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Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp.

August 18, 2009



Plaintiffs Greenwich Financial Services Distressed Mortgage Fund 3, LLC and QED LLC move to remand this case to state court for lack of subject matter jurisdiction. Defendants Countrywide Financial Corporation ("Countrywide Financial"), Countrywide Home Loans, Inc. ("Countrywide Home Loans"), and Countrywide Home Loans Servicing LP ("Countrywide Servicing") (collectively, "Countrywide") respond that this Court has jurisdiction under the Class Action Fairness Act of 2005, 28 U.S.C. §§ 1332(d), 1453, 1711-15 ("CAFA"), because the parties are minimally diverse and the amount sought is over $5 million, and under 28 U.S.C. § 1331 because plaintiffs' claims raise substantial, disputed federal questions under the Truth-in-Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"). For the reasons set forth below, the Court holds that neither CAFA nor TILA provides a basis for subject matter jurisdiction over this case, and therefore that the case must be remanded to state court.


Plaintiffs bring this putative class action as holders of the now-infamous mortgage-backed securities whose decline in value has hobbled the financial markets. Specifically, plaintiffs allege that they hold certificates issued by various trusts, which own hundreds of thousands of mortgage loans. (Notice of Removal, Ex. A. (the "Complaint" or "Compl.") ¶¶ 1, 12-14.) The trusts' ownership of the loans entitles them to the borrowers' periodic interest and principal payments, and the certificates entitle plaintiffs to a share of those payments. (Id. ¶ 25.) The trusts, of course, did not issue the loans, nor did they possess any assets prior to purchasing the loans. (Id. ¶¶ 23-24.) The purchases were all made pursuant to certain agreements that comprised the "securitization", and the money with which the purchases were made was raised by selling the certificates-the securities in question. (Id.)

Defendants were both the issuers and sellers of the mortgage loans currently owned by the trusts. (Id. ¶¶ 1, 23.) Because the trusts themselves had no expertise with lending and loan administration, defendant Countrywide Servicing remained as the "master servicer" for the loans under terms described in contracts known as Pooling and Servicing Agreements ("PSAs"). (Id. ¶¶ 26-27.) As master servicer, Countrywide Servicing administers the loans on behalf of plaintiffs with authority delineated by the PSAs. (See, e.g., Murata Decl. Ex A, Series 2005-36 PSA.)

Plaintiffs' claims arise from actions taken by 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. (Compl. ¶ 28.) Among other things, the states alleged that Countrywide made loans it had no reasonable basis to think borrowers could afford. (Id.) Countrywide 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. (Id. ¶ 30.) Plaintiffs allege that "[m]odifying a mortgage loan almost always means reducing or delaying payments due on that loan." (Id. ¶ 32.) Such modifications of the loans owned by the trusts could therefore reduce the cash flow into the trusts and thus "reduce[] the value of the certificates that those trusts sold to investors." (Id.)

Plaintiffs responded to defendants' settlement with the state Attorneys General by filing this putative class action in New York State Supreme Court. In their complaint, plaintiffs do not challenge Countrywide's authority under the PSAs to modify the loans, but rather seek declaratory judgments under N.Y. C.P.L.R. 3001 that the PSAs require Countrywide to purchase any loans it modifies at a price equal to the unpaid principal and accrued interest thereon. (Id. ¶¶ 35, 38.) Specifically, plaintiffs point to the following clause that is reproduced in sum and substance across all the PSAs: "Countrywide may agree to a modification of any Mortgage Loan (the 'Modified Mortgage Loan') if . . . Countrywide purchases the Modified Mortgage Loan from the Trust Fund . . . ." (Id. ¶¶ 34-35.) Defendants promptly removed the action to this Court, and plaintiff moved to remand two weeks later.


"If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." 28 U.S.C. § 1447(c). Here, defendants argue that this Court has jurisdiction (1) under CAFA because plaintiffs seek certification as a class action, the parties are minimally diverse, and the amount in controversy is over $5 million, and (2) under 28 U.S.C. § 1331 because plaintiffs' claims present substantial questions of federal law. Plaintiffs disagree, arguing that an exception to CAFA jurisdiction applies and that their claims do not present federal questions. At best, plaintiffs argue, defendants raise a federal defense, which is insufficient to establish subject matter jurisdiction. The Court agrees with plaintiffs.

I. Jurisdiction under CAFA

CAFA provides that

The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interests and costs, and is a class action in which . . . any member of a class of plaintiffs is a citizen of a State different from any defendant.

28 U.S.C. § 1332(d)(2). Plaintiffs do not dispute that the above requirements for jurisdiction under CAFA have been met. (Tr. of Mar. 13, 2009 Hr'g at 3.) Rather, plaintiffs argue that CAFA excepts certain suits from its jurisdictional reach and that this case falls squarely within one of those exceptions. Specifically, plaintiffs cite CAFA's provision that 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 . . . ." 28 U.S.C. § 1332(d)(9)(C). Plaintiffs concede that it is their burden to persuade the Court that this exception applies. (Tr. of Mar. 13, 2009 Hr'g at 3.)

While all statutory analysis begins with the text itself, CAFA's text poses a variety of problems. Considering the same exception the Court does here, the Court of Appeals declared that CAFA's text was both "cryptic" and "ambiguous". Estate of Barbara Pew v. Cardarelli, 527 F.3d 25, 30, 32 (2d Cir. 2008) (finding that "the imperfect drafting of [CAFA] makes it ambiguous" and that the court is "forced . . . to construe CAFA's cryptic text") (citations and quotations omitted). Indeed, considering the general rule of statutory construction to read exceptions narrowly when the statute itself should be read broadly, see C.I.R. v. Clark, 489 U.S. 726, 739 (1989) ("In construing provisions . . . in which a general statement of policy is qualified by an exception, we usually read the exception narrowly in order to preserve the primary operation of the provision."), it is particularly difficult to read narrowly language that sweeps in any claim that "relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security." (emphasis added). Read too literally, this exception would encompass all securities claims, a result that would truly swallow the rule. See Estate of Barbara Pew, 527 F.3d at 32 ("Review of [Securities Litigation Uniform Standards Act] and CAFA confirms an overall design to assure that the federal courts are available for all securities cases that have national impact . . . ."); New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust, 581 F. Supp. 2d 581, 588 (S.D.N.Y. 2008) ("Consistent with Congress's aim to interpret CAFA broadly, as reflected in the legislative history, all of CAFA's exceptions are to be interpreted narrowly.")

Fortunately, the Court of Appeals has already done the lion's share of the work interpreting this exception. In Estate of Barbara Pew, the Court of Appeals confronted the exception's scope in the context of a state consumer fraud claim. The plaintiffs in Pew were purchasers of money market certificates-unsecured, fixed-interest debt instruments-whose issuer had gone bankrupt. Plaintiffs brought suit in state court against the issuer's officers and the issuer's auditor for fraudulently failing to disclose the issuer's insolvency. Defendants removed to federal court under CAFA, and plaintiffs quickly moved to remand, arguing that ...

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