Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc.
| Decision Date | 11 October 2012 |
| Docket Number | No. 652837/2011.,652837/2011. |
| Parties | ASSURED GUARANTY MUNICIPAL CORP. f/k/a Financial Security Assurance, Inc., Assured Guaranty Corp., Plaintiffs, v. DLJ MORTGAGE CAPITAL, INC. and Credit Suisse Securities (USA), LLC, Defendants. |
| Court | New York Supreme Court |
OPINION TEXT STARTS HERE
Quinn, Emanuel, Urouhart, Oliver & Hedges, for Plaintiffs.
Orrick, Herrington & Sutcliffe, LLP, for Defendants.
This action arises out of financial guaranty insurance policies (Policy, collectively, Policies) issued by plaintiffs Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Corp. (Assured), or Assured Guaranty Corp. (AGC, collectively with Assured, Plaintiffs or Insurers). The Policies were issued in connection with six transactions (Transaction, collectively, Transactions) for the sale of residential mortgage-backed securities (RMBS).1 The complaint alleges five causes of action: 1) breach of contract, a Pooling and Service Agreements (PSAs) against both Defendants, seeking contract damages, rescissory damages, and Fees; 2) breach of a contractual repurchase obligation in § 2.03 of the PSAs against DLJ only, seeking contract damages and Fees; 3) breaches of contracts, specifically four Commitment Letters and two Engagement Letters, to obtain “shadow ratings” from the rating agencies Standard and Poor's and Moody's (collectively, Rating Agencies) against both Defendants, seeking rescissory damages and Fees; 4) declaratory judgment against DLJ only, declaring that it must repurchase mortgage loans as to which it breached representations and warranties in the PSAs; and 5) declaratory judgment against both Defendants, declaring that they breached the obligation in the Commitment Letters and Engagement Letters to obtain “shadow ratings” from the Rating Agencies and seeking indemnification. The demand for consequential damages is asserted in the prayer for relief, but not tied to a specific cause of action.
Defendants, DLJ Mortgage Capital, Inc. (DLJ) and Credit Suisse Securities (USA), LLC, (CS Securities, collectively Defendants), move to dismiss: 1) Plaintiffs' demands for rescissory damages in connection with the first and third causes of action; 2) Plaintiffs' demands for attorneys' fees, accountants' fees and expenses (Fees) in the first through third causes of action; 3) Plaintiffs' demands for consequential damages in connection with the first and second causes of action; 4) Plaintiffs' demand for indemnification in connection with the fifth cause of action; and 5) the third and fifth causes of action in their entirety. CPLR 3211(a)(1),(7).
As this is a motion to dismiss, the facts are drawn from the complaint and documentary evidence submitted by the parties.
The Transactions are substantially similar. In each of the Transactions, DLJ, acting as Sponsor, assembled a pool of first lien prime and Alt–A 2 residential mortgage loans, which were transferred to non-party Credit Suisse First Boston Mortgage Securities Corp. (Depositor, and together with CS Securities and DLJ, Credit Suisse).3 The Depositor then assigned the mortgage loans to a trust (Trust). US Bank National Association is the trustee (Trustee) of all of the Trusts. The Trusts then issued securities (Certificates), collateralized by the pool of mortgage loans. Defendant CS Securities, marketed the Certificates to investors. By purchasing Certificates, investors acquired the right to receive a portion of the principal and interest flowing from the mortgage loans owned by the Trust.
The Policies issued by the Insurers are financial guaranty Policies issued to the holders of certain classes or tranches (Certificateholders) of Certificates (Insured Certificates). All of the Policies provide that they cannot be canceled and that the premiums are non-refundable. For each Policy, the Insurers receive a premium and, in exchange, guaranteed that if cash flows from the mortgage loans are insufficient to make the payments of interest and principal due to the Certificateholders, the Insurer would pay the shortfall. It is undisputed that the Trusts paid, and the Insurers received, the premiums due under the Policies after this action was filed, and that the Insurers continued to receive premiums at the time this motion was submitted.
For each of the Transactions, the Depositor, the Trustee and DLJ, inter alia, entered into a PSA, of which the Insurers were express third-party beneficiaries, but not signatories. CS Securities is not a party to the PSAs. Representations and warranties for the benefit of the Insurers were made by DLJ in the PSAs, including that (i) the information on the mortgage loan schedule was accurate, (ii) the mortgage loans complied with the originator's underwriting guidelines, (iii) no mortgage loan had a loan-to-value ratio (LTV) of greater than 100 percent, i.e., no loan was greater than the value of the underlying property, (iv) the mortgage loans were free from material defaults, and (v) each loan file contained all necessary documentation.
