Bank of New York Mellon v. City of Richmond, California et al

Filing 17

STIPULATION WITH PROPOSED ORDER for Filing Second Amended Complaint filed by Bank of New York Mellon. (Attachments: # 1 Exhibit Exhibit A to SAC, # 2 Exhibit Exhibit B to SAC, # 3 Exhibit Exhibit C to SAC, # 4 Exhibit Exhibit D to SAC, # 5 Exhibit Exhibit E to SAC, # 6 Exhibit Exhibit F to SAC, # 7 Exhibit Exhibit G to SAC, # 8 Exhibit Exhibit H to SAC, # 9 Exhibit Exhibit I to SAC, # 10 Exhibit Exhibit J to SAC, # 11 Exhibit Exhibit K to SAC, # 12 Exhibit Exhibit L to SAC, # 13 Proposed Order Proposed order pursuant to stipulation, # 14 Certificate/Proof of Service Proof of service)(Pollock, Bronwyn) (Filed on 8/22/2013)

1
2
3
4
5
6
7
8

MAYER BROWN LLP
DONALD M. FALK (SBN 150256)
[e-mail]
Two Palo Alto Square, Suite 300
3000 El Camino Real
Palo Alto, CA 94306-2112
Tel: [phone]
Fax: [phone]
MAYER BROWN LLP
BRONWYN F. POLLOCK (SBN 210912)
[e-mail]
350 S. Grand Ave., 25th Floor
Los Angeles, CA 90071-1503
Tel: [phone]
Fax: [phone]

10

Attorneys for Plaintiffs
THE BANK OF NEW YORK MELLON and THE
BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustees

11

[Additional counsel listed on signature page]

9

12
13

UNITED STATES DISTRICT COURT

14

NORTHERN DISTRICT OF CALIFORNIA

15
16
17
18

THE BANK OF NEW YORK MELLON (f/k/a Case No.: 13-cv-3664-JCS
The Bank of New York), as Trustee, on behalf
of the Trusts listed in Exhibit A; and U.S.
BANK NATIONAL ASSOCIATION, as
STIPULATION FOR FILING OF
Trustee, on behalf of the Trusts listed in Exhibit SECOND AMENDED COMPLAINT
B,

19
20
21
22
23
24
25

Plaintiffs,
v.
CITY OF RICHMOND, CALIFORNIA, a
municipality; RICHMOND CITY COUNCIL;
MORTGAGE RESOLUTION PARTNERS
L.L.C., a Delaware limited liability company;
and GORDIAN SWORD LLC, a Delaware
limited liability company
Defendant.

26
27
28
STIPULATION FOR FILING OF SECOND AMENDED COMPLAINT
CASE NO. 13-CV-3664-JCS

1
2

WHEREAS, on August 7, 2013, The Bank of New York Mellon (f/k/a The Bank of
New York), as trustee, initiated this action against Defendants (the “Action”);

3

WHEREAS, on August 9, 2013, The Bank of New York Mellon filed the First

4

Amended Complaint, which added an additional trustee as plaintiff, U.S. Bank National

5

Association;

6

WHEREAS, The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of

7

New York Trust Company, N.A.), Wilmington Trust Company, and Wilmington Trust,

8

National Association, as trutees, seek relief against Defendants arising out of the same series

9

of occurrences;

10

IT IS HEREBY STIPULATED by and between the Parties hereto through their

11

respective attorneys that Plaintiffs may file a Second Amended Complaint, a copy of which is

12

attached hereto as Exhibit C. The Second Amended Complaint adds The Bank of New York

13

Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Company, N.A.),

14

Wilmington Trust Company, and Wilmington Trust, National Association, as trustees, as

15

Plaintiffs, and contains other minor revisions.

16
17

IT IS FURTHER STIPULATED that the Second Amended Complaint is deemed filed
on the date of entry of Court’s order pursuant to this stipulation.

18
19

SO STIPULATED.

20

Dated: August 22, 2013

21
22
23
24
25
26

MAYER BROWN LLP
DONALD M. FALK
BRONWYN F. POLLOCK
By: /s/ Bronwyn F. Pollock
Bronwyn F. Pollock
Attorneys for Plaintiffs
THE BANK OF NEW YORK MELLON
(f/k/a The Bank of New York) and THE BANK
OF NEW YORK MELLON TRUST
COMPANY, N.A. (f/k/a The Bank of New York
Trust Company, N.A.), as Trustees

27
28

1
STIPULATION FOR FILING OF SECOND AMENDED COMPLAINT
CASE NO. 13-CV-3664-JCS

1

Dated: August 22, 2013

2
3
4

JONES DAY
BRIAN D. HERSHMAN (SBN 168175)
[e-mail]
555 South Flower Street, 50th Floor
Los Angeles, CA 90071-2300
Tel: [phone]
Fax: [phone]
JONES DAY
MATTHEW A. MARTEL
(pro hac vice)
[e-mail]
JOSEPH B. SCONYERS
(pro hac vice)
[e-mail]
100 High Street, 21st Floor
Boston, MA 02110
Telephone: [phone]
Facsimile: 617-449-6999

5
6
7
8
9
10

By: /s/ Brian D. Hershman
Brian D. Hershman
Attorneys for Plaintiff
U.S. BANK NATIONAL ASSOCIATION,
as Trustee

11
12
13
14
15

Dated: August 22, 2013

16
17
18

ALSTON & BIRD LLP
KURT OSENBAUGH (SBN 106132)
[e-mail]
WHITNEY CHELGREN (SBN 285362)
[e-mail]
333 South Hope Street, Sixteenth Floor
Los Angeles, California 90071
Telephone:
213-576-1000
Facsimile:
213-576-1100

19
By: /s/ Kurt Osenbaugh
Kurt Osenbaugh
Attorneys for Plaintiff
WILMINGTON TRUST COMPANY and
WILMINGTON TRUST, NATIONAL
ASSOCIATION, as Trustees

20
21
22
23
24
25
26

Dated: August 22, 2013

ALTSHULER BERSON LLP
SCOTT A. KRONLAND (SBN 171693)
[e-mail]
177 Post Street, Suite 300
San Francisco, CA 94108

27
28

2
STIPULATION FOR FILING OF SECOND AMENDED COMPLAINT
CASE NO. 13-CV-3664-JCS

1
2
3
4

By: /s/ Scott A. Kronland
Scott A. Kronland
Attorneys for Plaintiff
CITY OF RICHMOND, RICHMOND CITY
COUNCIL, MORTGAGE RESOLUTIONS
PARTNERS L.L.C. and GORDIAN SWORD
LLC

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

3
STIPULATION FOR FILING OF SECOND AMENDED COMPLAINT
CASE NO. 13-CV-3664-JCS

1

SIGNATURE ATTESTATION

2

I, Bronwyn F. Pollock, attest that the concurrence in the filing of this Second Amended

3

Complaint has been obtained from Brian D. Hershman, Kurt Osenbaugh, and Scott A. Kronland.

4
5
6
7
8

By: /s/ Bronwyn F. Pollock_____________
Bronwyn F. Pollock
Attorneys for Plaintiff
THE BANK OF NEW YORK MELLON
(f/k/a The Bank of New York) and THE BANK OF
NEW YORK MELLON TRUST COMPANY, N.A.
(f/k/a The Bank of New York Trust Company, N.A.),
as Trustees

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

4
STIPULATION FOR FILING OF SECOND AMENDED COMPLAINT
CASE NO. 13-CV-3664-JCS

Exhibit A

Trusts For Which The Bank of New York Mellon, f/k/a The Bank of New York, is Trustee:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

CHASE 2006-S2
CWALT 2004-14T2
CWALT 2004-20T1
CWALT 2005-11CB
CWALT 2005-16
CWALT 2005-20CB
CWALT 2005-27
CWALT 2005-3CB
CWALT 2005-43
CWALT 2005-51
CWALT 2005-56
CWALT 2005-58
CWALT 2005-62
CWALT 2005-63
CWALT 2005-71
CWALT 2005-76
CWALT 2006-33CB
CWALT 2006-39CB
CWALT 2006-42
CWALT 2006-43CB
CWALT 2006-6CB
CWALT 2006-HY10
CWALT 2006-HY13
CWALT 2006-OA1
CWALT 2006-OA10
CWALT 2006-OA12
CWALT 2006-OA17
CWALT 2006-OA2

29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56

CWALT 2006-OA21
CWALT 2006-OC10
CWALT 2006-OC8
CWALT 2007-11T1
CWALT 2007-16CB
CWALT 2007-17CB
CWALT 2007-4CB
CWALT 2007-8CB
CWALT 2007-HY4
CWALT 2007-OH2
CWALT 2007-OH3
CWHL 2004-7
CWHL 2005-31
CWHL 2005-9
CWHL 2006-16
CWHL 2006-19
CWHL 2006-20
CWHL 2006-9
CWHL 2006-HYB1
CWHL 2007-11
CWHL 2007-12
CWHL 2007-15
CWHL 2007-2
CWHL 2007-7
CWHL 2007-HY6
CWHL 2007-HYB1
CWL 2003-5
CWL 2004-14

57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83

CWL 2004-BC4
CWL 2004-ECC1
CWL 2005-17
CWL 2005-3
CWL 2005-4
CWL 2005-AB4
CWL 2005-AB5
CWL 2006-13
CWL 2006-14
CWL 2006-16
CWL 2006-18
CWL 2006-19
CWL 2006-20
CWL 2006-22
CWL 2006-24
CWL 2006-26
CWL 2006-3
CWL 2006-BC4
CWL 2007-13
CWL 2007-3
CWL 2007-5
CWL 2007-7
CWL 2007-8
CWL 2007-BC3
FHAMS 2005-FA9
FHAMS 2006-AA4
FHAMS 2006-FA4

