Opinion
14 Civ. 2590 (VM)
10-30-2018
ROYAL PARK INVESTMENTS SA/NV, individually and on behalf of all others similarly situated, Plaintiff, v. U.S. BANK NATIONAL ASSOCIATION, as Trustee, Defendant.
Darryl J. Alvarado, Hillary B. Stakem, Pro Hac Vice, Joseph Marco Janoski Gray, Lucas F. Olts, Arthur C. Leahy, Juan Carlos Sanchez, Pro Hac Vice, Steven W. Pepich, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Christopher M. Wood, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, San Francisco, CA, Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiff. Michael Stephan Kraut, Morgan, Lewis and Bockius LLP, Chelsea Walcker, Pro Hac Vice, Sherli Furst, Robins Kaplan, LLP, Hillel Ira Parness, Parness Law Firm, PLLC, New York, NY, Ashley Anelcha Krupski, Benjamin Patrick Smith, Joseph Edward Floren, Kevin M. Papay, Pro Hac Vice, Rachael Catherine Chan, Pro Hac Vice, Rollin Bernard Chippey, Tera Marie Heintz, Morgan, Lewis & Bockius LLP, San Francisco, CA, David E. Marder, Pro Hac Vice, Morgia Dampf Holmes, Pro Hac Vice, Robins, Kaplan, Miller & Ciresi, LLP, Boston, MA, Martin Richard Lueck, Michael Collyard, Peter Cooper Ihrig, Pro Hac Vice, Stacey Paige Slaughter, Thomas F. Berndt, Pro Hac Vice, Robins Kaplan Miller & Ciresi, Minneapolis, MN, for Defendant.
Darryl J. Alvarado, Hillary B. Stakem, Pro Hac Vice, Joseph Marco Janoski Gray, Lucas F. Olts, Arthur C. Leahy, Juan Carlos Sanchez, Pro Hac Vice, Steven W. Pepich, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Christopher M. Wood, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, San Francisco, CA, Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiff.
Michael Stephan Kraut, Morgan, Lewis and Bockius LLP, Chelsea Walcker, Pro Hac Vice, Sherli Furst, Robins Kaplan, LLP, Hillel Ira Parness, Parness Law Firm, PLLC, New York, NY, Ashley Anelcha Krupski, Benjamin Patrick Smith, Joseph Edward Floren, Kevin M. Papay, Pro Hac Vice, Rachael Catherine Chan, Pro Hac Vice, Rollin Bernard Chippey, Tera Marie Heintz, Morgan, Lewis & Bockius LLP, San Francisco, CA, David E. Marder, Pro Hac Vice, Morgia Dampf Holmes, Pro Hac Vice, Robins, Kaplan, Miller & Ciresi, LLP, Boston, MA, Martin Richard Lueck, Michael Collyard, Peter Cooper Ihrig, Pro Hac Vice, Stacey Paige Slaughter, Thomas F. Berndt, Pro Hac Vice, Robins Kaplan Miller & Ciresi, Minneapolis, MN, for Defendant.
DECISION AND ORDER
VICTOR MARRERO, United States District JudgeRoyal Park Investments SA/NV ("Royal Park") moves to set aside the July 9, 2018 Order of Magistrate Judge Robert Lehrburger, granting U.S. Bank National Association's ("U.S. Bank") request for a protective order to preclude Royal Park from engaging in discovery on statistical sampling to establish liability and damages. See Royal Park Invs. SA/NV v. U.S. Bank Nat'l Assoc., No. 14 Civ. 2590, 2018 WL 3350323 (S.D.N.Y. July 9, 2018) (hereafter, " July 9 Order"). Numerous other courts in this district handling similar claims against other residential mortgage-backed-securities ("RMBS") trustees have consistently precluded Royal Park from pursuing statistical sampling in a series of cases Magistrate Judge Lehrburger termed the "Trustee Sampling Decisions," a term that the Court also adopts. The Court finds the legal basis of those prior decisions and Magistrate Judge Lehrburger's analysis and conclusions persuasive. Accordingly, the Court upholds Magistrate Judge Lehrburger's July 9 Order.
