UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
RETIREMENT BOARD OF THE
POLICEMEN’S ANNUITY AND BENEFIT
FUND OF THE CITY OF CHICAGO,
WESTMORELAND COUNTY EMPLOYEE
RETIREMENT SYSTEM, CITY OF GRAND
RAPIDS GENERAL RETIREMENT
SYSTEM, and CITY OF GRAND RAPIDS
POLICE AND FIRE RETIREMENT
SYSTEM (on Behalf of Themselves and
Similarly Situated Certificate Holders),
Plaintiffs,
v.
THE BANK OF NEW YORK MELLON, (as
Trustee Under Various Pooling and Servicing
Agreements),
Defendant.
Case No. 11-cv-05459-WHP
Honorable William H. Pauley
ECF Case
MEMORANDUM OF LAW IN SUPPORT OF THE BANK OF NEW YORK
MELLON’S MOTION TO RECONSIDER OR, IN THE ALTERNATIVE,
FOR CERTIFICATION PURSUANT TO 28 U.S.C. 1292(B)
MAYER BROWN LLP
1675 Broadway
New York, New York 10019
(212) 506-2500
Attorneys for Defendant
The Bank of New York Mellon
Case 1:11-cv-05459-WHP Document 39 Filed 04/17/12 Page 1 of 28
TABLE OF CONTENTS
Page
INTRODUCTION ...........................................................................................................................1
STANDARDS..................................................................................................................................2
ARGUMENT...................................................................................................................................3
I. The New York Trusts Are Exempt From The TIA..............................................................4
A. The Court should reconsider the Order..........................................................................4
1. Section 304(a)(1) exempts the New York Trusts from the TIA. .............................4
2. Section 304(a)(2) exempts the New York Trusts from the TIA. ...........................11
B. Alternatively, the Court should certify the Order for interlocutory review. ................14
1. The certification standards are satisfied.................................................................14
2. The practical need for certainty warrants certification. .........................................17
II. Plaintiffs Fail To State A TIA Claim Against The Delaware Indenture............................20
CONCLUSION..............................................................................................................................22
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TABLE OF AUTHORITIES
Page
ii
CASES
Ahrenholz v. Bd. of Trustees of Univ. of Ill.,
219 F.3d 674 (7th Cir. 2000) ...................................................................................................14
In re Auction Houses Antitrust Litig.,
164 F. Supp. 2d 345 (S.D.N.Y. 2001)......................................................................................19
Barnhart v. Walton,
535 U.S. 212 (2002).................................................................................................................16
Boim v. Quranic Literacy Inst. & Holy Land Found. for Relief & Dev.,
291 F.3d 1000 (7th Cir. 2002) ...................................................................................................3
Cmty. Health Ctr. v. Wilson-Coker,
311 F.3d 132 (2d Cir. 2002).....................................................................................................16
In re Currency Conversion Fee Antitrust Litig.,
2005 WL 1871012 (S.D.N.Y. Aug. 9, 2005).................................................................3, 14, 15
CWCapital Asset Mgmt., LLC v. Chicago Props., LLC,
610 F.3d 497 (7th Cir. 2010) ...................................................................................................11
Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc.,
2011 WL 6034310 (S.D.N.Y. Dec. 5, 2011) ...........................................................................10
Figueiredo Ferraz Consultoria E Engenharia De Projeto Ltda. v. Republic of Peru,
2009 WL 5177977 (S.D.N.Y. Dec. 15, 2009) ...........................................................2, 3, 16, 20
Gilbert v. Comm’r,
248 F.2d 399 (2d Cir. 1957).......................................................................................................6
Greenwich Fin. Servs. Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp.,
603 F.3d 23 (2d Cir. 2010).......................................................................................................11
John Kelley Co. v. Comm’r,
326 U.S. 521 (1946).............................................................................................................8, 10
Johnson v. Burken,
930 F.2d 1202 (7th Cir. 1991) .................................................................................................15
Kemp v. Countrywide Home Loans, Inc.,
440 B.R. 624 (Bankr. D.N.J. 2010) .........................................................................................21
Klinghoffer v. S.N.C. Achille Lauro Ed Altri-Gestione Motonave Achille Lauro in
Amministrazione Straordinaria,
921 F.2d 21 (2d Cir. 1990).......................................................................................................15
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TABLE OF AUTHORITIES
(continued)
Page
iii
CASES (CONT’D)
Estate of Landers v. Leavitt,
545 F.3d 98 (2d Cir. 2008).......................................................................................................16
LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp.,
424 F.3d 195 (2d Cir. 2005).....................................................................................................11
Lavin v. Data Sys. Analysts, Inc.,
443 F. Supp. 104 (E.D. Pa. 1977) ............................................................................................12
In re Microsoft Corp. Antitrust Litig.,
274 F. Supp. 2d 741 (D. Md. 2003) .........................................................................................17
Nat’l Res. Defense Council, Inc. v. FAA,
564 F.3d 549 (2d Cir. 2009).....................................................................................................16
In re New Times Secs. Servs., Inc.,
371 F.3d 68 (2d Cir. 2004).......................................................................................................16
O’Brien v. Nat’l Prop. Analysts Partners,
719 F. Supp. 222 (S.D.N.Y. 1989) ..........................................................................................20
In re Optimal U.S. Litig.,
813 F. Supp. 2d 383 (S.D.N.Y. 2011)........................................................................................2
Padilla ex rel. Newman v. Rumsfeld,
256 F. Supp. 2d 218 (S.D.N.Y. 2003)........................................................................................3
Robertson v. Steele’s Mills,
172 F.2d 817 (4th Cir. 1949) .....................................................................................................5
Schallerer v. Comm’r,
203 F.2d 100 (7th Cir. 1953) .....................................................................................................5
Shipping Corp. of India, Ltd. v. Jaldhi Overseas PTE Ltd.,
2008 WL 2596229 (S.D.N.Y. June 27, 2008) ...........................................................................3
Southgate Master Fund, L.L.C. ex rel. Montgomery Capital Advisors, LLC v.
