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New Jersey Carpenters Health Fund, New Jersey Carpenters Vacation Fund and Boilermaker v. Residential Capital

October 15, 2012


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:


Before this Court is an amended motion for class certification submitted by lead plaintiffs for two cases, 08 Civ. 5093 (the "Harborview" case) and 08 Civ. 8781 (the "RALI" case) (collectively "Plaintiffs"), pursuant to Fed. R. Civ. P. 23. Plaintiffs bring claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a)(2) & 77o, alleging that the defendants in both cases ("Harborview Defendants" and "RALI Defendants") made false and misleading statements in the offering documents of mortgage-backed securities ("MBS") with respect to their compliance with underwriting guidelines. I previously denied class certification in an Opinion and Order of January 18, 2011, because the predominance and superiority requirements under Rule 23(b)(3) were not satisfied, even though all the elements under Rule 23(a) were met.

N.J. Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011), aff'd, 2012 WL 1481519 (2d Cir. Apr. 30, 2012). Following the Second Circuit's Summary Order affirming my denial of certification, Plaintiffs, encouraged, I presume, by the Circuit's opinion, submit an amended motion that narrows the class and expands the record. The Circuit wrote, "our review is limited to the class definition that the judge rejected, and to the record as it stood at the time of this motion to certify . . . . without prejudice to further motion practice in the district court." N.J. Carpenters Health Fund v. Rali Series 2006-QO1 Trust, Nos. 11-1683-CV, 11-1684-CV, 2012 WL 1481519, at *4 (2d Cir. Apr. 30, 2012). Plaintiffs also ask the Court to certify them as Class Representatives and appoint Cohen Milstein Sellers & Toll PLLC as Class Counsel. Harborview and RALI Defendants oppose on the ground that Rule 23(b)(3) requirements are still not satisfied. For the reasons set forth below, Plaintiffs' motion is GRANTED in all respects but for a single modification that will further narrow Plaintiffs' proposed class to purchasers who bought the security on the date of offering directly from the issuers.


The party seeking class certification, after demonstrating that each of Rule 23(a) threshold requirements is met by a preponderance of the evidence, must also show that the class satisfies one of the subsections of Rule 23(b). See Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008). In my prior Opinion, I found that Plaintiffs satisfied Rule 23(a) requirements of numerosity,*fn1 commonality, typicality, and adequate representation in both cases but denied certification because Plaintiffs failed to meet their burden with respect to predominance and superiority under Rule 23(b)(3). 272 F.R.D. at 168. I presume familiarity with that opinion and incorporate my prior analysis and determination regarding Rule 23(a) by reference, and I examine below only whether Plaintiffs' new record and class definitions show that "the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed. R. Civ. P. 23(b)(3).

In considering Plaintiffs' amended motion, I am mindful of the Second Circuit's comment, "Perhaps another inference could have been drawn, and perhaps a different inference might be drawn on a renewed motion on a fuller record." 2012 WL 1481519, at *3. Although the Second Circuit has confirmed that "both grants and denials of class certification in MBS litigation may fall within the range of a district court's discretion"*fn2 and has affirmed my denial based on "particular facts confronting it on the limited record available in this case," it has also noted that other district courts, as well as I, have granted certification in similar MBS cases. Id. at *4 (citing Pub. Emps.' Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 280 F.R.D. 130 (S.D.N.Y. 2012) ("Goldman"); Pub. Emps.' Ret. Sys. of Miss. v. Merrill Lynch & Co., Inc., 277 F.R.D. 97 (S.D.N.Y. 2011) ("Merrill Lynch"); N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., No. 08 Civ. 5653, 2011 WL 3874821 (S.D.N.Y. Aug. 16, 2011)).*fn3

A. Predominance

"Class-wide issues predominate if resolution of some of the legal or factual questions that qualify each class member's case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than issues subject only to individualized proof." UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121, 131 (2d Cir. 2010) (quotation marks omitted). A plaintiff asserting a claim under Sections 11 and 12(a)(2) must first make a prima facie case by proving that the "offering participant" or "statutory seller" made material misstatements or omissions in the offering documents. See Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983); 15 U.S.C. § 77l(a)(2). Section 15 provides for derivative liability based on Sections 11 and 12(a)(2) for a "control person." While neither Section 11 nor Section 12 requires a culpable mental state, a claim under either section is subject to various defenses, including an affirmative defense based on the plaintiff's knowledge of the untruth or omission at the time of acquisition. See In re Initial Pub. Offering Sec. Litig., 483 F.3d 70, 73 n.1 (2d Cir. 2007). Underwriter defendants may also avoid liability under the two sections by demonstrating that they conducted due diligence and reasonably believed that the statements were not materially misleading. See 15 U.S.C. §§ 77k(b)(3), 77l(a)(2).

