Opinion
600070/2010
10-07-2011
Ambac Assurance Corporation and THE SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION, Plaintiffs, v. DLJ Mortgage Capital, Inc. and CREDIT SUISSE SECURITIES (USA), LLC, Defendants.
Plaintiff Ambac Assurance Corporation: Peter W. Tomlinson Jonathan Hatch Patterson Belknap Webb & Taylor. Plaintiff The Segregated Account of Ambac Insurance Corporation: Jeffrey A. Simmons Foley & Lardner. All defendants: John Ansbro Richard A. Jacobsen Daniel W. Robertson Barry S. Levin (pro hac vice) Darren S. Teshima (pro hac vice) Orrick, Herrington & Sutcliffe LLP.
Plaintiff Ambac Assurance Corporation: Peter W. Tomlinson Jonathan Hatch Patterson Belknap Webb & Taylor.
Plaintiff The Segregated Account of Ambac Insurance Corporation: Jeffrey A. Simmons Foley & Lardner.
All defendants: John Ansbro Richard A. Jacobsen Daniel W. Robertson Barry S. Levin (pro hac vice) Darren S. Teshima (pro hac vice) Orrick, Herrington & Sutcliffe LLP.
Shirley Werner Kornreich, J.
Plaintiffs move for leave to reargue the Court's April 7, 2011 Decision and Order (Prior Decision) dismissing their fraudulent inducement claim and striking their demand for a jury trial. Defendants oppose the motion.
I.Background
Most relevant facts are set forth in detail in the Prior Decision with which the reader's familiarity is assumed. The abbreviations used below mirror those in the Prior Decision.
A.The Securitization Transaction
Plaintiffs' claims arise from a 2007 securitization of second lien, residential mortgage loans (HELOCs). DLJ Mortgage Capital, Inc. (DLJ), as the "sponsor" in the securitization transaction, aggregated over two thousand of these loans into a "pool," which subsequently was transferred to a trust. Amend. Compl. ¶ 2. The trust issued securities that were to be paid from the cash flow of repayments on the pooled loans. Id. Credit Suisse Securities (USA), LLC (CS Securities) served as the underwriter for the public offering of the securities and marketed them to investors. Id. Ambac Assurance Corporation (Ambac), an insurance company in the business of insuring certain types of financial risk, issued a policy guaranteeing certain payments on these securities pursuant to a contract with DLJ. Id. Ambac brought this action, inter alia. for fraudulent inducement and breach of contractual warranty.
B.Plaintiffs' Allegations of Fraudulent Inducement
Plaintiffs' fraudulent inducement claim is premised on allegations of certain pre-contractual representations by CS Securities. The alleged representations fall into four categories.
Loan Tape. Plaintiffs allege that on February 7, 2007, "Tim Kuo [Kuo] of CS Securities sent Ambac an email . . . which attached an Excel spreadsheet referred to as the loan tape' that . . . included critical metrics relating to each borrower's ability to repay the loans and the value of the property as collateral, such as the borrower's debt-to-income ratio (DTI'), combined loan-to-value ratio (CLTV'), and occupancy type." Amend. Compl. ¶ 28. Plaintiffs further allege that Kuo represented "that CS Securities analyzed and audited the disclosures during its purported thorough due diligence of the HELOCs." Id. Plaintiffs allege that "CS Securities intended Ambac to take the disclosures as true, accurate and complete in making its determination regarding whether to offer its insurance policy." Id. Plaintiffs finally allege "that the disclosures on the loan tape concerning the key attributes of each HELOC were false and misleading." Amend Compl. ¶ 36. Ambac allegedly discovered this fact after it "retained an expert third-party consultant that reviewed the files created during the origination of the HELOCs." Id.
Guidelines. Plaintiffs allege that Ambac requested "the guidelines that governed the pooled HELOCs." Amend Compl. ¶ 29. They also allege that Kuo "sent Ambac an email dated February 14, 2007 that stated Attached are our guides' and in fact attached Credit Suisse guidelines dated August 2006 (the Credit Suisse Guidelines')." Id. Plaintiffs maintain that "[i]n disclosing only the Credit Suisse Guidelines, CS Securities intended Ambac to believe - and Ambac reasonably believed - that the Credit Suisse Guidelines were the minimum guidelines that applied to all the HELOCs in the securitization, including the Secured Funding loans." [emphasis supplied] Id. Finally, plaintiffs allege that "Credit Suisse now concedes that its Credit Suisse Guidelines were not used to screen the majority of HELOCs sold in the transaction, and instead that more lax guidelines were applied." Amend Compl. ¶ 36.
