This fraud action arises out of the HSH Nordbank plaintiffs' purchase of residential mortgage backed securities (RMBS) Certificates from the Barclays Bank defendants.^[FN1] Defendants move to dismiss the Amended Consolidated Complaint (Amended Complaint or AC), pursuant to CPLR 3211 (a) (1) and (7), on the grounds that it is barred by the statute of limitations and fails to state a cause of action.

BACKGROUND/THE COMPLAINT

The following facts are pleaded in the Amended Complaint, unless otherwise indicated. Plaintiff HSH Nordbank AG (HSH Nordbank) is a commercial bank incorporated in Germany, with an office in New York City. Plaintiff HSH Nordbank AG, Luxembourg Branch (HSH Luxembourg) is a division of HSH Nordbank, with a main office in Luxembourg. Plaintiff HSH [*2]Nordbank Securities S.A. (HSH Securities) is a wholly owned subsidiary of HSH Nordbank, with its principal place of business in Luxembourg. Plaintiff Poseidon Funding, Ltd. (Poseidon) is a funding conduit organized in the Channel Islands. Plaintiff Carrera Capital Finance Ltd. (Carrera) is a special investment vehicle organized in the Channel Islands. (AC ¶¶ 22-26.)

Defendant Barclays Bank PLC (Barclays Bank) is a public limited company registered in England and Wales, with its registered head office in London and a branch in New York City. Defendant Barclays Capital Inc. (Barclays Capital) is a registered broker-dealer, and is a Connecticut corporation that is principally located in New York City. Barclays Capital is a wholly owned subsidiary of Barclays Bank. Securitized Asset Backed Receivables LLC (SABR), a Delaware corporation, is also a wholly owned subsidiary of Barclays Bank. Defendant Sutton Funding LLC (Sutton) is a Delaware limited liability company, with its principal office in Melville, New York. (AC ¶¶ 27-30.) There is substantial overlap between the management and personnel of Barclays Bank, Barclays Capital and SABR, and Barclays Bank allegedly dominated and controlled both Barclays Capital and SABR. (AC ¶¶ 47-49.) Barclays Bank also controlled Sutton in its capacity as administrator of Sutton's mortgage loan acquisition business. (AC ¶ 56.)

Between September 2005 and February 2007, HSH Nordbank, HSH Luxembourg, HSH Securities, Carrera, and non-parties Rasmus Purchase No. 1 Limited and Rasmus Purchase No. 2 Limited (together Rasmus) purchased $46,000,000 in RMBS Certificates from the New York branch of Barclays Capital in three offerings.^[FN2] (AC ¶¶ 1, 33, 35.) Poseidon funded Rasmus' purchases. (AC ¶ 25.) Rasmus transferred all of its rights and interests in the Certificates to the three HSH Nordbank entities. (AC ¶ 33.) These entities are also the subrogee of both Carrera and Rasmus as to their rights and claims relating to their purchases of certain of the Certificates. (AC ¶ 34.)

In an RMBS securitization, an investment bank typically pools thousands of residential mortgages in a trust, which then issues securities in the form of certificates to investors. The certificates entitle the holders to a portion of the monthly revenue stream produced by principal and interest payments made by the mortgage borrowers. (AC ¶ 36.) The securitization process begins when a lending institution makes a home loan to a borrower. The lender, also known as the "originator," typically sells such loans in bulk to the "sponsor," an affiliate of the investment [*3]bank initiating the securitization. The sponsor then sells the loans to a "depositor," typically also an affiliate of the same investment bank. (AC ¶ 37.) The depositor "deposits" all of the loans into a trust. (AC ¶ 42.) The trust then issues certificates of varying seniority, called "tranches," which entitle the certificate holders to receive a portion of the principal and interest paid by the borrowers pursuant to the mortgages. (AC ¶ 43.) The certificates are ultimately allocated to one or more underwriters for sale to investors. (AC ¶ 44.)

The sponsor and depositor are typically the "issuers" of the securities. (AC ¶ 37.) The issuers prepare Offering Documents, including prospectuses, prospectus supplements, and registration statements, which describe the characteristics of the loans in the pool. (AC ¶¶ 2, 39, 41.) The Offering Documents include representations regarding the loan-to-value (LTV) and combined loan-to-value (CLTV) ratios of the mortgages, the owner occupancy status of the mortgaged properties, the fact that mortgages are assigned to the trust, and the originators' adherence to underwriting guidelines. (AC ¶ 41.)

In this case, the originators for all of the loans in the three securitizations were non-parties Fremont Investment and Loan (Fremont) and New Century Mortgage Corp. (New Century). Fremont originated the loans in SABR 2005-FR4 and SABR 2006-FR1, and New Century originated the loans in SABR 2007-NC2. (AC ¶ 149.) Barclays Bank was the sponsor of SABR 2006-FR1, and Sutton Funding was the sponsor of SABR 2007-NC2. (AC ¶¶ 27, 56.) SABR 2005-FR4 did not have a sponsor, and the loans for that securitization were acquired initially by the depositor. (AC ¶ 37, n 1.) For all of the securitizations, the depositor was SABR, and the sole or lead underwriter was Barclays Capital. (AC ¶¶ 28, 54.) By virtue of their respective roles as sponsors and depositors, Barclays Bank, Sutton, and SABR were the issuers of the Certificates. (See AC ¶¶ 2, 37.)

As discussed more fully below, the Amended Complaint alleges that defendants made false representations about the mortgage loans. First, plaintiffs emphasize that the Offering Documents contained numerous misrepresentations that the notes and mortgages would be transferred to the trusts as of the closing dates. Plaintiffs allege that the "vast majority of the notes and mortgages were apparently . . . not transferred to the Trusts within 3 months" of the closings, as required to obtain favorable Real Estate Mortgage Investment Conduit (REMIC) tax status. (AC ¶¶ 57, 58-83.) According to an investigation by plaintiffs which sampled over 700 assignments and satisfactions of mortgages, less than 1.7% of the assignments were made to the trusts within three months of the closing or offering, and no assignments were made at the time of offering.^[FN3] (AC ¶¶ 4, 57-58, 71, 76-77.) Only approximately 1.3% of the 309 sampled satisfactions listed a trust or trustee as the holder of the note and mortgage at the time of the satisfaction. (AC ¶¶ 59, 70, 73-75.)

Second, plaintiffs allege that the Offering Documents materially overstated the owner occupancy rates of the mortgaged properties. Specifically, the Offering Documents set forth owner occupancy rates for the mortgages underlying the securitizations, ranging from 89.8% to 93.5%. According to plaintiffs' own loan level investigation based on a sample of over 1100 [*4]loans, however, these rates were overstated by between 14.3% and 19.2%. (AC ¶¶ 112-118.)

Third, plaintiffs plead that the appraisal values were materially inflated in each of the securitizations, causing the LTV and CLTV ratios for the mortgages to be understated. (AC ¶ 123.) The Offering Documents understated the average weighted CLTV ratios by between 7.1% and 19.7%. (AC ¶ 132.) In approximately 37% of the loans sampled, the CLTV was misrepresented by more than 10%. (AC ¶ 128.) The Offering Documents represented that no mortgages in the loan pools had a CLTV ratio over 100% ("mean[ing] that the amount of the combined liens on the property was greater than the value of the property itself at the time the loan was originated"). (AC ¶ 126.) However, according to plaintiffs' sampling of over 1000 loans using an Automated Valuation Model, approximately 24.5% - 51.6% of the loans fell into that category. (AC ¶ 134.) The CLTV ratios were understated by 7.1% to 19.7%. (AC ¶ 132.) Plaintiffs further assert, based on the sampling of loans, that the weighted average LTV for SABR 2006-FR1 was understated by approximately 11%. (AC ¶ 137.)

Fourth, plaintiffs allege that the Offering Documents contained false representations that the loans either conformed to the underwriting guidelines of the originators, or qualified for inclusion in the pool due to certain compensating factors. (AC ¶¶ 143, 150-152.) However, both of the loan originators, Fremont and New Century, were the subject of public and private lawsuits, bankruptcy proceedings, and governmental investigations through which it was determined that they engaged in the systematic abandonment of underwriting standards, extending loans regardless of the borrowers' ability to repay. (AC ¶¶ 154-67.) Plaintiffs also allege that defendants were aware of these practices based on their due diligence. (AC ¶¶ 138-147.)

Finally, plaintiffs allege that the Offering Documents marketed the Certificates based on their investment grade ratings. However, according to the Amended Complaint, defendants obtained those high ratings from the ratings agencies by supplying credit risk data, which they knew to be false, relating to the CLTV ratios, owner occupancy rates, and adherence to underwriting guidelines. (AC ¶¶ 168-73.)

