Assured Guaranty Mun. Corp. v. DLJ Mortg. Capital, Inc.
| Decision Date | 03 July 2014 |
| Docket Number | No. 652837/2011.,652837/2011. |
| Parties | ASSURED GUARANTY MUNICIPAL CORP., f/k/a Financial Security Assurance Inc., and Assured Guaranty Corp., Plaintiffs, v. DLJ MORTGAGE CAPITAL, INC., Credit Suisse Securities (USA) LLC, Credit Suisse Boston Mortgage Securities Corp., Defendants. |
| Court | New York Supreme Court |
Patterson Belknap Webb & Tyler LLP, for Assured (in DBSP).
Quinn Emanuel Urquhart & Sullivan, LLP, for Assured (in DLJ).
Latham & Watkins LLP, for Deutsche Bank.
Orrick, Herrington & Sutcliffe LLP, for Credit Suisse.
Murphy & McGonigle, P.C., for GreenPoint.
This decision is being issued in conjunction with a decision in a related residential mortgage backed securities (RMBS) case brought by a monoline insurance company, styled Assured Guaranty Municipal Corp. v. DB Structured Prods., Inc., Index. No. 650705/2010 (DBSP ). The decisions are meant to be read together. In the instant case, the monoline alleges both fraud and contractual put-back claims, while in DBSP, the monoline only asserts contractual put-back claims. The court assumes familiarity with the DBSP decision, the procedural history of this action, and the prior rulings of this court and the Appellate Division.Before the court are Motion Sequence Numbers 004, 005, and 006, which are consolidated for disposition. In motion 006, defendants DLJ Mortgage Capital, Inc. (DLJ), Credit Suisse Securities (USA) LLC (CSS), and Credit Suisse First Boston Mortgage Securities Corp. (CS Boston) (collectively, Credit Suisse) seek dismissal of the Amended Complaint's (the AC): (1) fraud claims (the first and second causes of action); and (2) claims against new defendant CS Boston. The motion is granted and the fraud claims are dismissed for the reasons stated below.
The dismissal of the fraud claims directly impacts motions 004 and 005, which seek to compel discovery. In motion 004, plaintiffs Assured Guaranty Municipal Corp. and Assured Guaranty Corp. (collectively, Assured) move to compel Credit Suisse to produce documents concerning: (1) the repurchase analysis Credit Suisse performed after Assured made pre-litigation repurchase demands; and (2) credit default swaps (CDS) entered into by Credit Suisse. For the reasons explained below, Assured is entitled to Credit Suisse's non-privileged repurchase records but Assured is not entitled to Credit Suisse's CDS records.
In motion 005, Credit Suisse moves to compel Assured to produce documents regarding Assured's: (1) knowledge of alternative loan documentation programs; (2) internal RMBS policies and procedures; (3) understanding of risk in RMBS transactions; (4) originator due diligence; and (5) retrospective review. The motion is denied.
This litigation concerns six RMBS transactions for which Assured, a monoline insurer, provided financial guaranty coverage. DLJ originated or acquired the loans, CSS was the underwriter, and CS Boston was the depositor.Assured commenced this action on October 17, 2011, asserting contractual put-back claims against DLJ and CSS. See Dkt. 2. Assured did not assert a fraud claim. On October 21, 2013, Assured filed the AC, which asserted fraud claims and added CS Boston as a defendant. See Dkt. 118.1 In an order dated February 27, 2014, the Appellate Division partially reversed this court's decision on the original motion to dismiss regarding the “sole remedy” clause. 114 AD3d 598. On May 6, 2014, the Appellate Division modified its decision to reflect the scope of the issues appealed, and the rescissory damages claim dismissed by this court on multiple grounds was not reinstated. 117 AD3d 450. One such ground was Assured's continued acceptance of premiums, a well established bar to rescinding an insurance policy. See 37 Misc.3d 1212(A), at *7 (collecting cases). In fact, before the Appellate Division issued its modified order, Assured voluntarily stipulated “not to seek rescissory damages.” See Dkt. 135. Hence, coming into this motion, Assured's sole avenue to a rescission-type remedy was limited to its fraud claims. Since, for the reasons explained below, the fraud claims are dismissed, Assured now is limited to litigating its contractual put-back claims.2 On April 10, 2014, during oral argument on the instant motions, the parties were directed to submit supplemental briefs on the applicability of the New York Insurance Law. The parties filed these briefs on May 1, 2014. See Dkt. 137 & 138.