Due Diligence. Plaintiffs allege that "Kuo sent Ambac an email dated February 15, 2007, assuring Ambac that Credit Suisse had conducted due diligence on virtually 100% of the loans." Amend Compl. ¶ 31. Plaintiffs further allege that "Kuo presented a chart that specified the percentage of the pooled HELOCs that Credit Suisse obtained through each of its three origination channels: (I) the Loan-by-Loan (LBL') channel, which accounted for 47.95% of the loans; (ii) the Mini-Bulk channel, which accounted for 42.89%; and (iii) the Bulk channel, through which just 9.16% were obtained." Id. According to plaintiffs, "Kuo then explained that the majority of loans went through LBL and minibulk. [W]e do 100% diligence on the LBL, and virtually 100% for the minibulk loans. For Secured Funding Loans we do 100% diligence.'" Id. Plaintiffs allege that its "third-party consultant's review . . . affirm[s] that the due diligence Credit Suisse conveyed to Ambac was not designed or conducted to assess the HELOCs' compliance with underwriting guidelines, including whether the borrowers' stated income was reasonable to repay the loan." Amend Compl. ¶ 36.
Plaintiffs in addition allege that "Kuo transmitted to Ambac the due diligence results for a sample of 21 loans proposed for inclusion in the pool. The due diligence determined that the HELOCs complied with the governing underwriting guidelines, including the assessment that the borrower's stated income was reasonable and adequate to repay the loans." Amend. Compl. ¶ 33. Plaintiffs do not specifically allege, however, that the results reported in this communication were false.
Prior Securitization. Plaintiffs finally allege that "CS Securities represented that the structure and collateral in the contemplated transaction mirrored that of a prior Credit Suisse securitization, which CS Securities represented was performing well." Amend Compl. ¶ 34. Specifically, plaintiffs allege that Kuo "forwarded to Ambac the Prospectus Supplement pertaining to its prior HELOC securitization . . . and represented that the structure will be similar to that deal.'" Id. In addition, plaintiffs allege that Kuo "sent to Ambac an Excel spreadsheet that showed relatively low delinquencies and losses on the [prior] transaction." Id. According to plaintiffs, "in making the limited disclosures concerning the performance of the prior Credit Suisse securitization, CS Securities' disclosure was incomplete and misleading because Credit Suisse failed to disclose the most salient fact relevant to Ambac's analysis, i.e., that the earlier securitized loan pool was replete with loans that were made to borrowers that had little or no ability to repay their loans." Amend Compl. ¶ 36.
C.Documentary Evidence
Section 2.04(k) of the Insurance and Indemnity Agreement (the I & I) between, inter alia, Ambac and DLJ provides that "[t]he Company Information in the Offering Documents do not contain any untrue statement of material fact." Teshima Aff., Exh. E. "Company Information" means "all information with respect to the Offering Documents other than the Insurer Information and the Underwriter Information." Teshima Aff., Exh. E, §1.01. "Offering Documents" also is a defined term under the I & I and includes the Prospectus of March 1, 2007 and the Prospectus Supplement of March 8, 2007 (the ProSupp). Id.
The ProSupp contains a section entitled "Originators" which states in pertinent part:
[DLJ] acquired 48.88% of the initial mortgage loans . . . through its whole-loan flow acquisition channel from originators that [DLJ] has determined met its qualified correspondent requirements. Such standards require that the following conditions be satisfied: (I) the related mortgage loans were originated pursuant to a mortgage loan purchase agreement between [DLJ] and the applicable qualified correspondent that contemplated that such qualified correspondent would underwrite mortgage loans . . . in accordance with underwriting guidelines designated by [DLJ] (" Designated Guidelines ") or guidelines that do not vary materially from such Designated Guidelines ; (ii) such mortgage loans were in fact underwritten as described in clause (I) above . . . [and] (iv) [DLJ] employed, at the time such mortgage loans were acquired by [DLJ], certain quality assurance procedures designed to ensure that the applicable qualified correspondent from which it purchased the related mortgage loans properly applied the underwriting criteria designated by [DLJ] . The Designated Guidelines are substantially similar to the guidelines described in the prospectus under " The Trust Fund - Underwriting Standards ." [emphasis supplied]Teshima Aff., Exh. C, S-34.
