Greenwich Financial Dist CT
Greenwich Financial Dist CT
Greenwich Financial Dist CT
, 2009)
Page 192
654 F.Supp.2d 192
GREENWICH FINANCIAL SERVICES DISTRESSED MORTGAGE Fund 3, LLC, and QED
LLC, on behalf of themselves and all other persons similarly situated, Plaintiffs,
v.
COUNTRYWIDE FINANCIAL CORPORATION et al., Defendants.
No. 08 Civ. 11343(RJH).
United States District Court, S.D. New York.
August 14, 2009.
Page 193
David J. Grais, Grais & Ellsworth, LLP, Plaintiffs bring this putative class action as
New York, NY, for Plaintiffs. holders of the now-infamous mortgage-backed
securities whose decline in value has hobbled
John H. Beisner, Kathryn E. Tarbert, the financial markets. Specifically, plaintiffs
Matthew M. Shors, Michael E. Stamp, Stephen allege that they hold certificates
Heschel Weil, Brian David Boyle, O'Melveny &
Myers LLP, Washington, DC, William Joseph Page 194
Sushon, O'Melveny & Myers, LLP, New York,
NY, for Defendants. issued by various trusts, which own hundreds of
thousands of mortgage loans. (Notice of
MEMORANDUM OPINION AND ORDER Removal, Ex. A. (the "Complaint" or "Compl.")
¶¶ 1, 12-14.) The trusts' ownership of the loans
RICHARD J. HOLWELL, District Judge. entitles them to the borrowers' periodic interest
and principal payments, and the certificates
Plaintiffs Greenwich Financial Services entitle plaintiffs to a share of those payments.
Distressed Mortgage Fund 3, LLC and QED (Id. ¶ 25.) The trusts, of course, did not issue the
LLC move to remand this case to state court for loans, nor did they possess any assets prior to
lack of subject matter jurisdiction. Defendants purchasing the loans. (Id. ¶¶ 23-24.) The
Countrywide Financial Corporation purchases were all made pursuant to certain
("Countrywide Financial"), Countrywide Home agreements that comprised the "securitization",
Loans, Inc. ("Countrywide Home Loans"), and and the money with which the purchases were
Countrywide Home Loans Servicing LP made was raised by selling the certificates—the
("Countrywide Servicing") (collectively, securities in question. (Id.)
"Countrywide") respond that this Court has
jurisdiction under the Class Action Fairness Act Defendants were both the issuers and
of 2005, 28 U.S.C. §§ 1332(d), 1453, 1711-15 sellers of the mortgage loans currently owned by
("CAFA"), because the parties are minimally the trusts. (Id. ¶¶ 1, 23.) Because the trusts
diverse and the amount sought is over $5 themselves had no expertise with lending and
million, and under 28 U.S.C. § 1331 because loan administration, defendant Countrywide
plaintiffs' claims raise substantial, disputed Servicing remained as the "master servicer" for
federal questions under the Truth-in-Lending the loans under terms described in contracts
Act, 15 U.S.C. § 1601 et seq. ("TILA"). For the known as Pooling and Servicing Agreements
reasons set forth below, the Court holds that ("PSAs"). (Id. ¶¶ 26-27.) As master servicer,
neither CAFA nor TILA provides a basis for Countrywide Servicing administers the loans on
subject matter jurisdiction over this case, and behalf of plaintiffs with authority delineated by
therefore that the case must be remanded to state the PSAs. (See, e.g., Murata Decl. Ex. A, Series
court. 2005-36 PSA.)
BACKGROUND
-1-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
Plaintiffs' claims arise from actions taken 28 U.S.C. § 1447(c). Here, defendants argue that
by defendants with respect to these loans this Court has jurisdiction (1) under CAFA
pursuant to the terms of a settlement with because plaintiffs seek certification as a class
several state Attorneys General. In the summer action, the parties are minimally diverse, and the
of 2008, the Attorneys General for seven states amount in controversy is over $5 million, and
filed lawsuits accusing Countrywide of violating (2) under 28 U.S.C. § 1331 because
laws against predatory lending. (Compl. ¶ 28.)
