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Greenwich Financial Dist Ct

Greenwich Financial Dist Ct

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Published by bryllaw
Investors suing servicer (Countrywide) of securitized mortgages. Instructive on the financial incentives to the servicer NOT to modify loans.
Investors suing servicer (Countrywide) of securitized mortgages. Instructive on the financial incentives to the servicer NOT to modify loans.

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Published by: bryllaw on Dec 22, 2010
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Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)- 1 -
Page 192654 F.Supp.2d 192GREENWICH FINANCIAL SERVICES DISTRESSED MORTGAGE Fund 3, LLC, and QEDLLC, on behalf of themselves and all other persons similarly situated, Plaintiffs,v.COUNTRYWIDE FINANCIAL CORPORATION et al., Defendants.No. 08 Civ. 11343(RJH).United States District Court, S.D. New York.August 14, 2009.Page 193
David J. Grais, Grais & Ellsworth, LLP,New York, NY, for Plaintiffs.John H. Beisner, Kathryn E. Tarbert,Matthew M. Shors, Michael E. Stamp, StephenHeschel Weil, Brian David Boyle, O'Melveny &Myers LLP, Washington, DC, William JosephSushon, O'Melveny & Myers, LLP, New York,NY, for Defendants.
 RICHARD J. HOLWELL, District Judge.Plaintiffs Greenwich Financial ServicesDistressed Mortgage Fund 3, LLC and QEDLLC move to remand this case to state court forlack of subject matter jurisdiction. DefendantsCountrywide Financial Corporation("Countrywide Financial"), Countrywide HomeLoans, Inc. ("Countrywide Home Loans"), andCountrywide Home Loans Servicing LP("Countrywide Servicing") (collectively,"Countrywide") respond that this Court has jurisdiction under the Class Action Fairness Actof 2005, 28 U.S.C. §§ 1332(d), 1453, 1711-15("CAFA"), because the parties are minimallydiverse and the amount sought is over $5million, and under 28 U.S.C. § 1331 becauseplaintiffs' claims raise substantial, disputedfederal questions under the Truth-in-LendingAct, 15 U.S.C. § 1601 et seq. ("TILA"). For thereasons set forth below, the Court holds thatneither CAFA nor TILA provides a basis forsubject matter jurisdiction over this case, andtherefore that the case must be remanded to statecourt.
 Plaintiffs bring this putative class action asholders of the now-infamous mortgage-backedsecurities whose decline in value has hobbledthe financial markets. Specifically, plaintiffsallege that they hold certificatesPage 194issued by various trusts, which own hundreds of thousands of mortgage loans. (Notice of Removal, Ex. A. (the "Complaint" or "Compl.") ¶¶ 1, 12-14.) The trusts' ownership of the loansentitles them to the borrowers' periodic interestand principal payments, and the certificatesentitle plaintiffs to a share of those payments.(Id. ¶ 25.) The trusts, of course, did not issue theloans, nor did they possess any assets prior topurchasing the loans. (Id. ¶¶ 23-24.) Thepurchases were all made pursuant to certainagreements that comprised the "securitization",and the money with which the purchases weremade was raised by selling the certificates
thesecurities in question. (Id.)Defendants were both the issuers andsellers of the mortgage loans currently owned bythe trusts. (Id. ¶¶ 1, 23.) Because the truststhemselves had no expertise with lending andloan administration, defendant CountrywideServicing remained as the "master servicer" forthe loans under terms described in contractsknown as Pooling and Servicing Agreements("PSAs"). (Id. ¶¶ 26-27.) As master servicer,Countrywide Servicing administers the loans onbehalf of plaintiffs with authority delineated bythe PSAs. (See, e.g., Murata Decl. Ex. A, Series2005-36 PSA.)
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)- 2 -
Plaintiffs' claims arise from actions takenby defendants with respect to these loanspursuant to the terms of a settlement withseveral state Attorneys General. In the summerof 2008, the Attorneys General for seven statesfiled lawsuits accusing Countrywide of violatinglaws against predatory lending. (Compl. ¶ 28.)Among other things, the states alleged thatCountrywide made loans it had no reasonablebasis to think borrowers could afford. (Id.)Countrywide later agreed to a multistatesettlement, requiring it to modify the terms of numerous mortgage loans that it currentlyservices
including at least some of the loans itservices on behalf of plaintiffs. (Id. ¶ 30.)Plaintiffs allege that "[m]odifying a mortgageloan almost always means reducing or delayingpayments due on that loan." (Id. ¶ 32.) Suchmodifications of the loans owned by the trustscould therefore reduce the cash flow into thetrusts and thus "reduce[] the value of thecertificates that those trusts sold to investors."(Id.)Plaintiffs responded to defendants'settlement with the state Attorneys General byfiling this putative class action in New York State Supreme Court. In their complaint,plaintiffs do not challenge Countrywide'sauthority under the PSAs to modify the loans,but rather seek declaratory judgments underN.Y. C.P.L.R. 3001 that the PSAs requireCountrywide to purchase any loans it modifies ata price equal to the unpaid principal and accruedinterest thereon. (Id. ¶¶ 35, 38.) Specifically,plaintiffs point to the following clause that isreproduced in sum and substance across all thePSAs: "Countrywide may agree to amodification of any Mortgage Loan (the`Modified Mortgage Loan') if . . . Countrywidepurchases the Modified Mortgage Loan from theTrust Fund . . . ." (Id. ¶¶ 34-35.) Defendantspromptly removed the action to this Court, andplaintiff moved to remand two weeks later.