The "Trust Fund - Underwriting Standards" subsection of the Prospectus provides in relevant part:
The mortgage loans either have been originated by the seller [DLJ] or purchased by the seller from various banks, savings and loans associations, mortgage bankers (which may or may not be affiliated with that seller) and other mortgage loan originators and purchasers of mortgage loans in the secondary market, and were originated generally in accordance with the underwriting criteria described herein . The underwriting standards applicable to the mortgage loans typically differ from, and are, with respect to a substantial number of mortgage loans, generally less stringent than, the underwriting standards established by Fannie Mae or Freddie Mac primarily with respect to original principal balances, loan to value ratios, borrower income, required documentation, interest rates, borrower occupancy of the mortgaged property and/or property types . To the extent the programs reflect underwriting standards different from those of Fannie Mae and Freddie Mac , the performance of the mortgage loans thereunder may reflect higher delinquency rates and/or credit losses . In addition, certain exceptions to the underwriting standards described herein are made in the event that compensating factors are demonstrated by a prospective borrower. Neither the depositor nor any affiliate, including DLJ Mortgage Capital, has reunderwritten any mortgage loan . [emphasis supplied]Teshima Aff., Exh. C, 49-50.
The mortgage loans have been originated under "full" or "alternative," "reduced documentation," "stated income/stated assets" or "no income/no asset" programs . The "alternative," "reduced documentation," "stated income/stated assets" or "no income/no asset" programs generally require either alternative or less documentation and verification than do full documentation programs which generally require standard
Fannie Mae/Freddie Mac approved forms for verification of income/employment, assets and certain payment histories. . . . Generally, under both "full" and "alternative" documentation programs at least one year of income documentation is provided. Generally under a "reduced documentation " program, either no verification of the mortgagor's stated income is undertaken by the originator or no verification of the mortgagor's assets is undertaken by the originator. Under a " stated income/stated assets " program, no verification of either a mortgagor's income or a mortgagor's assets is undertaken by the originator although both income and assets are stated on the loan application and a "reasonableness test" is applied. Generally under a " no income/no assets " program, the mortgagor is not required to state his or her income or assets and therefore, no verification of such mortgagor's income or assets is undertaken by the originator. [emphasis supplied]
The ProSupp discloses that of the 2,563 initial mortgage loans in the securitized pool 1,079 loans, or 50.67% (by aggregate principal balance outstanding), were "reduced documentation" loans for which either no verification of the mortgagor's stated income or no verification of the mortgagor's assets was undertaken by the originator. Teshima Aff., Exh. C, S-28. The ProSupp further discloses that 404 loans, or 15.98 % (by aggregate principal balance outstanding), were "stated income" loans for which no verification of the mortgagor's stated income was undertaken by the originator. Id. In total, 66.65% of the initial mortgage loans were loans for which either no verification of the mortgagor's stated income or no verification of the mortgagor's assets was undertaken by the originator.
The ProSupp also discloses that 29.30% of the initial mortgage loans were originated by Secured Funding Corporation (Secured Funding). Teshima Aff., Exh. C, S-34. The ProSupp states that Secured Funding originates many mortgage loans under "limited documentation" or "Stated Income documentation" programs. Id., S-35. The ProSupp explains that "[u]nder the limited documentation program, more emphasis is placed on the value and adequacy of the real property and improvements that will be the collateral for the mortgage loan . . . than on verified income of the applicant. . . . Certain credit underwriting documentation relating to income or income verification and/or employment verification is waived ." [emphasis added] Id. With respect to loans originated by Secured Funding, the ProSupp further explains that "[u]nder the Stated Income documentation program, income for the applicant is not verified . Emphasis is placed on the value and adequacy of the real property and improvements that will be the collateral for the mortgage loan and the credit history of the applicant, rather than on verified income and assets of the applicant ." [emphasis supplied] Id.
II.Discussion
"A motion for leave to reargue . . . shall be based upon matters of fact or law allegedly overlooked or misapprehended by the court in determining the prior motion . . . ." CPLR §2221(d)(3). The court may grant a motion for leave to reargue in light of new and controlling law on the relevant issues. Hanover Ins. Co. v D & W Cent. Station Alarm Co., 164 AD2d 112, 115 (1st Dept 1990). If the motion is granted, "the court may adhere to the determination on the original motion or may alter that determination." CPLR §2221(f).
A.Fraudulent Inducement Claim
Plaintiffs move to reargue on three grounds: (1) the court incorrectly concluded that plaintiffs' fraud claim about the underwriting of the non-Secured Funding loans duplicated their breach of contract claims; (2) the court misunderstood the nature of the data available to Ambac prior to the close of the transaction; and (3) CS Securities' representations about its prior securitization were representations about past performance.
