Securities Archives - New York Appellate Digest

Civil Procedure, Insurance Law, Privilege, Securities

A PRIVILEGE UNDER WISCONSIN INSURANCE LAW APPLIED IN THIS NEW YORK ACTION CONCERNING INSURANCE CLAIMS STEMMING FROM THE ISSUANCE OF RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT).

The First Department determined a privilege under Wisconsin Law protected certain emails and documents generated in a Wisconsin action by the Wisconsin Commissioner of Insurance concerning the payment of insurance claims stemming from the issuance of residential mortgage-backed securities, The decision doesn’t explain the underlying facts:

The Commissioner appointed a Special Deputy Commissioner (SDC) to oversee all activities … from Ambac’s [plaintiffs’] New York offices, and, at the SDC’s direction, plaintiffs commenced this action in New York, asserting claims of fraudulent inducement and breach of contract in connection with the policies Ambac issued on the securitizations sponsored by defendant. When defendant demanded the production of certain emails and other documents maintained by the SDC, plaintiffs responded by claiming the statutory privilege held by the Wisconsin Office of the Commissioner of Insurance (OCI) under Wisconsin law (see Wis Stat § 601.465). Defendant argued that New York law should be applied because, in adjudicating privilege issues, New York courts must apply the law of the place where the evidence will be introduced at trial or where the discovery proceeding is located. Supreme Court, after engaging in an interest-balancing analysis, determined that the Wisconsin statutory privilege was applicable, and denied defendant’s motion to compel. We affirm.

New York courts “routinely apply the law of the place where the evidence in question will be introduced at trial or the location of the discovery proceeding when deciding privilege issues” … . However, there are circumstances in which an interest-balancing analysis is properly undertaken to decide whether another state’s law should govern the evidentiary privilege … . This is a case that presents such circumstances … . Ambac Assur. Corp. v Nomura Credit & Capital, Inc., 2019 NY Slip Op 06574, First Dept 9-17-19

September 17, 2019/by Bruce Freeman

Civil Procedure, Contract Law, Securities

MOTION TO AMEND THE COMPLAINTS IN THESE RESIDENTIAL MORTGAGE BACKED SECURITIES ACTIONS SHOULD HAVE BEEN GRANTED, COMPETING INTERPRETATIONS OF A CONTRACT SHOULD NOT BE DETERMINED AT THE MOTION-TO-DISMISS STAGE (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Richter, over a partial dissent, determined plaintiff’s (the Trustee’s) motion to amend its complaints in these residential mortgage backed securities actions should have been granted. The amendment sought to allege defendant breached the underlying contract by failing to notify the trustee of loan breaches. The majority found that the contract provision requiring notice was ambiguous. The dissent argued the contract was not ambiguous and did not require notification:

It is well settled that “[a] request for leave to amend a complaint should be freely given, and denied only if there is prejudice or surprise resulting directly from the delay, or if the proposed amendment is palpably improper or insufficient as a matter of law” … . “A party opposing leave to amend must overcome a heavy presumption of validity in favor of [permitting amendment]” … .

Judged by these standards, the motion court should have granted the Trustee’s motions for leave to file the amended complaints with respect to the express breach of contract claims based on DBSP’s (defendant’s) failure to notify the Trustee of the loan breaches … . It cannot be said, at this early stage of the proceedings, that these claims are “palpably improper or insufficient as a matter of law” … . Nor has DBSP asserted, let alone shown, that it would suffer any prejudice or surprise directly resulting from the delay. * * *

… [B]because the disputed provision is reasonably susceptible to more than one interpretation, “it cannot be construed as a matter of law, and dismissal . . . is not appropriate” … . LDIR, LLC v DB Structured Prods., Inc., 2019 NY Slip Op 03154, First Dept 4-25-19