United States,
659 F.3d 466 (5th Cir. 2011) .....................................................................................................5
Stillman v. Townsend,
2006 WL 2067035 (S.D.N.Y. July 26, 2006) ..........................................................................20
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TABLE OF AUTHORITIES
(continued)
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iv
CASES (CONT’D)
TIFD III-E v. United States,
459 F.3d 220 (2d Cir. 2006)...................................................................................................6, 8
Trust for Certificate Holders of Merrill Lynch Mortg. Passthrough Certificates Series
1999-C1 v. Love Funding Corp.,
2005 WL 2582177 (S.D.N.Y. Oct. 11, 2005) ..........................................................................11
Wells Fargo & Co. v. United States,
641 F.3d 1319 (Fed. Cir. 2011)..................................................................................................5
Zakrzewska v. The New School,
598 F. Supp. 2d 426 (S.D.N.Y. 2009)........................................................................................3
STATUTES, RULES, AND REGULATIONS
15 U.S.C. § 77aaa ............................................................................................................................1
15 U.S.C. § 77ddd............................................................................................................................4
Fed. R. Civ. P. 59.............................................................................................................................2
Fed. R. Civ. P. 60.............................................................................................................................2
S.D.N.Y. Loc. R. 6.3........................................................................................................................2
OTHER AUTHORITIES
16 Charles A. Wright, et al., Federal Practice and Procedure § 3929 (2d ed. 2012)...................14
14 U.S. Secs. Law for Financial Trans. § 4:36 (2d ed.)...........................................................11, 12
Edward J. O’Connell & Emily Goodman, 981 PRAC. LAW INST,
New Developments in Securitization 2004 ................................................................................4
Frank Fabozzi, Accessing Capital Markets Through Securitization 238 (2001).............................5
Free Writing Prospectus, J.P. Morgan Chase Commercial Mortgage Securities Trust
2012-C6, SEC Reg. Statement No. 333-165147-02 (April 9, 2012) .......................................19
Harbor Financial, Inc., SEC No-Action Letter, 1988 WL 235128 (Oct. 31, 1988)...................4, 10
John Arnholz & Edward E. Gainor, Offerings of Asset-Backed Securities § 14.05 (2006).............4
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TABLE OF AUTHORITIES
(continued)
Page
v
OTHER AUTHORITIES (CONT’D)
Michael S. Gambro & Scott Leichtner, Selected Legal Issues Affecting Securitization,
1 N.C. Banking Inst. 131 (1997)................................................................................................5
Mortgage-Backed Securities § 6:67 (2011) .....................................................................................4
PWBA Office of Regulations and Interpretations, letter dated Oct. 23, 1996, available at
http://www.dol.gov/ebsa/programs/ori/advisory96/96-23a.htm....................................4, 10, 17
SEC Trust Indenture Act Interpretations, at Question & Answer 202.01 (Mar. 30, 2007),
available at http://www.sec.gov/divisions/corpfin/guidance/tiainterp.htm.........................4, 10
Talcott Franklin, MORTGAGE & ASSET BACKED SECURITIES LITIGATION HANDBOOK
§ 1:44 (2011 update) ..................................................................................................................4
Tamar Frankel, SECURITIZATION § 12.26 (2d ed. 2005)..................................................................4
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INTRODUCTION
The Bank of New York Mellon (“BNYM”) respectfully requests the Court to reconsider
portions of its Order of April 3, 2012 (the “Order”), or—in the alternative—that the Court certify
the Order for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). Two issues warrant further
consideration. The first is the Court’s determination that trusts governed by Pooling and
Servicing Agreements (“PSAs”) are subject to the Trust Indenture Act (“TIA”), 15 U.S.C.
§§ 77aaa et seq.; as the Court recognized, that determination is inconsistent with SEC guidance
and the view of every commentator that has addressed the issue. The second issue concerns the
Court’s holding that plaintiffs have adequately alleged an “Event of Default” under the single
Delaware Indenture at issue here. The Court relied for both of these holdings on considerations
that were not addressed in the parties’ briefs; we respectfully submit that, on closer consideration
and full briefing, the Court should conclude that its initial ruling on each point was incorrect.
Moreover, the Court’s holding that the TIA applies to PSAs governing the New York
common law trusts is one of enormous practical importance that already is causing significant
confusion and uncertainty in the securities markets. Under the rule announced by the Court, not
only the PSA-governed trusts at issue in this case, but also thousands of other mortgage-backed
securities trusts that have issued securities worth hundreds of billions or (more likely) trillions of
dollars are subject to the TIA. Yet in reliance on the SEC’s contrary view and what has been the
universal industry practice, to the best of our knowledge, none of these PSA-governed trusts has
registered under the TIA or been structured in a manner that would make it possible to comply
with the TIA’s numerous requirements. As shown below, these requirements go far beyond those
addressing the trustee’s standard of care (which, in this case, is no different from the contractual
standard in any event) and extend to at least one party (the “obligor”) that does not even exist in
a PSA-governed trust. The Court’s holding would change the Trustee’s and the
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2
Certificateholders’ rights and remedies in ways that are irreconcilable with the governing
contracts.
In light of this, the Court’s holding is causing substantial disruption in the market, leaving
trustees and other participants unsure of their obligations and potential liabilities. Recognizing
the startling implications of the Order, at least one issuer already has expressly declined to apply
the Court’s analysis to a newly created trust. If the Court does not reconsider its holding, the
importance of the issue—both for this litigation and more broadly—warrants certification of an
interlocutory appeal so that the Second Circuit may provide a prompt and definitive resolution of
the question.
STANDARDS
Pursuant to Fed. R. Civ. P. 59, Fed. R. Civ. P. 60, and S.D.N.Y. Loc. R. 6.3, this Court
may reconsider its order of April 3, 2012. The Court has discretion to alter or amend an order,
particularly where there are “controlling decisions or data that the court overlooked . . . that
might reasonably be expected to alter the conclusion reached by the court.” In re Optimal U.S.
Litig., 813 F. Supp. 2d 383, 387 (S.D.N.Y. 2011) (quotation omitted). Rehearing “may also be
granted to correct a clear error or prevent manifest injustice.” Id. (quotation omitted).
Under 28 U.S.C. § 1292(b), when an “order involves [1] a controlling question of law as
to which [2] there is substantial ground for difference of opinion” and “[3] an immediate appeal
from the order may materially advance the ultimate termination of the litigation,” the district
court “shall so state,” permitting a party to seek review before the court of appeals. In deciding
whether to certify an order, a district court should consider whether “exceptional circumstances
sufficient to overcome the general aversion to piecemeal litigation” exist, with particular weight
given to considerations of judicial efficiency. Figueiredo Ferraz Consultoria E Engenharia De
Projeto Ltda. v. Republic of Peru, 2009 WL 5177977, at *1 (S.D.N.Y. Dec. 15, 2009) (quotation
Case 1:11-cv-05459-WHP Document 39 Filed 04/17/12 Page 8 of 28
3
marks omitted). When an interlocutory appeal will materially advance the litigation, certification
should be granted. See, e.g., id. at *2; Zakrzewska v. The New School, 598 F. Supp. 2d 426
(S.D.N.Y. 2009); Shipping Corp. of India, Ltd. v. Jaldhi Overseas PTE Ltd., 2008 WL 2596229,
at *1 (S.D.N.Y. June 27, 2008); In re Currency Conversion Fee Antitrust Litig., 2005 WL
1871012, at *2 (S.D.N.Y. Aug. 9, 2005); Padilla ex rel. Newman v. Rumsfeld, 256 F. Supp. 2d
218, 224 (S.D.N.Y. 2003).1
ARGUMENT
Although a grant of rehearing is unusual, this case involves circumstances warranting that
exceptional relief: The Court’s holdings turned on considerations that were not briefed by the
parties and that, on the fuller analysis that attends such briefing, dictate a contrary conclusion.
