Fed. Home Loan Bank of San Francisco v. Countrywide Fin. Corp.

214 Cal.App.4th 1520

154 Cal.Rptr.3d 873

FEDERAL HOME LOAN BANK OF SAN FRANCISCO, Plaintiff and Appellant,

v.COUNTRYWIDE FINANCIAL CORPORATION, Defendant and Respondent.

A135898

Court of Appeal, First District, Division 5, California.

Filed March 29, 2013

Review Denied July 17, 2013

Affirmed.

See 1 Witkin & Epstein, Cal. Criminal Law (4th ed. 2012) Defenses, § 132 et seq.

Superior Court of the County of San Francisco, No. CGC–10–505133, Richard A. Kramer, Judge.

Goodin, MacBride, Squeri, Day & Lamprey, Robert A. Goodin, Francine T. Radford, Anne H. Hartman, San Francisco, and Grais & Ellsworth, David J. Grais, Kathryn C. Ellsworth, Owen L. Cyrulnik, New York, for Plaintiff and Appellant.

Shearman & Sterling, Stephen D. Hibbard, San Francisco, and John Gueli for Defendant and Respondent.

Jones, P.J.

The trial court concluded res judicata barred Federal Home Loan Bank of San Francisco's (the Bank) claim against Countrywide Financial Corporation (Countrywide Financial) and sustained Countrywide Financial's demurrer to the first amended complaint without leave to amend.

The Bank appeals. It contends the court erred by concluding res judicata barred its claim against Countrywide Financial because “[t]here was no final judgment on the merits in a prior action that could have given rise to res judicata in this action.” We disagree and affirm. We conclude the doctrine of res judicata bars the Bank's claim against Countrywide Financial because: (1) the Bank's voluntary dismissal of its claim against Countrywide Financial in the prior action was a final judgment on the merits; and (2) the claim the Bank dismissed in a prior lawsuit is the same cause of action as the claim it asserts against Countrywide Financial in the current lawsuit. Having voluntarily dismissed with prejudice claims of control person wrongdoing against one of multiple defendants for its own strategic reasons, the Bank may not avoid the res judicata consequences of its decision and sue the dismissed defendant anew, again alleging control-person liability, in reliance on the pendency of these same claims against the remaining actors in the first action.

FACTUAL AND PROCEDURAL BACKGROUND

We accept as true the following allegations in the Bank's amended complaint for the purpose of reviewing the order sustaining Countrywide Financial's demurrer:

In a process called securitization, an entity “originate[s]” mortgage loans or acquires those loans and aggregates them into a “collateral pool” or loan pool for sale to a financial institution called a “depositor.” ¹ The depositor sells the loans to a trust, which then issues certificates that investors—like the Bank—can purchase. At some point before May 2010, the Bank purchased 95 residential mortgage-backed securities from various securities dealers “in 78 securitization trusts backed by residential mortgage loans” at a cost of over $13.5 billion dollars. The Bank purchased certificates in five securitizations from Countrywide Securities Corporation (Countrywide Securities). CWALT, Inc. (CWALT) issued the certificates in four securitizations. Countrywide Securities apparently issued the certificates in the fifth securitization.²

The Credit Suisse and Declaratory Relief Actions

In May 2010, the Bank sued eight securities dealers which offered and sold the 95 residential mortgage-backed securities, as well as the entities which issued the certificates or controlled one of the entities that issued the certificates ( Credit Suisse or the Credit Suisse action).³ The crux of the Bank's claims was defendants made untrue or misleading statements in offering documents issued in connection with the residential mortgage-backed securities the Bank purchased.

Among the defendants in Credit Suisse were Countrywide Securities Corporation, CWALT, and Countrywide Financial. As relevant here, the Bank alleged: (1) Countrywide Securities made untrue or misleading statements in the sale of securities in violation of Corporations Code sections 25401 and 25501 with respect to securitizations 74 through 78; ⁴ (2) Countrywide Securities and CWALT made untrue or misleading statements in violation of sections 11 and 12 of the Securities Act of 1933 (sections 11 & 12) with respect to securitizations 75 through 78; and (3) Countrywide Financial violated section 15 of the Securities Act (Section 15) based on its control of CWALT. In its Section 15 claim against Countrywide Financial, the Bank alleged “CWALT existed for no purpose than to receive and deposit loans into the trusts. Under Section 15 ... Countrywide ... therefore is liable to the Bank jointly and severally with, and to the same extent as, CWALT.”

