11-1683-cv & 11-1684-cv
New Jersey Carpenters Health Fund et al. v. RALI Series 2006-QO1 Trust et al.
Boilermaker Blacksmith National Pension Trust et al. v. Harborview Mortgage Loan Trust 2006-4 et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY
PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New
York, on the 30th day of April, two thousand twelve.
PRESENT: GERARD E. LYNCH,
JOHN M. WALKER, JR.,
CHRISTOPHER F. DRONEY,
Circuit Judges.
————————————————————————
NEW JERSEY CARPENTERS HEALTH FUND,
on behalf of itself and all others similarly situated,
NEW JERSEY CARPENTERS VACATION FUND,
BOILERMAKER BLACKSMITH NATIONAL PENSION TRUST,
on behalf of themselves and all others similarly situated,
Plaintiffs-Appellants,
v. No. 11-1683-cv
RALI SERIES 2006-QO1 TRUST, RALI SERIES 2006-QO2 TRUST, RALI SERIES
2006-QO3 TRUST, RALI SERIES 2006 QO4 TRUST, RALI SERIES 2006-QO5
TRUST, RALI SERIES 2006-QO6 TRUST, RALI SERIES 2006-QO7 TRUST, RALI
SERIES 2006-QO10 TRUST, RALI SERIES 2007-QO1 TRUST, RALI SERIES
2007-QO2 TRUST, RALI SERIES 2007-QO3 TRUST, RALI SERIES 2007-QO4
TRUST, RALI SERIES 2007-QO5 TRUST, GOLDMAN SACHES & COMPANY,
CITIGROUP GLOBAL MARKETS INCORPORATED, UBS SECURITIES, LLC,
Defendants-Appellees.
————————————————————————
BOILERMAKER BLACKSMITH NATIONAL PENSION TRUST,
NEW JERSEY CARPENTERS VACATION FUND,
on behalf of itself and all others similarly situated,
Plaintiffs-Appellants,
v. No. 11-1684-cv
HARBORVIEW MORTGAGE LOAN TRUST 2006-4, HARBORVIEW MORTGAGE
LOAN TRUST 2006-5, HARBORVIEW MORTGAGE LOAN TRUST 2006-9, FITCH
RATINGS, RBS HOLDINGS USA INC., RBS ACCEPTANCE INC., RBS FINANCIAL
PRODUCTS INC., RBS FINANCIAL PRODUCTS INC., RBS SECURITIES INC.,
Defendants.
THE ROYAL BANK OF SCOTLAND GROUP, PLC, GREENWICH CAPITAL
HOLDINGS, INC., GREENWICH CAPITAL ACCEPTANCE, INC., GREENWICH
CAPITAL MARKETS, INC., GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC., ROBERT J. MCGINNIS, CAROL P. MATHIS, JOSEPH N. WALSH, IIII, JOHN
C. ANDERSON, JAMES C. ESPOSITO, MOODY’S INVESTORS SERVICE,
INCORPORATED, THE MCGRAW-HILL COMPANIES, INC., RBS SECURITIES,
INC., FKA GREENWICH CAPITAL MARKETS, INC., d/b/a RBS GREENWICH
CAPITAL,
Defendants-Appellees.
————————————————————————
FOR APPELLANTS: JOEL PAUL LAITMAN, Cohen Milstein Sellers & Toll,
PLLC, New York, New York, for Appellants in both cases.
FOR APPELLEES: JEFFREY A. LIPPS, Carpenter Lipps & Leland LLP,
Columbus, Ohio, DAVID E. POTTER, Lazare Potter &
Giacovas LLP, New York, New York, for RALI Defendants-
Appellees in No. 11-1683.
WILLIAM G. MCGUINNESS, Fried, Frank, Harris, Shriver
& Jacobson LLP (David E. Hennes, Alfred L. Fatale III, on
the brief), for Defendants-Appellees in No. 11-1683 Citigroup
Global Markets Inc., Goldman, Sachs & Co., and UBS
Securities, LLC.
