Sealink Funding Limited v. Bear Stearns & Co., Inc. et al
Filing
24
MEMORANDUM OPINION AND ORDER re: 7 MOTION to Remand to State Court filed by Sealink Funding Limited. For the foregoing reasons, Plaintiff's motion to remand is granted. The Clerk of Court is directed to effectuate the remand and close this case. This Memorandum Opinion resolves docket entry no. 7. (Signed by Judge Laura Taylor Swain on 10/9/2012) (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SEALINK FUNDING LIMITED,
No. 12 Civ. 1397 (LTS)(HBP)
Plaintiff,
-againstBEAR STEARNS & CO. INC. et aI.,
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Defendants.
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Plaintiff Sealink Funding Limited ("Plaintiff') originally filed this action in New
York state court, asserting fraud claims under New York law against several financial entities l
in connection with the packaging and sale of residential mortgage-backed securities ("RMBS").
Defendants removed the action to this Court. Defendants' notice of removal (the "Removal
Notice") asserted two jurisdictional bases for removal: (1) "related to" bankruptcy jurisdiction,
28 U.S.c. § 1334(b), and (2) the Edge Act. 12 U.S.c. § 632. Plaintiff now moves for an order
remanding this action to New York state Supreme Court, arguing that this Court lacks subject
matter jurisdiction under either statute. For the following reasons, Plaintiff's remand motion is
Defendants in this action are: EMC Mortgage LLC (f/k/a EMC Mortgage
Corporation) and J.P. Morgan Mortgage Acquisition Corporation as sponsors for
the offerings at issue (Am. CompI. '1'116,27); Structured Asset Mortgage
Investments II Inc., Bear Steams Asset Backed Securities I LLC, Washington
Mutual ("WAMU") Asset Acceptance Corp. (now owned by defendant JPMorgan
Chase Bank, N.A.), and J.P. Morgan Acceptance Corporation I, as depositors (id.
,-r,-r 17-18,22,28); and WAMU Capital Corp. and J.P. Morgan Securities LLC as
underwriters. (Id.,-r,-r 21, 26). Plaintiff also bring suit against The Bear Steams
Companies, Inc. ("Bear Steams"), its successor-in-interest, JPMorgan Chase &
Co. (id. ,-r 24), and JPMorgan Chase Bank, N.A. ("Chase Bank"), which created
the trust holding several of the securities at issue.
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granted.
BACKGROUND
Plaintiff is a company incorporated under the laws of Ireland that was established
to receive, hold, and manage RMBS purchased by certain special purpose vehicles ("SPVs")
formerly sponsored by Sachsen LB. (Am. Compl. ~ 13.) The RMBS were transferred to Sealink
on June 7, 2008. (rd.) Plaintiff brings state law fraud claims against Defendants in connection
with their alleged misrepresentation of the risk profile of the RMBS Certificates and the
underlying mortgage loans in various registration statements, prospectuses, prospectus
supplements and other written materials ("Offering Documents") issued in connection with the
sale of those Certificates. (Am. Compl. ~~ 1,259-346.)
The alleged misrepresentations in the Offering Documents were based on
representations initially made to Defendants by the loans' originators, including several
originators who are now or have been debtors in bankruptcy proceedings ("Bankrupt
Originators"). As part of the purchase and sale agreements for these mortgages, Defendants
allege, the Bankrupt Originators agreed to indemnify several of the Defendants for the costs of
defending actions arising out of the sort of misrepresentations alleged in this case. (Declaration
of Daniel Slifkin ("Slifkin Decl.") ~ 4, Exs. 1-9.) The Bankrupt Originators against whom
Defendants assert that they have indemnification rights include: Aegis Mortgage Corporation
("Aegis"); Alliance Bancorp ("Alliance"); American Home Mortgage Corporation ("AHM");
Bear Steams Residential Mortgage Corporation ("Bear Steams Residential"), a subsidiary of
Accredited Home Lenders ("Accredited"); First Magnus Financial Corporation ("First Magnus");
Fremont Investment & Loan ("Fremont"); IndyMac Bank, F.S.B. ("IndyMac"), a subsidiary of
IndyMac Bancorp Inc. ("IndyMac Bancorp"); and SouthStar Funding, LLC ("SouthStar").
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In the Aegis bankruptcy, Defendants Bear Stearns and EMC Mortgage Corp. filed
proofs of claim. However, those claims were subsequently settled and withdrawn. (Declaration
of Chad Johnson in Support of Plaintiffs Motion for Remand ("Johnson Decl.") Exs. 4 & 5.)