Trusts For which the Bank of New York Mellon Trust Company, N.A., f/k/a The Bank of
New York Trust Company, N.A., is the Trustee:
1
2

CHASE 2007-A1
CHASE 2007-S4

EXHIBIT C

1
2
3
4
5
6
7
8
9
10
11
12

MAYER BROWN LLP
DONALD M. FALK (SBN 150256)
[e-mail]
Two Palo Alto Square, Suite 300
3000 El Camino Real
Palo Alto, CA 94306-2112
Tel: [phone]
Fax: [phone]
MAYER BROWN LLP
BRONWYN F. POLLOCK (SBN 210912)
[e-mail]
350 S. Grand Ave., 25th Floor
Los Angeles, CA 90071-1503
Tel: [phone]
Fax: [phone]
Attorneys for Plaintiffs
THE BANK OF NEW YORK MELLON and THE
BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustees
[Additional counsel listed on signature page]
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA

13
14
15
16
17
18
19
20
21

THE BANK OF NEW YORK MELLON (f/k/a
The Bank of New York) and THE BANK OF
NEW YORK MELLON TRUST COMPANY,
N.A. (f/k/a The Bank of New York Trust
Company, N.A.), as Trustees, on behalf of the
Trusts listed in Exhibit A; U.S. BANK
NATIONAL ASSOCIATION, as Trustee, on
behalf of the Trusts listed in Exhibit B; and
WILMINGTON TRUST COMPANY and
WILMINGTON TRUST, NATIONAL
ASSOCIATION, as Trustees, on behalf of the
Trusts listed in Exhibit C

24
25
26
27
28

SECOND AMENDED COMPLAINT
FOR DECLARATORY AND
INJUNCTIVE RELIEF

Plaintiffs,

22
23

Case No. 3:13-cv-3664-JCS

v.
CITY OF RICHMOND, CALIFORNIA, a
municipality; RICHMOND CITY COUNCIL;
MORTGAGE RESOLUTION PARTNERS
L.L.C., a Delaware limited liability company;
and GORDIAN SWORD LLC, a Delaware
limited liability company;
Defendants.
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

Plaintiffs allege as follows based on information and belief:
INTRODUCTION

2
3

1.

This is a case about the misuse of public power for private benefit.

4

2.

Following a scheme devised by a mortgage investment firm that stands to profit

5

handsomely from the deal, the City of Richmond (the “City”) has made clear that it imminently

6

plans to seize residential mortgages—mortgages that are current on their payments—at deep

7

discounts and then refinance the properties at reduced loan values. The borrowers would retain

8

their homes with a lower debt load. The City and the investment firm each would receive certain

9

fees generated by the refinancing transactions, and then the firm and its investors would profit

10

from reselling federally guaranteed loans. And the trusts and their investors, including pension

11

funds and other institutional investors, who held current, performing loans that had financed the

12

purchase of homes in the City would be left holding the bag, losing tens of millions of dollars in

13

loan principal.

14

3.

The contemplated use of the eminent domain power in this seizure and refinance

15

scheme violates the constitutions of both the United States and California, along with several

16

California statutes.

17

4.

Plaintiffs The Bank of New York Mellon, The Bank of New York Mellon Trust

18

Company, N.A., U.S. Bank National Association, Wilmington Trust Company, and Wilmington

19

Trust, National Association are the Trustees of certain trusts that were created to hold residential

20

mortgage loans (collectively, the “Trusts”). The Trusts subject to this action for which The Bank

21

of New York Mellon, The Bank of New York Mellon Trust Company, N.A., U.S. Bank National

22

Association, Wilmington Trust Company, and Wilmington Trust, National Association are

23

Trustee are listed respectively in Exhibits A, B and C hereto. The Trusts’ beneficiaries include

24

both municipal and private pension plans, 401(k) plans, mutual funds, and other investors.

25

5.

Defendants City and Mortgage Resolution Partners L.L.C. (“MRP”) have entered

26

into an agreement, pursuant to which they will use the City’s eminent domain power to seize

27

performing debt instruments—which are not located in Richmond and are held by out-of-state

28

trusts—at deeply discounted prices. Defendants would then profit by refinancing and
2
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

resecuritizing those loans, while paying fees to MRP and to the City. MRP’s investors—whose

2

funds will be used to acquire the loans—will reap substantial profits. Defendants’ mortgage loan

3

seizure program is referred to herein as the “Seizure Program.”

4

6.

Defendants attempt to justify the Seizure Program as one that will help

5

homeowners and communities in Richmond that are struggling with foreclosures, but the Seizure

6

Program actually targets performing loans and does nothing to help homeowners in foreclosure.

7

These loans, which have survived the recession and housing crisis intact, are the ones for which

8

seizure will be most valuable to MRP’s investors but least likely to generate any public benefit.

9

Even if the City did intend to take high-risk loans, the Seizure Program still could not create any

10

public benefit, because the Trusts’ servicers already can and do forgive principal where doing so

11

would make the loan more valuable, by reducing the risk of default enough to justify the loss of

12

principal.

13

7.

The Seizure Program is unlawful and unconstitutional and violates numerous

14

federal, state and local laws, including the City’s own Charter. Nevertheless, in connection with

15

its agreement with MRP, the City intends to employ the Seizure Program and has taken

16

substantial steps in its furtherance.

17

8.

Defendants have already selected over 230 mortgage loans that they wish to seize

18

from the Trusts. The City has nominally offered to “purchase” the loans on behalf of MRP. The

19

offers, however, are not in good faith: Defendants’ valuation method is designed to produce

20

values that are far below any reasonable level because they give no value to homeowners’ steady

21

payment record. And MRP has stated publicly that federal law precludes the Trusts from selling

22

the loans through the voluntary purchase proposal offered by Defendants.

23

9.

The low offers are no accident, nor are they the beginning of a constructive

24

negotiation. Defendants cannot simply purchase the loans consensually from their owners (i.e.,

25

the Trusts), because the Seizure Program does not work if the City actually pays fair value.

26

MRP and its investors do not plan to hold the loans for the long-term and collect principal and

27

interest from borrowers. The Seizure Program is pure financial engineering. MRP and its

28

investors, with the critical assistance of City’s purported power of eminent domain, intend to
3
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

take the loans for a fraction of their value and then flip them, reselling them in a new

2

securitization.

3

10.

Defendants do not plan to do anything to enhance the value of the mortgaged

4

properties, to bear market risk, or to work with borrowers to improve their ability to pay. In fact,

5

the only modification that they plan is to write off much of each loan’s balance before acquiring

6

the loans.

7

11.

The Seizure Program purportedly is intended to assist homeowners at risk of

8

defaulting on their mortgage loans and thereby somehow avoid urban blight. But the design and

9

implementation of the Seizure Program show that the rationale is a pretext. The Seizure Program

10

actually is intended to generate significant sums for MRP and its investors, with payments to the

11

City in exchange for the use of its eminent domain powers. The Seizure Program also generates

12

private benefits for the homeowners who are selected for it.

13

12.

Many of the Trusts’ existing guidelines and practices, implemented by the

14

servicers, of modifying loans is further proof that undercompensation, not modification, is the

15

source of the Seizure Program’s profit. The true value of the loans already reflects the Trusts’

16

ability to enhance their value through modification. There is no indication that MRP, which

17

describes itself as a “community advisory firm,” will be as qualified as experienced servicers.

18

Indeed, the blanket modifications that Defendants plan are unlikely to increase the price of the

19

loans in a resale. For example, while it is sometimes possible to increase a loan’s value with a

20

carefully considered modification, it rarely makes sense to reduce the loan balance when the

21

borrower is making the existing, agreed payments. Nor is it often the case that a loan will be

22

more valuable if its principal is reduced below the value of the house. That MRP expects to

23

profit nonetheless demonstrates that undercompensation of the Trusts is an essential element of

24

the Seizure Program.

25

13.

There are numerous reasons that this scheme is unconstitutional. As outlined

26

above, the Seizure Program cannot be successful on its own terms if the Trusts receive fair

27

market value. Thus, this case is more than a dispute about valuation of individual loans. The

28

takings also are manifestly not for public use—indeed, the Seizure Program specifically carves
4
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

out loans whose modification might avoid foreclosure, in apparent recognition that many Trusts

2

already can conduct such modifications. Further, the Seizure Program involves the taking of

3

loans that are located outside of the City’s limits and therefore are beyond its eminent domain

4

power.

5

14.

The Seizure Program violates other provisions of the U.S. and California

6

Constitutions as well. By coercing transactions across state lines and threatening massive

7

disruption to the national mortgage lending and securitization markets, it conflicts with federal

8

power under the Commerce Clause. It also runs afoul of the Contracts Clause, which bars States

9

and their political subdivisions like the City from modifying private contracts. In fact, the

10

Seizure Program is a paradigmatic example of the types of misconduct that each Clause was

11

intended to prevent. The City seeks to abrogate debts that its citizens owe to out-of-town entities

12

and permit a local speculator to reap the profits.

13

15.

Already, the federal government has expressed its concerns about the

14

unconstitutional nature of the Seizure Program and the federal interest in avoiding havoc to

15

mortgage lending nationwide. In a public statement dated August 9, 2012, the Federal Housing

16

Finance Administration (“FHFA”), the conservator of Fannie Mae and Freddie Mac (the two

17

Government–Sponsored Enterprises (“GSEs”) that are among the largest investors in residential-

18

mortgage backed securitization (“RMBS”) trusts), stated that “FHFA has significant concerns

19

about the use of eminent domain to revise existing financial contracts” and that “resulting losses

20

from such a program would represent a cost ultimately borne by taxpayers” and would have “a

21

chilling effect on the extension of credit to borrowers seeking to become homeowners and on

22

investors that support the housing market.” 77 Fed. Reg. 47,652 (August 9, 2012). FHFA noted

23

that “[a]mong questions raised regarding the proposed use of eminent domain are the

24

constitutionality of such use,” “the effects on holders of existing securities,” “the impact on

25

millions of negotiated and performing mortgage contracts,” and “critical issues surrounding the

26

valuation by local governments of complex contractual arrangements that are traded in national

27

and international markets.” Id.

