In re Application of the Bank of New York Mellon

• Decision Date: 19 October 2011
• Docket Number: No. 11 Civ. 5988 (WHP).,11 Civ. 5988 (WHP).
• Citation: 819 F.Supp.2d 354
• Parties: In the matter of the application of The BANK OF NEW YORK MELLON (as trustee under various pooling and servicing agreements and indenture trustee under various indentures), et al., Petitioners, v. WALNUT PLACE LLC, et al., Intervenor–Respondents.
• Court: U.S. District Court — Southern District of New York

819 F.Supp.2d 354

In the matter of the application of The BANK OF NEW YORK MELLON (as trustee under various pooling and servicing agreements and indenture trustee under various indentures), et al., Petitioners,

v.WALNUT PLACE LLC, et al., Intervenor–Respondents.

No. 11 Civ. 5988 (WHP).

United States District Court, S.D. New York.

Oct. 19, 2011.

Matthew D. Ingber, Christopher James Houpt, Mayer Brown LLP, New York, NY, Hector Gonzalez, Mauricio Alejandro Espana, Dechert, LLP, New York, NY, for Petitioners.

David J. Grais, Owen L. Cyrulnik, Grais & Ellsworth, LLP, New York, NY, for Intervenor–Respondents.

MEMORANDUM & ORDER

WILLIAM H. PAULEY III, District Judge:

The Bank of New York Mellon, as trustee for hundreds of trusts, seeks to dispose of billions of dollars in toxic mortgage claims through an arcane summary procedure in state court. The question presented is whether this mass settlement, which implicates core national interests in the integrity of the financial markets, is immune from review in federal court.

On June 29, 2011, The Bank of New York Mellon (“BNYM”), filed a Verified Petition (the “Petition”) commencing a proceeding under Article 77 of the New York Civil Practice Law and Rules in New York Supreme Court (New York County) before the Honorable Barbara R. Kapnick. See In the matter of the application of the Bank of New York Mellon et al. (Index No. 651786/2011) (the “Article 77 Proceeding”). The Walnut Place entities (collectively, “Walnut Place”), intervenor-respondents in the Article 77 Proceeding, removed this action to federal court. BNYM now moves to remand. For the following reasons, BNYM's motion is denied.

BACKGROUND

To raise money, Countrywide Home Loans, Inc. and various affiliates (collectively, “Countrywide”) entered into a number of securitization transactions between 2004 and 2008. (Declaration of Owen L. Cyrulnik dated Sept. 14, 2011 (“Cyrulnik Decl.”) Ex. A, Petition (“Pet.”) ¶¶ 2, 9.) In these transactions, Countrywide conveyed portfolios of securitized residential mortgages through a third party to BNYM, as trustee, to hold in trust. (Pet. ¶ 2.) In turn, investors purchased certificates or notes evidencing various categories of ownership interests in the trusts. (Pet. ¶ 2.) BNYM acts as trustee for hundreds of these mortgage securitization trusts created by Pooling and Servicing Agreements or Sale and Servicing Agreements (collectively, “PSAs”). (Pet. at 1.) Bank of America Corporation (“Bank of America”) now owns Countrywide. (Pet. ¶ 9.)

The Walnut Place entities are Delaware limited liability companies whose members are limited partnerships organized under Delaware law. (Cyrulnik Decl. Ex. B, Notice of Removal dated Aug. 26, 2011 (“Removal Notice”) ¶ 12.) Walnut Place avers that, based on the citizenship of their partners, both Walnut Place VIII LLC and Walnut Place X LLC are citizens of Connecticut, Maryland, Massachusetts, and New Hampshire. (Removal Notice ¶ 12.) Another entity, Walnut Place IX LLC, is a citizen of Connecticut, Maryland, Massachusetts, New Hampshire, and New Jersey. (Removal Notice ¶ 12.) Walnut Place owns securities issued by three Countrywide trusts. (Removal Notice ¶ 5.)

The circumstances leading to the present litigation began in June 2010, when at least one institutional investor holding mortgage-backed certificates issued by the trusts sent a letter to BNYM. (Pet. ¶ 27.) In that letter, the investor(s) asserted that Countrywide had sold a large number of mortgages into the trusts that failed to comply with certain representations and warranties contained in the PSAs. (Pet. ¶ 27.) They (or it) cited the alleged excessive early default and foreclosure rates for the mortgages, Countrywide's settlements with various state Attorneys General, and publicly disclosed e-mails from Countrywide officials as evidence of breaches of the representations and warranties. (Pet. ¶ 27.) As a remedy, the investor(s) contended that Countrywide and Bank of America were obligated to repurchase the defaulting mortgage loans. (Pet. ¶ 27.)