1.Duplication
In the Prior Decision, the court granted defendants' motion to dismiss plaintiffs' fraudulent inducement claim, in part, because it found that the fraud claim duplicated plaintiffs' breach of contract claims. That is, the court found that plaintiffs' fraudulent inducement claim - in so far as it was premised on CS Securities' alleged representations regarding the underwriting of the non-Secured Funding loans - was a topic addressed by express contractual representations and warranties and, thus, duplicative of plaintiffs' breach of contract claims.
The court is granting plaintiffs' motion to reargue because it is bound to follow the recent decision of the First Department in MBIA Ins. Corp v Countrywide Home Loans, Inc., 2011 NY Slip Op 5640, 928 NYS2d 229, 2011 NY App. Div. LEXIS 5509 (1st Dept 2011)(nor)(Countrywide). Addressing the duplication issue in Countrywide, the First Department held that the claims are not duplicative merely because "some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim." Id., 2011 NY App. Div. LEXIS 5509 at ***11-12. The Countrywide ruling mandates a decision that plaintiffs' fraudulent inducement claim does not duplicate the breach of contract claims.
2.Justifiable/Reasonable Reliance
Fraudulent inducement requires the presence of a misrepresentation and "justifiable reliance" on the misrepresentation. Channel Master Corp. v Aluminium Ltd. Sales, Inc., 4 NY2d 403, 407 (1958).
The general rule is that if the facts represented are not matters peculiarly within the party's knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.Schumaker v Mather, 133 NY 590, 596 (1892). Where a party
has been put on notice of the existence of material facts which have not been documented and he nevertheless proceeds with a transaction without securing the available documentation or inserting appropriate language in the agreement for his protection, he may truly be said to have willingly assumed the business risk that the facts may not be as represented. Succinctly put, a party will not be heard to complain that he has been defrauded when it is his own evident lack of due care which is responsible for his predicament.Rodas v Manitaras, 159 AD2d 341, 342-43 (1st Dept 1990).
Procedurally,
[a]s a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm's length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it, such as reviewing the files of the other parties.UST Private Equity Investors Fund, Inc. v Salomon Smith Barney, 288 AD2d 87, 88 (1st Dept 2001).
DDJ Management creates an exception to this general rule. DDJ Management, LLC v Rhone Group, LLC, 15 NY3d 147, 154 (2010). Specifically,
where a plaintiff has gone to the trouble to insist on a written representation [or warranty] that certain facts are true, it will often be justified in accepting that representation [or warranty] rather than making its own inquiry. [emphasis supplied]Id. Where such are the facts, whether a party was "justified in relying on the warranties [it] received is a question to be resolved by the trier of fact." Id. at 156.
The DDJ Management exception applies to the party making the written false representation as well as to a party "controlling" the party making the representation. Id. at 157. In DDJ Management, the Court applied the exception to defendants Rhone and Quilvest based on the following grounds:
[i]t can be inferred from the allegations of the complaint that plaintiffs believed Rhone and Quilvest would not knowingly cause a company they controlled to make false representations in a loan agreement as to the accuracy of financial statements. We cannot say as a matter of law that this was an unjustifiable belief. [emphasis supplied]Id. Under New York law, "control . . . means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise." NY BCL §912(a)(8). In sum, the threshold issue is whether the DDJ Management exception applies to CS Securities' representations in this case.
a.The Alleged Representations Regarding the Loan Tape, Guidelines and Due Diligence
The contractual representations and warranties at issue here were made in the I & I and the Loan Purchase Agreement (the LPA). CS Securities is not a party to either of these contracts - DLJ is. Thus, CS Securities did not make any contractual representations or warranties to Ambac. Consequently, CS Securities' representations would fall within the scope of the general rule of Schumaker and its progeny, and the DDJ Management exception would not apply, unless CS Securities controlled DLJ.
Ambac does not allege in the amended complaint that CS Securities controlled DLJ. Contrast with Countrywide, supra, 2011 LEXIS 5509 at ***11 ("MBIA further alleges that Countrywide Financial directed the activities of Countrywide Home and Countrywide Securities."). In fact, Ambac urged in its opposition to defendants' motion to dismiss that "CS Securities and DLJ are two separate entities." [emphasis supplied] Plaintiffs' MOL, p. 18. Ambac only alleges that CS Securities and DLJ are "affiliates under common control." [emphasis supplied] Amend. Compl. ¶ 3. Ambac, however, has not asserted a fraudulent inducement claim against, or identified, the party or parties that control CS Securities and DLJ "in common." Since CS Securities did not make the contractual representations and warranties at issue here and plaintiffs do not allege that CS Securities controlled DLJ, the party making them, CS Securities' alleged representations most likely fall outside the DDJ Management exception and within the general rule of Schumaker and its progeny. This would include the representations that were allegedly covered by DLJ's contractual warranties.
