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RMBS Recovery Holdings, I, LLC v. HSBC Bank USA, N.A.

Supreme Court of Virginia

May 30, 2019


          FROM THE CIRCUIT COURT OF FAIRFAX COUNTY Stephen C. Shannon, Judge.



         In these appeals, we consider whether the circuit court erred when it sustained a motion to dismiss based upon forum selection clauses, and when it denied a motion to dismiss based upon the doctrine of forum non conveniens.


         On May 30, 2017, RMBS Recovery Holdings I, LLC; RMBS Recovery Holdings II, LLC; RMBS Recovery Holdings IV, LLC; RMBS Recovery Holdings V, LLC; Fir Tree Ref III Master Fund, LLC; Fir Tree Capital Opportunity Master Fund, LP; and Fir Tree Capital Opportunity Master Fund III, LP (collectively, Funds) filed suit against HSBC Bank USA, National Association (HSBC) in the Circuit Court of the County of Fairfax. The four limited liability companies were organized in Delaware, and the two limited partnerships in the Cayman Islands. HSBC's main office is in McLean, Virginia, which is in Fairfax County (Fairfax), and HSBC does business throughout the United States, including Virginia.

         The Funds assert that HSBC serves as an indenture trustee[1] of three trusts in which the Funds have invested. The trusts, established in 2005 and 2006, are residential mortgage-backed securities trusts; they are made up of thousands of residential mortgage loans. The trusts were formed pursuant to pooling and service agreements (PSAs). According to their contractual terms, the PSAs are to be construed according to the laws of the State of New York.

         The trusts are governed by numerous contractual provisions which require that only qualifying loans be deposited into the trusts. The sponsors of the trusts, DB Structured Products, Inc. and Nomura Credit & Capital, Inc. (collectively Sponsors), were responsible for depositing only qualifying loans, and agreed to either replace or repurchase defective loans placed in the trusts.

         The Funds claim that without their knowledge, the trusts were "filled with defective mortgage loans" and HSBC, as trustee, had a duty to protect the Funds by having the Sponsors repurchase the deficient loans or by filing suit against the Sponsors. Beginning in 2011, the Funds reportedly notified HSBC that the Sponsors had breached their representations and warranties, and asked HSBC to enforce the Sponsors' repurchase obligations. HSBC responded that it would not act until the Funds agreed to a Confidentiality and Indemnification Agreement (CIA).

         In light of the impending statutes of limitations bar, the Funds filed derivative actions against the Sponsors (Repurchase Actions) prior to expiration of the limitations periods. The Funds and HSBC executed CIAs on July 12, 2012 and September 6, 2012. Both dates are after the statutes of limitations had expired on the claims against the Sponsors. After the CIAs were executed, HSBC was substituted into the Repurchase Actions as plaintiff. However, the Repurchase Actions, which were filed in New York, were dismissed as untimely because HSBC failed to intervene before the statutes of limitations ran.

         In the Fairfax complaint, the Funds claimed that HSBC "knowingly let the statutes of limitations expire, depriving certificate holders of any recourse from the [S]ponsors, and needlessly costing the trusts hundreds of millions of dollars." Based upon HSBC's failure to act, the Funds claimed breach of contract, breach of fiduciary duty, negligence, breach of the implied covenant of good faith and fair dealing, and violations of the Federal Trust Indenture Act.

         Motion to Dismiss for Forum Non Conveniens

         On June 29, 2017, HSBC filed a motion to dismiss for forum non conveniens, pursuant to Code § 8.01-265. HSBC argued that New York City was a "more convenient and practical forum" because (1) the Funds' investment manager, Fir Tree Partners, Inc. (Fir Tree) is located in New York, (2) the PSAs were formed under New York law, (3) the related documentary evidence and witnesses are primarily located in New York, (4) the Repurchase Actions were filed in New York, and (5) New York courts are familiar with the legal issues presented in this case because "virtually identical" actions are pending in New York courts against indenture trustees of similar trusts.

