provided
by the Master Servicer, together with the Mortgage Note with
written evidence of cancellation thereon.” PSA § 3.12.

48.

d.

“From time to time and as shall be appropriate for the servicing or
foreclosure of any Mortgage Loan, including for such purpose,
collection under any policy of flood insurance, any fidelity bond or
errors or omissions policy, or for the purposes of effecting a partial
release of any Mortgaged Property from the lien of the Mortgage
or the making of any corrections to the Mortgage Note or the
Mortgage or any of the other documents included in the Mortgage
File, the Trustee shall, upon delivery to the Trustee of a Request
for Release in the form of Exhibit M signed by a Servicing Officer,
release the Mortgage File to the Master Servicer. Subject to the
further limitations set forth below, the Master Servicer shall cause
the Mortgage File or documents so released to be returned to the
Trustee when the need therefor by the Master Servicer no longer
exists, unless the Mortgage Loan is liquidated and the proceeds
thereof are deposited in the Certificate Account, in which case the
Master Servicer shall deliver to the Trustee a Request for Release
in the form of Exhibit N, signed by a Servicing Officer.” PSA
§ 3.12 (emphasis added). Each “Request for Release” referenced
above makes clear that it is to be used for individual loans, not for
the entire loan pool.

e.

“Notwithstanding any other provisions of this Agreement, the
Master Servicer shall transmit to the Trustee as required by this
Agreement all documents and instruments in respect of a Mortgage
Loan coming into the possession of the Master Servicer from time
to time and shall account fully to the Trustee for any funds
received by the Master Servicer or which otherwise are collected
by the Master Servicer as Liquidation Proceeds, Insurance
Proceeds or Subsequent Recoveries in respect of any Mortgage
Loan.” PSA § 3.13 (emphasis added).

Even the PSA’s “fail safe” provision (providing that the Trustee has a

security interest in the loans if a true sale does not take place) required that the Mortgage
File be delivered to the Trustee:

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a.

In connection with the pledge of the fail safe security interest,
“[t]he Depositor hereby represents that: […] (v) All original
executed copies of each Mortgage Note that are required to be
delivered to the Trustee pursuant to Section 2.01 have been
delivered to the Trustee.” PSA § 10.04(b).

b.

“The Master Servicer shall take such action as is reasonably
necessary to maintain the perfection and priority of the security
interest of the Trustee in the Mortgage Loans; provided, however,
that the obligation to deliver the Mortgage File to the Trustee
pursuant to Section 2.01 shall be solely the Depositor’s obligation
and the Master Servicer shall not be responsible for the
safekeeping of the Mortgage Files by the Trustee.” PSA § 10.04(c)
(emphasis added).

BACKGROUND – DEFENDANT’S FAILURE TO ACQUIRE THE TRUST CORPUS
49.

Defendant knowingly failed in its obligation to receive, process, maintain,

and hold all or part of the Mortgage Files as required under the PSA. As a consequence,
Plaintiffs did not acquire residential mortgage-backed securities, but instead acquired
securities backed by nothing at all.
50.

In Kemp v. Countrywide Home Loans, Inc., 440 B.R. 624 (D.N.J. Bankr.

2010), the Master Servicer, identifying itself as the servicer for Defendant, filed a secured
claim in the bankruptcy of homeowner and debtor John Kemp. Kemp filed an adversary
complaint against the Master Servicer asserting that “the Bank of New York cannot
enforce the underlying obligation.” Id. at 626.
51.

At the trial in Kemp, a supervisor and operational team leader for the

Master Servicer’s Litigation Management Department testified that “to her knowledge,
the original note never left the possession of Countrywide, and that the original note
appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by
internal FedEx tracking numbers. She also confirmed that the new allonge had not been
attached or otherwise affixed to the note. She testified further that it was customary for

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Countrywide to maintain possession of the original note and related loan documents.” Id.
at 628.
52.

Summarizing the record, the New Jersey Bankruptcy Court found that:

[W]e have established on this record that at the time of the filing of the
proof of claim, the debtor’s mortgage had been assigned to the Bank of
New York, but that Countrywide did not transfer possession of the
associated note to the Bank. Shortly before trial in this matter, the
defendant executed an allonge to transfer the note to the Bank of New
York; however, the allonge was not initially affixed to the original note,
and possession of the note never actually changed. The Pooling and
Servicing Agreement required an endorsement and transfer of the note to
the Trustee, but this was not accomplished prior to the filing of the proof
of claim. The defendant has now produced the original note and has
apparently affixed the new allonge to it, but the original note and allonge
still have not been transferred to the possession of the Bank of New York.
Countrywide, the originator of the loan, filed the proof of claim on behalf
of the Bank of New York as Trustee, claiming that it was the servicer for
the loan. Pursuant to the PSA, Countrywide Servicing, and not
Countrywide, Inc., was the master servicer for the transferred loans. At all
relevant times, the original note appears to have been either in the
possession of Countrywide or Countrywide Servicing.
Id. at 629.
53.

“With this factual backdrop”, the New Jersey Bankruptcy Court turned “to

the issue of whether the challenge to the proof of claim filed on behalf of the Bank of
New York, by its servicer Countrywide, can be sustained”, and found that:
Countrywide’s claim here must be disallowed, because it is unenforceable
under New Jersey law on two grounds. First, under New Jersey’s Uniform
Commercial Code (“UCC”) provisions, the fact that the owner of the note,
the Bank of New York, never had possession of the note, is fatal to its
enforcement. Second, upon the sale of the note and mortgage to the Bank
of New York, the fact that the note was not properly indorsed to the new
owner also defeats the enforceability of the note.
Id. at 629-630.

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54.

To test the Kemp testimony concerning endorsements, FORTUNE magazine

“examined [104] foreclosures filed in two New York counties (Westchester and the
Bronx) between 2006 and 2010”, and reported the following:
None of the 104 Countrywide loans were endorsed by Countrywide – they
included only the original borrower’s signature. Two-thirds of the loans
made by other banks also lacked bank endorsements. The other third were
endorsed either directly on the note or on an allonge, or a rider,
accompanying the note.
The lack of Countrywide endorsements, combined with the bank’s
representation to the court that these documents are accurate copies of the
original notes, calls into question the securitization of these loans, as well
as Bank of New York’s right, as trustee, to foreclose on them. These notes
ostensibly belong to over 100 different Countrywide securities and worse,
they were originally made as long ago as 2002. If the lack of endorsement
on these notes is typical -- and 104 out of 104 suggests it is -- the problem
occurs across Countrywide securities and for loans that pre-date the peakbubble mortgage frenzy.
The lack of Countrywide endorsements also corroborates [the Master
Servicer employee who testified in Kemp], who said that in her 10 years at
Countrywide she had never seen a note with an endorsement, and that as
foreclosures had been increasingly litigated, she had been handling the
original notes, not just the copies scanned into the bank’s database. 3
55.

The process adopted by the Proposed Settlement Agreement in the Article

77 Proceeding – whereby the Master Servicer instead of the Trustee conducts an
inventory of the Mortgage File – demonstrates that Defendant failed to receive and retain
possession of all or part of the Mortgage Files, which failure persists to this day. See
Exhibit B, at 28-31.
56.

The Attorneys General of both New York and Delaware recently

requested information from Defendant to determine whether the Trusts for which

3

Abigail Field, At Bank of America, More Incomplete Mortgage Docs Raise More
Questions, FORTUNE, June 3, 2011. Available at http://bit.ly/kZJfGn.

- 18 -

Defendant served as Trustee “were properly documented and valid”. 4 The Attorney
General of New York, moreover, filed a proposed Verified Pleading in Intervention,
dated August 4, 2011, in the Article 77 Proceeding, attached as “Exhibit E,” which
alleges that Defendant not only knew Mortgage Files were not transferred properly
(¶¶ 23-28), but also breached its duty to notify Certificateholders like the Plaintiffs of this
fact (¶¶ 29-34).
BACKGROUND – THE COVER-UP THROUGH CERTIFICATIONS AND SECURITIES FILINGS
57.

For older Trusts, the Master Servicer, consistent with contractual

obligations, annually and at its own expense causes a nationally or regionally recognized
independent public accounting firm (which is a member of the American Institute of
Certified Public Accountants) to furnish a statement to Defendant that the firm has
examined certain documents and records relating to the servicing of the Mortgage Loans
and that, on the basis of that examination, the servicing has been conducted in
compliance with the Master Servicer’s contractual obligations, with any significant
exceptions or errors reported.
58.

For newer Trusts, the Master Servicer and the Trustee annually must

provide to the Depositor individual assessments of compliance with Applicable Servicing
Criteria, as described in Item 1122(d) of Regulation AB of Rule S-X of the Securities
Exchange Act, 17 C.F.R. § 229.1122(d) (collectively, “Servicing Criteria Assessments”).
For the Trustee, the Servicing Criteria Assessments include pool asset administration
compliance or non-compliance, including:

4

Gretchen Morgensen, Two States Ask if Paperwork in Mortgage Bundling Was
Complete, NEW YORK TIMES, June 12, 2011. Available at http://nyti.ms/laGDUf.

- 19 -

(i) Collateral or security on pool assets is maintained as required by the
transaction agreements or related pool asset documents.
(ii) Pool assets and related documents are safeguarded as required by the
transaction agreements.
Id. § 229.1122(d)(4). For newer Trusts, the Depositor must file the Servicing Criteria
Assessments with the SEC, and the SEC makes them available for public viewing by
investors, rating agencies, and others.
59.

In addition, under Regulation AB and the related PSA, the Trustee’s and

Master Servicer’s registered public accounting firms must deliver separate attestation
reports (collectively, “Accountant Attestation Reports”) to the SEC regarding the
Trustee’s and the Master Servicer’s individual assessments of compliance with
Applicable Servicing Criteria.
60.

For each newer Trust, the Trustee and Master Servicer filed Servicing

Criteria Assessments indicating compliance with Applicable Servicing Criteria, including
the Trustee’s compliance with requirements that “pool assets and related documents [be]
safeguarded as required by the transaction documents” and that “collateral security on
pool assets [be] maintained as required by transaction documents…” The Trustee and
Master Servicer also asserted that they were “in material compliance with the Applicable
Servicing Criteria” as part of Accountant Attestation Reports executed and filed with the
Securities and Exchange Commission in accordance with the Trusts’ PSAs and
Regulation AB.
61.

As set forth elsewhere in this Complaint, the Trustee’s and Master

Servicer’s Servicing Criteria Assessments and statements made in connection with
independent public accounting firm reports and statements, including Accountant

- 20 -

Attestation reports, were untrue, inaccurate, and misleading in failing to report material
non-compliance with servicing criteria to the detriment of the Plaintiffs.
62.

On information and belief, the Master Servicer provides to Defendant an

annual report of an independent accounting firm pursuant to the terms of certain PSAs,
but Defendant has not shared with Certificateholders at large findings regarding any
material non-compliance identified therein.
63.