In alleging damages, plaintiffs assert that in reliance on the representations in the Offering Documents, they paid a price for the Certificates that was much higher than what they were worth. The market value of the Certificates declined, and the vast majority were downgraded to junk status. The downgrades, in turn, allegedly forced plaintiffs to raise additional capital to meet regulatory requirements, causing them to incur additional losses. (AC ¶ 188.) Plaintiffs also claim that as a result of defendants' failure to transfer the mortgages and notes to the trusts, they have incurred two additional items of damages: the trusts cannot legally foreclose on mortgages when borrowers default on their obligations, and the trusts' eligibility for favorable REMIC tax status is at risk. (AC ¶¶ 90-98.)

Between September 29, 2011 and February 23, 2012, plaintiffs filed three separate actions against the defendants. The cases were consolidated on March 20, 2012. Nordbank filed its initial complaint on April 2, 2012 and the Amended Complaint was filed on June 26, 2012.

The Amended Complaint pleads five causes of action: (1) common law fraud (AC ¶¶ 189-197); (2) fraudulent concealment(AC ¶¶ 198-207); (3) aiding and abetting fraud (as against Barclays Capital only) (AC ¶¶ 208-212); (4) negligent misrepresentation (AC ¶¶ 213-220) (in the alternative); and (5) in the alternative and as against Barclays Capital only, rescission based upon [*5]mutual mistake (AC ¶¶ 221-227). The prayer for relief seeks punitive damages in connection with plaintiffs' fraud claims.

DISCUSSION

Defendants move to dismiss the claims as time-barred under German law. In the alternative, defendants seek to dismiss the Amended Complaint for failure to state a cause of action. Defendants contend that plaintiffs have not adequately pleaded fraud because they have not alleged material misrepresentations with respect to the transfer of title, underwriting guidelines, LTV ratios, owner occupancy statistics, or credit ratings. In addition, defendants contend that plaintiffs' pleading of scienter, loss causation, justifiable reliance, and damages is deficient. Defendants further assert that plaintiffs have not pleaded the special relationship or duty required to state claims for fraudulent concealment and negligent misrepresentation, and have not particularized their aiding and abetting claim or pleaded the elements of mutual mistake. Defendants also seek dismissal of the plea for punitive damages, on the ground that plaintiffs have not identified a public wrong.

Statute of Limitations

New York's borrowing statute, CPLR 202, provides, in pertinent part, that "[a]n action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued . . . ." It is thus well settled that "[w]hen a nonresident sues on a cause of action accruing outside New York, CPLR 202 requires the cause of action to be timely under the limitation periods of both New York and the jurisdiction where the cause of action accrued." (Global Fin. Corp. v Triarc Corp., 93 NY2d 525, 528 [1999].) In cases involving purely economic loss, "the place of injury usually is where the plaintiff resides and sustains the economic impact of the loss." (Id. at 529; accord Portfolio Recovery Assocs., LLC v King, 14 NY3d 410, 416 [2010].)

The parties agree that plaintiffs' claims are timely under CPLR 213, the six-year New York statute of limitations for fraud. Defendants contend, and plaintiffs do not dispute, that the cause of action accrued in Germany where the economic injury occurred, that New York's borrowing statute applies because plaintiffs are nonresidents, and that the court must therefore also determine whether Germany's three-year statute of limitations bars plaintiffs' claims. (See Ds.' Memo. In Support at 11-12; Ps.' Memo. In Opp. at 4-5).

The parties' experts on German law — Professor Uwe H. Schneider on behalf of defendants and Professor Heinz-Peter Mansel on behalf of plaintiffs — agree that the statute of limitations for torts and contracts is governed by German Civil Code § 199, and that this section, on the translation of which they also agree, provides: "(1) Unless another commencement of limitation is determined, the standard limitation period commences at the end of the year in which: 1. the claim arose and 2. the obligee obtains knowledge of the circumstances giving rise to the claim and of the identity of the obligor, or would have obtained such knowledge if he had not shown gross negligence." (Schneider Opinion [Op.], Ex. B [translation] Mansel Op. ¶ 6.^[FN4]) Although defendants' expert also discusses case law regarding statutes of limitation applicable to securities claims, he does not appear to dispute that section 199 applies to this action. (See [*6]Schneider Op. ¶¶ 16-17.) Thus, the complaint will be timely under section 199 if plaintiffs did not know or, absent gross negligence, would not have obtained the requisite knowledge, until on or after January 1, 2008. Three years from the end of that calendar year is December 31, 2011, and the complaint was filed in September 2011.

There is in fact substantial agreement between the experts on the standards to be applied in determining whether the limitations period has run. Both experts acknowledge that the statute runs from the time the party has enough knowledge to commence an action with a "sufficient prospect of success." (Mansel Op. ¶ 12; Schneider Reply Op. ¶ 2.) The knowledge must relate to specific claims against a particular defendant, and must concern the certificates that the investor purchased. (Mansel Op. ¶¶ 10, 21; Ds.' Reply Memo. In Support at 3; Ps.' Memo. In Opp. at 4-5.) Furthermore, the plaintiff must be aware of the facts evidencing every element of the causes of action, including the defendant's intent. (Mansel Op. ¶ 13.) According to plaintiffs' expert, gross negligence within the meaning of the statute occurs "when the creditor has no knowledge because he did not make obvious considerations or cast them aside or that which should have been obvious to anyone in that particular scenario must have gone unnoticed." (Mansel Op. ¶ 16.) Defendants' expert states, in virtually identical terms, that gross negligence is shown if "the creditor does not make obvious considerations or casts them aside." (Schneider Reply Op. ¶ 3.) The experts also agree that the plaintiff has no "secondary duty to investigate on his own initiative." (Mansel Op. ¶ 18; Schneider Reply Op. ¶ 4.) However, the plaintiff cannot refrain from investigating where the failure to investigate would be, as explained by the parties' experts, "incomprehensible to a reasonable damaged person who takes care of his own interests" (Mansel Op. ¶ 16), or an omission that "nobody would understand." (Schneider Reply Op. ¶ 4.) In addition, as explained by plaintiffs' expert, the plaintiff "must only avail himself of such possibilities to investigate that are, in a manner of speaking, in plain sight." (Mansel Op. ¶ 18 [internal quotation marks omitted].) Similarly, according to defendants' expert, the obligation is on the creditor to investigate if he can do so "without great effort and costs." (Schneider Reply Op. ¶ 4.)^[FN5]

In claiming that the facts underlying plaintiffs' causes of action were widely known in 2006 and 2007, defendants point to newspaper articles warning about inflated appraisals, owner occupancy fraud, and loosening of underwriting guidelines in connection with subprime mortgages, as well as specific disclosures relating to Fremont and New Century, the originators of the mortgages underlying the Certificates at issue. (Ds.' Memo. In Support at 13-15.) With [*7]respect to Fremont, defendants cite a cease and desist order issued to it in March 2007 by the Federal Deposit Insurance Corporation, due to unsatisfactory lending practices, and a complaint filed against Fremont in June 2007 by Lehman Brothers, alleging breach of representations regarding compliance with underwriting guidelines. (Id. at 14.) With respect to New Century, defendants cite a disclosure in the Offering Documents that New Century "needed" to restate its financial statements in light of its underwriting practices. They also rely on its bankruptcy filing in April 2007, and the filing in September 2007 of a class action alleging that New Century had abandoned its underwriting guidelines. (Id. at 15.) In addition, defendants submit evidence of downgrading in 2007 of one of the Certificates, SABR 2007-NC2. (See Reply Aff. of Joshua Fritsch [Ds.' Attorney], Ex. A.)

Courts that have applied the German statute of limitations have repeatedly held that satisfaction of the gross negligence standard was not demonstrated as a matter of law by information, similar to that cited by defendants here, which was publicly available in 2007 or even 2008. (See HSH Nordbank AG v The Goldman Sachs Group, Inc., 2013 WL 6240431, * 3-4 [Sup Ct, NY County Nov. 26, 2013] [Schweitzer, J.] [holding that information available in 2007, including news reports that German banks were considering whether to turn to U.S. courts to seek restitution, and that originators were not following underwriting standards, did not bar claims under German statute of limitations as a matter of law, and that triable issues of fact existed as to whether both Nordbank and Goldman Sachs knew that the offering materials for the particular certificates purchased by Nordbank contained false statements] Phoenix Light SF Ltd. v Ace Secs. Corp., 2013 WL 1788007, * 5 [Sup Ct, NY County April 24, 2013] [Kornreich, J.] [holding that "the statute of limitations does not begin to run until plaintiff is on notice of every element of the claim, which, in the case of fraud, includes scienter," and that the claims subject to German statute of limitations were timely, notwithstanding the availability in 2008 of news reports about the falsity of underlying loan data] Deutsche Zentral-Genossenchaftsbank AG v HSBC No. America Holdings, Inc., 2013 WL 6667601, * 13-15 [SD NY Dec. 17, 2013] [Deutsche Zentral] [holding that plaintiffs' fraud claims were timely under German statute of limitations, notwithstanding availability in 2007 and 2008 of widely reported information about originators' abandonment of underwriting guidelines, downgrades of certificates in 2008, and even plaintiffs' filing of lawsuit against different underwriter, UBS; Court reasoned that such information did not disclose fraudulent intent on the part of the HSBC defendants and that defendants had "offered no means of investigation available in 2008 — involving considerable effort or not — that would have revealed the HSBC Defendants' knowledge of the securitization of [nonconforming] loans without compensating factors"].)

