Assured Guar. Corp. v. Emc Mortg., LLC
| Decision Date | 04 April 2013 |
| Docket Number | No. 650805/12.,650805/12. |
| Court | New York Supreme Court |
| Parties | ASSURED GUARANTY CORP., Plaintiff, v. EMC Mortgage, LLC (formerly known as EMC Mortgage Corporation), Bear Stearns Asset Backed Securities 1 LLC, J.P. Morgan Securities LLC (formerly known as Bear, Stearns & Co. Inc.), and JPMorgan Chase Bank, N.A., Defendants. |
OPINION TEXT STARTS HERE
Erik Haas, Esq., of Patterson Belknap Webb Tyler LLP, for Plaintiff.
Sharon Nelles, Esq., of Sullivan Cromwell LLP, for Defendants.
Defendants EMC Mortgage, LLC, formerly known as EMC Mortgage Corporation (EMC), Bears Stearns Asset Backed Securities I LLC (BSABS), J.P. Morgan Securities LLC (JPMS), formerly known as Bear, Stearns & Co. Inc. (Bear Stearns & Co., together with EMC, Bear Stearns), and JP Morgan Chase Bank, N.A. (JP Morgan) (together, defendants) move for partial dismissal of the complaint, pursuant to CPLR 3211(a)(1) and (a)(7).
At oral argument held on these motions, the parties agreed to hold in abeyance that portion of the motion that seeks to dismiss the claim for fraudulent inducement, pending the determination by the First Department of a pending appeal stemming from the May 1, 2012 decision of Justice Sherwood in CIFG Assurance North America, Inc. v. Goldman, Sachs & Co., et al (652286/11).
The allegations set forth below are taken from the complaint, and are assumed to be true for the purposes of disposition.
Assured, a monoline insurer, provided financial guaranty insurance for residential mortgage-backed securities (RMBS) transactions underwritten by Bear Stearns, and alleges that Bear Stearns grossly misrepresented the risk of the underlying pooled loans.
The transaction at issue in this action, the SACO I Trust 2005–GP1 (SACO Transaction, or Transaction), closed in September 2005, and involved the sale of 6,028 home equity lines of credit (HELOCs) by EMC which were purchased from non-party GreenPoint Mortgage Funding Inc. (Greenpoint). The HELOCs, in turn, were used as collateral for the issuance of $337 million in debt securities of varying seniority with payments dependent on, or backed by, the cash flow received from the pooled loans. Greenpoint was one of Bear Stearns' largest suppliers of loans, and the sole supplier of the loans in the Saco Trust.
The Transaction was effectuated through a series of inter-locking agreements (Operative Documents), including the Mortgage Loan Purchase Agreement (MLPA), the Sale and Servicing Agreement (SSA), and the Insurance & Indemnity Agreement (I & I Agreement).
The MLPA is a sales agreement pursuant to which EMC transferred and sold HELOCs to the purchaser, another Bear Stearns entity. The SSA provides for the administration and servicing of the HELOCs. Assured is a third party beneficiary under both the MLPA and the SSA.
Under the MLPA and the SSA, EMC made numerous representations and warranties concerning the attributes of the loans and the practices pursuant to which they were originated (Loan Warranties). The MLPA and the SSA also create a repurchase protocol (Repurchase Protocol) pursuant to which the parties to the agreement and Assured, identified thereunder as the Note Insurer, can compel EMC to repurchase HELOCs that breach the Loan Warranties (Repurchase Protocol) (MLPA § 7, 16; SSA § 2.03[a] ).
Both the MLPA and the SSA provide that the Repurchase Protocol is the “sole and exclusive” remedy available for such breaches “hereunder” (MLPA § 7[uu]; SSA § 2.03).
EMC's commitments to Assured also appear in the Insurance and Indemnity Agreement (I & I Agreement), to which Assured is a direct party. Pursuant to the I & I Agreement, Assured agreed to issue a policy of insurance (Policy) in favor of the Transaction note holders. The I & I Agreement expressly incorporates the Loan Warranties established under the MLPA, including the exclusive remedy with respect to defective and breaching HELOCs, the Repurchase Protocol (I & I Agreement, § 2.02[k] ). The I & I Agreement also confers indemnification and reimbursement rights to Assured (I & I Agreement, §§ 3.03 [b]; 3.04[a] ).
Beyond the Loan Warranties and indemnification and reimbursement rights, Assured maintains that the I & I Agreement affords it additional warranties and remedies not available to the other securitization participants with respect to the Transaction as a whole, which it refers to as the “transaction warranties” (Transaction Warranties).