Among other things, the states alleged that Page 195
Countrywide made loans it had no reasonable
basis to think borrowers could afford. (Id.) plaintiffs' claims present substantial questions of
Countrywide later agreed to a multistate federal law. Plaintiffs disagree, arguing that an
settlement, requiring it to modify the terms of exception to CAFA jurisdiction applies and that
numerous mortgage loans that it currently their claims do not present federal questions. At
services—including at least some of the loans it best, plaintiffs argue, defendants raise a federal
services on behalf of plaintiffs. (Id. ¶ 30.) defense, which is insufficient to establish subject
Plaintiffs allege that "[m]odifying a mortgage matter jurisdiction. The Court agrees with
loan almost always means reducing or delaying plaintiffs.
payments due on that loan." (Id. ¶ 32.) Such I. Jurisdiction under CAFA
modifications of the loans owned by the trusts
could therefore reduce the cash flow into the CAFA provides that
trusts and thus "reduce[] the value of the
certificates that those trusts sold to investors." The district courts shall have
(Id.) original jurisdiction of any civil
action in which the matter in
Plaintiffs responded to defendants' controversy exceeds the sum or
settlement with the state Attorneys General by value of $5,000,000, exclusive
filing this putative class action in New York of interests and costs, and is a
State Supreme Court. In their complaint, class action in which . . . any
plaintiffs do not challenge Countrywide's member of a class of plaintiffs
authority under the PSAs to modify the loans, is a citizen of a State different
but rather seek declaratory judgments under from any defendant.
N.Y. C.P.L.R. 3001 that the PSAs require
Countrywide to purchase any loans it modifies at 28 U.S.C. § 1332(d)(2). Plaintiffs do not
a price equal to the unpaid principal and accrued dispute that the above requirements for
interest thereon. (Id. ¶¶ 35, 38.) Specifically, jurisdiction under CAFA have been met. (Tr. of
plaintiffs point to the following clause that is Mar. 13, 2009 Hr'g at 3.) Rather, plaintiffs argue
reproduced in sum and substance across all the that CAFA excepts certain suits from its
PSAs: "Countrywide may agree to a jurisdictional reach and that this case falls
modification of any Mortgage Loan (the squarely within one of those exceptions.
`Modified Mortgage Loan') if . . . Countrywide Specifically, plaintiffs cite CAFA's provision
purchases the Modified Mortgage Loan from the that district courts do not have jurisdiction over
Trust Fund . . . ." (Id. ¶¶ 34-35.) Defendants a class action that "solely involves a claim . . .
promptly removed the action to this Court, and that relates to the rights, duties (including
plaintiff moved to remand two weeks later. fiduciary duties), and obligations relating to or
created by or pursuant to any security . . . ." 28
DISCUSSION U.S.C. § 1332(d)(9)(C). Plaintiffs concede that it
is their burden to persuade the Court that this
"If at any time before final judgment it exception applies. (Tr. of Mar. 13, 2009 Hr'g at
appears that the district court lacks subject 3.)
matter jurisdiction, the case shall be remanded."
-2-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
While all statutory analysis begins with the brought suit in state court against the issuer's
text itself, CAFA's text poses a variety of officers and
problems. Considering the same exception the
Court does here, the Court of Appeals declared Page 196
that CAFA's text was both "cryptic" and
"ambiguous". Estate of Barbara Pew v. the issuer's auditor for fraudulently failing to
Cardarelli, 527 F.3d 25, 30, 32 (2d Cir.2008) disclose the issuer's insolvency. Defendants
(finding that "the imperfect drafting of [CAFA] removed to federal court under CAFA, and
makes it ambiguous" and that the court is plaintiffs quickly moved to remand, arguing that
"forced . . . to construe CAFA's cryptic text") the third exception in 28 U.S.C. § 1332(d)(9)
(citations and quotations omitted). Indeed, applied. The trial court agreed with plaintiffs,
considering the general rule of statutory and defendants appealed pursuant to 28 U.S.C. §
construction to read exceptions narrowly when 1453(c).