Before each Transaction closed, Credit Suisse issued a Prospectus and a Prospectus Supplement, which described certain characteristics and risks associated with the mortgage loans, the real estate market and the Certificates. In addition, before the closing of each Transaction, the mortgage loan schedule or “tape” (warranted in the PSAs to be true, complete and accurate) was given to the Insurer and the Rating Agencies. Complaint, ¶ 21. The tape disclosed characteristics of the underlying mortgage loans, including i) each borrower's Fair Isaac & Co. (“FICO”) score; (ii) the appraised value of the mortgaged property; (iii) the LTV; and (iv) the borrower's debt-to-income ratio (DTI), i.e., the ratio of the borrower's monthly debt to income. In addition, the complaint alleges that Defendants gave the Rating Agencies “pool-level data derived from the loan-level information” on the tape and “information as to the Transaction's structure.”
Two of the Transactions (CSAB 2007–1 and TBW 2007–2), in connection with which AGC issued a Policy, utilized Engagement Letters, between AGC and CS Securities. Four of the Transactions (CSAB 2006–2, CSAB 2006–3, CSAB 2006–4 and CSMC 2007–3), in which Assured issued a Policy, utilized Commitment Letters between Assured and DLJ. CS Securities signed the Commitment Letters solely to bind itself to paragraph seven, which provided that CS Securities would pay up to $24,000 of Assured's Fees. The complaint alleges that pursuant to the Engagement Letters and Commitment Letters, “shadow ratings” on the Insured Certificates by the Rating Agencies of AAA or Aaa, their highest ratings (AAA Ratings), were a condition precedent to issuance of the Policies. A “shadow rating” is a credit rating obtained without consideration of financial guaranty insurance. Plaintiffs allege that based upon false information Defendants supplied to the Rating Agencies, they gave the Insured Certificates shadow AAA Ratings at or around the date that the relevant Transaction closed.
The Transactions closed in 2006 or early 2007.4 The complaint alleges that after the closings, there were a staggering number of delinquencies among the mortgage loans. Plaintiffs conducted a forensic reunderwriting of the mortgage loans that were in default in the Transactions, which disclosed severe and pervasive breaches of the representations in the PSAs that materially affected the Insurers. The breaches included: failure to verify income; failure to verify employment; failure to investigate the borrowers' debts; LTV or combined loan to value that exceeded maximum guidelines; missing documents in loan files; and failure to conform to underwriting guidelines. Among the breaches were the following: the borrower's income was overstated, the borrower's debts were understated, the borrower's employment was incorrectly described in the mortgage application, and LTVs were based upon inflated appraisals. Moreover, plaintiffs discovered that the shadow AAA Ratings “did not accurately reflect the credit quality of the Insured Certificates” because they were based upon the same false data. Complaint, ¶¶ 60 & 61.
Pursuant to the PSAs, the Insurers gave notice to DLJ of mortgage loans that allegedly breached representations and warranties. According to Plaintiffs' Memorandum of Law in Opposition (Plaintiffs' Memo, Doc 23), DLJ has refused to replace or repurchase 7,320 out of 7,336 loans contained in the notices within the 90–day period required by the PSAs. Plaintiffs' Memo, p 6, fn 4.
In each Policy, the Insurer “unconditionally and irrevocably” agreed to pay (or guaranteed the payment of) 5 the principal and interest due on the RMBS to the Insured Certificateholders, and waived all defenses to such payments. Each Policy provides that it may not be canceled and that the premiums cannot be refunded.
Section 2.03 of each PSA contains a provision (Repurchase Protocol), which provides:
Upon discovery by any of the parties hereto of a breach of a representation or warranty made pursuant to Section 2.03(b) that materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties and the Certificate Insurer. The Seller [DLJ] hereby covenants that within 90 days of the earlier of its discovery or its receipt of written notice from any party of a breach of any representation or warranty made by it pursuant to Section 2.03(b) which materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Mortgage Loan sold by the Seller to the Trust, it shall cure such breach in all material respects, and if such breach is not so cured, shall (i) if such 90–day period expires prior to the...
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