SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK
)

GREENWICH FINANCIAL SERVICES
)
DISTRESSED MORTGAGE FUND 3, LLC, and)
QED LLC, on behalf of themselves and all other )
persons similarly situated,
)

Index No. 65047412008

)

Plaintiffs,

)
)

-against-

)
)

COUNTRYWIDE FINANCIAL
CORPORATION, COUNTRYWIDE HOME
LOANS, INC. and COUNTRYWIDE HOME
LOANS SERVICING LP,

)
)
)
)
)

Defendants.

)

MEMORANDUM OF LAW IN SUPPORT
OF DEFENDANTS' MOTION TO DISMISS
THE COMPLAINT UNDER CPLR 3211(a)(1) AND 3211(a)(7)

Of counsel:
Brian D. Boyle
Matthew M. Shors
Kathryn E. Tarbert
O'MELVENY & MYERS LLP
1625 Eye Street, N.W.
Washington, D.C. 20006
(202) 383-5300

William J. Sushon
O'MELVENY & MYERS LLP
7 Times Square
New York, New York 10036
(212) 326-2000
Counsel for Defendants
October 8, 2009

T ABLE OF CONTENTS
Page
INTRODUCTION ......................................................................................................................... 1
FACTUAL BACKGROUND ........................................................................................................ 5
A.

Mortgage Securitization ......................................................................................... 5

B.

ThePSA ................................................................................................................. 5

C.

Subprime Foreclosures .......................................................................................... 6

D.

Congressional Reaction to the Mortgage Meltdown ............................................. 7

E.

This Lawsuit .......................................................................................................... 8

ARGUMENT ................................................................................................................................. 9
I.

II.

III.

THE PSA'S NO-ACTION CLAUSE BARS THIS ACTION ........................................ 10
A.

Plaintiffs Have Not Satisfied the PSA's Requirements for Suit.. ........................ 10

B.

The Complaint Does Not Allege Any Legitimate Justification for Disregarding the PSA's Unambiguous Procedural Requirements for Suit.. ................ 12

UNDER THE PSA'S UNAMBIGUOUS TERMS, COUNTRYWIDE CANNOT
BE REQUIRED TO REPURCHASE THE MODIFIED MORTGAGES ...................... 14
A.

The PSA Authorizes Countrywide to Modify Mortgages to Mitigate Loss
to the Trust's Investors Without Requiring Repurchase ...................................... 14

B.

Plaintiffs' Interpretation of § 3.11 of the PSA to Require Countrywide to
Repurchase Every Loan It Modifies, Regardless of Purpose, Is Plainly
Wrong .................................................................................................................. 17
1.

Section 3.11(b) Expressly Applies Only to Modifications "in Lieu
of a Refinancing" ..................................................................................... 18

2.

Plaintiffs' Ultimate Conclusion that § 3.11 Provides the Sole Reservoir of Loan Modification Authority Cannot Be Squared with
Other Provisions of the PSA .................................................................... 20

CFC IS NOT A PROPER DEFENDANT ....................................................................... 22

CONCLUSION ............................................................................................................................ 23

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T ABLE OF AUTHORITIES
Page(s)

CASES
150 Broadway N. Y. Assoc.. L.P. v. Bodner,
14 A.D.3d 1, 784 N.Y.S.2d 63 (lst Dep't 2004) ..................................................................... 9
Allan v. Moline Plow Co.,
14 F.2d 912 (8th Cir. 1926) ................................................................................................... 12
Batchelder v. Council Grove Water Co.,
131 N.Y. 42, 29 N.E. 801 (1892) ........................................................................................... 11
Biondi v. Beekman Hill House Apartment Corp.,
257 A.D.2d 76,692 N.Y.S.2d 304 (lst Dep't 1999) ............................................................... 9
Blount v. Bovis Lend Lease Holdings, Inc.,
35 A.D.3d 310,828 N.Y.S.2d 305 (lst Dep't 2006) ............................................................. 23
Feder v. Union Carbide Corp.,
141 A.D.2d 799,530 N.Y.S.2d 165 (2d Dep't 1988) ............................................................ 11
Feldbaum v. McCrory Corp.,
Civ. A. No. 11866, 1992 WL 119095 (Del. Ch. June 2,1992) ....................................... 11, 14
Greene v. New York United Hotels, Inc.,
236 A.D. 647, 260 N.Y.S. 405 (lst Dep't 1932) ................................................................... 11
Harris v. Shearson Hayden Stone, Inc.,
82 A.D.2d 87, 441 N.Y.S.2d 70 (lst Dep't 1981) ................................................................. 13
Home Mortgage Co. v. Ramsey,
49 F.2d 738 (4th Cir. 1931) ................................................................................................... 12
In re Enron Corp. Secs., Derivative & "ERISA" Litig.,
No. MDL-1446, 2008 WL 744823 (S.D. Tex. Mar. 19,2008) ............................................. 11
McMahan & Co. v. Wherehouse Entm't, Inc.,
859 F. Supp. 743 (S.D.N.Y. 1994) ........................................................................................ 12
Murphy v. Keystone Steel & Wire Co.,
61 F.3d 560 (7th Cir. 1995) ................................................................................................... 15
Natwest USA Credit Corp. v. Alco Standard Corp.,
858 F. Supp. 401 (S.D.N.Y. 1994) ........................................................................................ 17
Peak Partners LP v. Republic Bank,
191 F. App'x 118 (3d Cir. 2006) ........................................................................................... 11
Relmar Holding Co. v. Paramount Publix Corp.,
147 Misc. 824,263 N.Y.S. 776 (N.Y. Sup. Ct. 1932) ........................................................... 10
Saffire Corp. v. Newkidco., LLC,
286 F. Supp. 2d 302 (S.D.N.Y. 2003) ................................................................................... 22

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T ABLE OF AUTHORITIES
(continued)
Page(s)

Sharon Steel Corp. v. Chase Manhattan Bank, N.A.,
691 F.2d 1039 (2d Cir. 1982) ................................................................................................ 13
Stellema v. Vantage Press Inc.,
121 Misc. 2d 1058,470 N.Y.S.2d 507 (N.Y. Sup. Ct. 1983) ................................................ 13
Suffolk County Water Auth. v. Vill. of Greenport,
21 AD.3d 947,800 N.Y.S.2d 767 (2d Dep't 2005) .............................................................. 21
Taussig v. Clipper Group, L.P.,
13 A.D.3d 166, 787 N.Y.S.2d 10 (lst Dep't 2004) ............................................................... 14
Tom Doherty Assocs., Inc. v. Saban Entm't, Inc.,
60 F.3d 27 (2d Cir. 1995) ...................................................................................................... 15
Victor v. Riklis,
No. 91 Civ. 2897, 1992 WL 122911 (S.D.N.Y. May 15, 1992) ............................................ 12
STATUTES
N.Y. C.P.L.R. 3211(a)(7) .............................................................................................................. 9
N.Y. C.P.L.R. 3211(c) ................................................................................................................... 9
15 U.S.C. § 1639a(a) (2008) .................................................................................................... 7, 17
15 U.S.C. § 1639a(b) ..................................................................................................................... 8
15 U.S.C. § 1639a(c) ............................................................................................................... 8, 17
15 U.S.C. § 1639a(d) ..................................................................................................................... 8
26 U.S.C. § 860A ......................................................................................................................... 15
26 U.S.C. § 860F(a) ..................................................................................................................... 16
26 U.S.C. § 860F(a)(2)(A) ..................................................................................................... 16, 19
26 U.S.C. § 860F(a)(2)(A)(i) ................................................................................................. 19,21
26 U.S.C. § 860F(a)(2)(A)(ii) ................................................................................................ 16, 19
26 U.S.C. § 860G(a)(3) ................................................................................................................ 16
Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22 § 201(a)(l), (2)
(2009) ................................................................................................................................... 1, 7
Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 (2008) ............................... 7

