STEARNS, District Judge.
Before the court is Plumbers' Union Local
Consistent with the appellate mandate, on June 13, 2011, 2011 WL 2442145, the court gave leave to plaintiffs to take limited preliminary discovery on the surviving claims involving the First National Bank of Nevada (FNBN). See Dkt # 89. Armed with new facts unearthed during that discovery, plaintiffs attempt to remake their case for pursuing violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a)(2), 77o (2006), based on Nomura's alleged misstatements and omissions with respect to FNBN's underwriting of loans included in the purchased trusts.
The court is guided by the following language taken from the First Circuit's opinion.
Plumbers' Union Local No. 12 Pension Fund, 632 F.3d at 772-773 & n. 11.
Initially, the parties disagree over the pertinent standard to be applied. Cribbing from the First Circuit's opinion, defendants argue that plaintiffs must produce evidence of a "wholesale abandonment of underwriting standards" by FNBN. Thus, if FNBN had any underwriting standards at all, even shoddy ones, plaintiffs (as defendants see it) have no viable cause of action. In contrast, plaintiffs contend that all they must do is produce prima facie evidence supporting the critical contention made in their Complaint, namely if whether contrary to Nomura's affirmative representations, the Bank's loan underwriting guidelines were not primarily intended to evaluate a prospective borrower's ability to repay the loan.
In the court's view, the standard (as it has previously held) is neither as stringent nor as permissive as the polar positions staked out by the parties. To survive a Rule 12(b)(6) dismissal of the Section 11 claims, plaintiffs must plausibly demonstrate that Nomura (or its affiliates) misrepresented (or omitted) material information about FNBN's underwriting guidelines. See In re Evergreen
Taking heed of the First Circuit's admonition to provide "more substantial sources, including statements from confidential witnesses, former employees and internal e-mails," plaintiffs have attempted to flesh out five categories of evidence. First, they identify three "representative" no-document loans that FNBN originated. In each of these "No Doc" loans, the borrower's income was either unknown or unverified, or inadequate to make payments on the underlying mortgage, or if not, the borrower's debt to income ratio (DTI) belied any realistic probability that the borrower could keep up with mortgage payments over the life of the loan. Second, plaintiffs submit the declaration of Susan Wright, who underwrote loans at FNBN in 2006 and 2007 and generally corroborates the Complaint's allegations about FNBN's underwriting practices.
Nomura attacks this evidence as inconclusive at best, and, at worst, misleading. Nomura contends that: (1) the three "exemplary" loans singled out by plaintiffs were No Doc loans, and, by definition, did not require verification of a borrower's means to make payments
As this brief recital suggests, defendants' efforts to impugn plaintiffs' evidence is largely factual in nature and better fitted to a summary judgment motion than the relaxed pleading standard that attaches to a Rule 12(b)(6) motion. Consequently, the court will put these efforts aside as premature, and turn to defendants' alternative Rule 12(b) motion to dismiss.
"A motion to dismiss for lack of subject matter jurisdiction under Fed. R.Civ.P. 12(b)(1) is appropriate when the plaintiff lacks standing to bring the claim." Edelkind v. Fairmont Funding, Ltd., 539 F.Supp.2d 449, 453 (D.Mass.2008).
Katz v. Pershing, LLC, 806 F.Supp.2d 452, 456 (D.Mass.2011), quoting Ne. Erectors Ass'n of the BTEA v. Sec'y of Labor, Occupational Safety & Health Admin., 62 F.3d 37, 39 (1st Cir.1995).
To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must allege "a plausible entitlement to relief." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 559, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "While a complaint attacked by a Rule 12(b)(6) motion does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 555, 127 S.Ct. 1955 (internal quotation marks and citations omitted); see also Rodríguez-Ortiz v. Margo Caribe, Inc., 490 F.3d 92, 95-96 (1st Cir.2007). A complaint will also be dismissed where the statute of limitations bars its claims. See Fed.R.Civ.P. 12(b)(6).