28
5
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

16.

As stated, the targeted loans are out-of-Richmond interests, held by out-of-

2

Richmond entities. Nevertheless, as an alternative, and to the extent that loans targeted by the

3

Seizure Program may be considered local interests (they are not), the Seizure Program also

4

violates the California Constitution, which, as amended by voter proposition in 2008, expressly

5

prohibits local governments from using eminent domain to seize owner-occupied residences for

6

the purpose of conveying it to a private person. Cal. Const. art. I, § 19(b). Specifically, as an

7

alternative basis, the Seizure Program is unlawful if the targeted mortgage loans constitute

8

interests in real property that are secured exclusively by owner-occupied residences and are

9

conveyed to private persons.

10

17.

Injunctive and declaratory relief is necessary to avoid imminent and irreversible

11

harm, not only to the Trusts but to the national economy. The City intends to use California’s

12

“quick take” procedure, which allows it to condemn property first and ask the courts to

13

determine fair compensation second. Once each loan is taken, MRP will destroy it through

14

refinancing; a new loan would then be imposed on each borrower, and those new loans would be

15

hastily sold to other investors. If the Seizure Program is found unconstitutional afterwards, that

16

egg may prove impossible to unscramble, and certainly not without harming innocent

17

homeowners and investors. Moreover, because of the design of the Seizure Program, the

18

compensable losses to the Trusts will be far greater than the City realizes and may exceed its

19

ability to pay. MRP is indemnifying the City for these costs, but its financial resources are

20

unknown.

21

18.

Moreover, several other municipalities—including North Las Vegas, Nevada; El

22

Monte, California; La Puente, California; Orange Cove, California; Pomona, California; and San

23

Joaquin, California—have entered into agreements with MRP. Litigating each taking

24

individually in state court while waiting for definitive guidance on federal constitutional issues

25

would be wasteful and protracted and lead to years of uncertainty.

26
27

19.

The Seizure Program is a scheme that should be nipped in the bud. That is why

Plaintiffs seek immediate relief from this Court.

28
6
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

THE PARTIES

2

A.

Plaintiffs

3

20.

Plaintiff The Bank of New York Mellon (f/k/a The Bank of New York) is a bank

4

organized under the laws of the State of New York and having its principal place of business at

5

One Wall Street, New York, New York 10286. The Bank of New York Mellon serves as Trustee

6

for Trusts listed on Exhibit A hereto that hold mortgage loans targeted by the Seizure Program.

7

21.

Plaintiff The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of

8

New York Trust Company, N.A.) is a national banking association formed under the laws of the

9

United States of America and having its principle place of business at 400 South Hope St., Ste.

10

400, Los Angeles, California 90071 (together with The Bank of New York Mellon, “BNY

11

Mellon Trustees”). The Bank of New York Mellon Trust Company serves as Trustee for Trusts

12

listed on Exhibit A hereto that hold mortgage loans targeted by the Seizure Program.

13

22.

Plaintiff U.S. Bank National Association is a national bank with its principal place

14

of business at 800 Nicollet Mall, Minneapolis, Minnesota 55402. U.S. Bank National

15

Association serves as Trustee for Trusts listed on Exhibit B hereto that hold mortgage loans

16

targeted by the Seizure Program.

17

23.

Plaintiff Wilmington Trust Company is a Delaware trust company with its

18

principal place of business at 1100 North Market Street, Wilmington, Delaware 19890. Plaintiff

19

Wilmington Trust, National Association is a national banking association with its principal place

20

of business at 1100 North Market Street, Wilmington, Delaware 19890. Wilmington Trust

21

Company and Wilmington Trust, National Association (collectively, “Wilmington Trust”) serve

22

as Trustee for Trusts listed on Exhibit C hereto that hold mortgage loans targeted by the Seizure

23

Program.

24
25
26

24.

The beneficial owners of the Trusts include municipal and private pension plans,

401(k) plans, mutual funds, and other investors.
25.

As the first phase of the Seizure Program, the City sent out letters to

27

approximately 32 trustees and servicers of RMBS trusts offering to purchase approximately 624

28

loans. The Mayor of Richmond publicly indicated that this was only the “first batch” of loans
7
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

and that she hopes to expand the Program. Plaintiffs each received a letter from the City dated

2

July 31, 2013 demanding to purchase a total of more than 230 loans from the Trusts. Attached

3

hereto as Exhibits D, E and F are true and correct copies of the City’s letters addressed

4

respectively to the BNY Mellon Trustees, U.S. Bank National Association and “Wells

5

Fargo/Wilmington Trust.”1

6

26.

None of the Trusts is incorporated in California or otherwise organized under the

7

laws of California. All, or nearly all, of the Trusts are organized under New York common law

8

or Delaware law.

9

27.

The physical notes and other documents evidencing the mortgage loans that

10

Defendants intend to seize all are valid and binding, and located outside of the territorial

11

boundaries of the City.

12

28.

The beneficiaries of the Trusts are located across the country and the world.

13

B.

Defendants

14

29.

Defendant MRP is a limited liability company organized and existing under the

15

laws of Delaware, and it is headquartered in San Francisco, California.

16

30.

MRP is a privately-owned, for-profit company that will manage and facilitate the

17

loan restructuring process of the Seizure Program, including (a) raising funds to finance the

18

seizures; (b) identifying mortgage loans to be acquired by eminent domain; and (c) arranging for

19

the loan refinancing. MRP will receive a $4,500 fee for each loan seized and refinanced. In

20

addition, MRP’s investors would receive the profit between the seizure price and price at which

21

the new loan to the homeowner is sold, net of MRP’s fee, the City’s fee, and any expenses

22

incurred by MRP. MRP has no other business operations.

23

31.

Defendant Gordian Sword LLC is a limited liability company organized and

24

existing under the laws of Delaware, and it is headquartered in San Francisco, California. It was

25

established to create the Seizure Program and is the managing member that controls and directs

26

1

27
28

The City’s letter addressed to Plaintiff U.S. Bank National Association mistakenly omitted
“Attachment B,” which was described in the letter as setting forth the amount offered for each of
the relevant mortgage loans. After repeated requests, U.S. Bank National Association received a
copy of “Attachment B” on August 15, 2013, and has incorporated that “Attachment B” into the
version of the City’s letter appended hereto as Exhibit E.
8
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

MRP. The name Gordian Sword is an apparent reference to the Gordian Knot, a legend and

2

metaphor for an intractable problem that is solved easily by cheating (i.e., cutting the knot).

3

32.

On or about April 2, 2013, the City, through its City Council and upon the

4

recommendation of its City Manager, voted to enter into an “Advisory Services Agreement” with

5

MRP, under which MRP would provide contractual services to the City regarding, among other

6

things, mortgage relief for City homeowners and the acquisition of existing mortgage loans

7

through eminent domain. It is not clear whether this is the only written agreement between the

8

City and MRP or if there are other undisclosed oral or written agreements between them.

9
10
11

33.

Defendant City, a municipality, is located in Contra Costa County in the State of

California, with the territorial boundaries described in Article I, section 2 of the City’s Charter.
34.

Defendant Richmond City Council (the “City Council”) is the City’s governing

12

body. Defendant City Council is the governing body with legal responsibility for making

13

decisions with respect to the City’s exercise of its eminent domain powers.

14
15

JURISDICTION AND VENUE
35.

The Court has jurisdiction over this action pursuant to 28 U.S.C. §§ 1331 (federal

16

question jurisdiction) and 1343(a)(3) and (4) (jurisdiction over actions for violations of

17

constitutional and federal rights secured by 42 U.S.C. § 1983), and over Plaintiffs’ declaratory

18

relief causes of action under 28 U.S.C. §§ 2201 and 2202. Plaintiffs’ state-law claims form part

19

of the same case or controversy as the federal claims. Accordingly, this Court has supplemental

20

jurisdiction over Plaintiffs’ state-law claims pursuant to 28 U.S.C. § 1367(a).

21

36.

This Court has personal jurisdiction over Defendants City and City Council, as

22

municipalities or agents and officers of municipalities located in this judicial district. The Court

23

also has personal jurisdiction over those Defendants because Plaintiffs’ claims arise out of

24

actions taken by those Defendants in this judicial district.

25

37.

The Court has personal jurisdiction over Defendants MRP and Gordian Sword

26

because they are headquartered in San Francisco, California, and Plaintiffs’ claims arise out of

27

MRP’s and Gordian Sword’s transaction of business in this judicial district.

28
9
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

38.

Venue is proper in this judicial district based on 28 U.S.C. § 1391(b). Defendants

2

City and City Council reside in this judicial district, Defendants MRP and Gordian Sword

3

conduct business in this district, and a substantial part of the events or omissions giving rise to

4

the claims asserted herein occurred in this district.

5

INTRADISTRICT ASSIGNMENT

6

39.

Pursuant to Civil Local Rules 3-2(c) and 3-2(d), this action is properly assigned to

7

either the San Francisco or Oakland Division of this Court, because a substantial part of the

8

events giving rise to the claims asserted herein occurred in Contra Costa County.

9
10
11

FACTUAL BACKGROUND
I.

DEFENDANTS’ SEIZURE PROGRAM
40.

Defendants seek to enrich themselves through an elaborate program under which

12

the City would use its eminent domain powers and litigation to seize residential mortgage loans,

13

secured by owner-occupied residences in the City, held by outsiders, at steeply and unjustifiably

14

discounted prices. MRP would then refinance those loans with new federally insured loans and

15

sell the new loans at a substantial markup.