Under the Schumaker/Rodas/UST analysis, in turn, Ambac's reliance on CS Securities' alleged representations regarding the underwriting guidelines, due diligence and loan tape for the mortgage loans would be unreasonable as a matter of law. Ambac admits that it did not "review the loan files created in connection with the loan origination to ensure that the loans complied with appropriate underwriting guidelines." Amend. Compl. ¶ 24. Nor does Ambac allege that it requested the files. Hence, Ambac, "cannot establish that it entered into an arm's length transaction in justifiable reliance on alleged misrepresentations" if it "failed to make use of the means of verification that were available to it, such as reviewing the files of the other parties." UST Private Equity Investors, 288 AD2d at 88.
Ambac alleges that the means of verification were not available to it because "in order to participate, it had to provide its commitment in a matter of weeks" and because it "did not have access to the loan-origination files - or the infrastructure required to conduct loan-level reunderwriting and diligence - that Credit Suisse had as the aggregator of the HELOCs, in privity with the HELOC originators." Amend. Compl. ¶ 24. Again, Ambac does not allege that it requested the loan files as a condition to making its insurance commitment. Further, any timing limitations were self-imposed because Ambac did not have to make a commitment to issue the Insurance Policy. The fact that Ambac lacked the requisite time and infrastructure to test CS Securities' representations might be a reason not to enter into this particular transaction or this type of transaction altogether, but is not an excuse for entering into it blind. Rodas, 159 AD2d at 342-43.
Moreover, the reasonableness of Ambac's reliance on CS Securities' representations regarding the guidelines, due diligence, and loan tape is in doubt even if the alleged representations fell within the DDJ Management exception discussed above. In DDJ Management the Court of Appeals held that reliance would often be reasonable even if there were " hints from which plaintiffs might have been put on their guard" about the truth of defendants' representations, where plaintiffs receive written representations and warranties that the facts represented are true from the appropriate parties. [emphasis supplied] See DDJ Management, 15 NY3d at 156. In its analysis, the Court cited with approval a decision by the Southern District of New York where "[e]xamining the facts of several state and federal cases applying New York law, the [SDNY] court concluded that they do not support the interpretation that a duty to inquire is necessarily triggered as soon as a plaintiff has the slightest hints' of any possibility of falsehood '." [emphasis supplied] DDJ Management, 15 NY3d at 155, citing JP Morgan Chase Bank v Winnick, 350 FSupp2d 393 (SDNY 2004). The JP Morgan Court, summarizing New York law, explained that
[i]n assessing whether reliance on allegedly fraudulent misrepresentations is reasonable or justifiable, New York takes a contextual view, focusing on the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision. . . .JP Morgan, 350 FSupp2d at 406, 408.
In addition, "[a] heightened degree of diligence is required where the victim of fraud had hints of its falsity." This rule applies where the "circumstances [are] so suspicious as to suggest to a reasonably prudent plaintiff that the defendants' representations may be false "; in such cases, a plaintiff "cannot reasonably rely on those representations, but rather must make additional inquiry to determine their accuracy.'" Once the duty to inquire is triggered, . . . a plaintiff is foreclosed from bringing a claim for false representations if no inquiry is made. . . . In each of these cases, the notice to the plaintiff was clear and direct : it was either provided by plaintiff's own direct knowledge of the fraud, by the terms of an operative contract , or by circumstances surrounding the parties' relationship (e.g. litigation) that would normally arouse suspicion. In each of these circumstances, the plaintiff may be said to have been "placed on guard or practically faced with the facts" of the complained of fraud, and fulfilling the duty to inquire was a necessary precondition to proceeding with a misrepresentation claim" [citations omitted] [emphasis supplied]
It appears that Ambac's notice in this case went well beyond mere "hints" of falsehood. Ambac had "clear and direct" notice "by the terms of operative contract[s]" - the Prospectus and ProSupp - that CS Securities' alleged representations regarding underwriting guidelines, due diligence, and the loan tape were false. Siemens Westinghouse Power Corp. v Dick Corp., 299 FSupp2d 242, 247 (SDNY 2004) ("Where there is a meaningful' conflict between a written contract and prior oral representations, a party will not be deemed to have justifiably relied on the prior oral representations."), citing Bango v Naughton, 184 AD2d 961, 963 (2d Dept 1992) ("The conflict between the provisions of the written contract and the oral representations negates the claim of reliance upon the latter."); see also Arnav Industries, Inc., Retirement Trust v Brown, Raysman, Millstein, Felder & Steiner, LLP, 96 NY2d 300, 304 (2001) ("a party who signs a document is conclusively bound by its terms absent a valid excuse for having failed to read it").