April 25, 2019/by Bruce Freeman

Civil Procedure, Debtor-Creditor, Securities

ONCE AN ACTION TO RECOVER THE PRINCIPAL OF A BOND IS TIME-BARRED, THERE IS NO LEGALLY COGNIZABLE CLAIM FOR POST-MATURITY INTEREST (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Feinman, determined that a bond issuer is not obligated to pay interest once a claim for the principal is time-barred:

The United States Court of Appeals for the Second Circuit has asked us to decide … “[i]f a bond issuer remains obligated to make biannual interest payments until the principal is paid, including after the date of maturity … , do enforceable claims for such biannual interest continue to accrue after a claim for principal of the bonds is time-barred?” We answer this question in the negative … . Pursuant to New York common law and the terms of the indenture, in the absence of a timely action to recover principal, a bondholder cannot enforce the conditional obligation to make post-maturity interest payments. * * *

The rule we reiterate today effectuates the agreement negotiated by the parties and reinforces our longstanding view of interest as generally dependent on principal. Moreover, it promotes the purposes underlying the statute of limitations … . For those reasons, we conclude that once a claim on the principal is time-barred, a claim to recover unpaid post-maturity interest payments is not legally cognizable. Ajdler v Province of Mendoza. 2019 NY Slip Op 02151, CtApp 3-21-19

March 21, 2019/by Bruce Freeman

Civil Procedure, Contract Law, Securities

THE SOLE REMEDY PROVISION OF THE CONTRACT IN THIS RESIDENTIAL MORTGAGE BACKED SECURITIES CASE, WHICH REQUIRED THAT THE DEFENDANT BE NOTIFIED AND GIVEN THE OPPORTUNITY TO REPURCHASE DEFECTIVE MORTGAGES, WAS NOT COMPLIED WITH PRIOR TO THE RUNNING OF THE STATUTE OF LIMITATIONS, PLAINTIFF’S TIMELY COMPLAINT WAS PROPERLY DISMISSED WITHOUT PREJUDICE, DESPITE THE FAILURE TO COMPLY WITH THE SOLE REMEDY PROVISION, ALLOWING PLAINTIFF TO REFILE THE COMPLAINT WITHIN SIX MONTHS PURSUANT TO CPLR 205 (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that the trustee’s breach of contract action in the residential-mortgage-backed-securities (RMBS) case was properly dismissed without prejudice, allowing plaintiff to refile pursuant to CPLR 205 (which allows a suit to be refiled within six months of a dismissal that is not on the merits). The contractual sole remedy provision, which requires that the defendant (DLJ) be notified and given the opportunity to repurchase any mortgages deemed defective, was not be complied with and the timely complaint was dismissed for that reason:

As a general rule, under CPLR 205 (a) a subsequent action may be filed within six months of a non-merits dismissal of the initial timely-filed matter. Here, we conclude that CPLR 205 (a) applies to an RMBS trustee’s second action when its timely first action is dismissed for failure to comply with a contractual condition precedent. * * *

The difference between a procedural and substantive condition precedent is well-established. A condition precedent is substantive when it “describe[s] acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract”… . In other words, the condition is “part of the cause of action and necessary to be alleged and proven, and without this no cause of action exist[s]” … , RMBS notice and sole remedy provisions are not substantive elements of the cause of action, but instead limitations on the remedy for a breach of the mortgage loan representations and warranties … . They serve as a precondition, “a procedural prerequisite to suit,” not a separate undertaking by the trustee … . Since notice and sole remedy provisions “do[] not create a substantive condition precedent” … , they do not affect when the statute of limitations commences because the limitations clock begins to run when the contract is executed.