         In support, HSBC attached a declaration from Thomas MacKay, HSBC's Senior Vice President. MacKay attested that (1) HSBC's "principal executive office" and the department that oversees indenture trustee functions are located in New York City, (2) the Sponsors' principal place of business is New York, (3) HSBC employees directly involved with the underlying allegations work in New York City, and (4) one of the Repurchase Actions has been pending on appeal in New York since 2016.

         In response, the Funds argued that the motion should be denied because HSBC cannot show that Fairfax is a "substantially inconvenient" jurisdiction. They asserted that (1) HSBC is a citizen of Virginia because its main office is in McLean, Virginia, (2) four of the Funds are Virginia citizens because they have investors who reside in and are citizens of Virginia, (3) the plaintiff's choice of forum has a presumption of correctness, (4) HSBC's employees have not been identified as witnesses, (5) nine of the fourteen identified witnesses live outside of New York, "and for most Fairfax is closer and faster to reach than New York," (6) four of the five witnesses in New York are employees of litigants, and it is presumed the employer can ensure their testimony at trial, (7) witnesses can be deposed where they live, (8) the relevant documents are electronic, (9) Virginia courts are capable of applying New York law, and (10) "[c]onsiderations of ease, speed, and economy strongly favor Fairfax over New York," especially considering New York courts permit interlocutory appeals "of right of virtually all trial court rulings," thereby prolonging cases almost indefinitely.

         The Funds attached declarations of Jay S. Handlin, an attorney representing the Funds, and David Proman, the managing director of Fir Tree. Handlin stated that in twenty other cases similar to the one at issue, including three against HSBC, all documents have been produced electronically and depositions have been taken of witnesses where they live or work to reduce inconvenience. He also stated that Fairfax, Virginia was closer to most of the signatories to the PSAs at issue. Proman listed the fourteen known witnesses, and noted that only five of them live or work in New York.

         The circuit court held a hearing on HSBC's motion to dismiss on July 21, 2017. During the hearing, HSBC contended that "[t]he question is whether [Virginia] is an appropriate forum, and under the good cause analysis, [Virginia] is not an appropriate forum [], because everything that matters to this case-the witnesses, the functions, the trust, the law, the prior litigation that preceded this-it all took place in New York." By contrast, the Funds argued that the loans that form the basis for the misconduct allegations arise out of Virginia, New York, and multiple states, and many of the defective loans were made to Virginia borrowers.

         At the end of the hearing, the circuit court commented that it was counterintuitive to think that a "multibillion-dollar international banking institution" that "elected to have its office here in Fairfax" could then be inconvenienced by litigation in Fairfax. The court reasoned, "I don't think you can set up business here in Fairfax, which I suspect is probably business-friendly, and then when you're sued say, oh, you can't sue us here; come up to New York where it takes years to try the case." The court concluded that the Fairfax County Circuit Court was a proper and convenient forum, and denied the motion to dismiss for forum non conveniens on July 21, 2017.[2]

         Motion to Dismiss Pursuant to Forum Selection Clauses

         From June 2017 through February 2018, the litigation of the case continued. In addition to the motion to dismiss for forum non conveniens, HSBC filed and argued demurrers, a plea in bar, a motion craving oyer, motions for the admission of counsel, several discovery motions, and a motion for leave to file a third-party complaint. It also asked for a judge to be assigned to the case, requested a jury trial, and agreed to a trial date. Over the eight months, HSBC filed an answer and a third-party complaint, and the circuit court held multiple hearings and either granted or denied HSBC's various requests for relief.

         On November 3, 2017, the circuit court sustained HSBC's demurrer to the good faith and fair dealing claim and granted the Funds leave solely to amend the good faith and fair dealing claim in the complaint. On November 27, 2017, the Funds filed an amended complaint.

         In response, on December 18, 2017, HSBC filed another demurrer and an answer. It also filed a motion to dismiss, arguing that forum selection clauses in the CIAs designated ...

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