BlackRock Allocation Target Shares v. Wells Fargo Bank, N.A., No. 14 Civ. 9371, 2017 WL 953550 (S.D.N.Y. Mar. 10, 2017), objections overruled sub nom. by BlackRock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank, N.A., 2017 WL 3610511 (S.D.N.Y. Aug. 21, 2017) ; Royal Park Invs. SA/NV v. HSBC Bank USA N.A., No. 14 Civ. 8175, 2017 WL 945099 (S.D.N.Y. Mar. 10, 2017), objections overruled sub nom. by Royal Park Invs. SA/NV v. HSBC Bank USA, N.A., 2018 U.S. Dist. LEXIS 31157 (S.D.N.Y. Feb. 23, 2018); BlackRock Balanced Capital Portfolio (FI) v. Deutsche Bank Nat'l Trust Co., No. 14 Civ. 9367, 2018 WL 3120971 (S.D.N.Y. May 17, 2018) ; Royal Park Invs. SA/NV v. Deutsche Bank Nat'l Trust Co., No. 14 Civ. 4394, 2018 WL 4682220 (S.D.N.Y. Sept. 28, 2018) (hereafter, "Royal Park v. Deutsche Bank Nat'l Tr.").
I. BACKGROUND
A. FACTUAL AND PROCEDURAL BACKGROUND
In light of this case's long history before this Court, the Court assumes familiarity with the extensive factual and lengthy procedural developments and addresses only briefly the relevant background below. Royal Park asserts that trustee U.S. Bank "breached its contractual obligations" by failing to protect trust assets across thousands of loans in twenty-one RMBS trusts ("Pl. Mem.," Dkt. No. 394, at 3.) under certain contractual agreements (the "Governing Agreements"). As stated in further detail this Court's order denying class certification, U.S. Bank has the right, on behalf and for the benefit of investors, to enforce various transferors' representations and warranties about the credit quality and characteristics of the underlying loans, and accuracy of the data conveyed about the loans. See Royal Park Invs. SA/NV v. U.S. Bank Nat'l Ass'n, 324 F.Supp.3d 387, 392 (S.D.N.Y. 2018). Moreover, according to Royal Park, in certain circumstances, U.S. Bank is obligated to take remedial action. See id. For example, U.S. Bank must, upon discovering a material breach regarding a loan, request that the transferor cure the breach and, if such breach is not cured, the transferor may either substitute or repurchase the defective loan. Royal Park alleges that U.S. Bank has not fulfilled those duties and seeks to demonstrate, in part through sampling, U.S. Bank's breaches of these duties and the resulting harm. See id.
The sampling methodology and purpose is described by Royal Park as follows. Royal Park would sample 100 loans from each of the twenty-eight different loan groups across the twenty-one trusts. (Pl. Mem. at 3.) For these 2,800 loans, Royal Park would re-underwrite them to "prove the scope of the material breaches that U.S. Bank would have uncovered" if it had fulfilled its duties, and "estimate damages by extrapolating" the rate of material breaches across each loan group. (Pl. Mem. at 3-4.) Unlike in its other recent applications in related cases, Royal Park would not use this evidence to prove U.S. Bank's discovery of breaches of the transferors' representations and warranties that trigger the relevant duties. Royal Park has estimated that this sampling analysis would cost about $1.4 million, but, claims that if it must proceed without sampling instead, Royal Park would have to analyze over 30,000 loans at the cost of more than $15 million. (Id. at 5.)
As Magistrate Judge Lehrburger also explained, "a 100-loan sample would be drawn from each of fifteen trusts, while thirteen 100-loan samples would be drawn from the six other trusts that have non-overlapping loan groups" for a total of twenty-eight sample loan groups. July 9 Order at *4 n.9.
U.S. Bank opposes this methodology as irrelevant to Royal Park's claims and asserts that it does not want to expend resources defending and rebutting expert analysis on what U.S. Bank considers a meaningless sample.
