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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
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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
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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
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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).)
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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.
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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).)
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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.
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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
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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.)
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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
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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
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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-
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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
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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).
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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).
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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 ).
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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
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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).
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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
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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-
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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.)
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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.
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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