the statute itself should be read broadly, see The Court of Appeals began by rejecting
C.I.R. v. Clark, 489 U.S. 726, 739, 109 S.Ct. plaintiffs' argument that the exception covered
1455, 103 L.Ed.2d 753 (1989) ("In construing all securities claims. Estate of Barbara Pew, 527
provisions . . . in which a general statement of F.3d at 31. Such a reading, the court concluded,
policy is qualified by an exception, we usually would render superfluous the phrase "the rights,
read the exception narrowly in order to preserve duties (including fiduciary duties), and
the primary operation of the provision."), it is obligations relating to or created by or pursuant
particularly difficult to read narrowly language to", leaving the text no different than if it read
that sweeps in any claim that "relates to the simply "[any] claim . . . that relates to . . . any
rights, duties (including fiduciary duties), and security." Furthermore, and perhaps more
obligations relating to or created by or pursuant importantly, the court held that such a reading
to any security." (emphasis added). Read too would collapse three CAFA exceptions into two,
literally, this exception would encompass all rendering superfluous the first exception
securities claims, a result that would truly involving claims "concerning a covered security
swallow the rule. See Estate of Barbara Pew, as defined under 16(f)(3) of the Securities Act of
527 F.3d at 32 ("Review of [Securities Litigation 1933 . . . and section 28(f)(5)(E) of the
Uniform Standards Act] and CAFA confirms an Securities Exchange Act of 1934. . . ."
overall design to assure that the federal courts
are available for all securities cases that have If the third exception did not apply to all
national impact . . . ."); New Jersey Carpenters claims relating to securities, what was the
Vacation Fund v. Harborview Mortgage Loan limiting principle? For this, the Court of Appeals
Trust, 581 F.Supp.2d 581, 588 (S.D.N.Y. 2008) focused on the "rights", "duties", and
("Consistent with Congress's aim to interpret "obligations" language. Duties were owed by
CAFA broadly, as reflected in the legislative persons—whether human or artificial—and
history, all of CAFA's exceptions are to be while obligations could be owed by persons or
interpreted narrowly.") by instruments, to differentiate them from
"duties", the term "obligations" should be read
Fortunately, the Court of Appeals has as "obligations created in instruments, such as a
already done the lion's share of the work certificate of incorporation, an indenture, a note,
interpreting this exception. In Estate of Barbara or some other corporate document." Estate of
Pew, the Court of Appeals confronted the Barbara Pew, 527 F.3d at 31. Of course, the
exception's scope in the context of a state "rights" are "those of the security-holders (or
consumer fraud claim. The plaintiffs in Pew their trustees or agents) to whom these duties
were purchasers of money market certificates— and obligations run." Id. Applying these
unsecured, fixed-interest debt instruments— distinctions, the Court of Appeals held that the
whose issuer had gone bankrupt. Plaintiffs exception was limited to suits seeking to enforce
-3-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
"the terms of the instruments that create and too are the certificateholders beneficiaries of, but
define securities" or the "duties imposed on not parties to, the PSAs. Where the indentures
persons who administer securities." Id. at 33. contain the details of the borrowing, the duties
of the trustee, and the legal relationship between
The consumer fraud claims at issue in Pew the trustee, borrower, and bondholders, the
did not fall into either of these categories. The sample PSA provided by defendants sets out the
plaintiffs' securities were simple debt distribution of mortgage principal and interest
instruments with fixed interest rates. Had payments to the various certificate classes,
plaintiffs sued over the issuer's obligation to (Murata Decl. Ex. A at 84-99), the duties of the
make interest payments—obligations specified trustee, (id. at 113), and the legal relationship
by the instruments themselves—the exception between the trustee, the master servicer, and the
would have applied. But the right to sue for certificateholders, (id. at 65-84). But even if the
fraud is created by state law, not the terms of the PSAs are not sufficiently analogous to
securities. Hence, the exception did not apply, indentures, the Article of the PSA containing
and the Court of Appeals reversed the trial Section 3.11(b)—the provision on which
court's remand order. Id. at 33. plaintiffs sue—specifies that "[Countrywide
Servicing] shall service and administer the
Given Pew's interpretation of Section Mortgage Loans in accordance with the terms of
1332(d)(9), this Court concludes that CAFA's this agreement" "[f]or and on behalf of the
third exception applies to plaintiffs' claims Certificateholders", i.e., the plaintiffs. The PSAs'
because plaintiffs seek to enforce "the terms of plain language creates obligations for
the instruments that create and define [their] defendants, relating to the securities, whose
securities." Id. at 33. Indeed, despite defendants' benefits run to the plaintiffs. Because defendants
many arguments to the contrary, it is hard to see are suing on those obligations, they fall within
how the PSAs do not constitute instruments that the third exception to CAFA jurisdiction.
