country wide motion dismiss greenwich

8/14/2019 Country Wide Motion Dismiss Greenwich

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SUPREME COURT OF THE STATE

OF

NEW YORK

COUNTY

OF

NEW YORK

)

GREENWICH FINANCIAL SERVICES )

DISTRESSED MORTGAGE FUND 3, LLC,

and)

Index No. 65 47412 8

QED LLC, on behalf of themselves and all other )

persons similarly situated, )

)

Plaintiffs, )

)

-against- )

)

COUNTRYWIDE FINANCIAL )

CORPORATION, COUNTRYWIDE HOME )

LOANS, INC. and COUNTRYWIDE HOME )

LOANS SERVICING LP, )

)

Defendants. )

MEMORANDUM OF LAW IN SUPPORT

OF DEFENDANTS MOTION TO DISMISS

THE COMPLAINT UNDER CPLR

3211(a)(1)

AND

3211(a)(7)

Of counsel:

Brian D. Boyle

Matthew

M

Shors

Kathryn

E

Tarbert

O MELVENY

MYERS LLP

1625 Eye Street, N.W.

Washington, D.C. 20006

(202) 383-5300

William

J

Sushon

O MELVENY MYERS LLP

7 Times Square

New York, New York 10036

(212) 326-2000

ounsel or Defendants

October 8, 2009


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T ABLE OF CONTENTS

Page

INTRODUCTION ......................................................................................................................... 1

FACTUAL BACKGROUND

....................................................................................................... 5

A. Mortgage Securitization ................................................. ....................................... 5

B. ThePSA ................................................................................................................ 5

C. Subprime Foreclosures ........................................ ................................................ .. 6

D. Congressional Reaction to the Mortgage Meltdown ............................................. 7

E. This Lawsuit .............................................. ...................................................... ...... 8

ARGUMENT

................................................................................................................................. 9

I THE PSA'S NO-ACTION CLAUSE

BARS THIS

ACTION

........................................ 10

A

Plaintiffs Have Not Satisfied the

PSA's

Requirements for Suit.. ....................... 10

B.

The

Complaint Does Not Allege

Any

Legitimate Justification for Disre-

garding the

PSA's

Unambiguous Procedural Requirements for Suit.. ................ 12

II.

UNDER THE PSA'S

UNAMBIGUOUS

TERMS, COUNTRYWIDE CANNOT

BE

REQUIRED TO REPURCHASE

THE

MODIFIED MORTGAGES

...................... 14

A

The

PSA Authorizes Countrywide to Modify Mortgages to Mitigate Loss

to the

Trust's

Investors Without Requiring Repurchase ...................................... 14

B. Plaintiffs' Interpretation

of

3.11 of the

PSA

to Require Countrywide to

Repurchase Every Loan It Modifies, Regardless of Purpose, Is Plainly

Wrong .................................................................................................................. 17

1 Section 3.11(b) Expressly Applies Only to Modifications in Lieu

of a Refinancing ..................................................................... ................ 18

2. Plaintiffs' Ultimate Conclusion that 3.11 Provides the Sole Res

ervoir of Loan Modification Authority Cannot Be Squared with

Other Provisions

of

the

PSA

.................................................................... 20

III.

CFC

IS

NOT

A

PROPER DEFENDANT

....................................................................... 22

CONCLUSION

........................................................................................................................... 23

1


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T BLE OF UTHORITIES

Page(s)

CASES

150 Broadway N Y Assoc L.P. v Bodner,

14 A.D.3d

1

784 N.Y.S.2d

63

(lst Dep t

2004) ..................................................................... 9

Allan v Moline Plow Co.,

14 F.2d 912 (8th Cir. 1926) ................................................................................................... 12

Batchelder

v

Council Grove Water Co.,

131 N.Y. 42,

29

N.E. 801 (1892) ........................................................................................... 11

Biondi v Beekman Hill House Apartment Corp.,

257 A.D.2d

76,692

N.Y.S.2d 304 (lst

Dep t

1999) ............................................................... 9

Blount v Bovis Lend Lease Holdings, Inc.,

35 A.D.3d 310,828 N.Y.S.2d 305

(lst

Dep t 2006) .............................................................

23

Feder v. Union Carbide Corp.,

141 A.D.2d

799,530

N.Y.S.2d 165 (2d

Dep t

1988) ............................................................

11

Feldbaum v McCrory Corp.,

Civ.

A.

No. 11866, 1992 WL 119095 (Del. Ch. June 2,1992) ....................................... 11, 14

Greene v New York United Hotels, Inc.,

236 A.D. 647, 260 N.Y.S. 405

(lst Dep t

1932) ...................................................................

11

Harris v. Shearson Hayden Stone, Inc.,

82 A.D.2d 87, 441 N.Y.S.2d 70

(lst

Dep t 1981) .................................................................

13

Home Mortgage

Co v

Ramsey,

49 F.2d 738 (4th Cir. 1931) ...................................................................................................

12

In re Enron Corp. Secs., Derivative ERISA Litig.,

No. MDL-1446, 2008 WL 744823 (S.D. Tex. Mar. 19,2008) .............................................

11

McMahan Co

v.

Wherehouse Entm't, Inc.,

859 F. Supp. 743 (S.D.N.Y. 1994) ........................................................................................

12

Murphy v Keystone Steel Wire Co.,

61 F.3d 560 (7th Cir. 1995) ................................................................................................... 15

Natwest

USA

Credit Corp. v. Alco Standard Corp.,

858 F. Supp. 401 (S.D.N.Y. 1994) ........................................................................................ 17

Peak Partners LP

v

Republic Bank,

191 F. App x 118 (3d Cir. 2006) ...........................................................................................

11

Relmar Holding

Co v

Paramount Publix Corp.,

147 Misc. 824,263 N.Y.S. 776 (N.Y. Sup. Ct. 1932) ........................................................... 10

Saffire Corp. v. Newkidco., LLC,

286 F. Supp. 2d 302 (S.D.N.Y. 2003) ................................................................................... 22

-11-


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T ABLE OF AUTHORITIES

continued)

Sharon Steel Corp.

v.

Chase Manhattan Bank,

N.A.

Page s)

691 F.2d 1039 2d Cir. 1982) .............................................. .................................................. 13

Stellema v. Vantage Press Inc.,

121 Misc. 2d 1058,470 N.Y.S.2d 507 N.Y. Sup. Ct. 1983) ................................................

13

Suffolk County Water Auth.

v

Vill. o Greenport,

21

AD.3d

947,800

N.Y.S.2d 767 2d

Dep t

2005) ..............................................................

21

Taussig

v.