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T ABLE OF AUTHORITIES
(continued)

Page(s)
ADMINISTRATIVE MATERIALS

26 C.F.R. § 1.860D-l(b)(3)(i) ..................................................................................................... 16
I.R.S. Priv. Ltr. Rul. 94-18-021,1994 WL 170342 (May 6, 1994) ....................................... 19,21
OTHER AUTHORITIES

American Bar Foundation, Commentaries on Indentures § 5-7 .................................................. 11
Peaslee, James M & David Z. Nirenberg, Federal Income Taxation of Securitization
Transactions (3d ed.) ............................................................................................................. 16

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INTRODUCTION
One legal principle disposes of the entire complaint in this action-that New York courts
interpret unambiguous contracts to mean what they say. Here, plaintiffs have sued defendants
(collectively, "Countrywide") under a Pooling and Servicing Agreement, or PSA, that governs
the trusts in which plaintiffs purchased mortgage-backed certificates on the open market. They
allege that under the PSA, Countrywide must purchase at full face value every mortgage underlying the certificates that Countrywide has agreed to modify. But the PSA itself unambiguously
provides that (i) no certificateholder may sue under the PSA unless the holder has satisfied a set
of four prerequisites, referred to as a "no-action" clause; and (ii) Countrywide may modify underlying mortgages without buying them at full face value unless the modification is in lieu of a
refinancing. The Complaint does not and cannot allege that plaintiffs have satisfied the noaction clause, and it likewise does not and cannot allege that the mortgage modifications Countrywide is undertaking were done in lieu of any refinancing. Therefore, for each of these independent failures, the Complaint must be dismissed.
At bottom, this case is plaintiffs' effort to force Countrywide to buy what they estimate to
be hundreds of thousands of mortgages Countrywide agreed to modify under nationwide programs designed to prevent residential foreclosures by relaxing the terms of mortgages at risk of
default. (CompI.

~[

1 (Sushon Aff. Ex. A).) Both Congress and the President have recognized

that these modifications are crucial to the nation's economic recovery, and have promoted them
in a series of statutes that make clear that such "loss-mitigation modifications" are a standard
mortgage servicing practice that should be encouraged whenever possible. See Helping Families
Save Their Homes Act of 2009, Pub. L. No. 111-22 § 201(a)(l), (2)(A)(i), 123 Stat. 1632, 1638
(2009); President Barack Obama, Remarks by the President on Financial Rescue and Reform, at
Federal Hall, New York, New York (Sept. 14,2009) (Sushon Aff. Ex. D). Countrywide has at-

tempted to respond responsibly to the Government's call to end the recent rash of foreclosures
and prevent further economic decline.
Plaintiffs, meanwhile, are not aggrieved investors but lawsuit speculators. Plaintiff
Greenwich reportedly purchased interests in securitized mortgages only after Countrywide publicly announced its plan to modify those mortgages, declaring that it intends to turn suits like this
one "into a business."l Plaintiffs have estimated that the declaration they seek-which would
affect thousands of mortgages Countrywide has already modified-would cost Countrywide $80
billion. 2 But the PSA's unambiguous terms procedurally prohibit plaintiffs from bringing this
action, and they authorize Countrywide to modify these mortgages without any obligation to buy
them at full value.
The Complaint is procedurally defective because plaintiffs have failed to comply with the
PSA's unambiguous prerequisites for suit. The PSA's no-action clause expressly prohibits certificateholders (like plaintiffs) from "institut[ing] any suit, action or proceeding in equity or at law
upon or under or with respect to [the PSA]" (emphasis added), unless those holders, in conjunction with certificateholders holding not less than 25% of the voting rights under the agreement,
(1) notify the Trustee of the alleged violation of the agreement, (2) demand that the Trustee bring

suit, and (3) offer the Trustee indemnity for that suit. (PSA § 10.08 (Sushon Aff. Ex. B).) These
requirements, which are standard in indenture agreements similar to the PSA and regularly enforced by courts, protect against not only the exercise of poor judgment but also the risk of strike
suits.

Ruth Simon, Mortgage-Bond Holders Get Voice. Greenwich Financial's William Frey Challenges Loan
Servicers Like BofA, WALL ST. J., Dec. 2, 2008, C3 (Sushon Aff. Ex. E).
2

Rachel Breitman, Class Action Demands Countrywide Repay Hedge Fundfor Losses, The Am Law Daily
Blog, Dec. 3, 2008, available at http://www.law.comljsp/article.jsp?id=120242643307&rss=newswire (last visited
Oct. 7, 2009) (Sushon Aff. Ex. F).

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Plaintiffs concede that they cannot meet the requirements for suit in the PSA (CompI.
~[<J[

19-20; see PSA § 10.08), arguing instead that the no-action clause does not mean what it says.

Even though the no-action clause plainly contains no exceptions, plaintiffs contend that it is
somehow "inapplicable" because plaintiffs have filed a class action purportedly for the "common
benefit" of all certificateholders. (CompI. <J[ 20.) Numerous courts have rejected these arguments
in the past because exempting cases purportedly filed for certificateholders' "common benefit"
would render the no-action clause a dead letter. The Complaint should therefore be dismissed
for plaintiffs' failure to satisfy the no-action clause alone.
Even if plaintiffs could clear this procedural hurdle-which they cannot-their claims
would still fail on the merits. The PSA's plain language provides in § 3.01 that Countrywide has
the authority to modify loans in the trust under the "customary and usual standards of practice of
prudent mortgage loan servicers." (PSA § 3.01.) The only limitation on that power is that Countrywide may not modify mortgages if doing so would give rise to draconian penalties under certain federal tax regulations. In contrast, the sole PSA provision that would require Countrywide
to repurchase modified mortgages is § 3.11, which by its terms applies only to loans modified "in
lieu of a refinancing," that is, where Countrywide offers to modify the loan of a paying customer
who wishes to refinance his or her mortgage with a competing lender (generally to take advantage of a decline in interest rates). But in the modifications at issue in this case, Countrywide is
not modifying mortgages in lieu of refinancing them. Instead, as the Complaint acknowledges
(see CompI. <J[<J[ 1-3, 31-32), Countrywide is modifying the mortgages at issue to avoid foreclo-

sures and their attendant losses to certificateholders.

