Am. Int'l Grp., Inc. v. Bank of Am. Corp. (In re Countrywide Fin. Corp. Mortg.–Backed Sec. Litig.), Case Nos. 2:11–ML–02265–MRP (MANx), 2:11–CV–10549 MRP (MANx).

• Citation: 943 F.Supp.2d 1035
• Decision Date: 06 May 2013
• Docket Number: Case Nos. 2:11–ML–02265–MRP (MANx), 2:11–CV–10549 MRP (MANx).
• Parties: In re COUNTRYWIDE FINANCIAL CORPORATION MORTGAGE–BACKED SECURITIES LITIGATION American International Group, Inc., et al., Plaintiffs, v. Bank of America Corporation, et al., Defendants.
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Central District of California

943 F.Supp.2d 1035

In re COUNTRYWIDE FINANCIAL CORPORATION MORTGAGE–BACKED SECURITIES LITIGATION

American International Group, Inc., et al., Plaintiffs,

v.Bank of America Corporation, et al., Defendants.

Case Nos. 2:11–ML–02265–MRP (MANx), 2:11–CV–10549 MRP (MANx).

United States District Court,

C.D. California.

May 6, 2013.

Brian Charles Devine, Brian E. Pastuszenski, Inez H. Friedman–Boyce, Goodwin Procter LLP, Boston, MA, David Martin Halbreich, Reed Smith LLP, Los Angeles, CA, for Countrywide Financial Corporation Mortgage–Backed Securities Litigation.

Order Re Motion to Dismiss the Amended Complaint and Motion to Stay Case

MARIANA R. PFAELZER, District Judge.

I. Background

The plaintiffs in this litigation (collectively, “AIG” or “Plaintiffs”) purchased hundreds of residential mortgage-backed securities (“RMBS”) worth tens of billions of dollars between 2005 and 2007. The listed defendants acted as sponsors, sellers and underwriters for 346 of the securities, and as originators and depositors for thousands of the mortgages underlying the RMBS themselves (collectively, all listed defendants are the “Defendants”).

These RMBS were created through a process called “securitization.” In mortgage securitization, originators extend or acquire thousands of mortgage loans. Each loan produces cash-flows from the payments by borrowers. The loans are pooled and sold to depositors, who transfer the loan pools to trusts. The trusts issue securities in the form of certificates for purchase by investors. Each certificate entitles the holder to a portion of the cash flow from the loan pools as the borrowers repay their mortgage debt. Certificates are often sold in “tranches,” i.e., slices of the loan pool with different priorities of payment, interest rates and credit protection. Upon issuance, credit rating agencies assign ratings to each tranche. If they desire, investors can select riskier certificates in the lower tranches with higher interest payments but lower credit ratings, instead of safer certificates in the higher tranches with lower interest payments and higher credit ratings.

This case demands careful consideration of the specific RMBS portfolio held by Plaintiffs as well as the Plaintiffs themselves. AIG purchased the 346 securities (the specific RMBS in this lawsuit are called the “Certificates,” and are only a small portion of AIG's total RMBS portfolio over time) pursuant to a program AIG called the “securities lending program.” Decl. of David H. Fry in Supp. of Defs.' Supplemental Mem. (“Supp. Fry Decl.”) Ex. 5, at 1 (AIG's 2008 Annual Report), ECF No. 251.¹ In this program, some of AIG's subsidiaries lent some of their securities holdings, usually fixed income securities, to other financial institutions. Id.; Supp. Fry Decl. Ex. 1, at 180:8–181:4, March 15, 2013 (deposition transcript of Steven J. Manzari, a senior vice president at the Federal Reserve Bank of New York, referred to as “Manzari Depo.”). Borrowers gave cash collateral in exchange for the securities. Id. 182:7–13. AIG then reinvested the cash collateral primarily through the purchase of mortgage-backed securities. Id. 183:7–184:7, 185:18–19. At the same time, in an additional development not directly relevant here, AIG and its subsidiaries sold billions of dollars of credit protection in credit default swaps. Supp. Fry Decl. Ex. 5, at 1.

The market decline in 2007 and 2008 triggered enormous obligations on the swaps, and contributed to sharp losses in the value of AIG's RMBS. Id. When the counterparties in the securities lending program “began in increasing numbers to request a return of their cash collateral,” AIG could not cover the demands through the sale of the purchased RMBS, because the value of the Certificates had fallen so precipitously. Id. at 40. The credit rating agencies downgraded AIG's ratings, which triggered an “acute liquidity crisis,” as AIG needed to find alternative sources to repay its counterparties. Id. at 1.

In these crisis conditions, the Federal Reserve Bank of New York (“FRBNY”) determined that the “disorderly failure of AIG could add to already significant levels of financial market fragility and lead to ... materially weaker economic performance,” and so extended an $85 billion bridge loan to the company. Supp. Fry Decl. Ex. 7 (Federal Reserve Board press release from September 16, 2008). The FRBNY received valuable collateral in exchange from AIG, including most of the stock in AIG and its subsidiaries, and “expected to be repaid from the sale of the firm's assets.” Id. This bridge loan “was essential to prevent an AIG bankruptcy.” Supp. Fry Decl. Ex. 6 (Form 8–K/A filed by AIG on November 10, 2008). However, even after the FRBNY made another $37 billion available to AIG, the FRBNY worried that the credit rating agencies would further downgrade AIG, and that AIG was not guaranteed to be viable going forward. Manzari Depo. 175:2–21, 206:23–207:2. As a result, the FRBNY and the U.S. Treasury restructured and increased AIG's financial assistance. Supp. Fry Decl. Ex. 11 (Federal Reserve Board press release from November 10, 2008).