Clipper Group, L.P.,

13 A.D.3d 166, 787 N.Y.S.2d 10 (lst Dep t 2004) ............................................................... 14

Tom Doherty Assocs., Inc. v. Saban Entm t, Inc.,

60 F.3d 27 2d Cir. 1995) ............................................. .................................................. ....... 15

Victor

v

Riklis,

No. 91 Civ. 2897, 1992

WL

122911 S.D.N.Y. May 15, 1992) ........................................... 12

STATUTES

N.Y. C.P.L.R. 3211 a) 7) .............................................................................................................. 9

N.Y. C.P.L.R. 3211 c) ................................................................................................................... 9

15 U.S.C. 1639a a) 2008) ........................................................ ............................................ 7, 17

15 U.S.C. 1639a b) ..................................................................................................................... 8

15 U.S.C. 1639a c) ............................................................................................................... 8, 17

15 U.S.C. 1639a d) ..................................................................................................................... 8

26 U.S.C. 860A ......................................................................................................................... 15

26 U.S.C. 860F a) ..................................................................................................................... 16

26 U.S.C. 860F a) 2) A) ...................................................... ............................................... 16, 19

26 U.S.C. 860F a) 2) A) i) .............................................................. ...................................

19,21

26 U.S.C. 860F a) 2) A) ii) .................................................................... ............................ 16, 19

26 U.S.C. 860G a) 3) .......................................................... ...................................................... 16

Helping Families Save Their Homes Act

of

2009, Pub. L. No. 111-22

201 a) l), 2)

2009) ...................................................................................................................................

1

7

Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 2008) ............................... 7

-111-


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T ABLE OF AUTHORITIES

continued

ADMINISTRATIVE MATERIALS

Page s)

26 C.F.R. 1.860D-l b) 3) i) .....................................................................................................

6

I.R.S. Priv. Ltr. Rul. 94-18-021,1994 WL 170342 May 6, 1994) ....................................... 19,21

OTH R AUTHORITIES

American Bar Foundation, ommentaries on Indentures 5-7 ..................................................

Peaslee, James M David Z. Nirenberg, Federal Income Taxation o Securitization

Transactions

3d ed.) .............................................................................................................

6

l


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INTRODU TION

One legal principle disposes of the entire complaint in this action-that New York courts

interpret unambiguous contracts to mean what they say. Here, plaintiffs have sued defendants

(collectively, Countrywide ) under a Pooling and Servicing Agreement,

or

PSA, that governs

the trusts in which plaintiffs purchased mortgage-backed certificates on the open market. They

allege that under the PSA, Countrywide must purchase at full face value every mortgage under

lying the certificates that Countrywide has agreed to modify. But the PSA itself unambiguously

provides that i) no certificateholder may sue under the PSA unless the holder has satisfied a set

of

four prerequisites, referred to as a no-action clause; and (ii) Countrywide may modify un

derlying mortgages without buying them at full face value unless the modification is in lieu of a

refinancing. The Complaint does not and cannot allege that plaintiffs have satisfied the no

action clause, and it likewise does not and cannot allege that the mortgage modifications Coun

trywide is undertaking were done in lieu of any refinancing. Therefore, for each

of

these inde

pendent failures, the Complaint must be dismissed.

At bottom, this case is plaintiffs' effort to force Countrywide to buy what they estimate to

be hundreds of thousands of mortgages Countrywide agreed to modify under nationwide pro

grams designed to prevent residential foreclosures by relaxing the terms of mortgages at risk of

default. (CompI. 1 (Sushon Aff. Ex. A).) Both Congress and the President have recognized

that these modifications are crucial to the nation's economic recovery, and have promoted them

in a series of statutes that make clear that such loss-mitigation modifications are a standard

mortgage servicing practice that should be encouraged whenever possible.

ee

Helping Families

Save Their Homes Act of 2009, Pub. L No. 111-22 201(a)(l), (2)(A)(i), 123 Stat. 1632, 1638

(2009); President Barack Obama, Remarks by the President on Financial Rescue and Reform, at

Federal Hall, New York, New York (Sept. 14,2009 (Sushon Aff. Ex. D). Countrywide has at-


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tempted to respond responsibly to the Government's call to end the recent rash of foreclosures

and prevent further economic decline.

Plaintiffs, meanwhile, are not aggrieved investors but lawsuit speculators. Plaintiff

Greenwich reportedly purchased interests in securitized mortgages only fter Countrywide pub-

licly announced its plan to modify those mortgages, declaring that it intends to turn suits like this

one into a business. l Plaintiffs have estimated that the declaration they

seek-which

would

affect thousands

of

mortgages Countrywide has already

modified-would

cost Countrywide $80

billion.

2

But the

PSA s

unambiguous terms procedurally prohibit plaintiffs from bringing this

action, and they authorize Countrywide to modify these mortgages without any obligation to buy

them at full value.

The Complaint

is procedurally defective because plaintiffs have failed to comply with the

PSA s

unambiguous prerequisites for suit. The

PSA s

no-action clause expressly prohibits certi-

ficateholders (like plaintiffs) from institut[ing] ny suit, action or proceeding in equity or at law

upon

or

under or with respect to [the PSA] (emphasis added), unless those holders, in conjunc-

tion with certificateholders holding not less than 25%

of

the voting rights under the agreement,

(1) notify the Trustee of the alleged violation of the agreement, (2) demand that the Trustee bring

suit, and (3) offer the Trustee indemnity for that suit.

(PSA

10.08 (Sushon Aff. Ex. B).) These

requirements, which are standard in indenture agreements similar to the PSA and regularly en-

forced by courts, protect against not only the exercise of poor judgment but also the risk of strike

suits.

Ruth Simon, Mortgage-Bond Holders Get Voice. Greenwich Financial s William Frey Challenges Loan

Servicers Like BofA, W LL ST J., Dec. 2, 2008, C3 (Sushon Aff. Ex. E).

2

Rachel Breitman, Class Action Demands Countrywide Repay Hedge

undfor

Losses, The Am Law Daily

Blog, Dec. 3, 2008, available at http://www.law.comljsp/article.jsp?id=120242643307&rss=newswire (last visited

Oct. 7, 2009) (Sushon Aff. Ex. F).


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Plaintiffs concede that they cannot meet the requirements for suit in the PSA (CompI.

~ [ J [ 19-20; see PSA 10.08), arguing instead that the no-action clause does not mean what it says.

Even though the no-action clause plainly contains no exceptions, plaintiffs contend that it is

somehow inapplicable because plaintiffs have filed a class action purportedly for the common

benefit of all certificateholders. (CompI.

J[

20.) Numerous courts have rejected these arguments

in the past because exempting cases purportedly filed for certificateholders' common benefit

would render the no-action clause a dead letter. The Complaint should therefore be dismissed

for plaintiffs' failure to satisfy the no-action clause alone.

Even

if

plaintiffs could clear this procedural

hurdle-which

they

cannot-their

claims

would still fail on the merits. The PSA's plain language provides in 3.01 that Countrywide has

the authority to modify loans in the trust under the customary and usual standards of practice of

prudent mortgage loan servicers. (PSA 3.01.) The only limitation on that power is that Coun

trywide

may

not modify mortgages

if

doing so would give rise to draconian penalties under cer

tain federal tax regulations. n

contrast, the sole PSA provision that would require Countrywide

to repurchase modified mortgages is

3.11, which

by

its terms applies only to loans modified

in

lieu

of

a refinancing, that is, where Countrywide offers to modify the loan

of

a paying customer

who wishes to refinance his

or

her mortgage with a competing lender (generally to take advan

tage

of

a decline in interest rates). But in the modifications at issue in this case, Countrywide is

not modifying mortgages in lieu of refinancing them. Instead, as the Complaint acknowledges

see

CompI.