In addition, federal tax law is also squarely inconsistent with plaintiffs' PSA interpretation. The statutes governing real estate mortgage investment conduits, or REMICs, impose se-

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vere tax penalties if a servicer modifies a mortgage in lieu of refinancing without also purchasing
the mortgage at full face value. But federal tax law has no similar penalty for modifications to
mitigate loan losses, such as those Countrywide has undertaken here. That is why the PSA distinguishes between modifications that require repurchase (i.e., modifications in lieu of refinancing) in § 3.11 and modifications incident to customary servicing authority in Section 3.01. Plaintiffs' interpretation of the PSA is clearly at odds with this intentional dichotomy. And just as significantly, plaintiffs' proposed PSA reading to require the repurchase of every modified loan, not
just those modified in lieu of refinancing, would render the second half of § 3.01 (which prohibits modifications that would result in draconian federal taxes) a nUllity, because no modification
that is accompanied by repurchase would ever result in that penalty.
But even assuming that plaintiffs were correct that the only provision in the PSA that authorizes modifications is § 3.11 (and they are not), and therefore any modification must satisfy
all the requirements of that section, including repurchase, plaintiffs still would not be entitled to
the declaration they seek. That is because, as explained above, § 3.11 requires any modification
it authorizes both to be accompanied by repurchase and to be "in lieu of a refinancing." If, as
plaintiffs' interpretation of the agreement would require, the only modifications Countrywide can
make are those in lieu of refinancing, then it cannot make modifications for any other purpose,
including loss mitigation. That interpretation would drastically curtail Countrywide's traditional
authority as Master Servicer in a way directly contrary to federal law. Nothing in the PSA requires or even permits that stringent restriction of authority.
Separate from the suit's other procedural and substantive defects, the Complaint must be
dismissed as to Countrywide Financial Corporation ("CFC") because that corporation is not a
proper defendant. The Complaint does not allege that CFC must repurchase any loan, and plain-

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tiffs seek no judgment binding CFC. Because plaintiffs have provided no basis upon which to
conclude that CFC is a proper defendant, the Complaint against it should be dismissed.

FACTUAL BACKGROUND
A. Mortgage Securitization

Defendant Countrywide Home Loans, Inc., is a licensed mortgage banker that previously
provided residential mortgage loans to individual consumers. (See Compl. Ij[ 8; Compl., Ex. G at
2.) Defendant Countrywide Home Loans Servicing LP ("Countrywide Servicing") services
loans. (See Compl. Ij[ 9; Compl., Ex. G at 2.) Defendant CFC is a thrift holding company. (See
Compl. Ij[ 7; Compl., Ex. G at 2.) Over the last several years, certain of the defendants and their
affiliates have followed the industry-wide practice of "securitizing" consumer mortgage loans by
selling them to trusts that elect to be treated as REMICs for federal income-tax purposes. After a
trust purchases such a loan, the trust, rather than the original lender, receives the mortgagor's
payments of principal and interest. (Compl. Ij[Ij[ 12, 23-24.) Investors may purchase certificates
entitling them to an interest in the income generated by the trust. (Id. Ij[Ij[ 23-24.)
B. ThePSA

The rights and duties of various securitization participants-which typically include (1) a
trustee; (2) a "Master Servicer" that administers the loans in the trust; and (3) the "sellers" that
transfer loans to the trust-are generally set forth in a PSA, the terms of which vary from trust to
trust and are usually also described in a prospectus? While plaintiffs in this suit, hedge funds
Greenwich Financial Services Distressed Mortgage Fund 3, LLC and QED, LLC, seek to represent certificateholders in numerous Countrywide certificate issuances, the plaintiffs purchased
The CW ALT and CWL Pooling and Service Agreements and prospectuses are available through EDGAR.
(See, e.g., http://www.sec.gov/Archives/edgar/datalI269518/000090514805003720/efc5-1546_ex991.txt (PSA);

http://www.sec.gov/Archives/edgar/datal 1269518/000089 10920500 1122/e22080_424b5.txt (CW ALT 2005-36 Prospectus).)

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certificates only in the CWALT 2005-36 securitization, the servicing requirements of which are
set forth in the CWALT 2005-36 PSA (the PSA) and described in the CWALT 2005-36 Pro spectus (the Prospectus) (Sushon Aff. Ex. C). (CompI. <j[ 6.)
This suit primarily involves three provisions of the PSA, § 3.01, § 3.11, and § 10.08.4

PSA § 10.08 explicitly prohibits certificateholders from suing to enforce any pro-

vision of the agreement unless they satisfy four preconditions for suit. As plaintiffs concede, they have not met those requirements here. (CompI. <j[<j[ 19-20.)

PSA § 3.01 authorizes Countrywide, as Master Servicer, to service the trust's

loans under the "customary and usual standards of practice of prudent mortgage
loan servicers" and limits that authority only to prohibit "any modification ...
which would cause any REMIC created under this Agreement to fail to qualify as
a REMIC or result in the imposition of any tax under section 860F(a) or section
860G(d) of the [Internal Revenue] Code." It does not require repurchase of any
loan modified pursuant to customary servicing practice. [d.

PSA § 3.11 provides that, when Countrywide engages in a "modification in lieu

of a refinancing"-a modification made to keep a borrower from refinancing with
a competing lender to take advantage of prevailing interest rates that are lower
than those of the original loan-Countrywide must "purchase the Modified Mortgage Loan from the Trust Fund" under a procedure set forth in the agreement.

C. Subprime Foreclosures
In the Fall of 2007, in response to growing subprime mortgage delinquencies, Country-

wide announced a multi-year campaign to refinance or modify certain subprime mortgages that
had an overall unpaid principal balance of $16 billion. (See Bloomberg News, Lender to Ease

Terms on Loans: Countrywide to Let 52,000 Refinance, CHI. TRIB., Oct. 24, 2007 (Sushon Aff.
Ex. G).) In October 2008, Countrywide followed that initiative with the announcement of a
streamlined, nationwide campaign to modify hundreds of thousands of additional delinquent

4

Countrywide has included the PSA in the accompanying affirmation. (Sushon Aff. Ex. B). Although the
Complaint refers to a purported repurchase requirement in § h3.12(a)" of other PSAs (Compl.<J[33), plaintiffs do not
claim to own any certificate governed by a PSA in which § 3.12 allegedly requires repurchase and thus must rely on
§ 3.11 for their claim that Countrywide is required to repurchase modified loans from their trust. See Plaintiffs' Reply Memorandum of Law in Support of their Motion to Remand 7 (Sushon Aff. Ex. K).

