Opinion
No. X08 CV09-5010295S
February 23, 2010
Memorandum of Decision on Motion to Dismiss (No. 104)
Procedural/Factual Background
This is an action brought in five counts by Carrington Asset Holding Company, LLC, Carrington Investment Partners, LP, and Carrington Asset Management, LLC (collectively herein "Carrington"), all related Delaware limited liability companies having a principal place of business in Greenwich, Connecticut, against a sole defendant, American Home Mortgage Servicing, Inc. ("American Home"), a Delaware Corporation registered to do business in Connecticut, having its principal place of business in Irving, Texas. The lawsuit centers on the parties' involvement in various capacities in four Real Estate Mortgage Investment Conduits or "REMICS" which are trusts established to facilitate under favorable tax consequences the issuance of asset-backed securities in the form of beneficial interests in large pools of real estate mortgages. Typically an institutional lender or "depositor" assembles a pool of mortgages which it or an affiliated investment bank deposits into a trust administered by a trustee, which then issues certificates of beneficial ownership to investors. The trust holds the mortgages for the benefit of the certificate holders. When homeowners or other borrowers make their monthly mortgage payments, or pay off their mortgages when they sell or refinance, the payments go to the trust and are passed through to the certificateholders in accordance with the relative rights established for each class of certificateholder. The trustee typically retains a professional mortgage "Servicer" to collect and administer the mortgages in the pool. A servicer's duties are set out in a Pooling and Servicing Agreement ("PSA") between the depositor, the trustee, and the servicer. Such an agreement typically requires a servicer to collect monthly payments from borrowers, monitor borrowers' compliance with the terms of their mortgages, and maintain and administer tax and insurance escrows. A Pooling and Servicing Agreement also describes the servicer's duties in the event that borrowers default on their mortgages — specifying, for example, the scope of the servicer's authority to modify the terms of any mortgage to avoid foreclosure, and defining the servicer's duties with respect to the disposition of foreclosed properties.
Three of the subject trusts were established in 2005 by Citigroup Mortgage Loan Trust, Inc. as depositor with Deutsche Bank as trustee. The fourth trust was established in 2006 by the plaintiff Stanwich Asset Acceptance Company, LLC (a Carrington affiliated company), as depositor and Wells Fargo as Trustee. The original Servicer of all four trusts was Option One Mortgage Corporation. In or about April of 2008 defendant American Home acquired Option One and became the substitute Servicer of all four trusts pursuant to the terms of the four PSAs.
The parties represent that the three 2005 PSASs are identical to each other and that the 2006 PSA differs slightly and not materially from the 2005 agreements.
The four trusts are empowered to issue to investors distinct classes of certificates, having different characteristics and different levels of seniority and different levels of priority among the certificate holders with respect to the distribution and payment of monies collected and received by the servicer of the pool of mortgages held by each trust. There are also differences among the classes regarding the allocation of losses suffered on defaulted mortgage loans in the pool. Each trust issues "Class A" certificates, "Mezzanine" certificates, "Residual" certificates, "Class P" certificates, and "Class CE" certificates. In 2005 and 2006 Carrington Asset Holding acquired through its subsidiaries Carrington Investment Partners and Carrington Capital Management, and presently owns, 100% of the Class CE certificates of each of the four trusts, having a cumulative initial certificate principal balance in excess of $128 million, which was less than 5% of the total initial value of all certificates issued by the four trusts. Voting rights are assigned proportional to the principal value of the certificates.
Central to the dispute between the parties are the particular characteristics of the Class CE certificates and the powers of the holder of those certificates. Generally in terms of priority in receiving allocations of monies paid to the servicer by the mortgagors, Class A certificates rank first and Class CE certificates rank last. But when losses are incurred from sales of foreclosed properties, those losses are allocated first to the Class CE certificates and last to the Class A certificates. As alleged in the complaint:
Distributions to certificateholders resemble a cascade, in which the most senior certificates are to receive payments before the next most senior class receive payment, and so on. Conversely, the losses suffered in connection with the defaulted mortgage loans are suffered last (if at all) by the more senior certificates. Thus, the Class A certificate holders are in the safest position compared to other certificate holders, while the Class CE certificate holders are in the riskiest position.
