Commonwealth of Virginia ex rel. Integra Rec LLC v. Countrywide Securities Corporation et al

Filing 85

MEMORANDUM OPINION. Signed by District Judge M. Hannah Lauck on 3/17/2015. (jsmi, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division

COMMONWEALTH OF VIRGINIA ex reL

INTEGRA REC LLC,
Plaintiff,
V,

Civil Action No. 3:14cv706

COUNTRYWIDE SECURITIES

CORPORATION, e/fl/.,
Defendants.
MEMORANDUM OPINION

In its Complaint originally filed in the Circuit Court for the City of Richmond, the

Commonwealth of Virginia, on behalf of the Virginia Retirement System ("VRS"), alleges that
defendants made fraudulent misrepresentations in offerings of mortgage-backed securities
("MBS"), also called certificates, or residential mortgage-backed securities ("RMBS"), also

called certificates (collectively, "certificates").' Pursuant to 28 U.S.C. § 1452(a),^ Countrywide
Securities Corporation ("CSC") and four of its affiliates ("the Removing Defendants") removed
the portion of the Richmond Circuit Court action they say involves every MBS certificate issued
by Countrywide Financial Corporation ("CFC") and its affiliates.
What remains pending before this Court are a Motion to Transfer Venue to the Central

District of California(the "Motion to Transfer") filed on October 24, 2014 by CSC on behalf of

' The Court assumes familiarity with the procedural and factual background ofthis case
as summarized in its January 14, 2015 Memorandum Opinion and Order. (ECF Nos. 75-76.)
All terms defined in that Opinion will continue unless otherwise noted.

^The removal statute states, in pertinent part: "(a) Aparty may remove any claim or
cause of action in a civil action ... to the district court for the district where such civil action is

pending, if such district court has jurisdiction of such claim or cause of action under section 1334
of this title." 28 U.S.C. § 1452(a).

the Removing Defendants (ECF No. 15), and the Motion to Remand and Request for Expedited
Hearing (the "Motion to Remand") filed on October 31, 2014 by the Commonwealth of Virginia
(ECF No. 42). The Motion to Transfer seeks to transfer the action pursuant to 28 U.S.C.

§ 1404(a)^ ("Section 1404(a)") to Judge Mariana R. Pfaelzer in the Central District ofCalifornia
who has presided over a factually-related multidistrict litigation No. 2265 ("MDL No. 2265")
since at least 2011.

For the reasons that follow, the Court denies CSC's Motion to Transfer Venue. (ECF
No. 15.) The Court also denies the Commonwealth's Motion to Remand. (ECF No. 42). The
Court will order further action as described below.
L Procedural and Factual Background

The Court addresses below pertinent procedural and factual background since the entry of
its January 14, 2015 Memorandum Opinion and Order.
A.

The JPML Has Rejected the Section 1407 Transfer Motion

On November 6, 2014, CSC filed a motion with the Joint Panel on Multidistrict

Litigation ("JPML") to transfer this federal court action to MDL No. 2265 for coordinated

^That statute states, in pertinent part: "(a) For the convenience ofparties and witnesses,
in the interest ofjustice, a district court may transfer any civil action to any other district or
division where it might have been brought or to any district or division to which all parties have
consented." 28 U.S.C. § 1404(a).

pretrial proceedings pursuant to 28 U.S.C. § HOTCa)"^ (the "Section 1407 Motion"). (Jn re:
Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., Q'ln re: Countrywide'''), MDL No. 2265, ECF
No. 492 (J.P.M.L. Nov. 6, 2014).)
On January 29, 2015, the JPML held a hearing without oral argument to consider CSC's

Section 1407 Motion. {Id., ECF No. 520 (J.P.M.L. Dec. 18, 2014) (hearing order).) After

consideration of the pleadings filed in support of and opposition to the Section 1407 Motion, the

JPML denied inclusion of this action into MDL No. 2265, stating that the "proceedings in [MDL
No. 2265] have advanced to the point that the continued transfer of related actions is no longer
necessary to achieve the purposes of 28 U.S.C. § 1407." {Id., ECF No. 545 (J.P.M.L. Feb. 5,
2015) (order denying transfer) (citation omitted).) In its February 5, 2015 decision, the JPML
noted that it had reached its conclusion "in consultation with the transferee judge," District Judge
MarianaL. Pfaelzer. {Id.)

