Appeal from a judgment of the United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge), entered after a bench trial, voiding as champertous an assignment of rights to plaintiff, a trust representing the holders of commercial mortgage-backed securities, which assignment enabled plaintiff to sue Love Funding Corporation, the originator of a securitized loan held by plaintiff. On this appeal, plaintiff contends that, as a matter of law, the assignment at issue does not constitute champerty under New York Judiciary Law § 489(1). Because we conclude that resolution of this issue depends on significant and unsettled questions of New York law, we certify to the New York Court of Appeals the questions stated at the end of this opinion.
Decision reserved pending the response of the New York Court of Appeals to certified questions of state law.
The opinion of the court was delivered by: Reena Raggi, Circuit Judge
Argued: September 26, 2008
Before: RAGGI, Circuit Judge, KEENAN*fn2, Senior District Judge.
This appeal arises out of the sale of commercial mortgage-backed securities, complex financial products held by Wall Street banks in an approximate amount of $100 billion. See Louise Story, Fears Over Commercial Property Loans, N.Y. Times, Aug. 22, 2008, at C1; see also LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d 195, 199 (2d Cir. 2005) (noting that commercial mortgage-backed securities comprise a "multi-billion dollar market"). Plaintiff, the Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC, as Master Servicer and Special Servicer ("the Trust"), as assignee of certain rights of UBS Real Estate Securities, Inc. ("UBS"),sued Love Funding Corporation ("Love Funding") for breach of certain representations and warranties that Love Funding made in a mortgage-loan-purchase agreement governing the origination of certain commercial mortgage loans held by the Trust. Among other defenses, Love Funding argued that the Trust's suit was barred by New York's statutory prohibition against champerty, see N.Y. Jud. Law § 489(1), because the Trust's primary purpose in obtaining the assignment of UBS's rights was to sue Love Funding. After a bench trial in the United States District Court for the Southern District of New York, Judge Shira A. Scheindlin held the assignment void as champertous and entered judgment in favor of Love Funding. See Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates Series 1999-C1 v. Love Funding Corp. ("Trust v. Love Funding"), 499 F. Supp. 2d 314, 325 (S.D.N.Y. 2007).
On appeal from that judgment, the Trust argues that the district court misconstrued New York champerty law, which, it asserts, was "never intended to prohibit assignments in complex commercial transactions where the assignee has a substantial interest at stake." Appellant's Br. at 26. We conclude that resolution of this appeal depends on significant and unsettled questions of New York law that are properly answered, in the first instance, by the New York Court of Appeals. Accordingly, we certify the questions stated at the conclusion of this opinion to the Court of Appeals. We retain jurisdiction so that, upon receipt of that court's responses, we may rule on this appeal.
A. The Mortgage-Loan-Purchase Agreement Between Love Funding and Paine
Webber Real Estate Securities, Inc. Love Funding is a commercial-mortgage-banking company that originates mortgage loans on income-producing real estate. In 1998 and 1999, Love Funding was involved in "conduit lending,"a practice in which large investment firms partner with smaller mortgage- banking companies in making loan arrangements. As part of that practice, Love Funding sought loan prospects for an investment bank to fund, typically receiving a fee of 1% of the loan amount for its services.
In April 1999, Love Funding entered into a conduit-lending arrangement with Paine Webber Real Estate Securities, Inc. ("PaineWebber"). That arrangement, which was governed by New York law, was memorialized in an April 23, 1999 mortgage-loan-purchase agreement ("the Love MLPA"). In the Love MLPA, Love Funding represented, inter alia, that none of the underlying mortgage loans were in default.*fn3
In the event Love Funding breached that or other representations, the Love MLPA provided PaineWebber with certain remedies, notably:
Within sixty (60) days of the earlier of either discovery by or notice to the Seller [i.e., Love Funding] of any Breach of a representation or warranty, [Love Funding] shall cure such Breach in all material respects and, if such breach cannot be cured, [Love Funding] shall, at the Purchaser's [i.e., PaineWebber's] option, repurchase such Mortgage Loan at the Repurchase Price.