J[ J[

1-3, 31-32), Countrywide is modifying the mortgages at issue to avoid foreclo

sures and their attendant losses to certificateholders.

n

addition, federal tax law is also squarely inconsistent with plaintiffs' PSA interpreta

tion. The statutes governing real estate mortgage investment conduits, or REMICs, impose se-

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vere tax penalties if a servicer modifies a mortgage in lieu of refinancing without also purchasing

the mortgage at full face value. But federal tax law has no similar penalty for modifications to

mitigate loan losses, such as those Countrywide has undertaken here. That is why the PSA dis

tinguishes between modifications that require repurchase i.e., modifications in lieu

of

refinanc

ing) in 3.11 and modifications incident to customary servicing authority in Section 3.01. Plain

tiffs' interpretation of the PSA is clearly at odds with this intentional dichotomy. And jus t as sig

nificantly, plaintiffs' proposed PSA reading to require the repurchase of every modified loan, not

just those modified in lieu of refinancing, would render the second half of

3.01 (which prohib

its modifications that would result in draconian federal taxes) a nUllity, because no modification

that s accompanied by repurchase would ever result in that penalty.

But even assuming that plaintiffs were correct that the only provision in the PSA that au

thorizes modifications s 3.11 (and they are not), and therefore any modification must satisfy

all the requirements

of

that section, including repurchase, plaintiffs still would not be entitled to

the declaration they seek. That is because, as explained above, 3.11 requires any modification

it authorizes both to be accompanied by repurchase nd to be in lieu of a refinancing. If, as

plaintiffs' interpretation of the agreement would require, the only modifications Countrywide can

make are those in lieu

of

refinancing, then it cannot make modifications for any other purpose,

including loss mitigation. That interpretation would drastically curtail Countrywide's traditional

authority as Master Servicer in a way directly contrary to federal law. Nothing in the PSA re

quires or even permits that stringent restriction of authority.

Separate from the suit's other procedural and substantive defects, the Complaint must be

dismissed as to Countrywide Financial Corporation ( CFC ) because that corporation s not a

proper defendant. The Complaint does not allege that CFC must repurchase any loan, and plain-

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tiffs seek no judgment binding CFC. Because plaintiffs have provided no basis upon which to

conclude that CFC is a proper defendant, the Complaint against it should be dismissed.

FACTUAL

BACKGROUND

A Mortgage Securitization

Defendant Countrywide Home Loans, Inc., is a licensed mortgage banker that previously

provided residential mortgage loans to individual consumers. See Compl. j[ ; Compl., Ex. G at

2.) Defendant Countrywide Home Loans Servicing P ( Countrywide Servicing ) services

loans.

See

Compl.

j[

9; Compl., Ex. G at 2.) Defendant CFC

is

a thrift holding company.

See

Compl.

j[

7; Compl., Ex. G at 2.) Over the last several years, certain

of

the defendants and their

affiliates have followed the industry-wide practice

of

securitizing consumer mortgage loans by

selling them to trusts that elect to be treated as REMICs for federal income-tax purposes. After a

trust purchases such a loan, the trust, rather than the original lender, receives the mortgagor's

payments

of

principal and interest. (Compl. j[ j[ 12, 23-24.) Investors may purchase certificates

entitling them

to

an interest in the income generated by the trust. Id.

j[ j[

23-24.)

B

ThePS

The rights and duties

of

various securitization participants which typically include 1) a

trustee; (2) a Master Servicer that administers the loans in the trust; and (3) the sellers that

transfer loans to the

trust are

generally set forth in a PSA, the terms

of

which vary from trust to

trust and are usually also described in a prospectus? While plaintiffs in this suit, hedge funds

Greenwich Financial Services Distressed Mortgage Fund 3, LLC and QED, LLC, seek to repre-

sent certificateholders in numerous Countrywide certificate issuances, the plaintiffs purchased

The

CW

ALT and

CWL

Pooling and Service Agreements and prospectuses are available through EDGAR.

See, e.g., http://www.sec.gov/Archives/edgar/datalI269518/000090514805003720/efc5-1546_ex991.txt (PSA);

http://www.sec.gov/Archives/edgar/datal 1269518/000089 10920500 1122/e22080_424b5.txt (CW ALT 2005-36 Pro

spectus).)

-5-


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certificates only in the

CW

ALT 2005-36 securitization, the servicing requirements of which are

set forth in the CWALT 2005-36 PSA (the PSA) and described in the CWALT 2005-36 Pro spec-

tus (the Prospectus) (Sushon Aff. Ex. C). (CompI. j[ 6.)

This suit primarily involves three provisions of the PSA, 3.01, 3.11, and 10.08.

4

PSA

10 08

explicitly prohibits certificateholders from suing to enforce any pro

vision of the agreement unless they satisfy four preconditions for suit. As plain

tiffs concede, they have not met those requirements here. (CompI. j[ j[ 19-20.)

PSA

3 01

authorizes Countrywide, as Master Servicer, to service the trust's

loans under the customary and usual standards of practice of prudent mortgage

loan servicers and limits that authority only to prohibit any modification ...

which would cause any REMIC created under this Agreement to fail to qualify as

a REMIC or result in the imposition

of

any tax under section 860F(a) or section

860G(d) of the [Internal Revenue] Code. t does not require repurchase of any

loan modified pursuant to customary servicing practice. [d

PSA 3 11 provides that, when Countrywide engages in a modification in lieu

of

a refinancing -a modification made to keep a borrower from refinancing with

a competing lender to take advantage of prevailing interest rates that are lower

than those of the original loan-Countrywide must purchase the Modified Mort

gage Loan from the Trust Fund under a procedure set forth in the agreement.

C Subprime Foreclosures

n the Fall

of

2007, in response to growing subprime mortgage delinquencies, Country-

wide announced a multi-year campaign to refinance or modify certain subprime mortgages that

had an overall unpaid principal balance of $16 billion.

See

Bloomberg News,

Lender to Ease

Terms on Loans: Countrywide to Let 52,000 Refinance,

CHI.

TRIB. Oct. 24, 2007 (Sushon Aff.

Ex. G).) n October 2008, Countrywide followed that initiative with the announcement of a

streamlined, nationwide campaign to modify hundreds of thousands of additional delinquent

4

Countrywide has included the PSA in the accompanying affirmation. (Sushon Aff. Ex. B). Although the

Complaint refers

to

a purported repurchase requirement in h3.12(a) of other PSAs (Compl.


12/29

mortgages. Under both programs, Countrywide committed to reduce mortgage payments in cir-

cumstances in which Countrywide believed modifications would increase the likelihood that bor-

rowers would meet their obligations, and thus ensure greater revenue than would be provided by

the alternative of costly foreclosures.

s

When a mortgage has been securitized, the revenue from

a modification is passed on to investors, who receive greater income from the reduced payments

than they would from foreclosure. Loss-mitigation modifications, therefore, are designed to

benefit homeowners and investors alike.

D Congressional Reaction to the Mortgage Meltdown

Separately, Congress recognized that the rash

of

residential foreclosures was hampering

the national economy. It responded by enacting a series of laws governing servicing practice and

encouraging loss-mitigation modifications. On July 30, 2008, Congress passed the Housing and

Economic Recovery Act of 2008 ( HERA ), Pub. L No. 110-289, 122 Stat. 2654 (2008), which

modified the Truth-in-Lending Act ( TILA ), 15 U.S.C.