B.

CSC's Section 1404(a) Transfer and the Commonwealth's Remand Motions
Remain Pending in this Court

Because the JPML denied the Section 1407 Motion, only CSC's Motion to Transfer and
the Commonwealth's Motion to Remand remain pending in this Court. The Court heard oral

argument on these, and all pending motions, on January 9. That day, the Court granted CSC's

^That statute states, inpertinent part:
(a) When civil actions involving one or more common questions of fact are
pending in different districts, such actions may be transferred to any district for
coordinated or consolidated pretrial proceedings. Such transfers shall be made by
the judicial panel on multidistrict litigation authorized by this section upon its
determination that transfers for such proceedings will be for the convenience of
parties and witnesses and will promote the just and efficient conduct of such
actions.

28 U.S.C. § 1407(a).

Motion to Stay from the bench.^ On January 14, 2015, the Court issued its written ruling that
stayed these proceedings for 45 days to allow the JPML to rule on the Section 1407 Motion.
(ECF Nos. 75-76.) The Court deferred ruling on the Motion to Transfer and the Motion to

Remand. (Jd) On March 2,2015, the stay issued by this Court expired. {See Jan, 20, 2015

Order, ECF No. 76.) All remaining matters are fully briefed and ripe for disposition.^
II. This Court Has "Related to** Jurisdiction

This Court must first address jurisdiction. "Related to" bankruptcy jurisdiction exists in
this case. A district court may exercise jurisdiction over civil proceedings that are "related to
cases under title 11." 28 U.S.C. § 1334(b). "The [United States Court of Appeals for the] Fourth
Circuit has found that a claim or action is 'related to' a bankruptcy case when 'the outcome of
that proceeding could conceivably have any effect on the estate being administered in
bankruptcy.'" Power Plant Entm't Casino Resort Ind, LLC v. Mangano, 484 B.R. 290,295
(Bankr. D. Md. 2012) (quoting In re Celotex, 124 F.3d 619, 625 (4th Cir. 1997)). Even where

none of the parties in the district court action are debtors in the bankruptcy proceeding, the action
may be "related to" the bankruptcy proceeding if the bankruptcy debtor has an indemnification
agreement with the defendant in the district court action. Id. Section 1452(a) allows removal of

^On October 24, 2014, CSC, later joined by the remaining defendants, had filed the
Motion to Stay and Motion to Transfer pursuant Section 1404(a) seeking transfer ofthis action to
the Central District of California. (ECF Nos. 17, 15.) CSC's Motion to Stay sought to stay the
action in this Court pending the JPML's ruling on the Section 1407 Motion. On October 31,
2014, the Commonwealth had filed its Motion to Remand. (ECF No. 42.)

^During the stay, the Court allowed the parties to submit 10-page supplemental briefs to
address any additional issues. {See ECF No. 76.) The Commonwealth and CSC each submitted
supplemental briefs with attached declarations. (ECF Nos. 78-81.) Following the JPML's
denial of the Section 1407 Motion {see ECF No. 84), the parties submitted position statements on
the ruling. (ECF Nos. 82, 83.)