In capsule form, defendants' argument is that plaintiff-Plumbers' Fund (one of the three remaining plaintiff pension funds) has no standing to bring this action because it suffered no loss causally connected to any of the alleged false misrepresentations. Moreover, because Plumbers' Fund was the only one of the three extant plaintiffs to have filed a complaint within the applicable one-year statute of limitations, the Complaints of the remaining two plaintiffs (Pipefitters' Fund and NECA-IBEW), which are piggy-backed on the Plumbers' Fund Complaint, necessarily fail as well. See In re Elscint, Ltd. Sec. Litig., 674 F.Supp. 374, 378 (D.Mass.1987) ("[I]t would be improper to allow the filing of a class action by nominal plaintiffs who are wholly inadequate to represent the asserted class to have the effect of tolling limitation to permit the otherwise untimely intervention of proper class representatives.").
Defendants' standing argument is two-fold. First, defendants contend that Plumbers' Fund lacks standing to sue on the 2006-AP1 offering because it did not purchase any Certificate in that offering.
Plaintiffs, for their part, insist that defendants have mistakenly labeled their argument as one of standing. Defendants cannot contest Plumbers' standing, they argue, by challenging Plumbers' failure to allege loss causation when loss causation is not a part of the prima facie case in either a Section 11 or Section 12 Securities Act lawsuit. See In re Evergreen, 705 F.Supp.2d at 94 ("Loss causation is not, however, an element of a prima facie case under Sections 11 and 12 and, accordingly, the plaintiffs are under no obligation to plead it.").
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145, 157 (2d Cir.2012).
Instead, the absence of loss causation (sometimes termed "negative loss causation") is an affirmative defense. See McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044, 1048 (2d Cir.1995) ("[W]here a defendant proves that the decline in the value of the security in question was not caused by the material omissions or misstatements in the registration statement, plaintiff is not entitled to recover any damages."); see also In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 272 F.Supp.2d 243, 253 (S.D.N.Y. 2003) ("It is an affirmative defense under Sections 11 and 12 that if the amounts recoverable represent other than the depreciation in value of the subject security resulting from such part of the prospectus, oral communication, or registration statement, with respect to which the liability of the defendant is asserted then such amount shall not be recoverable.").
Nonetheless, "occasionally courts have dismissed claims under Sections 11 and 12 on the pleadings when it was `apparent on the face of the complaint' that the plaintiffs would be unable to establish loss causation." In re Evergreen, 705 F.Supp.2d 86, 94 (D.Mass.2010), citing In re Merrill Lynch, 272 F.Supp.2d at 253-254. According to defendants this is one of those cases where the grounds for dismissal are apparent. Defendants argue that at the time Plumbers' Fund sold the 2006-AF1
Plaintiffs respond that Akerman does not operate as a bar to their claims. In a similar case, the Southern District of New York granted a motion to reconsider its initial decision to limit any recovery of losses to the period after a corrective disclosure was made. In re WRT Energy Sec. Litig., 2005 WL 2088406 (S.D.N.Y. Aug. 30, 2005). Relying on Akerman, the original Order had held that "a decline in the value of securities prior to disclosure of the material misstatement or omission is not chargeable to the defendants." Id. at *1. In vacating this holding, the court explained that
Id. (citations omitted). The court concluded that
Id. at *2, citing Akerman, 810 F.2d at 343.
Moreover, plaintiffs argue that the Complaint does allege other corrective disclosures that came well before the November 1, 2007 sale.
Finally, there is the issue of the claims brought by Pipefitters' Fund and NECA-IBEW. Under Sections 11 and 12(a)(2), a plaintiff must bring a claim "within one year after the discovery of the untrue statement" upon which the claim is premised. 15 U.S.C. § 77m. Defendants contend that Pipefitters and NECA-IBEW were on inquiry notice of the claims they seek to assert at least as of November 13, 2007, when the first corrective disclosure
In American Pipe, proposed class members sought to intervene in an antitrust class action after a district court denied class certification for lack of numerosity. The district court concluded that the statute of limitations had expired and denied the motions to intervene as untimely. The Supreme Court reversed, holding that "the commencement of the original class suit tolls the running of the statute for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status." Id. at 553, 94 S.Ct. 756. The Court reasoned that a contrary rule requiring potential class members to "successful[ly] anticipat[e] ... the determination of the viability of the class" would "induce[ ] [them] to file protective motions to intervene or to join in the event that a class was later found unsuitable," and thereby "deprive Rule 23 class actions of the efficiency and economy of litigation which is a principal purpose of the procedure." Id. at 553-554, 94 S.Ct. 756. The Court further stated that "[t]his rule is in no way inconsistent with the functional operation of a statute of limitations," as it permits tolling only of claims of which the defendant was timely put on notice by virtue of the putative class complaint. Id. at 554-555, 94 S.Ct. 756.