Some PSAs require the Trustee to provide the independent accounting

firm’s annual report to any Certificateholder who requests it. Based on the Affidavit of a
representative of a Certificateholder in another trust, the Trustee does not provide the
report to Certificateholders when requested to do so.
BACKGROUND – THE COVER-UP IN FORECLOSURE AND PROPERTY TRANSFER FILINGS
64.

In a February 19, 2010, deposition in a Massachusetts bankruptcy case,

Renee D. Hertzler, an employee of the Master Servicer, admitted under oath to signing
seven to eight thousand legal documents a month outside the presence of a notary and
without reviewing the documents prior to signing them. Ms. Hertzler testified: “I
typically don’t read them because of the volume that we sign.” Ms. Hertzler further
admitted to signing affidavits as the Vice President of Defendant BNYM when, in fact,
she was not and never had been employed by Defendant.
65.

Tam Doan worked on pre-sale foreclosures for the Master Servicer in

Southern California. While his job required him to sign various legal documents, he
primarily handled notices to delinquent borrowers that their loans were proceeding to
foreclosure. His signature constituted an affirmation that the Master Servicer had
reviewed the loan and it did not qualify for modification. Yet, Mr. Doan told CNN: “We

- 21 -

had no knowledge of whether the foreclosure could proceed or couldn't, but regardless,
we signed the documents to get these foreclosures out of the way.” In some cases, he
claimed, he did not even know what kind of document he was signing. “I had no idea
what I was signing,” said Doan. “Either you were in or you were out.” 5
66.

This practice of signing documents in an assembly-line manner and

swearing to personal knowledge of facts that the affiant has not even reviewed has
popularly become known as “robo-signing.”
67.

The media revelations about robo-signing were a topic of discussion

during a Congressional hearing 6 on the financial regulatory overhaul. A WASHINGTON
POST article dated September 30, 2010, quoted John Walsh, acting director of the Office
of the Comptroller of the Currency, as telling lawmakers that some lenders “clearly had
deficiencies” in their foreclosure systems. Accordingly, seven banks, including the
Master Servicer, were ordered to review their foreclosure processes. 7 In her testimony
before this same Congressional panel, Federal Deposit Insurance Corporation Chairman
Sheila C. Bair described the issue of document processing errors as “troubling.” She also
said “it’s just a further indication of how wrong we went with the mortgage origination
process and securitization process.” 8

5

http://bit.ly/q4ISRp.
The transcripts of the Senate Banking Committee Hearing on Financial
Overhaul can be found at http://1.usa.gov/9XkhWP, while the hearing video can be
viewed at http://www.c-spanvideo.org/program/OverhaulI.
7
Ariana E. Cha, 7 Major Lenders Ordered to Review Foreclosure Procedures,
WASHINGTON POST, Sept. 30, 2010. Available at http://wapo.st/bsCe3N.
8
Ariana E. Cha, Lenders Told to Review Foreclosure Procedures, WASHINGTON
POST, Oct. 1, 2010. Available at http://wapo.st/d9z6KS.
6

- 22 -

68.

On October 1, 2010, the Master Servicer announced that it was putting

foreclosures on hold in the 23 judicial foreclosure states. According to the Master
Servicer’s spokesman Dan Frahm: “To be certain affidavits have followed the correct
procedures, Bank of America will delay the process in order to amend all affidavits in
foreclosure cases that have not yet gone to judgment.” 9
69.

In early October 2010, Attorneys General in numerous states called for

expanded foreclosure moratoriums, and then-New York Attorney General and now
Governor Andrew Cuomo began an investigation of the issue. 10 Shortly thereafter, the
Attorneys General from all 50 states formed the Mortgage Foreclosure Multistate Group,
and in a joint statement, opined that robo-signing “may constitute a deceptive act and/or
an unfair practice or otherwise violate state laws.” 11
70.

On October 8, 2010, the Master Servicer responded to the calls for an

expanded foreclosure moratorium by releasing the following statement: “Bank of
America has extended our review of foreclosure documents to all fifty states. We will
stop foreclosure sales until our assessment has been satisfactorily completed. Our
ongoing assessment shows the basis for our past foreclosure decisions is accurate. We

9

Ariana E. Cha, Bank of America Latest to Put Hold on Foreclosures Amid
Paperwork Concerns, WASHINGTON POST, Oct. 1, 2010. Available at
http://wapo.st/bNumWZ.
10
See, e.g., http://bit.ly/cNBCBX; http://bit.ly/rj49Uv; http://bloom.bg/d9TBzu;
http://1.usa.gov/prWSAc; http://bit.ly/quFw9c.
11
National Association of Attorneys General, Joint Statement of the Mortgage
Foreclosure Multistate Group, Oct. 13, 2010. Available at http://1.usa.gov/1fuOymH.

- 23 -

continue to serve the interests of our customers, investors and communities. Providing
solutions for distressed homeowners remains our primary focus.” 12
71.

On October 18, 2010, the Master Servicer released the following

statement: “We have reviewed our process for resubmission of foreclosure affidavits in
the 23 judicial states with key stakeholders, including our largest investors. Accordingly,
Bank of America today began the process of preparing foreclosure affidavits for
submission in 102,000 foreclosure actions in which judgment is pending. We anticipate
that by Monday, Oct. 25, the first foreclosure affidavits will be resubmitted to the courts.
Upon judgment, foreclosure dates will be set and Bank of America will resume
foreclosure sales in such proceedings in the 23 judicial states.” 13
72.

However, on October 24, 2010, THE WALL STREET JOURNAL reported that

the Master Servicer admitted finding errors in ten to twenty-five out of the first several
hundred foreclosure files it examined. The mistakes included lack of signatures, missing
files, and inconsistent information about the property and the payment history. In
addition, a Master Servicer spokesman admitted that, rather than review all of the files for
accuracy, the Master Servicer only reviewed several hundred, which represents less than
1% of the foreclosure filings it intends to resubmit to the courts. 14 The WASHINGTON
POST quoted Master Servicer spokesman Dan Frahm as stating: “We never said that our
12

Bank of America Halts Foreclosure Sales in All 50 States, PBS NEWSHOUR,
Oct. 8, 2010. Available at http://to.pbs.org/cjNgih.
13
Available at http://bit.ly/19TmJn4. The states where foreclosures were
suspended are: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont, and
Wisconsin.
14
Dan Fitzpatrick, BofA Finds Foreclosure Document Errors, WALL STREET
JOURNAL, Oct. 24, 2010. Available at http://on.wsj.com/19xC5Ji.

- 24 -

review tested each of these previously filed affidavits in these 102,000 proceedings.”15
The Master Servicer’s “robo-review” was inadequate and insufficient to determine
whether the foreclosures were fully compliant with law. During the fourth quarter of
2010, the Office of Comptroller of the Currency, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, and the Federal Reserve Board undertook a
coordinated horizontal examination of foreclosure processing at the nation’s 14 largest
federally regulated mortgage servicers, including the Master Servicer. As John Walsh,
Acting Comptroller of the Currency, testified before the Senate Committee on Banking,
Housing, and Urban Affairs on February 17, 2011:
In general, the examinations found critical deficiencies and shortcomings
in foreclosure governance processes, foreclosure document preparation
processes, and oversight and monitoring of third party law firms and
vendors. These deficiencies have resulted in violations of state and local
foreclosure laws, regulations, or rules and have had an adverse affect on
the functioning of the mortgage markets and the U.S. economy as a whole.
By emphasizing timeliness and cost efficiency over quality and accuracy,
examined institutions fostered an operational environment that is not
consistent with conducting foreclosure processes in a safe and sound
manner. 16
73.

On April 13, 2011, the Office of the Comptroller of the Currency

“announced formal enforcement actions against eight national bank mortgage servicers
[including the Master Servicer] and two third-party servicer providers for unsafe and
unsound practices related to residential mortgage loan servicing and foreclosure

15

Zachary A. Goldfarb, Warning Signs of Foreclosure Crisis Were Ignored, Says
FDIC Chairman Sheila Bair, WASHINGTON POST, Oct. 25, 2010. Available at
http://wapo.st/dsXvXn.
16
Written testimony available at http://1.usa.gov/pcJlpq.

- 25 -

processing.” 17 On that same date, the Office of the Comptroller of the Currency signed
and published a consent order styled In the Matter of Bank of America, N.A. (the
“Consent Order”), 18 which found that the Master Servicer “engaged in unsafe or unsound
banking practices” by reason of the following conduct:
In connection with certain foreclosures of loans in its residential mortgage
servicing portfolio, the Bank:
(a) filed or caused to be filed in state and federal courts
affidavits executed by its employees or employees of thirdparty service providers making various assertions, such as
ownership of the mortgage note and mortgage, the amount
of the principal and interest due, and the fees and expenses
chargeable to the borrower, in which the affiant represented
that the assertions in the affidavit were made based on
personal knowledge or based on a review by the affiant of
the relevant books and records, when, in many cases, they
were not based on such personal knowledge or review of
the relevant books and records;
(b) filed or caused to be filed in state and federal courts,
or in local land records offices, numerous affidavits or
other mortgage-related documents that were not properly
notarized, including those not signed or affirmed in the
presence of a notary;
(c) litigated foreclosure proceedings and initiated nonjudicial foreclosure proceedings without always ensuring
that either the promissory note or the mortgage document
were properly endorsed or assigned and, if necessary, in the
possession of the appropriate party at the appropriate time;
(d) failed to devote sufficient financial, staffing and
managerial resources to ensure proper administration of its
foreclosure processes;

17

Office of the Comptroller of the Currency, News Release, OCC Takes
Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure
Practices, Apr. 13, 2011. Available at http://1.usa.gov/pa91Xx.
18
The Consent Order is available at http://1.usa.gov/1fuWch5.

- 26 -

(e) failed to devote to its foreclosure processes adequate
oversight, internal controls, policies, and procedures,
compliance risk management, internal audit, third party
management, and training; and
(f) failed to sufficiently oversee outside counsel and
other third-party providers handling foreclosure-related
services.
74.

In May 2011, the Guilford County, North Carolina, Register of Deeds

surveyed various recorded documents filed with his office. The Register of Deeds found
scores of filings in the name of Bank of America, N.A. signed by Christie Baldwin and in
the name of Bank of New York Trust Company, N.A. signed by Pat Kingston, who also
signed for numerous other entities, including EMC Mortgage Corp., Citi Residential
Lending Inc., Mortgage Electronic Registration Systems Inc., and Wells Fargo Bank,
N.A. “Pat Kingston” and “Christie Baldwin” respectively used eight and twelve different
signatures in Guilford County, including the following examples:

- 27 -

75.