a claim or cause of action from state court when the federal district court has jurisdiction under
28 U.S.C. § 1334 ("Section 1334"). 28 U.S.C. § 1452(a).
Here, "related to" jurisdiction exists pursuant to Section 1334 because 17 of the 22

certificates for which the suit was brought "are backed in part by mortgage loans originated or

acquired by entities that are the subject of pending bankruptcy proceedings."' (Not. Removal 5,
ECF No. 1.) These entities have contractual indemnification obligations to the Removing
Defendants arising out of "alleged misstatements or omissions concerning the mortgage loans"
acquired from the entities in bankruptcy. {Id. at 6.) Because the claims against the Removing
Defendants "give rise to contractual claims" against entities involved in pending bankruptcy
proceedings, the present action could conceivably affect the bankruptcy estates. {Id. at 6, 8.)
The Commonwealth argues in its motion to remand that jurisdiction is attenuated for

purposes of equitable remand and abstention, but it makes no real effort to argue that this Court

lacks Section 1334 jurisdiction. Indeed, it conceded at oral argument that "technically" the
action could have been brought in federal court. {See Hr'g Tr. 55-56, ECF No, 74.) Therefore,
the Court exercises jurisdiction over this action pursuant to Section 1334.
Ill, Analysis

A.

Section 1404(a) Transfer to the Central District of California No Longer
Serves the Interest of Justice

This Court cannot transfer this case to the California federal court. As noted above, after

considering the pleadings filed in support of and opposition to the motion filed by CSC to
transfer this action into MDL No. 2265, the JPML decisively denied inclusion of this action into
MDL No, 2265. {In re: Countrywide, MDL No. 2265, ECF No. 545 (J.P.M.L. Feb. 5, 2015)

^CSC removes the remaining five certificates under this Court's supplemental
jurisdiction. 28 U.S.C. § 1367(a).

(order denying transfer).) Although the JPML acknowledged that this action "falls within the
ambit of MDL No. 2265," the JPML, "in consultation with the transferee judge," found that the

"'proceedings in [MDL No. 2265] have advanced to the point that the continued transfer of
related actions is no longer necessary to achieve the purposes of 28 U.S.C. § 1407.'" {Id.
(citation omitted).)
This Court must reach a similar conclusion regarding the propriety of a Section 1404(a)
transfer. This case plainly mirrors those over which Judge Pfaelzer has presided in MDL

No. 2265. Court records demonstrably reveal, however, that transfers in any capacity to the
Central District of California have functionally ceased. The last transfer of a factually similar

case from a district court to the Central District of California occurred in early 2013. Royal Park
Invs. SA/NVv. Bank ofAm. Corp., 941 F. Supp. 2d 367, 372 (S.D.N.Y, 2013). Mid-2013 also

marks the acceptance by the JPML ofthe most recent cases into MDL No. 2265.® A nearly twoyear lapse in transfers of any type indicates that transfers—even Section 1404(a) transfers—^have
effectively concluded for cases factually within the "ambit of MDL No. 2265,"

Therefore, while recognizing that the analyses and the functions of Sections 1404(a) and
1407 differ, the Court finds that transfer pursuant to Section 1404(a) in this action would no
longer serve "the interest ofjustice." 28 U.S.C. § 1404(a). Accordingly, the Court denies CSC's
Motion to Transfer. (ECF No. 15.)

®
Prudential Life Ins. Co. v. Countrywide Fin. Corp., Lead Case No. 2:13-CV-05883MRP (MANx), was transferred by the JPML for inclusion in MDL No. 2265 on August 6, 2013.
{In re: Countrywide, MDL No. 2265, ECF No. 420.) Royal Park Invs. SA/NV v. Bank ofAm.
Corp., Lead Case No. 2:13-CV-3295-MRP (MANx), was transferred by the JPML for inclusion

in MDL No. 2265 on May 9,2013. {In re: Countrywide, MDL No. 2265, ECF No. 415.)
Deutsche Zentral-Genossenschaftsbank AG v. Bank ofAm. Corp., Lead Case No. 2:13-CV01118-MRP (MANx), was transferred by the JPML for inclusion in MDL No, 2265 on February
14,2013. {In re: Countrywide, MDL No. 2265, ECF No. 388.)

B.

