District Court Order Remanding Class Action to State Court Must be Dismissed because Class Action Fairness Act did not Authorize Appellate Review of Specific Facts of the Case Second Circuit Holds
Plaintiffs, the “holders of certificates issued by the trusts,” filed a putative class action in New York state court against various Countrywide Financial entities seeking a declaratory judgment that, under the terms of Pooling and Servicing Agreements between plaintiffs and defendants, Defendant Countrywide Servicing is required to repurchase the certain loans from the plaintiff-trusts “at a price equal to their unpaid principal plus any accrued interest.” Greenwich Financial Services Distressed Mortgage Fund 3 LLC v. Countrywide Financial Corp., ___ F.3d ___, 2010 WL 1541628, *1, *2 (2d Cir. April 20, 2010). Defense attorneys removed the class action to federal court pursuant to the Class Action Fairness Act (CAFA), id., at *1. Plaintiffs moved to remand the class action to state court on the grounds that “while CAFA extended federal jurisdiction for most class actions meeting certain monetary and diversity requirements, it did not apply to this action because the statute exempted suits involving claims that ‘relate[d] to the rights, duties[,] … and obligations relating to or created by or pursuant to any security.’” Id. (quoting 28 U.S.C. § 1332(d)(9)(C)). The district court agreed and remanded the class action to state court, id. Defendants appealed the remand order. The Second Circuit dismissed the appeal, concluding that it lacked jurisdiction to consider it.
The Circuit Court explained that appeal turned on a provision in CAFA that “bars appellate review of orders remanding securities class actions to state court.” Greenwich Financial, at *1. By way of background, the defendants originate and service residential home loans. Id. Defendant Countrywide Home Loans raised money to finance the loans by selling mortgages in securitization transactions “to specially created trusts, which received payment of interest and principal from mortgage borrowers.” Id. The trusts then “sold certificates to investors,” which entitled the owners to repayment of their principal and to interest payments, id. Defendant Countrywide Servicing administered the loans under Pooling and Servicing Agreements (PSAs). Id. Defendants Countrywide Home Loans and Countrywide Servicing, together with various other entities, were parties to the PSAs; however, the holders of the certificates and Defendant Countrywide Financial were not. Id. According to the allegations underlying the class action, in 2008, the attorneys general of seven states filed lawsuits against various Countrywide entities alleging predatory lending; specifically, “The states alleged that Countrywide engaged in deceptive sales practices, charged unlawful fees, and made loans it had no reasonable basis to think could be repaid.” Id., at *2. Countrywide eventually entered into a single settlement agreement resolving the multi-state litigation, which required Countrywide “to modify the terms of many of the mortgages owned by the trusts and administered by Countrywide Servicing on behalf of the trusts.” Id. Under the terms of the settlement, some homeowners “would make smaller payments of interest and principal to the trusts, thereby decreasing the value of the certificates.” Id.
Turning to the merits, the Second Circuit explained that CAFA extended federal court jurisdiction over certain class actions, and also “expanded the jurisdiction of the courts of appeals to hear appeals of orders remanding class actions to state courts.” Greenwich Financial, at *3 (citing 28 U.S.C. 1453(c) and Coll. of Dental Surgeons of P.R. v. Conn. Gen. Life Ins. Co., 585 F.3d 33, 37-38 (1st Cir. 2009)) However, the Circuit Court noted that CAFA “sets forth three circumstances under which appellate review of such orders is barred,” including Section 1453(d)(3), which excepts from appellate review remand orders of “a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)) and the regulations issued thereunder).” Id. This exception uses “identical to the third of three exceptions to CAFA’s grant of original federal diversity jurisdiction at 28 U.S.C. § 1332(d)(9)(C)”; accordingly, “if the district court lacked CAFA jurisdiction over the class action because it falls within the exception, we similarly lack jurisdiction to review the order remanding the action and must dismiss the appeal.” Id.
The Circuit Court found controlling its prior opinion in Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir. 2008), which “examined the scope of the §§ 1332(d)(9)(C) and 1453(d)(3) exceptions to CAFA jurisdiction[.]” Greenwich Financial, at *4. The Court recognized that the plaintiffs here were “holders rather than…purchasers of securities,” but found that to be an irrelevant distinction. Id., at *5. The class action’s claim plainly “‘relates to the rights, duties … and obligations relating to or created by or pursuant to’ their certificates, and their suit is not removable under CAFA.” Id. Similarly irrelevant was the fact that the class action was brought “not to enforce a term of the certificates themselves, but rather to enforce a term of the PSAs.” Id. At bottom, the class action fell within the scope of the securities exception to CAFA jurisdiction, id. Accordingly, the Circuit Court lacked jurisdiction to consider the appeal. Id., at *8.
NOTE: Defendants also removed the class action to federal court asserting federal question jurisdiction under 28 U.S.C. § 1331 based on the claim “that Countrywide Servicing’s duties under the PSAs were defined by the Housing and Economic Recovery Act of 2008” which “provides a safe harbor for servicers of pooled mortgages who modify home loans meeting certain conditions.” Greenwich Financial, at *2. Plaintiffs argued that federal law “was not an element of their claim” and that HERA’s safe harbor provision would, at best, “simply provide a federal defense to a claim under state law, and therefore was not a basis for subject matter jurisdiction.” Id. The district court agreed with this argument, as well. Id. The district court order remanding the class action on this ground was not reviewable on appeal. See id., at *4.