In a recent decision in Allstate Ins. Co. v Credit Suisse Secs. (USA) LLC (2014 WL 432458, * 4-5 [Jan. 24, 2014] [Allstate]), this court denied a motion to dismiss brought under a statute of limitations that imposed a reasonable diligence standard, where the motion was based on information available prior to February 28, 2008, including the bankruptcy of New Century, the originator of a small percentage of loans in the offerings at issue, and general reports of misconduct in the subprime industry, including reports of loosening of underwriting standards, problems with sponsor due diligence, and pressures on appraisers to inflate appraisals. The Allstate decision noted that Courts have repeatedly denied limitations-based motions to dismiss in RMBS cases, even under a reasonable diligence standard, based on publicly available [*8]information as of 2007 or as late as mid-2008. Courts have reasoned that such information did not demonstrate scienter on the defendant's part (see e.g. Allstate Ins. Co. v Ace Secs. Corp., 2013 WL 1103159, * 6-9 [Sup Ct, NY County Mar. 14, 2013] [Bransten, J.]), or did not relate directly to the misrepresentations alleged in the complaint or to the specific securitizations. (See id.; Capital Ventures Intl. v J.P. Morgan Mtge. Acquisition Corp., 2013 WL 535320, * 7 [D Mass Feb. 13, 2013] Massachusetts Mut. Life Ins. Co. v Residential Funding Co., LLC, 843 F Supp 2d 191, 208-209 [D Mass Feb. 14, 2012] Matter of Countrywide Fin. Corp. Mortgage-Backed Secs. Litig. [Massachusetts Mut. Life Ins. Co. v Countrywide Fin. Corp.], 2012 WL 1322884, * 4 [CD Cal Apr. 16, 2012] [holding, in case under state Blue Sky law, that "2007 was a turbulent time during which the causes, consequences, and interrelated natures of the housing downturn and subprime crisis were still being worked out," and that Court could not, based solely on the complaint and judicially noticeable documents, conclude that a reasonably diligent investor by August 2007 would have linked increased delinquencies in loan pools at issue with articles generally reporting lax underwriting standards].)

Other Courts have granted motions to dismiss RMBS claims as time-barred based on information available in 2007 or as of early to mid-2008. However, they have decided the motions on records which presented extensive evidence of noncompliance with underwriting standards by key originators, and a decline in the value of the certificates.^[FN6] (See e.g. Matter of Countrywide Fin. Corp. Mtge.-Backed Secs. Litig. [Federal Dep. Ins. Corp. v Banc of Am. Secs. LLC], 934 F Supp 2d 1219, 1227 [CD Cal Mar. 21, 2013] [holding that federal claims as to certain certificates accrued before February 27, 2008 where those certificates were downgraded below investment level in December 2007, and plaintiffs had sufficient information from the filing of lawsuits, media sources about the problems in the mortgage origination market and Countrywide, and the decline in credit ratings to offer a well-pled complaint that the Offering Documents for those certificates contained misrepresentations] Federal Dep. Ins. Corp. v Countrywide Fin. Corp., 2012 WL 5900973, * 6 [CD Cal Nov. 21, 2012] [holding that failed bank that purchased Countrywide RMBS had knowledge by May 22, 2008 of severe problems with Countrywide's underwriting and appraisals, based on filing of three class actions against Countrywide in 2008; that "granular loan-level data" — i.e., identification of specific nonconforming loans — was not required where universal deviations from underwriting guidelines were alleged; and that inquiry notice was triggered notwithstanding that certificates were not downgraded by credit rating agencies below investment levels until after the May 2008 inquiry notice date] Matter of Morgan Stanley Mtge. Pass-Through Certificates Litig., 2010 WL 3239430, * 7-8 [SD NY Aug. 17, 2010] [holding that inquiry notice existed before May 2008 based on downgrades of certificate at issue, monthly reports showing increases in delinquencies regarding that certificate, and lawsuit filed by plaintiff against "key originator" of loans underlying the certificate].)

In the instant action, defendants cite widespread media reports in 2006 and 2007 about the problems with subprime loan practices, and downgrading of the credit rating of one of the Certificates in 2007. In addition, defendants cite specific information about the two originators [*9]of the mortgages at issue, including Fremont's receipt of the FDIC cease and desist order, litigations against both Fremont and New Century regarding their underwriting practices, and New Century's bankruptcy. (See supra at 11.)

The information in the record raises red flags as to whether plaintiffs' duty to investigate was triggered under even the exacting gross negligence standard applicable to the German statute of limitations. However, this issue cannot be determined on this record, as the experts' discussion of the circumstances that suffice to trigger the duty is, at best, cursory. For example, while defendants' expert agrees that a claimant has the obligation to investigate if it can do so "without great effort" (Schneider Reply Op. ¶ 4), the record is not developed as to specific examples of the efforts that will satisfy the gross negligence standard — for example, whether or to what extent the German investor must keep abreast of media reports, acts by governmental agencies, and filing of private lawsuits in the U.S. In addition, the record is not developed as to the extent to which a sophisticated business entity, with an investment of the magnitude at issue, has a higher obligation to investigate than an individual investor. While defendants' expert asserts that the business entity has a higher obligation (id.), plaintiffs' expert does not address the issue here, although he may have acknowledged a higher obligation in another litigation. (See Deutsche Zentral, 2013 WL 6667601, at * 9-10.) In any event, the experts' opinions do not identify the types of efforts that would be necessitated by the higher obligation. The record is also factually undeveloped as to what information was available to plaintiffs, in the public domain or with the level of effort required by the German statute of limitations, about the falsity of the representations in the Offering Documents about the underlying loans, and about defendants' knowledge of the falsity. The motion to dismiss on statute of limitations grounds must therefore be denied.

Failure to State A Claim

It is well settled that on a motion to dismiss pursuant to CPLR 3211(a)(7), "the pleading is to be afforded a liberal construction (see, CPLR 3026). [The court must] accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." (Leon v Martinez, 84 NY2d 83, 87-88 [1994] see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144 [2002].) However, "the court is not required to accept factual allegations that are plainly contradicted by the documentary evidence or legal conclusions that are unsupportable based upon the undisputed facts." (Robinson v Robinson, 303 AD2d 234, 235 [1st Dept 2003] see also Water St. Leasehold LLC v Deloitte & Touche LLP, 19 AD3d 183 [1st Dept 2005], lv denied 6 NY3d 706 [2006].) When documentary evidence under CPLR 3211(a)(1) is considered, "a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." (Leon v Martinez, 84 NY2d at 88.)

Fraud

To plead fraud, the plaintiff must allege the following elements: "a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages." (Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 [2009].) A fraud claim must be pleaded with particularity pursuant to CPLR 3016 (b). (Eurycleia, 12 NY3d at 559.) However, this statute "should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be [*10]impossible to state in detail the circumstances constituting a fraud." (Id., quoting Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 491[2008].) "Thus, where concrete facts are peculiarly within the knowledge of the party charged with the fraud, it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings." (Pludeman, 10 NY3d at 491-492 [internal quotation marks and citations omitted].) CPLR 3016 (b) is satisfied when the alleged "facts are sufficient to permit a reasonable inference of the alleged conduct." (Id. at 492.)

Transfer of Mortgages and Notes

In moving to dismiss the fraud claims based on alleged misrepresentations regarding the transfers of the notes and mortgages to the trusts, defendants contend that the Offering Documents and Pooling and Servicing Agreements (PSAs), which govern the transfers, accurately disclosed how and when the transfers would be made. They cite section 2.01 (a) of the PSAs for the three securitizations, which provides: "The Depositor [SABR], concurrently with the execution and delivery hereof, hereby sells, transfers, assigns, sets over and otherwise conveys to the Trustee for the benefit of the Certificate holders, without recourse, all the right, title and interest of the Depositor in and to the Trust Fund." (PSA for SABR 2005-FR4 [Fritsch Aff., Ex. G].) Based on this provision, defendants contend that the PSAs conveyed all of SABR's interests in the mortgage loans to the trusts, and that there was accordingly no misrepresentation as to the conveyance of the notes and mortgages. (Ds.' Memo. In Support at 17.)