1601

et seq. to provide that, unless

established to the contrary in a servicing agreement, servicers shall be deemed to act in the

best interests

of

all

'

investors in a mortgage securitization when they modify a defaulted

mortgage on owner-occupied property where [t]he anticipated recovery on the principal out-

standing obligation

of

the mortgage under the modification

'

exceeds, on a net present value

basis, the anticipated recovery through foreclosure. 15 U.S.C. 1639a(a)(2) (2008).

Later, in May 2009, Congress passed the Helping Families Save Their Homes Act

of

This latter program is memorialized in agreements with a number

of

state attorneys general resolving

claims relating

to

Countrywide's loan origination activities. The Complaint alleges that Countrywide's streamlined

loan-modification program is purely a creature of these agreements, and represents an attempt by Countrywide to

resolve its own liabilities at the expense of investors in the mortgages that it services. (CompI. J[ I. In fact, Coun

trywide is pursuing its loan-modification program in

all

states, without regard to whether a state's attorney general

has pursued or settled claims against Countrywide. Countrywide has provided separate consideration, out

of

its own

funds, under the agreements with state attorneys general, such as a $150 million fund

to provide relief payments to

certain foreclosed borrowers.

See,

e.g. Compl., Ex.

at

19-20 (foreclosure relief program); Comp\., Ex.

Gat

29-

30 (same).)

-7-


13/29

2009 (the Homes Act ), Pub.

L

No. 111-22. That law amended

5

U.S.C.

1639a to provide

that the implementation of a qualified loss-mitigation modification shall constitute standard in-

dustry practice for servicers.

5

U.S.c.

1639a(c). The Homes Act further amended

1639a

to insulate servicers from liability when acting in investors' best interests as defined

by

that stat-

ute. Under those circumstances, servicers

(1)

shall not be liable to any party who is owed a

duty under [a provision of the statute governing duties to investors], and (2) shall

ot

be sub-

ject to any injunction, stay, or other equitable relief to such party, based solely upon the imple-

mentation by the servicer

of

a qualified loss mitigation plan.

5

U.S.c.

1639a(b) (emphasis

added). Congress extended the same immunity to [a)ny person, including a trustee, issuer, and

loan originator for its cooperation

...

with a servicer where necessary for the servicer to im-

plement a qualified loss mitigation plan. 5

U.S.c.

1639a(d).6

E This Lawsuit

On December 1 2008 plaintiffs sued Countrywide in this Court for a declaratory judg-

ment that Countrywide Home Loans or Countrywide Servicing must purchase every loan that

Countrywide Servicing or Countrywide Home Loans modifies. (Compi. J[ 35.) Plaintiff

Greenwich reportedly acquired its certificates in the CWALT 2005-36 trust less than a month

earlier-sometime

in November 2008-but after Countrywide publicly announced its nation-

wide streamlined loan-modification program.

(See

Ruth Simon,

Mortgage-Bond Holders Get

Voice, Greenwich Financial s William Frey Challenges Loan Servicers Like BC fA,

WALL ST.

J.,

Dec. 2, 2008, C3 (Sushon Aff. Ex. E).) Greenwich's acquisition was reportedly designed to

6

Countrywide has immunity for the modifications at issue here under the Homes Act and will brief that mat

ter in a future filing. Because the immunity question requires consideration of additional documentation, however,

Countrywide does not raise the immunity defense in this motion. For present purposes, Countrywide discusses

HERA and the Homes Act because they are plainly relevant to the question how the PSA should be interpreted,

since they inform standard servicing practice.

-8-


14/29

permit it to be[] an advocate for bondholders whose voice isn't being heard and to tum that

advocacy into a business. /d.) Plaintiffs seek a declaration that would govern Countrywide's

modification authority under hundreds of PSAs

(see

CompI. JI 12). But plaintiffs themselves

own certificates, and thus have an interest, in only in one trust, governed by one PSA (which is

addressed herein).

On December 30,2008, Countrywide removed the action to federal court under the Class

Action Fairness Act, 28

U.S.c.

1332(d), and the statute granting federal question jurisdiction,

28 U.S.C. 1331. On August 17,2009, the district court remanded the case to this Court. Coun

trywide filed a petition to appeal that order under 28

U.S.c.

1453(c).

The

petition is pending.

RGUMENT

CPLR 3211(a)(7) provides that a defendant may move to dismiss a complaint on the

ground that it fails to state a cause of action. In deciding such a motion, a court may consider

any evidence that could properly be considered on a motion for summary judgment. N.Y.

c.P L.R. 3211 (c). Allegations consisting of bare legal conclusions, as well as factual claims

either inherently incredible or flatly contradicted by documentary evidence are not presumed to

be true and accorded every favorable inference.

Biondi

v

Beekman Hill House Apartment

Corp., 257 A.D.2d

76,81,692

N.Y.S.2d 304, 308 (lst

Dep't

1999), aii d, 94 N.Y.2d 659, 709

N.Y.S.2d 861 (2000).

In addition, CPLR 3211(a)(1) authorizes dismissal where documentary evidence estab

lishes the complaint 's infirmity. Where, as here, a written agreement unambiguously con

tradicts the allegations supporting a litigant's cause of action for breach of contract, the contract

itself constitutes documentary evidence warranting the dismissal of the complaint pursuant to

C.P.L.R. 3211(a)(l), regardless of any extrinsic evidence or self-serving allegations offered by

the proponent of the claim. 150 Broadway N.Y. Assocs., L.P.

v

Bodner, 14 A.D.3d 1,5, 784

-9-


15/29

N.Y.S.2d

63 65

(1st Dep't 2004). The Complaint here must be dismissed because the PSA un

ambiguously contradicts the allegations in the Complaint and plaintiffs fail

to

state a claim.

I THE PSA S NO-ACTION CLAUSE BARS THIS ACTION

As plaintiffs admit

see

Compl.

J[

19), the PSA prohibits any certificateholder from insti-

tutling] any suit, action or proceeding in equity or at law with respect to [the PSA], unless the

certificateholder first abides by the procedural requirements set forth in 10.08 of the agreement.

(PSA

10.08.) Because plaintiffs have not satisfied these requirements, the Complaint must be

dismissed.

A

Plaintiffs Have Not Satisfied the PSA s Requirements for Suit

The PSA specifies that a certificateholder cannot sue to enforce the tmst's rights under

the PSA unless, among other things, the holder satisfies four preconditions to suit: (1) the certifi

cateholder previously [has] given to the Tmstee a written notice of an Event of Default [under

the agreement] and of the continuance thereof' ; (2) the Holders of Certificates evidencing not

less than 25% of the Voting Rights evidenced by the Certificates have made written request to

the Tmstee to institute such action in the Tmstee's own name; (3) the same holders have of

fered to the Tmstee reasonable indemnity

as

it may require against the costs, expenses, and

liabilities to be incurred in that action; and (4) the Tmstee neglect[

s]

or refuse[

s]

to institute

any such action for 60 days after receiving the written request for suit and offer of indemnity.

