GreenwichFinancial Services Distressed Mortg. v. Countrywide Financial Corp., Slip Copy, 2009 WL 2499149 (S.D.N.Y., Aug 14, 2009)(NO. 08 CIV. 11343RJH).
The United States District Court for the Southern District of New York held that a third exception to CAFA (28 U.S.C. § 1332(d)(9)(C)) applied in this case because the plaintiffs were attempting to create and define their securities; and remanded the case to the state court.
The plaintiffs in this case, Greenwich Financial Services Distressed Mortgaged Fund 3, LLC and QED LLC, brought this putative class action in the New York State Court, as the holders of now-infamous mortgage-backed securities whose decline in value had hobbled the financial markets. The plaintiffs specifically alleged that they held certificates issued by various trusts, which own hundreds of thousands of mortgage loans. The trusts’ ownership of the loans entitled them to the borrowers’ periodic interest and principal payments, and the certificates entitled the plaintiffs to a share of those payments.
The plaintiffs’ claims arose from actions taken by the defendants with respect to these loans pursuant to the terms of a settlement with several state Attorneys General. In the summer of 2008, the Attorneys General for seven states filed lawsuits accusing Countrywide of violating laws against predatory lending. The defendant, Countrywide Servicing, later agreed to a multistate settlement, requiring it to modify the terms of numerous mortgage loans that it currently services – including at least some of the loans it services on behalf of plaintiffs.
The plaintiffs responded to the defendants’ settlement with the state Attorneys General by filing this putative class action in New York State Supreme Court. The plaintiffs alleged that that pooling and servicing agreements (PSAs) required the defendants, loan servicers, to purchase any loans they modified at a price equal to the unpaid principal and accrued interest thereon.
The defendants removed the action to the United States District Court of New York, and the plaintiffs sought a remand.
The plaintiffs, citing 28 U.S.C. § 1332(d)(9)(C), argued that CAFA excepts certain suits from its jurisdictional reach, and this case fell within one of those exceptions.
The District Court noted that § 1332(d)(9)(C) provides that the district courts do not have jurisdiction over a class action that solely involves a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security.
The District Court observed that in Estate of Barbara Pew v. Cardarelli, 527 F.3d 25, 30, 32 (2d Cir. 2008), the Second Circuit confronted the exception’s scope in the context of a state consumer fraud claim, where the plaintiffs were purchasers of money market certificates – unsecured, fixed-interest debt instruments – whose issuer had gone bankrupt. (Editors’ Note: See the CAFA Law Blog analysis of Pew posted on August 20, 2008).
The Second Circuit began by rejecting the plaintiffs’ argument that the exception covered all securities claims, and held consumer fraud claims at issue in Pew did not fall into either of these categories. The Second Circuit concluded that the exception was limited to suits seeking to enforce the terms of the instruments that create and define securities or the duties imposed on persons who administer securities.
Based on Pew’s interpretation of Section 1332(d)(9), the District Court concluded that CAFA’s third exception applied to the plaintiffs’ claims because the plaintiffs sought to enforce the terms of the instruments that create and define their securities.
In its opposition, the defendants argued that: (1) Pew’s requirement that the claims be grounded in the terms of the security itself, should be read as restricting CAFA’s third exception to claims based on language contained in the four corners of the certificates; (2) even if the terms of the certificates were implicated by the plaintiffs’ claims, they were not solely implicated and, therefore, do not fall with the third CAFA exception; and (3) in its third argument, the defendant attempted to rewrite CAFA to grant jurisdiction over all cases having a national impact.
The District Court rejected all of the defendants’ arguments finding that it did not overcome a common sense reading of Pew and the text of CAFA itself. The District Court held that the CAFA did not provide the court with jurisdiction because the plaintiffs’ claims to enforce the defendants’ obligations under the PSAs fell within CAFA’s exception in 28 U.S.C.S. § 1332(d)(9)(C) for claims seeking to enforce the terms of instruments creating and defining securities.
The District Court also held the claims did not arise under federal law because the plaintiffs’ claim that the PSAs required the defendants to buy back the modified mortgage loans did not rely on or required an interpretation of Truth-in-Lending Act.
Accordingly, the District Court remanded the case to the state court.