Mbia Ins. Corp. v. Royal Bank Of Canada

Citation706 F.Supp.2d 380
Decision Date30 December 2009
Docket NumberCase No. 09-CV-5044 (KMK).
PartiesMBIA INSURANCE CORPORATION and Lacrosse Financial Products, LLC, Plaintiffs,v.ROYAL BANK OF CANADA and RBC Capital Markets Corporation, Defendants.
CourtU.S. District Court — Southern District of New York



Philippe Zuard Selendy, Esq., John H. Chun, Esq., Calli Ray, Esq., Quinn Emanuel Urquhart Oliver & Hedges LLP, New York, NY, for Plaintiffs.

Scott Sonny Balber, Esq., Emily Abrahams, Esq., Marc Ashley, Esq., Chadbourne & Parke LLP, New York, NY, for Defendants.


KENNETH M. KARAS, District Judge:

Defendants Royal Bank of Canada (RBC) and RBC Capital Markets Corporation (“RBCCMC”) removed the present action from state court. Plaintiffs MBIA Insurance Corporation (MBIA) and LaCrosse Financial Products, LLC (LaCrosse) move to remand this case back to state court and for attorneys' fees.

For the reasons stated herein, Plaintiffs' Motion to Remand is granted, but their Motion for Attorneys' Fees is denied.

I. Background
A. Factual Background

Plaintiffs' principal places of business are in Westchester, New York. (Chun Aff. Ex. A at 1.) Defendant RBC has its principal place of business in London, United Kingdom, and Defendant RBCCMC has its principal place of business in New York, New York. (Chun Aff. Ex. A at 1.) Royal Bank of Canada Europe Limited (RBC Euro) has its principal place of business in England, and is also a wholly-owned subsidiary of RBC.1 (Chun Aff. Ex. C ¶ 29.) 2

LaCrosse entered into three credit default swap contracts (“Logan CDS contracts”), with RBC between September 2005 and July 2007. (Chun Aff. Ex. A at 2.) Each Logan CDS contract involved a collateralized debt obligation (“CDO”), called Logan CDO I, Ltd. (“Logan I”), Logan CDO II, Ltd. (“Logan II”), and Logan CDO III, Ltd. (“Logan III”), respectively. ( Id.) In the Logan CDS contracts, LaCrosse was the “credit protection seller,” which means that LaCrosse assumed the risk of loss if certain credit events, such as default, occurred in the underlying CDOs. (Chun Aff. Ex. C ¶ 34.) In exchange, LaCrosse was to receive “premium payments” from RBC, which was the credit protection buyer, during the swap. ( Id. ¶ 35.) In connection with the Logan CDS contracts, MBIA entered into three corresponding Financial Guaranty Insurance Policies (“Financial Guaranties”) that provided financial guarantee insurance coverage to RBC in the event LaCrosse failed to pay its contractual obligations under the Logan CDS contracts when a qualifying credit event occurred. (Defs.' Mem. of Law in Opp'n to Pls.' Mot. to Remand (“Defs.' Mem.”) 3.) Only LaCrosse and RBC, not RBCCMC (or any other entity), were signatories to the Logan CDS contracts. ( Id. at 2-3.) Similarly, RBCCMC is not a signatory to the Financial Guaranties. ( Id. at 3.)

According to Plaintiffs, RBC and RBCCMC arranged the Logan CDS contracts and marketed them to LaCrosse and MBIA. (Chun Aff. Ex. A at 2.) Plaintiffs claim that RBCCMC took a leading role in the marketing and negotiating of the Logan I and II CDS contracts. (Chun Aff. Ex. C ¶ 42.) Furthermore, Plaintiffs allege that documents, pitchbooks, rating agency letters, and other documents were sent to Plaintiffs by people using RBCCMC email addresses. ( Id. ¶ 43.)

Plaintiffs claim that after the closing of the Logan CDS contracts, RBC and RBCCMC “issued Credit Event Notices (“CENs”) to Plaintiffs that failed to comply with, and resulted in breaches of, the terms of the CDS Contracts including, without limitation, [Defendants'] failure to: (a) properly serve and notify Plaintiffs of the credit events; (b) provide contractually-required information and verification of the credit events; and (c) conduct proper dealer polling following credit events in accordance with valuation procedures in the [Logan] CDS [c]ontracts.” (Chun Aff. Ex. A at 2.) According to Plaintiffs, these actions constituted breaches of the Logan CDS contracts. ( Id.) Plaintiffs also allege that both Defendants were responsible for “fail[ing] to deliver securities with the credit quality promised” and “select[ing] credits of inferior quality” for the CDO pools, in violation of the Logan CDS contracts. ( Id.) Plaintiffs claim that they “have performed each of their obligations under” the Logan CDS contracts. ( Id.)