(PSA 10.08.) Plaintiffs do not allege that they satisfied these requirements before filing suit

and thus they lack the capacity to sue.

Contractual provisions governing whether and how an agreement may be enforced

through litigation are fully enforceable under New York law.

See Relmar Holding

Co

v Para-

PSA

10.03 provides the PSA shall be construed in accordance with New York law. (PSA

10.03.)

-10-


16/29

mount Publix Corp., 147 Misc. 824, 825, 263 N.Y.S. 776, 778 (N.Y. Sup. Ct. 1932), sum. aff d,

237 AD. 870, 261 N.Y.S. 959 (1933). And no-action clauses of this type are commonly in

cluded in agreements relating to multi-investor trusts, conditioning a third-party investor's suit

upon a group of investors making a prior demand for suit (including an offer of indemnity) on

the investment's trustee. See American Bar Foundation, Commentaries on Indentures 5-7, at

232 (including

as

model debenture indenture provision a Limitation on Suits almost identical

to

10.08

of

the PSA) (Sushon Aff. Ex. H). By empowering the trustee to make litigation deci

sions on behalf of the trust, no-action clauses protect not only against the exercise of poor

judgment by a single [investor] or a small group

of

[investors], who might otherwise bring a suit

against the issuer that most [investors] would consider not to be in their collective economic in

terest, but also against the risk

of

strike suits. Feldbaum v McCrory Corp., Civ. A No.

11866, 1992 WL 119095, at *6 (Del. Ch. June 2, 1992); accord, e.g., Batchelder v Council

Grove Water Co.,

131

N.Y. 42,

46,29

N.E. 8 1 (1892) (no-action clause prevents individual

bondholders from ... harassing their common debtor and jeopardizing the fund provided for the

cornmon benefit ); Peak Partners

LP

v Republic Bank, No. 05-2242, 191 F. App'x 118, 126

(3d Cir. 2006) (the centraliz[ation] [of] enforcement powers

is

a

a

central feature of an Inden

ture ) (internal quotation marks omitted).

Accordingly, state and federal courts regularly dismiss investor lawsuits where,

as

here,

the complaint contains no allegations showing compliance with a no-action provision like

10.08.

Greene

v

New York United Hotels, Inc.,

236

AD.

647, 648, 260 N.Y.S. 405, 407 (1st

Dep't

1932), sum. affd 261 N.Y. 698, 185 N.E. 776 (1933); see, e.g., Feder v Union Carbide

Corp., 141 AD.2d 799,800,530 N.Y.S.2d 165, 166-67 (2d Dep't 1988) (affirming grant of

cross-motion to dismiss); Feldbaum, 1992 WL 119095, at *3, *5-*6 (applying New York law

-11-


17/29

and granting motion to dismiss for failure to state a claim);

In re Enron Corp. Sees., Derivative

ERISA Litig.,

No. MDL-1446, 2008 WL 744823, at *19 (S.D. Tex. Mar. 19,2008);

Victor

v Riklis,

No. 91 Civ.

2897(UF),

1992

WL

122911, at *4, *6 (S.D.N.Y. May

15

1992);

Home

Mortgage Co v Ramsey,

49 F.2d 738, 743 (4th Cir. 1931);

Allan v Moline Plow Co., 14

F.2d

912, 916-17 (8th Cir. 1926). This Court should do the same.

B. The Complaint Does Not Allege Any Legitimate Justification for Disregard-

ing the PSA s Unambiguous Procedural Requirements for Suit

Plaintiffs offer no excuse for their failure to comply with the

PSA s

requirements for suit.

Instead, the Complaint asserts that

10.08

is

inapplicable because plaintiffs purport to bring

this action as a class action for the common benefit of all certificateholders in the plaintiff class.

(CompI.

'H20.)

The Southern District has already provided the short and complete answer to this

argument: [r]egardless of whether the [right asserted] is characterized as a collective or individ-

ual right,

it is

does not escape application

of

the No Action Clause.

McMahan Co v Where-

house Entm't, Inc.,

859

F.

Supp. 743,748-49 (S.D.N.Y. 1994), jfd

in part, rev'd in part on

other grounds,

65 F.3d 1044, 1051 (2d Cir. 1995);

accord Allan,

14 F.2d at 917 (enforcing

clause and rejecting argument that clause applied only to suits brought by a note holder indi-

vidually for his individual advantage, not suits prosecuted for the benefit

of

all the note hold-

ers ).

The no-action clause includes no exception for a situation in which a small group of certi-

ficateholders declares that its litigation is aimed at advancing the common interests

of

all certi-

ficateholders as a putative class. In fact, the PSA

lre dy

requires that

ny

litigation brought un-

der the agreement be on behalf of ll certificateholders.

(See

PSA 10.08 (setting forth ex-

press[] covenant[]

by

each [c]ertificateholder with every other [c]ertificateholder and the Tms-

tee that no certificateholder will seek to enforce any right under this Agreement, unless it is

-12-


18/29

for

the common benefit of all [c]ertificateholders ).) In light of that language, an exception to

the PSA's procedural requirements for litigation purportedly on behalf

of

all certificateholders

would render the no-action clause a dead letter. t is thus unsurprising that plaintiffs' Complaint

does not cite or quote any language in the PSA or any other authority in support of their com

mon benefit bid to bypass the PSA's procedural requirements.

Nor does it matter that plaintiffs purport to bring this suit as a class action. As New York

courts have held,

the

substantive law of [a] contractual agreement must take[] precedence

over the class action, which is merely a procedural device for consolidating matters properly be

fore the Court.

Harris

v

Shearson Hayden Stone, Inc.,

82

AD.2d

87, 95, 441 N.Y.S.2d 70, 76

(1st Dep't 1981) (internal quotation marks omitted), aff d, 56 N.Y.2d 627, 450 N.Y.S.2d 482

(1982); Stellema v Vantage Press, Inc.,

121 Misc. 2d 1058, 1061,470 N.Y.S.2d 507, 510 (N.Y.

Sup. Ct. 1983) ( The adoption by the Legislature of [Article 9 of the CPLR), which established

the procedural right to maintain class action, was not intended to, nor did it, change the nec

essary elements

of

any substantive cause of action. ).

Indeed, well-established New York law prohibits this Court from creating an atextual ex

ception to the PSA's standard no-action clause. Courts have emphasized for decades the need

for uniform, reliable application of no-action clauses as written. And they have explained the

need for businesses and investors to be able to adjust their affairs according to a uniform inter

pretation of standard contract provisions, warning that

the

creation of enduring uncertainties as

to the meaning

of

boilerplate provisions would decrease the value

of

all debenture issues and

greatly impair the efficient working of capital markets[,) .... with no offsetting benefits. Sharon

Steel Corp. v Chase Manhattan Bank, N.A. 691 F.2d 1039, 1048 (2d Cir. 1982) (stressing that

'''[a] large degree of uniformity in the language of debenture indentures is essential to the effec-

-13-


19/29

tive functioning

of

the financial markets' (quoting Broad

v

Rockwell Int / Corp., 642 F.2d 929,

943 (5th Cir. 1981), cert. denied, 454 U.S.

965,102

S.

Ct. 506 (1981).