BNYM veils the identity of the pioneering investor(s). And the June 2010 letter—which is the first investor communication with BNYM mentioned in the Petition—is not part of the record before this Court or Justice Kapnick. But one thing is certain: no more than eight institutional investors had banded together by October 18, 2010, when they asserted a notice of nonperformance in a letter that is part of the record before Justice Kapnick. (Affirmation of Owen L. Cyrulnik in Further Support of Petition to Intervene dated July 13, 2011, Ex. 2) (NYSCEF Doc. No. 50–2). BNYM attributes actions to a large group of investors under the banner “the Institutional Investors.” BNYM's Petition is silent, however, regarding when and how these investors assembled themselves.¹

In November 2010, fearing that the trusts' claims against Countrywide and Bank of America would lapse as a result of BNYM's torpor, several institutional investors—acting without Walnut Place—commenced settlement discussions with Countrywide and Bank of America. (Pet. ¶ 35; Transcript of Proceedings held on Sept. 21, 2011 (“Sept. 21 Hr'g Tr.”) at 62.) Although BNYM was a party to the negotiations, these investors initiated the settlement process because “the trustee wasn't doing anything.” (Sept. 21 Hr'g Tr. at 62.) In their negotiations, the investors considered material non-public information from Bank of America that was unavailable to other certificate-holders, including Walnut Place. (Ingber Decl. Ex. C, Transcript of a Conference before the Hon. Barbara R. Kapnick dated Aug. 5, 2011 (“Aug. 5 Hr'g Tr.”) at 24–25.) And no certificate-holders other than this clique of institutional investors participated in these discussions. (Petition to Intervene ¶ 7.)

Independently, Walnut Place sued Countrywide on February 23, 2011, for breach of the representations and warranties contained in the PSAs. (Declaration of Matthew D. Ingber dated Aug. 31, 2011 (“Ingber Decl.”) Ex. F, Verified Petition to Intervene in the Article 77 Proceeding, filed on July 5, 2011 (“Petition to Intervene”) ¶ 4.) Two other investor lawsuits were subsequently filed against BNYM, Countrywide, and Bank of America. (Pet. ¶ 14.)

On June 28, 2011, BNYM entered into an agreement with Countrywide and Bank of America to settle all potential claims belonging to 530 of the trusts for which BNYM serves as trustee (the “Settlement Agreement”). (Pet. ¶¶ 10–11.) Although the trusts' claims may exceed $150 billion, (Removal Notice ¶ 13), the Settlement Agreement requires a payment of $8.5 billion to trust beneficiaries and mandates certain improvements to Countrywide's mortgage servicing process. (Pet. ¶ 11.) The Settlement Agreement does not encompass sixty-three other trusts for which BNYM is trustee with a combined unpaid balance of approximately $15.3 billion as of September 26, 2011. (Letter from Matthew Ingber to the Court dated Sept. 27, 2011) (ECF No. 108).

On June 29, 2011, BNYM initiated the Article 77 Proceeding without notifying any of the trust beneficiaries. (Transcript of Proceedings held on Sept. 1, 2011 (“Sept. 1 Hr'g Tr.”) at 20.) While BNYM knew that several trust beneficiaries had already begun litigation, BNYM proceeded ex parte and did not name a single respondent or defendant. (Removal Notice ¶ 3.) BNYM sought an order (i) declaring that BNYM had behaved reasonably by entering into the Settlement Agreement, (ii) ordering BNYM, Countrywide, and Bank of America to consummate the Settlement Agreement, and (iii) releasing claims brought by investors, including claims being litigated by Walnut Place. (Cyrulnik Decl. Ex. C, Proposed Final Order and Judgment, filed on June 29, 2011 (“Proposed Final Order and Judgment”) at 4–7.)

Like all New York special proceedings, Article 77 proceedings are intended to be expedited. See Vincent C. Alexander, Practice Commentaries C401:l (2010). At the outset of the Article 77 Proceeding, Justice Kapnick approved a scheduling order setting an August 30, 2011 deadline for any person to object to the Settlement Agreement and a November 17, 2011 final hearing date. (Declaration of Exigency dated Aug. 31, 2011 ¶ 3.) Walnut Place filed a petition to intervene on July 5, which Justice Kapnick granted on August 19. (Removal Notice 115–6.)

At an August 5 hearing, Justice Kapnick explained that there would be no opt-outs to the Settlement Agreement because an Article 77 proceeding is not a class action. (Aug. 5 Hr'g Tr. at 18.) Justice Kapnick also explained that Article 77 proceedings are, to say the least, exotic. (Aug. 5 Hr'g Tr. at 18) (“It's important to remember that this petition was brought as an Article 77 petition, which I personally have hardly ever seen before, so I had to go into the C.P.L.R., which doesn't have too much about Article 77, and read it.”). In sharp contrast to the $8.5 billion Settlement Agreement at issue here, proceedings under Article 77 typically “present mere matters of administration.” 22 Carmody–Wait New York Practice § 131:1 (2d ed. 2011). Indeed, this Court has located only twenty-eight decisions—many of which were short form orders—published in the past forty years concerning Article 77. Without exception, the often-uncontested proceedings described in these decisions and orders were garden-variety matters of trust administration. ² Most of the decisions this Court has located concerning Article 77 and its predecessor, Article 79, date from the 1950s and early 1960s. It is no wonder Justice Kapnick had “hardly ever seen [one] before.” (Aug. 5 Hr'g Tr. at 18.)

On August 26, 2011, Walnut Place removed the Article 77 Proceeding to this Court under the “mass action” provisions of the Class Action Fairness Act of 2005, 28 U.S.C. §§ 1332(d), 1453, and 1711–1715 (“CAFA”). (Removal Notice ¶ 11.)

DISCUSSION

I. Removal Under CAFA

A. Timeliness and Waiver

This Court first addresses BNYM's fleeting contention that Walnut Place did not timely...