1.Expanded Record

In their amended motion, Plaintiffs expanded the record in an effort, in the Circuit's language, that I might draw "a different inference . . . on a fuller record." 2012 WL 1481519, at *3. In my prior Opinion and Order, I found that individual issues predominated, Defendants having "mustered a good deal of documentary evidence" to show that "different putative class members have different levels of knowledge regarding the underwriting guidelines and practices based on their respective levels of sophistication and time of purchase." N.J. Carpenters, 272 F.R.D. at 168. I was particularly troubled by the specific evidence that Western Asset Management Company ("WAMCO"), an investment advisor who had complete discretion over Plaintiff Boilmaker's investments, "knew that loans could be originated with exceptions to underwriting guidelines, and it knew that such loans [] increased the risk of delinquencies and heightened losses" at the time it purchased the 2007--7 Harborview Certificates. Id. at 169 (citing Meltzer Decl. Ex. A, at 131:20-- 132:10). Given such evidence suggesting specific knowledge, as well as general evidence about putative class members' sophistication about MBS, I was concerned that different purchase dates would lead to additional individualized issues given the variation in the amount of available information over time. Id.

Now, Plaintiffs have had an opportunity to examine Defendants' documents (most of which were produced after Plaintiffs' first class certification motion was filed, see Harboview Einsenkraft Supplemental Decl. Ex. 1; RALI Einsenkraft Supplemental Decl. Ex. 1) and to take depositions of witnesses with knowledge of all communications between Defendants and purchasers regarding the relevant offerings. Haborview Pls.' Reply 2; RALI Pls.' Reply 2. These documents are alleged to include "all communications with investors regarding the offerings at issue," Haborview Pls.' Reply 2, n.7; RALI Pls.' Reply 2 n.7, and coupled with the depositions, they support Plaintiffs' contention that adverse due diligence results and loan files, which could have yielded specific information about underwriting compliance unlike loan tapes that merely convey loan characteristics, were not disclosed to the investors.

In considering this new information, I am guided by the Second Circuit's language that "the question before us (as it was before the district court) is not the merits question of whether defendants have shown purchasers' knowledge, but the certification question of whether common liability issues predominate over individual knowledge defenses." 2012 WL 1481519, at *2. Thus my task is simply to reconsider whether on the expanded record individual issues continue to predominate over common issues. See In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006) (instructing that a district court's obligation to make determinations by resolving factual disputes is "not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement."). Now that the record reveals that class members were similarly situated with respect to Defendants' due diligence results and access to loan files, I am persuaded that Defendants' affirmative defenses may not be as individualized as I had previously concluded. See Tsereteli, 2012 WL 2532172 at *6 ("While predominance requires a more rigorous showing than does commonality, it does not require a plaintiff to show that there are no individual issues.") (quotation marks omitted); see also Pub. Emps.' Ret. Sys. of Miss., 277 F.R.D. at 111. In particular, Plaintiffs' new record assuages my prior concern based on "a good deal of documentary evidence" demonstrating WAMCO's level of knowledge at the time it purchased the 2007--7 Harborview Certificates, 272 F.R.D. at 169, now the record shows that even the most sophisticated class members did not have access to the actual due diligence results and loan files for the certificates at issue and are therefore likely to be subject to the same knowledge and due diligence defense.

2.Revised Class Definition

As the Second Circuit noted, I previously "found the balance tipped in favor of the individual issues not only because of the evidence of purchaser knowledge, also because of the cumbersome class definitions proposed in both cases." 2012 WL 1481519, at *3. Plaintiffs, in turn, have narrowed their proposed class in both cases by excluding: (1) anyone who purchased on or after the date of the first downgrade or the first material downgrade of the certificates after the offering; (2) Fannie Mae and Freddie Mac; and (3) Defendants and related parties. Haborview Pls.' Supp. 1; RALI Pls.' Supp. 1. In my view, while Plaintiffs' new class definitions are an improvement from their prior request that the Court certify "[a]ll persons who ...

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