BLACKROCK FINANCIAL MANAGEMENT INC., Maiden Lane, LLC, Maiden Lane II, LLC, Kore Advisors, L.P., Metropolitan Life Insurance Company, Trust Company of the West and Affiliated Companies Controlled by the TCW Group, Inc., Maiden Lane III, LLC, Pacific Investment Management Company LLC, Goldman Sachs Asset Management, L.P., Neuberger Berman Europe Limited, Invesco Advisers, Inc., Thrivent Financial for Lutherans, Teachers Insurance and Annuity Association of America, LBBW Asset Management (Ireland) PLC, Dublin, ING Bank N.V., Landesbank Badenwuerttemburg, ING Investment Management LLC, New York Life Investment Management LLC, Nationwide Mutual Insurance Company and its Affiliated Companies, ING Capital LLC, Aegon Financial Assurance Ireland Limited, Transamerica Life International (Bermuda) Ltd., Aegon USA Investment Management LLC, Authorized Signatory for Transamerica Life Insurance Company, Transamerica Advisors Life Insurance Company, Aegon Global Institutional Markets, PLC, Monumental Life Insurance Company, Pine Falls RE, Inc., Transamerica Financial Life Insurance Company, LIICA RE II, Inc., Western Reserve Life Assurance Co. of Ohio, Federal Home Loan Bank of Atlanta, Stonebridge Life Insurance Company, Prudential Investment Management, Inc., Western Asset Management Company, Bayerische Landesbank, The Bank of New York Mellon, as Trustee under various Pooling and Servicing Agreements and Indenture Trustee Under Various Indentures, Petitioners-Appellants, v. The SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION, AMBAC Assurance Corporation, Triaxx Prime CDO 2007-1, Ltd., Triaxx Prime CDO 2006-2, Ltd., Triaxx Prime CDO 2006-1, Ltd., Commonwealth Investors, American Equity Investment Life Insurance Company, Walnut Place LLC, Walnut Place II LLC, Walnut Place III LLC, Walnut Place IV LLC, Walnut Place V LLC, Walnut Place VI LLC, Walnut Place VII LLC, Walnut Place VIII LLC, Walnut Place IX LLC, Walnut Place X LLC, Walnut Place XI LLC, Federal Home Loan Bank of San Francisco, Federal Home Loan Bank of Seattle, RMBS Acquisition, Inc., Cranberry Park LLC, Cranberry Park II LLC, TM1 Investors, LLC, V Re-Remic, LLC, Policemens Annuity & Benefit Fund of Chicago, The Westmoreland County Employee Retirement System, City of Grand Rapids General Retirement System, City of Grand Rapids Police and Fire Retirement System, Federal Home Loan Bank of Boston, Federal Home Loan Bank of Chicago, Federal Home Loan Bank of Indianapolis, Federal Home Loan Bank of Pittsburgh, The Western and Southern Life Insurance Company, Columbus Life Insurance Company, Western-Southern Life Assurance Company, Integrity Life Insurance Company, National Life Insurance Company, Fort Washington Investment Advisors, Inc. on behalf of Fort Washington Active Fixed Income LLC, American International Group, Inc., American General Assurance Company, American General Life and Accident Insurance Company, American General Life Insurance Company, American General Life Insurance Company of Delaware, American Home Assurance Company, American International Life Assurance Company of New York, Chartis Select Insurance Company, Chartis Property Casualty Company, Commerce and Industry Insurance Company, First SunAmerica Life Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company Of Pittsburgh, PA, New Hampshire Insurance Company, SunAmerica Annuity and Life Assurance Company, SunAmerica Life Insurance Company, The Insurance Company of the State of Pennsylvania, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, Western National Life Insurance Company, Knights of Columbus, Respondents-Appellees.
Docket Nos. 11-5309-cv(L), 11-5314-cv(CON)
United States Court of Appeals, Second Circuit
Feb. 27, 2012
672 F.3d 169
Argued: Feb. 15, 2012.