A Federal Court Affords the Most Appropriate Venue to Adjudicate the
Potential Preclusive Effect of the Luther Class Action Settlement So the
Motions for Permissive Abstention and Equitable Remand Will Be Denied

The cessation of transfers to the Central District of California coincides with another

procedural event: Judge Pfaelzer's 2013 final approval of a national class settlement covering

CFC-issued certificates. See Luther v. Countrywide Fin. Corjo.,No. 2:12-cv-05125-MRP
(MANx) 1, ECF No. 320 (C.D. Cal. Dec. 5, 2013) (final order approving class settlement). The
potentially preclusive effect of the Luther class action settlement presents an important question
of federal law. Taylor v. Sturgell, 553 U.S. 880, 891 (2008) ("The preclusive effect of a federal-

court judgment is determined by federal common law."). A federal court sits in the most
advantageous position to interpret an issue of federal common law. See Stichting Pensioenfonds
ABP V. Countrywide Fin. Corp., 447 B.R. 302,312 (C.D. Cal. 2010). This potentially

determinative federal issue suggests that this Court should maintain jurisdiction over this case

and deny the Commonwealth's Motion to Remand as it pertains to permissive abstention^ and

equitable remand.'® (ECF No. 42.)
The parties, in briefing, have touched on the preclusive effect of the Luther class

settlement on the case at bar. The Commonwealth argues that the settlement does not dispose of
its claims because, among other things, it brings suit against CSC as an underwriter, not as an

^"Permissive abstention" stems from Section 1334(c)(1), which states that "nothing in
this section prevents a district court in the interest ofjustice, or in the interest of comity with
State courts or respect for State law, from abstaining from hearing a particular proceeding" over
which the court exercises jurisdiction pursuant to Section 1334(b). 28 U.S.C § 1334(c)(1).
Permissive abstention is not reviewable on appeal. Id. § 1334(d); In re Lee^ 461 F. App'x 111,
237-38 (4th Cir. 2012).
Section 1452(b) grants the court the ability to grant an "equitable remand." 28 U.S.C.
§ 1452(b). That section provides that when a claim or cause of action is removed based on
"related to" jurisdiction pursuant to Section 1452(a), the court to which it was removed "may
remand such claim or cause of action on any equitable ground." Id. Such a remand is not
reviewable on appeal. Id.

originator of the certificates. (Commw. Supp'l Br. 4 n.6, ECF No. 78.) However, it appears to
the Court that the settlement releases claims based on the certificates at issue, not the role of the

defendant. See Luther, No. 2:12-cv-05125-MRP (MANx) 1, ECF No. 320 (C.D, Cal. Dec. 5,

2013) ("[The parties] ... propose a settlement on behalf of all purchasers or acquirers, duringthe

period of March 12, 2004 through August 7, 2013, of any Certificates purchased in connection
with 429 mortgage-backed securities ('MBS') offerings at issue in the Settlement Actions."); id,
at 9, ECF No. 142 (C.D. Cal. June 25, 2013) (stipulation and agreement of settlement) (defining
the class as "all Persons that purchased or otherwise acquired the Certificates during the Class
Period").

An examination of the Luther documents also suggests that 17 of the 22 certificates in
this action are included in the settlement. See Luther, No. 2:12-cv-05125-MRP (MANx) Ex. A

30-33, ECF No. 204 (C.D. Cal. Sept. 23, 2013) (notice of class action settlement) (listing 17 of
the 22 certificates involved in the present action), CSC suggests that the Commonwealth
received notice of the settlement. (Decl. Andrea Boivin 2, ECF No. 81.) The Commonwealth

has presentedno argument that it opted out of the settlement, and Judge Pfaelzer's approval
order does not reflect any objection or opt-out by the Commonwealth. See generally Luther,
No. 2:12-cv-05125-MRP (MANx) 12-13, ECF No. 320 (C.D. Cal. Dec. 5, 2013) (final order

approving class settlement) (outlining the specific objectors to the class settlement agreement,
which did not include the Commonwealth).

The existence of the Luther class and its possible preclusive effect on this action

interposes a potentially determinative issue of federal law in this case. "[A] federal court must

accept the jurisdiction granted it, and only in rare occasions is discretionary abstention
warranted." In re Freeway Foods ofGreensboro, Inc., 449 B.R. 860, 879 (Bankr. M.D.N.C.

