NATIONAL CREDIT UNION ADMINISTRATION BOARD vs U.S. BANK N A, and BANK OF AMERICA, N A | NCUA Sues Trustees of 99 Mortgage-Backed Securities

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK

NATIONAL CREDIT UNION
ADMINISTRATION BOARD,
as Liquidating Agent of U.S. Central Federal
Credit Union, Western Corporate Federal Credit
Union, Members United Corporate Federal
Credit Union, Southwest Corporate Federal
Credit Union, and Constitution Corporate
Federal Credit Union,

Plaintiffs,

U.S. BANK NATIONAL ASSOCIATION, and
BANK OF AMERICA, NATIONAL
ASSOCIATION,
Defendants.

COMPLAINT

The National Credit Union Administration Board (“NCUA Board”), acting in its capacity as liquidating agent for each of U.S. Central Federal Credit Union (“U.S. Central”), Western Corporate Federal Credit Union (“WesCorp”), Members United Corporate Federal Credit Union (“Members United”), Southwest Corporate Federal Credit Union (“Southwest”), and Constitution Corporate Federal Credit Union (“Constitution”), (collectively, the “CCUs” and the NCUA Board as liquidating agent for each, the “Plaintiffs”), by and through their attorneys, for this action against U.S. Bank National Association (“U.S. Bank”) and Bank of America, National Association (“Bank of America,” and collectively with U.S. Bank, “Defendants”), alleges as follows:

