Mbia Ins. Corp. v. Royal Indem. Co.
| Citation | 426 F.3d 204 |
| Decision Date | 03 October 2005 |
| Docket Number | No. 03-4382.,No. 04-2207.,03-4382.,04-2207. |
| Parties | MBIA INSURANCE CORPORATION; Wells Fargo Bank Minnesota, N.A., as Trustee of SFC Grantor Trust, Series 2000-1, SFC Grantor Trust, Series 2000-2, SFC Grantor Trust, Series 2000-3, SFC Grantor Trust, Series 2000-4, SFC Grantor Trust, Series 2001-1, SFC Grantor Trust 2001-2, SFC Owner Trust 2001-I and SFC Grantor Trust, Series 2001-3 v. ROYAL INDEMNITY COMPANY, Appellant, v. Royal Indemnity Company, Third-Party Plaintiff v. PNC Bank, N.A.; Student Loan Servicing LLC; Andrew N. Yao; SFC Acceptance II LLC; SFC Acceptance III LLC; SFC Acceptance IV LLC; SFC Acceptance V LLC; SFC Acceptance VIII LLC; SFC Acceptance IX LLC; SFC Financial I LLC; SFC Financial II LLC; SFC Acceptance VI LLC; SFC Acceptance VII LLC, Third-Party Defendants Wilmington Trust of Pennsylvania v. Royal Indemnity Company, Appellant, v. Royal Indemnity Company, Third-Party Plaintiff v. SFC Financial I, LLC, Third-Party Defendant. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Lawrence C. Ashby, Philip Trainer, Jr., Ashby & Geddes, Wilmington, Delaware, Michael H. Barr (Argued), Kenneth J. Pfaehler, Sonnenschein Nath & Rosenthal LLP, New York, New York, for Appellant.
Ronald S. Rauchberg (Argued), Steven E. Obus, Andre G. Castaybert, Frank Scibilia, Proskauer Rose LLP, New York, New York, David C. McBride, John W. Shaw, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware, for Appellees MBIA Insurance Corporation and Wells Fargo Bank Minnesota, N.A.
Kevin R. Shannon, Potter Anderson & Corroon LLP, Wilmington, Delaware, David H. Pittinsky (Argued), Lawrence D. Berger, Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania, for Appellee PNC Bank, N.A.
Joseph H. Huston, Jr. (Argued), Thomas G. Whalen, Jr., Stevens & Lee, P.C., Wilmington, Delaware, for Appellee Wilmington Trust of Pennsylvania.
Before ALITO, McKEE, and SMITH, Circuit Judges.
In these consolidated appeals, we are called upon to construe a series of contracts. Appellant Royal Indemnity Company ("Royal") agreed in these contracts to insure the repayment of principal and interest on several hundred million dollars of student loans. The named beneficiaries of the policies, Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") and Wilmington Trust of Pennsylvania ("Wilmington Trust"),1 sued after the loans went into default and Royal failed to pay the claims they submitted. Royal defended on the ground that the lender on the underlying obligations fraudulently induced it to issue the policies and that this fraud entitled it to rescission.
The District Court entered summary judgment for the beneficiaries, and this appeal followed. We agree with the District Court that Royal's policies unambiguously and effectively waive defenses to its obligations based on fraud, but we conclude that Royal has raised a triable issue as to whether all of the losses claimed by the beneficiaries were covered under its policies. We thus affirm in part and reverse in part.
Student Finance Corporation ("SFC") was founded in 1992 to cater to the vocational segment of the student loan market. Some of the loans it originated itself; others it acquired from the original lenders. Many of the loans were apparently made to students at truck-driving schools. At all relevant times, SFC was owned and controlled by its founder and chief executive officer, Andrew N. Yao.
The capital for SFC's business came from financial institutions like Wilmington Trust and Wells Fargo. In 1999, Wilmington Trust issued SFC a $75 million loan, taking a pool of student loans as security. Wells Fargo, by contrast, helped finance SFC by securitizing the older loans in its portfolio. In each securitization, student loans were packaged and sold to a trust settled for the specific purpose of holding title to the loans. Wells Fargo, as trustee, funded the purchase by selling certificated shares in the trust to institutional investors. The record reflects that Wells Fargo raised approximately $450 million for SFC in eight securitizations from 1999 to 2002.