Complaint. Common Allegations, ¶ 17
Being in the least favored position with respect to allocation of losses from the sale of foreclosed properties or "REO" (real estate owned), Carrington negotiated the inclusion in each PSA provisions under the chapter heading "Rights of the Class CE Certificate holder" requiring the servicer to provide to the holder of the Class CE certificates detailed periodic reports and information regarding mortgages in the pool including, without limitation, a status report on each mortgage in the pool, financial details regarding each mortgage that has liquidated or paid off, details regarding all primary mortgage insurance claims submitted and proceeds received, copies of any notices to the trustee regarding loan modifications, and monthly delinquency reports detailing the percentages of mortgages in 30, 60 and 90-day delinquent status that move into foreclosure. The Class CE certificate holder also has the right to conduct an annual on-site review of the servicer's operations as they relate to mortgage loans. (2005 PSAs § 12.01; 2006 PSA § 14.01.) No other class of certificate holders has the right to receive this level of information and reporting. Each PSA also includes, as negotiated by Carrington, the following provision entitled "Class CE Certificate holder's Directions with Respect to Defaulted Mortgage Loans":
All parties to this Agreement acknowledge that the Class CE Certificateholder's advice is made in the form of directions, and that the Class E Certificateholder has the right to direct the Servicer in performing its duties under this Agreement. The Servicer must accept such advice, subject to the duties of the Servicer set forth in this Agreement.
(2005 PSAs § 12.02; 2006 PSA § 14.02) (hereinafter, the "CE Certificateholder's Special Rights").
The plaintiff alleges that the previous Servicer, Option One honored the CE Certificateholder's Special Rights by complying with Carrington's demands regarding the sale or disposition of REO properties, and that American Home also honored those rights "for several months" after it took over for Option One in about April 2008 (Complaint ¶¶ 26-38). Then, it is claimed, "the Servicer's long history of honoring the Class CE Certificateholder's unique rights suddenly changed in September of 2008 . . ." just prior to the rate of liquidation of REO properties increasing dramatically from an average of 3.38% from January through October 2008 to 14.71% and 36.33% respectively for the months November and December 2008. (¶¶ 42, 58.) Carrington claims that it had requested various reports and information about certain defaulted mortgages from American Home in August and September of 2008, but received a letter from American Home dated September 17, 2008 disputing the CE Certificateholder's right to the information being sought and its right to direct the Servicer regarding REO properties (¶¶ 55-56). Since then, it is claimed, American Home has proceeded to ignore Carrington's objections and directions and began liquidating REO properties "at an extremely rapid rate, in many cases holding auctions of REO properties and otherwise essentially engaging in what amounted to `fire sales' of such properties." (¶ 57.) For instance, it is claimed that liquidations in the last two months of 2008 ran at 177 and 146 per month, whereas previously there had been about 40-50 liquidations per month. (¶ 59.) Carrington concluded that American Home "would not stop breaching the PSAs and demanded again in December 2008 by letter, that it revert to honoring Carrington's Special rights, pointing out the millions of dollars in damages [American Home's] breaches had caused (¶ 64) but American Home" has not complied with that letter.
Carrington alleges that American Home's decision in October 2008 to cease providing information to Carrington regarding foreclosed properties or the disposition thereof, and to cease honoring Carrington's directions under the CE Certificateholder's Special Rights provision of the PSAs was made to protect its own self-interests in that it was required as Servicer under the PSAs to make "Advances" and Servicing Advances to cover delinquent payments of principal and interest on the mortgage loans in the pool, which are essentially monthly payments made from the servicer's own funds that remain unreimbursed while a REO property remains unsold, but then is recouped as a priority item from the proceeds of REO properties as they are sold. (¶¶ 45-48.) It is alleged that in September 2008 American Home reached its borrowing limit on the $1.2 billion bank line of credit to finance those advances, and, in fact, was required by the lenders to pay down approximately $200 million of the $1.2 billion it had borrowed. (¶¶ 49-51.) In order to pay down that $200 million, it is claimed, American Home determined to liquidate REO properties in an unduly rapid fashion and recoup its advances as soon as possible from the sales proceeds. (¶¶ 53-55.) Carrington claims that American Home's breaches have benefitted it at the expense of Carrington (as Class CE Certificateholder, and consequently holder of a "first loss" position) causing it to suffer millions of dollars in damages by the unduly low amounts being received on the REO properties via the wrongful "fire sales" which, if permitted to continue, will eventually cause great harm to other certificateholders as well. (¶ 76.)
