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Prudential Insurance Co. v. UBS Real Estate Securities

United States District Court, Third Circuit

December 26, 2013



MADELINE COX ARLEO, Magistrate Judge.

This matter comes before the Court upon the Motion to Remand filed by Plaintiffs The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company, and Prudential Investment Portfolios 2 (collectively "Plaintiffs"). (Dkt. No. 6). Defendants UBS Real Estate Securities, Inc., UBS Securities LLC, and Mortgage Asset Securitization Transactions, Inc. (collectively "UBS" or "UBS Defendants") oppose remand. (Dkt. No. 20). Pursuant to Local Civil Rule 72.1(a)(2), the Honorable Kevin McNulty, U.S.D.J., referred the Motion to the undersigned for Report and Recommendation. The Court heard the parties' oral arguments related to the Motion on August 27, 2013. Having considered the parties' written submissions and oral arguments, for the following reasons, it is respectfully recommended that Plaintiffs Motion to Remand be GRANTED.


From 2004 to 2007, Plaintiffs purchased over $208 million in Residential Backed Securities ("RMBS" or "Securities") across eight (8) separate securitizations (the "Certificates") from UBS Defendants. (Compl.; Dkt. No. 1-3, ¶ 1 & Ex. A-B). On or about April 1, 2013, Plaintiffs filed a 183-page, 565-paragraph Complaint in the Superior Court of New Jersey, Law Division, Essex County, Dkt. No. L002489-13. (Dkt. No. 1-3). In their Complaint, Plaintiffs generally allege that the registration statements, prospectuses, prospectus supplements, term sheets, and other written materials prepared by UBS to solicit Plaintiffs' purchases (the "Offering Materials") made numerous material misrepresentations and omissions regarding the underwriting guidelines followed by the originators of the underlying mortgage loans, as well as material misrepresentations regarding the risk profile and credit quality of loans. (Dkt. No. 1-3, ¶¶ 77-293 & Ex. C). As a result, Plaintiffs allege that the default rates on the mortgage loans have soared and the value of Plaintiff's Certificates have plummeted. (Dkt. No. 1-3, ¶¶ 14-15, 148-150, 457-70, 472). Based upon those allegations, Plaintiffs lodge the following five New Jersey state law causes of action against Defendants: (1) Common-Law Fraud/Fraudulent Inducement; (2) Aiding and Abetting Common Law Fraud/Fraudulent Inducement; (3) Equitable Fraud; (4) Negligent Misrepresentation; and (5) violation of the New Jersey Civil RICO, N.J.S.A. 2C:41-1, et seq. (Dkt. No. 1-3, ¶ 476-565 (Counts 1-V)).

On May 8, 2013, Defendants filed a notice to remove the state court action to this Court. (Notice of Removal; Dkt. No. 1). In the Notice of Removal, Defendants assert that federal subject matter jurisdiction exists in this case: (1) under 28 U.S.C. §1334(b), because this case is "related to" several bankruptcy proceedings involving non-party mortgage originators; and (2) under 28 U.S.C. § 1332, because the "properly joined" parties to this case are diverse, and the matter in controversy exceeds $75, 000. (Dkt. No. 1, ¶¶ 17-45).

In support of their jurisdictional argument under Section 1334(b), Defendants assert that several of the Certificates at issue are backed by mortgage loans originated by entities that have filed bankruptcy petitions or whose parent corporations have filed bankruptcy petitions (the "Bankrupt Originators").[1] (Dkt. No. 1, ¶ 18). Defendants allege that they entered into written indemnification agreements with each of the Bankrupt Originators that underlie the Securities. ( Id., ¶ 21). Defendants argue that because at least four of those Bankrupt Originators have declared bankruptcy and have ongoing bankruptcy proceedings in District Courts around the country, the contractual indemnification clauses render this case "related to" those ongoing bankruptcy proceedings, and therefore give rise to federal subject matter jurisdiction pursuant to Section 1334(b). ( Id., ¶¶ 18-27).

In support of their jurisdictional argument under Section 1332, Defendants assert that Plaintiffs Prudential Retirement Insurance and Annuity Company ("PRIAC") and Prudential Investment Portfolios Company 2 ("PIP2") were fraudulently joined to this action for the purpose of destroying federal diversity jurisdiction. (Dkt. No. 1, ¶¶ 30-36). Defendants claim that these two entities should be disregarded by the Court in determining diversity jurisdiction, which will provide federal subject matter jurisdiction under Section 1332 in this case. (Id.)

On June 5, 2013, Plaintiffs filed the present Motion to Remand. (Dkt. No. 6). Plaintiffs argue that jurisdiction pursuant to Section 1334(b) does not exist because this case is not sufficiently "related to" any bankruptcy proceedings. (Id. at 12-24). Further, even if jurisdiction under Section 1334(b) exists, Plaintiffs assert that this action satisfies all the factors for both mandatory abstention under 28 U.S.C. § 1334(c)(2), permissive abstention under 28 U.S.C. § 1334(c)(1), and equitable remand pursuant to 28 U.S.C. § 1452(b). (Id. at 25-32). Lastly, Plaintiffs argue that there is no basis for diversity jurisdiction because all named plaintiffs are proper parties to this lawsuit, and the parties are not diverse. (Id. at 32-35). Importantly, in support of their foregoing arguments, Plaintiffs note that other courts in this District have recently addressed some or all of the issues presented here in nearly identical Prudential cases.[2] (Id. at 8).