In conclusion, we are satisfied (1) that the S.E.C. and Citigroup have made a strong showing of likelihood of success in setting aside the district court‘s rejection of their settlement, either by appeal or petition for mandamus; (2) the petitioning parties have shown serious, perhaps irreparable, harm sufficient to justify grant of a stay; (3) the stay will not substantially injure any other persons interested in the proceeding; and (4) giving due deference to the S.E.C.‘s assessment of the importance of its settlement to the public interest, that interest is not disserved by our grant of a stay.
It is hereby ORDERED that the motion to stay the proceedings in the district court is GRANTED pending the outcome of these consolidated appeals, and the motion to expedite the appeal is DENIED. The Clerk of the Court is directed to appoint counsel, who will advocate for upholding the district court‘s order, and to set a briefing schedule. Counsel will submit briefs addressing the issues discussed above, as well as any other matters they consider pertinent. These appeals shall be heard by a panel in due course.
Robert Madden, Gibbs & Bruns, LLP, Houston, TX (Kathy Patrick, Gibbs & Bruns, LLP, Houston, TX, Kenneth E. Warner, Warner Partners, P.C., New York, NY, on the brief), for Petitioners-Appellants BlackRock Financial Management, Inc., et al.
Andrew L. Frey, Mayer Brown LLP, New York, N.Y. (Matthew D. Ingber, Christopher J. Houpt, Mayer Brown LLP, New York, NY, Charles A. Rothfeld, Brian J. Wong, Mayer Brown LLP, Washington, DC, Hector Gonzalez, James M. McGuire, Dechert LLP, New York, NY, on the
Owen L. Cyrulnik, Grais & Ellsworth LLP, New York, N.Y. (David J. Grais, Kathryn E. Matthews, Leanne M. Wilson, on the brief), for Respondents-Appellees Walnut Place LLC, et al.
Rachel Allison Gupta, DLA Piper LLP, New York, NY, for Respondents-Appellees The Segregated Account of Ambac Assurance Corporation & AMBAC Assurance Corporation.
John G. Moon, Miller & Wrubel P.C., New York, NY, for Respondents-Appellees Triaxx Prime CDO 2007-1, Ltd., et al.
Justin M. Sher, Sher LLP, New York, NY, for Respondent-Appellee Commonwealth Investors.
Peter N. Tsapatsaris, Peter N. Tsapatsaris, LLC, New York, NY, for Respondents-Appellees American Equity Investment Life Insurance Company & Knights of Columbus.
David J. Grais, Grais & Ellsworth LLP, New York, NY, for Respondents-Appellees Federal Home Loan Bank of San Francisco, et al.
Beth A. Kaswan, Scott+Scott LLP, New York, NY, for Respondents-Appellees Policemens Annuity & Benefit Fund of Chicago, et al.
Derek W. Loeser, Amy Christine Williams-Derry, Keller Rohrback, L.L.P., Seattle, WA, Gary A. Gotto, Ron Kilgard, Keller Rohrback, PLC, Phoenix, AZ for Respondents-Appellees Federal Home Loan Bank of Boston, et al.
Heather Yue-Ling Fong, Robbins, Kaplan, Miller & Ciresi, LLP, New York, NY, for Respondent-Appellee Federal Home Loan Bank of Pittsburgh.
Daniel M. Reilly, Reilly Pozner, L.L.P., Denver, CO, for Respondents-Appellees Columbus Life Insurance Company, et al.
Theodore N. Mirvis, Wachtell, Lipton, Rosen & Katz, New York, N.Y. (George T. Conway III, Elaine P. Golin, Won S. Shin, on the brief), for Amicus Curiae Bank of America Corporation.
Before: JACOBS, Chief Judge, HALL and LOHIER, Circuit Judges.
