Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital I Inc., Index No. 652914/2014, 01/23/2017 (Friedman, J.)

Motion to Dismiss; Fraud; Breach of Contract; RMBS monoline insurance litigation

By: Richie DeMarco | Staff Writer

Plaintiff issued an insurance policy guaranteeing payments on certain certificates in a residential mortgage-backed securitization (“RMBS”) transaction (“Transaction”). Plaintiff alleged that Defendant made extensive pre-contractual oral misrepresentations regarding due diligence as to the loans including: misrepresentations about the quality and characteristics of the loans, and contractual representations and warranties that restated these misrepresentations. The loans underlying the Transaction were originated by a non-party.

Plaintiff brought an action for fraud and breach of contract against Defendant containing seven causes of action: (1) fraudulent inducement; (2) material breach of the Insurance Agreement; (3) “breach and frustration of [the] repurchase protocol”; (4) reimbursement; (5) breach of the Pooling and Servicing Agreement and Side Letter Agreement; claims (6) and (7) include two claims of breach of warranties, against different subsidiary parties to the Transaction. In turn, Defendant moved to dismiss the complaint, arguing that: a provision in the Insurance Agreement bars claims for future damages, the rescissory damages sought are speculative and unrecoverable, and that damages for the fraudulent inducement claim are limited.

Nearly all of the issues in this case were raised on substantially similar pleadings in three recent decisions by the Court in the RMBS monoline insurance litigation: FGIC I, Ambac I, and Ambac II. The Court rejected Defendant’s attempt to dismiss Plaintiff’s future damages claims, because Defendant fails to cite any authority that actual pecuniary loss cannot be established by a reasonably certain projection of future damages. Further, the Court rejected Defendant’s claim that Plaintiff’s fraudulent inducement claim is duplicative of its breach of contract claims. The Court also rejected Defendant’s claim that the damages under the fraud and breach of warranty claims are duplicative. Additionally, despite arguing that Plaintiff’s breach of contracts claims are limited by the sole remedy provisions in the governing agreements, Defendant does not dispute that Plaintiff may be entitled to recover at least past claims payments.

The Court concluded that, because Plaintiff obtained express written warranties in the Insurance Agreement, in which Defendant represented that the representations and warranties they had made in the underlying documents of the Transaction were true and correct as of the date made, Plaintiff’s allegations were sufficient to raise a question of fact as to whether Plaintiff reasonably relied on Defendant’s representations. Because Defendant acknowledged that there were some timely notices of breach with respect to mortgage loans, the Court did not determine the extent to which claims may be maintainable based on post-commencement breach notices. Finally, the Court determined that the Insurance Agreement evidences a clear intent to cover legal fees incurred in intra-party enforcement actions.

The Court denied Defendants’ motion to dismiss, with the provision that Plaintiff may not recover rescissory damages.

Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital I Inc., Index No. 652914/2014, 01/23/2017 (Friedman, J.).

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