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.

————————————————————————
2

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 DefendantsAppellees 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.
3

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.
4

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.
5

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.
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.

6

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
7

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”
8

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.
9

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
10

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