Bear Stearns and EMC Mortgage Corp. expressly represented in their agreement with Aegis that
they had "no other claims against the Debtors except for those proofs of claim described in this
Stipulation." (Johnson Dec!. Ex 5 at 8.) The settlement was approved by the bankruptcy court
on February] 2,2009. In the Alliance and First Magnus bankruptcies, no proof of claim for
indemnification obligations was filed by any Defendant before the bar date; the bankruptcy
proceedings are ongoing. In the AHM bankruptcy, Defendant J.P. Morgan Acceptance
Corporation I filed a proof of claim after the bar date. (Slifkin DecL ~ 9, Ex. 14.) That claim has
not been disallowed or otherwise adjudicated. In the bankruptcies of Accredited, Fremont, and
IndyMac Bancorp, no Defendant has filed a proof of claim. In the SouthStar bankruptcy,
Defendant WAMU Bank filed a timely proof of claim; that Chapter 7 bankruptcy proceeding was
closed on April 5,2011, after all assets were liquidated and the proceeds distributed to creditors.
(Johnson Decl. Ex. 3.) In sum, Defendants have not filed a timely proof of claim in any open
bankruptcy proceeding involving a Bankrupt Originator.
DISCUSSION
Any civil action brought in state court may be removed to a federal district court
"only ifit could have originally been commenced in federal court." Allstate Ins. Co. v. Ace Sec.
~,No.
11 Civ.1914(LBS), 2011 WL 3628852, at *3 (S.D.N.Y. Aug.17, 2(11); 28 U.S.C.
§ 1441 (a). If a case is removed and a federal district court determines that it lacks jurisdiction
over the matter, the court must order remand. rd. § 1447. "When challenged, the party seeking
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removal bears the burden of establishing that the federal district court has jurisdiction." Allstate
Ins. Co. v. CitiMortgage, Inc., 11 Civ. 1927(RJS), 2012 WL 967582, at *2 (S.D.N.Y. Mar. 13,
2012); Linardos v. Fortuna, 157 F.3d 945,947 (2d Cir.1998). On a motion for remand, the court
"must construe all disputed questions of fact and controlling substantive law in favor of the
plaintiff." In re NASDAQ Mkt. Makers Antitrust Litig., 929 F. Supp. 174, 178 (S.D.N.Y. 1996).
Moreover, "[rJemoval jurisdiction must be strictly construed, both because the federal courts are
courts oflimited jurisdiction and because removal of a case implicates significant federalism
concerns." Id. (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 109 (1941»; see also
In re Methyl Tertiary Butyl Ether ("MTBE") Prods. Liab. Litig., 488 F.3d 112, 124 (2d Cir.
2007) ("out of respect for the limited jurisdiction of the federal courts and the rights of states, we
must resolve any doubts against removability") (internal quotation marks and alterations
omitted).
A.
"Related To" Bankruptcy Jurisdiction
Defendants assert that the Court has jurisdiction of this action pursuant to 28
U.S.c. § 1334(b), which confers on district courts "original but not exclusive jurisdiction of all
civil proceedings arising under title 11, or arising in or related to cases under title 11." 28
U.S.c.A. § 1334(b) (West 2009). The Second Circuit has explained that a case is "related to" a
title 11 bankruptcy proceeding for purposes of § 1334(b) "if the action's outcome might have
any conceivable effect on the bankrupt estate." Parmalat Capital Fin. Ltd. v. Bank of Am. Corp.,
639 F.3d 572, 579 (2d Cif. 2011) (internal quotation marks omitted). "Conceivable effects
typically manifest themselves by altering the amount of property available for distribution to the
creditors of a bankruptcy estate or the allocation of property among such creditors." Allstate Ins.
Co. v. Credit Suisse Sec. (USA) LLC, No. 11 Civ. 2232(NRB), 2011 WL 4965150, at *3
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(S.D.N.Y. Oct.19, 2011). A contingent outcome may satisfy the "conceivable effects" test. rd.;
see also Pannalat, 639 F.3d at 579 (concluding that the test was satisfied because a possible
outcome of the underlying action would augment the bankruptcy estate). However, the Supreme
Court has cautioned that "a bankruptcy court's 'related to' jurisdiction cannot be limitless."
Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995). Thus, "any contingencies cannot be too far
removed; too many links in the chain of causation before the bankruptcy estate is affected may
preclude 'related to' jurisdiction." Allstate Ins. Co. v. Credit Suisse Sec. (USA) LLC, 2011 WL
4965150, at *3; see also Pacor, Inc. v. Higgins, 743 F.2d 984,995 (3d Cir. 1984) (finding that,
absent an "automatic creation ofliability" against the debtor, the underlying action was too far
removed from the bankruptcy to be related).