On May 20, 2011, the Connecticut Attorney General sent a letter to the

Master Servicer regarding the “numerous complaints from consumers whose loans are
served by Bank of America” received by his office:
Just this week my office received a complaint from a former Navy
Corpsman who described his two-year ordeal with the bank as a
“nightmare.” This customer’s experience is far from unique. Indeed, our
colleagues at the Connecticut Department of Banking and the Connecticut
Fair Housing Center report that they continue to assist many consumers
who are experiencing significant difficulties with Bank of America.
Despite having had more than two years to “right-size” your staff and
establish effective procedures and systems, Bank of America has so far not
prevented even the most common consumer complaints regarding lost
documentation, poor communication, misinformation, dual tracking, and
lack of a single point of contact. Such consumer complaints are common

- 28 -

and a clear indication that Bank of America has not devoted sufficient
resources toward addressing its well-documented default servicing
problems.
http://www.ct.gov/ag/lib/ag/press_releases/2011/brianmoynihanboa_.pdf
76.

According to the Associated Press, the Master Servicer continues to

engage in robo-signing despite entering into the consent order:
Since [June 7, 2011], [John] O’Brien, [the registrar of deeds in Essex
County, Massachusetts,] has received nine documents from Bank of
America purportedly signed by Linda Burton, another name on
authorities’ list of known robo-signers. For years, his office has regularly
received documents signed with Burton's name but written in such vastly
different handwriting that two forensic investigators say it’s highly
unlikely it all came from the same person.
O’Brien returned the nine Burton documents to Bank of America in midJune. He told the bank he would not file them unless the bank signed an
affidavit certifying the signature and accepting responsibility if the title
was called into question down the road. Instead, Bank of America sent
new documents with new signatures and new notaries.
A Bank of America spokesman says Burton is an assistant vice president
with a subsidiary, ReconTrust.
That company handles mortgage
paperwork processing for Bank of America.
“She signed the documents on behalf of the bank,” spokesman Richard
Simon says. The bank says providing the affidavit O’Brien asked for
would have been costly and time-consuming. Instead, Simon says Bank of
America sent a new set of documents “signed by an authorized associate
who Mr. O’Brien wasn’t challenging.”
The bank didn’t respond to questions about why Burton’s name has been
signed in different ways or why her signature appeared on documents that
investigators in at least two states have deemed invalid.
Several attempts by the AP to reach Burton at ReconTrust were
unsuccessful.
O’Brien says the bank’s actions show “consciousness of guilt.” Earlier this
year, he hired Marie McDonnell, a mortgage fraud investigator and
forensic document analyst, to verify his suspicions about Burton’s and
other names on suspect paperwork.
She compared valid copies of Burton’s signature with the documents
O’Brien had received in 2008, 2009 and 2010 and found that Burton’s
- 29 -

name was fraudulently signed on hundreds of documents.
Most of the documents reviewed by McDonnell were mortgage
discharges, which are issued when a home changes hands or is refinanced
by a new lender and are supposed to confirm that the previous mortgage
has been paid off. Bank of America declined comment on McDonnell’s
findings. 19
Examples of the Master Servicer’s latest robo-signed documents include the following
signatures:

77.

Similarly, Reuters published a special report on July 19, 2011, in which it

claimed that five mortgage loan servicers, including Bank of America, had filed
foreclosure documents of questionable validity since agreeing to stop doing so earlier this
year. Reuters went on to describe an incident only a week earlier in which Robert Drain,
United States Bankruptcy Judge for the Southern District of New York:
[O]rdered an investigation involving a foreclosure case brought by [Bank
of America]. [In re: Priscilla C. Taylor, Debtor, U.S. Bankruptcy Court,
Southern District of New York, Case #10-22652]. Two earlier copies of a
promissory note filed in court had lacked any endorsement, but then one
appeared on the note when bank lawyers produced the original. The judge
said the sudden appearance of an endorsement, and his own close look at
it, raised questions about whether it has been added illegally to make the

19

Michelle Conlin, AP Exclusive: Mortgage ‘Robo-signing’ Goes On,
ASSOCIATED PRESS, July 18, 2011. Available at http://apne.ws/mYIUus.

- 30 -

note look legitimate. It ‘raises a sufficiently serious issue as to when and
more importantly by whom this note was endorsed,’ the judge said. 20
BACKGROUND – IMPACT ON FORECLOSURES
78.

Defendant’s failure to possess the complete Mortgage File and properly

execute assignments has prevented, obstructed, delayed, and/or increased the expense of
otherwise proper foreclosures.
79.

The nation’s courts have responded to the servicers’ notoriously flawed

paperwork by instituting new procedures in foreclosure matters in an effort to insure the
integrity of the process. For example:

80.

a.

The New York Court of Appeals implemented a new rule on
October 20, 2010, requiring that every attorney handling a
foreclosure matter sign a form verifying that the documentation
presented to the court is valid.

b.

On November 8, 2010, the Cuyahoga County Court of Common
Pleas (covering Ohio’s largest county including the Cleveland
metro area) announced a new residential mortgage foreclosure
affidavit policy that will require attorneys to provide details of
their communication with the representative of the party seeking
foreclosure and certify that, to the best of their knowledge, the
pleadings and other court filings are complete and accurate.

c.

In Maryland, the state’s highest court approved new emergency
measures that provide for examiners and/or special masters to
scrutinize the documentation in foreclosure matters. The new rules
specifically allow the courts to pass on the cost of the examinations
to the firms foreclosing on debtors.

Due to Defendant’s failings, no foreclosure can take place at the cost

anticipated when Plaintiffs invested in the Trusts because the cost of preparing
foreclosure paperwork has increased exponentially.

20

Scot J. Paltrow, Special Report: Banks Still Robo-signing, REUTERS, July 19,
2011. Available at http://t.co/0BmGkVH.

- 31 -

81.

Further, Defendant’s failings give rise to additional expenses associated

with foreclosures. Such expenses include, but are not limited to: (1) sanctions for
misconduct in legal proceedings; (2) attorneys’ fees and costs of filing a foreclosure
complaint dismissed or delayed due to improper documentation; (3) attorneys’ fees and
costs of re-filing or amending a foreclosure complaint or affidavit; (4) attorneys’ and
other professional fees related to defenses against government investigations and claims;
(5) costs of evaluating servicing procedures to ensure compliance with law; (6) the
payment to borrowers and/or government entities of settlements, fines, penalties, or
judgments related to this issue; (7) increased costs of future foreclosures; and
(8) “carrying costs” associated with delaying Valid Foreclosures such as force-placed
insurance, default-related services, and taxes.
BACKGROUND – IMPACT ON SALES OF FORECLOSED-UPON PROPERTIES
82.

When a homeowner loses a home to foreclosure, title to the home passes

to the lender before the property is marketed and sold to a third party. At this stage in the
process, the property is called “Real Estate Owned” (i.e., real estate owned by the
lender). During this time, the property is typically vacant – the homeowner no longer
lives at the property. Real Estate Owned has certain “costs of carry,” which are necessary
to preserve the value of the property and get the best possible price from a buyer to
reduce the deficiency owed by the borrower and maximize the return to the Trust. Such
“carrying costs” include property maintenance, force-placed insurance coverage, taxes,
and other expenses.
83.

Further, once a property becomes Real Estate Owned, it cannot be allowed

to deteriorate so that it becomes unsellable and a public nuisance. Such practices damage

- 32 -

both the borrower and the investor by increasing the deficiency owed by the borrower on
the loan and the loss associated with the property, as well as the community at large.
84.

An example of this practice is alleged by the City of Buffalo in a

complaint in a case styled City of Buffalo v. ABN AMRO Mortgage Group, Inc., Case No.
2008002200 (N.Y. Sup. Ct. Feb. 20, 2008) (“Buffalo Complaint”), which states at
paragraph 117 that Bank of New York Trust was “granted a judgment of foreclosure for
the property know[n] as 508 Dodge in the City of Buffalo, New York and thereby was
the owner, occupant, mortgagee in possession, equitable owner, or that which exercised
dominion and control over said property” and adds at paragraph 120 “on information and
belief” that “Defendant Bank of New York permitted, suffered and allowed the aforesaid
building(s) located at 508 Dodge [to] become so dilapidated, deteriorated, abandoned
and/or decayed so as to present a danger to the health, safety and welfare of the public.”
Buffalo Complaint ¶¶ 109-114.

Similar allegations are made against the parent of the

Master Servicer respecting a property at 1 Ruhland. Id.
85.

According to a Brookings Institution Senior Fellow, the “impact of an

REO property that sits vacant and boarded up for a year after a foreclosure sale is far
more damaging than that of a property that is quickly fixed up and sold at an affordable
price to a homebuyer. […] The magnitude of that impact, as noted above, is largely a
function of how long the property sat vacant prior to resale. The shorter the period from
initial notice to foreclosure sale, and from then until the property is resold and
reoccupied, the less the impact.” 21

21

REO

Alan Mallach, REO Properties, Housing Markets, and the Shadow Inventory,
VACANT PROPERTIES: STRATEGIES FOR NEIGHBORHOOD STABILIZATION

AND

- 33 -

86.

By contrast, according to the president of the National Community

Stabilization Trust, a “quick sale” of Real Estate Owned property “means lower carrying
and marketing costs, less property deterioration and vandalism, and other savings.” 22
87.

To obtain maximum value for an REO property, the Trust must be able to

assure the purchaser that the Trust has good and marketable title to the property.
88.

The inability to assure the purchaser that the Trust has good and

marketable title to the property greatly suppresses the value the Trust can obtain for the
property.
89.

To the extent that title insurance can be obtained on the sale of an REO

property, title insurers now must perform significant additional diligence, which increases
the time that the Trust must hold the REO property even after a potential purchaser has
made an offer to buy the property.
90.

Defendant’s failure to receive, process, retain, and hold the Mortgage Files

in accordance with the PSA calls into question title on REO properties that have been
sold, as well as current and future REO inventory. Defendant’s failures have caused
Plaintiffs direct damages, including: (1) potential liability on already-sold REO property
from borrowers, purchasers, and title insurers; (2) suppressed values of and/or the
inability to sell REO property due to suspected or actual title defects; (3) increased
expenses to remedy and/or insure against potential purchaser title defects; and

(Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board), Sept.
2010, at 16.
22
Craig Nickerson, Acquiring Property for Neighborhood Stabilization: Lessons
Learned from the Front Lines, REO AND VACANT PROPERTIES: STRATEGIES FOR
NEIGHBORHOOD STABILIZATION (Federal Reserve Banks of Boston and Cleveland and the
Federal Reserve Board), Sept. 2010, at 92.

- 34 -

(4) reduced property values and/or increased costs of carry due to longer timelines
between foreclosure and REO sale dates.
BACKGROUND – OTHER IMPACTS
91.