Plaintiffs counter that PSA section 2.01 is ineffective, without more, to transfer the notes and mortgages to the trusts, and that delivery of endorsed notes is required to effectuate the transfer. (Ps.' Memo. In Opp. at 9.) In support of this contention, plaintiffs cite the following representation in the prospectus supplements: "At the time of issuance of each series of securities, the depositor will cause the assets comprising the related trust fund or mortgage securities included in the related trust fund to be assigned to the trustee."^[FN7] (AC ¶ 63, quoting Prospectus Supplement for SABR 2005-FR4 at 45.) They also cite a representation that the depositor "will cause" specified mortgage loan documents, including notes and mortgages, to be delivered to the trustee on or before the closing date. (Prospectus Supplement for SABR 2005-FR4 at S-126.)

The court is unable, on the record as briefed, to credit defendants' contention that PSA section 2.01, by its terms, effectuated the transfer to the trusts of title to the notes and mortgages. There is settled authority, developed in foreclosure actions, that in order to establish standing, a plaintiff must be "both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced." (U.S. Bank, N.A. v Collymore, 68 AD3d 752, 753 [2d Dept 2009] accord Bank of New York Mellon Trust Co. v Sachar, 95 AD3d 695, 695 [1st Dept 2012].) As defendants correctly argue, "no special form or language is necessary to effect an assignment [of the note and mortgage] as long as the language shows the intention of the owner of a right to transfer it." (Bank of New York v Silverberg, 86 AD3d 274, 280-281 [2d Dept 2011] [internal quotation marks and citations omitted].) Moreover, "[e]ither a [*11]written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident." (Collymore, 68 AD3d at 754; accord GRP Loan, LLC v Taylor, 95 AD3d 1172, 1173 [2d Dept 2012].)

Notwithstanding the use of the disjunctive "or" in the appellate cases, there is considerable uncertainty as to the circumstances in which physical delivery of the note is required in order to establish the title necessary to prove standing for purposes of a foreclosure action. (See Bank of New York Mellon v Deane, 41 Misc 3d 494 [Sup Ct, Kings County 2013] [exhaustively surveying cases on this issue].) In the RMBS context, it is not clear that courts hearing foreclosure actions will find that an assignment of the note is effected by the mere representation in section 2.01 of the PSA that the depositor "hereby . . . assigns . . . all of the right, title and interest of the Depositor in and to the Trust Fund." (See Wells Fargo Bank, N.A. v Erobobo, 2013 WL 1831799, * 7-9 [Sup Ct, Kings County Apr. 29, 2013] [holding that the trustee's receipt of an assignment of the note and mortgage from a different entity than the depositor, after the closing date, exceeded the trustee's authority because it violated the PSA requirement prohibiting acquisition of any asset for the REMIC part of trust after the closing date; and, in the alternative, holding that the assignment by an entity other than depositor was void because it violated section 2.01 of the PSA, which required the depositor to deliver the original note and mortgage to the trustee] SG Mtge. Secs. Asset Backed Certificates v Bresler, 2013 WL 1339550, * 6 [Sup Ct, Kings County Apr. 3, 2013] [based on a substantially similar PSA section 2.01, stating in dicta that "execution of the PSA does not effectuate a transfer of the Note as contemplated by the applicable statutes and case[s] . . . which require both a proper indorsement and physical delivery of the Note" [emphasis in original] Deutsche Bank Natl. Trust Co. v Haque, 2012 WL 2435577, * 2 [Sup Ct, Queens County June 20, 2012] [rejecting plaintiff trustee's contention that a note was transferred to the trust pursuant to a PSA, although not quoting the PSA provision on which the trustee relied].)

The extent to which the above cases represent the weight of authority, or a divergence from it, is not addressed by the parties.^[FN8] Neither New York law, nor the law of other states that will govern transfer of title to loans for properties outside New York, has been comprehensively briefed on this motion. It must therefore suffice for present purposes to note the uncertainty that exists as to the standards for transfer of title, at least in New York and at least for purposes of maintenance of a foreclosure action. On this motion, the court holds that defendants have not demonstrated as a matter of law that section 2.01 of the PSAs was effective to transfer the notes and mortgages to the trusts.^[FN9] [*12]

The court accordingly turns to plaintiffs' contention that the Offering Documents misrepresented that the notes and mortgages would be transferred to the trusts. In the Countrywide Multi-District Litigation (MDL), Matter of Countrywide Fin. Corp. Mtge.-Backed Secs. Litig. [Western & Southern Life Ins. Co. v. Countrywide Fin. Corp.] (2012 US Dist Lexis 184429 [CD Cal June 29, 2012]), the Court dismissed a fraud claim based on a statement in a prospectus supplement that is substantially similar to that at issue here: "[O]n the closing date, the depositor will sell, transfer, assign, set over and otherwise convey without recourse to the trustee . . . all right, title and interest of the depositor in and to each mortgage loan. . . ." The Court held that the statement must be viewed in the context of the section of the prospectus supplement in which it appeared, entitled "Assignment of the Mortgage Loans," and that it was prefaced by the language that "[p]ursuant to the pooling and servicing agreement, on the closing date, the depositor will sell, transfer, assign . . . to the trustee . . . all right, title and interest. . . ." [emphasis in original]. (Id. at * 15-16.) Noting that a prospectus supplement is used to market RMBS before the PSA has been finalized and made available to investors, and that the prospectus supplement therefore typically summarizes the PSA for investors, the Court concluded that "an RMBS investor reading the Assignment of the Mortgage Loans' section . . . would understand that the pursuant to the pooling and servicing agreement' language indicates that the section is meant as a description of the PSA rather than an independent manifestation of present intent." (Id. at * 16.) In rejecting the fraud claim based on the transfer allegations, the Court reasoned that the plaintiff had not alleged that the prospectus supplement inaccurately described any portion of the PSA. (Id.) In the alternative, the Court cited federal authority that breach of a contractual promise of future performance typically does not constitute a fraud, and that the remedy for such nonperformance is an action for breach of contract — there, based on a sole remedy provision in the PSA, providing for repurchase or substitution of noncomplying loans. (Id. at * 19-22; accord Bank Hapoalim, 2012 WL 6814194, at * 8 [same Court adhered to the Western & Southern Life Ins. Co. v Countrywide Fin. Corp. holding, and also held that the PSA was effective to transfer the loans to the trusts].)

Here, review of the prospectus supplements shows that the representation regarding transfer of the mortgages and loans, like that in the Countrywide Litigation (Western & Southern Life Ins. Co.), appears in a section entitled "Assignment of the Mortgage Loans," which also expressly provides: "Pursuant to the pooling and servicing agreement, the depositor will sell, without recourse, to the trust, all right, title and interest in and to each mortgage loan," including all principal and interest due as of the "cut-off date." (Prospectus Supplement for [*13]SABR 2005-FR4 at S-127.)^{[FN10] [FN11]} The cut-off date is defined in the PSA as September 1, 2005. (PSA for SABR 2005-FR4, Art. I, Definitions.) The PSA was dated September 1, 2005, but its Closing Date was September 29, 2005. (Id.) The prospectus supplement was dated September 22, 2005 and, thus, like that in Western & Southern Life Ins. Co., was used to market the Certificates before the PSA was finalized.

The prospectus supplements here also contain a statement — again, similar to that in Western & Southern Life Ins. Co., although not discussed there — which appears in a section entitled "Delivery of Mortgage Loan Documents," immediately following the representation that the depositor will sell all right, title and interest in the mortgage loans. The statement is to the following effect: "In connection with the transfer and assignment of each mortgage loan to the trust, the depositor will cause to be delivered to the trustee, on or before the closing date" various loan documents including the original mortgage notes, endorsed without recourse in blank by the last endorsee and showing a complete chain of endorsement from the originator to the last endorsee, and the mortgage assignments, showing a complete chain of assignment. (Prospectus Supplement for SABR 2005-FR4 at S-127-128.) While this statement is not preceded by the clause "pursuant to the pooling and servicing agreement," it is directly followed by the statement: "Pursuant to the pooling and servicing agreement, the trustee will agree to execute and deliver on or prior to the closing date an acknowledgment of receipt of the original mortgage note . . . ." (Id., at S-128.) The statement regarding delivery of the loan documents thus also clearly refers to the depositor's obligations under the PSA, and corresponds to the following PSA provisions: Section 2.01(b), which represents that "the Depositor has delivered or caused to be delivered to the Trustee" the original mortgage notes endorsed in blank, and the original assignments for each mortgage loan, "except with respect to MERS Designated Loans"; and section 2.02, which requires the Trustee to provide an acknowledgment on the closing date of its receipt of a mortgage note and assignment for each loan. (PSA for SABR 2005-FR4 at 48-51.)