Nevertheless, DLJ argues that the Trustee had to fulfill the procedural condition precedent before the limitations period expired, and its failure to do so rendered the original action untimely, such that a new action cannot be commenced pursuant to CPLR 205 (a). DLJ’s argument cannot be reconciled with our case law that a suit may be refiled pursuant to CPLR 205 (a) despite a plaintiff’s failure to comply with a condition precedent prior to the expiration of the statute of limitations. U.S. Bank Natl. Assn. v DLJ Mtge. Capital, Inc., 2019 NY Slip Op 01169, CtApp 2-19-19

February 19, 2019/by Bruce Freeman

Appeals, Civil Procedure, Contract Law, Securities

TRUSTEE’S BREACH OF CONTRACT ACTION IN THIS RESIDENTIAL MORTGAGE BACKED SECURITIES CASE WAS TIME-BARRED, THE ACTION COULD NOT RELATE BACK PURSUANT TO CPLR 203 BECAUSE THE TIMELY ACTION BY ANOTHER PARTY WAS PRECLUDED BY THE CONTRACT, THE COURT OF APPEALS COULD NOT CONSIDER WHETHER THE ACTION WAS TIMELY PURSUANT TO CPLR 205, EVEN THOUGH THE ISSUE WAS ADDRESSED BY THE APPELLATE DIVISION, BECAUSE THE ISSUE WAS NOT FULLY ADDRESSED IN SUPREME COURT (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that the trustee’s breach of contract action in this residential-mortgage-backed-securities securities case was time-barred. A certificate holder had filed a timely action, but the relevant contract precluded the action by the certificate holder. Therefore the trustee’s action could not be deemed to relate-back to it (CPLR 203). The Court of Appeals could not consider whether the trustee’s action was timely under CPLR 205, despite the fact that the Appellate Division addressed the issue, because the issue was not fully addressed by the parties in Supreme Court and the Court of Appeals does not have interest of justice jurisdiction:

CPLR 203 (f) has no application here because the certificate holder’s pre-existing action was not valid. The lower courts concluded that under the no action clause, the certificate holder could not bring the action on behalf of itself, any other certificate holder, or the Trustee. Those conclusions are not at issue in this Court. Thus, the certificate holder’s action was subject to dismissal, and there is no valid pre-existing action to which a claim in a subsequent amended pleading may relate back. The Trustee’s contention that it may use the relation-back doctrine of CPLR 203 (f) to cure the certificate holder’s lack of a right to sue, and that it may therefore avoid any problem with the identity of the plaintiff upon re-filing pursuant to CPLR 205 (a), is without merit. U.S. Bank Natl. Assn. v DLJ Mtge. Capital, Inc., 2019 NY Slip Op 01168, CtApp 2-19-19

February 19, 2019/by Bruce Freeman

Attorneys, Contract Law, Securities

IN THIS ACTION STEMMING FROM WORTHLESS RESIDENTIAL MORTGAGE BACKED SECURITIES, THE COMPLAINT SUFFICIENTLY PLED THAT GROSS NEGLIGENCE PRECLUDED ENFORCEMENT OF THE ‘SOLE REMEDIES’ CLAUSES AND THE DEMANDS FOR PUNITIVE DAMAGES AND ATTORNEY’S FEES SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Kahn, reversing Supreme Court, determined that the complaint in this residential mortgage backed securities (RMBS) action sufficiently pled that gross negligence precluded enforcement of the “sole remedies” clauses in the contracts and that the demands for punitive damages and attorney’s fees should not have been dismissed:

On this appeal, which arises from the securitization and sale of residential mortgages, plaintiff, Deutsche Bank National Trust Company (Trustee), as trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 (Trust), challenges the motion court’s pre-answer dismissal of the Trustee’s cause of action for breach of contract to the extent that it included a demand for compensatory damages. The motion court dismissed the Trustee’s compensatory damages demand on the ground that the “sole remedies” clauses in the underlying securitization agreements precluded the Trustee from seeking such relief. The Trustee maintains, however, that it sufficiently pleaded gross negligence on the part of defendants Morgan Stanley Mortgage Capital Holdings LLC (MSMCH) and Morgan Stanley ABS Capital I Inc. (MSAC) to render the “sole remedies” clauses unenforceable. On that issue, we hold, consistent with our decision in Morgan Stanley Mortgage Mtge. Loan Trust 2006-13ARX v Morgan Stanley Mtge. Capital Holdings LLC (143 AD3d 1 [1st Dept 2016]), that the complaint’s allegations of gross negligence in this case are sufficient to render the “sole remedies” clauses unenforceable. We are also called upon to decide whether the motion court properly dismissed the Trustee’s demands for punitive damages and attorneys’ fees. As to those issues, for the reasons that follow, we hold that those demands should not have been dismissed.