Asking for compensatory, consequential, and punitive damages, disgorgement of servicing fees, an order of specific performance, injunctive relief, and attorneys fees and costs, plaintiffs have pleaded Carrington's Breach of Contract Claim (First Count); Stanwich's Breach of Contract Claim (Second Count); Specific Performance (all plaintiffs) (Third Count); Breach of Fiduciary Duty (all plaintiffs) (Fourth Count) and Violation of the Connecticut Unfair Trade Practices Act ("CUTPA") (all plaintiffs) (Fifth Count).
Conn. Gen. Stat. § 42-110a, et seq.
Now before the court is defendant's Motion to Dismiss claiming that this court lacks subject matter jurisdiction over this action in that the plaintiffs have no standing to sue on these claims because they have failed to comply with the condition precedent to litigation as stipulated in the "No Action" clauses of the four PSA contracts which provide:
No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action, or proceeding in equity or law, upon or under or with respect to this Agreement, unless such holder previously shall have given to the Trustee a written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of Certificates entitled to at least 25% of the Voting Rights shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 15 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding.
Plaintiffs admittedly have not complied with the No Action Clauses. They argue for various reasons, discussed below, that the No Action Clauses do not apply to deprive them of standing to sue on the claims pleaded in the complaint and/or do not work to deprive this court of subject matter jurisdiction. It is for the court to determine if they are correct and whether or not this case, or any counts thereof, should be dismissed for lack of subject matter jurisdiction.
All PSAs contain a choice of law provision specifying that they shall be construed in accordance with New York Law "and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws, without regard to the conflicts of laws provisions thereof." (2005 PSAs § 11.05; 2006 PSA § 13.04.)
Discussion A. Legal Standard
"A motion to dismiss . . . properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court." (Emphasis in original; internal quotation marks omitted.) Gurliacci v. Mayer, 218 Conn. 531, 544 (1991). "The motion to dismiss shall be used to assert (1) lack of jurisdiction over the subject matter . . ." (Internal quotation marks omitted.) Sadloski v. Manchester, 235 Conn. 637, 645-46 n. 13 (1995). "The plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." Fink v. Golenbock, 238 Conn. 183, 199 n. 13 (1996). But it is a "well established principle that in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged." (Internal citation and quotation marks omitted.) Fedus v. Planning Zoning Commission, 278 Conn. 751, 778-79 (2006). "The motion to dismiss admits all facts which are well pleaded, invokes the existing record, and must be decided on that alone . . . Where, however, . . . the motion is accompanied by supporting affidavits containing undisputed facts, the court may look to their content for determination of the jurisdictional issue and need not conclusively presume the validity of the allegations of the complaint." (Citation omitted; internal quotation marks omitted.) Ferreira v. Pringle, 255 Conn. 330, 346-47 (2001). "When a court decides a jurisdictional question raised by a pretrial motion to dismiss, it must consider the allegations of the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal citation omitted.) Bagg v. Town of Thompson, 114 Conn.App. 30, 37-38 (2009).
Here both parties have submitted detailed factual affidavits with multiple documentary attachments. If those affidavits frame disputed issues of facts necessary to the determination of subject matter jurisdiction, due process requires that a trial-like hearing be held, in which an opportunity is provided to present evidence and to cross examine adverse witnesses. Standard Tallow Corp. v. Jowdy, 190 Conn. 48, 56 (1983).