Defendants concede that the American Pipe rule tolls the statute of limitations on claims that Plumbers' Fund had standing to bring, which, as the court concluded above, includes claims pertaining to the 2006-AF 1 Certificate. See supra. But whether the rule applies to claims for which the Plumbers' Fund lacked standing — namely, the 2006-AP1 Certificate, which Plumbers' Fund did not buy — is a subject of much debate. Neither the Supreme Court
Applying the tolling rule to Pipefitters' and NECA-IBEW's 2006-AF1 Certificate claims advances the policies of efficiency and economy served by Rule 23 and American Pipe. As indicated above, the American Pipe tolling rule is intended to give a disincentive to putative class members from filing duplicative, protective filings. Under the outcome advocated by defendants, proposed class members would be forced to do just that in order to preserve their claims in the event that the class representative(s) was later found to lack standing, because of an internal technical failure (in this case the failure to purchase a particular certificate in a raft of related securities offerings) that would not be as apparent to a putative class member as would be the subject matter of the suit itself. The court is loath to "punish class members for relying on the very thing Rule 23 is intended to provide: an efficient method for resolving claims common to a class of individuals without the need for wasteful and duplicative litigation." In re Initial Pub. Offering Sec. Litig., 2004 WL 3015304, at *5 (S.D.N.Y. Dec. 27, 2004).
Application of the tolling rule in this case further comports with "the polic[y] of ensuring essential fairness to defendants." Am. Pipe, 414 U.S. at 554, 94 S.Ct. 756 (internal quotation marks omitted). The original complaint filed by Plumbers' Fund included the claims pertaining to the 2006-AP1 Certificate. "[D]efendants," therefore, "are not being blindsided or forced to defend against stale claims." In re Morgan Stanley, 810 F.Supp.2d at 669. To the contrary, "the complaint unquestionably apprised them `[w]ithin the period set by the statute of limitations ... [of] the essential information necessary to determine both the subject matter and the size of the prospective litigation.'" Id., quoting Am. Pipe, 414 U.S. at 555, 94 S.Ct. 756; see also Rose v. Arkansas Valley Envtl. & Util. Auth., 562 F.Supp. 1180, 1193 (W.D.Mo.1983) (reasoning that a putative class action that is denied for lack of standing of the representative may be more likely to give defendants actual notice of the claims of individual class members than one denied for lack of typicality or commonality).
While the First Circuit ultimately affirmed this court's conclusion that Plumbers' Fund lacked standing to pursue the 2006-AP1 Certificate claims, the issue, as the Court emphasized, was neither "straightforward" nor "well settled." Plumbers' Union Local No. 12 Pension Fund, 632 F.3d at 768. Indeed, in its opinion the First Circuit canvassed authority suggesting that "the class action should embrace defendants against whom no named plaintiff has a claim so long as the claims are essentially of the same character as the claim against a properly named defendant." Id. at 769-770 (collecting cases). Given this authority and the overlap in the conduct underlying the 2006-AP 1 and 2006-AF1 claims, the putative class members were not unreasonable in believing prior to the rulings of this court and the First Circuit that Plumbers' Fund standing extended to certificates beyond the 2006-AF1 Certificate that it had purchased.
In sum, the court finds that pursuant to the tolling rule of American Pipe, Pipefitters' and NECA-IBEW's claims were timely.
For the foregoing reasons, plaintiffs' motion to proceed with the litigation is ALLOWED. Defendants' renewed motion
SO ORDERED.
Defendants move pursuant to 28 U.S.C. § 1292(b) for certification of an interlocutory appeal of this court's October 1, 2012 Memorandum and Order denying Defendants' Renewed Motion to Dismiss. Defendants specifically seek review of the court's determination that under the circumstances of this case, and consistent with the rule announced in American Pipe Construction Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), the filing of a putative class action by plaintiff Plumbers' Union Local No. 12 Pension Fund (Plumbers' Fund), which lacks standing to sue on the 2006-AP 1 offering, had the effect of tolling the statute of limitations for the 2006-AP I claims of plaintiffs Plumbers & Pipefitters' Welfare Educational Fund (Pipefitters) and NECA-IBEW Health & Welfare Fund (NECA). The motion will be GRANTED.