And even if the Court disagrees with that view, the case is the paradigm of one in which
certification under Section 1292(b) is appropriate. The issue of the TIA’s application in the
circumstances here surely is debatable (the Court, after all, expressly rejected the view of the
expert agency); it is important (both to the efficient resolution of this case and to the broader
operation of the securities markets); and it is one where an immediate and definitive resolution is
of obvious value (to the parties, the Court, and the public). One way or the other, then, further
review is appropriate.
1 To obtain interlocutory review, BNYM must have filed this motion “within a reasonable amount of time after
entry of the order sought to be appealed.” Boim v. Quranic Literacy Inst. & Holy Land Found. for Relief & Dev.,
291 F.3d 1000, 1007 (7th Cir. 2002). That condition is met here. This motion was filed on April 17, 2012, just 14
days after the filed date of the Order. Courts have found far longer periods of time reasonable under
Section 1292(b). See id. at 1008 (finding 35-day period from entry of order to filing of motion in the district court to
be “reasonable”).
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I. The New York Trusts Are Exempt From The TIA.
A. The Court should reconsider the Order.
1. Section 304(a)(1) exempts the New York Trusts from the TIA.
In the Order, the Court concluded that, “[b]ecause the New York certificates are debt
securities, the TIA applies.” Op. 12 (citing 15 U.S.C. § 77ddd). We respectfully urge the Court to
reconsider this conclusion. As the Court recognized, the SEC disagrees with its view that the
TIA is applicable to PSA-governed Certificates, a position it has maintained for more than two
decades and that has guided the development of the securitization market. See SEC Trust
Indenture Act Interpretations, at Question & Answer 202.01 (Mar. 30, 2007), available at
http://www.sec.gov/divisions/corpfin/guidance/tiainterp.htm; see also Harbor Financial, Inc.,
SEC No-Action Letter, 1988 WL 235128 (Oct. 31, 1988) (in no-action letter, SEC agreed that
certificates for an interest in a pool of mortgages are exempt from the TIA under Sections
304(a)(1) and (a)(2)). The Department of Labor has issued the same guidance, classifying
mortgage pass-through certificates as equity for purposes of ERISA. See PWBA Office of
Regulations and Interpretations, letter dated Oct. 23, 1996, available at http://www.dol.gov/-
ebsa/programs/ori/advisory96/96-23a.htm (“[I]t is the view of the Department that the pass-
through certificates representing a beneficial interest in the trust . . . constitute equity interests”).
Commentators, too, have uniformly agreed that pass-through certificates are equity and thus
exempt from the TIA.2
2 See, e.g., Mortgage-Backed Securities § 6:67 (2011) (“Pass-through certificates, because they represent
ownership of the underlying mortgages, are regarded as equity rather than debt and are not issued under a qualified
indenture.”); John Arnholz & Edward E. Gainor, Offerings of Asset-Backed Securities § 14.05 & nn.78-79 (2006)
(“Section 304(a)(1) excludes equity securities from the TIA. Nearly every offering of securities structured as pass-
through certificates is therefore exempt.”); Tamar Frankel, SECURITIZATION § 12.26 (2d ed. 2005) (“The TIA
applies only to some types of asset-backed securities. If an SPV issues equity securities, the TIA does not apply to
them because section 304(a)(1) excludes [equity]”); Talcott Franklin, MORTGAGE & ASSET BACKED SECURITIES
LITIGATION HANDBOOK § 1:44 (2011 update) (referring to “trust certificates (representing the equity interest of the
issuer)”); id. § 4:36 (“[W]here a securitization involves debt securities, it may be subject to the Trust Indenture Act
of 1939. Equity securities are not covered under the Act.”); Edward J. O’Connell & Emily Goodman, 981 PRAC.
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5
In reaching the contrary conclusion and rejecting the views of the federal agency that
administers the securities laws, including the TIA, this Court relied in substantial part on rules
promulgated by a different agency, the IRS, to distinguish between debt and equity in the tax
context. The tax code, of course, serves a much different purpose from the securities laws. In this
context, the tax laws seek to prevent parties from obtaining more favorable tax treatment through
manipulations of legal form. By contrast, the TIA was passed to ensure that debt issuances are
accompanied by mechanisms to enforce holders’ legal rights. Section 302 of the TIA, on the
“Necessity for Regulation,” describes the problems created “when the obligor fails to provide a
trustee to protect and enforce the rights and to represent the interests of . . . investors.” TIA
§ 302(a)(1). Thus, whereas the tax laws focus on economic substance, often intentionally
disregarding the legal form of the transaction, the TIA facilitates the enforcement of the parties’
legal rights and remedies.3 It does so by imposing certain mandatory terms that, while helpful to
holders of true legal debt, are incompatible with the legal form that the parties to these
LAW INST., New Developments in Securitization 2004, at 989 (Certificates “represent the ownership in the Trust and
are viewed as equity by the [SEC]. Consequently, the Pooling Agreement is not required to comply with the Trust
Indenture Act of 1939.”); Frank Fabozzi, Accessing Capital Markets Through Securitization 238 (2001) (“Such
interests are considered ‘equity interests’ under state law and, therefore, notwithstanding credit ratings of up to
AAA/Aaa, are considered not to be ‘debt’ for purposes such as . . . the [TIA].”); Michael S. Gambro & Scott
Leichtner, Selected Legal Issues Affecting Securitization, 1 N.C. Banking Inst. 131, 149 (1997) (“The 1939 Act does
not apply to securities that are exempt from the registration requirements of the 1933 Act or to equity securities such
as asset-backed securities issued in passthrough form.”).
3 See, e.g., Southgate Master Fund, L.L.C. ex rel. Montgomery Capital Advisors, LLC v. United States, 659 F.3d
466, 479 (5th Cir. 2011) (“‘[T]he tax consequences of a transaction are determined based on the underlying
substance of the transaction rather than its legal form.’ The substance-over-form doctrine allows a transaction to be
recharacterized so that its taxable form corresponds to its economic substance.” (quoting Wells Fargo & Co. v.
United States, 641 F.3d 1319, 1325 (Fed. Cir. 2011)). In some circumstances, the transfer of property to a trust is
disregarded entirely for tax purposes, a result that would make little sense when applying securities or trust law. See,
e.g., Schallerer v. Comm’r, 203 F.2d 100, 103 (7th Cir. 1953) (“The transferring of titular ownership of a part of the
taxpayer’s business capital to a trustee, instead of directly to the donee, affects the legal form but not the economic
substance of the arrangement.”); Robertson v. Steele’s Mills, 172 F.2d 817, 821 (4th Cir. 1949) (“Nor are we
impressed, as to the nature of this expenditure for federal tax purposes, by the fact that the North Carolina Supreme
Court . . . declared this trust agreement to be valid and the expenditure to be a proper corporate outlay. That holding,
in no proper sense, binds us as to the nature of the expenditure under the apposite federal tax statute”) (citation
omitted).