B. Claims of Stanwich
Stanwhich Asset Acceptance Company, LLC ("Stanwich") is the sole plaintiff on the Stanwhich breach of contract claim (Second Count) and is co-plaintiff with the Carrington plaintiffs on the Third, Fourth, and Fifth Counts. Stanwich alleges in ¶ 94 of the Second Count that it is suing in its capacity as the "Depositor" (the party that put together the pool of mortgages and caused them to be transferred into the trust) under the 2006 Trust and the PSA that governs that trust. Section 6.05 of that agreement provides, in part: "The Depositor may, but is not obligated to, enforce the obligations of the Servicer under this Agreement and may, but is not obligated to, perform, or cause a designee to perform, any defaulted obligation of the Servicer, Under this Agreement, or exercise the rights of the Servicer under this Agreement . . ." There is no suggestion in the record that Stanwich is making any claim as a certificateholder or even that Stanwich now holds or has ever held any Certificates under any of the four trusts. The No Action Clause of the 2006 PSA on which the motion to dismiss is grounded limits the rights of a "Certificateholder" or a "Holders of Certificates" to initiate litigation in law or equity "upon, under, or with respect to this Agreement." There is no similar provision limiting the right of a Depositor to litigate, and the power to "enforce the obligations of the Servicer" bestowed by § 6.05 implies authority under the PSA to sue the Servicer, which is exactly what Stanwich is doing here.
The arguments why the claims of Stanwich should be dismissed is that Stanwich is a subsidiary of Carrington Investment Partners LLC, operates out of Carrington's offices, is represented by the same counsel as the Carrington plaintiffs, and in the Second and Third Counts is seeking damages for breach of and an order to enforce American Home's duties under the CE Certificateholder's Special Rights which inures to Carrington, and therefore Stanwich should be estopped from denying that its claims are subject to the No Action clause of the contract or, in other words, that Stanwich should be treated as a certificateholder bound by the No Action clause. This is an incongruous argument by the defendant in view of its position that in assessing the applicability of the No Action Clause to the Carrington plaintiffs the contractual language must be literally and strictly applied. Although not asked to do so, the court adopts that position here, as well. The No Action clause does not apply to a Depositor. It could have been applied to a Depositor by adding those words, but it does not. It also could have expanded the application of the clause's application to Certificateholder to include a Certificateholder "or any subsidiary of a certificateholder" but does not. The fact that Stanwich is seeking to enforce the Servicer's duties under the Class CE Certificateholder's Special Rights provision is entirely consistent with a Depositor's unqualified power to "enforce the obligations of the Servicer under this Agreement." Section 6.05 could have said "except the obligations of the Servicer to the Class CE Certificateholder under Section 14.02," but it does not.
The federal Southern District of New York arbitration clause estoppel cases cited by defendant are inapposite. Those cases are based on the strong federal policy favoring the enforcement of arbitration agreements. Neither case involved a party suing to enforce an obligation under a contract which gave it express authority to enforce that obligation. Defendant's estoppel argument may be grounds for a special defense to the claims of Stanwich, but in the context of a motion to dismiss where the court must indulge every presumption favoring jurisdiction, on the record presented there is no lack of standing for the Stanwich claims.
Chase Manhattan Mortgage Company-West v. Bankers Trust Company, 2001 WL 547224 at *2-3 (S.D.N.Y. May 23, 2001 and Thixomat, Inc. v. Takata Physics Int'l Co., 2001 WL 863556, *3 (S.D.N.Y. July 30, 2001).
The motion to dismiss is therefore denied as to the second Count and the Third, Fourth, and Fifth Counts insofar as the claims therein are made by Stanwich.
C. Satisfaction of Condition Precedent as an Element of Standing.
"Standing . . . implicates a court's subject matter jurisdiction, which may be raised at any point in judicial proceedings." Stamford Hospital v. Vega, 236 Conn. 646 (1996). "If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause . . ." (Internal quotation marks omitted; citation omitted.) Connecticut State Medical Society v. Oxford Health Plans, 272 Conn. 469, 475 (2005). Carrington argues that its failure to satisfy the 25% concurrence of Certificateholders to initiation of this action as required by the No Action clauses is not a matter of standing but rather should be raised as a special defense as in the case of a statute of limitations defense. But under Connecticut law a plaintiff lacks standing to sue when it has failed to satisfy contractually agreed upon conditions precedent to suit. Multi Service Contractors, Inc. v. Town of Vernon, 181 Conn. 445, 447 (1980). (When arbitration is a condition precedent to litigation, and plaintiff fails to pursue arbitration, plaintiff lacks standing and the court lacks subject matter jurisdiction.) It is true, as plaintiffs point out, that the Multi Service court found that the arbitration clause at issue in that case was not a condition precedent to suit and therefore did not apply the general principle, but that principle is clear:
Where a contract contains a stipulation that the decision of arbitrators on certain questions shall be a condition precedent to the right of action on the contract itself, such a stipulation will be enforced and, until arbitration has been pursued or some sufficient reason given for not pursuing it, no action can be brought on the contract. (Emphasis added.)