create and define plaintiffs' certificates. In the
sample PSA provided by defendants, "Article V" Defendants make three arguments to try to
is devoted entirely to the certificates, including avoid this conclusion—all of which fail. First,
sections relating to their issuance, registration, defendants try to further narrow the scope of
mutilation, and ownership. (See Murata Decl. CAFA's third exception by selectively, and
Ex. A at 100-06.) Moreover, the PSAs are in misleadingly, quoting from Pew. In particular,
many ways similar to indentures, documents defendants argue that Pew's requirement that the
specifically referred to by the Court of Appeals claims be "grounded in the terms of the security
in Pew. Estate of Barbara Pew, 527 F.3d at 31. itself", Estate of Barbara Pew, 527 F.3d at 32,
A bond indenture is a "contract between the should be read as restricting CAFA's third
borrowing company and the trustee (usually a exception to claims based on language contained
bank) or trustees representing the bondholders." in the four corners of the certificates. (Def. Br. at
ENCYCLOPEDIC DICTIONARY OF 6-8.) Because plaintiffs are not suing on the
BUSINESS FINANCE 313 (Prentice Hall, Inc. language contained in the certificates themselves
1960). Bond indentures "contain[] all of the but rather on the PSAs—contracts to which
provisions of the borrowing, the duties of the plaintiffs are not parties—Countrywide contends
trustee that their motion to remand must fail. (Id.) Only
if plaintiffs brought claims concerning "how
Page 197 interest rates are to be calculated" or the proper
and the relation of the trustee to the issuer and recourse when the issuer "default[s] on
the bondholder." Id.; accord DICTIONARY OF principle", would the claims qualify for the
FINANCE AND INVESTMENT TERMS 325 exception. (See id. (citing Estate of Barbara
(6th ed.2003). Hence, just as bondholders are Pew, 527 F.3d at 31-32).)
beneficiaries of, but not parties to, indentures, so
-4-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
In making this argument, however, implicated and, therefore, do not fall with the
defendants make no attempt to reconcile their third CAFA exception. In support of this
interpretation with the language in Pew that argument, defendants discuss at length a series
finds the exception applicable when plaintiffs of cases interpreting the word "solely" in other
are seeking to enforce "the terms of the contexts. (Def. Br. at 8-11.) They then cite two
instruments that create and define securities". Id. aspects of plaintiffs' claims that they claim go
at 33 (emphasis added). They similarly ignore beyond the terms of the securities, namely: (1)
Pew's references to documents outside of the plaintiffs' naming of Countrywide Financial as a
four corners of the securities such as "a defendant under an alter-ego theory; and (2)
certificate of incorporation" or "an indenture". In plaintiffs' failure to include in their claim the
fact, the only acknowledgement of this language "no-action" clauses in the PSAs, a necessary
by defendants came at oral argument when hurdle for plaintiffs to bring suit. (Def. Br. at 11-
counsel argued that the reference to "articles of 13.) Suffice to say, the word "solely" cannot be
incorporation" in Pew was during a discussion read to limit the third exception to substantive
of CAFA's second exception in Section claims that raise no collateral issues. Every
1332(d)(9)(B). (Tr. of Mar. 13, 2009 Hr'g at 17.) plaintiff bringing a contract claim under state
Pew, however, never discusses the scope of the law must rely on the state's procedural rules,
second exception. Moreover, to the extent rules of evidence, and the substantive law of
defendants are relying on other courts for their contract, and the law of alter-ego liability is no
interpretation, they have misread the case law. less collateral to the merits of plaintiffs' claim
See New Jersey Carpenters Vacation Fund, 581 than these bodies of law. If pleading alter-ego
F.Supp.2d at 590 (interpreting Pew to hold that liability excluded plaintiffs' claims from an
CAFA's third exception should apply to exception otherwise squarely on point, no suit
"disputes over the meaning of the terms of a would ever fall under the exception. As for
security, which is spelled out in some formative plaintiffs' failure to include the "no-action"
document of the business enterprise, such as a clauses in their claims, defendants confuse
certificate of incorporation"); Katz v. Gerardi, plaintiffs' invocation of law in their claims with
552 F.3d 558, 563 (7th Cir.2009) (interpreting defendants' own invocation of law in their
Pew to hold that CAFA's exception "applies to defense. The fact that defendants plan to argue
suits asserting that the promises made in that the "no-action" clauses bar plaintiffs'
securities have not been honored" where claims—or that any other PSA provision or
body of law bars plaintiffs' claims1—does not
Page 198 take plaintiffs' claim outside the scope of
CAFA's third exception.