B. Procedural Background

On May 22, 2009, Plaintiffs initiated this action by filing a Summons with Notice in the Supreme Court of the State of New York in the County of Westchester. (Chun. Aff. Ex. A at 1.) The Summons with Notice listed RBC and RBCCMC as defendants. ( Id.) The Summons with Notice stated that the action was “to enforce three credit default swap contracts” and that both Defendants had breached the Logan CDS contracts. ( Id. at 2.) After summarizing the conduct alleged to have breached the contracts, the Summons with Notice requested “enforcement of the CDS Contracts, judgment declaring that [Defendants] ha[ve] materially breached their terms and ... damages in an amount to be determined.” ( Id.)

On May 28, 2009, within a week of the filing of the Summons with Notice, Defendants removed the case to this Court pursuant to 28 U.S.C. §§ 1332, 1441, and 1446. (Balber Aff. Ex. H at 1.) In the removal petition, Defendants stated that the Court had diversity jurisdiction because “the proper parties to this action are completely diverse.” ( Id. at 2.) Defendants claimed that RBCCMC, the only non-diverse Defendant, was “improperly joined ... in an attempt to defeat diversity jurisdiction.” ( Id. at 3.) In particular, Defendants explained that Plaintiffs' only claims were for breach of contract and that RBCCMC, as a non-signatory to the contracts at issue, could not be liable for those breaches. ( Id. at 3-4.) On June 17, 2009, Defendant RBC filed an Answer and asserted counterclaims against Plaintiffs. (Dkt. No. 4.)

Plaintiffs timely filed the instant motion on July 17, 2009, and the motion was fully submitted on September 2, 2009. (Dkt. No. 14.) The Court held oral argument on December 7, 2009.

II. Discussion
A. Standard of Review

Federal courts have original jurisdiction over civil actions in which the dispute is between citizens of different states and in which the sum in controversy exceeds $75,000. See 28 U.S.C. § 1332(a). In order to obtain diversity jurisdiction, there must be “complete diversity” so that no adverse parties are citizens of the same state. Caterpillar Inc. v. Lewis, 519 U.S. 61, 68, 117 S.Ct. 467, 136 L.Ed.2d 437 (1996). The federal removal statute allows a defendant to remove “any civil action brought in a State court of which the district courts of the United States have original jurisdiction.” 28 U.S.C. § 1441(a); see Lincoln Prop. Co. v. Roche, 546 U.S. 81, 84, 126 S.Ct. 606, 163 L.Ed.2d 415 (2005) (Defendants may remove an action on the basis of diversity of citizenship if there is complete diversity....”). A diversity case may only be removed if none of the properly joined defendants is a citizen of the state in which the action was brought. 28 U.S.C. § 1441(b). A defendant must file a notice of removal within thirty days of receipt “of the initial pleading setting forth the claim for relief upon which such action or proceeding is based....” Id. § 1446(b). “If the case stated by the initial pleading is not removable, a notice of removal may be filed within thirty days after receipt by the defendant ... of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable....” Id.

In evaluating the propriety of a removal, the Court starts with the baseline principle that federal courts are courts of limited jurisdiction. See Keene Corp. v. United States, 508 U.S. 200, 207, 113 S.Ct. 2035, 124 L.Ed.2d 118 (1993). Accordingly, “removal jurisdiction exists in a given case only when that jurisdiction is expressly conferred on the courts by Congress.” Fed. Ins. Co. v. Tyco Int'l Ltd., 422 F.Supp.2d 357, 367 (S.D.N.Y.2006) (internal quotation marks omitted); see also Irving Trust Co. v. Century Exp. & Imp., S.A., 464 F.Supp. 1232, 1234 (S.D.N.Y.1979) (noting that the right of removal is “a matter of legislative grace” (citing Great N. Ry. Co. v. Alexander, 246 U.S. 276, 280, 38 S.Ct. 237, 62 L.Ed. 713 (1918))). Judicial scrutiny is especially important “in the context of removal, where considerations of comity play an important role.” Johnston v. St. Paul Fire & Marine Ins. Co., 134 F.Supp.2d 879, 880 (E.D.Mich.2001). Indeed, [o]ut of respect for the independence of state courts, and in order to control the federal docket, federal courts construe the removal statute narrowly, resolving any doubts against removability.” Stan Winston Creatures, Inc. v. Toys “R” Us, Inc., 314 F.Supp.2d 177, 179 (S.D.N.Y.2003) (internal quotation marks omitted); see also Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09, 61 S.Ct. 868, 85 L.Ed. 1214 (1941) (noting that federalism concerns call for “the strict construction” of the removal statute); Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 274 (2d Cir.1994) (“In light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments, federal courts construe the removal statute narrowly, resolving any doubts against removability.” (internal citation omitted)); Zerafa v. Montefiore Hosp. Hous. Co., 403 F.Supp.2d 320, 324 (S.D.N.Y.2005) (“Removal jurisdiction is strictly construed inasmuch as it implicates significant federalism concerns and abridges the deference courts generally give to a plaintiff's choice of forum.”).

As a general matter, the party asserting federal jurisdiction bears the burden of proving that the case is properly in federal court. See McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189, 56 S.Ct. 780, 80 L.Ed. 1135 (1936). “Where, as here, jurisdiction is asserted by a defendant...

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