This issue been briefed multiple times not only in the Trustee Sampling Decisions, but on other occasions on the matter before this Court. U.S. Bank initially sought to preclude this discovery in April 2017. (See Dkt. No. 221.) Magistrate Judge Francis denied the request without prejudice, permitting U.S. Bank to renew its motion once the opinions of other magistrate judges in the related RMBS trustee cases addressing the same topic were reviewed by the district courts. See July 9 Order at *1. Once the opinions were evaluated and affirmed by various judges, U.S. Bank renewed its motion.
After the first round of letter motions on the issue, Magistrate Judge Lehrburger heard oral argument. (See Dkt. Nos. 371, 374, 375, 378.) Within a few weeks of argument, Magistrate Judge Lehrburger received additional correspondence from the parties (see Dkt. Nos. 383, 384), and then asked the parties to address four additional questions, inviting even further briefing (see Dkt. Nos. 385, 387, 388, 390). At the conclusion of this substantial briefing -- made with the benefit of the considered opinions of other courts grappling with the same issues -- Magistrate Judge Lehrburger issued the July 9 Order granting U.S. Bank's request for a protective order.
B. THE JULY 9 ORDER
Magistrate Judge Lehrburger resolved the dispute under a proportionality framework, weighing whether the burden or expense of sampling outweighed its benefits in accordance with Federal Rule of Civil Procedure 26 (" Rule 26"). See July 9 Order at *2. He first reviewed the Trustee Sampling Decisions, noting that "[t]he principal reason given by each of the Trustee Sampling Decisions for precluding the use of sampling is that under the language of the relevant agreements governing the trusts, the sole remedy provided to the trustee with regard to breaching loans is to seek repurchase on a loan-by-loan, trust-by-trust basis." Id. However, requesting repurchasing at a loan-by-loan level necessitates loan-by-loan proof. See id. Given this need for loan-by-loan proof, the Trustee Sampling Decisions uniformly recognized that "sampling would have little to no relevance" as it could not "identify which specific loans were in breach" and thus undertaking a $1.4 million sampling effort "would not be proportional to the needs of the case." Id.
At oral argument, Magistrate Judge Lehrburger provided Royal Park's counsel an opportunity to address whether the contractual language in this matter differed compared to the contracts in other Trustee Sampling Decisions, and Royal Park's counsel responded "the facts are generally the same" and did not address the matter further. July 9 Order at *3 n.4
Magistrate Judge Lehrburger also analyzed the genesis of this "loan-by-loan" proof requirement, which sprang from language in Retirement Board of the Policemen's Annuity & Benefit Fund v. Bank of N.Y. Mellon, 775 F.3d 154 (2d Cir. 2014). The Court of Appeals for the Second Circuit there held, in the context of determining whether plaintiffs had class standing, that a trustee's "alleged misconduct must be proved loan-by-loan and trust-by-trust." Id. at 162. Magistrate Judge Lehrburger recognized that in this separate context the Second Circuit "did not directly address the propriety of sampling to prove liability against a trustee." July 9 Order at *2. But he concluded that "there is no reason to believe that the Second Circuit would depart from its ‘loan-by-loan’ incantation with respect to [the] use of sampling to prove liability or damages." Id. He further contrasted the case the Second Circuit cited as an example where the court permitted sampling. That case involved lawsuits against RMBS issuers and sponsors who had relationships and contractual terms with the trustee different from those of the certificate holders here. See id. at *3 (citing Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 F.Supp.2d 475, 486-87 (S.D.N.Y. 2013) ).
This distinction between lawsuits against trustees on the one hand and those against transferors on the other is also raised in the Trustee Sampling Decisions, as Flagstar Bank is a case Royal Park has heavily relied in connection with litigating the sampling issue.
Having established this background about the need to proceed on a "loan-by-loan" basis, Magistrate Judge Lehrburger then addressed Royal Park's arguments about why sampling should still be permitted in this matter. Those arguments can be analyzed under the burden and benefit prongs of Rule 26. Royal Park's initial two arguments address burden. First, Royal Park asserted that the procedural posture of this case, where U.S. Bank sought a protective order against a possible discovery method, distinguished the issue from the cases where Royal Park first sought court approval for its sampling methodology. See id. at *4. Royal Park argued that here, its choice to undertake sampling independent of prior court approval would put no discovery burden on U.S. Bank. In response, Magistrate Judge Lehrburger noted that realistically this multi-million-dollar litigation would effectively force U.S. Bank to undertake a costly defense of Royal Park's sampling methodology.