Defendant’s failings could have an additional impact. In an exclusive

report, Reuters noted on April 27, 2011 that:
The U.S. Internal Revenue Service has launched a review of the taxexempt status of a widely-held form of mortgage-backed securities called
REMICs.
The IRS confirmed to Reuters that the review comes in response to
mounting evidence that banks violated tax requirements by mishandling
the transfer of mortgages to REMICs, short for Real Estate Mortgage
Conduits.
Should the IRS find reason to take tough action, the financial impact could
be enormous. REMIC investments are held by pension funds, in individual
retirement plans such as 401(k)s and by state and local government
entities.
As of the end of 2010, investments in REMICs totaled more than $3
trillion, according to data supplied by the Securities Industry and Financial
Markets Association.
In a brief statement in response to questions from Reuters, the agency
said: “The IRS is aware of questions in the market regarding REMICs and
proper ownership of the underlying mortgages as set out in federal tax
law, and is actively reviewing certain aspects of this issue.”
The statement said the IRS would not make any further comment. An IRS
spokesman declined to say anything about the extent of the review, or
whether the agency is likely to take action.
The review, however, is a sign that the widespread bank misdeeds in home
foreclosure cases are spilling over to threaten the interests of investors in
mortgage-backed securities. The banks originated the mortgages and
packaged them into securities.
These banks’ transgressions, confirmed in court decisions and through
recent action by federal bank regulators, include the failure to formally
transfer ownership of mortgages to the trusts that invested in them and the

- 35 -

subsequent creation of fraudulent mortgage assignments and other false
documents.
These investment trusts already have suffered big drops in income because
of vast numbers of mortgage defaults after the housing boom collapse.
They have been hurt too because in an increasing number of instances they
have been blocked by courts from foreclosing on defaulted mortgages.
The courts ruled that because the trusts never received the required
documents establishing that they owned the mortgages, they have no
standing to foreclose.
For investors, one of the big attractions of REMICs has been that they
aren’t “double-taxed.” While individual investors pay taxes on income
they receive from REMICs, the securities themselves are exempt from
business income tax.
But if the IRS concludes that the REMIC investments failed to comply
with strict requirements in the federal tax code, the REMIC would have to
pay a 100 percent tax on the income from those investments.
That means that the IRS could confiscate the full amount. Tax law experts
said the REMICs also could be subjected to additional penalties for failing
to file tax returns on the income. 23
BACKGROUND – ILLICIT FORECLOSURES
92.

The people of the United States have long supported members of the

United States Armed Forces. One means of demonstrating this support is to protect active
duty military personnel from foreclosure.
93.

According to Thomas E. Perez, Assistant Attorney General for the Civil

Rights Division of the United States Department of Justice:
The men and women who serve our nation in the armed forces deserve, at
the very least, to know that they will not have their homes taken from
them wrongfully while they are bravely putting their lives on the line on
behalf of their country. […] All lenders have an obligation to do their part

23

Scot J. Paltrow, IRS Weighs Tax Penalties on Mortgage Securities, REUTERS,
April 27, 2011. Available at http://reut.rs/kPqOnE.

- 36 -

to work with servicemembers while these brave men and women focus on
keeping us safe. 24
94.

To support this policy, Congress enacted the Servicemembers Civil Relief

Act (SCRA) (formerly the Soldiers’ and Sailors’ Civil Relief Act), which, among other
things, prohibits certain foreclosures absent a court order or specified agreement.
95.

On May 26, 2011, the United States Department of Justice announced that

the Master Servicer “will pay $20 million to resolve a lawsuit alleging that Countrywide
foreclosed on approximately 160 servicemembers between January 2006 and May 2009
without court orders.” The complaint supporting the lawsuit “alleges that Countrywide
did not consistently check the military status of borrowers on whom it foreclosed through
at least May 31, 2009.” 25
96.

In announcing the settlement, André Birotte Jr, United States Attorney for

the Central District of California, noted:
Countrywide Home Loans failed to protect and respect the rights of our
servicemembers, failed to comply with clearly mandated procedures and
foreclosed against homeowners who are valiantly serving our
nation…. Military families lost their homes when Countrywide violated
the law, causing undue stress to wartime personnel who have been
protected from such actions since the Civil War. 26
97.

James T. Jacks, United States Attorney for the Northern District of Texas,

added:
With the numerous sacrifices our servicemembers make while they are
serving our country, the last thing they need to worry about is whether or
not their families will be forced from their homes. These lenders’ callous
disregard for the SCRA, a law which was designed to insulate these
24

Press Release, U.S. Dep’t of Justice, Justice Department Settles with Bank of
America and Saxon Mortgage for Illegally Foreclosing on Servicemembers (May 26,
2011). Available at http://1.usa.gov/1brBeyN.
25
Id.
26
Id.

- 37 -

patriots from unlawful foreclosures and other civil and financial
obligations while they are on active duty, is deplorable…. 27
98.

Allegations that the Master Servicer engages in illicit foreclosures are not

limited to foreclosures against servicemembers, however. For example, a Collier County,
Florida court found that the Master Servicer wrongfully tried to foreclose on a Florida
couple. The court found that the couple, who bought the house for cash, did not even
have a mortgage. The court ordered the Master Servicer to pay the couple’s legal fees,
but, for more than five months, the Master Servicer failed to comply with the court’s
order. Finally, on or about June 5, 2011, the couple foreclosed on a Bank of America
branch, showing up with their attorney and a deputy sheriff, seizing property, and locking
out a “visibly shaken” bank manager for about an hour until he presented the couple with
a check for their legal fees. “They’ve ignored our calls, ignored our letters, legally this is
the next step to get my clients compensated,” said the couple’s attorney.
99.

The fees, costs, and liabilities associated with wrongful foreclosures

should not be borne by borrowers or each Trust’s beneficiaries.
BACKGROUND – MARKED UP FEES FOR DEFAULT-RELATED SERVICES
100.

According to a complaint filed by the Federal Trade Commission on

June 7, 2010, styled Federal Trade Commission v. Countrywide Home Loans, Inc. and
BAC Home Loans Servicing, LP, Case No. CV-10-4193 (C.D. Cal.) (the “FTC
Complaint”), the Master Servicer engaged in “unlawful acts and practices” “in servicing
mortgage loans for a particularly vulnerable class of consumers: borrowers in financial
distress who are struggling to keep their homes.” As with the loans in each Trust,
“[m]any of the loans serviced by Defendants are risky, high-cost loans that had been
27

Id.

- 38 -

originated or funded by Defendants’ parent company, Countrywide Financial Corporation
… and its subsidiaries ….” FTC Complaint ¶ 10.
101.

According to the FTC Complaint ¶ 15: “The scheme works as follows.

Defendants order default-related services from the default subsidiaries, which in turn
obtain the services from third-party vendors. The default subsidiaries then charge
Defendants a fee significantly marked up from the third-party vendors' fee for the service,
and the Defendants, in turn, assess and collect these marked-up fees from borrowers.”
102.

The FTC Complaint ¶ 15 quotes the President, Chief Operating Officer,

and Director of Countrywide Financial Corporation, who indicated that this is a
deliberate strategy created to profit from increased delinquencies:
Now, we are frequently asked what the impact of our servicing costs and
earnings will be from increased delinquencies and [loss] mitigation efforts,
and what happens to costs. And what we point out is, as I will now, is that
increased operating expenses in times like this tend to be fully offset by
increases in ancillary income in our servicing operation, greater fee
income from items like late charges, and importantly from in-sourced
vendor functions that represent part of our diversification strategy, a
counter-cyclical diversification strategy such as our businesses involved in
foreclosure trustee and default title services and property inspection
services.
103.

The FTC Complaint ¶ 18 provides a specific example of the manner in

which the Master Servicer charged for default-related services: “Countrywide Field
Services Corporation (‘CFSC’), now doing business as BAC Field Services Corporation,
is one of the default subsidiaries used by Defendants in servicing borrowers’ mortgage
loans. Until at least July 1, 2008, CFSC was a subsidiary of Defendant CHL. Defendants
order property inspections and property preservation services, such as lawn cuts, from
CFSC, which in turn orders the services from third-party vendors. The vendors charge
CFSC prices for the performance of these services, which prices CFSC then marks up in

- 39 -

numerous instances by 100% or more before ‘charging’ them to Defendants. Defendants
then charge the marked-up fees to the borrower. Defendants collect these marked-up fees
from borrowers through various means, including in connection with repayment plans,
reinstatements, payoffs, bankruptcy plans, and foreclosures.”
104.

The FTC Complaint ¶ 19 details other examples of the manner in which

the Master Servicer on each Trust charged for default-related services: “Defendants
obtain services through other default subsidiaries in similar fashion and then charge
borrowers fees for default services that are substantially marked up from the actual cost
of the services. These other default subsidiaries are LandSafe Default, Inc., also known as
LandSafe

National

Default,

(“LandSafe”)

and

ReconTrust

Company,

N.A.

(“ReconTrust”). Defendants order pre-foreclosure title reports from LandSafe at the very
beginning of a foreclosure referral. As soon as the report is completed, the borrower is
billed for it, and Defendants send the report with the foreclosure referral to a foreclosure
attorney or trustee. In many instances, Defendants send foreclosure referrals to
ReconTrust. ReconTrust acts as the Defendants’ foreclosure trustee in non-judicial
foreclosure states, such as California. LandSafe hires vendors to perform pre-foreclosure
title services and then “charges” fees to Defendants for those services that are
substantially marked up from the vendors’ prices. Likewise, ReconTrust provides
foreclosure trustee services that have been substantially marked up from the actual cost of
the services. Defendants then pass on these marked-up fees to borrowers.”

- 40 -

105.

The Utah Attorney General has “determined that ReconTrust, N.A., is not

in compliance with Utah Code §§ 57-1-21(3) and 57-1-23 when conducting real estate
foreclosures in the state of Utah.” 28
106.

According to the Utah Attorney General, “Utah Code §§ 57-1-21(3) and

57-1-23 provide that the only valid trustees of trust deeds with the ‘power of sale’ are
those who are either members of the Utah State Bar or title insurance companies.
Because ReconTrust is neither of these, all real estate foreclosures conducted by
ReconTrust in the State of Utah are not in compliance with Utah’s statutes, and are hence
illegal.” 29
107.

The FTC Complaint omits one other method by which the Master Servicer

can collect for these marked-up services: by charging them to a Trust and its beneficiaries
as expenses incurred in foreclosure.
108.

In the most common instance, the borrower in default on the loan lacks

sufficient funds to pay the Master Servicer for these charges. Therefore, the Master
Servicer takes its reimbursement for the default-related services from the amount
recovered from the foreclosure sale of the home, which reduces the amount to be
distributed to each Trust’s beneficiaries. In exchange, each Trust’s beneficiaries are
provided with a deficiency claim against the borrower for these default-related services,
which is of debatable validity and has little chance of being collected.

28
29

Letter from Utah Attorney General to Bank of America, May 19, 2011.
Id.

- 41 -

109.

Unfortunately, the detail of these charges is not reported in a manner that

allows each Trust’s beneficiaries to discern whether or not the Trust fund is incurring
these marked-up services as expenses.
110.

