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Allstate Insurance Company, Allstate Life Insurance Company, Allstate v. Ace Securities Corp.

August 17, 2011


The opinion of the court was delivered by: Sand, J.


Plaintiffs brought this action in the New York State Supreme Court of New York County on February 18, 2011, alleging state common law claims of fraud and negligent misrepresentation. Defendants removed this action to this Court on March 18, 2011, pursuant to 28 U.S.C. §§ 1334(b), 1441, 1446, and 1452(a). On April 15, 2011, Plaintiff moved to remand the case back to the state court pursuant to 28 U.S.C. §§ 1334(c)(1)--(2) and 1452(b).

For the reasons stated below, Plaintiffs' motion is granted.


Plaintiff Allstate Insurance Company is an Illinois corporation, operating as a publicly-held personal lines insurer licensed to do business in New York. Plaintiff Allstate Life Insurance Company is also an Illinois corporation and a wholly-owned subsidiary of Allstate Insurance Company, while Plaintiff Allstate Life Insurance Company of New York, a New York corporation, is a wholly owned subsidiary of Allstate Life Insurance Company. Plaintiffs Allstate Retirement Plan and Agents Pension Plan are ERISA plans sponsored by Allstate Insurance Company, while Allstate Bank is a federally-chartered thrift institution registered in Illinois. Compl. ¶¶ 7--12.*fn1 Defendants are New York and Delaware corporations associated with a German corporation, Deutsche Bank AG. Id. ¶¶ 13--18.

Defendants created and marketed certain mortgage-backed securities (the "Certificates"), and sold them to Plaintiffs. Defendants DB Structured Products Inc. ("DBSP") and Deutsche Bank AG New York acted as sponsors and sellers for the offerings at issue in this case, obtaining mortgage loans from third parties that were pooled together in the securitizations, then sold or transferred to depositors. Id. ¶ 41. Defendants Ace Securities Corp. and Deutsche Alt-A Securities Inc. acted as the depositors, purchasing the mortgage loans from the sponsors and sellers, transferring them to trusts that are not parties to this action, and then issuing the Certificates, which represented interests in the mortgage loans held by the trusts. Id. The Certificates were sold in classes according to credit ratings, and were expected to provide interest on the income stream generated by the pooled and securitized mortgage loans. Id. Together, the depositors and the sponsors and sellers sold the Certificates to investors including Plaintiffs. Id. Plaintiffs invested a total of $185 million in mortgage-backed securities issued by Defendants "as part of a broader plan to invest in a diverse array of mortgage-backed securities." Id. ¶ 3.

Plaintiffs now maintain that Defendants included various misrepresentations and false statements in the prospectuses, registration statements, terms sheets, and other materials (together, the "Offering Materials") for the Certificates. Defendants allegedly represented these securities as "highly-rated, safe securities backed by pools of loans with specifically-represented mix profiles," when they were "a toxic mix of loans given to borrowers who could not afford the properties, and thus were highly likely to default." Id. ¶ 1. In particular, Plaintiffs allege that Defendants failed to disclose that a high percentage of the loans in the pools had significant rates of default and delinquency, that Defendants were informed of these defects, and that Defendants chose to waive the defects and use them to negotiate a lower price when they purchased the loan pools. Id. ¶¶ 55, 70, 76--82. Plaintiffs also allege misrepresentations regarding the owner-occupancy of the mortgaged properties, id. ¶¶ 57--59, 83--92; the ratio between the principal balance of mortgage loans and the appraised value of mortgaged properties, id. ¶¶ 60--61, 93-- 103; and the credit ratings of the Certificates, id. ¶¶ 62--63. In general, Plaintiffs claim, the mortgage loans "did not comply with the underwriting standards the Offering Materials described." Id. ¶ 71. Plaintiffs bring a claim of common-law fraud, alleging that Defendants knowingly made false and misleading misstatements and omissions with regard to the Certificates. Id. ¶¶ 207--12. Plaintiffs also bring a claim of negligent misrepresentation, alleging that Plaintiffs relied on the unique, specialized expertise of Defendants; that because of this reliance, Defendants owed a duty to provide complete, accurate, and timely information regarding the mortgage loans; and that Defendants breached this duty. Id. ¶¶ 215--20.