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mortgages. Under both programs, Countrywide committed to reduce mortgage payments in circumstances in which Countrywide believed modifications would increase the likelihood that borrowers would meet their obligations, and thus ensure greater revenue than would be provided by
the alternative of costly foreclosures. s When a mortgage has been securitized, the revenue from
a modification is passed on to investors, who receive greater income from the reduced payments
than they would from foreclosure. Loss-mitigation modifications, therefore, are designed to
benefit homeowners and investors alike.
D. Congressional Reaction to the Mortgage Meltdown
Separately, Congress recognized that the rash of residential foreclosures was hampering
the national economy. It responded by enacting a series of laws governing servicing practice and
encouraging loss-mitigation modifications. On July 30, 2008, Congress passed the Housing and
Economic Recovery Act of 2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654 (2008), which
modified the Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., to provide that, unless
"established" to the contrary in a servicing agreement, servicers "shall be deemed to act in the
best interests of all '" investors" in a mortgage securitization when they modify a defaulted
mortgage on owner-occupied property where "[t]he anticipated recovery on the principal outstanding obligation of the mortgage under the modification '" exceeds, on a net present value
basis, the anticipated recovery ... through foreclosure." 15 U.S.C. § 1639a(a)(2) (2008).
Later, in May 2009, Congress passed the "Helping Families Save Their Homes Act of
This latter program is memorialized in agreements with a number of state attorneys general resolving
claims relating to Countrywide's loan origination activities. The Complaint alleges that Countrywide's streamlined
loan-modification program is purely a creature of these agreements, and represents an attempt by Countrywide to
resolve its own liabilities at the expense of investors in the mortgages that it services. (CompI. <J[ I.) In fact, Countrywide is pursuing its loan-modification program in all states, without regard to whether a state's attorney general
has pursued or settled claims against Countrywide. Countrywide has provided separate consideration, out of its own
funds, under the agreements with state attorneys general, such as a $150 million fund to provide relief payments to
certain foreclosed borrowers. (See, e.g., Compl., Ex. Fat 19-20 (foreclosure relief program); Comp\., Ex. Gat 2930 (same).)

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2009" (the "Homes Act"), Pub. L. No. 111-22. That law amended 15 U.S.C. § 1639a to provide
that the implementation of a qualified loss-mitigation modification "shall constitute standard industry practice" for servicers. 15 U.S.c. § 1639a(c). The Homes Act further amended § 1639a
to insulate servicers from liability when acting in investors' best interests as defined by that statute. Under those circumstances, servicers (1) "shall not be liable to any party who is owed a
duty under [a provision of the statute governing duties to investors]," and (2) "shall not be subject to any injunction, stay, or other equitable relief to such party, based solely upon the implementation by the servicer of a qualified loss mitigation plan." 15 U.S.c. § 1639a(b) (emphasis
added). Congress extended the same immunity to "[a)ny person, including a trustee, issuer, and
loan originator" for its "cooperation ... with a servicer" where "necessary for the servicer to implement a qualified loss mitigation plan." 15 U.S.c. § 1639a(d).6

E. This Lawsuit
On December 1,2008, plaintiffs sued Countrywide in this Court for a declaratory judgment that "Countrywide Home Loans or Countrywide Servicing must purchase every loan that
Countrywide Servicing or Countrywide Home Loans modifies." (Compi. <J[ 35.) Plaintiff
Greenwich reportedly acquired its certificates in the CWALT 2005-36 trust less than a month
earlier-sometime in November 2008-but after Countrywide publicly announced its nationwide streamlined loan-modification program. (See Ruth Simon, Mortgage-Bond Holders Get
Voice, Greenwich Financial's William Frey Challenges Loan Servicers Like BC!fA, WALL ST. J.,
Dec. 2, 2008, C3 (Sushon Aff. Ex. E).) Greenwich's acquisition was reportedly designed to

6

Countrywide has immunity for the modifications at issue here under the Homes Act and will brief that matter in a future filing. Because the immunity question requires consideration of additional documentation, however,
Countrywide does not raise the immunity defense in this motion. For present purposes, Countrywide discusses
HERA and the Homes Act because they are plainly relevant to the question how the PSA should be interpreted,
since they inform standard servicing practice.

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permit it to "be[] an advocate for bondholders whose voice isn't being heard" and to tum that
advocacy "into a business." (/d.) Plaintiffs seek a declaration that would govern Countrywide's
modification authority under hundreds of PSAs (see CompI. <JI 12). But plaintiffs themselves
own certificates, and thus have an interest, in only in one trust, governed by one PSA (which is
addressed herein).
On December 30,2008, Countrywide removed the action to federal court under the Class
Action Fairness Act, 28 U.S.c. § 1332(d), and the statute granting federal question jurisdiction,
28 U.S.C. § 1331. On August 17,2009, the district court remanded the case to this Court. Countrywide filed a petition to appeal that order under 28 U.S.c. § 1453(c). The petition is pending.

ARGUMENT
CPLR 3211(a)(7) provides that a defendant may move to dismiss a complaint on the
ground that it "fails to state a cause of action." In deciding such a motion, a court may consider
"any evidence that could properly be considered on a motion for summary judgment." N.Y.
c.P .L.R. 3211 (c). "Allegations consisting of bare legal conclusions, as well as factual claims
either inherently incredible or flatly contradicted by documentary evidence are not presumed to
be true and accorded every favorable inference." Biondi v. Beekman Hill House Apartment

Corp., 257 A.D.2d 76,81,692 N.Y.S.2d 304, 308 (lst Dep't 1999), aii'd, 94 N.Y.2d 659, 709
N.Y.S.2d 861 (2000).
In addition, CPLR 3211(a)(1) authorizes dismissal where documentary evidence establishes the complaint's infirmity. Where, as here, "a written agreement ... unambiguously contradicts the allegations supporting a litigant's cause of action for breach of contract, the contract
itself constitutes documentary evidence warranting the dismissal of the complaint pursuant to
C.P.L.R. 3211(a)(l), regardless of any extrinsic evidence or self-serving allegations offered by
the proponent of the claim." 150 Broadway N.Y. Assocs., L.P. v. Bodner, 14 A.D.3d 1,5, 784

-9-

N.Y.S.2d 63,65 (1st Dep't 2004). The Complaint here must be dismissed because the PSA unambiguously contradicts the allegations in the Complaint and plaintiffs fail to state a claim.

I.

THE PSA'S NO-ACTION CLAUSE BARS THIS ACTION
As plaintiffs admit (see Compl. <J[ 19), the PSA prohibits any certificateholder from "insti-

tutling] any suit, action or proceeding in equity or at law ... with respect to [the PSA]," unless the
certificateholder first abides by the procedural requirements set forth in § 10.08 of the agreement.
(PSA § 10.08.) Because plaintiffs have not satisfied these requirements, the Complaint must be
dismissed.

A.