8

2011) (citation omitted). Judicial economy dictates that this Court resolve the class issue before
reaching the discretionary aspects of the Commonwealth's Motionto Remand, The permissive

abstention and equitable remand^' doctrines are precatory, and, if necessary, can be addressed
after the Luther class applicability is decided. As such,this Court denies the Commonwealth's
Motion to Remand as it relates to permissive abstention and equitable remand (ECF No. 42) in
order to consider the federal issue of the applicability of the Luther class to the certificates at bar.
C.

The Court Cannot Grant Mandatory Abstention on the Present Record

The Court must review the Commonwealth's motion for mandatory abstention

separately. Having done so, the Court finds that it must also deny this aspect of the
Commonwealth's Motion to Remand. The record before the Court does not present a solid basis

for mandatory abstention. "Mandatory abstention" derives its power from Section 1334(c)(2),
which requires remand of a case removed pursuant to Section 1452(a) when: (1) a party makes a

timelymotionto abstain; (2) the proceeding is based upon a state law claim or state law cause of
action; (3) the proceeding is based on "related to" jurisdiction but not "arising under"

^' Some courts analyze permissive abstention and equitable remand pursuant to a number
of factors, while other courts do not. Compare, e.g.. In re Freeway Foods, 449 B.R. at 879-82

(considering eleven factors), with MasseyEnergy Co. v. W Va. Consumersfor Justice, 351
B.R. 348, 354 (E.D. Va. 2006) ("[T]his Court has not been provided with any reason to believe
that the State Court is an inadequate forum or that federal court is a superior one.").
The statute states, in pertinent part:

(2) Upon timely motion of a party in a proceeding based upon a State law claim
or State law cause of action, related to a case under title 11 but not arising under
title 11 or arising in a case under title 11, with respect to which an action could
not have been commenced in a court of the United States absent jurisdiction under
this section, the district court shall abstain from hearing such proceeding if an

action is commenced, and can be timely adjudicated, in a State forum of
appropriate jurisdiction.
28 U.S.C. § 1334(c)(2).

jurisdiction; (4) the proceeding could not have been commenced in a federal court absent
jurisdiction under § 1334; and, (5) an action is commenced and can be timely adjudicated in state

court. See Bowles v. Massey Energy Co., No. 2:12-cv-05997, 2012 WL 6628953, at *3 (S.D. W.
Va. Dec. 19, 2012); In re Freeway Foods, 449 B.R. at 876-77; Massey Energy Co., 351 B.R.
at 350. The parties here dispute only the last factor of this test.
The legal significance of this last factor remains unsettled in two ways. First, the Fourth

Circuit has not spoken to the split of lower court authority as to when an action must have
"commenced" under this test. Compare In re Freeway Foods, 449 B.R. at 877-78, and In re
LandbankEquity Corp., 11 B.R. 44, 50 (E.D. Va. 1987) (interpreting the statute to require that
the state proceeding be commenced prior to both the federal action and the bankruptcy
proceeding to which it related), with Loudin v. J.P. Morgan Trust Co., 481 B.R. 388, 393 (S.D.
W. Va. 2012) (finding the factor met when plaintiffs had filed a state court action before the
removal based on "related to" jurisdiction); accordMt. McKinley Ins. Co. v. Corning Inc., 399
F.3d 436,446-47 (2d Cir. 2005) (same).

The Fourth Circuit also has not resolved a split of lower court authority as to which party
bears the burden of demonstrating whether a case can be timely adjudicated in state court, and
what evidence is needed to meet the burden. See Bowles, 2012 WL 6628953, at * 10. Some

courts place the burden on the party opposing abstention, relying on the well-known principle in
removal cases that the removing party carries the burden due to concerns of federalism and
comity. See, e.g.. Power Plant, 484 B.R. at 297-98. Other courts hew to the common tenet that
the moving party carries the burden of proof. See, e.g., In re Freeway Foods, 449 B.R. at 879.

