Gresser v. Wells Fargo Bank, N.A.

Subprime mortgage lender KH Funding (KH) entered an indenture with Wells Fargo Bank, N.A. (Wells Fargo) (defendant) as trustee. Pursuant to the indenture, KH issued senior secured investment debt securities and subordinated unsecured investment debt securities. The indenture imposed an obligation on Wells Fargo to protect the value of the notes on behalf of the noteholders in the event of a default. Wells Fargo also had a duty to inform the senior secured noteholders of an event of default. In 2005 Well Fargo filed a financing statement on behalf of the senior secured noteholders, effective for five years after the date of filing. In 2007 and 2008, KH experienced mounting financial losses, which it reported to the United States Securities and Exchange Commission (SEC). Several 2009 SEC filings reported that KH was more than 30 days late on payments of interest and principal. In early 2010, Wells Fargo informed the noteholders that an event of default was occurring and that the notes would be accelerated. A few months later, Wells Fargo failed to file a continuation statement on behalf of the senior secured noteholders, causing those notes to lapse. Less than 90 days later, KH filed for bankruptcy, and the holders of the formerly senior notes lost their status as senior secured creditors. Anne Gresser (plaintiff), a holder of senior secured notes, brought an action against Wells Fargo for breach of contract (i.e., breach of the indenture) and breach of a fiduciary duty of care. Gresser’s complaint alleged that Wells Fargo was not only aware of the SEC filings, but also received information about KH’s defaults directly from KH in early 2009—a year before Wells Fargo accelerated the notes. Wells Fargo moved for judgment on the pleadings, arguing that Gresser failed to state a claim or plead specific facts.