16

41.

Defendants would profit by sharing in the spread between the price paid by the

17

City (by MRP’s investors) to seize the loans and the proceeds received by the City (through

18

MRP) for selling the new loan to the homeowner to a third party. The outside-of-Richmond

19

Trusts whose mortgage loans would be seized under the Seizure Program would lose significant

20

value—potentially hundreds of thousands of dollars on some individual loans. Thus, the Seizure

21

Program amounts to a seizure and transfer of wealth from private parties outside of the City, on

22

the one hand, to other private parties, on the other hand, with the City receiving a payment as its

23

fee for renting out its eminent domain powers.

24

A.

The Seizure Program’s Targeting of Performing Loans

25

42.

The Seizure Program primarily targets for eminent domain seizure mortgage loans

26

that meet a specific profile: (a) performing loans (meaning where the borrower is current on

27

payment); (b) underwater (meaning that the principal loan balance is greater than the underlying

28

home value); and (c) held by “private-label” securitization trusts (meaning that the trusts are
10
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

sponsored by a private entity, rather than by a Government-Sponsored Enterprise (GSEs), such a

2

Fannie Mae and Freddie Mac).2

3

43.

The Seizure Program seeks to cherry-pick loans that are “relatively current (not in

4

default),” and only from “borrowers who appear likely to repay their loans.” See Exhibit G at 9

5

(emphasis added).3 Thus, the Seizure Program does not target loans where there is a serious risk

6

of default (much less a serious risk of foreclosure). Indeed, of the approximately 624 loans that

7

the City has offered to purchase, approximately 85% are not in any stage of the foreclosure

8

process and approximately 81% of the loans have never had a notice of default filed or are now

9

current. Of the 105 loans held by Plaintiffs BNY Mellon Trustees, for example, over 90% are

10

not in any stage of the foreclosure process.

11

44.

The stated justifications for the Seizure Program—to prevent “blight” or some

12

other “public” harm caused by foreclosures—are mere pretexts for this profit-driven scheme.

13

Indeed, the fact that the Seizure Program primarily targets performing loans—loans that will be

14

the most profitable to restructure and sell but are the least likely to default—shows that the

15

Seizure Program is designed to create profits for MRP and its investors.

16

45.

MRP has included a small percentage of loans in default or foreclosure for optics

17

only, in a thinly-veiled attempt to justify its scheme under the guise of public good. The Seizure

18

Program is not structured to help borrowers actually facing foreclosure because such borrowers

19

are a bad credit risk, unlikely to qualify for refinancing. In MRP’s own words, one of the “key

20

steps to the MRP process” is that “[h]omeowners who opt into the program, but do not qualify

21

for a refinance or a lease will be dropped from the eminent domain motion before their mortgage

22

is purchased.” See Exhibit H at 13 (emphasis added).4

23
24
25
26
27
28

2

The Seizure Program has been described in several public sources, attached hereto as Exhibits
G and H.
3
Available at http://online.wsj.com/public/resources/documents/EMINENT-powerpoint.pdf (last
visited August 7, 2013).
4
Available at
http://sireweb.ci.richmond.ca.us/sirepub/cache/2/mb1qpzgj4mcgl3zqu31kl0y3/36546408062013
071309684.PDF (last visited August 7, 2013). This presentation is attached to explain the
Seizure Program, which would be unlawful if fully implemented.
11
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

46.

Defendants attempt to justify the Seizure Program as correcting what they claim

2

to be a contractual bar on forgiving principal in securitization trusts See, e.g., Exhibit H at 5. As

3

to the Trusts administered by Plaintiffs, that is simply false. But loan servicers can and do

4

forgive principal when doing so would maximize the value of the loan.

5
6

47.

Another seemingly arbitrary provision is that the Seizure Program is limited to

loans held by private RMBS trusts, all located outside of the City of Richmond.

7

48.

The Seizure Program excludes loans held by trusts sponsored and guaranteed by

8

Freddie Mac or Fannie Mae. It also excludes loans held directly by banks. These exceptions

9

demonstrate that the stated justifications are a pretext and appear intended to minimize

10

opposition from local banks and federal agencies.

11

B.

The Seizure and Refinancing of the Targeted Loans

12

49.

Having now selected loans held by the Trusts for seizure, the City will attempt to

13

seize the loan through eminent domain for a fraction of its value.5 The example frequently given

14

by MRP of its proposed valuation methodology is that for a loan with a principal balance of

15

$300,000 secured by a home worth $200,000, Defendants would seize the loan at $160,000. See

16

Exhibit H at 7, 16-18.

17

50.

Once Defendants expropriate each loan for less than fair market value, they then

18

intend to replace it with a new loan to be sold into a FHA securitized pool in an amount equal to

19

approximately 95% of the underlying home value. Defendants and MRP’s investors would

20

profit by sharing the spread between the discounted seizure price and the 95% refinancing price.

21

See id.

22

51.

Because the loans are underwater (i.e., the home value is less than the outstanding

23

principal balance), Defendants have calculated a discounted valuation that is far lower than the

24

unpaid principal balance of the loan.

25

5

26
27
28

In one instance, the City’s July 31, 2013 letter addressed to Plaintiffs BNY Mellon Trustees
offered a mere 11% of the principal balance of the loan. See Exhibit D at Trustee Exhibit B
therein. The letter received by Plaintiff U.S. Bank National Association included an offer priced
at just 7% of the balance of the subject loan. See Exhibit E at Trustee Exhibit B therein.
Moreover, while the City’s letter addressed to Plaintiff Wilmington Trust referred to an
“Attachment B” as setting forth the amount and basis for the City’s offer to acquire the relevant
mortgage loans, the attachment included no clear basis for the City’s offer. See Exhibit F.
12
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

52.

The offers also are totally disconnected from, and far less than, any measure of

2

fair value. Defendants have primarily selected loans that are current and not in foreclosure. The

3

fair value of such loans includes the anticipated principal and interest payments over the life of

4

the loan. That is especially so for long-term holders of the loans like the Trusts, which were

5

designed to hold loans to maturity, not to trade them in the market.

6

C.

7

Seizure Program.

8
9

Defendants Have Taken Substantial Steps Towards Implementing the

53.

Defendants have taken substantial steps towards implementing the Seizure

Program. In April 2013, the City entered into an “Advisory Services Agreement” with MRP,

10

which is an operative agreement between the City and MRP with respect to the Seizure Program,

11

attached hereto as Exhibits I (agreement) and J (City Council minutes indicating approval).

12

Recently, MRP began sending letters to Plaintiffs and other trustees and servicers for RMBS

13

trusts stating that unidentified California cities were interested in acquiring mortgage loans and

14

would soon be making purchase offers on the loans, one of the prerequisites under California

15

eminent domain law before a local government can seize property.

16

54.

On multiple occasions over the past months, the Mayor of Richmond or other City

17

officials have publicly discussed the City’s implementation of the Seizure Program, including

18

confirming that the City Council entered into a partnership with MRP to implement the Seizure

19

Program and discussing MRP and the City’s readiness to begin implementing the Seizure

20

Program.

21

55.

On or about July 31, 2013, Richmond sent letters to Plaintiffs (attached hereto as

22

Exhibits D, E, and F) and other trustees and servicers for RMBS trusts making offers to purchase

23

loans from the Trusts. The offer letters attached a list of approximately 624 mortgage loans

24

purportedly held by RMBS trusts (including more than 230 purportedly held by the Trusts) that

25

the City is offering to acquire, “at the present time.”6 The letters state that the offers are not

26

binding on the City but provide a deadline of August 13, 2013 for Plaintiffs to respond, after

27
28

6

Notably, a majority of the loans identified in the letter sent to Wilmington Trust are not owned
by a trust for which Wilmington acts as trustee.
13
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

which the City may “decide[] to proceed with the acquisition of the loans through eminent

2

domain.” After sending the letters, the Mayor of Richmond reportedly declared: “If financial

3

institutions do not cooperate, the city will seize the loans using eminent domain.” See Exhibit K

4

hereto.7 The City’s offer letters constitute a first wave of offers, and if Defendants are successful

5

in acquiring or seizing these loans, it is expected that they will attempt to acquire or seize many

6

other loans.

7

56.

If the offers are not accepted, the City will attempt to quickly seize possession of

8

the loans. The City Council must first hold a condemnation hearing, and immediately thereafter

9

could file an eminent domain lawsuit in California and use an expedited procedure known as a

10

“quick take” to quickly obtain a court order giving the City possession of the loan. MRP has

11

indicated that the “quick take” procedure is a critical component of the Seizure Program. See

12

Exhibit L hereto at 3.8 Once the City receives possession of the loans, it could then extinguish,

13

restructure, and refinance them, causing immediate and irreparable harm to the Trusts that will

14

be exceedingly difficult, if not impossible, to unwind.

15

57.

Thus, there is a high likelihood that Defendants will very soon exercise the City’s

16

eminent domain powers to seize possession of mortgage loans under the Seizure Program.

17

II.

IMPLEMENTATION OF THE SEIZURE PROGRAM WOULD RESULT IN

18

SIGNIFICANT HARM TO THE TRUSTS AND WILL AFFECT INTERSTATE

19

COMMERCE

20

A.

Harm to the Trusts

21

58.

If implemented, the Seizure Program would cause significant harm to the Trusts.

22

59.

First, the targeting of performing loans within the Trusts’ portfolios would, by

23

itself, completely upend the purpose of the securitization process. The structure and value of a

24

particular securitization trust is based upon diversification of loans, in both the terms of the loans

25

and the geographic location of the property secured by the loans, and the associated risks.