Plaintiffs Have Not Satisfied the PSA's Requirements for Suit

The PSA specifies that a certificateholder cannot sue to enforce the tmst's rights under
the PSA unless, among other things, the holder satisfies four preconditions to suit: (1) the certificateholder "previously [has] given to the Tmstee a written notice of an Event of Default [under
the agreement] and of the continuance thereof'; (2) the "Holders of Certificates evidencing not
less than 25% of the Voting Rights evidenced by the Certificates ... have made written request to
the Tmstee to institute such action" in the Tmstee's own name; (3) the same holders "have offered to the Tmstee ... reasonable indemnity as it may require against the costs, expenses, and
liabilities" to be incurred in that action; and (4) the Tmstee "neglect[ s] or refuse[ s] to institute
any such action" for 60 days after receiving the written request for suit and offer of indemnity.
(PSA § 10.08.) Plaintiffs do not allege that they satisfied these requirements before filing suit
and thus they lack the capacity to sue.
Contractual provisions governing whether and how an agreement may be enforced
through litigation are fully enforceable under New York law. 7 See Relmar Holding Co. v. Para-

PSA § 10.03 provides the PSA shall be construed in accordance with New York law. (PSA § 10.03.)

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mount Publix Corp., 147 Misc. 824, 825, 263 N.Y.S. 776, 778 (N.Y. Sup. Ct. 1932), sum. aff'd,

237 AD. 870, 261 N.Y.S. 959 (1933). And "no-action" clauses of this type are commonly included in agreements relating to multi-investor trusts, conditioning a third-party investor's suit
upon a group of investors making a prior demand for suit (including an offer of indemnity) on
the investment's trustee. See American Bar Foundation, Commentaries on Indentures § 5-7, at
232 (including as model debenture indenture provision a "Limitation on Suits" almost identical
to § 10.08 of the PSA) (Sushon Aff. Ex. H). By empowering the trustee to make litigation decisions on behalf of the trust, no-action clauses protect not only "against the exercise of poor
judgment by a single [investor] or a small group of [investors], who might otherwise bring a suit
against the issuer that most [investors] would consider not to be in their collective economic interest," but also "against the risk of strike suits." Feldbaum v. McCrory Corp., Civ. A No.
11866, 1992 WL 119095, at *6 (Del. Ch. June 2, 1992); accord, e.g., Batchelder v. Council
Grove Water Co., 131 N.Y. 42, 46,29 N.E. 801 (1892) (no-action clause "prevents individual

bondholders from ... harassing their common debtor and jeopardizing the fund provided for the
cornmon benefit"); Peak Partners LP v. Republic Bank, No. 05-2242, 191 F. App'x 118, 126
(3d Cir. 2006) (the "centraliz[ation] [of] enforcement powers" is a "a central feature of an Indenture") (internal quotation marks omitted).
Accordingly, state and federal courts regularly dismiss investor lawsuits where, as here,
the "complaint contains no allegations showing compliance" with a no-action provision like
§ 10.08. Greene v. New York United Hotels, Inc., 236 AD. 647, 648, 260 N.Y.S. 405, 407 (1st

Dep't 1932), sum. affd, 261 N.Y. 698, 185 N.E. 776 (1933); see, e.g., Feder v. Union Carbide
Corp., 141 AD.2d 799,800,530 N.Y.S.2d 165, 166-67 (2d Dep't 1988) (affirming grant of

cross-motion to dismiss); Feldbaum, 1992 WL 119095, at *3, *5-*6 (applying New York law

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and granting motion to dismiss for failure to state a claim); In re Enron Corp. Sees., Derivative
& "ERISA" Litig., No. MDL-1446, 2008 WL 744823, at *19 (S.D. Tex. Mar. 19,2008); Victor

v. Riklis, No. 91 Civ. 2897(UF), 1992 WL 122911, at *4, *6 (S.D.N.Y. May 15, 1992); Home
Mortgage Co. v. Ramsey, 49 F.2d 738, 743 (4th Cir. 1931); Allan v. Moline Plow Co., 14 F.2d
912, 916-17 (8th Cir. 1926). This Court should do the same.

B.

The Complaint Does Not Allege Any Legitimate Justification for Disregarding the PSA's Unambiguous Procedural Requirements for Suit

Plaintiffs offer no excuse for their failure to comply with the PSA's requirements for suit.
Instead, the Complaint asserts that § 10.08 is "inapplicable" because plaintiffs purport to "bring
this action as a class action for the common benefit of all certificateholders in the plaintiff class."
(CompI. 'H20.) The Southern District has already provided the short and complete answer to this
argument: "[r]egardless of whether the [right asserted] is characterized as a collective or individual right, it is does not escape application of the No Action Clause." McMahan & Co. v. Where-

house Entm't, Inc., 859 F. Supp. 743,748-49 (S.D.N.Y. 1994), ajfd in part, rev'd in part on
other grounds, 65 F.3d 1044, 1051 (2d Cir. 1995); accord Allan, 14 F.2d at 917 (enforcing
clause and rejecting argument that clause applied only "to suits brought by a note holder individually for his individual advantage," not suits "prosecuted for the benefit of all the note holders").
The no-action clause includes no exception for a situation in which a small group of certificateholders declares that its litigation is aimed at advancing the "common" interests of all certificateholders as a putative class. In fact, the PSA already requires that any litigation brought under the agreement be on behalf of all certificateholders. (See PSA § 10.08 (setting forth "express[] covenant[] by each [c]ertificateholder with every other [c]ertificateholder and the Tmstee" that no certificateholder will seek "to enforce any right under this Agreement," unless it is

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"for the common benefit of all [c]ertificateholders").) In light of that language, an exception to
the PSA's procedural requirements for litigation purportedly on behalf of all certificateholders
would render the no-action clause a dead letter. It is thus unsurprising that plaintiffs' Complaint
does not cite or quote any language in the PSA or any other authority in support of their "common benefit" bid to bypass the PSA's procedural requirements.
Nor does it matter that plaintiffs purport to bring this suit as a class action. As New York
courts have held, "the substantive law of [a] contractual agreement" must "take[] precedence
over the class action, which is merely a procedural device for consolidating matters properly before the Court." Harris v. Shearson Hayden Stone, Inc., 82 AD.2d 87, 95, 441 N.Y.S.2d 70, 76
(1st Dep't 1981) (internal quotation marks omitted), aff'd, 56 N.Y.2d 627, 450 N.Y.S.2d 482

(1982); Stellema v. Vantage Press, Inc., 121 Misc. 2d 1058, 1061,470 N.Y.S.2d 507, 510 (N.Y.
Sup. Ct. 1983) ("The adoption by the Legislature of [Article 9 of the CPLR), which established
the procedural right to maintain class action, ... was not intended to, nor did it, change the necessary elements of any substantive cause of action.").
Indeed, well-established New York law prohibits this Court from creating an atextual exception to the PSA's standard no-action clause. Courts have emphasized for decades the need
for uniform, reliable application of no-action clauses as written. And they have explained the
need for businesses and investors to be able to "adjust their affairs according to a uniform interpretation" of standard contract provisions, warning that "the creation of enduring uncertainties as
to the meaning of boilerplate provisions would decrease the value of all debenture issues and
greatly impair the efficient working of capital markets[,) .... with no offsetting benefits." Sharon

Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982) (stressing that
'''[a] large degree of uniformity in the language of debenture indentures is essential to the effec-

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tive functioning of the financial markets'" (quoting Broad v. Rockwell Int'/ Corp., 642 F.2d 929,
943 (5th Cir. 1981), cert. denied, 454 U.S. 965,102 S. Ct. 506 (1981»).
In short, plaintiffs cannot avoid the preconditions to suit to which they agreed when purchasing certificates under the PSA merely by affixing the terms "common benefit" and "class
action" to their Complaint. If, as plaintiffs believe, this suit is truly in the best interest of certificateholders, plaintiffs should surely be able to secure the agreement of other holders, contact the
Trustee to request suit, and offer indemnification as the PSA requires. See Feldbaum, 1992 WL
119095, at *5 ("[No-action] clauses need not prevent the prosecution of meritorious suits.").
Their failure to do so requires that the Complaint be dismissed.