A. Removal Pursuant to 28 U.S.C. § 1441(a)

Generally, the federal removal statute provides that, "[e]xcept as otherwise provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants, to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441 (a). It is well settled that "the party asserting federal jurisdiction in a removal case bears the burden of showing, at all stages of the litigation, that the case is properly before the federal court." Frederico v. Home Depot , 507 F.3d 188, 193 (3d Cir. 2007) (citing Samuel-Bassett v. Kia Motors Am., Inc. , 357 F.3d 392, 396 (3d Cir. 2004). Further, where federal subject matter jurisdiction is based upon the parties' alleged diversity of citizenship, 28 U.S.C. § 1441 "is to be strictly construed against removal." Samuel-Bassett , 357 F.3d 396 (citing Boyer v. Snap-On Tools Corp. , 913 F.2d 108, 111 (3d Cir. 1990)). In particular, "a removing party who charges that a plaintiff has fraudulently joined a party to destroy diversity jurisdiction has a heavy burden of persuasion.'" Boyer , 913 F.2d at 111 (citations omitted).

B. "Related To" Bankruptcy Jurisdiction Pursuant to 28 U.S.C. § 1334(b)

UBS Defendants' first basis for removal is that this case purportedly "relates to" the bankruptcy proceedings of four Bankrupt Originators that contributed loans underlying some of Plaintiffs' Certificates. The threshold question is whether federal subject matter jurisdiction under 28 U.S.C. § 1334(b) exists because this case is "related to" several pending bankruptcy proceedings by virtue of indemnity agreements that Defendants have with the Bankrupt Originators, who are the debtors in those bankruptcies.

Section 1452(a) of the Bankruptcy Code allows for the removal from state court of any claims that arise under 28 U.S.C. § 1334(b), which confers on the district court "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Id . (emphasis added). This section was "intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate." Pacor, Inc. v. Higgins , 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca , 516 U.S. 124 (1995).

In Pacor, [3] the Third Circuit articulated that "the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." 743 F.2d at 994 (citations omitted). Thus, under certain limited circumstances, a civil "action can be related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate." Id . The Supreme Court, however, has cautioned that this standard is not "limitless." Celotex Corp. , 514 U.S. at 308. As the Pacor Court itself noted, "[t]here must be some nexus between the related' civil proceeding and the title 11 case." Pacor , 743 F.2d at 994. Thus, the civil proceeding at issue must present more than the "mere potential" to "impact upon [a] debtor's estate." Steel Workers Pension Tr. , 295 B.R. at 753. If a debtor's liability cannot be fixed in the supposedly related civil case and a second proceeding is required, then "related to" jurisdiction does not exist. See Id. at 753; Pacor , 743 F.2d at 994; In re Federal-Mogul Global Inc. , 300 F.3d 368, 382 (3d. Cir. 2002) (reinforcing that "the test articulated in Pacor for whether a lawsuit could conceivably' have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit"); In re W.R. Grace & Co. , 591 F.3d 164, 172 (3d Cir. 2009) ("[T]here is no related-to jurisdiction over a third-party claim if there would need to be another lawsuit before the third-party claim could have any impact on the bankruptcy proceedings."); Barclays , 2013 WL 221995, at *4 (quoting Pacor , 743 F.2d at 994).

In view of Third Circuit precedent, in determining whether § 1452 "related to" jurisdiction exists, Judge Falk recently summarized that:

A defendant's claim for indemnity against a bankrupt debtor... only creates "related to" jurisdiction if the defendant can establish: (1) the liability of the bankrupt party is automatically triggered when the purported related action against the party seeking indemnification is begun'; and (2) a later lawsuit against the debtor... [is not] a prerequisite to a finding of indemnification.'

Barclays , 2013 WL 221995, at *3 (emphasis added) (quoting Steel Workers Pension Tr. , 295 B.R. at 753). Applying the foregoing standard here, the Court concludes that Defendants have failed to carry their burden and establish that the indemnification clauses at issue are sufficient to create "related to" federal subject matter jurisdiction in this case.

Defendants argue that there is "related to" bankruptcy jurisdiction in this case based on certain indemnification agreements that they have with Bankrupt Originators-identified as Fremont, New Century, Meritage, and First NLC-who are four, non-party companies who have filed for bankruptcy.[4](Dkt. No. 1, at ¶¶ 18-21). Defendants contend that the Bankrupt Originators originated some of the loans underlying five (5) of the eight (8) RMBS Certificates at issue in this case. (Id.). According to Defendants, they acquired some of the loans underlying the Certificates from the Bankrupt Originators and, in doing so, entered into "almost identical" indemnification agreements with each of the Bankrupt Originators. (Id. at ¶ 21). For example, in their Notice of Removal, Defendants quote an indemnification clause in an agreement with one of the Bankrupt Originators, Fremont, as follows:

Fremont hereby agrees to indemnify and hold harmless the Company [Defendant Mortgage Asset Securitization Transactions, Inc.] and UBS [Defendant UBS Real Estate Securities Inc.]... from and against any and all losses, claims, expenses, damages or liabilities to which the Company or UBS, their respective officers or directors and any such controlling person may become subject under the [Securities Act of 1933] or otherwise, as and when such losses, claims, expenses, damages or liabilities are incurred, insofar as such losses, claims, expenses, damages or liabilities (or actions in respect thereof) arise out of or are based upon (1) any untrue statement or alleged untrue statement of any material fact contained in the Fremont Information... or arise out of, or are based upon or (2) the omission or alleged omission to state therein any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading, and will reimburse the Company and UBS, their respective officers and directors and any such controlling person for any legal or other expenses reasonably incurred by it or any of them in connection with investigating or defending any such loss, claim, expense, damage, liability or action, as and when incurred....

(Id. at ¶ 22).[5] Defendants contend that the court has "related to" jurisdiction because the filing of Plaintiffs' Complaint, which alleges misstatements in the Offering Materials, "automatically triggered" the indemnification agreements and will have a "conceivable effect" on the bankruptcy proceedings of the ...

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