The FTC Complaint ¶ 17 alleges that the charges for default services

violate the borrower’s loan documents: “In charging marked-up fees for default services,
Defendants have violated the mortgage contract by charging borrowers for default
services that exceed the actual cost of the services and that are not reasonable and
appropriate to protect the note holder’s interest in the property and rights under the
security instrument. In addition, Defendants have charged borrowers for the performance
of default services, such as property inspections and title reports, that in some instances
were not reasonable and appropriate to protect the note holder’s interest in the property
and rights under the security instrument.”
111.

Any inflated fees charged by the Master Servicer for default-related

services are neither customary, nor reasonable, nor necessary, and reflect more than the
cost of the services.
112.

Based on the information presented above, each Trust has been charged

for these marked-up default-related services, and the Trusts could suffer further harm in
addition to the marked-up charges.
BACKGROUND – FORCE-PLACED INSURANCE
113.

A November 9, 2010 article in AMERICAN BANKER describes the Master

Servicer’s practice of using an affiliate to force-place insurance at inflated rates on
homeowners struggling to make payments, with investors like Plaintiffs ultimately
bearing the cost:

- 42 -

Nominally purchased to protect the owners of mortgage-backed securities,
such “force-placed” insurance can be 10 times as costly as regular
policies, raising struggling homeowners' debt loads, pushing them toward
foreclosure — and worsening the loss to investors on each defaulted loan.
Evidence of abuses and self-dealing in the force-placed insurance industry
suggests that there may be far larger problems in how servicers are
handling distressed loans than the sloppy document recording that has
been the recent focus of industry woes.
Behind banks’ servicing insurance practices lie conflicts of interest that
align servicers and their insurer partners against borrowers and investors.
Bank of America Corp. owns a force-placed insurance subsidiary, and
most other major servicers receive commissions or reinsurance fees on the
very same policies they purchase on investors’ and borrowers’ behalf.
“There’s no arm’s-length transaction here, and that creates all sorts of
incentives for the servicer to force-place excessive insurance and
overcharge consumers for policies that provide minimal benefit,” said
Diane Thompson, of counsel for the National Consumer Law Center.
“Servicers and insurers have turned this into a gravy train.”
[…]
Foreclosure defense and legal aid attorneys say force-placed insurance is
found on most of the severely delinquent loans in this country. If so, the
cost to investors may well be in the billions of dollars.
[…]
With little regulatory oversight or even private investor awareness, forceplaced insurance has helped make drawn-out foreclosures lucrative for
servicers — far more so, in some cases, than helping a borrower return to
performing status. As the intermediary between borrower and investor,
servicers appear to be benefiting themselves at the expense of both. 30
114.

As the AMERICAN BANKER article suggests, force-placed insurance at

inflated rates damages Plaintiffs and other investors in the Trusts in two ways. First,
force-placing exorbitant insurance premiums on a struggling borrower makes the

30

Jeff Horwitz, Ties to Insurers Could Land Mortgage Servicers in More Trouble,
AMERICAN BANKER, Nov. 9, 2010. Available at http://bit.ly/aw1KmF.

- 43 -

borrower less likely to recover from the default and make payments on the loan. Second,
if the borrower fails to pay the exorbitant premium, as most do, then the Master Servicer
collects those payments from the proceeds of a foreclosure before passing the remaining
funds through to the Trust. By thus reducing the amount paid to each Trust from the
foreclosure sale, the Master Servicer has effectively charged its exorbitant premiums to
the Trust.
115.

Further, well-respected analyst Laurie Goodman notes that “by extending

time to foreclosure, Bank of America/Countrywide are not only able to obtain hefty late
fees (which payment is at the top of the waterfall at liquidation; paid before investors
recover a single dime), but they are also profiting though their Balboa subsidiary [part of
the Countrywide Insurance Group].” 31
116.

Charges for unnecessary insurance coverage at inflated rates increases the

losses to investors associated with defaulted loans while benefiting the Master Servicer
and its affiliates.
BACKGROUND – THE TRUSTEE’S CONFLICT OF INTEREST
117.

The meltdown in the mortgage industry created significant uncertainty and

potential liability for the Trustee. Debra Baker, a senior managing director in the
Trustee’s Corporate Trust division, testified that in the summer of 2008 when the “market
downturn” began, there was “a lot of activity” within the Trustee “around setting up war
rooms, we called them at that time, just to make sure we understood any of our
exposures.” When asked who “our” referred to in that answer, Ms. Baker explained “[i]t
refers to Bank of New York Mellon[.]” The war room was a resource for the Trustee
31

AMHERST MORTGAGE INSIGHT, May 20, 2010, at 23.

- 44 -

personnel and outside counsel, and was a “pretty rigorous setup in that there were people
there pretty much manning. There [were] hotlines set up, phones so people could call
with questions and documents brought in as needed.”
118.

From 2009 through 2011, the Trustee received numerous letters from

Certificateholders in the Countrywide trusts either alerting the Trustee to the massive
defaults in the Trusts, demanding that the Trustee take some action to curb
Certificateholder losses, or demanding that the Trustee provide Certificateholders with
information that would enable them to take action on their own. Additional inquiries from
Certificateholders were also being received by the Trustee through telephone calls or emails. Rather than provide Certificateholders with the information they requested and
complying with its fiduciary duties to its beneficiaries, the Trustee refused most of these
requests by interposing hypertechnical objections that the Certificateholders had not
satisfied the threshold requirements under the PSAs to require the Trustee to take any
action.
119.

By mid 2010, Certificateholder inquiries to the Trustee were increasing.

Richard Stanley, a senior managing director for the Trustee, began holding daily
meetings with key structured finance businesspeople and representatives from the risk
and legal departments to ensure that issues were being properly escalated within the
Trustee. Shortly thereafter, Scott Posner, then-CEO of Corporate Trust, began holding
regular meetings at the senior executive level to similarly monitor investor inquiries and
related issues.
120.

In the summer of 2010, certain Certificateholders (the “Inside Institutional

Investors”) began sending letters to the Trustee and its outside counsel at Pillsbury

- 45 -

Winthrop Shaw Pittman LLP. These letters, among other things, purported to instruct the
Trustee to appoint Gibbs & Bruns as counsel to investigate breaches of representations
and warranties against Bank of America/Countrywide. The Trustee therefore did not give
these letters much attention. Instead, the Trustee followed its standard playbook by
making technical objections to the instruction letters and refusing to take any action.
121.

In October 2010, the Inside Institutional Investors changed their strategy

by sending two letters that directly created risk for the Trustee. On October 18, 2010, the
Inside Institutional Investors sent Bank of America/Countrywide and the Trustee a
detailed Notice of Non-Performance setting forth numerous violations of the PSAs by
Bank of America/Countrywide that, if left unremedied for 60 days, would result in an
Event of Default that would subject the Trustee to heightened duties and provide
expanded rights to Certificateholders. After that shot across the Trustee’s bow, the Inside
Institutional Investors then took dead aim at the Trustee. In a letter on October 22, 2010,
the Inside Institutional Investors asked the Trustee for evidence of compliance with its
own duties under the PSAs to ensure that loans with incomplete mortgage files (which
pose risks to investors because they often cannot be foreclosed on) were substituted for
loans with complete mortgage files, which is the subject of the present lawsuit.
122.

The Trustee clearly understood that it now faced potential liability.

Douglas Chapman, a risk officer for the Trustee, recognized that these letters created
“downside risk . . . [that] could be significant” and could have cost the Trustee “a lot of
money.” Other Trustee representatives admitted they knew there was a possibility the
Trustee could be sued by the Certificateholders. In addition, the Trustee investigated its
own document custody operations, the failure of which would give rise to direct liability

- 46 -

against the Trustee. Early in settlement negotiations with Bank of America, the Trustee
sought to ensure that the settlement would “resolve trustee certification issues, such as …
BONY’s alleged failure to ensure it had the notes….”
123.

Facing the prospects of heightened duties and direct liability for its own

misconduct, the Trustee responded to these two letters by immediately replacing
Pillsbury. The Trustee hired Mayer Brown LLP, and specifically, dealmaker Jason
Kravitt to work more “constructively” with Ms. Patrick and the Inside Institutional
Investors. Mr. Kravitt and his firm already had relationships with many of the parties
involved in the matter, including Bank of America, whom Mr. Kravitt considered a “good
client.”
124.

The Trustee, like Mayer Brown and Mr. Kravitt, had an ongoing business

relationship with Bank of America. Bank of America was one of the Trustee’s largest
clients and accounted for over half of the Trustee’s mortgage-backed securities business.
Even during settlement talks, the Trustee was attempting to generate additional revenue
from Bank of America, including through a meeting of high-level BNYM and Bank of
America personnel.
125.

Once the Inside Institutional Investors placed direct pressure on the

Trustee, and Mayer Brown stepped in, matters moved quickly towards settlement. In the
summer of 2010, the Trustee took over six weeks to arrange a meeting in New York with
the Inside Institutional Investors after that group specifically requested a meeting. But
after receiving Gibbs & Bruns’s October 22 letter, Jason Kravitt, Mayer Brown’s lead
negotiator, flew to Houston to meet with Ms. Patrick a week and a half later.

- 47 -

126.

When an Event of Default occurs, the Trustee is subject to heightened

duties and the Certificateholders receive additional rights. Specifically, the Trustee is
obligated to give notice to all Certificateholders of the Event of Default and is held to the
standard of a prudent person in the conduct of his own affairs. Certificateholders benefit
from receiving notice of an Event of Default and from having a Trustee subject to
heightened duties. Certificateholders are also able to demand that the Trustee initiate
action against the Master Servicer to cure the Event of Default. If the Trustee fails to take
action or otherwise fails to act prudently, the Certificateholders can sue the Master
Servicer directly.
127.

In December 2010, as the 60-day clock started by the Inside Institutional

Investors’ October 18, 2010 Notice of Non-Performance continued to run, the Trustee
undertook to ensure that these heightened duties and expanded rights would never take
effect. Specifically, the Trustee negotiated a “forbearance agreement” with Bank of
America and the Inside Institutional Investors in an attempt to protect both banks from
the effects of an Event of Default. The resulting agreement was renewed approximately
every two months during the course of the settlement negotiations. The forbearance
agreement purports to prevent an Event of Default from occurring, thereby suppressing
the Trustee's heightened duties, ensuring valuable Certificateholder rights are not
triggered, and buying Bank of America more time to structure a favorable deal without
the pressures of mandatory cure obligations and involvement of other Certificateholders.
128.

In an early draft of the forbearance agreement, Gibbs & Bruns asserted

that the agreement would only prevent their investor group from taking action to initiate a
suit against Bank of America, but would not prevent the Event of Default from occurring.