In short, plaintiffs cannot avoid the preconditions to suit to which they agreed when pur-

chasing certificates under the PSA merely by affixing the terms common benefit and class

action to their Complaint. If, as plaintiffs believe, this suit is truly in the best interest of certifi-

cateholders, plaintiffs should surely be able to secure the agreement of other holders, contact the

Trustee to request suit, and offer indemnification as the PSA requires. See Feldbaum, 1992

WL

119095, at

5

( [No-action] clauses need not prevent the prosecution of meritorious suits. ).

Their failure to do so requires that the Complaint be dismissed.

II. UNDER THE PSA S UNAMBIGUOUS TERMS, COUNTRYWIDE CANNOT BE

REQUIRED TO REPURCHASE THE MODIFIED MORTGAGES

Even

if

plaintiffs had the capacity to sue for declaratory relief (they do not), they would

not be entitled to the declaration they seek as a matter

of

law. Here again, the text

of

the PSA

plainly dooms their claims.

A.

The

PSA Authorizes Countrywide to Modify Mortgages to Mitigate Loss to

the Trust s Investors Without Requiring Repurchase

Plaintiffs' Complaint

is

defective as a matter

of

law because the

PSA s

unambiguous

terms foreclose the relief plaintiffs seek. See Taussig

v

Clipper Group, L.P.,

3

A.D.3d 166,

167, 787 N.Y.S.2d 10,

11 (1st Dep t 2004) ( The interpretation of an unambiguous contract is a

question of law for the court, and the provisions of a contract addressing the rights

of

the parties

will prevail over the allegations in a complaint. ). PSA 3.01 unambiguously authorizes Coun-

trywide to engage in loss-mitigation modifications and does not require that loans modified for

that purpose be repurchased. It authorizes the Master Servicer to [s]ervice [m]ortgage fl]oans

under the customary and usual standards

of

practice of prudent mortgage loan servicers.

t

prohibits Countrywide from making only those modifications that would cause any REMIC

-14-


20/29

created under th[ eI Agreement to fail to qualify as a REMIC or result in the imposition

of

any tax

under [26 U.S.C. 1860F(a) or [26 U.S.C. ] 860G(d).

(Id.)

By prohibiting these specified

modifications, the PSA necessarily presupposes that Countrywide has the authority to modify

mortgages. There would

of

course be no reason for

3.01 to impose a REMIC-related con-

straint on Countrywide's authority to modify loans unless loan modifications were contemplated

in the first instance as part and parcel

of

Countrywide's customary servicing powers. Indeed, it

is

a settled principle of construction that a provision containing a specific limitation on authority

to take an act necessarily presupposes the existence

of

authority to take that act generally in the

first place.

8

The same logic applies here:

3.01 s bar on certain modifications leaves no doubt that

the authority to modify loans generally

is

included in its grant

of

customary and usual servic-

ing power. And that authority-to engage in modifications

as

part of prudent servicing prac-

tice-is not limited by any requirement that Countrywide repurchase the loans modified. See

PSA

3.01.) The Complaint does not and cannot allege that the Countrywide loan modification

program falls outside 3.01's authority. Accordingly, because 3.01 authorizes Countrywide's

loan-loss modifications and does not require purchase, plaintiffs' claims fail as a matter

of

law.

Federal law governing REMICs confirms this conclusion. A REMIC, like the trust at

issue in this case, is a special creature

of

the federal tax law that provides favorable tax treatment

for investors.

9

To qualify for favorable tax treatment, however, REMICs must comply with fed-

In

Murphy

v.

Keystone Steel Wire Co.

for example, the Seventh Circuit held that a collective bargaining

agreement (HCBA ) article that prevented a company from terminating or amending [a benefits] Plan

during the

term o he CBA

... clearly indicate[dJ that [the company] can terminate or amend the Plan

after the term

o

he

CBA.

6 F.3d 560, 567 (7th Cir. 1995) (emphasis added);

accord Tom Doherty Assocs.,

Inc.

v. Saban Entm't, Inc.,

60 F.3d 27, 36 (2d Cir. 1995) (interpreting contract limitation to determine what contract authorized in the first in

stance).

9

See

26 U.s.c.

860A (distinguishing REMICs from entities that do not receive the same treatment).

-15-


21/29

eral laws that limit the types

of

loans a REMIC may possess and the transactions in which it may

engage. The Internal Revenue Code subjects any income a REMIC derives from transactions

involving non-qualified mortgages to a 100 percent, prohibited transaction tax. 26 U.S.c.

860F(a).lo

Modifications a servicer makes when a borrower is otherwise likely to default on a loan

are not prohibited transactions under federal law, and accordingly can be made without the

REMIC incurring any prohibited-transaction taxes. That is because 26 U.S.c.

860F(a)(2)(A)(ii) specifically excludes from its list

of

prohibited transaction[s] modifications

incident to foreclosure, default, or imminent default. Under federal REMIC law, therefore,

Countrywide can modify loans at risk

of

default without the Trust incurring any REMIC penal-

ties. For this reason, the loss-mitigation modifications fall within the prudent servicing standards

by which Countrywide must abide under

3.01: they do not cause any REMIC created under

th[e] Agreement to fail to qualify as a REMIC or result in the imposition

of

any tax under [26

U.S.C.

]

860F(a) or [26 U.S.C.

]

860G(d). (PSA

3.01.) That the law governing REMICs

specifically contemplates loss-mitigation modifications confirms such modifications are a stan-

dard practice of loan servicing.

The same is true of Congress's multiple enactments to address residential foreclosures,

each

of

which has been premised upon Congress's recognition that loss-mitigation modifications

are part of standard industry practice that aid the federal government in halting the national eco-

1 Mortgages transferred to a REMIC at the time

of

its creation are, barring certain defects not relevant here,

qualified mortgages that the REMIC can hold without penalty. See 26 U.S.C.

860G(a)(3)(A)(i). Those mort

gages may cease to be quali fied, however, if the Master Servicer modifies or otherwise disposes of them in a

manner that is not explicitly permitted by 26 U.S.c .

860F(a)(2)(A). A REMIC may lose its advantaged tax status

if its holdings include more than a de minimis amount of loans that are not qualified mortgages as defined

in

26

U.S.c.

860G(a)(3). 26 C.F.R.

1.860D-1(b)(3)(i);

see generally

James

M

Peaslee & David

Z

Nirenberg,

Fed-

erallncome Taxation o Securitization Transactions 344-45 (3d

ed.

2002).

-16-


22/29

nomic decline. As Congress has recognized, such modifications make good sense. They im-

prove returns to investors by ensuring the Trust receives monthly payments that are greater than

any income

it

would receive from a foreclosure. For that reason, it would make no sense for the

PSA to require the Master Servicer to repurchase loans modified for loss-mitigation purposes.

Such a requirement would only ensure that no servicer would engage in modifications, for no

rational servicer would be willing to repurchase non-performing loans at full value with their

own funds. That result would be contrary to the interests

of

homeowners and investors alike.

Nothing in the PSA remotely suggests that the Master Servicer and investors are to be placed in

such an antagonistic relationship. And there is no reason to interpret the PSA to require that mu-

tually detrimental result. See Natwest USA Credit Corp.

v

Alco Standard Corp. 858

F

Supp.