As discussed, Ambac is a party to the I & I which incorporates by reference both the Prospectus and the ProSupp. Teshima Aff., Exh. E §§ 2.04, 1.01 (definitions of "Company Information" and "Offering Documents"); see also discussion supra at 4.
Regarding the underwriting guidelines, plaintiffs maintain that "[i]n disclosing only the Credit Suisse Guidelines, CS Securities intended Ambac to believe - and Ambac reasonably believed - that the Credit Suisse Guidelines were the minimum guidelines that applied to all the HELOCs in the securitization, including the Secured Funding loans." [emphasis supplied] Amend. Comp. ¶ 29. This alleged belief appears inconsistent with the disclosures in the ProSupp and, therefore, seemingly unreasonable. The ProSupp explained that DLJ's "Designated Guidelines" applied only to the 48.88% of the mortgage loans that DLJ acquired "through its whole-loan flow acquisition channel from originators that [DLJ] has determined met its qualified correspondent requirements." Teshima Aff., Exh. C, S-34. The ProSupp further described the underwriting guidelines for Secured Funding loans without making any reference to DLJ's "Designated Guidelines." Finally, the Prospectus clarified that "[n]either the depositor nor any affiliate , including DLJ Mortgage Capital, has reunderwritten any mortgage loan." [emphasis supplied] Id., 49.
Regarding the due diligence conducted on the HELOC pool, plaintiffs allege that CS Securities represented "that Credit Suisse had conducted due diligence on virtually 100% of the loans." Amend Compl. ¶31. According to plaintiffs, CS Securities further represented that " the majority of loans went through LBL and minibulk. [W]e do 100% diligence on the LBL, and virtually 100% for the minibulk loans. For Secured Funding Loans we do 100% diligence.'"
The court notes that plaintiffs do not allege that CS Securities made statements regarding the results of the due diligence, including the level of compliance with Credit Suisse's "Designated Guidelines."
The disclosures in the ProSupp seemingly belie these representations. The ProSupp discloses that - with respect to 48.88% of the mortgage loans that DLJ acquired "through its whole-loan flow acquisition channel from originators that [DLJ] has determined met its qualified correspondent requirements" - DLJ "employed certain quality assurance procedures designed to ensure that the applicable qualified correspondent from which it purchased the related mortgage loans properly applied [the Designated Guidelines]." Teshima Aff., Exh. C, S-34. The ProSupp claims no diligence regarding the remaining 51.18% of the mortgage loans. On the contrary, as discussed, the Prospectus stated that "[n]either the depositor nor any affiliate, including DLJ Mortgage Capital, has reunderwritten any mortgage loan." [emphasis supplied] Id., 49.
Regarding the loan tape, plaintiffs allege that "CS Securities sent Ambac an email . . . which attached an Excel spreadsheet referred to as the loan tape' that . . . included critical metrics relating to each borrower's ability to repay the loans and the value of the property as collateral, such as the borrower's debt-to-income ratio (DTI'), combined loan-to-value ratio (CLTV'), and occupancy type." Amend Compl. ¶28. Plaintiffs further allege that CS Securities represented that it "analyzed and audited the disclosures during its purported thorough due diligence of the HELOCs" and that "CS Securities intended Ambac to take the disclosures as true, accurate and complete in making its determination regarding whether to offer its insurance policy." Id.
Even if the court infers from these allegations that CS Securities represented that the information in the loan tape was "true, accurate and complete," the reasonableness of Ambac's belief in this representation is questionable in light of the disclosures in the ProSupp. As discussed, the ProSupp discloses that 66.65% of the initial mortgage loans were loans for which either no verification of the mortgagor's stated income or no verification of the mortgagor's assets was undertaken. Teshima Aff., Exh. C, S-28. If such information was not verified in 66.65% of the loans, and yet included in the loan tape, there would be no reason to believe that the information in the loan tape was "true, accurate and complete." A belief for which there is no reason is prima facie unreasonable . As a result, Ambac's belief in CS Securities' alleged representation that the information in the loan tape was "true, accurate and complete" would be unreasonable as well.
Ambac does not claim that CS Securities represented that the loan tape data were "true, accurate and complete" - only that CS Securities intended Ambac to believe that. Mere intentions are not actionable as fraud because they are not representations of fact. As to the representations regarding due diligence, they have been addressed above.