This court agrees with the MDL Court that the statements in the prospectus supplement refer to contractual obligations set forth in the PSA. The court does not, however, adopt the reasoning of the MDL Court to the extent that it held that the statements in the prospectus supplement were merely a description of the depositor's obligations under the PSA and not an independent manifestation of intent. Rather, the court holds that the statements were representations of future intent to perform under the PSA. As such, however, the statements in the prospectus supplement are subject to a long settled body of law, similar to that cited by the MDL Court, that a fraud claim cannot be premised merely on a misrepresentation of future intent or, put another way, on an insincere promise of future performance. (See e.g. New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995] ["General allegations that defendant entered into a contract while lacking the intent to perform it are insufficient to support the [fraud] claim"] [*14]MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 293 [1st Dept 2011] [same] Manas v VMS Assocs., LLC, 53 AD3d 451, 453 [1st Dept 2008] ["A fraud-based cause of action is duplicative of a breach of contract claim when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract" [internal quotation marks and citation omitted] Eastman Kodak Co. v Roopak Enterps., Ltd., 202 AD2d 220, 222 [1st Dept 1994] [fraud claim is maintainable "only if the misrepresentations alleged consist of more than mere promissory statements about what is to be done in the future"].)

In order to establish a fraud, the plaintiff must show a material misrepresentation of an existing fact. (Eurycleia Partners, 12 NY3d at 559.) As the Appellate Division has explained, "the classic definition of fraud [is] the misrepresentation of a present fact." Thus, "a promise to confer a benefit in the future . . . is only actionable when the defendant had no intention of fulfilling the promise at the time it was given." (Braddock v Braddock, 60 AD3d 84, 89 [1st Dept 2009] [emphasis in original], appeal withdrawn 12 NY3d 780.) A present intention not to fulfill a promise should not be found solely on the basis that the promise was not fulfilled, but may be inferred from surrounding circumstances. (Id.) However, there must be specific "factual allegations from which the misrepresentation of an inconsistent present intention can be inferred." (Id. at 98 [Lippman, then P.J., agreeing with majority's statement of the standard, but dissenting on whether it was met] Lanzi v Brooks, 43 NY2d 778, 779-780 [1977] ["Plaintiff's complaint did not allege either a present intent not to carry out the promises of future action, or, in fact, any factual assertions from which this conclusion can be drawn, and thus failed to state a cause of action for fraud based on a misstatement of future intentions"] see MBIA [Countrywide], 87 AD3d at 293; Healthwave Inc. v New York Socy. For The Relief Of The Ruptured And Crippled Maintaining The Hosp. For Special Surgery, 99 AD3d 494, 494 [1st Dept 2012] Fletcher v Boies, Schiller & Flexner, 75 AD3d 469, 470 [1st Dept 2010].)^[FN12]

Here, the Amended Complaint does not plead factual allegations from which it may reasonably be inferred that, at the time it entered into the PSA, SABR as depositor had a present intent not to perform its future obligations under the PSA. The Amended Complaint alleges that "in years prior to the issuance of the Certificates, the ongoing practice of SABR was to not transfer mortgages into the RMBS trusts that they securitized," and "[t]he fact that SABR's practice was to not transfer the mortgages and notes into the Trust was peculiarly within [*15]Defendants' knowledge." (AC ¶¶ 85-86.) These conclusory allegations are unsupported by reference to a single instance, let alone a pattern, in any past securitization by defendants in which the mortgages and notes were not transferred to the trust. They are accordingly insufficient to support the fraud claim. (See HSH Nordbank AG [Goldman Sachs], 2013 WL 6240431, at * 6 [holding that similar representation regarding assignment and transfer of the notes and mortgages was "a statement of future intent," which must therefore "be premised on the fact that [defendant] knew at the time it issued the Certificates that proper transfer would not be effectuated"; moreover, the wholly conclusory allegation that defendant "knowingly engaged in a continuing and deliberate practice of not effectuating transfers" was insufficient to support the pleading of fraud].)^[FN13]In reaching this conclusion, the court holds that plaintiffs' allegations regarding their review of assignments and satisfactions of mortgages do not provide the specificity necessary to preserve the fraud claim, to the extent based on the alleged misrepresentations as to transfer of title. The cited assignments and satisfactions state on their face that they were made after the date of the closing of the trust, or that the mortgages were satisfied after the closing date by parties other than the trustee. (AC ¶¶ 74, 76.) However, under the PSA, the depositor was required to deliver the original assignment of mortgage for each mortgage loan, "except with respect to MERS Designated Loans," which were defined as mortgage loans for which the Responsible Party [defined, in turn, as the originator] has designated or will designate MERS [Mortgage Electronic Registration Systems, Inc.] to be the mortgagee of record as nominee of the Responsible Party. (PSA for SABR 2005-FR4 § 2.01 [b] [v] Article I, Definitions.) The vast majority of the assignments and satisfactions investigated by plaintiffs appear to have been for MERS loans. (See AC ¶¶ 74, 76.) The allegations as to what they showed are therefore not probative of a failure on defendants' part to transfer the mortgages and notes to the trust.

Plaintiffs' allegations regarding transfer of the notes to the trusts are likewise insufficient. Plaintiffs claim that in a random review of public records of foreclosure actions, they located five notes, four of which were unendorsed. (Ps.' Memo. In Opp. at 15; AC ¶ 83, Ex. 5.) While plaintiffs allege that access to promissory notes is limited (id.), this evidence is de minimis in the context of the thousands of loans underlying the securitizations at issue. Moreover, the notes that plaintiffs produce were all for loans made by New Century. The prospectus supplement contains [*16]a representation, not quoted by plaintiffs, that the residential loan documents "will be delivered to the trustee or to the custodian." (Prospectus Supplement for SABR 2005-FR 4 at 45.) The Amended Complaint does not, however, allege that New Century was not a custodian within the meaning of the prospectus supplement. (See Western & Southern Life Ins., 2012 US Dist Lexis 184429, at *18.)

For the above reasons, the court holds that the allegations regarding transfer of the notes and mortgages to the trusts do not state actionable misrepresentations. In addition, plaintiffs do not adequately plead injury as a result of these alleged misrepresentations. Plaintiffs vaguely assert that defendants' failure to timely assign the mortgages "affects the tax status of the trust" (AC ¶ 92), and that defendants knew that, as a result of such failure, the trusts "could not qualify for favorable REMIC tax status." (AC ¶ 98.) Notably, the Amended Complaint does not cite one instance, in the six to eight years since the formation of the trusts, in which any of the trusts failed to qualify for, or lost, REMIC tax status. Plaintiffs' speculative allegation that the trusts may fail in the future to qualify for favorable tax status is insufficient to plead injury. (Bank Hapoalim, 2012 WL 6814194, at * 8.) Plaintiffs also allege that as a result of defendants' failure to transfer the notes and mortgages to the trusts, the trusts "cannot legally foreclose on the mortgages" when borrowers default. (AC ¶ 90.) This claim is similarly unsupported by factual allegations citing widespread, or even recurring, instances in which the trusts have been unable to foreclose.^[FN14]

In holding that plaintiffs fail to state a fraud claim based on defendants' alleged failure to transfer notes and mortgages to the trusts, the court recognizes that there has been considerable litigation over the standing not only of RMBS trusts, but of assignees generally, to maintain foreclosure actions, due to difficulties in demonstrating a chain of ownership for both the mortgages and notes. These difficulties can be ascribed, at least in part, to the widespread use of the MERS system, in lieu of the public recording system that had been used for generations, to track assignments of mortgages. (See generally Matter of MERSCORP, Inc. v Romaine, 8 NY3d 90 [2006] Bank of New York v Silverberg, 86 AD3d 274, supra.) Under the MERS system, MERS remains the mortgagee of record no matter how many times the mortgage is transferred. (Id. at 278.) However, the underlying notes are not necessarily transferred to MERS, and the system thus "leaves borrowers and the local county or municipal recording offices unaware of the identity of the true owner of the note. . . ." (Id.) If the plaintiff in a foreclosure action is an assignee of MERS and the mortgage has been registered with MERS but the note has not been transferred to MERS or to the plaintiff, the plaintiff will be unable to establish its standing, if it is challenged. (Compare id. at 275 [holding that trustee bank lacked standing to foreclose where its assignor, MERS, "was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying notes"] with Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674, 674 [2d Dept 2007] [holding that MERS had standing to the maintain foreclosure action where the promissory note was transferred to MERS, and MERS was the holder of the note at the time of [*17]commencement of the action].)