the promises include those made in the
"Declaration of Trust"). Finally, even if Defendants' third and final argument
defendants' construction were correct, they attempts to re-write CAFA to grant jurisdiction
would still lose because the PSAs are expressly over all cases having a "national-impact". The
incorporated into the certificates themselves. Court concedes that CAFA was designed to
(See Pl. Reply Br. at 3 & n. 2.) Unlike bonds, relocate a large portion of class action litigation
which traditionally contain interest rates and into federal court from state court, but Congress
principal, the certificates do not have fixed did not grant this Court jurisdiction over all class
interest rates printed on them, referencing the actions having a "national impact". If it had, it
PSAs for their calculation. Plaintiffs cannot sue would not have needed to include the
over the calculation of payment under the requirements of minimal diversity and at least $5
certificates without suing under the PSAs. million dollars in controversy. Moreover, had
Congress believed that disputes with national
Defendants' second argument is that even if impact trumped CAFA's third exception, it
the terms of the certificates are implicated by would have said so.
plaintiffs' claims, they are not "solely"
-5-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
In sum, none of defendants' arguments 26 U.S.C. § 6335, the statute that governed
overcome a common sense reading of Pew and service of the seizure notice, required personal
the text of CAFA itself. As interesting, timely, service, not service by certified mail.
and important as this case may be, the Court Respondent removed the case to federal court,
holds that it does not have jurisdiction under and petitioner challenged removal for lack of
CAFA. subject matter jurisdiction.
II. Substantial Question of Federal Law The Grable Court held that "[the] case
warrants federal jurisdiction", explaining that
Courts have jurisdiction under 28 U.S.C. § "[w]hether Grable was given notice within the
1331 over actions "arising under the meaning of the federal statute is . . . an essential
Constitution, laws, or treaties of the United element of its quiet title claim . . . ." Id. at 314-
States." 28 U.S.C. § 1331. "A case aris[es] under 15, 125 S.Ct. 2363. Michigan law required
federal law within the meaning of § 1331 . . . if a plaintiffs bringing an action to quiet title to
well-pleaded complaint establishes either that specify "the facts establishing the superiority of
federal law creates the cause of action or that the [their] claim," and Grable had sought to satisfy
this element of its claim by establishing the
Page 199 "failure by the IRS to give it adequate notice, as
plaintiff's right to relief necessarily depends on defined by federal law". Id. at 314, 125 S.Ct.
resolution of a substantial question of federal 2363. Consequently, while state law created the
law." Empire Healthchoice Assurance, Inc. v. rights Grable sought to vindicate, Grable bore
McVeigh, 547 U.S. 677, 689-90, 126 S.Ct. the burden of proving an application of federal
2121, 165 L.Ed.2d 131 (2006) (quotations and law that was favorable to his claim. Indeed, the
citations omitted). Defendants do not argue that adequacy of notice under 26 U.S.C. § 6335
plaintiffs' complaint pleads a federal cause of "appear[ed] to be the only legal or factual issue
action, indirectly conceding that plaintiffs' contested in the case." Id. at 315, 125 S.Ct.
claims sound in the state common law of 2363.
contract.2 Defendants instead argue that the The Court also stressed that Grable's claim
Court has "arising under" jurisdiction over satisfied two additional hurdles necessary for
plaintiffs' state law claims because they federal jurisdiction. First, the federal issue was a
"implicate[] substantial, disputed issues of "substantial" one because the federal
federal law." (Def. Br. at 2.) For this argument, government "ha[d] a strong interest in the
they rely heavily on Grable & Sons Metal Prods. prompt and certain collection of delinquent
v. Darue Eng'g & Mfg., 545 U.S. 308, 125 S.Ct. taxes." Id. (quotations omitted). Second,
2363, 162 L.Ed.2d 257 (2005). upholding federal jurisdiction was "consistent
A. Grable and its Progeny with congressional judgment about the sound
division of labor between state and federal
Commentators have cited Grable for courts governing the application of § 1331." Id.