Royal Park also argued that if forced to proceed on a loan-by-loan basis, the parties would have to analyze 30,000 loans instead of 2,800. Magistrate Judge Lehrburger acknowledged the substantial workload involved but found that the sampling analysis simply was not "proportionate to the needs of the case when every court to address the issue has concluded sampling is not viable proof against trustees." Id. at *4.
Royal Park also made arguments that relate more to sampling's relevance or benefit as it would apply to this case. It claimed that the sampling methodology here would differ from the sampling at issue in the Trustee Sampling Decisions as it would consist of separate samples for each loan group in question, as opposed to mixed samples of loans across trusts. See id. at *4. Magistrate Judge Lehrburger found this difference superficial because it still did not overcome the need to proceed on a loan-by-loan basis.
Next, Royal Park argued that it would limit intended use of the sampling data to just one of two liability prongs. See id. at *5. Specifically, Royal Park asserts that it intends to use this evidence only to prove the "scope of breaches" and "to demonstrate the extent of materially breaching loans within a given trust." Id. In contrast, in the Trustee Sampling Decisions, Royal Park had also sought to use sampling evidence to show discovery or notice of materially breaching loans, but Royal Park stated that it would not seek to do so here. The more limited use of sampling Royal Park urges here has been successfully advocated for by trustees to prove the scope of breaches in suits where trustees enforce their rights against transferors. See id.
Magistrate Judge Lehrburger found that this limited use would not cure sampling's defects. The cases where trustees like U.S. Bank brought claims were instituted against "sponsors or issuers of the securities who had a direct relationship to the mortgages underlying them." Id. By contrast, here, for each loan, Royal Park would still need to establish "which entity originated the loan and whether that entity was solvent at the time that U.S. Bank would have demanded that the originator repurchase the loan." Id. That process would require loan-by-loan proof.
Royal Park now objects to the July 9 Order and moves to set it aside. (See Dkt. No. 393.)
II. STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 72 (" Rule 72"), a district judge reviews a "pretrial matter not dispositive of a party's claim or defense" under the "clearly erroneous or ... contrary to law" standard. Fed. R. Civ. P. 72(a). However, a pretrial matter that is "dispositive of a claim or defense" is reviewed de novo. Fed. R. Civ. P. 72(b) ; see also 28 U.S.C. § 636(b)(1)(A). A district judge may accept, set aside, or modify, in whole or in part, the findings and recommendations of a magistrate judge. See Fed. R. Civ. P. 72(b) ; DeLuca v. Lord, 858 F.Supp. 1330, 1345 (S.D.N.Y. 1994).
The parties disagree as to the applicable standard of review. Royal Park argues that the standard of review should be de novo, even though this dispute concerns a pretrial discovery matter. (Pl. Mem. at 8-9.) Royal Park reasons that the July 9 Order resolves ultimate questions of law and fact warranting de novo review. U.S. Bank responds that the court should apply the "clearly erroneous or contrary to law" standard. ("Def. Mem.," Dkt. No. 400, at 5.) As U.S. Bank points out, the district courts in the Trustee Sampling Decisions have all determined that this dispute concerns a "classic, non-dispositive decision regarding discovery that is subject to clear error review." Wells Fargo Bank, 2017 WL 3610511 at *6.
Given that Magistrate Judge Lehrburger limited the ruling's impact strictly to a discovery issue resolved on proportionality grounds, the Court will review the July 9 Order for clear error.
III. DISCUSSION
Rule 26(b)(1) generally entitles parties to "discovery regarding any nonprivileged matter that is relevant ... and proportional to the needs of the case, considering the importance of the issues as stake in the action ... and whether the burden or expense of the proposed discovery outweighs its likely benefit." Fed. R. Civ. P. 26(b)(1).