"No action can be brought . . ." is not the language of a special defense which goes to trial to be decided by the fact finder. It means the court lacks jurisdiction to entertain the lawsuit. See Homonnay v. Nusbaum, Docket No. CV05-4011886, Superior Court, Judicial District of Fairfield at Bridgeport (May 3, 2006, Arnold, J.) 2006 Ct.Sup. 8149 (Motion to dismiss granted for lack of subject matter jurisdiction when plaintiff failed to arbitrate as required by an arbitration clause that the court found to be a condition precedent to suit: "A court is deprived of subject matter jurisdiction in the arbitration context when the parties to a contract have agreed to arbitrate their disputes and such arbitration is a precedent to court action." citing Multi Service Contractors, Inc., supra).
The court finds that the No Action clauses of the four PSAs state conditions precedent to a Certificateholder bringing suit. "No Certificateholder shall have any right . . . to institute any suit . . . unless . . ." As said by the Multi Service Contractors, Inc., court in holding that the arbitration clause in that case was not a condition precedent to suit: "For arbitration to be a condition precedent, the agreement to arbitrate must expressly so stipulate or it must be necessarily implied from the language used." 181 Conn. at 447. The No Action clauses expressly so state.
D. Applicability of the No Action Clauses to the Carrington Claims.
Carrington plaintiffs argue that the CE Certificateholder's Special Rights which it claims American Home has violated, are not barred by the No-Action clauses, because they are a boilerplate general provision not intended to apply the plaintiffs' specially negotiated rights provision for special disclosures by the Servicer and the right to direct the activities of the Servicer with regard to REO dispositions. Implicit in this argument is a claim that the interaction between the CE Certificateholder's Special Rights provision and the No Action Clause presents an ambiguity calling for construction by the court beyond the plain meaning of the contractual language. Carrington argues that the No-Action clauses should be construed consistent with their very purposes which are designed to limit suits that protect rights belonging to all Certificateholders unless a significant number of Certificateholders support the suit. Since the right sought to be enforced here is unique to the Class CE Certificateholder, so the argument goes, it should not be limited by the more general No Action clauses. They cite Beal Savings Bank v. Somner, 865 N.E.2d 1210, 1213-14 (N.Y. 2007) for the proposition that "[A] contract should be read as a whole; and every part will be interpreted with reference to the whole; and, if possible will be so interpreted as to give effect to its general purpose." To find that general purpose plaintiffs direct the court to the American Bar Foundation commentary on its Model Debenture Indenture Provisions, particularly Section 507 which both parties agree is the ultimate model for the No Action clauses of the four PSAs. That drafter's commentary notes that "one purpose of the model clause is the expression of the principle of law that would otherwise be implied that all rights and remedies of the indenture are for the equal and ratable benefit of all holders." AMERICAN BAR FOUNDATION'S COMMENTARIES ON MODEL DEBENTURE INDENTURE PROVISIONS at 233 (1986). Carrington further argues that if the limitations set forth in the No Action clauses were to apply to the Class CE Certificateholder's special rights, it would create the absurd result that the Class CE Certificateholder would not have the ability to enforce the rights that it specifically bargained for in violation of the precept that courts should not interpret contracts in a way that places "one of the parties to the contract at the mercy of another" or leads "to an unjust result," citing Rubinger v. Int'l Telephone Telegraph Corp., 193 F.Sup. 711, 721-22 (S.D.N.Y. 1961).