401,413

(S.D.N.Y. 1994) ( A contract must be construed,

if

possible, to avoid an interpretation

that will result in an absurdity, an injustice or have an inequitable or unusual result. ).

B. Plaintiffs Interpretation o 3.11 o the PSA to Require Countrywide to Re-

purchase Every Loan

t

Modifies, Regardless

o

Purpose, Is Plainly Wrong

The Complaint also must be dismissed because it is premised on a fundamental misread-

ing of PSA 3.11. That section by its plain terms governs only modifications that are in lieu of

a

refinancing -that

is, modifications Countrywide's lending affiliates make when borrowers

indicate that they are prepared to refinance their loans elsewhere. Although 3.11 expressly be-

stows authority on Countrywide to offer loan modifications to borrowers who would otherwise

refinance with other lenders, it also requires Countrywide to repurchase any such modified

loans-which

is

necessary to comply with the federal law governing REMICs. This activity is

worlds apart from modifications in lieu of foreclosure under

3.01 's general servicing powers.

See 15

U.S.c. I 639a(a) (2008) (recognizing that, unless establ ished to the contrary, servicers act in the

best interests

of

all ... investors when they modify loans in order to avoid greater losses from foreclosure);

15

V S c

l639a(c) (providing for loss-mitigation modifications as standard industry practice ).

-17-


23/29

Because 3.11 is the only provision in the PSA to include a repurchase requirement,

however, plaintiffs are forced to argue that the PSA does not mean what it actually says and that

3.11 is the

exclusive

authority in the PSA for Countrywide to modify mortgages and requires

repurchase of any loan modified for any purpose. Plaintiffs are wrong. And even if they were

correct, their reading of the PSA would not entitle them to the declaration they seek.

1 Section 3.11(b) Expressly Applies Only to Modifications in Lieu of a

Refinancing

To begin, plaintiffs completely misunderstand

3.11' s scope and purpose, which

is

to

permit and govern only those modifications in lieu of a refinancing. Plaintiffs describe this

provision in their Complaint as stating, without qualification, that Countrywide may agree to a

modification ... if Countrywide purchases the Modified Mortgage Loan from the Trust Fund.

(Compi.

]I

34.) That quotation

is

incomplete and misleading. Section 3.11

's

unabridged lan-

guage makes plain that this provision and its repurchase requirement apply, not to

all

modifica-

tions, but only to those modifications that are made in lieu of a refinancing :

(b) The Master Servicer may agree to a modification

of

any Mortgage Loan (the

Modified Mortgage Loan )

i i) the modification is in lieu ofa refinancing,

(ii)

the Mortgage Rate on the Modified Mortgage Loan is approximately a prevailing

market rate for newly-originated mortgage loans having similar terms nd

iii) the

Master Servicer purchases the Modified Mortgage Loan

from the Trust Fund as

described below.

(PSA 3.11(b) (emphasis added).)

The repurchase requirement in

3.11(b) is thus limited to only a subspecies of modifica-

tions-those in lieu

of

a refinancing. t has nothing to do with modifications undertaken to

mitigate loss in the context of a threatened foreclosure. Rather, a modification that is in lieu of

a refinancing occurs only where a lender modifies a loan for a borrower who wishes to refi-

nance his or her mortgage with another lender (generally to take advantage of a decline in pre-

vailing interest rates) by providing for the borrower the same or similar economic benefits as a

-18-


24/29

refinancing. That is why

3.11 limits its scope to modifications in which the Mortgage Rate on

the Modified Mortgage Loan

is

approximately a prevailing market rate for newly-originated

mortgage loans having similar terms. (PSA 3.11.)

PSA 3.11 accordingly serves the limited purpose of authorizing Countrywide or its

lending affiliates to offer modifications that prevent the loss

of

a

performing

customer to a com-

peting lender through a threatened refinancing. t is thus eminently fair for the PSA to require

the servicer to repurchase at full value a loan that

is

modified in lieu

of

the borrower refinancing

the mortgage with another lender (thus paying off the loan entirely). The need for the repurchase

requirement in

3.11 (b) is also understood against the backdrop

of

federal REMIC law, which

provides that any income the trust receives from a mortgage modified in lieu of refinancing

will

be subject to a 100% prohibited-transaction tax 12 unless the loan is repurchased from the

trust. 3 That law fully explains why the PSA requires repurchase of loans modified in lieu of

refinancing.

Loss-mitigation modifications of the sort involved in this case could not be more differ-

ent. They are offered not to keep a borrower from refinancing elsewhere but rather because the

servicer thinks the trust will recover more from the modified loan than from a foreclosure. And

loss-mitigation modifications are explicitly

ex luded

from

860F(a)'s definition

of

prohibited

transactions. ee 26 U.S.C. 860F(a)(2)(A)(ii). While there is thus every reason for the PSA to

require repurchase

of

modifications in lieu

of

refinancing, there

is

absolutely no reason to require

repurchase for those in lieu

of

foreclosure. A loss-mitigation modification

is

designed to im-

2

This is because modifications made in lieu of refinancing are not excluded from the definition

of

prohibited

transactions in 26 U.S.C. 860F(a)(2)(A).

3

ee 26 U.s.C.

860F(a)(2)(A)(i) (permitting as non-prohibited transaction repurchase

of

defective obli

gation); I.R.S. Priv. Ltr. Rul. 94-18-021, 1994

WL

170342 (May 6, 1994) ( IRS Letter Ruling ) (ruling that pro

posed transaction, where loan was modified in lieu of refinancing, was not prohibited, because REMIC was paid the

amount of outstanding principal and interest on the transaction).

-19-


25/29

prove the overall recovery to the trust, and it makes no economic sense to require the Master

Servicer to pay full value for the loan for the privilege of being able to modify it.

2. Plaintiffs Ultimate Conclusion that

3.11 Provides the Sole Reservoir

o

Loan Modification Authority Cannot Be Squared with Other Pro-

visions o the PSA

As explained,

3.11 by its terms applies only to the limited subset of modifications made

in lieu of refinancing. Because 3.11 is the only provision in the PSA to include a repurchase

requirement, however, plaintiffs are forced

to

argue that the PSA does not mean what it actually

says and that

3.11 is the

ex lusive

authority in the PSA for Countrywide to modify any mort-

gage for any purpose and thus requires repurchase

of

all loans modified).

See

PIs.' Reply to

Countrywide's Opp. to Motion

to

Remand 7 ( In the plaintiffs' interpretation of the PSA[], only

... 3.1l(b) authorizes Countrywide to modify loans. ) (Sushon Aff. Ex.

K);

Hearing on Mo-

tion to Remand, Tr. 13-14 (Mar. 13,2009) (statement of Mr. Grais) (arguing that Country-

wide's PSA's are very unusual because they giv[e] Countrywide no authority to modify loans

when it's in the best interest of the investors

to

do so and that plaintiffs don't agree that other

clauses in the PSAs [aside from Section 3.11] give Countrywide the power to modify loans

without repurchase ) (Sushon Aff. Ex.

J .

Plaintiffs are wrong.