bringing some clarity to the question of federal at 313-14, 125 S.Ct. 2363. In particular, the
jurisdiction over state law claims.3 In Grable, the Court held that "because it will be the
petitioner had originally brought a quiet title
action in Michigan State court. Five years before Page 200
the suit, the IRS had seized the petitioner's rare state title case that raises a contested matter
property to satisfy federal tax delinquencies, of federal law, federal jurisdiction to resolve
served notice of the seizure on the petitioner by genuine disagreement over federal tax title
certified mail, and sold the property to provisions will portend only a microscopic
respondent. Petitioner's suit against respondent effect on the federal-state division of labor." Id.
claimed that petitioner had retained title because at 315, 125 S.Ct. 2363.
-6-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
The Supreme Court noted the narrow scope whom it relies to carry out its functions", the
of Grable only a year later in Empire Court rejected the notion that these interests
Healthchoice Assurance, Inc. v. McVeigh, 547 warranted turning a discrete matter of state law
U.S. 677, 126 S.Ct. 2121, 165 L.Ed.2d 131 into a "federal case". Id. at 701, 126 S.Ct. 2121.
(2006). The petitioner in Empire was a health The Court concluded by noting that "Grable
insurance carrier that had contracted with the emphasized that it takes more than a federal
federal government to provide health care plans element to open the `arising under' door" and
for government employees. Respondent was that the case before it "[could not] be squeezed
administrator of the estate of Joseph McVeigh, a into the slim category Grable exemplifies." Id.
former enrollee in one of petitioner's plans.
McVeigh had been injured in a car accident and Courts in this Circuit have not hesitated to
received payments from petitioner for medical reject arguments that attempt to apply Grable too
care. Respondent later commenced an action in broadly in breach of contract actions. See, e.g.,
tort against the parties allegedly responsible for Citigroup, Inc. v. Wachovia Corp., 613
McVeigh's injuries—which ultimately led to his F.Supp.2d 485, 494-95 & n. 72 (S.D.N.Y.2009)
death—and settled for a substantial sum of (no jurisdiction under Grable for an action for
money. Upon learning of the settlement, breach of an exclusivity agreement when the
petitioner commenced suit against respondent in FDIC directs the parties to enter the agreement);
federal court for reimbursement of its payments D.B. Zwirn Special Opportunities Fund, L.P. v.
to McVeigh based on a clause in his health care Tama Broad., Inc., 550 F.Supp.2d 481, 487-88
plan. Respondent moved to dismiss for lack of (S.D.N.Y.2008) (no jurisdiction under Grable
subject matter jurisdiction, and the trial court for action to appoint a temporary receiver under
granted the motion. parties' contract when transfer of some of the
assets to the receiver required approval of the
On certiorari, the Supreme Court rejected FCC); Elmira Teachers' Assoc. v. Elmira City
the argument, pressed by the United States as Sch. Dist., No.,05 Civ. 6513(CJS), 2006 WL
amicus curiae, that jurisdiction was proper under 240552, at *6 (W.D.N.Y. Jan. 27, 2006) (no
Grable because interpreting McVeigh's health jurisdiction under Grable for a breach of contract
care plan required application of the Federal action when defendants were required
Employees Health Benefits Act of 1959
("FEHBA"), 5 U.S.C. § 8901 et seq. (2000). Page 201
FEHBA provided that "[t]he provisions of any
contract under this chapter which relate to the to maintain a retirement plan consistent with
nature or extent of coverage or benefits . . . shall Internal Revenue Code § 403(b)). The Court of
supersede and preempt any State or local law, Appeals did, however, find jurisdiction under
any regulation issued thereunder, which relates Grable in Broder v. Cablevision Sys. Corp., 418
to health insurance or plans . . . ." 5 U.S.C. § F.3d 187 (2d Cir.2005). In Broder, plaintiff
8901(m)(1). The Supreme Court held that even alleged that Cablevision had violated their
if FEHBA was a necessary element of contract's provision subjecting "all of
petitioner's claim, in all other respects the "case [Cablevision's] rates and any changes in those
[was] poles apart from Grable." Id. at 700, 126 rates" to "applicable law" by violating 47 U.S.C.