26

RMBS trusts are dependent on the stable and non-saleable nature of performing loans within the

27

7

28

Available at http://www.latimes.com/business/money/la-fi-mo-richmond-eminent-domain20130730,0,7196420.story.
8
Available at http://online.wsj.com/public/resources/documents/EMINENT-faqs.pdf.
14
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

pool. Cherry-picking performing loans from the Trusts disrupts the risk diversification on which

2

the Trusts were structured.

3

60.

Second, the number of loans targeted in the City alone—hundreds of mortgage

4

loans—would cause significant direct losses to the Trusts and other RMBS trusts. Indeed, the

5

first wave of the approximately 624 loans targeted by Defendants could potentially cause losses

6

to the RMBS trusts holding those loans of over $90 million or more.

7

61.

Third, there is a risk that the takings could jeopardize the Trusts’ tax status. The

8

Trusts are organized as Real Estate Mortgage Investment Conduits (REMICs), a status that

9

Congress created to apply uniformly on a national basis to encourage securitization of static

10

pools of residential mortgage loans. The REMIC regulations do not permit the transfer of non-

11

defaulted loans out of the trusts without the imposition of potentially significant and adverse tax

12

consequences, nor do they contemplate the City’s unprecedented seizure of mortgage loans from

13

securitized trusts. Particularly if the Seizure Program is copied by other municipalities, the IRS

14

may find that the Trusts are not REMIC-eligible. If as a result of the seizure of such loans, the

15

IRS concluded that the Trusts are no longer REMIC-eligible, the results of that finding would be

16

catastrophic: the Trusts, which currently pay no tax at the trust level, would be subject to a 35%

17

tax on all of their income. That tax liability could result in a sharp loss of income for pension

18

funds, retirees, and others who rely on regular payments from these securities.

19

62.

Fourth, many other municipalities across the U.S. are watching to see whether

20

Defendants are able to carry out the Seizure Program. If even a few other municipalities of

21

City’s size implement the Seizure Program, losses could range in the billions of dollars. If more

22

than a few implement the Seizure Program, far greater losses could mount. This widespread

23

transfer of substantial funds from the Trusts’ beneficiaries, including municipal pension funds

24

and private retirement plans, on the one hand, to Defendants, on the other hand, could destabilize

25

the national housing market and the larger economy.

26

B.

The Effect on Interstate Commerce and the National Housing Market

27

63.

The Seizure Program also would cause significant harm to interstate commerce

28

and the national housing market. As a preliminary matter, because the Trusts and the loans are
15
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

located out of California, the Seizure Program would coerce interstate transactions.

2

Additionally, the Seizure Program is expressly designed to favor local interests—MRP and

3

underwater homeowners—at the expense of out-of-state creditors. Furthermore, in addition to

4

the losses suffered by the Trusts from the seizure of performing residential mortgage loans at

5

below fair market values, the Seizure Program would have a chilling effect on the extension of

6

credit to homeowners. The Seizure Program also will disrupt the national nature of the mortgage

7

market by subjecting investors to qualitatively different types of risk in different jurisdictions.

8

Mortgage rates would rise, and some prospective homeowners may be unable to obtain loans at

9

all, lowering housing prices across the country.

10

64.

Further, the Seizure Program would undermine investor confidence in the

11

residential mortgage-backed securities market, and by extension, the national housing market

12

and national economy. The securitization market would be upended, as investors in residential

13

mortgage-backed securities would be unable to adequately evaluate underlying mortgage pools

14

that collateralize their investment, and prices for affected securities would decrease. A broad

15

range of investors hold interests in residential mortgage-backed securitizations as part of

16

common diversification strategies. Thus, the detrimental effects of a valuation crisis as to the

17

securities evidencing such interests would flow through the national housing market, and

18

likewise, the larger economy.

19
20
21

65.

Likewise, industries dependent on a vibrant housing market and an active home

lending environment would suffer, such as the home building, construction, and realty industries.
66.

In comments published in the Federal Register, 77 Fed. Reg. 47,652 (August 9,

22

2012) discussing the “Use of Eminent Domain To Restructure Performing Loans,” the FHFA

23

recognized the harm that programs like the Seizure Program would cause. Among other things,

24

FHFA has explained that the GSEs, as well as the multiple Federal Home Loan Banks for which

25

FHFA acts as a regulator, because they are substantial holders of RMBS trusts, would be

26

harmed, as well as the communities themselves that attempt to use eminent domain. According

27

to FHFA:

28

FHFA has significant concerns about the use of eminent domain to revise
16
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

existing financial contracts and the alteration of the value of Enterprise or Bank
securities holdings. In the case of the Enterprises, resulting losses from such a
program would represent a cost ultimately borne by taxpayers. At the same time,
FHFA has significant concerns with programs that could undermine and have a
chilling effect on the extension of credit to borrowers seeking to become
homeowners and on investors that support the housing market.

1
2
3
4

FHFA has determined that action may be necessary on its part as conservator for
the Enterprises and as regulator for the Banks to avoid a risk to safe and sound
operations and to avoid taxpayer expense.

5
6

Among questions raised regarding the proposed use of eminent domain are the
constitutionality of such use; the application of federal and state consumer
protection laws; the effects on holders of existing securities; the impact on
millions of negotiated and performing mortgage contracts; the role of courts in
administering or overseeing such a program, including available judicial
resources; fees and costs attendant to such programs; and, in particular, critical
issues surrounding the valuation by local governments of complex contractual
arrangements that are traded in national and international markets.

7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

67.

which has oversight of Fannie Mae and Freddie Mac, recently issued a draft reform bill, a stated
purpose of which is to implement the following reform: “To combat constitutionally-suspect
‘eminent domain’ schemes by local municipalities to seize mortgages out of legally binding
securities for purposes of rewriting their terms, prohibit the GSEs from purchasing or
guaranteeing loans originated in municipalities where such practices have been employed during
the last ten years.” Executive Summary of the Protecting American Homeowners (PATH) Act,
July 11, 2013, at 2.9
68.

25
26
27
28

The concerns expressed by the FHFA and the House Financial Services

Committee are well-founded. The Seizure Program will have a devastating effect on interstate
commerce, including on the mortgage-backed securities market and the national housing market,
and would detrimentally affect both borrowers and lenders.
C.

The Adverse Effects on the City and Its Homeowners

69.

23
24

Likewise, the U.S. House of Representatives Financial Services Committee,

The City, and its residents, would not be spared from the harm caused by the

Seizure Program. The Seizure Program will have negative consequences for borrowers and
prospective homeowners with respect to lending products in communities that seize mortgage
loans at unfairly reduced values through eminent domain. The risks associated with lending in
9

Available at
http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=342165.
17
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

such communities will force lenders to place more stringent conditions on borrowers seeking a

2

mortgage. With less people qualifying for mortgages, homeownership rates would drop and

3

property values would plummet.

4

70.

The relatively small number of select City homeowners who could potentially

5

receive a windfall under the Program by having their underwater mortgages refinanced will not

6

offset the devastation to the local housing market and economy due to the Seizure Program’s

7

chilling effect on credit.

8
9

71.

City homeowners whose loans are in the Seizure Program actually may be

damaged by it. Debt forgiveness generally is treated as taxable income for both state and federal

10

income tax purposes. The Seizure Program intends to seize loans at a price that is hundreds of

11

thousands of dollars lower than the principal balance on the loan. This principal balance

12

reduction may be treated as debt forgiveness and subject to income tax. Thus, these select City

13

homeowners could owe upwards of six figures in income tax liability. Even more, unlike

14

mortgage debt, income tax debt is not necessarily dischargeable in bankruptcy. Instead of

15

creating more stable neighborhoods, having more money in our local economy to stimulate

16

community wealth, and saving homeowners money on their mortgage payments, as MRP and the

17

City claim will happen, the Seizure Program in fact may undermine the growing economy and

18

push the City back into recession. Although certain federal and state programs temporarily allow

19

for mortgage debt forgiveness to be excluded from taxable income, it is far from clear whether

20

the Seizure Program would qualify for any such exclusion or whether the Seizure Program would

21

complete the seizure process before the expiration of the tax holiday at the end of 2013.

22

III.

INJUNCTIVE RELIEF IS NECESSARY TO PREVENT IMMEDIATE AND

23

IRREPARABLE HARM.

24

72.

Defendants should be enjoined from implementing the Seizure Program. The

25

Seizure Program would cause significant and widespread harm, and the transactions that will

26

occur under the Seizure Program will be exceedingly difficult, if not impossible, to unwind.

27
28

73.

Under the Seizure Program, once new loans are issued to refinance the original

loans, they would be securitized. Thus, to unwind these unlawful seizures would require
18
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

extinguishing the new loan—thereby harming the new trust that holds that loan, and its

2

beneficiaries—and then reinstating the homeowner’s old loan. It is doubtful that either step of

3

this process could occur—that is, that MRP could “claw back” the new loan, and any payments

4

that have been made, from the new trust and its investors, or that the Trusts could reinstate the

5

old loans.

6

74.

Nor could money damages adequately compensate the Trusts. First, widespread

7

seizure and extinguishment of the loans may cause significant damage to the Trusts and their

8

beneficiaries, including, among other things, causing the Trusts to lose their REMIC status and

9

affecting the credit rating of the Trusts’ certificates and the market value of trust securities,

10

which could cause systemic problems for other RMBS securitizations and their

11

Certificateholders—including the Trusts—that cannot be compensated by money damages.

12

75.

Second, even if money damages could somehow be adequate, there is serious

13

doubt that Defendants would have the financial means necessary to compensate the Trusts (at the

14

same time that they also must compensate all similarly-situated RMBS trusts) for the potentially

15

hundreds of millions of dollars in losses caused by the Seizure Program, in which case the Trusts

16

will be left without recourse for their loss.