The problem with these arguments is that the No Action clause warrants no interpretations and, even when read in conjunction with the Class CE Certificateholder's Special Rights provision, presents no ambiguity which would admit a court to the halls of extrinsic evidence. Although the special rights provision is unique in a way to the Class CE Certificateholder, it does not totally exclude consideration of the rights of all certificateholders of all classes. The key language says ". . . the Class CE Certificateholder has the right to direct the Servicer in performing its duties under this Agreement. The Servicer must accept such advice, subject to the duties of the Servicer set forth in this Agreement. (Emphasis added.) Among those duties of the Servicer which the special rights of the Class CE Certificateholder remain `subject to' are:
The Servicer shall service and administer the Mortgage Loans on behalf of the Trust Fund and in the best interests of and for the benefit of all Certificateholder (as determined by the Servicer in its reasonable judgment in accordance with the terms of this Agreement and the Mortgage Loans.) (Section 3.01)
References are to the three 2005 agreements. The 2006 agreement varies slightly.
CT Page 6166
The Servicer shall Manage, conserve, protect and operate each REO Property for the Certificateholders solely for the purpose of its prompt disposition and sale. (Section 3.23(a)(1). Subject to the time constraints set forth in Section 3.23(a) [approximately three years from acquisition as an REO property] each REO disposition shall be carried out by the Servicer in a manner, at such price and upon such terms and conditions as shall be normal and usual in its servicing standard. (Section 3.23(e))
The CE Certificateholder's special rights are sufficiently integrated with and subject to the general rights of all Certificateholders of all classes that the court sees no ambiguity or incongruity in having the CE Certificateholder's right to judicial enforcement of those rights tied to concurrence of enough Certificateholders of other classes to constitute a 25% minority of all Certificateholders. It is black letter law that when a contract clause is clear and unambiguous it must be applied as stated. WWW Assocs., Inc. v. Giancontieri, 565 N.Y.S.2d 440, 441-44 (N.Y. 1990) (when contract provision is clear, extrinsic evidence of intent or purpose is irrelevant). The No Action clause clearly states in its introductory phrase: "No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit action or proceeding in equity or at law upon or under or with respect to this Agreement unless . . ." As defendant points out all it would have taken to change the clear meaning of the provision to plaintiffs' requested construction would have been the insertion of the words "except the Class CE Certificateholder" after the words "No Certificateholder." The words are not there. To construe the provisions as plaintiffs request would violate the "cardinal principle of contract construction that all provisions of a contract should be given effect if possible." Galli v. Metz, 973 F.2d 145, 149 (2 Cir. 1992) ("Under new York law an interpretation of a contract that `has the effect of rendering at least one clause superfluous or meaningless . . . is not preferred and will be avoided if possible'"). Plaintiffs' interpretation would virtually write the No Action clause out of the contracts in violation of that principle.
E. There is No Rule of New York Law barring the Application of No-Action Clauses to Contract Rights Given Only to Some Investors
Since at least 1932 New York courts have upheld the validity and enforcement of no action clauses similar to that involved here. See Greene v. New York United Hotels, Inc., 260 N.Y.S. 405, 406 (N.Y.App.Div. 1932 (debenture holder's action against an issuer barred by a no action clause). The court said: "[t]he plaintiff as a bondholder holds his securities subject to the condition of this underlying trust agreement and can maintain an action only upon the conditions specified in the trust agreement." Id. at 407. A more recent case (2007) is Beal Savings Bank v. Sommer, supra, where the plaintiff was a 4.5% participant in a loan syndicate that had lent to a casino. When the casino defaulted, the other members of the syndicate collectively settled with the guarantor of the casino's obligations. The plaintiff did not join the settlement and brought suit against the guarantor who moved to dismiss on the grounds that the loan agreement only allowed the syndicate's Administrative agent or a two-thirds supermajority of the lenders to commence an action. The Court of Appeals affirmed the dismissal of the plaintiff's claim, holding that the loan agreement evidenced the parties' plan to "prevent