Yesterday, the Second Circuit Court of Appeals issued its decision on whether the challenges to the Bank of America RMBS settlement should be heard in federal or state court.  We posted recently about the February 15, 2012 oral argument that focused on whether the settlement challenge was entitled to federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”) or whether it fell into an exception to CAFA for cases involving claims “relate[d] to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security.”  The Second Circuit reversed Judge Pauley, finding that the securities exception applied and the case must be remanded to state court.

Chief Judge Dennis Jacobs authored the 29-page opinion.  The court first found that Bank of New York Mellon, as trustee, “asks for a construction of the [Pooling and Servicing Agreement] and an instruction that its planned course of action complies with its obligations under that document and the law of trusts…”  The court characterized this as a “declaration.”   The court relied on its prior decisions in (i) Greenwich Financial v. Countrywide, which the court characterized as holding that a “suit by security holders attempting to enforce the terms of a [Pooling and Servicing Agreement] fit within [the securities exception]; ” and (ii)  Estate of Pew v. Cardarelli, which the court found “drew no distinction between suits that relate to ‘the terms of investments that create and define securities,’ and those that relate to the ‘duties on persons who administer securities.’” The court found that there was no difference between Bank of New York Mellon’s request for a declaration and the precedent cases involving proceedings to enforce a Pooling and Servicing Agreement:

As Walnut Place points out, our previous cases interpreting [section] 1453(d)(3) have dealt with suits enforcing rights, duties, and obligations that relate to or are created by or pursuant to a security; however, the statutory language equally bears upon a declaration as to what those rights, duties and obligations may be. Cases that declare them (so that they can be realized) “relate” to them to the same extent that cases that enforce them.

The court also rejected investor Walnut Place’s arguments that because some other source of law beyond the Pooling and Servicing Agreement – namely state law on conflicts of interest – may bear on evaluating the trustee’s obligations, the securities exception did not apply.  Specifically, the court found the plain language of the statute, which contains a reference to “duties (including fiduciary duties)” makes it clear that such evaluations involve securities.

This is not the end of the Bank of America saga: once the case is remanded back to state court, that court must still hear the substantive challenges in an Article 77 proceeding.  The challenges include those from other investors and the New York and Delaware attorneys general. For additional news and analysis see 2nd Circuit greenlights novel vehicle for BofA’s MBS settlement and BofA, BlackRock Win Venue Appeal in Mortgage-Bond Settlement.