Bank of N.Y. Mellon v. Walnut Place LLC, No. 11 Civ. 5988 (WHP), 2011 WL 4953907 (S.D.N.Y. Oct. 19, 2011).

In this action, a federal court retained jurisdiction on a verified petition finding that the petitioner was not entitled to the securities exception under CAFA when its claim does not entirely depend on a mutual securities agreement, but rather requires other sources of law for its evaluation.

The Bank of New York Mellon (“BNYM”), as a trustee for hundreds of trusts, filed this petition under Article 77 of the New York Civil Practice Law and Rules in the New York Supreme Court, seeking to dispose billions of dollars in toxic mortgage claims. This billion-dollar disbursement action was a result of Countrywide Home Loans, Inc. and its various affiliates’ (collectively, “Countrywide”) securitization transactions entered into between 2004 and 2008. In these transactions, Countrywide conveyed portfolios of securitized residential mortgages through a third party to BNYM, as trustee, to hold in trust. In turn, investors purchased certificates or notes evidencing various categories of ownership interests in the trusts. BNYM acted as trustee for hundreds of those mortgage securitization trusts created by Pooling and Servicing Agreements (“PSAs”) or Sale and Servicing Agreements. 

The circumstances leading to this litigation began in June 2010, when at least one institutional investor holding mortgage-backed certificates issued by the trusts sent a letter to BNYM asserting that Countrywide had sold a large number of those mortgages into the trusts and failed to comply with certain representations and warranties. As a remedy, the investors contended that Countrywide and its present owner were obligated to repurchase the defaulting mortgage loans. BNYM concealed the identity of the pioneering investors, and attributed this action to a large group of investors under the banner “the Institutional Investors”.

BNYM entered into an agreement with Countrywide to settle all potential claims belonging to 530 of the trusts for which BNYM served as trustee. Although the trusts’ claims may exceed $150 billion, the Settlement Agreement required a payment of $8.5 billion to trust beneficiaries. The Settlement Agreement did not encompass 63 other trusts for which BNYM was trustee with a combined unpaid balance of approximately $15.3 billion as of September 26, 2011.

The Walnut Place entities (collectively, “Walnut Place”), the intervenor-respondents removed the Article 77 Proceeding to the federal court under the “mass action” provisions of CAFA, and BNYM sought  remand.

CAFA defines mass action as a civil action in which (1) monetary relief claims (2) of 100 or more persons (3) are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact. As BNYM sought a court order directing Countrywide to pay $8.5 billion to trustees and the trusts, Walnut Place argued that BNYM plainly sought monetary relief. In its defense, BNYM argued that it sought only a judicial declaration that it acted reasonably and in good faith as trustee as well as a court order enjoining BNYM and Bank of America to consummate the settlement agreement. The Court observed that if BNYM prevailed in this proceeding, the defendants would transfer $8.5 billion to the trusts, and remarked that if the $8.5 billion did not constitute, it would be difficult to imagine what would. Therefore, the Court concluded that the Article 77 Proceeding involved a monetary relief.

Second, the Court found that BNYM acted as trustee for 530 separate trusts, and sought approval for its decision to settle the claims of each individual trust. As the trustees are considered as separate legal entities with respect to each trust they administered under New York law, the Court concluded that the Article 77 Proceeding claimed of more than 100 persons. Finally, the Court concluded that as the purpose of the Article 77 Proceeding was to determine the acceptability of a global settlement impacting 530 separate entities, the Article 77 Proceeding concerned common questions of law or fact.

Relying on the Second Circuit’s finding in Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23 (2d Cir. 2010), BNYM argued that the Article 77 Proceeding could not be removed because it fell under CAFA’s securities exception. Under the securities exception, CAFA’s removal provisions does apply to any class action that solely involves a claim that relates to the rights or duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security. In Greenwich Financial, the Second Circuit held that the securities exception to CAFA barred federal jurisdiction over declaratory judgment claims brought by holders of certificates issued by trusts under various PSAs. 

The analysis in Greenwich Financial expanded on the Second Circuit’s earlier opinion in Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir. 2008). (Editors’ Note: See the CAFA Law Blog analysis of Cardarelli  posted on August 20, 2008). In Cardarelli, the court held that the securities exception to CAFA did not bar removal of securities holders’ state law fraud claims. The Court noted that under Cardarelli and Greenwich Financial, the pivotal question in determining whether the securities exception bars removal was whether a plaintiff’s claims arose under the terms of an instrument that created or defined securities or plaintiff’s claims arose under an independent source of state or federal law. 

The Court observed that securities exception would apply only when the relevant legal standards for evaluating its conduct as trustees were found in the PSAs executed by the trustees. In other words, the securities exception would apply if the determination of the claim would entirely depend on the PSAs. However, the exception would not apply if the trustees conduct in approving the settlement would be evaluated under some other source of law, such as New York’s common law. Here, although, BNYM conceded that the trustees owed common law duties to trust beneficiaries, it still argued that the terms of the PSAs were subsumed and any New York duty to avoid conflicts of interests. In other words, BNYM contended that because the PSAs imposed a duty to act in good faith on the trustee, it did not owe any duties to the trust beneficiaries that were not contractually defined.

The Court noted that in Cardarelli, the parties agreed that the certificates were securities, therefore, the Second Circuit concluded that plaintiffs’ state law fraud claims did not enforce the rights of Certificate holders as holders, and therefore, were not subject to the securities exception. The court in Greenwich Financial applied this principle in holding that application of the securities exception depended on the source of the right that the suit seeks to enforce. Based on this interpretation, the Court noted that the PSAs in this case were not talismans endowed with the power to ward off federal jurisdiction. Because the Article 77 Proceeding necessarily involved New York common law, the securities exception did not bar removal.

Accordingly, the Court declined to remand this action to state court.