the possibility of a multiplicity of suits by individual banks working at cross purpose — a situation that could be chaotic" ( Id. at 48) and "to protect all Lenders in the consortium from a disaffected Lender seeking financial benefit perhaps at the expense of other debtholders." ( Id. at 53.) Plaintiffs do not quarrel with the holdings of Greene and Beal or the many similar cases in the intervening 75 years alluded to by the defendant, but seeks to distinguish those cases, particularly Beal, being a fairly recent decision of New York's highest court, by saying that all those cases involved one lender trying to bring an action to exercise a right that was shared by all the lenders. "Nothing in Beal even remotely suggests that a certificateholder should be barred from exercising a unique, bargained-for right that belongs solely to the Certificateholder." (Plaintiff's memorandum, p. 18.) For the proposition that a New York Court would not apply a no action clause to a plaintiff like Carrington seeking to enforce a contract right unique to itself, plaintiffs cite a 2006 decision of the Delaware Chancery Court applying Utah law. In Cypress Assoc. LLC v. Sunnyside Cogeneration Assoc., Project, 2006 WL 668441, Civ.A 1607-N at *6 (Del.Ch. March 8, 2006) two types of bonds were issued to finance the construction of a solid waste facility. The Series A Bonds were entitled to fixed payments of principal and interest. By contrast, the plaintiff ("Cypress") purchased the Series B Bonds which derived their value from the right to share in the profits of the facility. Defendants (the "Borrowers") were required to obtain consent from 80% of the bondholders to make amendments to the agreements. The Borrowers proposed to amend the agreements in a manner that would cap the price at which the facility sold energy. Cypress — with 74.4% of the series B Bonds and more than 20% of the total bonds — opposed the amendment because it would adversely affect the facility's profits, and thus negatively affect the value of the Series B Bonds. Without Cypress's consent but with letters of authority from a majority (but less than 80%) of the bondholders, the Borrowers proceeded to amend the agreements anyway. Cypress filed suit to enforce its rights to block the amendments, and the Borrowers moved to dismiss on the grounds that the suit was barred by a no-action clause which required as a condition precedent to litigation that the holders of at least 51% of the bonds request the Trustee to bring the suit in their name.
Cypress had not complied with that condition precedent. Cypress argued: (1) that the 51% no action clause should not apply to its situation where it felt — and the court agreed — that its holdings of more than 20% were sufficient to block the passage of the amendment, and the amendment therefore was not properly enacted, but it would need the backing of 51% of the bonds (which it did not itself have) to get access to the court to set the amendment aside; and (2) that, in any event it would have been futile for it to seek the approval of other bondholders to get the requisite 51%. The court agreed with the futility argument and on that basis denied that part of the motion to dismiss, but said, in dictum, that the first argument had "color," remarking:
Indeed, in this respect, the obvious lack of a fit between the provisions of § 7.10 helps explain Cypress's argument as to why the provisions of § 7.10 of the Indenture [the 51% no-action clause] do not pertain to a claim under § 9.4 of the Loan Agreement [the 80% vote requirement to amend]. By its plain terms § 9.4 — when it applies — invests a minority of 20% or greater with the power to block an amendment favored by a majority of the Bondholders. A provision like § 7.10 that is designed to limit suits on behalf of all holders unless a majority supports the suit arguably does not speak at all to claims under provisions under § 9.4 which are brought only for the benefit of the dissenting minority.
Id. at *6
On this slender reed — a Delaware trial level court (even a renowned court on corporate law) applying Utah law commenting in dictum on an argument that it considered "colorful" and "arguably" valid — the plaintiffs ask this trial level court in Connecticut to declare that New York would attach a "lack of fit" exception to its 75-year doctrine of enforceability of no-action clauses similar to the clause here at issue. This court declines that invitation, especially here where, as previously discussed, the plaintiffs' claim of a unique right to dictate the Servicer's handling of REO properties is not clearly for plaintiff's sole benefit, being "subject to" the Servicer's contract obligations to all Certificateholers. Instead of not fitting at all, the suit might just be ill-fitting.