Although not couched in terms of Rule 26, Royal Park's core objection is that Magistrate Judge Lehrburger wrongly determined that Royal Park is required to prove liability and damages on a "loan-by-loan" basis. (Pl. Mem. at 9.) Specifically, Royal Park argues there are legal and factual issues contained in that finding, including the applicability of a sole remedy clause in the Governing Agreements between the trustee, transferors, and depositors. Royal Park argues that it would "be impossible to decide the propriety of sampling without making these findings of fact and law."Id. Ultimately, this contention largely goes to the relevance and benefit inquiry of the Rule 26 proportionality analysis, implicating the competing burdens of a potentially wasted $1.4 million expert analysis against the possibility of a larger $15 million analysis looming in the background.
Notably, this Court already determined at the class certification stage that Royal Park must ultimately prove its claims on a loan-by-loan basis. See Royal Park Invs. SA/NV v. U.S. Bank Nat'l Assoc., 324 F.Supp.3d 387, 387 n.6 (S.D.N.Y. 2018). Nonetheless, for the purposes of this motion, the Court considers the nuances raised by the parties and more squarely addresses the issue.
Royal Park bases its objections primarily on three legal and factual issues that a "loan-by-loan" finding would supposedly encompass.
A. OBJECTION REGARDING INTERPRETATION OF SECOND CIRCUIT AUTHORITY
The first objection is that Magistrate Judge Lehrburger put too much weight on the language from the Second Circuit that claims such as those here in dispute must be proven on a "loan-by-loan" basis. See Retirement Board, 775 F.3d at 162. Royal Park reiterates that the Circuit Court's statement was made in the context of a decision on class action standing and does not address the appropriateness of sampling. Then, Royal Park argues that "no Second Circuit authority holds that sampling is not viable proof against trustees" (Pl. Mem. at 11), and that the Second Circuit separately recognized that some district court cases permitted statistical sampling "to prove the incident of defects within individual trusts" (id. at 12 (quoting Retirement Board, 775 F.3d at 162 n.6 ) ). In response, U.S. Bank argues that, while the Second Circuit did not expressly prohibit sampling, there is still no contrary, controlling authority to warrant reversing Magistrate Judge Lehrburger under the applicable standard of review. (Def. Mem. at 8 (citing Pall Corp. v. Entegris, Inc., 655 F.Supp.2d 169, 172 (E.D.N.Y. 2008) ("[A] magistrate judge's decision is contrary to law only where it runs counter to controlling authority.") ).) Retirement Board involved claims similar to those at issue here. In that case, certificate holders sought to hold the trustee Bank of New York Mellon ("BNYM") responsible for the breaches of the representations and warranties by loan originators under similar breach of contract theories. The question was whether such certificate holders had "standing to assert claims related to certificates issued by trusts in which no [p]laintiff ever invested." 775 F.3d at 159. The Second Circuit concluded that plaintiffs did not have standing because the named plaintiffs' claims were not similar in all "essential respects," and because BNYM's "alleged misconduct must be proved loan-by-loan and trust-by-trust." Id. at 162. As an example, the Second Circuit noted that:
[W]hether [the loan originator] breached its obligations under the governing agreements (thus triggering BNYM's duty to act) requires examining its conduct with respect to each trust. Whether it was obligated to repurchase a given loan requires examining which loans, in which trusts, were in breach of the representations and warranties. And whether a loan's documentation was deficient requires looking at individual loans and documents. We see no way in which answering these questions for the trusts in which [p]laintiffs invested will answer the same questions for the numerous trusts in which they did not invest.
Id.
On this point, plaintiffs had argued that BNYM's "policy of inaction in the face of widespread defaults will be applicable to all trusts at issue." Id. The Second Circuit rejected this contention, explaining that "even proof that BNYM always failed to act when it was required to do so would not prove their case, because they would still have to show which trusts actually had deficiencies that required BNYM to act in the first place." Id. (emphasis added). Plaintiffs also sought to show deficiencies through the use of statistical sampling. The Second Circuit did not decide "[w]hether or not that method of proof could appropriately be used to establish that BNYM breached its duties to certificateholders." Id.