II.

UNDER THE PSA'S UNAMBIGUOUS TERMS, COUNTRYWIDE CANNOT BE
REQUIRED TO REPURCHASE THE MODIFIED MORTGAGES
Even if plaintiffs had the capacity to sue for declaratory relief (they do not), they would

not be entitled to the declaration they seek as a matter of law. Here again, the text of the PSA
plainly dooms their claims.

A.

The PSA Authorizes Countrywide to Modify Mortgages to Mitigate Loss to
the Trust's Investors Without Requiring Repurchase

Plaintiffs' Complaint is defective as a matter of law because the PSA's unambiguous
terms foreclose the relief plaintiffs seek. See Taussig v. Clipper Group, L.P., 13 A.D.3d 166,
167, 787 N.Y.S.2d 10, 11 (1st Dep't 2004) ("The interpretation of an unambiguous contract is a
question of law for the court, and the provisions of a contract addressing the rights of the parties
will prevail over the allegations in a complaint."). PSA § 3.01 unambiguously authorizes Countrywide to engage in loss-mitigation modifications and does not require that loans modified for
that purpose be repurchased. It authorizes the "Master Servicer to [s]ervice [m]ortgage fl]oans"
under the "customary and usual standards of practice of prudent mortgage loan servicers." It
prohibits Countrywide from making only those modifications that would "cause any REMIC

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created under th[ e I Agreement to fail to qualify as a REMIC or result in the imposition of any tax
under [26 U.S.C. §1860F(a) or [26 U.S.C. §] 860G(d)." (Id.) By prohibiting these specified
modifications, the PSA necessarily presupposes that Countrywide has the authority to modify
mortgages. There would of course be no reason for § 3.01 to impose a REMIC-related con-

straint on Countrywide's authority to modify loans unless loan modifications were contemplated
in the first instance as part and parcel of Countrywide's customary servicing powers. Indeed, it
is a settled principle of construction that a provision containing a specific limitation on authority
to take an act necessarily presupposes the existence of authority to take that act generally in the
first place. 8
The same logic applies here: § 3.01 's bar on certain modifications leaves no doubt that
the authority to modify loans generally is included in its grant of "customary and usual" servicing power. And that authority-to engage in modifications as part of prudent servicing practice-is not limited by any requirement that Countrywide repurchase the loans modified. (See
PSA § 3.01.) The Complaint does not and cannot allege that the Countrywide loan modification
program falls outside § 3.01's authority. Accordingly, because § 3.01 authorizes Countrywide's
loan-loss modifications and does not require purchase, plaintiffs' claims fail as a matter of law.
Federal law governing REMICs confirms this conclusion. A "REMIC," like the trust at
issue in this case, is a special creature of the federal tax law that provides favorable tax treatment
for investors. 9 To qualify for favorable tax treatment, however, REMICs must comply with fed-

In Murphy v. Keystone Steel & Wire Co., for example, the Seventh Circuit held that a collective bargaining
agreement (HCBA") article that prevented a company "from terminating or amending [a benefits] Plan during the
term of the CBA ... clearly indicate[dJ that [the company] can terminate or amend the Plan after the term of the
CBA." 61 F.3d 560, 567 (7th Cir. 1995) (emphasis added); accord Tom Doherty Assocs., Inc. v. Saban Entm't, Inc.,
60 F.3d 27, 36 (2d Cir. 1995) (interpreting contract limitation to determine what contract authorized in the first instance).
9

See 26 U.s.c. § 860A (distinguishing REMICs from entities that do not receive the same treatment).

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eral laws that limit the types of loans a REMIC may possess and the transactions in which it may
engage. The Internal Revenue Code subjects any income a REMIC derives from transactions
involving "non-qualified mortgages" to a "100 percent," "prohibited transaction" tax. 26 U.S.c.
§ 860F(a).lo

Modifications a servicer makes when a borrower is otherwise likely to default on a loan
are not "prohibited transactions" under federal law, and accordingly can be made without the
REMIC incurring any prohibited-transaction taxes. That is because 26 U.S.c.
§ 860F(a)(2)(A)(ii) specifically excludes from its list of "prohibited transaction[s]" modifications

"incident to ... foreclosure, default, or imminent default." Under federal REMIC law, therefore,
Countrywide can modify loans at risk of default without the Trust incurring any REMIC penalties. For this reason, the loss-mitigation modifications fall within the prudent servicing standards
by which Countrywide must abide under § 3.01: they do not "cause any REMIC created under
th[ e] Agreement to fail to qualify as a REMIC or result in the imposition of any tax under [26
U.S.C. §] 860F(a) or [26 U.S.C. §] 860G(d)." (PSA § 3.01.) That the law governing REMICs
specifically contemplates loss-mitigation modifications confirms such modifications are a standard practice of loan servicing.
The same is true of Congress's multiple enactments to address residential foreclosures,
each of which has been premised upon Congress's recognition that loss-mitigation modifications
are part of standard industry practice that aid the federal government in halting the national eco-

10
Mortgages transferred to a REMIC at the time of its creation are, barring certain defects not relevant here,
"qualified mortgages" that the REMIC can hold without penalty. See 26 U.S.C. § 860G(a)(3)(A)(i). Those mortgages may cease to be "qualified," however, if the Master Servicer modifies or otherwise disposes of them in a
manner that is not explicitly permitted by 26 U.S.c. § 860F(a)(2)(A). A REMIC may lose its advantaged tax status
if its holdings include more than a de minimis amount of loans that are not "qualified mortgages" as defined in 26
U.S.c. § 860G(a)(3). 26 C.F.R. § 1.860D-1(b)(3)(i); see generally James M. Peaslee & David Z. Nirenberg, Federallncome Taxation of Securitization Transactions, 344-45 (3d ed. 2002).

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nomic decline. II As Congress has recognized, such modifications make good sense. They improve returns to investors by ensuring the Trust receives monthly payments that are greater than
any income it would receive from a foreclosure. For that reason, it would make no sense for the
PSA to require the Master Servicer to repurchase loans modified for loss-mitigation purposes.
Such a requirement would only ensure that no servicer would engage in modifications, for no
rational servicer would be willing to repurchase non-performing loans at full value with their
own funds. That result would be contrary to the interests of homeowners and investors alike.
Nothing in the PSA remotely suggests that the Master Servicer and investors are to be placed in
such an antagonistic relationship. And there is no reason to interpret the PSA to require that mutually detrimental result. See Natwest USA Credit Corp. v. Alco Standard Corp., 858 F. Supp.
401,413 (S.D.N.Y. 1994) ("A contract must be construed, if possible, to avoid an interpretation
that will result in an absurdity, an injustice or have an inequitable or unusual result.").