THOMAS C. RICE (Alan C. Turner, on the brief), Simpson
Thacher & Bartlett LLP, New York, New York, for Appellees
in No. 11-1684.
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Appeals from the United States District Court for the Southern District of New York
(Harold Baer, Jr., Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the judgments of the district court are AFFIRMED.
These two cases, No. 11-1683 (“RALI”) and No. 11-1684 (“Harborview”), were
argued together, both in the district court and for this appeal, but not formally consolidated.
Because the cases involve facts and issues that are for our purposes identical, we resolve both
in this order.
In each case, pension fund lead plaintiffs (“Plaintiffs”) seek to certify a class of
investors in mortgage-backed securities (“MBS”) that lost substantial value in the months
after they were issued. Plaintiffs allege that the defendants in each case made false and
misleading statements in the prospectuses of various MBS, and they seek to recover under
Sections 11, 12, and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l & 77o. The
district court denied Rule 23(b)(3) class certification in both cases; in a single opinion, it
found that individual, not common, issues would predominate and that class adjudication
would not be superior to individual actions. N.J. Carpenters Health Fund v. Residential
Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011). We permitted an appeal of the denial under
Federal Rule of Civil Procedure 23(f). The sole question is whether the district court
properly denied certification of the proposed classes. We assume familiarity with the facts
of the case, which are laid out in detail in the district court’s opinion.
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BACKGROUND
The general features of mortgage-backed securities – and their role in the financial
crisis of 2008 – are familiar in this Circuit. See, e.g., In re Lehman Bros. Mortgage-Backed
Securities Litigation, 650 F.3d 167, 171-73 (2d Cir. 2011); Greenwich Fin. Svcs. Distressed
Mortg. Fund 3 LLC v. Countrywide Fin. Corp., 603 F.3d 23, 24-26 (2d Cir. 2010). In both
of the instant cases, the lead plaintiffs are pension funds that purchased MBS from issuers.
The RALI case covers 59 separate offerings from March 28, 2006 to October 9, 2007;
Harborview covers 15 offerings from April 26, 2006 through October 1, 2007.
Each MBS was divided into tranches and structured so that more junior tranches
absorbed shortfalls in mortgage payments before more senior tranches. Registration
statements for each MBS laid out underwriting guidelines that the issuers or subcontractors
had supposedly followed in selecting mortgages for each security. The underwriting
guidelines were very similar for each MBS. Ratings agencies awarded AAA credit ratings
to more than 95% of the RALI tranches and 90% of the Harborview tranches.
In the months following each issue, however, the default and delinquency rates in the
underlying mortgages soared. Eventually, based on these defaults, the ratings agencies
downgraded most of the tranches. Plaintiffs contend that the eventual defaults show that the
issuers and subcontractors had not in fact followed the underwriting guidelines. If that is so,
then the registration statements contained false statements at the time of purchase, triggering
prima facie Section 11 liability. After filing complaints alleging the above facts and
conducting some discovery, including expert reports on both sides, Plaintiffs moved in each
case to certify a class. The district court denied certification, leading to these appeals.
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DISCUSSION
We review a district court’s class certification decision for abuse of discretion, both
as to its determination of each individual Rule 23 requirement, and as to its overall balancing
of the Rule 23 factors. See In re Initial Pub. Offerings Secs. Litig., 471 F.3d 24, 31-32 (2d
Cir. 2006) (“IPO”). “To the extent that the district court’s ruling on an individual Rule 23
requirement is supported by a finding of fact, that finding is reviewed under the ‘clearly
erroneous’ standard. To the extent such a ruling involves an issue of law, we review it de
novo.” Brown v. Kelly, 609 F.3d 467, 475 (2d Cir. 2010), citing IPO, 471 F.3d at 40-41.
The party seeking class certification (here, the lead plaintiffs in each case) bears the
burden of demonstrating that each of Rule 23’s requirements is satisfied; facts requisite for
such a demonstration must be shown by a preponderance of the evidence. See Myers v.