Defendants' "related-to" jurisdictional assertion is premised on the proposition
that their potential indemnification claims and recovery against Bankrupt Originators could
conceivably affect those debtors' estates. However, the indemnification claims against the
Bankrupt Originators cannot affect the bankruptcy estate or the allocation of property to
creditors unless Defendants are in a position to receive actual distributions on account of allowed
indemnification claims. There is no prospect of such allowance and distribution with respect to
unsecured claims that are neither filed in a bankruptcy proceeding or scheduled as undisputed by
a Chapter 11 debtor in possession. See Fed. R. Bankr. P. 3002(a), 3003(b). There is no
indication in the record that any of the Bankrupt Originators has scheduled any of Defendants'
indemnification claims. Furthennore, Defendants concede that they have not filed a timely proof
of claim in any open bankruptcy proceeding? Generally, a creditor must file a proof of claim
2
SEAUNK REMAND. WPO
Defendants also concede that several of the late-filed claims do not relate to this
litigation, and that certain claims have already been expunged.
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before the court-imposed bar date. In re Enron Creditors Recovery Corp., 370 B.R. 90,94
(Bankr. S.D.N.Y. 2007); see also Fed. R. Bankr. P. 3003(c)(3). Nonetheless, Defendants argue
that at least some of their untimely proofs of claim might be allowed under Federal Rule of
Bankruptcy Procedure 9006(b)(1), which pennits a court to allow a time-barred proof of claim
"where the failure to act was the result of excusable neglect." Defendants speculate that a
bankruptcy court might excuse their failure to file timely proofs of claim because Defendants did
not anticipate their indemnification claims prior to the filing of this suit (i.e., after the bar dates).
An identical argument was advanced and rejected in Allstate Ins. Co. v. Credit
Suisse Sec. (USA) LLC, No. 11 Civ. 2232(NRB), 2011 WL 4965150, at *5 (S.D.N.Y. Oct. 19,
2011). In that case, Judge Buchwald noted that "[a]n indemnification right 'arises at the time the
indemnification agreement is executed,' and it constitutes a claim under the Bankruptcy Code
even ifthe act giving rise to indemnification has not yet occurred." Id. (quoting Olin Corp. v.
Riverwood Int'l Corp. (In re Manville Forest Prods. Corp.), 209 F.3d 125, 128-29 (2d Cir. 2000).
Thus, "defendants could, and should, have asserted their indemnification claims prior to the bar
dates." Id.; see also P.A. Props., Inc. v. B.S. Moss' Criterion CtL Corp., No. 02 Civ. 4900(LTS)
2004 WL 2979984, at *12 (S.D.N.Y. Dec. 23, 2004) (holding that, because indemnity
agreements create contingent rights to payment upon their execution, claims based on such
agreements must be asserted prior to the bar date). A remote chance that a late-filed claim
might be allowed, without evidence of pursuit of such claims or any demonstration that the
claims, if allowed, would have a financial impact on the estate, is too remote and speCUlative to
support the exercise of "related to" jurisdiction of this non-core state law fraud action. See
Allstate Ins. Co. v. Merril Lynch & Co., No. 11 Civ. 2280(DAB) (S.D.N.Y. August 15,2011);
Allstate Ins. Co. v. Credit Suisse Sec. (USA) LLC, 2011 WL 4965150, at *5.
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Even if this action did have the potential to affect the Bankrupt Originators'
bankruptcies, any effect would be so attenuated and tangential that the Court would exercise its
discretion to abstain from deciding the issue pursuant to 28 U.S.c. § 1334(c)(1). Courts in this
district look to the following non-exclusive list of factors in detennining whether equitable
remand is appropriate:
(1) the effect on the efficient administration of the bankruptcy estate; (2) the
extent to which issues of state law predominate; (3) the difficulty or unsettled
nature of the applicable state law; (4) comity; (5) the degree of relatedness or
remoteness of the proceeding to the main bankruptcy case; (6) the existence of the
right to a jury trial; and (7) prejudice to the involuntarily removed defendants.
Farace v. Pereira, No. 04 Civ. I 880(RWS), 2004 WL 1638090, at *6-7 (S.D.N.Y. July 22,2004).
As explained above, Defendants have not articulated any plausible way in which this action will
affect the efficient administration of the administration ofthe Bankrupt Originators' estates.
Plaintiffs claims exclusively involve state law. Comity considerations favor remand as
well, because "(i]t is well-settled that comity considerations dictate that federal courts should be
hesitant to exercise jurisdiction when state issues substantially predominate." In re 9281 Shore
Road Owners Corp., 214 B.R 676, 696 (E.D.N.Y.1997). Remanding to state court preserves the
parties' right to avail themselves of a jury trial. Finally, Defendants have not identified any
prejUdice that would result from this action being remanded to state court.
B.
Edge Act
The Edge Act, 12 U.S.c. §§ 601 et seq., provides federal district courts with an
independent basis for exercising subject matter jurisdiction over certain state or common law
actions involving international banking by designating such actions as "federal question" actions.
The Act provides, in relevant part:
(A]ll suits ofa civil nature at common law or in equity to which any corporation
SEALINK REMAe
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