B.

Plaintiffs' Interpretation of § 3.11 of the PSA to Require Countrywide to Repurchase Every Loan It Modifies, Regardless of Purpose, Is Plainly Wrong

The Complaint also must be dismissed because it is premised on a fundamental misreading of PSA § 3.11. That section by its plain terms governs only modifications that are "in lieu of
a refinancing"-that is, modifications Countrywide's lending affiliates make when borrowers
indicate that they are prepared to refinance their loans elsewhere. Although § 3.11 expressly bestows authority on Countrywide to offer loan modifications to borrowers who would otherwise
refinance with other lenders, it also requires Countrywide to repurchase any such modified
loans-which is necessary to comply with the federal law governing REMICs. This activity is
worlds apart from modifications in lieu of foreclosure under § 3.01 's general servicing powers.
II

See 15 U.S.c. § I 639a(a) (2008) (recognizing that, unless "established" to the contrary, servicers act "in the
best interests of all ... investors" when they modify loans in order to avoid greater losses from foreclosure); 15
V.S.c. § l639a(c) (providing for loss-mitigation modifications as "standard industry practice").

-17-

Because § 3.11 is the only provision in the PSA to include a repurchase requirement,
however, plaintiffs are forced to argue that the PSA does not mean what it actually says and that
§ 3.11 is the exclusive authority in the PSA for Countrywide to modify mortgages and requires

repurchase of any loan modified for any purpose. Plaintiffs are wrong. And even if they were
correct, their reading of the PSA would not entitle them to the declaration they seek.
1.

Section 3.11(b) Expressly Applies Only to Modifications "in Lieu of a
Refinancing"

To begin, plaintiffs completely misunderstand § 3.11' s scope and purpose, which is to
permit and govern only those modifications "in lieu of a refinancing." Plaintiffs describe this
provision in their Complaint as stating, without qualification, that Countrywide "may agree to a
modification ... if ... Countrywide purchases the Modified Mortgage Loan from the Trust Fund."
(Compi. <]I 34.) That quotation is incomplete and misleading. Section 3.11 's unabridged language makes plain that this provision and its repurchase requirement apply, not to all modifications, but only to those modifications that are made "in lieu of a refinancing":
(b) The Master Servicer may agree to a modification of any Mortgage Loan (the
"Modified Mortgage Loan") if (i) the modification is in lieu of a refinancing, (ii)
the Mortgage Rate on the Modified Mortgage Loan is approximately a prevailing
market rate for newly-originated mortgage loans having similar terms and (iii) the
Master Servicer purchases the Modified Mortgage Loan from the Trust Fund as
described below.
(PSA § 3.11(b) (emphasis added).)
The repurchase requirement in § 3.11(b) is thus limited to only a subspecies of modifications-those "in lieu of a refinancing." It has nothing to do with modifications undertaken to
mitigate loss in the context of a threatened foreclosure. Rather, a modification that is "in lieu of
a refinancing" occurs only where a lender modifies a loan for a borrower who wishes to refinance his or her mortgage with another lender (generally to take advantage of a decline in prevailing interest rates) by providing for the borrower the same or similar economic benefits as a

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refinancing. That is why § 3.11 limits its scope to modifications in which "the Mortgage Rate on
the Modified Mortgage Loan is approximately a prevailing market rate for newly-originated
mortgage loans having similar terms." (PSA § 3.11.)
PSA § 3.11 accordingly serves the limited purpose of authorizing Countrywide or its
lending affiliates to offer modifications that prevent the loss of a performing customer to a competing lender through a threatened refinancing. It is thus eminently fair for the PSA to require
the servicer to repurchase at full value a loan that is modified in lieu of the borrower refinancing
the mortgage with another lender (thus paying off the loan entirely). The need for the repurchase
requirement in § 3.11 (b) is also understood against the backdrop of federal REMIC law, which
provides that any income the trust receives from a mortgage modified in lieu of refinancing will
be subject to a 100% prohibited-transaction tax 12-unless the loan is repurchased from the
trust. 13 That law fully explains why the PSA requires repurchase of loans modified in lieu of
refinancing.
Loss-mitigation modifications of the sort involved in this case could not be more different. They are offered not to keep a borrower from refinancing elsewhere but rather because the
servicer thinks the trust will recover more from the modified loan than from a foreclosure. And
loss-mitigation modifications are explicitly excluded from § 860F(a)'s definition of prohibited
transactions. See 26 U.S.C. § 860F(a)(2)(A)(ii). While there is thus every reason for the PSA to
require repurchase of modifications in lieu of refinancing, there is absolutely no reason to require
repurchase for those in lieu of foreclosure. A loss-mitigation modification is designed to im12

This is because modifications made in lieu of refinancing are not excluded from the definition of prohibited
transactions in 26 U.S.C. § 860F(a)(2)(A).
13

See 26 U.s.C. § 860F(a)(2)(A)(i) (permitting as non-prohibited transaction "repurchase" of defective obligation); I.R.S. Priv. Ltr. Rul. 94-18-021, 1994 WL 170342 (May 6, 1994) ("IRS Letter Ruling") (ruling that proposed transaction, where loan was modified in lieu of refinancing, was not prohibited, because REMIC was paid the
amount of outstanding principal and interest on the transaction).

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prove the overall recovery to the trust, and it makes no economic sense to require the Master
Servicer to pay full value for the loan for the privilege of being able to modify it.

2.

Plaintiffs' Ultimate Conclusion that § 3.11 Provides the Sole Reservoir
of Loan Modification Authority Cannot Be Squared with Other Provisions of the PSA

As explained, § 3.11 by its terms applies only to the limited subset of modifications made
in lieu of refinancing. Because § 3.11 is the only provision in the PSA to include a repurchase
requirement, however, plaintiffs are forced to argue that the PSA does not mean what it actually
says and that § 3.11 is the exclusive authority in the PSA for Countrywide to modify any mortgage for any purpose and thus requires repurchase of all loans modified). (See PIs.' Reply to
Countrywide's Opp. to Motion to Remand 7 ("In the plaintiffs' interpretation of the PSA[], only
... § 3.1l(b) ... authorizes Countrywide to modify loans.") (Sushon Aff. Ex. K); Hearing on Mo-

tion to Remand, Tr. 13-14 (Mar. 13,2009) (statement of Mr. Grais) (arguing that "Countrywide's PSA's are very unusual" because they "giv[e] Countrywide no authority to modify loans
when it's in the best interest of the investors to do so" and that plaintiffs "don't agree" that "other
clauses in the PSAs [aside from Section 3.11] ... give Countrywide the power to modify loans
without repurchase") (Sushon Aff. Ex. J).) Plaintiffs are wrong.
To begin with, plaintiffs' argument that PSA § 3.11 is the sole source of authority for
modification contradicts language in other sections of the PSA and prospectus. As already explained, § 3.01 clearly vests Countrywide with authority to modify loans in accordance with the
"customary and usual" practice of prudent servicers so long as the modification does not create
problems under the federal tax law governing REMICs. Indeed, if plaintiffs were correct that
every modification (including loss-mitigation modifications) required immediate repurchase of
the modified loan, then § 3.01's prohibition on modifications that would impose REMIC taxes
would be superfluous. Literally no modification could cause the REMIC to incur taxes if the