Still other courts within the Fourth Circuit hold that even if the party moving for abstention

10

carries the burden of proof on this matter, that party does not need to present extrinsic evidence.
See, e.g., Bowles, 2012 WL 6628953, at *10.

In addressing whether a state court can timely adjudicate the proceeding, a federal court
does not undertake a comparison of the relative federal and state dockets. Massey Energy Co.,
351 B.R. at 352. "The correct inquiry is not where litigation would move the fastest, but whether
it can be timely adjudicated in state court at all." Power Plant, 484 B.R. at 297; accord Texas
Cnty & Dist. Retirement Sys. v. J.P. Morgan Sec. LLC, et al.. No. A-14-CA-380-SS, 2014 WL
3420812, at *3-4 (W.D. Tex. July 10, 2014) ("[Plaintiffs] burden is to show the state court can

timely adjudicate this dispute, not that the state court is the most efficient avenue for resolution
of these claims.")

The parties placed some evidence before this Court regarding timely adjudication. The
Commonwealth submitted exhibits showing that from January 2013 to September 2014, the
Richmond Circuit Court saw on average 1253 cases filed and 1220 closed. (Mem. Supp. Mot.

Remand, Ex. 1, at 2-3, ECF No. 43-1.) In response, CSC provided news sources discussing the

general status of the state judiciary and the difficulty the state legislature had then encountered to
fill judicial vacancies. (Mem. 0pp. Mot. Remand, Exs. 27-28, ECF No. 59.)
None of this evidence sufficiently educates this Court regarding the Richmond Circuit

Court's ability to timely adjudicate this case. This Court would not find that a state court could

not timely adjudicate a matter merely because its dockets were "generally busy," Bowles, 2012
WL 6628953, at *11, or based on news articles that describe a then-existing large number of

judicial vacancies without reference to any impact on the state court that would hear this matter.
On the other hand, the Commonwealth's own exhibits suggest that matters may pend for a

number of years in the Richmond Circuit Court, contradicting its own claim of timely

11

adjudication inthe state court. In2013, the court had over 300 cases pending onits docket that
were overtwo years old, and 25 cases thatwere more than five years old. (Mot. Remand, Ex. 1,
at 4.)
While the Commonwealth notes that CSC has had to file an answer in the Richmond

Circuit Court, this Courthas nothingon its record beyond that reference speaking to the progress
of the state action. No record exists as to whether hearing and trial dates have been set, or could

be readily. See, e.g., Massey Energy Co., 351 B.R. at 352. In short, thisrecord is bereft of
evidence from eitherparty from whichthis Court couldmake a definitive finding as to timely

adjudication. As such, the Court denies the Commonwealth's Motion to Remand as it relates to
mandatory abstention. (ECF No. 42.)
IV. Further Action in this Court

The Court requires further briefing on the exact parameters ofthe Luther class and its

applicability to thecertificates removed to this Court. The Court will order further briefing from
the parties following a status conference with counsel.
The Court also will refer these proceedings to the Honorable David J. Novak, United

States Magistrate Judge, for a court-ordered settlement conference. Counsel will be instructed to
contact Judge Novak to coordinate a settlement conference.
V. Conclusion

Accordingly, for the reasons statedabove, the Court denies CSC's Motion to Transfer
(ECF No. 15)and denies the Commonwealth's Motion to Remand (ECFNo. 42).
The Court ordersthe parties to contactchambers for the undersigned within five days of
the date of this Memorandum Opinion to schedule a status conference. The parties will be

12

expected to submit further briefing on the applicability of the Luther class settlement to the
certificates at bar.

The Court refers these proceedings to the Honorable David J. Novak, United States

Magistrate Judge, for a court-ordered settlement conference. Counsel shall contact Judge Novak
within five days of the date of this Order to coordinate a settlement conference.
An appropriate Order shall issue.

^

^

M. Hannah]

United States District Judge
Richmond, Virginia
Date:

i4.20l6

13