Potential impediments to the ability of the trusts to foreclose are a matter of undeniable concern to the Certificate holders. For the reasons discussed above, however, their remedy lies not in a fraud cause of action, but in a claim for breach of contract or breach of fiduciary duty. The fraud claim, to the extent based on alleged misrepresentations as to the transfer of the notes and mortgages, will accordingly be dismissed.

Other Alleged Misrepresentations

The Amended Complaint pleads four categories of misrepresentations in the Offering Documents: material understatements of the LTV and CLTV ratios, based on appraisal values that were allegedly deliberately inflated by the originators (AC ¶¶ 123, 130, 137); material overstatements of the percentage of loans for owner occupied properties (AC ¶ 111); representations as to credit ratings that were false and misleading (AC ¶ 173); and representations that the loans in the mortgage pool "either complied with the underwriting guidelines or had compensating factors, even though [defendants] knew or should have known that this was false." (AC 138-139, 143.)

In Allstate (2014 WL 432458, supra), this court discussed the extensive legal authority on the sufficiency of fraud claims pleaded on the basis of allegations regarding data material to the assessment of the quality of the loans and the risk of the Certificates, including allegations as to loan-to-value and combined loan-to-value ratios, owner occupancy of the underlying properties, originators' compliance with underwriting standards, and credit ratings. The allegations of the Amended Complaint are substantially similar to the allegations considered in Allstate. Except where otherwise noted, defendants' arguments in support of their motion to dismiss are also substantially similar to those considered in Allstate. On the reasoning and authority cited there, the court holds that the allegations (other than those relating to transfer of the notes and mortgages to the trusts) adequately plead material misrepresentations that were made by defendants with knowledge of their falsity, and are therefore actionable. This conclusion is supported by the following additional considerations.

Scienter

As held above, the pleading of each element of the fraud claim must be supported by sufficient facts to "permit a reasonable inference of the alleged conduct." (Pludeman, 10 NY3d at 492.) This requirement is satisfied as to scienter, in particular, where the "complaint contains some rational basis for inferring that the alleged misrepresentation was knowingly made." (Houbigant, Inc. v Deloitte & Touche LLP, 303 AD2d 92, 93 [1st Dept 2003] accord Seaview Mezzanine Fund, LP v Ramson, 77 AD3d 567, 568 [1st Dept 2010].)

In support of their scienter pleading, plaintiffs allege that defendants had knowledge, through their due diligence, of the falsity of the representations in the Offering Documents regarding the quality of the loans and compliance with underwriting standards. Defendants claim that plaintiffs' due diligence allegations are insufficient to support a reasonable inference of scienter. (See Ds.' Memo. In Support at 35-37.)

The Amended Complaint alleges that during the period from 2006 through 2007, defendants used third-parties Clayton Services Inc. (Clayton) and The Bohan Group, Inc. (Bohan) to perform due diligence "on the pools of mortgages that went into [defendants'] RMBS [*18]securitizations," and these entities "provided detailed reports to the Issuer Defendants . . . prior to and during the preparation of the Offering documents." (AC ¶ 138.) According to the Amended Complaint, the due diligence process scrutinized many aspects of the originators' guidelines, including CLTV ratios and owner occupancy rates. (Id.) Clayton allegedly found that over 27% of the loan files that Clayton reviewed did not comply with the underwriting guidelines or did not have compensating factors; yet, defendants waived 28 % of these loans into the pools. (AC ¶¶ 140-141.) As further alleged, Barclays Bank was a major warehouse financer for its originator, New Century. In this capacity, it was "entitled to conduct on-site due diligence of New Century's operations," and allegedly did so. (AC ¶¶ 146.)

Courts have widely considered the sufficiency of the pleading of scienter on the part of issuer or underwriter defendants in RMBS cases, based on allegations that they received reports from third-party due diligence provider Clayton or performed their own due diligence. (Compare e.g. HSH Nordbank[Goldman Sachs], 2013 WL 6240431, at * 8 [holding that inference of fraudulent intent was supported by allegations, among others, that due diligence provider furnished defendant with " detailed reports' regarding the quality of the underlying mortgages prior to and during the preparation of the Offering Materials'"] Bank Hapoalim, 2012 WL 6814194, at * 6 [holding that "Plaintiffs have plausibly alleged that Defendants knew the appraisals were flawed when made, based upon Defendants' access to loan files and their efforts at due diligence"] Federal Hous. Fin. Agency v JP Morgan Chase & Co., 902 F Supp 2d 476, 492 n 15 [SD NY Nov. 5, 2012] [FHFA [JP Morgan]] [holding that Clayton Report, which had recently been released by Financial Crisis Inquiry Commission but was not received by defendant JP Morgan at the time RMBS securities were purchased in 2006 and 2007, provided support, along with other allegations, for scienter pleading on representations regarding compliance with underwriting standards [though not on LTV ratio or owner occupancy representations], because Report was cited as "evidence of information that Clayton communicated to the defendants on a rolling basis between the first quarter of 2006 and second quarter of 2007"] with Deutsche Zentral, 2013 WL 6667601 at * 19-22 [holding that complaint relying on the same Clayton Report did not create "strong inference" of fraudulent intent for the reason, among others, that complaint did not allege that Clayton did diligence on any of the loans underlying the securitizations at issue; pleaded no factual allegations, such as allegations based on internal documents or statements from insiders, indicating that defendants were aware of the abandoned guidelines; and did not specifically identify the due diligence reports or statements regarding nonconforming loans] Matter of Lehman Bros. Secs. & ERISA Litig. [Stichting Pensioenfonds ABP v Merrill Lynch & Co.], 2013 WL 3989066, * 5 [SD NY July 31, 2013] [complaint that alleged that Clayton provided due diligence reports to defendant "during the housing boom," but that did "not allege with any specificity when Clayton provided due diligence reports to [defendant] or whether Clayton's due diligence implicated in any way the mortgages underlying the security at issue" insufficiently pleaded fraud].)

Defendants claim that plaintiffs' due diligence allegations are too "generalized" to support a finding of knowledge on defendants' part. (See Ds.' Memo. In Support at 35-37.) They rely chiefly on the trial court decision in Landesbank Baden-Wurttemberg v Goldman, Sachs & Co. (821 F Supp 2d 616, 622 [SD NY Sept. 28, 2011], affd 478 Fed Appx 679 [2012]) for the proposition that the allegations are insufficient because they lack details as to who drafted, who [*19]prepared, and who, on behalf of defendant, reviewed the due diligence reports. Defendants do not cite any case under the New York "reasonable inference standard" which requires the level of detail that the Landesbank trial court required about a writing that is claimed to have contradicted a party's representations. Moreover, while the Second Circuit's affirmation of the trial court's decision noted that "an allegation that defendants had access to information that was inconsistent with their alleged misstatements must specifically identify the reports or statements containing this information," the Court held that the only due diligence report that was specifically identified in the complaint post-dated the issuance of the notes in question and therefore did not "bear on the defendants' knowledge at the time of issuance." [internal quotation marks and citation omitted].

Here, as noted above, the claim is that Clayton and Bohan performed due diligence in 2006 and 2007 on the pools of mortgages underlying defendants' securitizations, and issued reports to defendants "prior to and during the preparation of the Offering Documents." (AC ¶ 138.) Accordingly, plaintiffs allege defendants' reliance on its due diligence providers' reports during two of the three years that the RMBS Certificates were purchased. These allegations, like the substantially similar allegations in HSH Nordbank [Goldman Sachs], 2013 WL 6240431 [quoted supra at 31] are sufficiently specific to identify the due diligence efforts on which the claim of scienter is based.^[FN15]

In Allstate, the defendants participated in all aspects of the securitization process, including origination of some of the loans, although third-party originators were also involved. Plaintiffs' scienter claim was therefore supported by defendants' direct access to the loan files. (2014 WL 432458, at *12.) Here, the Barclays defendants participated in all aspects of the securitization process other than origination of the loans, which was performed by third-parties Fremont and New Century. The court finds, however, that plaintiffs' scienter allegations, while not as strong as those in Allstate, are sufficiently pleaded. Plaintiffs' scienter pleading is supported not only by their allegations as to Clayton's due diligence, but also by their allegation that defendant Barclays Bank, in its capacity as warehouse lender to originator New Century, performed due diligence on New Century's "operations," and thus, inferentially, had access to information about the true quality of the loans. (See e.g. HSH Nordbank [Goldman Sachs], 2013 WL 6240431, at * 9 [defendant's "role as warehouse lender strongly suggests it had access to information" regarding loan quality].)