17
18
19
20

JUSTICIABLE DISPUTE
76.

By reason of the foregoing, there now exists a justifiable dispute and controversy

for which immediate relief is necessary.
77.

Accordingly, Plaintiffs seek injunctive and declaratory relief as set forth herein.

21
22
23
24
25
26
27
28
19
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

CLAIMS FOR RELIEF

2

FIRST CLAIM

3

(DECLARATORY RELIEF REGARDING VIOLATION OF THE “PUBLIC USE”

4

REQUIREMENT OF THE TAKINGS CLAUSES OF THE U.S. AND CALIFORNIA

5

CONSTITUTIONS, THE RICHMOND CITY CHARTER, AND CLAIM UNDER 42

6

U.S.C. § 1983)

7

(AGAINST ALL DEFENDANTS)

8
9
10

78.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
79.

The Fifth Amendment to the U.S. Constitution provides that “private property”

11

shall not be “taken for public use, without just compensation” (the “Takings Clause”). This

12

requirement is incorporated and made applicable to the states and their political subdivisions and

13

actors by the Fourteenth Amendment of the U.S. Constitution.

14

80.

42 U.S.C. § 1983 provides that any person, acting under the color of state law,

15

that subjects or causes to be subjected any citizen of the United States or other person within its

16

jurisdiction to the deprivation of any rights, privileges, or immunities under the Constitution,

17

shall be liable to the injured party in an action at law, suit in equity, or other proper proceeding

18

for redress.

19

81.

20
21
22
23
24
25

California Constitution Article I, section 19 provides that private property may be

taken only for a “public use.”
82.

The Richmond City Charter Article II, section 19 provides that a private property

may be taken only for a “public use.”
83.

The Seizure Program is carried out by Defendants, who are inextricably

intertwined, under the color of state law.
84.

The Seizure Program violates the “public use” requirement of the Takings Clause

26

of the Fifth and Fourteenth Amendments, the California Constitution, and the Richmond City

27

Charter.

28
20
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

85.

The Seizure Program is not implemented for a public purpose, but rather for the

2

purpose of seizing property from one set of private entities (the Trusts) to enrich MRP, a private

3

investment firm, and its investors. Even if individual homeowners do benefit, and those benefits

4

are not wiped out by, for example, federal tax liability, those homeowners are private parties as

5

well.

6

86.

The stated justifications for the Seizure Program—to prevent “blight” or some

7

other “public” harm caused by foreclosures—are mere pretexts for this profit-driven scheme.

8

Indeed, the fact that the Seizure Program primarily targets performing loans—loans that will be

9

the most profitable to restructure and sell but are the least likely to default—shows that the

10

Seizure Program is designed to create profits for MRP and its investors. Furthermore, even if the

11

purported justification of preventing future foreclosures were true, prevention of future blight or

12

harm is not a valid public use.

13

87.

In addition, the Seizure Program would not benefit the City’s citizens on a whole,

14

but would instead lead to windfalls for the select group of homeowners who meet a loan profile

15

profitable to MRP and its investors, to the detriment of all others. Even this small group of

16

intended beneficiaries may receive a severe tax burden that would offset any windfall and may

17

worsen the homeowners’ financial situations. Further, the Seizure Program expressly excludes

18

many borrowers and primarily targets performing mortgage loans that are not in default or

19

foreclosure. If the Seizure Program is fully implemented and performing loans are seized for

20

well-below their unpaid principal balance, and thus at significant losses to the Trusts holding

21

those loans, lenders will be unwilling to extend credit in the City at the current level, creating, at

22

a minimum, a chilling effect on the local home lending environment. This will have severe

23

consequences for current and prospective City homeowners.

24

88.

For all of the reasons asserted herein, there is an actual controversy between

25

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

26

and 2202.

27
28
21
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

89.

Defendants have taken substantial steps towards seizing loans under the Seizure

2

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

3

harmed.

4

90.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

5

declaratory and injunctive relief against Defendants, declaring that the implementation of the

6

Seizure Program would violate the Fifth and Fourteenth Amendments of the U.S. Constitution,

7

Article I, section 19 of the California Constitution, and Article II, section 19 of the Richmond

8

Charter, and permanently enjoining Defendants from implementing any aspect of the Seizure

9

Program.

10

SECOND CLAIM

11

(DECLARATORY RELIEF REGARDING VIOLATION OF THE PROHIBITIONS

12

AGAINST EXTRATERRITORIAL SEIZURES UNDER THE TAKINGS CLAUSES OF

13

THE U.S. AND CALIFORNIA CONSTITUTIONS AND THE CALIFORNIA CODE OF

14

CIVIL PROCEDURE, AND CLAIM UNDER 42 U.S.C. § 1983)

15

(AGAINST ALL DEFENDANTS)

16
17
18

91.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
92.

The Fifth Amendment to the U.S. Constitution prohibits a local government from

19

extraterritorially seizing property pursuant to eminent domain powers. This requirement is

20

incorporated and made applicable to the states and their political subdivisions and actors by the

21

Fourteenth Amendment of the U.S. Constitution.

22

93.

42 U.S.C. § 1983 provides that any person, acting under the color of state law,

23

that subjects or causes to be subjected any citizen of the United States or other person within its

24

jurisdiction to the deprivation of any rights, privileges, or immunities under the Constitution,

25

shall be liable to the injured party in an action at law, suit in equity, or other proper proceeding

26

for redress.

27

94.

28

The California Constitution prohibits local governments from extraterritorially

seizing property pursuant to eminent domain powers.
22
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

95.

Under section 1240.050 of the California Code of Civil Procedure, a local public

2

entity may acquire by eminent domain only property located within its territorial limits. Under

3

section 1250.020 of the California Code of Civil Procedure, an eminent domain proceeding must

4

be commenced in the county in which the property sought to be taken is located.

5
6
7

96.

The Seizure Program is carried out by Defendants, who are inextricably

intertwined, under the color of state law.
97.

Defendants’ implementation of the Seizure Program violates prohibitions against

8

extraterritorial property seizures under the Fifth and Fourteenth Amendments of the U.S.

9

Constitution, the California Constitution, and the California Code of Civil Procedure. The debt

10

instruments that Defendants target under the Seizure Program are not located within the

11

territorial boundaries of the City and are held by Trusts located outside of Richmond. Because

12

the situs of a debt instrument for eminent domain purposes is the location of the physical

13

instrument, and the situs of an intangible debt is the location of the creditor, Defendants have no

14

power to seize these outside-of-Richmond debts.

15

98.

In addition, the notes evidencing the mortgage loans are held outside of the

16

territorial boundaries of the City. Defendants have no power to effect extraterritorial seizures of

17

those tangible instruments.

18

99.

For all of the reasons asserted herein, there is an actual controversy between

19

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

20

and 2202.

21

100.

Defendants have taken substantial steps towards seizing loans under the Seizure

22

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

23

harmed.

24

101.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

25

declaratory and injunctive relief against Defendants, declaring that the implementation of the

26

Seizure Program would violate the Fifth and Fourteenth Amendments of the U.S. Constitution,

27

the California Constitution, and the California Code of Civil Procedure, and permanently

28

enjoining Defendants from implementing any aspect of the Seizure Program.
23
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

THIRD CLAIM

2

(DECLARATORY RELIEF REGARDING VIOLATION OF THE COMMERCE

3

CLAUSE OF THE U.S. CONSTITUTION AND CLAIM UNDER 42 U.S.C. § 1983)

4

(AGAINST ALL DEFENDANTS)

5
6
7

102.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
103.

Article I, section 8, clause 3 of the U.S. Constitution (the “Commerce Clause”)

8

gives Congress the power to regulate commerce among the several states. The Commerce

9

Clause bars states and their political subdivisions from taking action designed to benefit in-state

10

economic interests by burdening out-of-state interests. Direct regulation of interstate commerce

11

by the states and their political subdivisions is prohibited, and incidental regulation is permissible

12

only where the burden imposed on such commerce is not excessive in comparison with the

13

putative local benefits.

14

104.

42 U.S.C. § 1983 provides that any person, acting under the color of state law,

15

that subjects or causes to be subjected any citizen of the United States or other person within its

16

jurisdiction to the deprivation of any rights, privileges, or immunities under the Constitution,

17

shall be liable to the injured party in an action at law, suit in equity, or other proper proceeding

18

for redress.

19

105.

20
21

The Seizure Program is carried out by Defendants, who are inextricably

intertwined, under the color of state law.
106.

Defendants violate the Commerce Clause of the U.S. Constitution by

22

implementing the Seizure Program, which is designed to benefit local Defendants’ own

23

economic interests at the expense of out-of-Richmond and out-of-state interests, including the

24

Trusts that hold the mortgage loans targeted for seizure.

25

107.

In addition, the Seizure Program is a direct regulation of interstate commerce by

26

the City. The Seizure Program expressly targets for seizure private-label mortgage loans held by

27

out-of-Richmond and out-of-state Trusts. The Seizure Program thus seeks to impermissibly

28

coerce interstate transactions. In addition, the Trusts are investment vehicles designed to
24
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

distribute economic and financial risk by holding a diversified collateral base of mortgage loans,

2

including loans that are diverse based on, among other factors, their geographic and risk profiles.

3

Thus, by design, the Trusts hold not only loans secured by property in the City or even

4

California, but from a variety of states and localities.

5

108.

Also, the private-label mortgage loans targeted by MRP at issue here were

6

acquired by a private sponsor, who securitized them in private RMBS Trusts, in which the loans

7

are serviced, and mortgage payments flow through the Trusts to be ultimately distributed to the

8

Trusts’ beneficiaries. Therefore, the Seizure Program would directly regulate an investment

9

structure that by its very nature depends on a pool of collateral located in different states, and on

10

the interstate flows of proceeds from homeowners, to loan servicers, to the Trusts, and then

11

ultimately to the Trusts’ investors.