- 48 -

Under this formulation, Certificateholders would have received notice of the Event of
Default from the Trustee, would have received the benefit of having a Trustee subject to a
higher standard of conduct, and would have been able to avail themselves of their right to
sue Bank of America/Countrywide if the Trustee failed to take action.
129.

The Trustee and Bank of America, however, attempted to prevent the

occurrence of an Event of Default. Jason Kravitt explained his response to Gibbs &
Bruns’ position in an e-mail to Bank of America’s counsel at Wachtell: “I put a call into
Kathy and shot her an email saying that all I wanted to do is change ‘extend’ in the first
sentence of item 1. to ‘toll’. The letter should prevent an EOD [Event of Default] from
occurring for a period of time; not tie one group of CHs [‘Certificateholders’] hands with
regard to an EOD that is claimed to be outstanding.” Ultimately, the Trustee’s language
was adopted.
130.

As noted, an Event of Default requires the Trustee to give notice of the

Event of Default to all Certificateholders. This responsibility is consistent with hornbook
trust law which recognizes that a trustee’s duties change post-default. See, e.g., Beck v.
Manufacturers Hanover Trust Co., 218 A.D.2d 1, 12 (1st Dep’t 1995) (“The reality
militating in favor of this revised allocation of responsibility, of course, is that in the
aftermath of a default by the obligor, bondholders, particularly those whose bonds
represent only a relatively small portion of a large issue, will, as a practical matter, be
unable to act effectively to guard against the further impairment of their economic
interests, and although those interests may be relatively small when compared to the
entire issue, they may nevertheless be, and often are, extremely substantial in the context
of the individual bondholder's assets.”).

- 49 -

131.

Here, not only did Certificateholders never receive notice of an actual or

potential Event of Default, the Trustee “did not send out a formal notice to certificate
holders until the proposed settlement was agreed to.” The lack of notice was the result of
a conscious decision made by the Trustee to exclude other Certificateholders and avoid
heightened duties. As Jason Kravitt testified:
[I]t’s very unstable to try to negotiate a large, complicated, timeconsuming matter when other parties can interfere because an event
happened. Q: Other parties meaning who? A: Any group of certificate
holders who want the trustees to do something different or who want to
attack the bank based on the event of default.
132.

The Trustee’s decision not to provide notice here was also a departure

from its standard practice. Robert Griffin, a managing director for the Trustee, testified
that he could not recall an instance in which the Trustee “agreed to extinguish claims to
which certificateholders had rights without first notifying the certificateholders of that
potential extinguishment.” Even more mundane topics of trust administration often
resulted in Certificateholders receiving notice. For example, in September 2010, when
the Inside Institutional Investors were requesting that they be appointed on a contingency
fee basis to investigate representation and warranty breaches, the Trustee’s then-counsel
at Pillsbury responded by noting: “The Trustee does not customarily engage counsel on a
contingent fee basis and would want, at a minimum, to notice all certificateholders of the
proposed engagement to enable them to express any concerns that they might have.”
133.

In December 2010, the Trustee was considering giving notice to

Certificateholders concerning the ongoing discussions with Bank of America and the
Inside Institutional Investors, but Bank of America’s attorneys expressed a concern that
“if a notice was going to be in the form of inviting each and every or any and all

- 50 -

certificate holders who participated in discussions, it seemed impracticable and bordering
on chaos to have a group in the hundreds or so step forward as a result of such a notice.”
Kravitt agreed, and on behalf of the Trustee offered to forego providing notice to
Certificateholders in exchange for indemnity from Bank of America.
134.

In a ruling in the Article 77 Proceeding, the court ultimately approved the

proposed settlement in some respects, but held that the Defendant “abused its discretion”
and “acted unreasonably or beyond the bounds of reasonable judgment” by attempting to
release loan modification claims (the “Loan Modification Claims”) as part of the
settlement “without investigating their potential worth or strength.” Case No. 651786/11,
Motion Seq. No. 1 (January 31, 2014) (Kapnick, J.).
135.

The PSAs for the trusts at issue in the Article 77 Proceeding (including 67

out of 93 of the Trusts at issue in this case) in most instances require immediate
repurchase of loans that are modified (applicable to 11 of the Trusts at issue) or modified
in lieu of refinance (applicable to 56 of the Trusts at issue). These Loan Modification
Claims for all trusts at issue in the Article 77 Proceeding amounted to over $30 billion,
but despite this, the Defendant attempted to compromise and release these claims for zero
additional compensation and without any evaluation or analysis. Accordingly, Judge
Kapnick declined to approve the proposed settlement with respect to these claims, finding
that the Defendant “abused its discretion” and “acted unreasonably or beyond the bounds
of reasonable judgment.” Id. This abuse of discretion began during the Defendant’s
settlement negotiations with Bank of America and continued through the Article 77
Proceeding as the Defendant continued to press for settlement of these claims.

- 51 -

NATURE OF CLAIMS AND DAMAGES SOUGHT ON ALL COUNTS
136.

Plaintiffs’ damages are direct, and not derivative, because Plaintiffs have

not simply been harmed by a de-valuation of their Certificates or some amorphous harm
to the Trust itself, but by a specific loss of cash flow that is unique to each of the
Plaintiffs given their particular rights as a Certificate-holder in a particular tranche, and
who purchased particular Certificates for a specific reason.
137.

Plaintiffs, nonetheless, shall take all steps necessary to make certain that

the rights of other Certificateholders are protected to the extent Plaintiffs are required to
do so by operation of law or the PSAs at issue.
138.

Although Plaintiffs’ damages are direct, should any Court determine that

its damages were derivative, then Plaintiffs will proceed in this action on behalf of the
entire Trust and/or all similarly situated Certificateholders. Further, as the relevant case
law provides, demand on the trustee to sue itself is futile and should be excused.
COUNT I – BREACH OF CONTRACT
139.

Plaintiffs incorporate by reference this Complaint’s preceding paragraphs,

and make the following allegations on information and belief on the basis set forth in the
Complaint’s preceding paragraphs.
140.

All of the PSAs for the Trusts at issue in this action and identified above

are “substantively similar.” See Article 77 Proceedings Defendant’s Verified Petition,
attached as “Exhibit F,” at 2–3.
141.

The Defendant included the Trusts formed after January 1, 2004, in its

proposed settlement in the Article 77 Proceeding. See Exhibit A (list of covered trusts) to
Proposed Settlement Agreement (attached hereto as Exhibit B). The Defendant was also

- 52 -

aware that its servicer breached the PSA, yet did nothing to prevent or mitigate the
servicer’s breaches.
142.

Plaintiffs purchased an interest in each of the Trusts identified in “Exhibit

C”. The PSAs establish the Trust and appoint the Trustee for the benefit of investors.
143.

The PSAs are contracts. The PSAs created the mechanism for investment

in a pool of residential mortgage loans—a tax advantaged Trust known as a REMIC.
Such a trust imposes detailed provisions for the administration of the loans. Plaintiffs’
investments in the Trusts included not only the right to receive income from mortgage
payments, but also the right to have the mortgage loans serviced and administered in
accordance with the PSAs. In addition to the servicing and administering by the Master
Servicer, the Trustee is contractually required to perform various duties, including
holding the corpuses of the Trusts and the Mortgage Files, reporting to the investors, and
giving notice to the Master Servicer of any Event of Default under the PSA.
144.

Defendant entered into the PSAs for the benefit of Certificateholders.

Plaintiffs are Certificateholders in, and thus beneficiaries of, the Trusts. See, e.g., PSA
§ 2.01(b) (“Immediately upon the conveyance of the Initial Mortgage Loans referred to in
clause (a), the Depositor sells, transfers, assigns, sets over and otherwise conveys to the
Trustee for the benefit of the Certificateholders, without recourse, all the right, title and
interest of the Depositor in and to the Trust Fund…”); PSA § 2.01(c) (“[T]he Depositor
has delivered or caused to be delivered to the Trustee … for the benefit of the
Certificateholders the following documents or instruments with respect to each Mortgage
Loan …”); PSA § 2.02(a) (“The Trustee acknowledges receipt of the documents … and
declares that it holds and will hold such documents and the other documents delivered to

- 53 -

it constituting the Mortgage Files, and that it holds or will hold such other assets as are
included in the Trust Fund, in trust for the exclusive use and benefit of all present and
future Certificateholders.”); PSA § 2.03(c) (“The representations and warranties made
pursuant to this Section 2.03 shall survive delivery of the respective Mortgage Files to the
Trustee for the benefit of the Certificateholders.”); PSA §2.06 (“The Trustee agrees to
hold the Trust Fund and exercise the rights referred to above for the benefit of all present
and future Holders of the Certificates and to perform the duties set forth in this
Agreement, to the end that the interest of the Holders of the Certificates may be
adequately and effectively protected.”). Further, the purpose of the PSAs was to facilitate
the sale of Certificates to investors such as the Plaintiffs.
145.

The foregoing makes Plaintiffs at least a third party beneficiary to each of

the PSAs and entitles Plaintiffs to seek redress for breach of their contractual rights.
Breaching Act—Failure to Obtain and Hold the Trust Corpus
146.

On the inception date of each PSA, Defendant failed to perform its

fundamental obligation to obtain and hold the corpus of each Trust, including the
Mortgage Files.
147.

The PSA clearly requires that the Trustee obtain the trust corpus in

exchange for the certificates. See PSA at vi (“The Depositor is the owner of the Trust
Fund that is hereby conveyed to the Trustee in return for the Certificates.”); PSA § 2.06
(“The Trustee acknowledges the transfer and assignment to it of the Trust Fund and,
concurrently with such transfer and assignment, has executed and delivered to or upon
the order of the Depositor, the Certificates in authorized denominations evidencing
directly or indirectly the entire ownership of the Trust Fund.”).

- 54 -

148.

The Trustee promised that it will maintain possession of the Mortgage

Notes (not just those Mortgage Notes delivered to it) and that it holds or will hold the
entirety of the Trust Fund. PSA § 2.02(i) (“The Trustee acknowledges that it will
maintain possession of the Mortgage Notes in the State of California, unless otherwise
permitted by the Rating Agencies.”); PSA § 2.06 (“The Trustee agrees to hold the Trust
Fund and exercise the rights referred to above for the benefit of all present and future
Holders of the Certificates….“); see also PSA § 2.02(a) (“The Trustee acknowledges
receipt of the documents identified in the Initial Certification in the form annexed hereto
as Exhibit F-1 and declares that it holds and will hold such documents and the other
documents delivered to it constituting the Mortgage Files, and that it holds or will hold
such other assets as are included in the Trust Fund, in trust for the exclusive use and
benefit of all present and future Certificateholders.”); PSA § 2.02(b) (“Upon delivery of
the Supplemental Mortgage Loans pursuant to a Supplemental Transfer Agreement, the
Trustee shall acknowledge receipt of the documents identified in any Supplemental
Certification in the form annexed hereto as Exhibit F-2 and declare that it will hold such
documents and the other documents delivered to it constituting the Mortgage Files, and
that it will hold such other assets as are included in the Trust Fund, in trust for the
exclusive use and benefit of all present and future Certificateholders.”) (emphasis added).
149.