S.Ct. 2121. The Court observed that unlike the 543(d), which provided for uniform rates in a
case before it, Grable involved the actions of a geographic area. Because the federal statute was
federal agency, and the question involved was a incorporated by reference into the contract, was
pure issue of law applicable to numerous other the basis for one of plaintiff's claims, raised a
cases. While admitting that the United States substantial issue of federal law, and did not
had "an overwhelming interest in attracting able threaten to disturb the federal/state allocation of
workers to the federal workforce" and in "the jurisdiction, the Court of Appeals held that
health and welfare of the federal workers upon jurisdiction was appropriate under Grable.
-7-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
-8-
Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
sections govern Countrywide's modification of the loans without repurchase. Plaintiffs' position,
the loans pursuant to its settlement with the however, is, not surprisingly, that Section 3.11
Attorneys General is a matter of contract was the only provision that could have
construction. But 15 U.S.C. § 1639a, defendants authorized defendants' modifications under the
maintain, supplies a rule of construction for circumstances, and that whatever other
documents such as the PSAs. (Id. at 15.) provisions grant such authority do not apply.
Assuming that Countrywide's modifications Nothing in this position requires an
constitute a "qualified loss mitigation plan" interpretation of federal law. TILA is not
under the statute—and plaintiff does not contest incorporated by reference in the PSAs, see
this point in its papers—the statute provides that Broder, 418 F.3d at 195, and plaintiff does not
Countrywide "shall not be liable" for rely on TILA to satisfy its burden of proof, see
modifications effected pursuant to its duty to Grable & Sons Metal Prods., 545 U.S. at 314-
investors "to maximize the net present value of 15, 125 S.Ct. 2363.
[the] mortgages". (Def. Br. at 15; Def. Ltr.,
dated May 27, 2009, at 2.) The statute itself To the extent defendants are arguing that
defines this duty to investors and even provides plaintiffs are "artfully pleading" their claim to
that the Treasury shall define what constitutes avoid TILA, they misunderstand the law. If the
"standard industry practice". (Def. Ltr., dated defendant in Grable had never removed the case
May 27, 2009, at 2-3.) According to defendants, to federal court and never mentioned the federal
these provisions create a federal presumption statute at issue, the plaintiff would still have
against liability when servicers modify loans, required a favorable interpretation of federal law
and plaintiffs bear the burden of overcoming this to succeed on its quiet title claim. In contrast, if
presumption. (Def. Br. at 16.) Because plaintiffs defendants had never raised TILA as an issue in
bear this burden, federal law is a necessary this case, plaintiffs would not have required an
element of their claim and therefore a federal interpretation of federal law in order to succeed
forum is required under Grable. (Id. at 17-18.) on their claims.
Simply put, the Court disagrees. As an Although defendants deny it, by arguing
initial matter, it is not obvious to the Court why that TILA requires a different interpretation of
any part of 15 U.S.C. § 1639a is a necessary the contract, defendants are
element of plaintiffs' claims. The Court agrees
that plaintiffs bear the burden of demonstrating Page 203
that the PSAs as a whole require defendants to raising a federal defense. A federal defense has
buy back the modified mortgage loans—i.e., it is never been sufficient for federal question
not sufficient to merely single out a particular jurisdiction. Franchise Tax Bd. of CA v. Const.