In sum, considering that the disclosures in the Prospectus and ProSupp seem to "meaningfully contradict" CS Securities' alleged representations regarding the minimum guidelines, the due diligence conducted on the pool of HELOCs and the information contained in the loan tape, the circumstances were likely "so suspicious as to suggest to a reasonably prudent plaintiff that [CS Securities'] representations may be false." JP Morgan Chase, 350 FSupp2d at 406; Siemens Westinghouse, 299 FSupp2d at 247; Bango, 184 AD2d at 963. If that was the case, Ambac could not have "reasonably rel[ied] on those representations, but rather must [have] ma[d]e additional inquiry to determine their accuracy.'" JP Morgan Chase, 350 FSupp2d at 406. If Ambac's "duty to inquire [was] triggered, . . . [Ambac] [would be] foreclosed from bringing a claim for false representations if no inquiry [wa]s made. . . ." Id. By its own admission, Ambac made no inquiry. Amend. Compl. ¶29.
The fact that Ambac received certain contractual representations and warranties from DLJ - such as that "the information in the Loan Schedule was complete, true and correct in all material respects as of the related Cut-Off Date" - only supports the conclusion that Ambac reasonably relied on this representation for the purposes of an action for breach of express warranty . However, it does not change the analysis of Ambac's reliance for the purposes of a tort action based on fraud or misrepresentation . As the New York Court of Appeals explained in CBS Inc v Ziff-Davis Publishing Co., the analysis of reliance in a tort action based on fraud or misrepresentation [tort reliance] differs from the analysis of reliance in actions for breach of express warranties [warranty reliance]. CBS Inc v Ziff-Davis Publishing Co., 75 NY2d 496, 502-506 (1990). The Court of Appeals in Ziff-Davis adopted the reasoning of the Southern District of New York in Ainger, which clarifies that for the purposes of tort reliance the plaintiff must have
The Court is drawing an inference in favor of Ambac that the loan tape allegedly sent by CS Securities and the Loan Schedule incorporated in the LPA contained the same information.
Teshima Aff., Exh. F, §2(b) and Exh. B.
believed [the representation] to be true . If it appears that he knew the facts, or believed the statement to be false, or that he was in fact so skeptical as to its truth that he reposed no confidence in it , it cannot be regarded as a substantial cause of his conduct. [emphasis supplied]Ziff-Davis, 75 NY2d at 503 ("We believe that the analysis of the reliance requirement in actions for breach of express warranties adopted in Ainger v Michigan Gen. Corp. (supra) and urged by CBS here is correct."), following Ainger v Michigan General Corp., 476 FSupp 1209, 1224 (SDNY 1979), citing W. Prosser, Handbook on the Law of Torts, §108, at 714-15 (4th ed. 1971).
By contrast, in warranty reliance, "the critical question is not whether the [plaintiff] believed in the truth of the warranted information . . . but whether it believed it was purchasing the [defendant's] promise as to its truth ." [citations omitted] [emphasis supplied] Ziff-Davis Publishing Co., 75 NY2d at 503; see also Merrill Lynch & Co. Inc. v Allegheny Energy, Inc., 500 F3d 171, 186 (2d Cir 2007) (applying New York law) ("In contrast to the reliance required to make out a claim for fraud, the general rule is that a buyer may enforce an express warranty even if it had reason to know that the warranted facts are untrue. . . . [as long as] it believed that it was purchasing seller's promise regarding the truth of the warranted facts."). The distinction between tort and warranty reliance is grounded on the definition of a warranty, which is "a promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the promisor cannot control what is already in the past." Metropolitan Coal Co. v Howard, 155 F2d 780, 784 (2d Cir 1956) (Hand, J.).
The distinction between tort and warranty reliance that the court established in Ziff-Davis mandates that a party "may not satisfy its burden simply by pointing to the warranties because, for purposes of showing fraud, a party cannot demonstrate justifiable reliance on representations it knew were false." Merrill Lynch, 500 F3d at 182 (A party's "asserted reliance on . . . financials despite its receipt of a different financial report appears at first blush to evince the sort of recklessness or knowing blindness that raises doubt about its reliance.").