12

109.

Furthermore, the residential mortgage-backed securities market is a national

13

industry that crosses state lines, with investors and other market participants located throughout

14

the country. The Seizure Program would significantly and directly regulate, if not destroy, this

15

market by seizing assets from nationwide trusts.

16

110.

Moreover, the burden imposed on interstate commerce by the Seizure Program

17

would be excessive, and would greatly outweigh any purported benefits to the City and its

18

residents. Among other things, the Seizure Program could cause tens of millions of dollars in

19

losses to the trusts that hold the approximately 624 targeted mortgage loans, which is just the

20

first wave of the Seizure Program. It also would upend the heavily negotiated investment

21

structures used across the national residential mortgage backed securitization industry, diminish

22

investor confidence in such structures, and have a chilling effect on credit and insurance of

23

mortgaged properties and loans throughout the U.S. Moreover, it could severely disrupt the

24

uniform application of the REMIC rules, which Congress enacted to encourage private

25

securitization. In addition, the purported benefits to the City—preventing foreclosures and their

26

local consequences—are non-existent. The Seizure Program does not aim to seize loans in

27

default or at serious risk of default or foreclosure, but performing loans at low risk of default,

28

which would not address the harms that the Seizure Program purports to prevent. The potential
25
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

benefits to the relatively small number of private City homeowners receiving a windfall under

2

the Seizure Program (should that windfall not be blown away by the tax liability) would not

3

outweigh the harm that the Seizure Program would cause to the Trusts and the national economy.

4

111.

For all of the reasons asserted herein, there is an actual controversy between

5

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

6

and 2202.

7

112.

Defendants have taken substantial steps towards seizing loans under the Seizure

8

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

9

harmed.

10

113.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

11

declaratory and injunctive relief against Defendants, declaring that the implementation of the

12

Seizure Program would violate the Commerce Clause of the U.S. Constitution, and permanently

13

enjoining Defendants from implementing any aspect of the Seizure Program.

14

FOURTH CLAIM

15

(DECLARATORY RELIEF REGARDING VIOLATION OF THE CONTRACTS

16

CLAUSE OF THE U.S. CONSTITUTION AND CLAIM UNDER 42 U.S.C. § 1983)

17

(AGAINST ALL DEFENDANTS)

18
19
20

114.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
115.

Article I, section 10 of the U.S. Constitution—the “Contracts Clause”—prohibits

21

states from “impairing the Obligation of Contracts.” The Contracts Clause prevents states and

22

their political subdivisions from passing any law that would abrogate debts of their citizens,

23

where that law would impair commercial intercourse and threaten the existence of credit.

24

116.

42 U.S.C. § 1983 provides that any person, acting under the color of state law,

25

that subjects or causes to be subjected any citizen of the United States or other person within its

26

jurisdiction to the deprivation of any rights, privileges, or immunities under the Constitution,

27

shall be liable to the injured party in an action at law, suit in equity, or other proper proceeding

28

for redress.
26
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1
2
3

117.

The Seizure Program is carried out by Defendants, who are inextricably

intertwined, under the color of state law.
118.

Defendants violate the Contracts Clause by implementing a scheme that would

4

severely impair the Trusts’ contractual rights to receive full payments of unpaid principal from

5

borrowers. In exchange, the Seizure Program provides cash payments worth significantly less

6

than the rights abrogated by Defendants. The purpose of this significant impairment of

7

contractual rights is improper and without a legitimate public purpose or necessity: to abrogate

8

debts owed by a selected group of that jurisdiction’s residents while enriching a private

9

investment firm and its backers.

10

119.

For all of the reasons asserted herein, there is an actual controversy between

11

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

12

and 2202.

13

120.

Defendants have taken substantial steps towards seizing loans under the Seizure

14

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

15

harmed.

16

121.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

17

declaratory and injunctive relief against Defendants, declaring that the implementation of the

18

Seizure Program would violate the Contracts Clause of the U.S. Constitution, and permanently

19

enjoining Defendants from implementing any aspect of the Seizure Program.

20

FIFTH CLAIM

21

(DECLARATORY RELIEF REGARDING VIOLATION OF THE “JUST

22

COMPENSATION” REQUIREMENTS OF THE TAKINGS CLAUSE OF THE U.S. AND

23

CALIFORNIA CONSTITUTIONS AND CLAIM 42 U.S.C. § 1983)

24

(AGAINST ALL DEFENDANTS)

25
26
27
28

122.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
123.

The Fifth Amendment to the U.S. Constitution provides that “private property”

shall not be “taken for public use, without just compensation.” This requirement is incorporated
27
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

and made applicable to the states and their political subdivisions and actors by the Fourteenth

2

Amendment of the U.S. Constitution.

3

124.

42 U.S.C. § 1983 provides that any person, acting under the color of state law,

4

that subjects or causes to be subjected any citizen of the United States or other person within its

5

jurisdiction to the deprivation of any rights, privileges, or immunities under the Constitution,

6

shall be liable to the injured party in an action at law, suit in equity, or other proper proceeding

7

for redress.

8

125.

9

A property owner is entitled to just compensation for any taking under Article I,

section 19 of the California Constitution. California Code of Civil Procedure § 1263.320

10

provides that the test for assessing “fair market value” for purposes of the “just compensation”

11

requirement is the highest price that a hypothetical buyer and seller would agree to in the

12

marketplace, assuming both were willing and able to complete the transaction but had no

13

particular or urgent necessity to do so.

14
15
16

126.

The Seizure Program is carried out by Defendants, who are inextricably

intertwined, under the color of state law.
127.

Defendants violate the just compensation requirements of the Takings Clause of

17

the U.S. Constitution and California Constitution. The Seizure Program proposes seizing

18

performing mortgage loans at fractions of their unpaid principal balance, prices that are below

19

the fair market value even if the loans would be in default. To achieve its profit goals, the

20

Seizure Program must compensate the Trusts inadequately by seizing loans at prices far less than

21

their actual or fair market values. This unconstitutional feature of the Seizure Program is not

22

merely a question of the valuation of a single property, but is central to the Seizure Program’s

23

financing and viability.

24

128.

For all of the reasons asserted herein, there is an actual controversy between

25

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

26

and 2202.

27
28
28
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

129.

Defendants have taken substantial steps towards seizing loans under the Seizure

2

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

3

harmed.

4

130.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

5

declaratory and injunctive relief against Defendants, declaring that the implementation of the

6

Seizure Program would violate the Takings Clause of the U.S. Constitution and California

7

Constitution, and permanently enjoining Defendants from implementing any aspect of the

8

Seizure Program.

9

SIXTH CLAIM

10

(DECLARATORY RELIEF REGARDING TORTIOUS INTERFERENCE WITH

11

CONTRACT)

12

(AGAINST ALL DEFENDANTS)

13
14
15

131.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
132.

Under California law, a defendant commits the tort of intentional interference

16

with contract where: (1) there is a valid contract between plaintiff and a third party; (2) defendant

17

has knowledge of the contract; (3) defendant’s intentional acts are designed to induce a

18

disruption of the contractual relationship; (4) the contractual relationship is disrupted; and (5) the

19

disruption results in damages.

20

133.

The implementation of the Seizure Program would constitute tortious interference

21

with contracts. The loan agreements are valid contracts. Defendants have knowledge of those

22

contracts, especially as Defendants select which loans to target for seizure based on certain terms

23

of those contracts, such as the principal balance of the loans. The Seizure Program is designed to

24

induce a disruption of the contractual relationship for Defendants’ own profit, by extinguishing

25

those contracts through the City’s eminent domain powers so that the loans can be refinanced by

26

the Defendants for a substantial profit. The Seizure Program is unconstitutional under the United

27

States and California constitutions, and violates California’s statutory restriction on the use of

28

eminent domain, and therefore Defendants are causing the disruption of the borrowers’ contracts
29
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

with the Trusts through wrongful means—i.e., the illegal Seizure Program. Moreover, the

2

disruption of the Trusts’ contracts is not merely an incidental effect of the seizures; the contracts

3

are the very object of the seizure, and their abrogation is the purpose of the Seizure Program.

4

The disruption to the contractual relationship that would be caused by the Seizure Program will

5

result in significant damages to the Trusts that are parties to the contracts, and should be enjoined

6

and declared unlawful.

7

134.

For all of the reasons asserted herein, there is an actual controversy between

8

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

9

and 2202.

10

135.

Defendants have taken substantial steps towards seizing loans under the Seizure

11

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

12

harmed.

13

136.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

14

declaratory and injunctive relief against Defendants, declaring that the implementation of the

15

Seizure Program would constitute tortious interference with contract, and permanently enjoining

16

Defendants from implementing any aspect of the Seizure Program.

17

SEVENTH CLAIM

18

(DECLARATORY RELIEF REGARDING VIOLATION OF CAL. CODE CIV. PROC.

19

§ 1240.030)

20

(AGAINST ALL DEFENDANTS)

21
22
23

137.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
138.

Section 1240.030 of the California Code of Civil Procedure provides that the

24

power of eminent domain may exercised to acquire property “only if all of the following are

25

established: (a) The public interest and necessity require the project. (b) The project is planned

26

or located in the manner that will be most compatible with the greatest public good and the least

27

public injury. (c) The property sought to be acquired is necessary for the project.”

28
30
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

139.

The Seizure Program violates section 1240.030 because public interest and

2

necessity do not require the seizure of the Trusts’ loans under the Seizure Program, and it is not

3

planned in the manner that is the most compatible with the greatest public good and the least

4

private injury. Far from being required or from being implemented for the public good, the

5

Seizure Program has been devised for the purpose of seizing property from one set of private

6

entities (the Trusts) to enrich MRP, a private investment firm, and its investors. The fact that the

7

Seizure Program principally targets performing loans shows that it is not designed to prevent

8

foreclosures or their economic consequences, but rather to confer private benefits on a select set

9

of individuals.