DENNIS JACOBS, Chief Judge:
On this appeal from an order of the United States District Court for the Southern District of New York (Pauley, J.) denying petitioners’ motion to remand an Article 77 proceeding to New York Supreme Court, we consider again the application of
The Bank of New York Mellon, acting in its capacity as trustee of trusts established to hold residential mortgage-backed securities, settled claims that the originator and servicer breached obligations owed to the trusts. Then, as a condition precedent to the settlement, The Bank of New York Mellon initiated an Article 77 proceeding in New York Supreme Court to confirm that it had the authority to enter into the settlement under the governing trust documents and that entry into the settlement did not violate its duties under the governing trust agreements and state law. Certain investors intervened in the special proceeding and removed the proceeding to federal court under CAFA. A motion to remand—on the ground, among others, that the controversy fell within CAFA‘s securities exception,
We hold that the case falls within CAFA‘s securities exception as one that solely involves a claim that “relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to” a security. Accordingly, we dismiss the petition for lack of jurisdiction, reverse the order of the district court, and instruct it to vacate its decision and order and remand the matter to the state court.
BACKGROUND
The features of residential mortgage-securitization trusts are well known in the recent annals of litigation. See, e.g., Greenwich Fin. Svcs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23 (2d Cir. 2010); In re IndyMac Mortgage-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011). To raise funds for new mortgages, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificateholders. The trustee hires a mortgage servicer to administer the mortgages by enforcing the mortgage terms and administering the payments. The terms of the securitization trusts as well as the rights, duties, and obligations of the trustee, seller, and servicer are set forth in a Pooling and Servicing Agreement (“PSA“).
At issue in this case are 530 such trusts created between 2004 and 2008, for which The Bank of New York Mellon is trustee. The home mortgages were sold into the trusts by Countrywide Home Loans, Inc.—now a subsidiary of Bank of America1—and are serviced by Countrywide‘s servicing arm. Countrywide made representations and warranties that the mortgages conformed to the trusts’ requirements for credit quality, property value, title, and lien priority.2 A breach of any such representation or warranty required the seller to cure or repurchase at the mortgage purchase price. The servicing and administration of the mortgage loans was required to be “in accordance with the terms of [the PSA] and customary and usual standards of practice of prudent mortgage loan servicers.” PSA § 3.01. The PSAs granted to the trustee, “for the benefit of the Certificateholders,” the “right to require each Seller to cure any breach of a representation or warranty made herein by Seller, or to repurchase or substitute for any affected Mortgage Loan in accordance herewith.” PSA § 2.01(b).
Two organized groups of certificateholders are opposed in this case. The “Institutional Investors” are aligned with The Bank of New York Mellon and include such large financial institutions as BlackRock Financial Management Inc., Goldman Sachs Asset Management L.P., Federal Home Loan Mortgage Corporation,
In June 2010, the Institutional Investors complained to The Bank of New York Mellon that a large number of mortgages that Countrywide sold into the trusts failed to comply with the PSAs’ representations and warranties. In October, they complained that the servicer had also breached its obligations. Negotiations, aimed at avoiding litigation, ensued among the Institutional Investors, Countrywide, Bank of America, and The Bank of New York Mellon.
Walnut Place also complained to The Bank of New York Mellon that Countrywide was in breach. Countrywide had refused Walnut Place‘s direct demand that Countrywide repurchase the nonconforming loans, and Walnut Place demanded that The Bank of New York Mellon sue Countrywide to enforce the terms of the PSA. In February 2011, after The Bank of New York Mellon did not act, Walnut Place filed a derivative action in state court on behalf of a trust in which it held an interest.
Meanwhile, the negotiations provoked by the Institutional Investors culminated in a “Settlement Agreement” on June 28, 2011, which provided that Countrywide and Bank of America will pay $8.5 billion, to be allocated among all of the trusts in accordance with an agreed-upon formula. (It also required the mortgage servicer to adopt reforms.)
The Settlement Agreement is contingent on court approval: it is not effective until The Bank of New York Mellon brings an Article 77 proceeding in New York state court and obtains entry of a judgment sanctioning its execution of the Settlement Agreement. On June 29, 2011, The Bank of New York Mellon filed a verified petition in New York Supreme Court under
Article 77 of the New York Civil Practice Law and Rules authorizes a special proceeding “to determine a matter relating to any express trust....”