There were four parts to the modified government assistance, which was to be extended “in order to keep the company strong and facilitate its ability to complete its restructuring process successfully.” Id. The Treasury would purchase $40 billion of newly issued AIG shares, the FRBNY would alter the terms of the bridge loan, and the FRBNY would lend money to two newly created special purpose vehicles. Id. One special purpose vehicle would purchase the obligations AIG had promised to protect through credit default swaps. Id. The other, later called Maiden Lane II, LLC (“Maiden Lane II” or “MLII,”) would purchase a portion of AIG's RMBS portfolio, which makes up most of the RMBS subject to this motion. Id.

That purchase was effected through an Asset Purchase Agreement (“APA,”) finalized on December 12, 2008. Supp. Fry Decl. Ex. 12.² Under the APA, the FRBNY loaned Maiden Lane II $19.8 billion. Maiden Lane II purchased a portfolio of RMBS from AIG in exchange for the $19.8 billion. Maiden Lane II was to sell or collect on the RMBS. Those proceeds would be used to repay the FRBNY's loan. Once the $19.8 billion sum was repaid, AIG would receive the first $1 billion of the remaining proceeds of Maiden Lane II. After both sums were paid by ML II, any residual profits would be split between the FRBNY and AIG, with 5/6 of the recovery going to the Federal Reserve Bank. Supp. Fry Decl. Ex. 5, at 41.³

The APA transferred “RMBS Issues” to Maiden Lane II. APA § 1.01. “RMBS Issues” are defined as “the securities of a single issue of residential mortgage-backed securities ... together with all right, title and interest in and to all Related Instruments.” Id. § 7.01. “Related Instruments” are defined as “any participation, pooling, servicing or other agreement, document or instrument” that governs or affects an RMBS Issue. Id.

Almost three years later, AIG filed the instant lawsuit in New York state court, alleging that it was defrauded in purchasing the RMBS at an inflated price. The RMBS at issue here include those sold to Maiden Lane II as well as some that AIG continued to hold past December 2008. AIG asserts that the documents used to create and market the RMBS “fraudulently misrepresented and concealed the actual credit quality of the mortgages by providing false quantitative data about the loans, thus masking the true credit risk of AIG's investments.” Am. Compl. (“AC”) ¶ 3.

The Defendants removed this matter to federal court on the basis of the Edge Act, 12 U.S.C. § 632, and the “related to” bankruptcy jurisdiction statute, 28 U.S.C. § 1334(b). Judge Jones of the Southern District of New York denied AIG's motion to remand to state court on the basis of the Edge Act, and found that there was jurisdiction under § 1334(b), but did not determine whether to abstain or remand the case based on 28 U.S.C. § 1334(c)(1), because jurisdiction existed under the Edge Act. Am. Int'l Grp., Inc. v. Bank of Am. Corp. (“ AIG I,”) 820 F.Supp.2d 555 (S.D.N.Y.2011); Am. Int'l Grp., Inc. v. Bank of Am. Corp. (“ AIG II,”) No. 11 Civ. 6212(BSJ), 2011 WL 6778473 (S.D.N.Y. Dec. 20, 2011). The Judicial Panel on Multidistrict Litigation transferred all claims involving Countrywide MBS to this Court as part of the Countrywide Mortgage–Backed Securities Multidistrict Litigation. Transfer Order, In re Countrywide Mortg.-Backed Secs. Litig., 11–ML–2265, slip op. (J.P.M.L. Dec. 21, 2011); Corrected Copy Transfer Order, In re Countrywide Mortg.-Backed Secs. Litig., 11–ML–2265, slip op. (J.P.M.L. Jan. 12, 2012). Claims “relating to non-Countrywide MBS” were “separated and remanded to the Southern District of New York.” Id. The claims transferred to this Court are “all claims relating to Certificates that Countrywide issued (including the successor liability claims against Bank of America with respect to such Certificates).” Am. Int'l Grp., Inc. v. Countrywide Fin. Corp. (“ AIG III,”) 834 F.Supp.2d 949, 950 (C.D.Cal.2012). That includes “claims relating to those Third Party Offerings that contain Countrywide-originated loans,” but not claims “relating to the Bank of America/Merrill Offerings” that were issued by Bank of America, Merrill Lynch & Co. or their subsidiaries, even if underwritten by Countrywide Securities Corporation. Id. This Court issued an opinion on timeliness and jurisdiction on May 23, 2012, dismissing some of the claims before it. Id.

AIG filed an amended complaint on August 29, 2012 (the “Amended Complaint”). In the Amended Complaint, Plaintiffs allege that the Defendants made misrepresentations in the legal documents used to create and market the RMBS (“the Offering Documents”). The Amended Complaint states that the Offering Documents contained four types of misstatements. AIG claims the Defendants deviated from the listed underwriting guidelines and orally provided assurances regarding...