At some point in late 2007, the loans in the Saco Trust began defaulting at alarming rates. Assured re-underwrote approximately 900 of the HELOCs in the trust and alleges that EMC breached the Loan Warranties with respect to an astounding 88.5% of the loan pool. The majority of the loans in the pool have since defaulted or are seriously delinquent.
Around this time, Bear Stearns itself began aggressively shorting financial guaranty insurers including Assured, and the banks with large exposure to the securities they insured. Nonetheless, it was unable to curb its own exposure to risky mortgages, and in March 2008, Bear Stearns collapsed and was acquired by JP Morgan, with Bear Stearns thereafter merging into and with JP Morgan.
When Assured notified EMC of the 820 breaching loans in the Saco Trust and demanded repurchase under the Repurchase Protocol, EMC, at the direction of JP Morgan, refused to repurchase the breaching loans identified by Assured. JP Morgan purportedly refused to permit EMC to comply with its obligations under the Repurchase Protocol in order to manipulate its own accounting reserves. Nonetheless, JP Morgan simultaneously asserted against Greenpoint, the originator of the loans, the identical repurchase demands that JP Morgan forced EMC to deny.
The growing tide of defaults in the loan pool in turn caused massive shortfalls in the cash flows required to pay down the securities, requiring Assured to make large payments under the Policy. Assured maintains that its cumulative losses exceed $75 million, and that it has made more than $43 million in unreimbursed claims payments.
Assured alleges that Bear Stearns and EMC deliberately and knowingly made false statements to Assured to induce its participation in the Transaction, concealed their own knowledge that the loans contained in the Saco Trust were defective, and that the operative documents contain false warranties.
Bear Stearns purportedly acquired loans it knew were defective and sold them at a profit into securitizations before they could default. Bear Stearns purportedly knew that its underwriting due diligence was deficient, did not engage in quality control of its favored loan providers, and did not have protocols to identify and repurchase breaching loans from the trusts.
Whistleblower testimony from former employees of Watterson Prime, a third-party due diligence firm hired by Bear Stearns to review the loans in the Saco Trust, purportedly affirm that Bear Stearns disregarded loan quality for loan quantity. Additionally, former Greenpoint employees have come forward and purportedly testified that Greenpoint's management pressured its underwriters to approve loans regardless of quality, and that Greenpoint consistently funded and closed loans in violation of its own underwriter guidelines to maintain its relationship with favored brokers in its network.
Assured asserts nine causes of action against defendants, including fraudulent inducement against JP Morgan and EMC; breaches of representations and warranties against EMC, BSABS and JP Morgan; breaches of the Repurchase Protocol obligations against EMC, BSABS and JP Morgan, breaches of the I & I Agreement against EMC, BSABS and JP Morgan; indemnification against EMC, BSABS, and JP Morgan; tortious interference with contract against JP Morgan; breach of contract against EMC and BSABS arising out of the asset transfer of EMC to JPMS; and successor liability against JPMS Bank.
Defendants move to dismiss Assured's breach of contract claims that do not arise strictly under the Repurchase Protocol. Defendants argue that limitations on Assured's remedies contained within the MLPA and incorporated in the I & I Agreement bar contract claims which seek remedies beyond the Repurchase Protocol. In support, defendants cite to Assured Guar. Mun. Corp. v. Flagstar Bank, FSB (2011 WL 5335566, *11 [SD N.Y.2011] ) (Flagstar Action).
Defendants also seek to dismiss Assured's claims for indemnification and reimbursement of attorney's fees on the ground that the applicable contractual provisions only cover claims brought by third parties against Assured, rather than litigation between the contracting parties.
In opposition, Assured argues that the “sole remedy” language of the MLPA only applies to breaches of the Loan Warranties, whereas its contract claims are premised upon EMC's breaches of Transaction Warranties, which appear in section 2 of the I & I Agreement. According to Assured, defendants' breach of the Transaction Warranties constitute an “event of default” under section 5.10(a) of the I & I Agreement, which entitles it “in its sole judgment” to pursue “whatever action at law or in equity” available to it (I & I Agreement, § 5.02 [a][iii] ).
The Court rejects Assured's interpretation of the relevant contractual language, which is premised upon a flawed interpretation of the I & I Agreement in isolation to the MLPA.
Reading the inter-locking operative documents together, as the Court must, makes it clear that the parties intended to limit Assured's remedies for breach of the representations and warranties relating to the quality and characteristics of the pooled loans to the Repurchase Protocol ( see Brax Capital Group, LLC v. WinWin Gaming, Inc., 83 A.D.3d 591, 922 N.Y.S.2d 43 [1st Dept 2011] [...
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