Walnut Place moved to intervene in the Article 77 proceeding, chiefly to exclude the three trusts that it invested in from the proposed settlement. The motion stated that The Bank of New York Mellon had negotiated the Settlement Agreement “in secret,” working only with the Institutional Investors, that the Article 77 proceeding was initiated without notice to all certificateholders,4 and that the parties had conflicts of interest: The Bank of New York Mellon obtained for itself an expanded indemnity, and the Institutional Investors had other business relationships with Bank of America. On August 19, 2011, the state court granted the motion to intervene.
On August 26, 2011, Walnut Place removed the Article 77 proceeding to the United States District Court for the Southern District of New York, on the ground that the Article 77 proceeding was a “mass action” under CAFA,
The Bank of New York Mellon and the Institutional Investors sought permission to bring an appeal pursuant to CAFA‘s interlocutory appeal provision. See
We conclude that we lack appellate jurisdiction over this case as one 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.”
DISCUSSION
CAFA expanded federal jurisdiction to permit a defendant to remove to federal court a class action or “mass action” notwithstanding the absence of the complete diversity or federal question otherwise required for removal. See
At the same time, Congress carved out exceptions to CAFA‘s expanded jurisdiction. One of them targets claims that relate to the rights, duties, and obligations relating to securities:
(d) Exception.—This section shall not apply to any class action that solely involves
...
(3) a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (
15 U.S.C. 77b(a)(1) ) and the regulations issued thereunder).
I
We have twice before construed the exception to CAFA for an 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.” See Greenwich Fin., 603 F.3d 23; Estate of Pew v. Cardarelli, 527 F.3d 25 (2008). Although the wording of the exception (like much of CAFA) does not easily give up its meaning, Cardarelli, 527 F.3d at 30, our precedents explain that
By way of example, the plaintiffs in Cardarelli sued solely under a New York consumer fraud statute,
The same principle produced the opposite result in Greenwich Financial, which was brought by certificateholders of trusts that were similar in all material respects to those at issue here, down to the originator, trustee, and servicer. 603 F.3d at 24-25. A class action complaint in New York state court sought a declaratory judgment that
II
The first step is to determine what claims were asserted in the state court, an inquiry complicated somewhat by the nature of an Article 77 proceeding. Ultimately, we conclude that The Bank of New York Mellon is seeking a judicial determination [i] that it has the authority to assert and settle claims on behalf of the trusts and [ii] that it “acted in good faith, within its discretion, and within the bounds of reasonableness in determining that the Settlement Agreement was in the best interests of the Covered Trusts.” Joint Appendix at 165-166, 169; Walnut Place Br. at 25 (“[The Bank of New York Mellon] is affirmatively and unambiguously seeking a declaration that it complied with its duties under New York common law.“). Thus it asks for a construction of the PSA and an instruction that its planned course of action complies with its obligations under that document and the law of trusts—consistent with other proceedings brought under Article 77. See Gilbert, 39 N.Y.2d at 666 (providing construction of trust documents); Scarborough, 25 N.Y.2d at 559-60 (approving sale of trust assets to trustee after adversarial proceeding).
We classify the claims by reference to the verified petition filed by The Bank of New York Mellon and its election to proceed under Article 77. The Bank of New York Mellon‘s verified petition alleges chiefly its good faith in negotiating, evaluating, and agreeing to the settlement, as well as the fairness of the settlement itself. It sets out the potential claims belonging to the trusts, the demands made by certificateholders, the varying strength of the claims and the obstacles to prevailing on them, concerns about successor liability in enforcing a recovery from Countrywide, and the retention of experts to evaluate the settlement.