II.Credit Suisse's Motion to Dismiss (Seq.006)
A. Legal Standard
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp., 60 AD3d 491 (1st Dept 2009) ; Skillgames, LLC v. Brody, 1 AD3d 247, 250 (1st Dept 2003), citing McGill v. Parker, 179 A.D.2d 98, 105 (1992) ; see also Cron v. Harago Fabrics, 91 N.Y.2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. “However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration.” Skillgames, 1 AD3d at 250, citing Caniglia v. Chicago Tribune–New York News Syndicate, 204 A.D.2d 233 (1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if “the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law.” Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002) (citation omitted); Leon v. Martinez, 84 N.Y.2d 83, 88 (1994).
“The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 NY3d 553, 559 (2009) ; Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 AD3d 495, 498 (1st Dept 2011). Pursuant to CPLR 3016(b), “the circumstances constituting the wrong shall be stated in detail .” Pludeman v. Northern Leasing Sys., Inc., 10 NY3d 486, 491 (2008).
Assured alleges it was fraudulently induced to issue the subject financial guarantee policies based on Credit Suisse's countless misrepresentations about the loans in the transaction. Some of the alleged malfeasance expressly falls under the ambit of the PSA's representations and warranties, such as lies about borrowers' income .3 Other malfeasance, such as “wholesale abandonment of underwriting standards,” does not.4
As discussed in DBSP, before a monoline agrees to guarantee revenue to RMBS investors, the monoline and the bank negotiate their risk of loss. Monolines take no risk on non-conforming loans and expressly negotiate the universe of loan defects that constitute non-conformance, negotiations which result in the representations and warranties. Banks want to limit their exposure by negotiating for as narrow a universe of representations as possible (even if banks can put-back non-conforming loans to originators under MLPAs,5 because originators pose more counterparty credit risk than global banks). The universe of representations ultimately agreed-to is the only universe of non-conformance coverage that monolines are entitled to. The monoline's risk is every possible problem with the loans not covered by the representations and warranties. So, for instance, when Assured does not negotiate for the inclusion of a “no fraud rep”6 (or any other representation not included in the PSA), perhaps, thereby, charging a higher premium, it makes a conscious decision to take the risk that if such non-included representations cause losses resulting in claims payments, Assured will not be reimbursed by Credit Suisse via a put-back.7
Here, Assured agreed to issue insurance to investors for all loan losses, while bargaining for partial reinsurance from Credit Suisse for non-conforming loan losses. By asserting a fraud claim, Assured is trying to broaden the scope of its bargained-for partial loan loss protection to cover all loan loss risk. Stated another way, Assured is trying to rewrite the contract by broadening the scope of its non-conformance protection. This is an attempt to retroactively alter the parties' risk allocation the crux of this transaction. To allow this is not only commercially unreasonable, it would violate the axiom that courts should interpret contracts “in accord with the parties' intent” and may not “alter the contract to reflect its personal notions of fairness and equity.” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569–70 (2002).
Assured, in seeking a way around this problem, relies on the general principle that one need not expressly list every possible way in which one might be defrauded in a contract. This is true. See Silver Oak Capital L.L.C. v. UBS AG, 82 AD3d 666, 667 (1st Dept 2011). Only specific, itemized waivers disclaiming reliance on particular representations are valid. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 115 AD3d 128, 137 (1st Dept 2014) ; Steinhardt Group Inc. v. Citicorp, 272 A.D.2d 255, 256 (1st Dept 2000), accord Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959). Nonetheless, “a fraud claim is barred where a sophisticated and well-counseled entity fails to include an appropriate prophylactic provision in the agreement governing the transaction from which the legal dispute arises to ensure against...
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