Hertz Corp., 624 F.3d 537, 547 (2d Cir. 2010). Predominance is the key Rule 23 requirement
in dispute here and the only one we address. “Class-wide issues predominate if resolution
of some of the legal or factual questions that qualify each class member’s case as a genuine
controversy can be achieved through generalized proof, and if these particular issues are
more substantial than the issues subject only to individualized proof.” UFCW Local 1776
v. Eli Lilly & Co., 620 F.3d 121, 131 (2d Cir. 2010) (internal quotation marks omitted).
Plaintiffs argue principally that the district court applied a novel and incorrect legal
standard in its predominance determination. We find no legal error. Nor do we find error
in the district court’s factfinding or in its discretionary determination that individual issues
predominated.
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Plaintiffs assert claims under Sections 11, 12 and 15 of the 1933 Securities Act, but
because Section 12 and 15 claims are essentially derivative of Section 11 claims, we need
discuss only Section 11. A prima facie case under Section 11 requires proof that a
registration statement contained material misstatements or omissions. McMahan & Co. v.
Wherehouse Entertainment, Inc., 65 F.3d 1044, 1047 (2d Cir. 1995); see also 15 U.S.C.
§ 77k(a). Because it is not a fraud provision, Section 11 does not require a culpable mental
state on the part of the security issuer. See Greenapple v. Detroit Edison Co., 618 F.2d 198,
203 & n.9 (2d Cir. 1980). But Section 11 claims are subject to an affirmative defense – the
issuer may “prove[] that at the time of [] acquisition [the purchaser] knew of such untruth or
omission.” 15 U.S.C. § 77k(a).1 The statutory language leaves no ambiguity: For the
knowledge affirmative defense to succeed on the merits, the defendant must show the
purchaser’s actual knowledge of the specific untruth or omission. Id.; see also IPO, 471 F.3d
at 43.
But the merits of this case are not before us. As in IPO, the question before us (as it
was before the district court) is not the merits question of whether defendants have shown
purchasers’ knowledge, but the certification question of whether common liability issues
predominate over individual knowledge defenses. See IPO, 471 F.3d at 43-44 & n.14. The
1
Because the language of Section 12 differs as to knowledge, we place the burden on
a plaintiff in a Section 12(a)(2) claim to show lack of knowledge. 15 U.S.C. § 77l; Healey
v. Chelsea Res., Ltd., 947 F.2d 611, 617 (2d Cir. 1991) (requiring the plaintiff to prove “that
he had no knowledge of the untruth or omission” that formed the basis of his Section 12
claim). This does not change our analysis at the certification stage.
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district court held that to determine whether each purchaser had actual knowledge of the
specific untruths or omissions at the time of its purchase would require many individualized
inquires, outweighing the common issues in the case. 272 F.R.D. at 168-70. Recognizing
that we are “noticeably less deferential when the district court has denied class status than
when it has certified a class,” Brown, 609 F.3d at 485 (internal quotation marks omitted), we
nonetheless cannot on this record hold the district court to have abused its discretion in
concluding that individual issues would predominate.
Defendants’ evidence of knowledge, which surely would not have sufficed to prove
each knowledge defense on the merits, nonetheless indicated that individual knowledge
inquiries might be necessary. The court had a limited record without the benefit of discovery
of absent potential class members’ records. On the basis of this limited evidence, it
permissibly determined that knowledge defenses would require extensive individual
proceedings. Perhaps another inference could have been drawn, and perhaps a different
inference might be drawn on a renewed motion on a fuller record. But “[i]n reviewing
findings for clear error, we are not allowed to second-guess the trial court’s choice between
permissible competing inferences, because in that case, the factfinder’s choice cannot be
clearly erroneous.” Arch Ins. Co. v. Precision Stone, Inc., 584 F.3d 33, 39 (2d Cir. 2009)
(internal quotation marks and ellipses and citations omitted).