Specifically, this action arises from the securitization of subprime mortgages by Morgan Stanley & Co., Inc. in 2007, shortly before the housing market collapsed. The Trustee, as trustee of the Trust, seeks damages for the numerous loan defaults that occurred, rendering the residential mortgage backed securities (RMBS) it sold to outside investors virtually worthless. Matter of Part 60 Put-Back Litig., 2019 NY Slip Op 00368, First Dept 1-17-19

January 17, 2019/by Bruce Freeman

Civil Procedure, Contract Law, Securities

WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Fahey, over a two-judge dissent, determined that the language of a mortgage loan purchase and warranties agreement (MLPWA) did not postpone the accrual of a breach of contract cause of action and, therefore, the statute of limitations had expired. This is another case arising out of the sale of residential mortgage-backed securities which were supported by allegedly defective mortgage loans that did not comply with the representations and warranties in the agreement:

… [P]laintiff did not dispute that the representations and warranties made by defendant in the MLPWA were effective as of the closing date. Instead, plaintiff argued that the statute of limitations had yet to lapse, relying upon a provision in the MLPWA that it refers to as the “accrual clause,” which states as follows: “Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Subsections 9.01 and 9.02 shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach, substitute a Qualified Substitute Mortgage Loan or repurchase such Mortgage Loan as specified above and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement.” …

In New York, the default accrual rule for breach of contract causes of action is that the cause of action accrues when the contract is breached … . “[E]xcept in cases of fraud where the statute expressly provides otherwise, the statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury”… . This Court has “repeatedly rejected accrual dates which cannot be ascertained with any degree of certainty, in favor of a bright line approach,” and for that reason, we do not “apply the discovery rule to statutes of limitations in contract actions” … . “To extend the highly exceptional discovery notion to general breach of contract actions would effectively eviscerate the Statute of Limitations in this commercial dispute arena” … . * * *

… [General Obligations Law 17-103] requires an agreement to extend the statute of limitations to be made “after accrual of the cause of action,” and it allows extension of the limitations period only for, at most, the time period that would apply if the cause of action had accrued on the date of the agreement, i.e., six years from the date that the agreement was made if the limitations period is six years … . An agreement to extend the statute of limitations that does not comply with these requirements “has no effect” … . In addition, CPLR 201 provides that an action “must be commenced within the time specified in this article unless a different time is prescribed by law or a shorter time is prescribed by written agreement,” and “[n]o court shall extend the time limited by law for the commencement of an action.” Deutsche Bank Natl. Trust Co. v Flagstar Capital Mkts., 2018 NY Slip Op 06851, CtApp 10-16-18

CONTRACT LAW (WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP))/CIVIL PROCEDURE (CONTRACT LAW, WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP))/SECURITIES (WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP))/RESIDENTIAL MORTGAGE BACKED SECURITIES (CONTRACT LAW, CIVIL PROCEDURE, WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP))/STATUTE OF LIMITATIONS (WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP))

October 16, 2018/by Bruce Freeman

Insurance Law, Securities

A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (SECOND DEPT).

The First Department, in a full-fledged opinion by Justice Andrias, determined that the requirement that Bear Stearns repay $160,000,000 constituted a penalty (disgorgement) for improper profit-taking, even where the benefits went to others and not Bear Stearns, and therefore was not a “loss” for which Bear Stearns' insurer was liable:

The law of the case is applicable to “legal determinations that were necessarily resolved on the merits in a prior decision” … . On the prior appeal, the Court of Appeals stated that “the Insurers do not earnestly dispute that the claims fall within the policy's definition of Loss” … , but did not rely on the policy language in denying defendants' motions. Instead it focused on the public policy issue. Furthermore, the doctrine does not apply where a motion for summary judgment follows a motion to dismiss that was not converted to a motion for summary judgment pursuant to CPLR 3212(c)… .