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6
transactions adopted. We respectfully submit that the Court erred in setting aside the SEC’s
interpretation of the securities laws and instead importing a standard from the IRS.
Even if the tax standard is applied, however, the Certificates still should be construed as
equity. Under the IRS standard, the Court looked to:
(a) whether there is an unconditional promise on the part of the issuer to pay a
sum certain on demand or at a fixed maturity date that is in the reasonably
foreseeable future; (b) whether holders of the instruments possess the right to
enforce the payment of principal and interest; (c) whether the rights of the
holders of the instruments are subordinate to rights of general creditors; (d)
whether the instruments give the holders the right to participate in the
management of the issuer; (e) whether the issuer is thinly capitalized; (f)
whether there is identity between holders of the instruments and stockholders
of the issuer; (g) the label placed upon the instruments by the parties; and (h)
whether the instruments are intended to be treated as debt or equity for non-
tax purposes, including regulatory, rating agency, or financial accounting
purposes.
Op. 10-11 (quoting TIFD III-E v. United States, 459 F.3d 220, 235 n.15 (2d Cir. 2006), in turn
quoting I.R.S. Notice 94-47). We respectfully submit that this issue is especially suitable for
reconsideration because the parties did not address the IRS standard for analyzing debt versus
equity treatment. On closer examination, the tax standard, even if relevant in the very different
TIA context, in fact supports the conclusion that the New York Certificates are equity.
a. Unconditional promise to pay a sum certain. As to the first and perhaps the most
significant factor in the IRS analysis, which looks to “whether there is an unconditional promise
on the part of the issuer to pay a sum certain,” the PSAs create no obligation whatsoever to pay
Certificateholders a sum certain, either on demand or at a fixed maturity date. Yet as the IRS
standard suggests, payment of a “sum certain” is a hallmark element of debt. See Gilbert v.
Comm’r, 248 F.2d 399, 402 (2d Cir. 1957) (“The classic debt is an unqualified obligation to pay
Case 1:11-cv-05459-WHP Document 39 Filed 04/17/12 Page 12 of 28
7
a sum certain at a reasonably close fixed maturity date along with a fixed percentage in interest
payable regardless of the debtor’s income or lack thereof.”).4
To be sure, as this Court noted (Op. 11), the PSAs establish distribution dates for
proceeds received by the Trusts. PSA §§ 3.05(a), 3.05(b). But the agreements do not oblige the
Trusts to pay Certificateholders a sum certain; instead, they require distribution of whatever
proceeds are collected by the Trusts. Id. §§ 3.08(a), 4.02 (requiring that Master Servicer attempt
to collect amounts due on mortgage loans and then transfer whatever it collects to the Trustee for
distribution to Certificateholders). The Court appears to have overlooked these provisions in
finding that “the certificateholders’ rights are not wholly contingent on the performance of those
loans” (Op. 12)—there is no obligation or source of assets standing behind the Certificates other
than the loans. Although this critical distinction appears not to have factored into the Court’s
analysis, it has substantial implications for the question here: The most characteristic element of
debt—the obligation to repay a fixed amount of money—is not present in this case.
b. Rights of enforcement. Related to the lack of a sum-certain obligation, the
Certificateholders have no right to enforce payment of principal and interest through a default
mechanism. See BNYM Reply Br. 5.5 This absence is in striking contrast to the rights of holders
of true debt instruments, such as the Delaware Notes, which experience an Event of Default if
4 The Court stated that the “certificates have a fixed maturity date.” Op. 11. We respectfully suggest that this is
incorrect. The “Maturity Date” on the face of the Certificates is the “Latest Possible Maturity Date,” a term that is
defined as three years after the scheduled maturity of the last mortgage loan. It has nothing to do with when
payments are made under the Certificates. The trusts continue until the earlier of the Latest Possible Maturity Date
and the date “21 years from the death of the last survivor of the descendants of Joseph P. Kennedy, the late
Ambassador of the United States to the Court of St. James’s, living on the date hereof” (PSA § 9.01) (to avoid
violating the Rule Against Perpetuities). Neither of these dates is “fixed,” and, even more importantly, no payment is
due on either date.
5 An Event of Default is triggered under the PSAs if the Master Servicer collects money from borrowers and then
fails to transmit it to the Trustee (PSA § 7.01(i)), but the Master Servicer is required only to act prudently in
attempting to collect from borrowers and does not promise any fixed sum. Thus, the Section 7.01(i) Event of Default
does not give Certificateholders a right to “enforce payment of principal and interest.”
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8
the Issuer fails to pay interest (Indenture § 5.01(i)) or principal (id. § 5.01(i)). For this reason as
well, the Certificates cannot constitute a form of debt.
c. Subordination. The Certificates state that they “represent[] a beneficial ownership
interest in the Trust Fund.” Neither the plaintiffs nor the Court identified any language giving the
Certificateholders a security interest in the Trust Fund or otherwise making them senior to
“general creditors.” As residual claims, the Certificates cannot be debt.
d. Participation. The Certificates, it is true, do not provide the holders any right to
management of the Trusts because those duties are assigned elsewhere by the PSAs. See Op. 11.
But this factor is a minor one; “[t]he failure to exercise management rights is certainly not
conclusive.” TIFD III-E, 459 F.3d at 238. This is because “[a] holder of a bona fide minority
equity interest in a partnership or corporation may well have no practical ability to influence
management and may even have no vote as a formal matter.” Id. Here, though the
Certificateholders have no role in day-to-day administration, they do have the power to direct the
Trustee (PSA §§ 7.01(i), 8.02(iv)), rights that exceed those of holders of non-voting common
stock, as well as the power to commence derivative litigation if they satisfy the no-action clause
in Section 10.08 of the PSAs. This factor, accordingly, is of little relevance here. See John Kelley
Co. v. Comm’r, 326 U.S. 521, 530 (1946) (no single factor, “not even the exclusion from
management,” is dispositive).
e. Capitalization. This factor also has no bearing here; that an issuer is thinly capitalized
may suggest that a security legally structured as a debt instrument in fact operates as equity (at
least for tax purposes), but no degree of capitalization could transform ownership interests into
an obligation to pay a sum certain or otherwise turn equity into debt. Indeed, if this factor were
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9
relevant, it would point strongly toward the Certificates being equity: if the Certificates were
debt, the Trusts would not be just “thinly capitalized,” they would be insolvent.
f. Identity of holders. Like the capitalization factor, this is a one-way ratchet—it can
support the treatment of a debt instrument as equity (for tax purposes), but not the
recharacterization of equity as debt. As noted above, each Certificate “represents a beneficial
ownership interest.” Thus, not only is there “identity between holders of the instruments and
stockholders,” there is identity between the instruments and the stock. To the extent that this
factor applies, it shows decisively that the Certificates are equity.
g. Label. This consideration suggests that the parties’ treatment of the transaction is
given some weight. And here, the parties made clear their view that the certificates conveyed
equity. The Certificates themselves state that they “represent[] a beneficial ownership interest in
the Trust Fund” (PSA, Ex. E), and the PSAs say the same thing (PSA, Preliminary Statement
(“Each Certificate . . . will represent ownership of one or more regular interests in the Master
REMIC”)). Thus, the “Certificates in authorized denominations evidenc[e] directly or indirectly
the entire ownership of the Trust Fund.” Id. § 2.06.