Love MLPA § 5.03(b). The Love MLPA also afforded PaineWebber the right to indemnification "from and against all demands, claims or asserted claims, liabilities or asserted liabilities, costs and expenses, including reasonable attorneys' fees, incurred . . . in any way arising from or related to any breach of any representation, warranty, covenant or agreement of [Love Funding] hereunder." Id. § 9.14(a).
In November 2000, pursuant to a merger of their parent companies, UBS succeeded in interest to PaineWebber's rights and obligations under the Love MLPA.*fn4 Thus, in this opinion, references to post-merger events will be to UBS; references to pre-merger events will be to PaineWebber.
In July 1999, pursuant to the Love MLPA, Love Funding arranged a $6.4 million mortgage loan to an entity called the Cyrus II Partnership ("Cyrus"), which was secured by a mortgage on Louisiana property known as the Arlington Apartments.*fn5 This "Arlington Loan" was further secured by a personal guarantee executed by Mondona Rafizadeh, president of Bahar Development, Inc. ("Bahar"), a corporate entity that served as Cyrus's general partner.
C. The Mortgage-Loan-Purchase Agreement Between PaineWebber and Merrill Lynch Investors, Inc.
1. The Securitization Process
As part of a larger commercial-mortgage-backed securities transaction, on November 1, 1999, PaineWebber entered into a separate mortgage-loan-purchase agreement with Merrill Lynch Investors, Inc. ("Merrill Lynch"). Pursuant to that agreement ("the Merrill Lynch MLPA"), PaineWebber sold and assigned 36 loans to Merrill Lynch, three of which - including the Arlington Loan - had been originated by Love Funding.
In a series of related transactions, these 36 loans were then securitized, i.e., pooled and packaged in a manner that allowed for sale to investors. See generally Gariety v. Grant Thornton, LLP, 368 F.3d 356, 359 (4th Cir. 2004) (describing similar securitization process for sub-prime mortgage loans). Central to that securitization process was the execution of a separate agreement, dated November 1, 1999, called a "pooling and servicing agreement." Pursuant to this agreement, the plaintiff Trust was created, with Merrill Lynch acting as depositor; Orix Real Estate Capital Markets, LLC ("Orix"), serving as master and special servicer of the loans ; and Norwest Bank Minnesota, National Association, acting as trustee.*fn6
Additionally, Merrill Lynch assigned to the Trust all of its "right[s], title and interest . . . in, to and under (i) the Mortgage Loans [including the loans sold by PaineWebber], (ii) each Mortgage Loan Purchase Agreement and (iii) all other assets included or to be included" in the Trust. Pooling and Services Agreement § 2.01(a).
The beneficial ownership of the Trust was evidenced by the issuance of the "Mortgage Pass-Through Certificates, Series 1999-C1," which were sold to investors via private placement or public offering. Those certificates, referred to as "commercial mortgage-backed securities" or "CMBS," see LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d at 200, were secured by the underlying commercial mortgages and entitled their holders to interest payments generated by the underlying mortgage loans.
2. The Merrill Lynch MLPA Representations
In the Merrill Lynch MLPA, PaineWebber made a representation, akin to that in the Love MLPA, that none of the mortgage loans conveyed were in default.*fn7 PaineWebber expressly acknowledged that this representation, as with others, was made for the benefit of the Trust's certificate holders and could be enforced by the trustee or its designee. See Merrill Lynch MLPA §§ 3.3(d), 5.3.In the event that PaineWebber breached its representations, the Merrill Lynch MLPA afforded the following remedy, among others:
Within 90 days of the earlier of its discovery or its receipt of notice of any . . . Defective Mortgage Loan . . . , the Mortgage Loan Seller [i.e., PaineWebber] shall cure such Document Defect or Breach in all material respects, which shall include payment of losses and any expenses associated therewith, or, if such Document Defect or Breach cannot be cured within such 90-day period, either (i) repurchase the affected Mortgage Loan at the applicable Repurchase Price not later ...