Plaintiffs tie the Cypress decision loosely to New York by saying that the Cypress court "relies on cases applying New York law, and noted `that this sound approach . . . would likely be adopted by the courts of Utah.'" (Plaintiff's memorandum, note 11.) The latter point [the reference to a sound approach likely to be adopted by Utah courts] clearly applies to the Cypress futility ruling and not the "no fit" dictum. As to citing New York authority, there are no New York state court decisions cited in the Cypress decision, and no citations at all on the point in dictum. One federal case from the Southern District of New York is cited in footnote 17 of Cypress, clearly related to the futility holding. It may be that some of the many cases cited in Cypress rely on New York authority. The court did not review those cases.
The situation calls to mind the U.S. Senate 60% "cloture" rule very much in the news these days. It takes a 51% Senate vote to pass a bill into law, but a 60% vote to end debate. Many commentators decry the arrangement but for many years significant national policy has thus been made or blocked, and it remains the law of the land.
F. Futility
New York law recognizes a "futility" exception to a plaintiff's obligation to comply with the conditions of a "no action" clause in a contract. (In Cypress, supra at *7 the Delaware Chancellor describes the futility exception as "a line of reasoning that draws on the law of derivative suits.") The New York rule, also drawing on the law relating to corporate shareholder derivative actions, is stated in Marx v. Akers, 644 N.Y.S.2d 121 (N.Y. 1996) (Demand [on directors to bring the action] is excused only when (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction." To apply this rule to a no-action clause requiring the concurrence of 25% of the Certificateholders the court would presumably be equating the Certificateholders to corporate directors, although the comparison lacks validity in many ways since directors have fiduciary duties not necessarily shared among co-investors. In the context of a futility exception to a no-action clause requirement of securing the concurrence of a certain percentage of fellow bondholders or certificateholders both plaintiffs and defendants have referred the court to the Delaware Cypress case, supra, which was decided on the futility point where the court focused not so much on the futility of seeking the approval of fellow bondholders to approach the Trustee, but the futility of approaching the Trustee at all since it had already decided to enact the amendment in question without the required 80% bondholder consent. Aside from the considerable issues of law, the court is not satisfied that there is an adequate factual record presented by the complaint and the affidavits to decide this point. Many facts relevant to futility are undeveloped, such as the precise directions given to the Servicer by Carrington which were allegedly disregarded, the amounts of the losses from sales of REO properties after the Servicer allegedly disregarded Carrington's directions, and whether or not those losses cumulated to the point that they were allocable to any Certificateholders with a higher priority than the Class CE Certificateholder, whether or not or to what extent American Home's decisions to disregard any direction from Carrington were the product of American Home's obligation to make advances to cover defaulted installments of principal and interest on the mortgages, or any requirement from its line of credit financiers to pay down principal on the line, what positions, if any, have been taken by the Trustees under the four Pooling and Servicing Agreements regarding the binding effect of Carrington's directions to the Servicer, and whether or not the notice to Certificateholders proposed in the January 16, 2009 letter of Atty. Kristine Bailey of Morgan Lewis representing Deutsche Bank National Trust Company, Trustee addressed to Atty Sean F. O'Shea representing Carrington, was ever circulated and, if so, the contents of that "notice," any attachments or enclosures thereto as invited by Atty. Bailey, and any responses to that notice received from any Certificateholders. Not all this evidence, if it exists and is available, may necessarily be admissible, and this is not an exclusive list, but these are some of the factual issues that come to mind. The court concludes that this is the type of situation contemplated by Standard Tallow, supra, mandating a "trial-like" evidentiary hearing regarding jurisdictional facts.
G. Applicability of the No Action Clauses to the Third, Fourth, and Fifth Counts
The court defers decision on these issues until after it has heard and decided the futility issue. If the conclusion is ultimately reached that compliance with the No Actions Clauses is excused under the futility doctrine, these issues may become moot.
Order
The motion to dismiss is denied as to the Second Count and the Third, Fourth, and Fifth Counts insofar as the claims therein are made by Stanwich Asset Acceptance Company, LLC. In all other respects the court defers decision on the motion to dismiss until the court has heard evidence as to jurisdictional facts at a hearing to be scheduled.
Counsel shall contact Court Officer Atty. Sharnet Jumpp at (203) 965-5753 to arrange scheduling. The court will be available for such a hearing on a mutually convenient date after April 12, 2010.