The parties’ use of these labels was no accident. Other mortgage-backed securities—
including the Delaware Notes, sponsored by the same company (Countrywide) and administered
by the same Trustee (BNYM)—are denominated “Notes,” and their governing contracts are
titled “Indenture,” describe the instruments as “debt” (e.g., Indenture § 2.03(d)), and state
expressly that they are subject to the Trust Indenture Act (Indenture § 11.07). Given that none of
these things is true of the New York Certificates, the intent of the parties could hardly be clearer.
h. Regulatory treatment. Finally, for regulatory purposes, PSA certificates have always
been treated as equity, and thus exempt from the TIA. The SEC has consistently maintained this
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10
view. See SEC Trust Indenture Act Interpretations, Question & Answer 202.01 (Mar. 30, 2007),
available at http://www.sec.gov/divisions/corpfin/guidance/tiainterp.htm; Harbor Financial, Inc.,
SEC No-Action Letter, 1988 WL 235128 (Oct. 31, 1988). The Labor Department has adopted
the same approach for purposes of ERISA. See PWBA Office of Regulations and Interpretations,
letter dated Oct. 23, 1996, available at http://www.dol.gov/ebsa/programs/ori/advisory96/96-
23a.htm.
* * *
In combination, these factors compel the conclusion that the Certificates in the New York
trusts governed by PSAs are equity interests. See John Kelley Co., 326 U.S. at 530 (in the tax
context, courts must take account of all relevant factors to distinguish debt from equity). All but
one of the IRS considerations, and all of the most important ones, point in that direction. There is
no obligation in the PSAs to pay Certificateholders a sum certain; the Trusts cannot default, as
any default under the PSAs exists solely with respect to the Master Servicer; the Certificates
transfer an ownership interest in the Trusts; the parties expressly viewed the instruments as
equity; and the relevant regulatory bodies always have viewed them as equity. We urge the Court
to take account of these factors on reconsideration.
The judicial decisions cited in the Order—none of which arose in the TIA context—do
not offer a reasoned basis to reach a contrary conclusion. Op. 9-10. In Ellington Credit Fund,
Ltd. v. Select Portfolio Servicing, Inc., 2011 WL 6034310, at *7-*8 (S.D.N.Y. Dec. 5, 2011),
Judge Sullivan emphasized that the defendants had “offer[ed] no argument” that the pass-through
certificates were equity rather than debt, repeating that observation three times in his opinion.
Accordingly, the question critical to this case was not at issue there. The other decisions noted by
the Court simply suggest, in passing, that certificates for mortgage trusts may have some
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11
resemblance to bonds; that observation doubtless is sometimes true, but none of those cases
decided whether certificates are bonds for purposes of the TIA. See Greenwich Fin. Servs.
Distressed Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23, 29 (2d Cir. 2010);
CWCapital Asset Mgmt., LLC v. Chicago Props., LLC, 610 F.3d 497, 499 (7th Cir. 2010);
LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 200 (2d Cir. 2005)
(referring to “‘bonds’ or ‘certificates’”) (emphasis added); Trust for Certificate Holders of
Merrill Lynch Mortg. Passthrough Certificates Series 1999-C1 v. Love Funding Corp., 2005 WL
2582177, at *1 (S.D.N.Y. Oct. 11, 2005). In particular, not one of these decisions concludes that
Certificates should be construed as debt rather than equity.
2. Section 304(a)(2) exempts the New York Trusts from the TIA.
Reconsideration also is warranted on this issue for a separate reason. As the Court
recognized, the SEC has concluded that “‘[c]ertificates representing a beneficial ownership
interest in a trust . . . are treated as exempt from the Trust Indenture Act under Section 304(a)(2)
thereof,’” which exempts “any certificate of interest or participation in two or more securities
having substantially different rights and privileges.” Op. 12 (quotation marks omitted).
Commentators agree. See, e.g., 14 U.S. Secs. Law for Financial Trans. § 4:36 (2d ed.) (“The
certificates are exempt from the Trust Indenture Act under § 304(a)(2) of that Act.”). The Court
rejected the SEC’s view on the ground that the Certificates “do not evidence ‘participation’ in
the underlying mortgage loans because the certificateholders’ rights are not wholly contingent on
the performance of those loans.” Op. 12. But this issue, too, was not addressed by the parties.
And on close examination, we respectfully submit that the SEC’s conclusion regarding
application of Section 304(a)(2) is correct.
On the face of it, Certificates issued by the New York trusts constitute “certificate[s] of
interest or participation in two or more securities having substantially different rights and
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12
privileges.” The trusts here undoubtedly pool multiple securities that have substantially different
rights and privileges. Each of the underlying loans is an obligation of a different borrower,
secured by a different piece of real estate, and the principal balances, interest rates, maturities,
and other terms and conditions differ as well. The Court did not disagree on that point.
Instead, in rejecting the SEC’s guidance, the Court relied on its view that the New York
Certificates “do not evidence ‘participation’ in the underlying mortgage loans because the
certificateholders’ rights are not wholly contingent on the performance of those loans.” Op. 12.
The Court supported this analysis by observing that if the mortgage loans generate “Excess
Proceeds” the Master Servicer, not the Certificateholders, receives those funds, and that the
Master Servicer, not the Certificateholders, is entitled to profits “from investing the funds
contained in the Distribution and Certificate Accounts.” Id. We respectfully suggest that this
conclusion was mistaken, for two separate reasons.
First, under the plain statutory language, an instrument may be a certificate of “interest
and participation” if it entitles the holder to profits, even if others also may share in those profits.
Cf. Lavin v. Data Sys. Analysts, Inc., 443 F. Supp. 104, 109 (E.D. Pa. 1977) (describing
certificates of participation as “instruments that give the holder at least some rights to future
profits” (emphasis added)). The defining feature of a certificate of interest or participation would
seem to be that the holder recovers based on a share proportionate to profits generated. And that
is precisely what occurs here. PSA §§ 3.08(a), 4.02. On the face of it, then, the Certificateholders
inarguably have an “interest,” and “participate,” in the performance of the securities.