Further, the Trustee agreed to receive and hold critical documents

evidencing each Mortgage Loan, including the “Mortgage File,” which encompasses the
mortgage, the note and assignments. PSA § 2.01(c) and § 2.02(a), quoted supra ¶¶ 42-3
and 45-6; PSA §§ 2.02(d), 2.03(c), 3.12, 3.13, quoted supra ¶ 47; § 10.04(b) and
10.04(c), quoted supra ¶ 48.

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150.

Without the promissory notes and valid assignments of those notes to

Defendant, along with the associated mortgages, Defendant did not receive the Trust
corpus.
151.

Evidence from other litigation and investigations demonstrated the

Defendant’s widespread failure to obtain and hold the Mortgage Files. See supra ¶¶ 4953, 55, 76.
152.

The widespread practice of “robo-signing” prompted investigations by the

Office of the Comptroller of the Currency, which found that such practices often involved
missing loan documentation such as the note or an assignment or a mortgage,
demonstrated that the Trustee failed to obtain the Mortgage Files as required under the
PSAs. See supra ¶¶ 72-73.
153.

The controversy caused by robo-signing and the questions it raised about

“proper ownership of the underlying mortgages as set out in federal tax law,” caused the
IRS to launch a review of the tax exempt status of trusts such as those at issue here. See
supra ¶ 91.
154.

The Inside Institutional Investors represented by Gibbs & Bruns in the

Article 77 Proceeding asserted the Trustee’s failure to obtain Mortgage Files in a letter
dated October 18, 2010, attached as “Exhibit G”. Specifically, the letter stated that the
“loan and collateral files” were not “accurate and adequate” for proper servicing and that
there was no effort to “cure deficiencies in mortgage records when deficient loan files
and lien records are discovered.” Id. at 2.
155.

Defendant acknowledged in its Verified Petition that the Inside

Institutional Investors asserted servicer breaches of the PSA § 3.01 by: “(i) failing to

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maintain accurate and adequate loan and collateral files in a manner consistent with
prudent mortgage servicing standards; (ii) failing to demand that the Sellers cure
deficiencies in mortgage records; (iii) incurring avoidable and unnecessary servicing fees
as a result of its allegedly deficient record-keeping….” Verified Petition attached as
Exhibit F at 11. Such allegations necessarily implicate the Defendant’s failure as Trustee
to hold the Mortgage Files as required under the PSAs.
156.

The Proposed Settlement Agreement requires the Master Servicer to

inventory the documents in each Mortgage File, something that would be difficult in the
originally specified time frame if the Trustee held the Mortgage Files. Such provision is
an admission that Defendant failed to obtain and hold the complete Mortgage Files. See
supra ¶ 55.
157.

The Master Servicer is benefiting from the Trusts’ corpuses at the expense

of Trust beneficiaries.

See supra ¶¶ 49-116.

Thus, Defendant is not holding the

Mortgage Loans for the exclusive use and benefit of the Certificateholders.

PSA

§ 2.02(a).
158.

The Trustee breached PSA §§ 2.01(c), 2.02(a), 2.02(b), 2.02(d), 2.03(c),

2.06, 3.12, 3.13, 8.01, 10.4(b) and 10.04(c) by failing to obtain and hold the Mortgage
Files and Mortgage Loans for the benefit of the Trusts’ beneficiaries.
Breaching Act—Failure to Inventory Mortgage File Documents and Report
159.

Defendant failed to perform its obligations to review the Mortgage Files.

160.

PSA § 2.02(i) requires that the Trustee perform “a review and

examination” of the Mortgage Files and determine what documents for each Mortgage
Loan were in its possession. Additionally, the Trustee was obligated to provide on the

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“Closing Date” an “Initial Certification” stating for each Mortgage Loan that the Trustee
had received the original Mortgage Note endorsed in blank and an executed assignment
of the Mortgage, as well as “a schedule of exceptions attached thereto.” PSA § 2.02(i)
and Exhibit F-1. The Trustee was further obligated on the thirtieth day after the Closing
Day to provide a “Delay Delivery Certification” of receipt of various Mortgage File
documents and a list of exceptions. PSA § 2.02(i) and Exhibit G-1. Ninety days after the
Closing Date, the Trustee was to deliver a “Final Certification” as to Mortgage File
documents, “with any applicable exceptions noted thereon.” PSA § 2.02(i) and Exhibit
H-1.
161.

The PSA requires the Trustee to inspect all documents delivered to it to

determine if they are in the proper form. PSA § 8.01 (“The Trustee, upon receipt of all
resolutions, certificates, statements, opinions, reports, documents, orders or other
instruments furnished to the Trustee that are specifically required to be furnished
pursuant to any provision of this Agreement shall examine them to determine whether
they are in the form required by this Agreement; provided, however, that the Trustee shall
not be responsible for the accuracy or content of any such resolution, certificate,
statement, opinion, report, document, order or other instrument.”).
162.

The Trustee agreed to affix certain language to each assignment of

Mortgage. PSA § 2.01(c) (“As promptly as practicable subsequent to such transfer and
assignment, and in any event, within one hundred twenty (120) days thereafter, the
Trustee shall (A) as the assignee thereof, affix the following language to each assignment
of Mortgage: “CWALT Series 2007-25, The Bank of New York, as trustee”, (B) cause
such assignment to be in proper form for recording in the appropriate public office for

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real property records….”). To avoid doubt, Plaintiffs allege that Defendant failed to affix
this language both on assignments generally and also on any assignments that were
delivered to Defendant.
163.

As set out in the preceding paragraphs, Defendant failed to diligently

inventory the Mortgage Files and make accurate certifications as to its receipt of the
mortgages, notes, assignments, and exceptions. To the extent Defendant performed an
accurate inventory, Defendant breached certain notice provisions as set forth below.
164.

Such failures breached the PSA §§ 2.01(c), 2.02.
Breaching Act—Failure to Give Notice of Breaches of
Representations and Warranties

165.

The Depositor assigned to the Trustee the Depositor’s right to require

repurchase or substitution of a Mortgage Loan. PSA § 2.04 (“The Depositor hereby
assigns, transfers and conveys to the Trustee all of its rights with respect to the Mortgage
Loans including, without limitation, the representations and warranties of each Seller
made pursuant to Section 2.03(a)(ii) hereof, together with all rights of the Depositor to
require each Seller to cure any breach thereof or to repurchase or substitute for any
affected Mortgage Loan in accordance with this Agreement.”).
166.

To the extent documents are missing from the Mortgage File or are not

delivered, then the substitution or repurchase of the Mortgage Loan shall be
accomplished in the manner and subject to the conditions set forth in PSA § 2.03(c). PSA
§ 2.01(c) (“Notwithstanding anything to the contrary in this Agreement, within thirty (30)
days after the Closing Date with respect to the Initial Mortgage Loans, Countrywide (on
its own behalf and on behalf of Park Granada, Park Monaco and Park Sienna) shall either
(i) deliver to the Depositor, or at the Depositor's direction, to the Trustee or other

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designee of the Depositor the Mortgage File as required pursuant to this Section 2.01 for
each Delay Delivery Mortgage Loan or (ii) either (A) substitute a Substitute Mortgage
Loan for the Delay Delivery Mortgage Loan or (B) repurchase the Delay Delivery
Mortgage Loan, which substitution or repurchase shall be accomplished in the manner
and subject to the conditions set forth in Section 2.03 (treating each Delay Delivery
Mortgage Loan as a Deleted Mortgage Loan for purposes of such Section 2.03);
provided, however, that if Countrywide fails to deliver a Mortgage File for any Delay
Delivery Mortgage Loan within the thirty (30) day period provided in the prior sentence,
Countrywide (on its own behalf and on behalf of Park Granada, Park Monaco and Park
Sienna) shall use its best reasonable efforts to effect a substitution, rather than a
repurchase of, such Deleted Mortgage Loan and provided further that the cure period
provided for in Section 2.02 or in Section 2.03 shall not apply to the initial delivery of the
Mortgage File for such Delay Delivery Mortgage Loan, but rather Countrywide (on its
own behalf and on behalf of Park Granada, Park Monaco and Park Sienna) shall have five
(5) Business Days to cure such failure to deliver. At the end of such thirty (30) day period
the Trustee shall send a Delay Delivery Certification for the Delay Delivery Mortgage
Loans delivered during such thirty (30) day period in accordance with the provisions of
Section 2.02.”).
167.

Defendant failed to provide prompt notice when Defendant discovered

breaches of representations and warranties, including those breaches of representations
and warranties discovered: (a) through the Trustee’s inventory of delivered (and
undelivered) documents; (b) in the Trustee’s Delay Delivery Certification; (c) in notices
received from Certificateholders; (d) in Securities and Exchange Commission v. Mozilo,

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No. 09-CV-3994, 2010 WL 3656068 (C.D. Cal. Sept. 16, 2010); (e) In the Article 77
proceeding; (f) in the Consent Order and the related HUD OIG Memorandum No. 2012FW-1802, Bank of America Corporation Foreclosure and Claims Process Review,
Charlotte, NC, dated March 12, 2012 (the “HUD OIG Memorandum”); and (g) when
loans in the Trusts went into default. PSA § 2.03(c) (“Upon discovery by any of the
parties hereto of a breach of a representation or warranty with respect to a Mortgage Loan
made pursuant to Section 2.03(a) or a breach of a representation or warranty with respect
to a Supplemental Mortgage Loan under Section 2.01(e)(i) that materially and adversely
affects the interests of the Certificateholders in that Mortgage Loan, the party discovering
such breach shall give prompt notice thereof to the other parties.”); PSA § 2.04 (“It is
understood and agreed that the representations and warranties set forth in this Section
2.04 shall survive delivery of the Mortgage Files to the Trustee. Upon discovery by the
Depositor or the Trustee of a breach of any of the foregoing representations and
warranties set forth in this Section 2.04 (referred to herein as a ‘breach’), which breach
materially and adversely affects the interest of the Certificateholders, the party
discovering such breach shall give prompt written notice to the others and to each Rating
Agency.”). Defendant further failed to pursue the remedies for those breaches provided
in the PSA for the benefit of the Certificateholders and to the end that those holders
would be adequately and effectively protected. PSA § 2.06 (“The Trustee agrees to hold
the Trust Fund and exercise the rights referred to above for the benefit of all present and
future Holders of the Certificates and to perform the duties set forth in this Agreement, to
the end that the interest of the Holders of the Certificates may be adequately and
effectively protected.”) (emphasis added).

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Breaching Act—Failure to Give Notice of an Event of Default
and Exercise Prudence
168.

Defendant failed to give notice of an Event of Default as defined in the

PSA and to then to “exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of such person’s own
affairs.” See PSA § 8.01.
169.

