Royal Park Investments SA/NV v. The Bank of New York Mellon
- Gregory Woods
- 1:14-cv-06502
- U.S. District Court · Southern District of New York
- 13
Royal Park v. Bank of New York Mellon: Judge Woods denied requested loan-sampling expert discovery as disproportionate to the case’s needs.
Royal Park Investments SA/NV could not obtain the proposed sampling-related expert discovery at this stage; The Bank of New York Mellon was not required to participate in that discovery.
What happened
Royal Park Investments SA/NV sued The Bank of New York Mellon, trustee for five residential mortgage-backed securities trusts, over alleged failures involving mortgage-loan breaches and servicing defaults. Royal Park sought to use experts to sample loans and estimate breach rates across the trusts.
Royal Park argued that sampling could show what the trustee would have discovered through a reasonable investigation and help establish damages. The Bank of New York Mellon argued that the discovery would cost hundreds of thousands to millions of dollars and would have limited value because general breach rates would not show what the trustee actually knew or was required to do.
The court denied Royal Park’s motion because the proposed discovery was not proportional to the case’s needs under the federal discovery rules. Judge Gregory H. Woods said the value of the sampling depended on Royal Park first showing that the trustee had a duty to investigate the loans, and Royal Park had not yet provided convincing evidence of that duty.
The detailed version
- Royal Park Investments SA/NV v. The Bank of New York Mellon · No. 1:14-cv-06502
- Gregory Woods
- Nov. 18, 2019
Background
Royal Park Investments SA/NV brought claims against The Bank of New York Mellon, acting as trustee for five residential mortgage-backed securities trusts in which Royal Park invested. The claims alleged breach of contract, breach of trust duties, and violations of sections 315(b) and 315(c) of the Trust Indenture Act. Royal Park alleged that the trustee discovered, or should have discovered, breaches of representations and warranties about the quality and characteristics of mortgage loans but failed to enforce repurchase obligations. Royal Park also alleged that the trustee learned of servicing Events of Default but failed to act as a prudent person would, and failed to avoid conflicts of interest.
Royal Park sought permission to conduct sampling-related expert discovery. Under its proposed process, a sampling expert would select a statistically significant sample of loans, a loan reunderwriting expert would examine the files, and the sampling expert would use the results to estimate the breach rate for the entire loan pool within a stated margin of error. Royal Park said this evidence would show the breach rates the trustee would have found and the damages resulting from the alleged misconduct.
The Bank of New York Mellon did not dispute, for purposes of this motion, that similar sampling methods can be used to estimate breach rates. It argued that the proposed discovery would cost hundreds of thousands to millions of dollars and would have low probative value because a general breach rate would not establish that the trustee actually discovered particular breaches or knew of Events of Default.
Legal standard
Federal Rule of Civil Procedure 26(b)(1) permits discovery of nonprivileged information that is relevant to a claim or defense and proportional to the needs of the case. In evaluating proportionality, the court balances the value of the requested discovery against the burden and expense of producing it. The court may also protect a party from undue burden or expense.
Court’s analysis
The court examined whether information about the rate of representations-and-warranties breaches justified the cost of the proposed expert work. It considered earlier decisions involving similar requests for sampling-related expert discovery but did not adopt all of those decisions’ reasoning.
The court rejected the view that sampling was categorically barred because the governing agreements contained “sole remedy” provisions or because damages necessarily had to be proven loan by loan. Those provisions described remedies available against the entities that made the representations and warranties, while this case sought monetary damages from the trustee. The court also stated that sampling could potentially provide a reasonable estimate of damages and that the cited appellate decision did not establish that every aspect of Royal Park’s claims had to be proven entirely through loan-by-loan evidence.
The court nevertheless found the proposed discovery disproportionate. Royal Park’s theory depended on showing that the trustee had an obligation to investigate the loans. The court found it unclear how the theory that the trustee knew or should have known about breaches created a broad duty to investigate. It also found that Royal Park had not produced evidence showing that the “prudent person” standard, which applied after notice of certain servicing defaults, required the trustee to investigate all loans for representations-and-warranties breaches. Royal Park’s evidence that the trustee allegedly used sampling in other litigation did not establish what a prudent trustee would have been required to do before litigation.
The court noted that discovery was ongoing and that Royal Park might later produce evidence supporting its theory. But on the record before it, the court could not require the parties to spend hundreds of thousands of dollars on expert discovery whose usefulness depended on a factual theory that Royal Park had not shown to be viable.
Disposition
The court denied Royal Park’s motion for sampling-related expert discovery and directed the Clerk of Court to terminate the motion at Docket No. 186. Judge Gregory H. Woods did not decide the underlying contract, trust-duty, or Trust Indenture Act claims in this order.
Read the full 13-page opinion on CourtListener, the free public archive maintained by the Free Law Project.