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Blackrock Financial Management Inc., Maiden Lane, LLC v. the Segregated Account of Ambac Assurance Corporation

February 27, 2012

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.*FN1



On this appeal from an order of the United States District Court for the Southern District of New York

The opinion of the court was delivered by: Dennis Jacobs, Chief Judge:

11-5309-cv(L)

BlackRock Financial Management Inc., et al. v. The Segregated Account of Ambac Assurance Corporation, et al.

(Argued: February 15, 2012

Before: JACOBS, Chief Judge, HALL and LOHIER, Circuit Judges.

(Pauley, J.), which denied petitioners' motion to remand an Article 77 proceeding to New York Supreme Court, we conclude that the case falls within the securities exception to both original and appellate jurisdiction under the Class Action Fairness Act of 2005. We therefore dismiss the appeal, reverse the order of the district court, and instruct it to vacate its decision and order and remand the matter to the state court.

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 28 U.S.C. §§ 1453(d)(3) and 1332(d)(9)(C), exceptions to the federal jurisdiction conferred by the Class Action Fairness Act of 2005 ("CAFA"), Pub.L. No. 109-2, 119 Stat. 4 (codified in scattered sections of Title 28, United States Code).

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, 28 U.S.C. § 1332(d)(9)--was denied. Bank of New York Mellon v. Walnut Place LLC, No. 11 Civ. 5988 (WHP), 2011 WL 4953907 (S.D.N.Y. Oct. 19, 2011).

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 America--and are serviced by Countrywide's servicing arm.*fn2

Countrywide made representations and warranties that the mortgages conformed to the trusts' requirements for credit quality, property value, title, and lien priority.*fn3 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, and Maiden Lane LLC and associated entities formed by the Federal Reserve Bank of New York. The "Walnut Place" group is the set of investors that intervened in the state proceeding and removed it to federal court. Everyone is a sophisticated investor.

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 ...


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