Even if the Court of Appeals' prior determination is viewed as addressing the contractual issue, “while the law of the case doctrine is intended to foster orderly convenience' . . ., it is not an absolute mandate which limits an appellate court's power to reconsider issues where there are extraordinary circumstances, such as subsequent evidence affecting the prior determination or a change of law'” … . Here, the United States Supreme Court's decision in [Kokesh v Securities and Exchange Commission (_ US_, 137 S Ct 1635 [2017])], characterizing SEC disgorgement as a penalty, represents such a change of law. * * *… Kokesh has now provided the missing precedent, establishing that disgorgement is a penalty, whether it is linked to the wrongdoer's gains or gains that went to others. In Kokesh, the Supreme Court, emphasizing that when a sanction “can only be explained as . . . serving either retributive or deterrent purposes,” it is a “punishment,” rejected the SEC's argument that disgorgement is remedial because it simply puts the defendant back in the position “he would have occupied had he not broken the law.” J.P. Morgan Sec., Inc. v Vigilant Ins. Co., 2018 NY Slip Op 06146, First Dept 9-19-18

INSURANCE LAW (SECURITIES, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))/SECURITIES (INSURANCE LAW, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))/DISGORGEMENT (INSURANCE LAW, SECURITIES, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))

September 19, 2018/by Bruce Freeman

Contract Law, Fraud, Insurance Law, Securities

INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT).

The First Department, modifying Supreme Court, in a full-fledged opinion by Justice Manzanet-Daniels, determined plaintiff insurer's (MBAI's) motion for summary judgment should have been denied in its entirety in this action stemming from the insuring of residential mortgage-backed securities. MBAI sought to recover all the payments made after more than 50% of the mortgages underlying the securities went into default:

MBIA seeks “Claims Payment Damages” and “Repurchase Damages.” The “Claims Payment Damages” consist of “all claims payments that MBIA has made . . . [or] will likely incur,” and are designed to put MBIA in the same position it would have been in had the policy never been issued. As such, they constitute rescissory damages and are not recoverable by plaintiff monoline insurer seeking redress under an irrevocable policy. We have made clear that an insurer is “not entitled to damages amounting to all claims payments it made or will make under the policies,” inasmuch as such damages are “rescissory damages to which the insurer is not entitled” … .

“Repurchase Damages” represent the difference between the claims payments MBIA made or is projected to incur, and those MBIA would have made had [defendant] Credit Suisse repurchased nonconforming lines, i.e., those that breached the representations and warranties.

While such repurchase damages are in theory recoverable, the fraud claim was nonetheless correctly dismissed. It has long been the rule that parties may not assert fraud claims seeking damages that are duplicative of those recoverable on a cause of action for breach of contract (see e.g. Manas v VMS Assoc., LLC, 53 AD3d 451, 454 [1st Dept 2008]). As we noted in Manas, fraud damages are meant to redress a different harm than damages on a cause of action for breach of contract. Contract damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; fraud damages are meant to indemnify losses suffered as a result of the fraudulent inducement … . Where all of the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed … . * * *

… [T]he order of the Supreme Court … [which] granted defendants' motion for summary judgment dismissing the fraudulent inducement claim, denied so much of plaintiff's motion for summary judgment as sought a ruling that an insurer does not have to prove loss causation in connection with a fraudulent inducement claim, granted so much of plaintiff's motion as sought a ruling on the meaning of the “No Monetary Default” representation and the “Mortgage Loan Schedule” representation in the Pooling and Service Agreement for the subject residential mortgage-backed securitization transaction, and denied plaintiff's motion to supplement the record in opposition to defendants' motion, should be modified, on the law, to deny plaintiff's motion as to the meaning of the representations, and otherwise affirmed … . MBIA Ins. Corp. v Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op 06060, First Dept 9-13-18