clause. See S. Road Assocs. v. Intern. Bus. Laborers Vacation Trust, 463 U.S. 1, 2, 103
Machs. Corp., 4 N.Y.3d 272, 277, 793 N.Y.S.2d S.Ct. 2841, 77 L.Ed.2d 420 (1983) ("Under the
835, 826 N.E.2d 806 (2005) ("It is also `well-pleaded complaint' rule, a defendant may
important to read the document as a whole to not remove such a case to federal court unless
ensure that excessive emphasis is not placed the plaintiff's complaint establishes that the case
upon particular words or phrases"); NY JUR. `arises under' federal law within the meaning of
(CONTRACTS) § 248 ("Because the intention § 1331, and it may not be removed on the basis
of parties to a contract is ascertained, not from of a federal defense, including the defense of
one provision or particular words or phrases, but pre-emption, even if the defense is anticipated in
from the entire instrument, in the construction of the complaint and both parties admit that the
contracts, the entire contract must be defense is the only question truly at issue.");
considered."). At least as a logical matter, the Fleet Bank, Nat. Ass'n v. Burke, 160 F.3d 883,
Court further agrees that provisions other than 886 (2d Cir.1998) ("[the well-pleaded
Section 3.11 could provide for modification of complaint] rule requires a complaint invoking
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Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
federal question jurisdiction to assert the federal eliminating all liability associated with loan
question as part of the plaintiff's claim, and modifications. See Empire Healthchoice
precludes invoking federal question jurisdiction Assurance, Inc., 547 U.S. at 697-99, 126 S.Ct.
merely to anticipate a federal defense") 2121. Congress did neither of these things. In
(citations omitted). An argument constitutes an fact, previous drafts of both HERA and the
affirmative defense if it is the defendant's burden Homes Act proposed more sweeping immunity
to prove the facts essential to the argument. for loan servicers, but Congress ultimately
Because plaintiffs' claims depend only on the rejected this language in favor of the current
PSAs and the various common law principles of text. See 154 Cong. Rec. S. 3306, 3306 (2008)
contract interpretation, it follows that defendants (draft of HERA providing that "[Servicers] shall
bear the burden of demonstrating why TILA not be liable under any law or regulation of the
bars plaintiffs' claims. Defendants attempt to United States, any State or any political
avoid this conclusion by arguing that TILA subdivision of any State, for entering into a
actually modified the state law of contract to qualified loan modification or workout plan");
require application of a particular rule of H.R. 1106 (draft of the Homes Act passed by the
construction. But even if TILA does set forth the House) ("Notwithstanding any other provision
rule of construction that defendants allege, there of law, and notwithstanding any investment
is no evidence that TILA modified the common contract between a servicer and a securitization
law cause of action for breach of contract to vehicle or
require the rule's application, and the Court
declines defendants' invitation to impose such an Page 204
interpretation on TILA.
investor, a servicer (i) shall not be limited in the
Furthermore, while plaintiffs' claims might ability to modify mortgages . . . and (ii) shall not
meet Grable's other criteria—that the federal be obliged to repurchase loans . . . on account of
issue be "substantial" and that jurisdiction not modification [if the modification meets certain
upset the federal/state division of judicial criteria].")
labor—defendants' insistence on this point
misses the overarching principle governing any It is tempting to find federal jurisdiction
interpretation of 28 U.S.C. § 1331: legislative every time a multi-billion dollar case with
intent. Considering that Congress enacted national implications arrives at the doorstep of a
HERA and the Homes Act in response to a federal court. The jurisdiction of the federal
growing crisis in the American economy, there district courts, however, is left to Congress, not
is little doubt that interpretation of these to the discretion of the courts themselves. In this
amendments raises a "substantial" federal issue. case, Congress passed two statutes within a year
Furthermore, finding jurisdiction would not of each other to address the mortgage crisis. In
invite a flood of new lawsuits to federal court neither of these statutes did Congress federalize
because, as plaintiffs concede, Countrywide's the case before this Court. Considering the
PSAs are unique in the industry. (Tr. of Mar. 13, eminently predictable nature of this suit, the
2009 Hr'g at 2.) But here the Court is not Court finds that Congressional intent weighs
discerning Congress's intent regarding the against fitting this case in Grable's "slim
federal/state division of labor in a vacuum. category" of federal jurisdiction.
Congress could have expressly granted the CONCLUSION
federal courts jurisdiction over this cause of
action, but it didn't. See 28 U.S.C. § 1332(d); For the reasons stated, plaintiffs' motion to
Empire Healthchoice Assurance, Inc., 547 U.S. remand is GRANTED. The Clerk of the Court is
at 696, 126 S.Ct. 2121. It also could have done directed to close this case.
so implicitly by displacing all state law
concerning loan modifications or by completely SO ORDERED.
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Greenwich Financial Svcs. v. Countrywide Financial, 654 F.Supp.2d 192 (S.D.N.Y., 2009)
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