10

140.

In addition, the Seizure Program would not benefit the City’s residents as a

11

whole, but would instead lead to windfalls for the select group of homeowners that meet a loan

12

profile profitable to Defendants and MRP’s investors, to the detriment of all others. Even this

13

small group of intended beneficiaries may receive a severe tax burden that would offset any

14

windfall and may worsen their financial situations. Further, the Seizure Program expressly

15

excludes many borrowers and principally targets performing mortgage loans that are not in

16

default or foreclosure. If the Seizure Program is fully implemented and performing loans are

17

seized for well-below their unpaid principal balance, and thus at significant losses to the Trusts

18

holding those loans, future lenders will be unwilling to extend credit in Richmond at the current

19

level, creating, at a minimum, a chilling effect on the local home lending environment. This will

20

have severe consequences for current and prospective City homeowners.

21
22
23

141.

As described above, the private injury that this Seizure Program would inflict will

vastly outweigh its minimal or nonexistent benefits.
142.

For all of the reasons asserted herein, there is an actual controversy between

24

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201

25

and 2202.

26

143.

Defendants have taken substantial steps towards seizing loans under the Seizure

27

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

28

harmed.
31
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

144.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

2

declaratory and injunctive relief against Defendants, declaring that the implementation of the

3

Seizure Program would violate section 1240.030 of the California Code of Civil Procedure, and

4

permanently enjoining Defendants from implementing any aspect of the Seizure Program.

5

EIGHTH CLAIM

6

(ALTERNATIVE CLAIM FOR DECLARATORY RELIEF REGARDING VIOLATION

7

OF THE PROHIBITION AGAINST TAKING OWNER-OCCUPIED RESIDENCES FOR

8

THE PURPOSE OF CONVEYING IT TO A PRIVATE PERSON UNDER THE

9

CALIFORNIA CONSTITUTION)

10

(AGAINST ALL DEFENDANTS)

11
12
13

145.

Plaintiffs repeat and reallege the allegations contained in each preceding

paragraph as if fully set forth herein.
146.

Plaintiffs plead this claim as an alternative to other alleged claims and only to the

14

extent that the mortgage loans constitute an owner-occupied residence in the City, and thus,

15

Article I, section 19(b) of the California Constitution applies and renders the Seizure Program

16

unconstitutional.

17

147.

Article I, section 19(b) of the California Constitution provides that “local

18

governments are prohibited from acquiring by eminent domain an owner-occupied residence for

19

the purpose of conveying it to a private person.”

20

148.

As an alternative to the claims pleaded above, if the Court determines that the

21

mortgage loans at issue in the Seizure Program constitute owner-occupied residences in the City,

22

the Seizure Program would thus violate the California Constitution’s prohibition against taking

23

owner-occupied residences for the purpose of conveying them to a private person. The Seizure

24

Program is implemented expressly for the purpose of seizing an interest in an owner-occupied

25

residence to convey to (and enrich) private entities including MRP, a private investment firm,

26

and its investors, which are funding the seizures. Indeed, the Seizure Program hinges on the City

27

exercising eminent domain solely to convey the interest seized to private entities and those

28
32
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

entities’ supplying the City with the funds to conduct the seizure. Without these features, the

2

Seizure Program collapses.

3

149.

As an alternative to the claims pleaded above, the Seizure Program does not

4

qualify for the exceptions to this prohibition because the stated justifications for the Seizure

5

Program—to prevent foreclosures and their attendant economic affects—are mere pretexts for

6

this profit-driven scheme. Furthermore, the Seizure Program will inflict significant harm, both

7

locally and nationally, with no likely benefit to the City or its residents.

8
9
10
11

150.

For all of the reasons asserted herein, there is an actual controversy between

Plaintiffs and Defendants sufficient for a declaratory judgment pursuant to 28 U.S.C. §§ 2201
and 2202.
151.

Defendants have taken substantial steps towards seizing loans under the Seizure

12

Program, and such seizures are imminent. If those seizures occur, the Trusts will be irreparably

13

harmed.

14

152.

Accordingly, Plaintiffs respectfully request that the Court issue a judgment for

15

declaratory and injunctive relief against Defendants, declaring that the implementation of the

16

Seizure Program would violate Article I, section 19(b) of the California Constitution, and

17

permanently enjoining Defendants from implementing any aspect of the Seizure Program.

18
19
20
21

PRAYER FOR RELIEF
WHEREFORE, Plaintiffs respectfully request that this Court enter judgment in their
favor on all claims asserted in the Complaint and that the Court:
A.

Declare that Defendants’ implementation of the Seizure Program violates the

22

Takings Clause of the Fifth and Fourteenth Amendments to the Constitution of the United States,

23

and enjoin Defendants from implementing the Seizure Program on that basis;

24

B.

Declare that Defendants’ implementation of the Seizure Program violates the

25

Commerce Clause of the Constitution of the United States, and enjoin Defendants from

26

implementing the Seizure Program on that basis;

27
28
33
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

C.

Declare that Defendants’ implementation of the Seizure Program violates the

2

Contracts Clause of the Constitution of the United States, and enjoin Defendants from

3

implementing the Seizure Program on that basis;

4

D.

Declare that Defendants’ implementation of the Seizure Program violates Article

5

I, section 19(a) of the Constitution of the State of California, and enjoin Defendants from

6

implementing the Seizure Program on that basis;

7

E.

Alternatively, declare that Defendants’ implementation of the Seizure Program

8

violates Article I, section 19(b) of the California Constitution, and enjoin Defendants from

9

implementing the Seizure Program on that basis;

10

F.

Declare that Defendants’ implementation of the Seizure Program violates Article

11

II, section 19 of the Richmond City Charter, and enjoin Defendants from implementing the

12

Seizure Program on that basis;

13

G.

Declare that Defendants’ implementation of the Seizure Program violates section

14

1263.320 of the California Code of Civil Procedure, and enjoin Defendants from implementing

15

the Seizure Program on that basis;

16

H.

Declare that Defendants’ implementation of the Seizure Program violates section

17

1240.050 of the California Code of Civil Procedure, and enjoin Defendants from implementing

18

the Seizure Program on that basis;

19

I.

Declare that Defendants’ implementation of the Seizure Program violates section

20

1240.030 of the California Code of Civil Procedure, and enjoin Defendants from implementing

21

the Seizure Program on that basis;

22

J.

Declare that Defendants’ implementation of the Seizure Program constitutes

23

tortious interference with contract and, enjoin Defendants from implementing the Seizure

24

Program on that basis;

25

K.

Declare that Defendants’ Implementation of the Seizure Program constitutes a

26

violation of 42 U.S.C. § 1983 and, enjoin Defendants from implementing the Seizure Program on

27

that basis;

28
34
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1

L.

Issue a temporary restraining order and preliminary and permanent injunctions

2

restraining Defendants, their officers, employees, agents, successors, and assigns from

3

implementing the Seizure Program;

4

M.

5

U.S.C. § 1988; and

6

N.

Award to Plaintiffs the costs and expenses of suit and counsel fees pursuant to 42

Award to Plaintiffs such other and further relief as this Court may deem just and

7

proper.

8

Dated: August 22, 2013

9

MAYER BROWN LLP
DONALD M. FALK
BRONWYN F. POLLOCK

10
11
12
13
14

By: /s/ Bronwyn F. Pollock
Bronwyn F. Pollock
Attorneys for Plaintiffs
THE BANK OF NEW YORK MELLON
(f/k/a The Bank of New York) and THE BANK
OF NEW YORK MELLON TRUST COMPANY,
N.A. (f/k/a The Bank of New York Trust
Company, N.A.), as Trustees

15
16
17
18
19
20
21
22
23
24

JONES DAY
BRIAN D. HERSHMAN (SBN 168175)
[e-mail]
555 South Flower Street, 50th Floor
Los Angeles, CA 90071-2300
Tel: [phone]
Fax: [phone]
JONES DAY
MATTHEW A. MARTEL
(pro hac vice)
[e-mail]
JOSEPH B. SCONYERS
(pro hac vice)
[e-mail]
100 High Street, 21st Floor
Boston, MA 02110
Telephone: [phone]
Facsimile: 617-449-6999

25
26
27
28

By: /s/ Brian D. Hershman
Brian D. Hershman
Attorneys for Plaintiff
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
35
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1
2
3
4
5

ALSTON & BIRD LLP
KURT OSENBAUGH (SBN 106132)
[e-mail]
WHITNEY CHELGREN (SBN 285362)
[e-mail]
333 South Hope Street, Sixteenth Floor
Los Angeles, California 90071
Telephone:
213-576-1000
Facsimile:
213-576-1100

6
7
8
9

By: /s/ Kurt Osenbaugh
Kurt Osenbaugh
Attorneys for Plaintiff
WILMINGTON TRUST COMPANY and
WILMINGTON TRUST, NATIONAL
ASSOCIATION, as Trustees

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
36
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS

1
2
3

SIGNATURE ATTESTATION
I, Bronwyn F. Pollock, attest that the concurrence in the filing of this Second Amended
Complaint has been obtained from Brian D. Hershman and Kurt Osenbaugh.

4
5
6
7
8

By: /s/ Bronwyn F. Pollock_____________
Bronwyn F. Pollock
Attorneys for Plaintiff
THE BANK OF NEW YORK MELLON
(f/k/a The Bank of New York) and THE BANK
OF NEW YORK MELLON TRUST
COMPANY, N.A. (f/k/a The Bank of New York
Trust Company, N.A.), as Trustees

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
37
SECOND AMENDED COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
CASE NO. 13-CV-3664-JCS