-20-

PSA were interpreted to require Countrywide to repurchase every loan so modified, regardless of
purpose. See 26 U.S.C. § 860F(a)(2)(A)(i); IRS Letter Ruling 94-18-021 (no penalty for transaction so long as modified loan repurchased). Under plaintiffs' view of § 3.l1(b), therefore,
§ 3.01 's REMIC limitation on loan modifications would operate on a null set. Plaintiffs' inter-

pretation of § 3.11 to render § 3.01 meaningless should be rejected. See SufJolk County Water
Auth. v. Vill. of Greenport, 21 A.D.3d 947,948,800 N.Y.S.2d 767, 768 (2d Dep't 2005) ("[A]n

interpretation which renders language in the contract superfluous is unsupportable.").
In addition, the PSA Prospectus recognizes the Master Servicer's obligation, with respect

to certain defaulted loans, "to make an effort to avoid foreclosure by entering, if feasible," into
one of a number of agreements that "may involve the reduction or suspension of regular mortgage payments for a specified period." Those modifications have nothing to do with refinancing
and therefore must be authorized by some other provision, specifically § 3.01. (CWALT 200536 Prospectus 49,50 (Sushon Aff. Ex. C).) Plaintiffs' premise that § 3. l1(b) is the only provision of the PSA that authorizes Countrywide to modify mortgage loans is thus insupportable under the relevant Prospectus as well.
What is more, even assuming that plaintiffs were correct that § 3.11(b) is the only provision that authorizes modifications, their claim would still fail as a matter of law. That is because,
if the requirements of § 3.11 govern every modification, then it necessarily follows that § 3.11(b)
flatly prohibits Countrywide from making any modification unless that modification is "in lieu
of a refinancing." Indeed, § 3.11(b) explicitly provides that H[t]he Master Servicer may agree to
a modification of any Mortgage Loan ... if (i) the modification is in lieu of a refinancing, ... and
(iii) the Master Servicer purchases the Modified Mortgage Loan from the Trust Fund as de-

-21-

scribed below." (PSA § 3.11(b) (emphasis added).)14 Because § 3.11 conditions any modification it authorizes both on it functioning "in lieu of a refinancing" and on repurchase, the only
declaration to which plaintiffs could possibly be entitled is one that prohibits Countrywide from
making any modification unless it is in the first instance in lieu of refinancing. That declaration
would necessarily bar Countrywide from making most modifications, because (as plaintiffs recognize) most modifications are not in lieu of threatened refinancings. (See Compl. <Jrl[ 1-3 (describing modifications), 32 ("Modifying a mortgage loan almost always means reducing or delaying payments due on that loan.").)
That restriction would be a drastic and unexpected limitation on a servicer's traditional
authority to administer a loan-an authority both federal law and PSA § 3.01 make plain includes the ability to modify loans for loss-mitigation purposes. Indeed, plaintiffs themselves recognize the absurdity of interpreting the PSA to prohibit loss-mitigation modifications in their repeated claims that they are not trying to bar them. (See, e.g., Compl. <j[<j[ 1-2.) Despite those
protestations, however, plaintiffs' argument that § 3.11 applies to all modifications would necessarily require that absurd result. For this reason, too, plaintiffs' interpretation of the PSA must
be rejected and their Complaint dismissed as contrary to the PSA's plain terms. See Saffire
Corp. v. Newkidco., LLC, 286 F. Supp. 2d 302, 308 (S.D.N.Y. 2003) (applying the "traditional

contract interpretation rules" of New York law to hold that "a provision may not be interpreted in
a manner which would render it an absurdity").

14

Countrywide likewise could not make any modification unless it also imposed an interest rate approximate
to "a prevailing market rate for newly-originated mortgage loans having similar terms." (ld.)

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III.

CFC IS NOT A PROPER DEFENDANT
Plaintiffs' Complaint against CFC must independently be dismissed because CFC is not a

proper defendant. Plaintiffs seek a judgment that "Countrywide Home Loans or Countrywide
Servicing must purchase every loan that Countrywide Servicing or Countrywide Home Loans
modifies" (CompI. 135), and that "Countrywide Home Loans or Countrywide Servicing must
purchase every modified loan [at] not less than 100% of the unpaid principal balance of, and any
accrued interest on, that loan immediately before modification" (ld.138). Plaintiffs do not allege CFC is required to repurchase any mortgage, and they seek no judgment binding CFC. Because plaintiffs have provided no basis upon which to conclude that CFC is a proper defendant,
the Complaint against it should be dismissed. See Blount v. Bovis Lend Lease Holdings, Inc., 35
A.D.3d 310,310-11,828 N.Y.S.2d 305,306 (1st Dep't 2006) (dismissing suit against named defendant where plaintiffs' claim lay against "separate and distinct (albeit affiliated) entit[y]").

CONCLUSION
The Complaint must be dismissed because the plain terms of the PSA foreclose the
judgment plaintiffs seek.
First, the Complaint does not and cannot allege that plaintiffs have satisfied the no-action
clause in PSA § 10.08. The action accordingly must be dismissed because plaintiffs lack capacity to sue.
Second, even if plaintiffs had the capacity to sue (which they do not), the substantive
terms of the PSA would bar their claims. PSA § 3.01 unambiguously authorizes Countrywide to
engage in loss-mitigation modifications and does not require Countrywide to repurchase loans
modified for that purpose. Plaintiffs' argument to the contrary-that § 3.11 provides Countrywide's sole source of authority to modify loans and requires repurchase of every loan Countrywide modifies-simply cannot be squared with the PSA's plain text or federal law.

-23-

Third, separate from the suit's other procedural and substantive defects, the Complaint
must be dismissed as to Countrywide Financial Corporation ("CFC") because that corporation is
not a proper defendant.
For the reasons set forth above, plaintiffs' Complaint should be dismissed.
Dated: New York, New York
October 8, 2009
LLP

u

7 Times Squar /
New York, N~>vYork 10036
Telephone: (112) 326-2000
Facsimile: (212) 326-2061
Attorneys for Defendants Countrywide Financial Corporation, Countrywide Home Loans,
Inc. and Countrywide Home Loans Servicing LP
Of counsel:

Brain D. Boyle
Matthew M. Shors
Kathryn E. Tarbert
O'MELVENY & MYERS LLP
1625 Eye Street, N.W.
Washington, D.C. 20006
Telephone: (202) 383-5300
Facsimile: (202) 383-5414

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