The proposed order that The Bank of New York Mellon submitted in state court is consistent with the petition, and confirms that the trustee is primarily seeking a construction of the trust documents and an instruction about the reasonableness of its planned course of action—the kinds of relief afforded under Article 77. But it ostensibly recites other relief—relief that, according to Walnut Place‘s theory, fundamentally alters or expands the scope of The Bank of New York Mellon‘s claim such that it no longer solely involves a claim relating to a security. Thus the proposed order [i] directs the “parties” to “consummate the Settlement in accordance with its terms and conditions,” [ii] enjoins Countrywide and Bank of America from suing The Bank of New York Mellon in connection with the Settlement Agreement, and [iii] enjoins the certificateholders, including Walnut Place, from suing The Bank of New York Mellon in connection with the Settlement Agreement. This wish list does not alter the nature of the relief sought by the trustee, for several reasons. As a structural matter, relief would be limited by the purposes and procedural features of Article 77. As a procedural matter, it is elementary that a court cannot bind a non-party absent special circumstances, and neither Countrywide nor
III
Having characterized the claim as a declaration authorizing the exercise of a trustee‘s powers, we can now determine whether it 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.”
Greenwich Financial already held that a suit by security holders attempting to enforce the terms of a PSA fits within
The fact that a certificate holder‘s rights may be enumerated in an instrument other than the security itself is not material. Securities are created and defined not simply by their own text, but also by any number of deal instruments executed between various parties. Indeed, we made clear in Cardarelli that the “instruments that create and define securities” include documents such as certificates of incorporation and bond indentures. [Cardarelli, 527 F.3d at 31.] For this reason, the fact that plaintiffs seek enforcement of a term of the PSAs—trust agreements similar to bond indentures in many respects—rather than of the certificates does not affect our conclusion that this suit is not removable under CAFA.
Greenwich Fin., 603 F.3d at 29.
The sole claim presented in the Article 77 proceeding fits within
It follows that the district court erred insofar as it reasoned that the securities exception does not apply if “the trustee‘s conduct in approving the settlement must also be evaluated under some” source of law other than the PSA, “such as New York‘s common law of trusts.” Bank of New York Mellon, 819 F. Supp. 2d at 364, 2011 WL 4953907, at *8. The district court specifically cited the duty to avoid conflicts of interest that (it determined) beset The Bank of New York Mellon. Id. However, duties superimposed by state law as a result of the relationship created by or underlying the security fall within the plain meaning of the statute, which expressly references “duties (including fiduciary duties).” We have previously explained that “certain duties and obligations of course ‘relate to’ securities even though they are not rooted in a corporate document but are instead superimposed by a state‘s corporation law or common law on the relationships underlying that document.” Cardarelli, 527 F.3d at 31; see also Rubin v. Mercer Ins. Grp., Inc., No. 10-6816(MLC), 2011 WL 677466, at *4 (D.N.J. Feb. 15, 2011) (remanding breach of fiduciary duty claim brought by shareholders against issuer).
Walnut Place argues that applying this analysis in a suit that is not brought by certificateholders would amount to a bright-line rule that any suit touching on a PSA falls within CAFA‘s securities exception. Walnut Place would thus recast the removed proceeding (which concerns a trustee‘s rights, duties, and obligations) into the underlying claim resolved in the Settlement Agreement: a claim by The Bank of New York Mellon against Countrywide and Bank of America to enforce the buy-back provisions of the PSA. That is not the claim that was removed here, and we need not reach the question of whether such a suit would be removable under CAFA.5
IV
Walnut Place argued in opposition to Appellants’ petitions for permission to appeal that if we should find that this case fits within
The Supreme Court or any other court of appellate jurisdiction may affirm, modify, vacate, set aside or reverse any judgment, decree, or order of a court lawfully brought before it for review, and may remand the cause and direct the entry of such appropriate judgment, decree, or order, or require such further proceedings to be had as may be just under the circumstances.
CONCLUSION
For the foregoing reasons, we dismiss the appeal for lack of jurisdiction, reverse the order of the district court, and instruct it to vacate its decision and order and remand the matter to New York Supreme Court.