In deciding whether to grant a motion for leave to file an interlocutory appeal, the court must consider "whether (1) `the order involves a controlling question of law' (2) `as to which there is substantial ground for difference of opinion,' and (3) whether `an immediate appeal from the order may materially advance the ultimate termination of the litigation.'" In re Bank of New England, 218 B.R. 643, 652 (B.A.P. 1st Cir.1998), quoting 28 U.S.C. § 1292(b). While interlocutory appeals are granted "sparingly and only in exceptional circumstances," this court is of the opinion that this is one of those "rare cases [that] qualif[ies] for the statutory anodyne." In re San Juan DuPont Plaza Hotel Fire Litig., 859 F.2d 1007, 1010 n. 1 (1st Cir.1988) (internal quotation marks and citation omitted).
As set forth in the court's previous Memorandum and Order,
Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,
Given the controlling nature of this important and unsettled question of law, the court concludes that this litigation would "benefit from [its] prompt resolution" by the Court of Appeals. Camacho v. Puerto Rico Ports Auth., 369 F.3d 570, 573 (1st Cir.2004).
For the foregoing reasons, defendants' motion for certification of an interlocutory appeal is GRANTED. Further proceedings before this court are STAYED pending the Court of Appeals' disposition of the proposed appeal.
SO ORDERED.
Plaintiffs move for reconsideration of the court's October 30, 2012 Order granting defendants' Motion for Certification Pursuant to 28 U.S.C. § 1292(b) for an interlocutory appeal of its October 1, 2012 Memorandum and Order denying defendants' Renewed Motion to Dismiss. The motion will be DENIED.
The court has twice articulated its view that the applicability vel non of the American Pipe tolling rule presents a controlling question of law about which there is substantial ground for difference of opinion and is unpersuaded by plaintiffs' arguments to revise this conclusion. Plaintiffs' case for reconsideration relies primarily on the contention that the question is not controlling because "First National Bank of Nevada ([]FNBN[]) originated loans in both of the trusts at issue herein, thereby creating a common set of `concerns' which conferred standing on Plumbers' Union Local No. 12 to sue on both trusts." Pls.' Mot. at 2. This argument, nowhere found in plaintiffs' briefing in opposition to defendants' Renewed Motion to Dismiss, is flatly contradicted by the First Circuit's previous ruling on standing in this case. See Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 770-771 (1st Cir.2011) (recognizing the possibility of an exception to the requirement that named plaintiffs must themselves possess claims against each defendant but concluding that "[i]n our case ... the necessary identity of issues and alignment of incentives is not present"). As defendants point out, "[p]laintiffs have alleged that FNBN was a `key originator' of loans that backed offerings of 2006-AP1, 2006-AF1, and 2006-AR[4] Certificates." Defs.' Opp. at 9, quoting Compl. ¶ 83; see also Compl. ¶¶ 69. Thus, "[i]f [plaintiffs' reading of the First Circuit's decision were correct, then their claims on all three offerings should still be in the case...." Defs.' Opp. at 9.
The court is similarly unconvinced by plaintiffs' argument that the proposed appeal will not materially advance the ultimate termination of the litigation. Resolution of the certified question will conserve court, party, and nonparty time and resources by clarifying the proper scope of the action. The court further declines to undermine these intended benefits by lifting the stay imposed by its October 30, 2012 Order.
For the foregoing reasons, plaintiffs' Motion for Reconsideration is DENIED. Further proceedings before this court will
A second email on which plaintiffs rely (Ex. 4), from Lisa Sleeper, states, "[m]athematically, a lot of our borrowers would not or could not actually own a home much less pay rent, pay for food, etc." Sleeper continued, "[w]e have also found that in [California] there are usually a few parties living within properties in order to be able to afford the housing there. [California] is truly a beast within itself." This email is responsive to a chain of at least five emails that question whether a painter living in the Bay Area could really be making $95,000 a year. One underwriter explains to another that the cost of living in the Bay Area is extremely high, and this "painter" was actually a senior painter for a small company and had owned his own home previously. To check the painter's income, one underwriter appears to suggest pulling the business license information from the California contractor's website. Sleeper sent another email several months later (Ex. 25), in which she complains about the lack of quality control and the mixed messages on the subject being sent by senior management.
Id. ¶¶ 169-173.