Magistrate Judge Lehrburger was not clearly wrong in determining that this Second Circuit decision weighed heavily against the relevance of undertaking sampling. As he and other courts have recognized, Retirement Board addressed the standing inquiry for class certification purposes. Thus, Royal Park is correct to note that the case did not explicitly foreclose the use of sampling. On the other hand, neither did the Circuit Court unequivocally endorse that methodology as applied to the circumstances at issue here. Nonetheless, the loan-by-loan prerequisite addressing the standing issue cannot be divorced from the plaintiffs' ultimate burden of proof. A barring of sampling, therefore, could be considered a straightforward application and reasoned extension of Retirement Board. Moreover, given that Royal Park cites no cases where the use of sampling has been upheld against a trustee (as opposed to a loan transferor, originator, or sponsor), there is no contrary law or other reason to find that Magistrate Judge Lehrburger misinterpreted the controlling standard or acted contrary to the law.
In sum, the Court is not persuaded by Royal Park's objection to how Magistrate Judge Lehrburger interpreted Second Circuit precedent.
B. OBJECTION REGARDING INTERPRETATION OF THE SOLE REMEDY CLAUSE
The second issue that Royal Park argues Magistrate Judge Lehrburger incorrectly addressed is the scope of the Governing Agreements' sole remedy clause. That provision actually drives the "loan-by-loan" proof formulation, although the Second Circuit did not address it in precisely the way the parties and Trustee Sampling Decisions have. The Trustee Sampling Decisions interpret the sole remedy clause to require Royal Park to proceed loan-by-loan to prove liability and damages. This method is called for because under the clause, a trustee "has neither the obligation nor the ability to demand cure, substitution, or repurchase of a nonconforming loan unless -– among other things –- it can identify a [breach that] materially and adversely affects the value of that particular loan." Royal Park v. Deutsche Bank Nat'l Tr. Co., 2018 WL 4682220 at *6 (internal quotation marks omitted). Magistrate Judge Lehrburger agreed with this analysis.
In objecting to this finding, Royal Park notes that the July 9 Order cites no specific contractual provision or sole remedy clause, largely relying on the discussions of the other Trustee Sampling Decisions. (Pl. Mem. at 13.) As to this point, however, Magistrate Judge Lehrburger gave Royal Park the opportunity to address specific differences in the contractual language at issue here compared to that in other cases but Royal Park did not attempt to differentiate the contracts at the time. See July 9 Order at *3 n.4. Magistrate Judge Lehrburger reasonably relied upon this point when conducting his analysis.
Royal Park also argues that Magistrate Judge Lehrburger wrongly "assumed" the clause was enforceable, and contends that the clause is void and not enforceable. (Pl. Mem. at 13-14.) This argument relies heavily upon Deutsche Bank Nat'l Tr. Co. for Morgan Stanley Structured Tr. I 2007-1 v. Morgan Stanley Mortg. Capital Holdings LLC, 289 F.Supp.3d 484 (S.D.N.Y. 2018) (hereafter, " Deutsche Bank"). In that case, a trustee sued a sponsor who transferred materially breaching loans into the trust. The court denied the defendant's motion for summary judgment, holding, in a long and considered opinion, that the sole remedy provision was "voidable given [the] allegations of gross negligence, and that in all events, the [sole remedy clause] does not foreclose recovery of damages." Id. at 499.
Royal Park argues that if a "trustee is not always required to produce loan-by-loan proof" even when there is a sole remedy clause, "there is no basis for mandating that Royal Park do so." (Pl. Mem. at 14.) U.S. Bank largely relies upon the reasoning of the Trustee Sampling Decisions that distinguish cases against sponsors from those against trustees. (Def. Mem. at 13.)
Deutsche Bank was decided after a number of the Trustee Sampling Decisions, and thus the sampling rulings did not address its arguments or findings. The case does not, however, fatally undermine the Trustee Sampling Decisions or otherwise persuade this Court to grant Royal Park's motion to set aside the July 9 Order.