Section 7.01 of the PSA defines an “Event of Default” to include a failure

by the Master Servicer to perform its duties, or “covenants or agreements.” PSA
§ 7.01(ii).
170.

Section 3.01 of the PSA requires the Master Servicer to follow “the

customary and usual standards of practice of prudent mortgage loan servicers” and to
“not take any action that is inconsistent with or prejudices the interests of the Trust Fund
or the Certificateholders in any Mortgage Loan or the rights and interests of the
Depositor, the Trustee and the Certificateholders under this Agreement. The Master
Servicer shall represent and protect the interests of the Trust Fund in the same manner as
it protects its own interests in mortgage loans in its own portfolio in any claim,
proceeding or litigation regarding a Mortgage Loan ….”
171.

Paragraphs 50-117 above, set forth evidence that the Master Servicer

failed to properly service the mortgage loans by obtaining false reports attesting to its
compliance with the servicing standards, engaging in robo-signing, illegally foreclosing
on homes owned by members of the military, charging marked up fees to distressed
borrowers for default-related services by the master servicer, and overcharging borrowers

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for “force-placed” insurance. Those paragraphs also detail the costs to the Trusts and
Certificateholders for such default.
172.

Defendant, as Trustee, had knowledge and notice of the foregoing

improper servicing.
173.

In addition, Defendant and the Master Servicer received notice of

servicing defaults via one or more letters from the law firm Gibbs & Bruns representing
various Certificateholders. The letters informed Defendant that the Master Servicer had
not enforced the obligation of the Sellers to cure outstanding breaches of document
defects and of representations and warranties. Such failure continued for more than sixty
days.
174.

The October 18, 2010 letter specifically stated that the Master Servicer

had failed and refused to take actions in breach of its obligations set forth in §§ 2.03(c),
3.01, 3.11(a) and 3.14 of the PSAs. See “Exhibit G.” The letter continued that such
breaches materially and adversely affected the Certificateholders. Those breaches have
continued for more than sixty days.
175.

The Master Servicer’s improper servicing has continued for more than 60

days and “materially affects the rights of the Certificateholders.”
176.

The PSA explicitly requires that “[w]ithin 60 days after the occurrence of

any Event of Default, the Trustee shall transmit by mail to all Certificateholders notice of
each such Event of Default hereunder known to the Trustee, unless such Event of Default
shall have been cured or waived.” PSA § 7.03(b).
177.

The Trustee has not provided notice to the Certificateholders of any Event

of Default.

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178.

The Trustee’s failure to provide notice of the multiple Events of Default as

described above breaches §§ 7.03(b) and 10.05 of the PSA.
Damages
179.

Paragraphs 78-116 above set forth the damages to the Trusts from

document defects, robo-signing, illicit foreclosures, excessive fees for default related
services and force-placed insurance. Those damages include: (i) the inability to foreclose
or long delays in foreclosure which result in less recovery in foreclosure; (ii) additional
costs to the Trusts to cure document defects; (iii) costs associated with lawsuits by
borrowers for improper foreclosure practices and force-placed insurance; (iv) increased
costs to maintain foreclosed property; and (v) the decrease in value of the Certificates.
180.

With regard to the failure to enforce the cure or repurchase remedies for

document defects and breaches of representations and warranties, the various Trusts have
suffered the loss resulting from the failure to cure or the repurchase price of the affected
Mortgage Loans. Plaintiffs have incurred losses arising from this failure through the loss
of distributions, the erosion of credit support and the concomitant diminution in the value
of its Certificates in the Trusts.
COUNT II – BREACH OF FIDUCIARY DUTY
181.

Plaintiffs incorporate by reference this Complaint’s preceding paragraphs

and make the following allegations on information and belief on the basis set forth in the
Complaint’s preceding paragraphs.
182.

As described in greater detail in Paragraphs 117-135 above, the Trustee

failed to provide the Certificateholders with notice of the multiple Events of Default, and
attempted to release the Loan Modification Claims in a settlement with Bank of America
for zero additional compensation and without any evaluation or analysis, because, inter
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alia, the Trustee had an egregious conflict of interest in that it was more interested in
protecting the interests of itself and of entities like Bank of America, with which the
Trustee had an ongoing business relationship, than it was with protecting the Trust
beneficiaries, the Certificateholders.
183.

The Trustee holds the loans for the benefit of Plaintiffs and the other

Certificateholders in the Trusts. The Trustee has an unwaivable fiduciary duty to avoid
conflicts of interest and act in the best interests of the Trust beneficiaries, the
Certificateholders.
184.

The Trustee breached these fiduciary duties by failing to provide notices

of Events of Default, attempting to release the Loan Modification Claims in a settlement
with Bank of America for zero additional compensation and without any evaluation or
analysis, and otherwise failing to act in the Plaintiffs’ best interests, as detailed above.
185.

The Trustee’s actions have harmed and continue to harm Plaintiffs by

directly causing substantial and unwarranted losses to the investments in the Trusts.
These losses continue to mount as the costs of foreclosure and carrying costs on empty
homes increase each day.
186.

As a result of the Trustee’s breach of fiduciary duties, Plaintiffs have been

severely damaged in the matter set forth herein.
COUNT III – NEGLIGENCE/GROSS NEGLIGENCE/RECKLESSNESS
187.

Plaintiffs incorporate by reference this Complaint’s preceding paragraphs

and make the following allegations on information and belief on the basis set forth in the
Complaint’s preceding paragraphs.

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188.

Defendant owed Plaintiffs numerous duties as beneficiaries of the Trusts.

Such duties included, but were not limited to:
a.

Notifying Plaintiffs that Defendant failed to perform its duties
regarding the Mortgage Files;

b.

Notifying Plaintiffs that other parties to the PSA had failed to
perform obligations regarding, among other things, the Mortgage
Files and the servicing and administration of the Trusts;

c.

Refraining from issuing (or allowing to be issued) certifications
indicating that Mortgage Files were maintained and/or safeguarded
as required by certain transaction agreements;

d.

Making inquiry as to the location and content of the Mortgage
Files;

e.

Ensuring that the assignments have been filled out properly and
executed;

f.

Giving notice that the Master Servicer was covering up
Defendant’s failure to receive, review, retain, and process the
Mortgage Files;

g.

Fully analyzing and evaluating the Loan Modification Claims and
negotiating the greatest value possible for such claims in any
attempted settlement with Bank of America;

h.

“Nose to the source” of the systematic improper servicing and
administration conduct as described in multiple government
actions that were widely and publicly disseminated, in order to
discover if Event of Defaults or Master Servicer Event of Defaults
or other PSA breaches had occurred; and

i.

Ascertaining pertinent facts causing an error in the Trustee’s
judgment when Trustee and its Responsible Officers in light of the
Consent Order, the HUD OIG Memorandum and other similar
documents and information.

189.

Defendant breached its duties.

190.

Defendant’s breaches of duties rise to the level of gross negligence and

recklessness. Defendant knew or should have known that:

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a.

Defendant’s failure to receive, review, retain, and process the
Mortgage Files jeopardized the very existence of each Trust, as
well as each Trust’s ability to realize value on the Trust corpus;

b.

Defendant’s failure to receive, review, retain, and process the
Mortgage Files for each Trust could cloud title on thousands of
mortgages, giving rise to significant societal problems, as well as
damages to the Trust;

c.

Plaintiffs and other investors would be purchasing and/or holding
Certificates in each Trust on the representation that Defendant had
properly received, reviewed, retained, and processed the Mortgage
Files for the benefit of the Trust beneficiaries;

d.

Defendant offered to settle the Loan Modification Claims (1) for
zero additional compensation, (2) without any evaluation or
analysis, and (3) in return for releases from Bank of America to
Defendant in its capacity as Trustee and as an entity;

e.

Underlying actions and conduct by Bank of America and
Countrywide Home Loans occurred and Trustee knew, but failed
to give notice to Certificateholders of any Event of Defaults or
Master Servicer Event of Defaults of Countrywide Home Loans
and Bank of America;

f.

The laws of several states required that Defendant hold the Note in
order to foreclose on borrowers, and foreclosures performed for
each Trust may not comply with those laws; and
The Master Servicer executed untruthful affidavits and
manufactured documents in order to foreclose on borrowers and
cover up Defendant’s failures.

191.

As a proximate cause of Defendant’s breaches of duties, Plaintiffs have

suffered damages in terms of the current and future value of investments, the return on
investments, and the risks of investments.
192.

Plaintiffs are entitled to punitive damages.

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COUNT IV – ACCOUNTING
193.

Plaintiffs incorporate by reference this Complaint’s preceding paragraphs,

and make the following allegations on information and belief on the basis set forth in the
Complaint’s preceding paragraphs.
194.

Significant evidence exists that Plaintiffs and each Trust are suffering

irreparable harm, including but not limited to the: (a) payment to the Master Servicer and
its affiliates and vendors of unauthorized, exorbitant, and potentially illegal fees;
(b) failure of each Trust to enforce its rights regarding the loans that comprise the Trust
corpus; and (c) actual size and nature of each Trust’s corpus itself.
195.

The results of an accounting may demonstrate that Plaintiffs and others are

entitled to further relief, including but not limited to money damages, rescission on the
purchase of the Certificates, a cease and desist order, or other monetary, declaratory, or
injunctive remedies.
196.

Defendant is obligated to provide an accounting regarding the issues set

forth in this Complaint.
197.

Plaintiffs demands an immediate accounting of: (a) all costs, charges, and

expenses for which the Master Servicer has obtained or sought reimbursement from
either Trust or from the proceeds of any foreclosure, payment, short sale, or other money
received related to a loan in a Trust; (b) the practices of the Master Servicer related to
foreclosures and REO Property; and (c) the actual size and nature of each Trust’s corpus.

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PRAYER FOR RELIEF
WHEREFORE, Plaintiffs respectfully pray that this Court enter an Order:
a.

Requiring Defendant to pay Plaintiffs’ damages in an amount to be

determined at trial;
b.

Requiring Defendant to pay Plaintiffs’ cost of investment, minus amounts

received, and bear all risk of such investment going forward;
c.

Granting Plaintiffs’ request for an accounting;

d.

To the extent that the request for accounting benefits any party, including

the Trustee, the Trusts, or the Trusts’ beneficiaries, assessing all costs and expenses of
the accounting and of this action, first, against any party found to have unjustly caused
the Trusts to incur losses or expenses, and second, if that is not possible, against the
parties receiving the benefit;
e.

Granting Plaintiffs’ request for equitable relief;

f.

Attorney’s fees and expenses; and

g.

Such other and further relief as the Court may deem just and proper.

VANDENBERG & FELIU, LLP
By: _______/s/________________
Raymond L. Vandenberg
60 East 42nd Street, 51st Floor
New York, New York 10165
(212) 763-6800
Attorneys for Plaintiffs

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