Plaintiffs' scienter pleading is based not only on their due diligence allegations but also on their allegations regarding the originators' pervasive noncompliance with underwriting standards. As discussed above, these allegations include specific factual information as to government [*20]action against one of the two originators (the Fremont cease and desist order), as well as plaintiffs' loan level analyses setting forth significant percentages by which defendants allegedly misrepresented loan data. As noted in the FHFA litigation, "the magnitude of inaccuracy" of a defendant's representations regarding compliance with underwriting standards can provide circumstantial evidence of scienter, but should generally be supported by additional circumstantial evidence, particularly where the originator of the false information is a third-party. (FHFA [JP Morgan], 902 F Supp 2d at 493; see also HSH Nordbank [Goldman Sachs], 2013 WL 6240431, at * 7; Allstate [Ace], 2013 WL 1103159, at * 10.) Here, plaintiffs' allegations, considered as a whole, adequately support a reasonable inference of scienter.

Appraisals

While plaintiffs' allegations that the originators deliberately inflated the appraisals are conclusory (see AC ¶ 123), their allegation that the appraisals were materially inflated is supported by plaintiffs' use of an Automated Valuation Model (AVM) to sample over 1000 loans in the securitizations "in order to determine the value of the underlying properties at the time the pooled loans were originated." (AC ¶ 130.) As this court has previously noted, loan level analyses have been cited by the Courts in RMBS cases as providing factual support for general allegations. (Allstate, 2014 WL 432458, at * 10 n 7, citing Capital Ventures Intl. v J.P. Morgan Mtge. Acquisition Corp., 2013 WL 535320, at *3 [D Mass Feb. 13, 2013].) Contrary to defendants' contention, the use of the AVM to support the complaint is not "fraud-by-hindsight," in which "an assertion is false only in light of later events." (See Bank Hapoalim, 2012 WL 6814194, at * 6.) Rather, the AVM is an alternate opinion as to the values of the properties underlying the loans, which must be accepted as true for pleading purposes, and thus supports the allegation that the loan-to-value ratios in the Offering Documents were understated. (See id. at * 5; accord Matter of Countrywide Fin. Corp. Mtge.-Backed Secs. Litig. [Federal Hous. Fin. Agency v Countrywide Fin. Corp.], 932 F Supp 2d 1095, 1108-1109 [CD Cal Mar. 15, 2013] [FHFA [Countrywide].) The reliability of the values determined by the AVM is an issue of fact. (Id. at 1109.)

Defendants also contend that the LTV/CLTV representations are inactionable because they are based on appraisals which, according to defendants, are themselves inactionable statements of opinion unless the appraisers did not believe the appraisals at the time they were issued. (Ds.' Memo. In Support at 28-29.) In Allstate, this court held that this argument is without merit, where the complaint pleads facts calling into question the factual bases for the appraisals. (2014 WL 432458, at * 10.) Here, the Amended Complaint pleads such facts based on the AVM, and also pleads defendants' knowledge of the falsity of the appraisals based on their due diligence. (See Bank Hapoalim, 2012 WL 6814194, at * 6 [quoted at 32, supra].)

Owner Occupancy

Plaintiffs' pleading of alleged misrepresentations as to the owner occupancy status of the properties underlying the loans is similarly supported by plaintiffs' loan level analysis of 1100 loans from the securitizations (AC ¶ 114), although the pleading is adequate even without the [*21]analysis. While defendants challenge the methodology used in performing the analysis — a survey of borrowers' credit histories setting forth their mailing addresses six months after the origination of the mortgages (AC ¶ 116) — the court cannot find as a matter of law that the methodology is unsound, and its reliability must therefore be assumed for pleading purposes.

Defendants also appear to contend that the owner occupancy representations are not actionable because the Offering Documents merely reported representations of borrowers that defendants had no obligation to verify. (Ds.' Memo. In Support at 31-32.) As noted above, however, the Amended Complaint alleges that as a result of their own due diligence, defendants knew of the falsity of representations regarding the loan characteristics. On the authority cited in Allstate, if defendants knew that their originators had abandoned underwriting guidelines and were permitting borrowers to falsify information, they cannot hide behind the borrowers' representations. (2014 WL 432458, at * 11 [internal quotation marks and citation omitted] see also HSH Nordbank [Goldman Sachs], 2013 WL 6240431, at * 6; compare FHFA [Countrywide], 932 F Supp 2d at 1114 [rejecting fraud claim based on alleged owner occupancy misrepresentation where Offering Documents stated that the data was based on borrowers' representations, but distinguishing cases upholding claim where complaint alleged that defendants passed on information they knew was false].)

Credit Ratings

A similar analysis applies to the allegations in the Amended Complaint based on credit ratings. The Amended Complaint alleges that defendants knew, through their due diligence, that the credit risk data they supplied to the ratings agencies was inaccurate, and that the ratings they represented in the Offering Documents were therefore false and misleading. (AC ¶¶ 171-173.) This alleged misrepresentation is actionable, as it is based on allegations of defendants' knowledge of the falsity of the ratings.

Compliance with Underwriting Standards

The allegations of the Amended Complaint that the two originators systematically departed from their own underwriting guidelines (AC ¶¶ 13,155-156) are also sufficient to support the fraud claim. In seeking dismissal of these allegations, defendants cite disclosures in the Offering Documents that include the following: The mortgage loans "may be considered to be of a riskier nature than mortgage loans made by traditional sources of financing, so that the holders of the certificates may be deemed to be at greater risk than if the mortgage loans were made to other types of borrowers"; borrowers "may have an impaired or unsubstantiated credit history," and "[a]s a result of this less stringent approach to underwriting, the mortgage loans . . . may experience higher rates of delinquencies"; a "substantial portion of the mortgage loans may represent [] underwriting exceptions"; the value of the mortgaged property used in calculating the ratios of the mortgage loans "may differ from the appraised value of such mortgaged properties if current appraisals were obtained." (Ds.' Memo. In Support at 25.)

As discussed in Allstate, the Courts have considered the efficacy of a wide range of disclosures, including the following: Exceptions would be made if compensating factors were shown for prospective borrowers; underwriting standards for loans, or even for a "substantial [*22]number" of loans, would be less stringent than those for Fannie Mae and Freddie Mac; loan collateral was risky; loans to borrowers could have been issued, or even "many loans" were underwritten, under reduced or no documentation programs; appraisals may not be current; originators would make certain exceptions, or even a "substantial number of exceptions," to underwriting standards; high delinquency rates were possible.

The Courts have overwhelmingly concluded that such disclosures are insufficient to disclose to investors defendants' systematic or "wholesale abandonment of underwriting standards." (Allstate, 2014 WL 432458, at * 8 [and authorities cited].) The disclosures here fall within the range of disclosures that have been held insufficient to warrant dismissal of fraud claims based on misrepresentations regarding compliance with underwriting standards.

The court also rejects, as without merit, defendants' claim that the Amended Complaint lacks particularity because the allegations as to deviations from underwriting standards are not tied to the particular Certificates that plaintiffs purchased. (Allstate, 2014 WL 432458, at * 9 [and authorities cited].)

Justifiable Reliance

In claiming that the Amended Complaint does not adequately plead justifiable reliance, defendants contend that as sophisticated investors, plaintiffs "cannot credibly claim that [they] reasonably relied on isolated, alleged misstatements in the Offering Materials in light of the clear disclosures concerning the Certificate Collateral." (Ds.' Memo. In Support at 38.) As in Allstate, where a substantially similar claim was rejected, plaintiffs' undisputed allegation as to their lack of access to the underlying loan files (AC ¶ 186) supports the justifiable reliance element of the fraud claim at the pleading stage. (Allstate, 2014 WL 432458, at * 12 [and authorities cited].) HSH Nordbank [UBS] (95 AD3d at 195-196), on which defendants' rely, is not to the contrary. The Court held, on a motion to dismiss, that the plaintiff, a sophisticated investor, had a duty to exercise ordinary diligence, and could have ascertained the truthfulness of the complained-of representations — there, the reliability of credit ratings used to define the permissible composition of the reference pool for a portfolio of securities — based on publicly available information. The Court distinguished MBIA [Countrywide] (87 AD3d 287, supra), which upheld the pleading of an RMBS fraud claim, on the ground, among others, that the matter allegedly misrepresented — whether the underlying loans were made in compliance with underwriting standards — was apparently "peculiarly within the knowledge of the defendants, the entities that originated, serviced, and securitized the underlying loans and sold the resulting securities." (95 AD3d at 208, n 15.)