In November 2010, the Bank filed the complaint in the action before us seeking declaratory relief against Bank of America Corporation (declaratory relief action). The Bank sought a declaration that Bank of America Corporation—which had purchased Countrywide's assets—was liable for any damages Countrywide was required to pay in the Credit Suisse action.

In August 2011, and following an adverse tentative ruling on a demurrer, the Bank dismissed with prejudice its Securities Act claims in the Credit Suisse action, including its Section 15 claim against Countrywide Financial. The Bank did so to avoid affirmatively pleading the circumstances surrounding its discovery of facts giving rise to its claims as required by the Securities Act. Two months later, in October 2011, the Bank amended the subject declaratory relief complaint to add Countrywide Financial as a defendant. The operative first amended complaint in the declaratory relief action alleged a single claim against Countrywide Financial as a “control person” under section 25504. Specifically, the Bank alleged “[i]n doing the acts alleged in the sale to the Bank of the seven certificates in securitizations 74 through 78 described in the [ Credit Suisse ] [a]ction, Countrywide Securities violated [s]ections 25401 and 25501 ... by offering or selling securities ... that included untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” The Bank further alleged Countrywide Financial “controlled Countrywide Securities directly or indirectly within the meaning of section 25504” and was “therefore jointly and severally liable with and to the same extent as Countrywide Securities for Countrywide Securities' violation of [s]ections 25401 and 25501....” The amended complaint attached a copy of the operative Credit Suisse complaint, incorporated it by reference, and alleged “[t]he control person liability claims asserted against [Countrywide Financial] arise out of the same facts alleged in [ Credit Suisse ], and [the Bank] seeks the same remedy that it sought in the [ Credit Suisse ] [a]ction, that is, rescission and recovery of the consideration paid for the seven certificates.”

Countrywide Financial's Demurrer to the Amended Declaratory Relief Complaint

Countrywide Financial demurred to the operative amended declaratory relief complaint, contending res judicata barred the Bank's section 25504 claim because the Bank was “impermissibly seeking to relitigate a cause of action that was dismissed with prejudice in a prior action involving the same parties.” Specifically, Countrywide Financial argued the Bank's section 25504 claim was “the same cause of action as its Section 15 claim” under the ‘primary rights' theory.” According to Countrywide Financial, the Bank sought to hold it liable in the Credit Suisse action “as a control person for alleged misrepresentations in [residential mortgage-backed securities] offering documents” and in the declaratory relief action, the Bank “seeks to hold [Countrywide Financial] liable “as a control person for the same alleged misrepresentations in the same ... offering documents.” Countrywide Financial conceded the legal theories in the two cases were different, but contended the Bank “alleged a violation of the same primary right—the asserted right to offering documents free of material misrepresentations; and, moreover, claims in both actions to have suffered the same harm as a result of [Countrywide's Financial's] alleged misconduct.”

In opposition, the Bank argued the section 25504 claim it asserted in the declaratory relief action was “different from the claims that [it] voluntarily dismissed” in Credit Suisse and that res judicata did not bar it from asserting different claims under a different statute. In addition, the Bank contended there was no final judgment on the merits in the Credit Suisse action because its claims on each securitization at issue in Credit Suisse were “part of a single cause of action for purposes of res judicata.” As the Bank explained, “the majority of the Bank's claims on those securities in the Credit Suisse action remain pending. Thus, there has been no final judgment on the merits of the Bank's entire cause of action on any of the four securities in the Credit Suisse action that are also the subject of this action [.]” ⁵

At a hearing, the court sustained Countrywide Financial's demurrer without leave to amend. The court observed, “[t]he real question here is whether what was dismissed is the same primary right as to what is alleged here [in the declaratory relief action].” Then the court answered the question in the affirmative. It explained, the Securities Act and sections 25401 and 25501 render “control persons responsible under the same circumstances ... without any significant difference under the federal scheme or the state scheme.... And the California statute is not materially different from the federal statute.” The court continued, “a general concept in preclusive effect jurisprudence is that the [c]ourt is not bound by the format, or the pleadings, or the articulation in the causes of action. In other words ... you don't look at causes of action ......