To begin with, plaintiffs' argument that PSA 3.11 is the sole source of authority for

modification contradicts language in other sections of the PSA and prospectus. As already ex-

plained, 3.01 clearly vests Countrywide with authority to modify loans in accordance with the

customary and usual practice of prudent servicers so long

as

the modification does not create

problems under the federal tax law governing REMICs. Indeed, if plaintiffs were correct that

every modification (including loss-mitigation modifications) required immediate repurchase

of

the modified loan, then 3.01's prohibition on modifications that would impose REMIC taxes

would be superfluous. Literally o modification could cause the REMIC to incur taxes if the

-20-


26/29

PSA were interpreted to require Countrywide to repurchase every loan so modified, regardless of

purpose.

See

26 U.S.C.

860F(a)(2)(A)(i); IRS Letter Ruling 94-18-021 (no penalty for transac

tion so long as modified loan repurchased). Under plaintiffs' view of 3.l1(b), therefore,

3.01 s REMIC limitation on loan modifications would operate on a null set. Plaintiffs' inter

pretation of

3.11

to

render

3.01 meaningless should be rejected.

See SufJolk County Water

Auth. v Vill. o Greenport 21 A.D.3d 947,948,800 N.Y.S.2d 767, 768 (2d Dep't 2005) ( [A]n

interpretation which renders language in the contract superfluous

is

unsupportable. ).

n addition, the PSA Prospectus recognizes the Master Servicer's obligation, with respect

to certain defaulted loans, to make an effort to avoid foreclosure by entering, if feasible, into

one of a number

of

agreements that may involve the reduction or suspension of regular mort

gage payments for a specified period. Those modifications have nothing to do with refinancing

and therefore must be authorized by some other provision, specifically

3.01. (CWALT 2005-

36 Prospectus

49,50

(Sushon Aff. Ex. C).) Plaintiffs' premise that

3 l1(b) is the only provi

sion of the PSA that authorizes Countrywide to modify mortgage loans is thus insupportable un

der the relevant Prospectus as well.

What is more, even assuming that plaintiffs were correct that

3.11(b) is the only provi

sion that authorizes modifications, their claim would still fail as a matter

of

law. That is because,

if the requirements of 3.11 govern every modification, then it necessarily follows that 3.11(b)

flatly prohibits Countrywide from making

ny

modification unless that modification is in lieu

of a refinancing. Indeed, 3.11(b) explicitly provides that H[t]he Master Servicer may agree to

a modification of any Mortgage Loan i (i) the modification is in lieu of a refinancing, nd

(iii) the Master Servicer purchases the Modified Mortgage Loan from the Trust Fund

as

de-

-21-


27/29

scribed below. (PSA 3.11(b) (emphasis added).)14 Because 3.11 conditions any modifica-

tion it authorizes

oth

on it functioning in lieu of a refinancing

nd

on repurchase, the only

declaration to which plaintiffs could possibly be entitled is one that prohibits Countrywide from

making any modification unless it is in the first instance in lieu

of

refinancing. That declaration

would necessarily bar Countrywide from making most modifications, because (as plaintiffs rec-

ognize) most modifications are not in lieu

of

threatened refinancings. See Compl. Jrl[

1 3

(de-

scribing modifications), 32 ( Modifying a mortgage loan almost always means reducing or de-

laying payments due on that loan. ).)

That restriction would be a drastic and unexpected limitation on a servicer's traditional

authority to administer a

loan-an

authority both federal law and PSA 3.01 make plain in-

cludes the ability to modify loans for loss-mitigation purposes. Indeed, plaintiffs themselves rec-

ognize the absurdity

of

interpreting the PSA to prohibit loss-mitigation modifications in their re-

peated claims that they are not trying to bar them.

See, e.g.,

Compl.

j[ j[

1-2.) Despite those

protestations, however, plaintiffs' argument that 3.11 applies to all modifications would neces-

sarily require that absurd result. For this reason, too, plaintiffs' interpretation of the PSA must

be rejected and their Complaint dismissed as contrary to the PSA's plain terms. See Saffire

Corp.

v.

Newkidco., LLC,

286 F. Supp. 2d 302, 308 (S.D.N.Y. 2003) (applying the traditional

contract interpretation rules

of

New York law to hold that

a

provision may not be interpreted in

a manner which would render it an absurdity ).

14

Countrywide likewise could not make any modification unless it also imposed an interest rate approximate

to a prevailing market rate for newly-originated mortgage loans having similar terms. ld.)

-22-


28/29

III CFC

S

NOT A PROPER DEFENDANT

Plaintiffs' Complaint against CFC must independently be dismissed because CFC is not a

proper defendant. Plaintiffs seek a judgment that Countrywide Home Loans or Countrywide

Servicing must purchase every loan that Countrywide Servicing or Countrywide Home Loans

modifies (CompI.

135 ,

and that Countrywide Home Loans or Countrywide Servicing must

purchase every modified loan [at] not less than 100% of the unpaid principal balance of, and any

accrued interest on, that loan immediately before modification ld.138). Plaintiffs do not al

lege CFC is required to repurchase any mortgage, and they seek no judgment binding CFC. Be

cause plaintiffs have provided no basis upon which to conclude that CFC is a proper defendant,

the Complaint against it should be dismissed. See Blount

v

Bovis Lend Lease Holdings Inc. 5

A.D.3d 310,310-11,828 N.Y.S.2d 305,306 (1st Dep't 2006) (dismissing suit against named de

fendant where plaintiffs' claim lay against separate and distinct (albeit affiliated) entit[y] ).

CONCLUSION

The Complaint must be dismissed because the plain terms

of

the PSA foreclose the

judgment plaintiffs seek.

First, the Complaint does not and cannot allege that plaintiffs have satisfied the no-action

clause in PSA 10.08. The action accordingly must be dismissed because plaintiffs lack capac

ity to sue.

Second, even if plaintiffs had the capacity to sue (which they do not), the substantive

terms

of

the PSA would bar their claims. PSA

3.01 unambiguously authorizes Countrywide to

engage in loss-mitigation modifications and does not require Countrywide to repurchase loans

modified for that purpose. Plaintiffs' argument to the contrary-that

3.11 provides Country

wide's sole source of authority to modify loans and requires repurchase

of

every loan Country

wide modifies-simply cannot be squared with the PSA's plain text or federal law.

-23-


29/29

Third, separate from the suit's other procedural and substantive defects, the Complaint

must be dismissed as to Countrywide Financial Corporation ( CFC ) because that corporation is

not a proper defendant.

For the reasons set forth above, plaintiffs' Complaint should be dismissed.

Dated: New York, New York

October 8 2009

f counsel:

Brain D. Boyle

Matthew

M.

Shors

Kathryn E. Tarbert

O'MELVENY MYERS LLP

1625 Eye Street, N.W.

Washington, D.C. 20006

Telephone: (202) 383-5300

Facsimile: (202) 383-5414

LLP

u

7 Times Squar /

New York,

N ~ v Y o r k

10036

Telephone: (112) 326-2000

Facsimile: (212) 326-2061

Attorneys for Defendants Countrywide Finan-

cial Corporation Countrywide Home Loans

Inc. and Countrywide Home Loans Servicing LP

country wide motion dismiss greenwich

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