Second, even if a right of non-Certificateholders to share in the Trust profits has some
bearing here, the Order was incorrect as a matter of fact in finding such a right under the PSAs.
The Court pointed to two circumstances in which the Master Servicer may receive a share of
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13
what the Court viewed as “profits.” But these provisions in no way undermine the conclusion
that Certificateholders ultimately obtain all profits generated by the underlying mortgages.
Thus, citing PSA § 3.05(e), the Court noted that the Master Servicer could invest certain
funds generated by the Trust and may keep any gains. But this provision simply addresses the
reality that funds are collected by the Master Servicer continuously—whenever an individual
homeowner makes a payment on his or her loan. The Trustee, however, distributes proceeds to
Certificateholders only on certain distribution dates. In the meantime, the funds sit in the
Certificate Account. Section 3.05(e) of the PSA merely provides that profits or losses from that
account do not affect the Master Servicer’s obligation to transfer to the Trustee exactly the
amount collected. Nothing about this possibility alters the equity interest of Certificateholders in
the proceeds generated by the Trust assets.
The Court also pointed to the “Excess Proceeds” that may be retained by the Master
Servicer under PSA § 3.14. But this incentive for the Master Servicer to maximize collections
does not alter the contingent nature of the Certificateholders’ interests. As defined by PSA
§ 1.01, “Excess Proceeds” means monies generated in one very specific manner: when the
Master Servicer recovers on a particular property an amount exceeding the outstanding
mortgage principal and interest. It is highly unusual for this to occur, because a foreclosure sale
returns any excess monies to the borrower. In the rare case when a Trust acquires title to a
property that ultimately generates funds exceeding the outstanding loan balance and accrued
interest, the Master Servicer may retain those revenues; that provision does not entitle the Master
Servicer to any amount collected, on a Trust-wide basis, beyond the “Principal” balance on the
Certificates. And even if that were the case, a company’s decision to distribute some (or even all)
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14
of its profits above a certain level to employees or contractors would not affect the status of trust
certificates as ones of “interest or participation.”
These provisions of the PSAs accordingly do not undermine the SEC’s conclusion that,
under Section 304(a)(2), trusts such as those at issue here are exempt from the TIA.
B. Alternatively, the Court should certify the Order for interlocutory review.
1. The certification standards are satisfied.
If the Court does not reconsider the Order, we respectfully urge it to certify the decision
for interlocutory appeal pursuant to 28 U.S.C. § 1292(b) so that the Second Circuit can resolve
the question whether mortgage trust certificates are subject to the TIA. The Order surely meets
the criteria for interlocutory certification: it raises a debatable issue of pure law that directly
controls the outcome of the case, and there is no doubt that “an intermediate appeal may avoid
protracted and expensive litigation.” In re Currency Conversion Fee Antitrust Litig., 2005 WL
1871012, at *3 (quotation marks omitted); see also 16 Charles A. Wright, et al., Federal Practice
and Procedure § 3929 (2d ed. 2012) (interlocutory review is “especially suitable” for use in
“exceptionally complex” cases where immediate appellate review might avoid “protracted and
expensive litigation”). Because it is the “duty of the district court . . . to allow an immediate
appeal to be taken when the statutory criteria are met” (Ahrenholz v. Bd. of Trustees of Univ. of
Ill., 219 F.3d 674, 677 (7th Cir. 2000) (emphasis added)), certification for interlocutory review is
warranted.
First, whether the TIA applies here is a “pure” and controlling question of law.
Ahrenholz, 219 F.3d at 677. There is no denying that “a prompt and authoritative disposition of
the question is extremely important to the prudent management of the litigation.” In re Currency
Conversion Free Antitrust Litig., 2005 WL 1871012, at *3 (quotation omitted). If the case
proceeds on interlocutory appeal and the court of appeals reverses this Court’s decision, it will
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15
put an end to most, if not all, of this litigation. And “a question is controlling, even though its
decision may not lead to reversal on appeal, if interlocutory reversal might save time for the
district court, and time and expense for the litigants.” Johnson v. Burken, 930 F.2d 1202, 1206
(7th Cir. 1991) (quotation marks omitted).
Second, for the reasons addressed above, the resolution of this question surely is
contestable: There can be little doubt that the issues relating to the TIA’s application are
“difficult and of first impression.” In re Currency Conversion Fee Antitrust Litig., 2005 WL
1871012, at *3 (quoting Klinghoffer v. S.N.C. Achille Lauro Ed Altri-Gestione Motonave Achille
Lauro in Amministrazione Straordinaria, 921 F.2d 21, 25 (2d Cir. 1990)); see also Allison
Frankel, “Does Pauley’s ruling spell new liability for MBS trustees?” (REUTERS Apr. 4, 2012)
(quoting plaintiff’s counsel: “Judge Pauley is the first judge to say the Trust Indenture Act, in
existence since 1939, does apply in this type of circumstance to mortgage-backed securities.”).
As we have explained, no other court has addressed those issues. But they have been addressed
by both the SEC and authoritative commentators, all of which disagree with the conclusion
reached by this Court here. The contestability of the TIA’s application is thus apparent.
Moreover, although the Court declined to defer to the SEC’s views (Op. 12), that
conclusion is itself open to question. To be sure, the SEC rulemaking is not the product of a
formal notice and comment proceeding. But the Second Circuit has made clear that “[l]ess
formal interpretations may also be entitled to mandatory deference, depending upon to what
extent the underlying statute suffers from exposed gaps in its policies, especially if the statute
itself is very complex, as well as on the agency’s expertise in making such policy decisions, the
importance of the agency's decisions to the administration of the statute, and the degree of
consideration the agency has given the relevant issues over time.” Cmty. Health Ctr. v. Wilson-
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16
Coker, 311 F.3d 132, 138 (2d Cir. 2002); see also Barnhart v. Walton, 535 U.S. 212, 222 (2002).
In this case, those factors strongly support deference to the SEC interpretation. The SEC
guidance here “is generally applicable and is not an ad hoc position,” which supports deference.
Estate of Landers v. Leavitt, 545 F.3d 98, 110 (2d Cir. 2008). To the extent that there is an
“absence of statutory guidance” on the specific question presented in the TIA, that too favors
deference. Nat’l Res. Defense Council, Inc. v. FAA, 564 F.3d 549, 564 (2d Cir. 2009). The TIA is
part of “a large and complex regulatory scheme” as to which the SEC is a “highly expert
agency,” which also supports looking to the agency’s view. Cmty. Health Ctr., 311 F.3d at 138.