Furthermore, the district court found the balance tipped in favor of the individual
issues not only because of the evidence of purchaser knowledge, but also because of the
cumbersome class definitions proposed in both cases. Plaintiffs did not select a “cohesive”
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class or set of subclasses. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623 (1997). For
example, counsel represented at oral argument that “most of” or “ninety percent” of the
purchasers of each security bought on the date of issue directly from the issuers. Despite the
availability of a narrower class definition focused on this more readily identifiable, more
homogeneous group, Plaintiffs chose to include in the class definitions any purchaser from
the initial offering to the present day. Under the proposed class definitions in each case, the
district court found that purchasers of each security who purchased at different times would
have had available different levels of public information. 272 F.R.D. at 169-70. Because
public information could constitute circumstantial evidence of individual purchaser
knowledge, the defendants would have stronger or weaker evidence of purchaser knowledge
depending on purchase timing. Id. Such predicted variation supported the judge’s
conclusion that individual knowledge inquiries would be required. Furthermore, because of
the differences in purchase timing, the chosen class definition also removed the possibility
that the knowledge defense could be adjudicated on a class basis using common publicly
available evidence. Cf. Public Employees’ Ret. Sys. of Mississippi v. Merrill Lynch & Co.,
Inc., 277 F.R.D. 97, 119 (S.D.N.Y 2011). This further tipped the balance away from
common issues and toward individual ones.
In this light, it is clear that Plaintiffs’ argument that the district court committed
reversible error by analyzing the class’s cohesiveness under superiority rather than
predominance is meritless. First, there is no independent requirement of cohesiveness – that
element merely summarizes the Rule 23(b)(3) predominance factors. See Amchem, 521 U.S.
8
at 623. Second, neither Rule 23(b)(3) nor our caselaw indicates that the court may not
analyze the (b)(3) factors together. See Fed. R. Civ. P. 23(b)(3) (requiring predominance and
superiority and enumerating factors “pertinent to these findings”) (emphasis added). Here,
the district court’s analysis of cohesiveness – pointing out that differently situated class
members might have competing interests in controlling the litigation, 272 F.R.D. at 171 –
was not an abuse of discretion. See Fed. R. Civ. P. 23(b)(3)(A), (D); see also Fed. R. Civ.
P. 23(a)(3), (4).
As this discussion reveals, Plaintiffs’ assertion that the district court made a broad
ruling that undermines the potential for any class certification in cases of this type is
incorrect. The district court here did no more than analyze the particular facts confronting
it on the limited record available in this case. We note that the same district judge has since
certified a class in a similar litigation. See Public Employees’ Retirement System of
Mississippi v. Goldman Sachs Group, --- F.R.D. ----, 2012 WL 336146 (S.D.N.Y. Feb. 3,
2012). Two other district courts have also certified such classes. See Merrill Lynch & Co.,
Inc., 277 F.R.D. 97; New Jersey Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2011
WL 3874821 (S.D.N.Y. Aug. 16, 2011). Without opining on the propriety of these decisions,
we note that both grants and denials of class certification in MBS litigation may fall within
the range of a district court’s discretion. Thus, Plaintiffs’ effort to dramatize the nature and
consequences of the district court’s ruling overreaches the facts.
Plaintiffs also argue that the district court erred by finding that superiority was not
met. Because the district court did not abuse its discretion in finding that common issues did
9
not predominate over individual ones, and because the party seeking class certification must
show all of the Rule 23 factors, Myers, 624 F.3d at 547, we need not reach this argument.
CONCLUSION
The district court did not abuse its discretion in denying class certification on this
record. We note, however, that our review is limited to the class definition that the judge
rejected, and to the record as it stood at the time of this motion to certify. Our determination
on this Rule 23(f) appeal is therefore without prejudice to further motion practice in the
district court. Cf. Fed. R. Civ. P. 23(c)(1)(C) (“An order that grants or denies class
certification may be altered or amended before final judgment.”).
For the foregoing reasons, the district court’s denial of class certification in both of
these cases is AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
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