At the outset, Deutsche Bank recognized that in RMBS cases, "given the fact-intensive nature of some issues and the lack of controlling precedent on others, that body of law contains disagreements large and small. It is impossible (and unnecessary) to reconcile every case, and reasonable minds can certainly differ on what the law should be for cases like this." 289 F.Supp.3d at 498.
The court then addressed New York law on limitation clauses on damages, such as the sole remedy clauses at issue here. The court concluded that under a public policy exception, New York law does not permit parties to insulate themselves from grossly negligent conduct or intentional wrongdoing. See id. at 494.
The court also analyzed the applicability of the sole remedy clause's specific performance provision requiring the loan originator or sponsor to repurchase the breaching loan. The court found that "when the granting of equitable relief appears to be impossible or impracticable, equity may award damages in lieu of the desired equitable remedy." Id. at 496 (internal quotation marks omitted). Thus, in RMBS cases, "several courts have relied on this general principle in holding that sole remedy provisions similar to the one in this case do not conclusively foreclose an award of money damages, particularly with respect to loans that have already been liquidated or foreclosed." Id. Even more specifically, "[c]ourts applying New York law have repeatedly approved the use of statistical sampling [as] a means of proving liability and damages in RMBS cases." Id. (citing Flagstar Bank, 920 F.Supp.2d at 512 ).
However, one of the Trustee Sampling Decisions cites a competing New York Court of Appeals case upholding strict enforcement of sole remedy clauses. See Royal Park v. Deutsche Bank Nat'l Tr., 2018 WL 4682220, at *5 (citing Ambac Ass. Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569, 584-85, 81 N.Y.S.3d 816, 106 N.E.3d 1176 (2018) ("[T]he remedy for Ambac's contract claims is limited to the repurchase protocol provided for in the contract's sole remedy provision.") ).
With that background, the Deutsche Bank court concluded that the sole remedy clause was voidable. The court relied on the proffered facts about the transferor's grossly negligent conduct, such as intentionally conveying defective loans to empty its position of the toxic assets. See id. at 499. Alternatively, the Court determined that the trustee would not be limited to equitable remedies because "loan-by-loan re-underwriting and analysis is impracticable given the scope of the alleged breach in this action." Id. at 502. Then, given those findings, the court concluded that statistical sampling would be admissible to prove damages and liability. See id. at 504.
The court also remarked that even if the sole remedy clause applied and thus the trustee had to proceed with loan-by-loan proof, statistical sampling would still be appropriate based on general observations about statistical sampling that the court made in Flagstar Bank and that Royal Park repeats throughout its briefing. Id. at 504-05.
"Although Flagstar argues that the fact determination of material breach in any given instance requires consideration of an entire loan file renders the loans ill-suited to proof by statistical sampling, this argument is unpersuasive. The very purpose of creating a representative sample of sufficient size is so that, despite the unique characteristics of the individual members populating the underlying pool, the sample is nonetheless reflective of the proportion of the individual members in the entire pool exhibiting any given characteristic." Flagstar Bank, 920 F.Supp.2d at 512.
U.S. Bank and Magistrate Judge Lehrburger address the arguments set forth in Deutsche Bank in much the same way the Trustee Sampling Decisions addressed Flagstar Bank. As Magistrate Judge Lehrburger put it, the transferors have a different relationship with the underlying loans because, "unlike a trustee, an RMBS issuer or sponsor securitizes the loans, conducts due diligence on the loans (or at least is in a position to do so), and makes representations and warranties about the loans." July 9 Order at *3.
This finding is compelling and persuasive. It is rooted in analysis of the contractual relationships, and not contrary to law under Rule 72 (a). Royal Park faces a large hurdle in relying on Deutsche Bank because that decision explains at the outset the fact-specific nature of the inquiry. This statement, coupled with the Trustee Sampling Decisions, means at best that there is competing case law on point, but no binding determination contrary to Magistrate Judge Lehrburger's ruling. Equally important, likely because Deutsche Bank does not involve claims against a trustee, the case did not address the Second Circuit's language in Retirement Board. Critically, Royal Park does not address the Deutsche Bank court's analysis concerning sole remedy provisions and equitable remedies, nor to apply its reasoning here.