To encourage Wilmington Trust and the investors in Wells Fargo's trusts to part with their capital, SFC contracted with Royal to insure the repayment of interest and principal on the student loans. At issue in this case are ten "Credit Risk Insurance Policies" issued by Royal. Eight of them insured the loans held by the Wells Fargo trusts (one per trust), and two of them insured the loans pledged as collateral to Wilmington Trust. Each policy named either Wells Fargo or Wilmington Trust as beneficiary. The following table summarizes their terms:
Royal alleges, and the beneficiaries do not dispute, that SFC procured this insurance through a spectacular fraud. According to Royal, SFC misrepresented the creditworthiness and employment history of its student borrowers and conspired with schools to generate as many loans as possible by altering or forging loan documents. As loans went into default, SFC allegedly paid some of them down by surreptitiously diverting the proceeds of later loans. By thus masking the default rates of the older loans, SFC allegedly induced Royal to insure still more loans, whose proceeds then had to be applied in Ponziesque fashion to pay down the earlier ones. According to Royal, some of the proceeds were also diverted to Yao's personal accounts.
SFC's business proved unsustainable. In a March 2002 telephone call to Royal, Yao allegedly confessed that SFC had been paying down defaulted loans and explained that this practice could no longer be continued. An investigation launched by Royal revealed that SFC's loans had been defaulting at rates — over 80% in the case of one pool — well in excess of reported figures. Within three months of Yao's call, SFC was in Chapter 7 bankruptcy, where it apparently remains to this day. With SFC no longer paying down student loans, the defaults fell on the shoulders of Wilmington Trust and Wells Fargo, who turned to Royal to make good on its policies. Claims on those policies, which totaled only $38.6 million between 1999 and the spring of 2002, had piled up to $380 million by the end of 2002.
A flurry of lawsuits followed. Royal filed suit in Texas state court to rescind the policies, but this case was dismissed after limited discovery for lack of personal jurisdiction. In July 2002, Wells Fargo and MBIA Insurance Corporation ("MBIA")2 sued Royal in the U.S. District Court for the District of Delaware. Their complaint, which invoked the Court's diversity jurisdiction, alleged that Royal had wrongfully repudiated the trusts' eight policies by filing the Texas action and sought relief in the form of specific performance, a declaratory judgment that the policies were in effect, and damages. Wilmington Trust filed its own suit in Delaware federal court, alleging essentially the same claims.
Royal defended on the ground that SFC's fraudulent inducement entitled it to rescission. The beneficiaries countered that the policies unambiguously waived this defense. In separate opinions, the District Court entered summary judgment for the beneficiaries. See MBIA Ins. Corp. v. Royal Indem. Co., 312 F.Supp.2d 583 (D.Del.2004); MBIA Ins. Corp. v. Royal Indem. Co., 286 F.Supp.2d 347 (D.Del.2003). It found that the ten policies unambiguously waived fraud in the inducement as a defense to payment, and it predicted that Delaware's highest court would enforce them. The Court acknowledged that Delaware law was reluctant to enforce boilerplate waivers against unsophisticated parties, but it believed a clear waiver negotiated by sophisticated parties could be enforced. See 312 F.Supp.2d at 586, 286 F.Supp.2d at 355.
Since the Court concluded that Royal's waivers were enforceable, and that they clearly covered the defense Royal sought to present, it found further discovery on that defense unnecessary. It awarded summary judgment to the beneficiaries, ordering Royal to pay $269,851,527 plus interest to Wells Fargo and $12,908,966.43 plus interest to Wilmington Trust, and it further ordered Royal to pay subsequent claims as they came due. Royal timely appealed to this Court.
We review an award of summary judgment de novo, applying the same test on review that the District Court should have applied. In re Ikon Office Solutions, Inc., ...
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