As held in Allstate, a significant issue of fact exists as to the reasonableness of plaintiffs' reliance on defendants' representations, in light of the information available to institutions of their size and sophistication and to plaintiffs in particular. Whether or not plaintiffs ultimately prevail on the issue (see 2014 WL 432458, at * 12; CIFG Assur. N. Amer., Inc. v Goldman, Sachs & Co., 106 AD3d 437, 438 [1st Dept 2013]), the pleading is sufficient to withstand this motion to dismiss.

Loss Causation [*23]

The court rejects defendants' contention that plaintiffs cannot prove that defendants' alleged fraud caused damages. As defendants correctly argue, plaintiffs cannot recover damages based on the allegations regarding transfer of the mortgages and notes to the trust. However, plaintiffs have sufficiently pleaded pecuniary loss based on the downgrading and diminished value of the Certificates. (See AC ¶ 188.) As also held in Allstate, "it cannot be said, on this pre-answer motion to dismiss, that MBIA's losses were caused, as a matter of law, by the 2007 housing and credit crisis." (2014 WL 432458, at * 12, citing MBIA [Countrywide], 87 AD3d at 296.)

Punitive Damages

The Amended Complaint seeks punitive damages on plaintiffs' fraud claims. (AC, Prayer for Relief.) Punitive damages are recoverable in a tort case only where a "very high

threshold of moral culpability is satisfied." (Giblin v Murphy, 73 NY2d 769, 772 [1988] Walker v Sheldon, 10 NY2d 401 [1961].) In RMBS cases alleging fraud claims that have withstood challenges on motions to dismiss, this Court has repeatedly declined to strike the punitive damages claims. The Courts have reasoned that the viability of punitive damages should await discovery or proof at trial of the culpability necessary to support such damages. (See MBIA Ins. Corp. v Credit Suisse Secs. (USA) LLC, 2011 WL 4865133, * 17 [Sup Ct, NY County Oct. 7, 2011], revd on other grounds 102 AD3d 488 [1st Dept 2013] MBIA Ins. Corp. v Morgan Stanley, 2011 WL 11556446, * 7 [Sup Ct, Westchester County May 26, 2011] [Loehr, J.] MBIA Ins. Co. v Residential Funding Co., LLC, 2009 WL 5178337, *4 [Sup Ct, NY County Dec. 22, 2009] [Fried, J.] see also Ambac Assur. Corp. v First Franklin Fin. Corp., 2013 WL 3779636, * 15-16 [Sup Ct, NY County July18, 2013] but see Stichting Pensioenfonds ABP v Credit Suisse Group AG, 2012 WL 6929336, * 14 [Sup Ct, NY County Nov. 30, 2012] CIFG Assur. No. Am., Inc. v Goldman, Sachs & Co., 2012 WL 1562718 [Sup Ct, NY County May 1, 2012], mod 106 AD3d 437 [1st Dept 2013].)

Defendants' reliance on HSH Nordbank [UBS] (95 AD3d at 209) is misplaced. The Court dismissed the punitive damages claim, noting that the plaintiff did not "allege that UBS engaged in egregious conduct that was part of a pattern of similar conduct directed at the public generally." [internal quotations marks and citation omitted]. However, the Court had dismissed the fraud claim on which the punitive damages claim was based. In any event, here the Amended Complaint alleges the systematic, deliberate, and widespread fraud that supports the viability of the punitive damages claim at the pleading stage.^[FN16]

Negligent Misrepresentation/Fraudulent Concealment

A claim for negligent misrepresentation requires the plaintiff to allege: "(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on [*24]the information." (Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 180 [2011] [internal quotation marks and citations omitted] accord Gomez-Jimenez v New York Law School,

103 AD3d 13, 18 [1st Dept 2012], lv denied 20 NY3d 1093 [2013].) A cause of action for fraudulent concealment requires proof of the elements of fraud based on a misrepresentation (see supra at 16-17), as well as "an allegation that the defendant had a duty to disclose material information and that it failed to do so." (P.T. Bank Cent. Asia, New York Branch v ABN AMRO Bank N.V., 301 AD2d 373, 376 [1st Dept 2003].) A fraudulent concealment claim must be based on a "special relationship or fiduciary obligation." (Gomez-Jimenez, 103 AD3d at 18.)

Plaintiffs do not allege the special or fiduciary relationship necessary to support either a negligent misrepresentation or fraudulent concealment claim. In MBIA [Countrywide] (87 AD3d at 297), this Department held that the defendant's superior knowledge of its own business practices was insufficient to sustain a negligent misrepresentation claim where the parties to the RMBS case were, as here, sophisticated entities engaged in an arm's length transaction. This Court has also repeatedly rejected negligent misrepresentation claims, like that made here (see P.'s Memo. In Opp. at 40), based on the defendants' exclusive access to the files for the loans underlying the securitizations. (See e.g. HSH Nordbank [Goldman Sachs], 2013 WL 6240431, at * 14; Allstate [Ace], 2013 WL 1103159, at * 16; Stichting Pensioenfonds, 2012 WL 6929336, at * 13; MBIA Ins. Co. v GMAC Mtge. LLC, 30 Misc 3d 856, 864-65 [Sup Ct, NY County 2010] [Fried, J.] Federal Hous. Fin. Agency v UBS Americas, Inc., 858 F Supp 2d 306, 335 [SD NY 2012], affd on other grounds 712 F3d 136 [2d Cir 2013], cert denied ___ US ____, 134 S Ct 372.)

Aiding and Abetting

Defendants challenge plaintiffs' aiding and abetting claim as conclusory. A complaint may be sustained even where the case for corporate defendants' knowledge and participation in the alleged fraud is a purely circumstantial one drawn from the inferences arising from their positions and responsibilities at the defendant companies. (See Pludeman,10 NY3d at 493 [upholding fraud complaint against corporate officers where the scheme gave rise to a "reasonable inference . . . that the officers, as individuals and in the key positions they held, knew of and/or were involved in the fraud"] Polonetsky v Better Homes Depot, Inc., 97 NY2d 46 [2001].) Plaintiffs have adequately detailed the role of each defendant in the securitization process and the overlap in high-level personnel between and among the various defendants. (AC ¶¶ 88, 209-211.) The claim is accordingly maintainable.

Mutual Mistake

Plaintiffs argue that the underwriter defendant knew that the notes and mortgages were not timely assigned to the trusts or, in the alternative, that if defendant did not have such knowledge, "then the parties' mutual mistake as to these essential facts upon which the sale of the Certificates was predicated entitles Plaintiffs to rescission of the sale." (AC ¶¶ 222-223.) In support of this argument, defendants contend that there was no mistake because the PSA effected assignment and transfer as a matter of law — a claim this court has rejected above. Defendants also contend that plaintiffs fail to plead a mistake that was so substantial as to undermine a meeting of the minds. (Ds.' Memo. In Support at 44.) [*25]

In order to support a rescission claim, a mutual mistake "must be so material that it goes to the foundation of the agreement. . . . The premise underlying the doctrine of mutual mistake is that the agreement as expressed, in some material respect, does not represent the meeting of the minds of the parties." (Simkin v Blank, 19 NY3d 46, 52-53 [2012] [internal quotation marks, citations, and ellipses omitted].) A claim of mistake must be pleaded with particularity, pursuant to CPLR 3016 (b).

Plaintiffs claim that as a result of defendants' failure to assign and transfer the notes and mortgages, the securities they purchased were "not mortgage-backed," and that the mistake therefore goes to the very subject matter of the transaction. (Ps.' Memo. In Opp. at 41-42.) The Amended Complaint pleads in wholly conclusory terms that the "vast majority" of the notes and mortgages were not assigned to the trusts prior to the issuance of the Certificates. (AC ¶ 87.) As discussed above, however, defendants do not plead particularized factual allegations, based on their loan level analyses or otherwise, that defendants failed, on a wholesale or even widespread basis, to assign or transfer the notes and mortgages to the trusts. On the contrary, plaintiffs' factual allegations at most support a claim that some, or even a substantial number, of notes and mortgages were not assigned or transferred on a timely, as opposed to permanent, basis. Plaintiffs also do not deny that they have received payments of principal and interest from the underlying mortgages. On the pleaded allegations, plaintiffs' claim that the securities were not mortgage-backed goes too far. Plaintiffs' remedy is not rescission but damages. The mutual mistake claim will therefore be dismissed.

It is hereby ORDERED that defendants' motion to dismiss is granted to the following extent: The first cause of action for fraud is dismissed only to the extent that it is based on alleged misrepresentations regarding transfer of notes and mortgages to the trusts. The second cause of action for fraudulent concealment, the fourth cause of action for negligent misrepresentation, and the fifth cause of action for rescission are dismissed.

This constitutes the decision and order of the court.

Dated: New York, New York

March 3, 2014

__________________________

MARCY S. FRIEDMAN, J.S.C.