In other words, Royal Park makes no arguments about its allegations of U.S. Bank's gross negligence that should negate the applicability of the sole remedy clause. Moreover, Royal Park provides no analysis on addressing how the gross negligence inquiry applies in a situation such as presented here. U.S. Bank's alleged gross negligence as to certificate holders may be less intertwined with in the sole remedy as clause compared to the transferor's gross negligence as to the trustee in Deutsche Bank. Hence, it is not clear how U.S. Bank's alleged gross negligence impacts the sole remedy clause. Finally, despite its focus on using sampling for the limited purpose of proving damages, Royal Park offers no arguments on how damages inquiries may or may not differ, given their differing obligations in suits against trustees versus those against transferors. Contrary to Royal Park's assertions, these differences between trustees and transferors are not "illusory" distinctions. (See Pl. Memo at 15.)
Notably, ruling on a related case, Magistrate Judge Moses addressed this question. She held that Royal Park did not allege the same level of "pervasive breach," and "under circumstances quite different from any that the Trustee could have presented with respect to the [t]rusts at issue here" as compared to those in dispute in Deutsche Bank. Royal Park v. Deutsche Bank Nat'l Tr., 2018 WL 4682220 at *13.
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Accordingly, the Court does not find Royal Park's arguments as to the scope of the sole remedy clause persuasive.
C. OBJECTION REGARDING ROLE OF AFFIRMATIVE DEFENSES
Finally, Royal Park argues that Magistrate Judge Lehrburger incorrectly shifted the burden of proof of U.S. Bank's affirmative defenses onto Royal Park when determining that Royal Park had to proceed "loan-by-loan." (Pl. Mem. at 18.) Royal Park highlighted as an example the statement that "for each breaching loan, Royal Park would need to establish which entity originated the loan and whether that entity was solvent at the time that U.S. Bank would have demanded that the originator repurchase the loan. Sampling cannot answer those questions." July 9 Order at *5. Royal Park maintains that those are affirmative defenses that U.S. Bank could raise but that Royal Park need not address in proving its claims, especially because any uncertainty about the damages figure goes against U.S. Bank. (Pl. Mem. at 18.) U.S. Bank disagrees that Magistrate Judge Lehrburger's statement shifts the burden and counters that, at a minimum, Royal Park needs to prove the fact of damages on a loan-by-loan basis. (Def. Mem. at 14-15.)
As discussed at length earlier, there is considerable support in case law and logic to sustain a finding that Royal Park needs to proceed on a loan-by-loan basis. Separately, however, the July 9 Order should not be understood to resolve definitively what Royal Park's initial burden with regards to these specific affirmative defenses will be. The parties may address the burden, as appropriate, in the context of a dispositive motion addressing those issues. This clarification does not undermine the proportionality finding by Magistrate Judge Lehrburger, because the applicable standard is whether discovery is "proportional to the needs of the case." Fed. R. Civ. P. 26. Ultimately, these issues require resolution on a loan-by-loan basis, a proposition that supports Magistrate Judge Lehrburger's decision regardless of which party, for example, ultimately needs to show the solvency of the various entities at issue in this dispute.
These issues also warrant rejecting sampling for the slightly more limited purpose "to prove the material defect rates in [t]rusts that Royal Park will prove experienced" an "Event of Default" (Pl. Mem. At 16) -– a defined contractual term that triggered heightened duties for U.S. Bank. Similar to the issues examined above, even for trusts where there was an Event of Default, there remain factual issues to resolve beyond the "material defect rates."
IV. ORDER
For the reasons discussed above, it is hereby
ORDERED that the objection pursuant to Federal Rule of Civil Procedure 72 of plaintiff Royal Park Investments SA/NV to the Order of Magistrate Judge Lehrburger dated July 9, 2018 (the "July 9 Order") (Dkt. Nos. 393, 394) is DENIED; and it is further
ORDERED that the July 9 Order (Dkt. No. 391) is AFFIRMED.