In fact, Section 304(d) of the TIA permits the SEC to exempt securities on its own. And the SEC
has been “consistent in its interpretation.” Estate of Landers, 545 F.3d at 108. Indeed,
recognizing the unique expertise of the SEC, the Second Circuit has afforded Skidmore deference
to a position adopted by the SEC for the first time in an amicus brief before that Court. See In re
New Times Secs. Servs., Inc., 371 F.3d 68, 82-83 (2d Cir. 2004). The case for Skidmore
deference is far more compelling here, where the SEC guidance stems from a long-standing
interpretation and there is a clear need for consistency in application of the statute.
Third, there is no question that interlocutory appellate review has the potential to
“meaningfully advance the ultimate resolution of this litigation.” Figueiredo Ferraz Consultoria
E Engenharia De Projeto Ltda., 2009 WL 5177977, at *2. Such a possibility is a principal reason
for interlocutory certification. A “district court should consider judicial efficiency when
considering an application for interlocutory appeal” (id. at *1), and “senseless waste of private
and public resources and an unconscionable delay in the final resolution of these proceedings”
(In re Microsoft Corp. Antitrust Litig., 274 F. Supp. 2d 741, 743 (D. Md. 2003)) will have
occurred if the Court were to deny certification and the Second Circuit subsequently were to
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hold, after discovery and a lengthy and expensive trial, that 25 of the 26 trusts here are exempt
from the TIA and not properly part of the case. In these circumstances, the Court’s certification
of the Order for immediate appeal is warranted.
2. The practical need for certainty warrants certification.
While satisfaction of the statutory criteria itself makes certification appropriate, practical
considerations make the need for immediate appellate review in this case especially acute. Prior
to this Court’s decision, the SEC had concluded that trusts like those at issue in this case are not
subject to the TIA. In reliance on that guidance, no such trust, so far as we are aware, ever has
registered under the TIA or satisfied the statute’s other requirements. Those trusts have issued
securities worth many hundreds of billions, and more likely trillions, of dollars. If those trusts are
now believed subject to the TIA by virtue of the analysis in this Court’s Order, the consequences
would be profoundly disruptive and, in significant respects, immeasurable. The industry is still
digesting the ramifications of recharacterizing trust certificates as debt, but the potential
consequences include:
Because it appears that no pass-through securitization trust was “qualified” under the
TIA (through the filing of a Form T-1 with the SEC), and offering documents were
drafted on the understanding that the securities were equity, investors may assert
claims for securities law violations against the sponsors of these securitizations. The
Trustee would be neither a plaintiff nor a defendant in such suits, but it would seem
that both investors and sponsors would benefit from clarity on this issue before the
investment of substantial resources in litigation.
The Department of Labor has ruled that trust certificates are not “debt” for ERISA
purposes. See PWBA Office of Regulations and Interpretations, letter dated Oct. 23,
1996, available at http://www.dol.gov/ebsa/programs/ori/advisory96/96-23a.htm (“it
is the view of the Department that the pass-through certificates representing a
beneficial interest in the trust . . . constitute equity interests”). If the Court’s analysis
is correct, and the DOL is wrong, then a wide range of securities will suddenly
become eligible for purchase by ERISA benefit plans (without the need to qualify
under various exemptions). Until the matter is definitely resolved, this will leave plan
administrators in considerable doubt about permissible investments and, to the extent
they follow the Court’s analysis, may lead plans to purchase securities that turn out to
be non-ERISA-eligible if the decision ultimately is set aside.
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The PSAs here, like those governing other certificate structures, expressly provide for
the “Principal” balance on Certificates to be written down whenever the Master
Servicer determines that the balance on a particular mortgage loan is non-recoverable.
See PSA § 4.02. Section 316(b) of the TIA, however, expressly prohibits the
“impair[ment]” of “the right of any holder of any indenture security to receive
payment of the principal and interest on such indenture security.” If the TIA applies,
it could invalidate the contractual write-off provisions, potentially obligating the
Trustee to disregard the contracts, but without providing any further guidance. This
same section may prohibit the modification of loans by the servicer through the
reduction of principal balances.
Section 314 imposes detailed reporting requirements on the “obligor.” This Court’s
ruling leaves unanswered the question of who the obligor on the Certificates is, and
the PSAs expressly state that it is not any of the parties to the PSA—not the Trustee,
the Master Servicer, the Seller, or the Depositor. PSA, Ex. A, at A2. Relatedly,
Section 315(a) states that “the indenture trustee shall examine the evidence furnished
to it pursuant to section 314 to determine whether or not such evidence confirms to
the requirements of the indenture.” That requirement applies to reports of the
“obligor.” See Op. 14. Thus, the “obligor” is now required to report, and the Trustee
is required to examine those reports, even though no one knows who the obligor is.
Even if the obligor could be identified, many of the specific reports are unintelligible
in this context. For example, Section 314(d)(1) requires “a certificate or opinion of an
engineer, appraiser, or other expert as to the fair value . . . of any property . . . to be
released from the lien of the indenture.” The PSA imposes no “lien,” because the
Certificateholders own the Trust Fund. But by conceiving of the Certificates as
secured debt, this Court’s opinion could be read to require an appraisal every time a
mortgage loan is modified or written off, which would profoundly change the
economics of the Trusts by multiplying administrative expenses (costs that would be
borne by investors) and impede loan modifications (if they were not barred
completely by Section 316(b)).
The sole source of payment on the Certificates is the Trust Fund. See PSA, Ex. E. Yet
if the Trust Fund is treated as the obligor, then no one can be the trustee. Section
310(a)(5) states that “[n]o obligor upon the indenture securities or person directly or
indirectly controlling . . . such obligor shall serve as trustee upon such indenture
securities.” The PSAs require a Trustee to administer each Trust and hold title to all
of its assets. But if the Trust is the obligor, any trustee will be a “person . . .
controlling . . . such obligor” and will be disqualified.
Section 303(12) states that “obligors” include not only obligors on the covered
securities but also, “if such security [subject to the TIA] is a certificate of interest or
participation, . . . every person . . . who is liable upon the security or securities in
which such certificate evidences an interest or participation.” The assets in which the
Certificates “evidence[] a beneficial ownership interest” are the mortgage loans of
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19
millions of homeowners,6 who could now be held liable under Section 314 of the
TIA. See also PSA, Art. I (defining “Mortgagor” as “The obligor(s) on a Mortgage
Note.”). The definition also suggests that under Section 317(a)(1), the Trustee could
sue each homeowner “for the whole amount of such principal and interest remaining
unpaid” on the Certificates issued by the whole Trust.