I. NATURE OF THE ACTION
1. Plaintiffs bring this action against Defendants for violating the Trust Indenture Act of 1939 (the “TIA”), 15 U.S.C. § 77aaa et seq., and, regarding the New York trusts, for violating New York Real Property Law § 124 et seq. (the “Streit Act”) to recover the damages they have suffered because of Defendants’ violations of their statutory and contractual obligations.
2. This action arises out of Defendants’ roles as trustees for 99 trusts identified on Exhibit A that issued residential mortgage-backed securities (“RMBS”).1 Each trust consists of hundreds of individual residential mortgage loans that were pooled together and securitized for sale to investors. Investors purchased certificates issued by the RMBS trust that entitled the investors (or “certificateholders”) to fixed principal and interest payments from the income stream generated as borrowers made monthly payments on the mortgage loans in the trusts.
3. The CCUs purchased the certificates in the trusts identified on Exhibit A at an original face value of approximately $5.8 billion.
4. The certificates’ value was dependent on the quality and performance of the mortgage loans in the trusts and swift correction of any problems with the loans. But, because of the structure of the securitization, certificateholders do not have access to the mortgage loan files or the power to remedy or replace any defective loans. Instead, certificateholders must rely on the trustees to protect their interests.
5. Defendants, as the trustees for the trusts, had contractual and statutory duties to address and correct problems with the mortgage loans and to protect the trusts’ and the certificateholders’ interests. The trustee for each trust has three primary duties. First, the trustee must take possession and acknowledge receipt of the mortgage files, review the documents in the mortgage files, identify any mortgage files that lack a complete chain of title or that have missing documents, and then certify that the mortgage files are complete and accurate. If the trustee identifies defects in the mortgage files, it must notify the appropriate parties and take steps to enforce the responsible party’s obligation to cure, substitute, or repurchase any mortgage loans with defective mortgage files.
6. Second, if the trustee discovers a breach of the representations and warranties concerning the mortgage loans, including but not limited to representations concerning the characteristics of the mortgage borrowers, the collateral for the mortgage loans, and assurances that the mortgage loans were originated in accordance with applicable underwriting criteria, the trustee must notify the appropriate parties and take steps to enforce the responsible party’s obligation to cure, substitute, or repurchase the defective mortgage loans. If the trustee fails to exercise this duty, then the trusts and the certificateholders will suffer losses properly borne by the party responsible for the defective loans.
7. Third, the trustee must act to protect the interests of the trust and the certificateholders when it becomes aware of defaults concerning the trust. Thus, when the trustee discovers a default, or is notified by other parties, such as servicers, of defaults like breaches of representations and warranties with respect to the underlying mortgage loans, the trustee must act prudently to investigate those defaults, notify certificateholders of the defaults, and take appropriate action to address the defaults.
8. Here, Defendants even failed to perform the threshold duties of taking full possession of the original notes and mortgages and properly reviewing the mortgage loan files for irregularities. If they had fulfilled their obligations, a significant percentage of the mortgage loans in the trusts would have been repurchased or substituted.
9. Moreover, an overwhelming number of events alerted Defendants to the fact that the trusts suffered from numerous problems, yet they did nothing. First, the trusts suffered identifies defects in the mortgage files, it must notify the appropriate parties and take steps to enforce the responsible party’s obligation to cure, substitute, or repurchase any mortgage loans with defective mortgage files.
6. Second, if the trustee discovers a breach of the representations and warranties concerning the mortgage loans, including but not limited to representations concerning the characteristics of the mortgage borrowers, the collateral for the mortgage loans, and assurances that the mortgage loans were originated in accordance with applicable underwriting criteria, the trustee must notify the appropriate parties and take steps to enforce the responsible party’s obligation to cure, substitute, or repurchase the defective mortgage loans. If the trustee fails to exercise this duty, then the trusts and the certificateholders will suffer losses properly borne by the party responsible for the defective loans.
7. Third, the trustee must act to protect the interests of the trust and the certificateholders when it becomes aware of defaults concerning the trust. Thus, when the trustee discovers a default, or is notified by other parties, such as servicers, of defaults like breaches of representations and warranties with respect to the underlying mortgage loans, the trustee must act prudently to investigate those defaults, notify certificateholders of the defaults, and take appropriate action to address the defaults.
8. Here, Defendants even failed to perform the threshold duties of taking full possession of the original notes and mortgages and properly reviewing the mortgage loan files for irregularities. If they had fulfilled their obligations, a significant percentage of the mortgage loans in the trusts would have been repurchased or substituted.
9. Moreover, an overwhelming number of events alerted Defendants to the fact that the trusts suffered from numerous problems, yet they did nothing. First, the trusts suffered enormous losses due to the high number of mortgage defaults, delinquencies, and foreclosures caused by defective loan origination and underwriting. Second, highly publicized government investigations and enforcement actions, public and private litigation, and media reports highlighted the mortgage originators’ systematic abandonment and disregard of underwriting guidelines and the deal sponsors’ poor securitization standards in the years leading up to the financial crisis. As summarized below, these actions and reports detail the incredible volume of defective loans and notorious activities of the originators, sponsors, and other players in the RMBS industry. Yet Defendants failed to take steps to preserve their rights or hold the responsible parties accountable for the repurchase or substitution of defective mortgage loans in direct contravention of their obligations as trustees.
10. Finally, Defendants failed to address servicer and/or master servicer defaults and events of default. Defendants knew that the master servicers and servicers were ignoring their duty to notify other parties, including Defendants as trustees, upon the master servicers’ and servicers’ discovery of breaches of the mortgage loan representations and warranties. Despite Defendants’ knowledge of these ongoing defaults and events of default, Defendants failed to act prudently to protect the interests of the trusts and the certificateholders.
11. Defendants’ failures resulted in the trusts and certificateholders suffering losses rightfully borne by other parties. Had Defendants adequately performed their contractual and statutory obligations, breaching loans would have been removed from the loan pools underlying the certificates and returned to the responsible party. Defendants’ improper conduct directly caused losses to certificateholders like the Plaintiffs.
12. Even after ample evidence came to light that the trusts were riddled with defective loans, Defendants shut their eyes to such problems and failed to take the steps necessary to protect the trusts and certificateholders. Defendants failed to act in part because protecting the best interests of the trusts and the certificateholders would have conflicted with Defendants’ interests. As participants in many roles in the securitization process, Defendants were economically intertwined with the parties they were supposed to police.
13. Because of the widespread misconduct in the securitization process, Defendants had incentives to ignore other parties’ misconduct in order to avoid drawing attention to their own misconduct. Thus, Defendants failed and unreasonably refused to take action to protect the trusts and certificateholders against responsible party breaches.
14. Indeed, it is precisely this type of trustee complicity and inaction that led Congress to enact the TIA to “meet the problems and eliminate the practices” that plagued Depression-era trustee arrangements and provide investors with a remedy for trustees that utterly neglect their obligations. See, e.g., 15 U.S.C. § 77bbb(b) (explaining purposes of the TIA in light of problems identified in 15 U.S.C. § 77bbb(a)).
15. To that end, several sections of the TIA impose duties on trustees. First, TIA Section 315(a) provides that, prior to default (as that term is defined in the governing documents), the trustee is liable for any duties specifically set out in the governing documents. 15 U.S.C. § 77ooo(a)(1). Second, TIA Section 315(b) provides that the trustee must give holders of covered securities “notice of all defaults known to the trustee, within ninety days after the occurrence thereof.” 15 U.S.C. § 77ooo(b). Third, Section 315(c) requires a trustee to act prudently in the event of a default (as that term is defined in the governing documents). 15 U.S.C. § 77ooo(c). Finally, the TIA states that “[n]otwithstanding any other provision of the indenture to be qualified, the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security . . . shall not be impaired or affected without the consent of such holder.” 15 U.S.C. § 77ppp(b).
16. In addition, Section 124 of the Streit Act imposes a duty upon the trustee to discharge its duties under the applicable indenture with due care to ensure the orderly administration of the trust and to protect the trust beneficiaries’ rights. N.Y. Real Prop. Law § 124. Like the TIA, following an event of default, the Streit Act provides that the trustee must exercise the same degree of skill and care in the performance of its duties as would a prudent person under the same circumstances. N.Y. Real Prop. Law § 126(1).
17. Finally, upon awareness of the various failures discussed in this complaint, the governing agreements require Defendants to exercise their rights and powers using the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.
18. Defendants’ failure to perform their duties under the TIA, the Streit Act, and the governing agreements has caused Plaintiffs to suffer enormous damages.

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