INSURANCE LAW (SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/CONTRACT LAW (INSURANCE LAW, SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/SECURITIES (INSURANCE LAW, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/FRAUD (INSURANCE LAW, SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/RESIDENTIAL MORTGAGE BACKED SECURITIES (INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))

September 13, 2018/by Bruce Freeman

Attorneys, Contract Law, Fraud, Insurance Law, Securities

IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Garcia, over a partial dissent, determined certain aspects of defendant Countrywide’s motion for summary judgment against plaintiff insurer, Ambac, stemming from residential mortgage backed securities issued by Countrywide, were properly granted. Ambac’s argument that it need not demonstrate justifiable reliance or loss causation in support of its fraudulent inducement cause of action was rejected, as was Ambac’s argument that it was entitled to relief over and above that specified in the sole remedy clause, as well as attorney’s fees:

Public policy reasons support the justifiable reliance requirement. Where a “sophisticated business person or entity . . . claims to have been taken in,” the justifiable reliance rule “serves to rid the court of cases in which the claim of reliance is likely to be hypocritical” … . Excusing a sophisticated party such as a monoline financial guaranty insurer from demonstrating justifiable reliance would not further the policy underlying this “venerable rule.”

Likewise, there is no merit to Ambac’s argument that it need not show loss causation. Loss causation is a well-established requirement of a common law fraudulent inducement claim for damages. * * *

Ambac’s complaint fails to include breach of contract allegations beyond those that fall under the sole remedy provision … , and accordingly Ambac is limited to the repurchase protocol as the potential remedy for those claims. * * *

In New York, “the prevailing litigant ordinarily cannot collect . . . attorneys’ fees from its unsuccessful opponents. . . . Attorneys’ fees are treated as incidents of litigation, rather than damages. . . . The exception is when an award is authorized by agreement between the parties or by statute or court rule” … . … [T]his Court [has] held that a court “should not infer a party’s intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise … . Ambac Assur. Corp. v Countrywide Home Loans, Inc., 2018 NY Slip Op 04686, CtApp 6-27-18

INSURANCE LAW (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/FRAUD (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/CONTRACT LAW (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/SECURITIES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/RESIDENTIAL MORTGAGE BACKED SECURITIES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/ATTORNEY’S FEES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))

June 27, 2018/by Bruce Freeman

A PRIVILEGE UNDER WISCONSIN INSURANCE LAW APPLIED IN THIS NEW YORK ACTION CONCERNING INSURANCE CLAIMS STEMMING FROM THE ISSUANCE OF RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT).

MOTION TO AMEND THE COMPLAINTS IN THESE RESIDENTIAL MORTGAGE BACKED SECURITIES ACTIONS SHOULD HAVE BEEN GRANTED, COMPETING INTERPRETATIONS OF A CONTRACT SHOULD NOT BE DETERMINED AT THE MOTION-TO-DISMISS STAGE (FIRST DEPT).

ONCE AN ACTION TO RECOVER THE PRINCIPAL OF A BOND IS TIME-BARRED, THERE IS NO LEGALLY COGNIZABLE CLAIM FOR POST-MATURITY INTEREST (CT APP).

IN THIS ACTION STEMMING FROM WORTHLESS RESIDENTIAL MORTGAGE BACKED SECURITIES, THE COMPLAINT SUFFICIENTLY PLED THAT GROSS NEGLIGENCE PRECLUDED ENFORCEMENT OF THE ‘SOLE REMEDIES’ CLAUSES AND THE DEMANDS FOR PUNITIVE DAMAGES AND ATTORNEY’S FEES SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

WARRANTIES AND REPRESENTATIONS CLAUSE IN RESIDENTIAL MORTGAGE-BACKED SECURITIES PURCHASE AGREEMENT DID NOT POSTPONE THE ACCRUAL OF A BREACH OF CONTRACT ACTION, THE ACTION WAS THEREFORE TIME-BARRED (CT APP).

A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (SECOND DEPT).

INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT).

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