The securities issued by Defendants contained 47,135 mortgage loans originated by fourteen third-party originators. Id. ¶ 128. Defendants' Notice of Removal states that bankruptcy proceedings are underway for three of these fourteen originators: People's Choice Home Loan, Inc. ("People's Choice"); First NLC Financial Services, LLC ("First NLC"); and American Home Mortgage Corporation ("AHM"). Defendants claim that certain of the alleged misrepresentations in Plaintiffs' Complaint were provided to Defendants by these three companies. Notice of Removal ¶¶ 8--9. Furthermore, Defendants state that these originators have a contractual indemnification and/or contribution obligation to Defendants for any claims arising out of misstatements or omissions they made to Defendants. Id. ¶ 10; Reynard Decl. Ex. C, at 34, § 7.03(viii) (People's Choice purchasing agreement); Ex. D, at 52--55, § 12A.07 (AHM purchasing agreement); Ex. E, at 33--34, § 7.03 (First NLC purchasing agreement). People's Choice originated a total of 1,350 mortgage loans out of the 47,135 securitized by Defendants, a total of 3.24% of these loans. AHM originated 4,104 loans, or 8.52% of all loans underlying Defendants' securitizations. First NLC originated 1,060 loans, or 2.25% of the total. Compl. ¶ 128.

People's Choice filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on March 20, 2007; a plan of reorganization has been confirmed in these proceedings. Id. ¶ 11; In re People's Choice Home Loan Inc., et al., No. 8:07-bk-10765-RK (Bankr. C.D. Cal.). Under this plan, unsecured claimants against People's Choice Home Loan, Inc., signatory to the master loan purchasing agreement with Defendants, are estimated to recover approximately 10--14% of allowed claims or interests. Chung Decl. Ex. J, at 19--20. Defendant DBSP filed a Proof of Claim in that proceeding on August 23, 2007, including a claim for indemnification of litigation costs. Reynard Decl. Ex. F. AHM filed a Chapter 11 bankruptcy petition on August 6, 2007; a plan of reorganization has also been confirmed in these proceedings. Notice of Removal ¶ 15; In re Am. Home Mortg. Holdings, Inc., No. 07-11047-CSS (Bankr. D. Del.). Unsecured claimants against American Home Mortgage Corp., signatory to the master loan purchasing agreement with Defendants, are estimated to recover approximately 1.06% of allowed claims or interests. Chung Decl. Ex. L, at 8. Defendant Deutsche Bank Securities, Inc. filed a Proof of Claim in that proceeding on January 11, 2008, including a claim for indemnification of litigation costs. Reynard Decl. Ex. G. Finally, First NLC filed a Chapter 11 bankruptcy petition on January 18, 2008, later converted to a Chapter 7 proceeding; no plan of reorganization has yet been confirmed. Notice of Removal ¶ 13; In re First NLC Fin. Servs., LLC, No. 08-10632-PGH (Bankr. S.D. Fla.). Defendant DBSP filed a Proof of Claim in that proceeding on April 28, 2008, reserving its rights to seek indemnification and contribution. Notice of Removal ¶ 14; Reynard Decl. Ex. H.

II.Legal Standard

A case may be removed from state court to federal court "only if it could have originally been commenced in federal court on either the basis of federal question jurisdiction or diversity jurisdiction." 28 U.S.C. § 1441(a). If a federal district court determines that it lacks subject matter jurisdiction over a case removed from state court, the case must be remanded. Id. § 1447(c). Plaintiffs may not "use artful pleading to close off defendant's right to a federal forum." Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 397 n.2 (1981) (internal quotation marks and citations omitted). When a party challenges the removal of an action from state court, the removing party has the burden "to establish its right to a federal forum by competent proof." R.G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d 651, 655 (2d Cir. 1979). On a motion for remand, the court "must construe all disputed questions of fact and controlling substantive law in favor of the plaintiff." In re NASDAQ Mkt. Makers Antitrust Litig., 929 F. Supp. 174, 178 (S.D.N.Y. 1996).


A.Bankruptcy Jurisdiction Under 28 U.S.C. § 1334(b)

District courts "have original but not exclusive jurisdiction of all civil proceedings arising under" the United States Bankruptcy Code, "or arising in or related to cases under" the Code. 28 U.S.C. § 1334(b). The United States Court of Appeals for the Second Circuit has held that litigation is "related to" a bankruptcy proceeding if "its outcome might have any 'conceivable effect' on the bankrupt estate. If that question is answered affirmatively, the litigation falls within the 'related to' jurisdiction of the bankruptcy court." In re Cuyahoga Equip. Corp., 980 F.2d 110, ...

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