As a consequence, the Court’s decision has created confusion and paralyzing uncertainty
in the mortgage-backed securities market. This concern is not theoretical: in the two weeks since
the Court’s ruling, a prospectus filed by JP Morgan Chase Commercial Mortgage Securities
Corp. (“JPMCC 2012-C6”) noted the decision but indicated that it believes the “ruling is
contrary to SEC guidance and historical industry practice,” and thus concluded that “the Pooling
and Servicing Agreement is not required to be qualified under the TIA.” See Free Writing
Prospectus, J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-C6, SEC Reg.
Statement No. 333-165147-02, at S-222 to S-223 (April 9, 2012). Other issuers will have to
decide whether to be guided by the SEC or by this Court’s holding, both in their future actions
and in determining whether steps must be taken to conform prior issues to the TIA’s
requirements. Immediate, authoritative resolution of this uncertainty is essential to the efficient
operation of the market—and, absent reconsideration, that resolution can be provided only by
certification of the question to the Second Circuit.
In these circumstances, the Order concerns an issue “of unusual significance” that has
“practical importance going well beyond run-of-the-mill concerns of parties before the Court.” In
re Auction Houses Antitrust Litig., 164 F. Supp. 2d 345, 348 (S.D.N.Y. 2001). Indeed, given the
imperative need for a quick and definitive resolution of the issue whether the TIA applies in
6 The SEC believes that these mortgage loans are “securities” for these purposes, as evidenced by its ruling that
the Certificates are exempt under Section 304(a)(2). Accord Section 310(A) (for purposes of certain paragraphs
only, “the term[] ‘security’ . . . shall include only such securities as are generally known as corporate securities, but
shall not include any note . . . issued to evidence an obligation to repay moneys lent to a person by one or more
banks”). If the SEC were to reverse course and hold that loans are not securities, it would have the effect of
exempting from these requirements the borrowers on large commercial loans that are securitized individually.
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these circumstances, even a belief on the Court’s part that there is no “substantial ground for
differences of opinion” on the question would not be “fatal to certification.” Figueiredo Ferraz
Consultoria E Engenharia De Projeto Ltda., 2009 WL 5177977, at *2 (quotation marks
omitted). For these reasons, we respectfully submit that this case presents the exceptional
circumstances that justify immediate appeal and certification under section 1292(b).
II. Plaintiffs Fail To State A TIA Claim Against The Delaware Indenture.
Separately, reconsideration is warranted because the plaintiffs have failed to state a TIA
claim against the Delaware indenture under the SSA. The Court concluded that plaintiffs did
state a claim under TIA provisions imposing heightened duties on trustees following an “Event
of Default,” reasoning that failure by the Master Servicer to perform its contractual obligations
resulted in a similar failure by the Issuer, which constituted such an Event of Default. Op. 17
(citing TIA §§ 315(b) and 315(c)). Here too, however, the Court based its decision on
considerations not addressed by the parties in their briefs. And on close consideration, we again
respectfully suggest that this holding was incorrect, in two respects.
First, plaintiffs did not plead this theory. In the complaint, plaintiffs did not assert that the
Issuer had any relevant duty, much less that the Issuer breached a duty or that such a breach
constituted an Event of Default. The Amended Complaint alleges an Event of Default based
solely on alleged breaches by the Master Servicer. In addition, by alleging (incorrectly) that the
PSA attached as Exhibit C was “substantially similar to all other . . . governing agreements for
the Covered Trusts” (AC ¶ 2), this pleading plainly did not put the Trustee on notice that it was
attempting to allege a default by the Issuer under the Indenture. “It is ‘axiomatic that the
Complaint cannot be amended by the briefs in opposition to a motion to dismiss.’” Stillman v.
Townsend, 2006 WL 2067035, at *3 (S.D.N.Y. July 26, 2006) (quoting O’Brien v. Nat’l Prop.
Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989)).
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21
Second, the Court in any event erred in its interpretation of the Indenture. As the Court
correctly noted, under the Delaware Indenture, an “Event of Default” is triggered by a failure of
the Issuer. Indenture § 5.01. The Court reasoned that because the Issuer has a duty to “enforce
any rights with respect to the collateral,” it had a duty to sue the Master Servicer for alleged
breaches of the Sale and Servicing Agreement, and that the Issuer’s failure to do so was a breach
of the Indenture by the Issuer. Op. 16-17.
But that is not correct. The Issuer has neither the duty nor even the right to enforce the
SSA, which means that its failure to do so cannot be a breach of the Indenture and an Event of
Default. In fact, the Issuer expressly granted to the Indenture Trustee all rights in the mortgage
loan assets. That grant included “all present and future claims, demands, causes of action, and
choses in action,” specifically including “the interest of the Issuer in the Sale and Servicing
Agreement and the Purchase Agreement (including the Issuer’s right . . . to cause [mortgage
loans] to be repurchased.” Indenture, Granting Clause. In nevertheless finding an Event of
Default, the Court looked to the Issuer’s duties under Sections 3.05(a)(iv) and 3.05(a)(v) of the
Indenture. Op. 17. Section 3.05 obligates the Issuer to take steps to protect the collateral by
delivering certain specific documents that demonstrate (a) the Issuer’s ownership of the collateral
and (b) the Indenture Trustee’s lien on the collateral.7 Indenture, § 3.05 (Issuer must “deliver any
supplements and amendments to this Indenture and any Financing Statements, continuation
Statements, instruments of further assurance, and other instruments”). But nothing in the
agreement requires the Issuer to monitor the Master Servicer’s performance. Thus, even if the
7 For the reasons explained at pages 8-9 of our reply brief, allegations that the Depositor failed to transfer
physical mortgage files do not implicate the Issuer’s title to the loans. As other courts have found, the governing
contracts themselves transfer ownership to the Trusts, and the physical files are (sometimes) necessary only to
enforce the loans against the borrowers. See, e.g., Kemp v. Countrywide Home Loans, Inc., 440 B.R. 624, 629-30
(Bankr. D.N.J. 2010) (“the debtor’s mortgage had been assigned to the Bank of New York,” even where the note
was improperly endorsed).
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Master Servicer had failed to maintain or furnish mortgage loan files to the Indenture Trustee,
the Issuer would have had no duty to be aware of, let alone to enforce, that breach of the SSA,
and its failure to do so would not be an Event of Default. As a consequence, the TIA provisions
that come into play upon an Event of Default have no application here, and we urge the Court to
reconsider its decision on that point.
CONCLUSION
For the foregoing reasons, Court should reconsider its Order of April 3, 2012 and grant
the motion to dismiss. Alternatively, the Court should certify that Order for interlocutory appeal,
by amending that Order pursuant to Section 1292(b).
Dated: New York, New York
April 17, 2012
MAYER BROWN LLP
s/Matthew D. Ingber
Matthew D. Ingber
Charles A. Rothfeld
Christopher J. Houpt
Paul W. Hughes
1675 Broadway
New York, New York 10019
(212) 506-2500
Attorneys for Defendant
The Bank of New York Mellon
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