Mortgage-backed securities litigation has been very good for
some of the most obscure laws on the books. I've already
mentioned the starring role the unheralded statute of repose has
taken in bank motions to dismiss securities claims by MBS
investors, and we all know about Bank of America's ingenious (or
nefarious, depending on your perspective) use of New York's
Article 77 -- a proceeding so rarely invoked that the judge
assigned the case had to look it up -- to seek approval of its
proposed $8.5 billion settlement with investors in Countrywide
mortgage-backed notes. Today I bring you the Edge Act, a
hundred-year-old law that grants federal-court jurisdiction to
civil suits against any U.S corporation in which claims arise
from international banking or banking transactions in a U.S.
You're probably wondering what the Edge Act has to do with
U.S. MBS trusts in which securities are backed by U.S.-issued
mortgages on properties in the United States. Well, it turns out
that a handful of the mortgages backing BofA securities actually
originated in the Virgin Islands and Guam. We are talking about
a very small handful. According to a brief AIG submitted to the 2nd Circuit Court of Appeals, of the 1.7 million mortgages
underlying the 349 MBS trusts at issue in AIG's $10 billion case
against Bank of America, exactly 8 mortgages in 3 trusts
originated in U.S. territories.
Nevertheless, after BofA's lawyers at Munger, Tolles & Olson
and Countrywide's counsel at Reed Smith removed AIG's suit from
New York State Supreme Court to federal court in Manhattan, they
countered a remand motion by AIG counsel at Quinn Emanuel
Urquhart & Sullivan with a brief citing the Edge Act. "Neither
the case law nor the statute ... contains a requirement that the
case be entirely, primarily, or even in substantial part
premised on foreign banking," they argued. The Edge Act comes
into play, BofA said, "if any part of it arises out of
transactions involving international or foreign banking."
U.S. District Judge Barbara Jones agreed. She denied the
remand motion, and then denied AIG's motion for reconsideration.
Jones said the number of mortgages issued from U.S. territories
doesn't matter. She also rejected AIG's argument that Bank of
America N.A. -- the nationally chartered bank that gave the
defendants standing to assert the Edge Act -- wasn't involved in
issuing the Guam and Virgin Islands mortgages. The judge did,
however, grant AIG's motion to certify the issue for appeal to
the 2nd Circuit. On Wednesday, the appeals court agreed to hear
If AIG wins at the 2nd Circuit, its BofA case would go back
to New York state court -- except that part of the case is no
longer before Jones in Manhattan federal court. Countrywide
successfully petitioned to have AIG's claims against it
transferred to the Countrywide MBS multidistrict litigation
overseen by U.S. District Judge Mariana Pfaelzer in Los Angeles
federal court. Pfaelzer declined to stay the case while the 2nd
Circuit decided whether to grant AIG's jurisdictional appeal. In
fact, as I've reported, she's already poised to rule on
Countrywide's motion to dismiss AIG's fraud claims. And given
Pfaelzer's track record in the Countrywide MDL, the ruling
probably won't favor AIG.
AIG counsel Michael Carlinsky of Quinn told me he intends to
file a formal motion with Pfaelzer to stay the Countrywide case,
now that the 2nd Circuit has agreed to hear AIG's appeal.
Carlinsky didn't say this, but I'd bet his client would love to
get its Countrywide case out of Pfaelzer's courtroom and back to
New York state court.
But even if AIG prevails at the 2nd Circuit, that's not a
sure thing. Here's the complication: Bank of America and
Countrywide have argued that the Edge Act isn't the only reason
AIG's case belongs in federal court. Some of the mortgage
issuers whose loans were packaged into BofA, Merrill, and
Countrywide mortgage-backed notes are bankrupt. The BofA
defendants argue that because they have indemnification claims
in those bankruptcies, AIG's case must proceed in federal court
because it's related to a federal court bankruptcy.
AIG didn't specifically ask the 2nd Circuit to consider the
bankruptcy argument against remand, but now that the appeals
court has agreed to hear the case, it may raise the issue in the
next round of briefs. If AIG persuades the appeals court that
Bank of America has neither Edge Act or bankruptcy-related
reasons to maintain federal-court jurisdiction, will Pfaelzer be
bound by that ruling?
A BofA spokesman declined to comment.
(Reporting by Alison Frankel)
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