 "If at any time before final judgment itappears that the district court lacks subjectmatter jurisdiction, the case shall be remanded."28 U.S.C. § 1447(c). Here, defendants argue thatthis Court has jurisdiction (1) under CAFAbecause plaintiffs seek certification as a classaction, the parties are minimally diverse, and theamount in controversy is over $5 million, and(2) under 28 U.S.C. § 1331 becausePage 195plaintiffs' claims present substantial questions of federal law. Plaintiffs disagree, arguing that anexception to CAFA jurisdiction applies and thattheir claims do not present federal questions. Atbest, plaintiffs argue, defendants raise a federaldefense, which is insufficient to establish subjectmatter jurisdiction. The Court agrees withplaintiffs.
I. Jurisdiction under CAFA
 CAFA provides thatThe district courts shall haveoriginal jurisdiction of any civilaction in which the matter incontroversy exceeds the sum orvalue of $5,000,000, exclusiveof interests and costs, and is aclass action in which . . . anymember of a class of plaintiffsis a citizen of a State differentfrom any defendant.28 U.S.C. § 1332(d)(2). Plaintiffs do notdispute that the above requirements for jurisdiction under CAFA have been met. (Tr. of Mar. 13, 2009 Hr'g at 3.) Rather, plaintiffs arguethat CAFA excepts certain suits from its jurisdictional reach and that this case fallssquarely within one of those exceptions.Specifically, plaintiffs cite CAFA's provisionthat district courts do not have jurisdiction overa class action that "solely involves a claim . . .that relates to the rights, duties (includingfiduciary duties), and obligations relating to orcreated by or pursuant to any security . . . ." 28U.S.C. § 1332(d)(9)(C). Plaintiffs concede that itis their burden to persuade the Court that thisexception applies. (Tr. of Mar. 13, 2009 Hr'g at3.)
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)- 3 -
While all statutory analysis begins with thetext itself, CAFA's text poses a variety of problems. Considering the same exception theCourt does here, the Court of Appeals declaredthat CAFA's text was both "cryptic" and"ambiguous". Estate of Barbara Pew v.Cardarelli, 527 F.3d 25, 30, 32 (2d Cir.2008)(finding that "the imperfect drafting of [CAFA]makes it ambiguous" and that the court is"forced . . . to construe CAFA's cryptic text")(citations and quotations omitted). Indeed,considering the general rule of statutoryconstruction to read exceptions narrowly whenthe statute itself should be read broadly, seeC.I.R. v. Clark, 489 U.S. 726, 739, 109 S.Ct.1455, 103 L.Ed.2d 753 (1989) ("In construingprovisions . . . in which a general statement of policy is qualified by an exception, we usuallyread the exception narrowly in order to preservethe primary operation of the provision."), it isparticularly difficult to read narrowly languagethat sweeps in any claim that "relates to therights, duties (including fiduciary duties), andobligations relating to or created by or pursuantto any security." (emphasis added). Read tooliterally, this exception would encompass allsecurities claims, a result that would trulyswallow the rule. See Estate of Barbara Pew,527 F.3d at 32 ("Review of [Securities LitigationUniform Standards Act] and CAFA confirms anoverall design to assure that the federal courtsare available for all securities cases that havenational impact . . . ."); New Jersey CarpentersVacation Fund v. Harborview Mortgage LoanTrust, 581 F.Supp.2d 581, 588 (S.D.N.Y. 2008)("Consistent with Congress's aim to interpretCAFA broadly, as reflected in the legislativehistory, all of CAFA's exceptions are to beinterpreted narrowly.")Fortunately, the Court of Appeals hasalready done the lion's share of the work interpreting this exception. In Estate of BarbaraPew, the Court of Appeals confronted theexception's scope in the context of a stateconsumer fraud claim. The plaintiffs in Pewwere purchasers of money market certificates
unsecured, fixed-interest debt instruments
whose issuer had gone bankrupt. Plaintiffsbrought suit in state court against the issuer'sofficers andPage 196the issuer's auditor for fraudulently failing todisclose the issuer's insolvency. Defendantsremoved to federal court under CAFA, andplaintiffs quickly moved to remand, arguing thatthe third exception in 28 U.S.C. § 1332(d)(9)applied. The trial court agreed with plaintiffs,and defendants appealed pursuant to 28 U.S.C. §1453(c).The Court of Appeals began by rejectingplaintiffs' argument that the exception coveredall securities claims. Estate of Barbara Pew, 527F.3d at 31. Such a reading, the court concluded,would render superfluous the phrase "the rights,duties (including fiduciary duties), andobligations relating to or created by or pursuantto", leaving the text no different than if it readsimply "[any] claim . . . that relates to . . . anysecurity." Furthermore, and perhaps moreimportantly, the court held that such a readingwould collapse three CAFA exceptions into two,rendering superfluous the first exceptioninvolving claims "concerning a covered securityas defined under 16(f)(3) of the Securities Act of 1933 . . . and section 28(f)(5)(E) of theSecurities Exchange Act of 1934. . . ."If the third exception did not apply to allclaims relating to securities, what was thelimiting principle? For this, the Court of Appealsfocused on the "rights", "duties", and"obligations" language. Duties were owed bypersons
whether human or artificial
andwhile obligations could be owed by persons orby instruments, to differentiate them from"duties", the term "obligations" should be readas "obligations created in instruments, such as acertificate of incorporation, an indenture, a note,or some other corporate document." Estate of Barbara Pew, 527 F.3d at 31. Of course, the"rights" are "those of the security-holders (ortheir trustees or agents) to whom these dutiesand obligations run." Id. Applying thesedistinctions, the Court of Appeals held that theexception was limited to suits seeking to enforce

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