The distinction drawn and the analysis employed in Ziff-Davis supports the conclusion that Ambac's reliance could be reasonable for the purposes of a claim for breach of express warranty without necessarily being reasonable for the purposes of a fraud claim. The court notes that Ambac's complaint is replete with allegations of suspension of judgment and outright skepticism regarding the subject matter of CS Securities' alleged representations. These allegations include the following:
(1) the determination of borrowers' ability to repay takes time, and time was one thing that CS Securities did not allow. . . . [I]n order to participate, Ambac had to provide its commitment in a matter of weeks - well in advance of closing. The short time-to-closing did not afford Ambac the opportunity, for example, to review the loan files created in connection with the loan origination to ensure the loans complied with the appropriate underwriting guidelines . Moreover, . . . Ambac did not have access to the loan-origination files - or the infrastructure required to conduct loan-level re-underwriting and diligence. (2) [T]wo aspects of the proposed Transaction gave Ambac pause . First, Ambac had not previously provided insurance for a Credit Suisse transaction. Second, CS Securities disclosed that a significant percentage of the loans in the proposed transaction were originated by Secured Funding, a lender in whom Ambac had little confidence and whose loans it had refused to insure in the past .Amend. Compl. ¶¶ 24-27.
(3) In view of these constraints and concerns , Ambac required as a condition to providing its financial guaranty insurance strong assurances from Credit Suisse regarding, among other things, the borrowers' ability to repay the HELOCs . Credit Suisse provided these assurances via written and oral representations by CS Securities in advance of closing and in express representations and warranties made by its affiliate DLJ in the parties' insurance agreement executed at closing.
(4) From CS Securities, Ambac requested assurances regarding, among other things, the attributes of the pooled HELOCs, the underwriting guidelines used to evaluate the borrower's ability to repay, and the due diligence undertaken to assess the HELOC's compliance with such guidelines . In full recognition of Ambac's need for and reliance on such assurances, CS Securities made affirmative representations regarding these very matters.
Further, the complaint alleges that " [a]fter CS Securities solicited Ambac's participation in the Transaction, its affiliate DLJ stepped in to provide contractual representations and warranties that Ambac required as a condition to issuing its insurance policy ." [emphasis supplied] Amend. Compl. ¶38. In sum, Ambac conclusively alleges that it believed CS Securities' representations while also alleging "little confidence," and "concern" about the very subject matter of the representations and insisting on contractual representations and warranties from DLJ - covering certain matters implicated in CS Securities' alleged representations - "as a condition to issuing its insurance policy."
Moreover, as discussed, the Prospectus and ProSupp disclose that neither DLJ nor any of its affiliates reunderwrote any of the mortgage loans and that the information included in the Loan Schedule with respect to 66% of the mortgage loans was unverified . In sum, the specific allegations in the complaint and the documentary evidence suggest that Ambac could not have reasonably "believe[d] in the truth of the warranted information . . . but [only that] it was purchasing [DLJ's] promise as to its truth." [emphasis supplied] This type of reliance is sufficient to sustain a breach of warranty claim, not a fraud claim based on misrepresentation. Ziff-Davis Publishing Co., 75 NY2d at 502-506.
b.The Alleged Representations Regarding the Prior Securitization
"To constitute actionable fraud, the false representation relied upon must relate to a past or existing fact, or something equivalent thereto, as distinguished from a mere estimate." Zanani v Savad, 217 AD2d 696, 697 (2d Dept 1995). "[Nor will a] representation of opinion . . . sustain an action for fraud." Id.
Plaintiffs allege that "CS Securities represented that the structure and collateral in the contemplated transaction mirrored that of a prior Credit Suisse securitization, which CS Securities represented was performing well [First Representation]." Amend. Compl. ¶34. Plaintiffs also allege that CS Securities "forwarded to Ambac the Prospectus Supplement pertaining to its prior HELOC securitization . . . and represented that the structure will be similar to that deal [Second Representation].'" Id. In addition, plaintiffs allege that CS Securities "sent to Ambac an Excel spreadsheet that showed relatively low delinquencies and losses on the [prior] transaction [Third Representation]." Id. According to plaintiffs, "in making the limited disclosures concerning the performance of the prior Credit Suisse securitization, CS Securities' disclosure was incomplete and misleading because Credit Suisse failed to disclose the most salient fact relevant to Ambac's analysis, i.e., that the earlier securitized loan pool was replete with loans that were made to borrowers that had little or no ability to repay their loans." Amend Compl. ¶36.
The First Representation is an estimate and/or a statement of opinion. Zanani, 217 AD2d at 697. The Second and Third Representations do not allege falsity but, rather, an "incomplete and misleading disclosure," which relates to a claim for "fraudulent concealment." L.K. Station Group, LLC v Quantek Media, LLC, 62 AD3d 487, 493 (1st Dept 2009). Such a claim requires "an allegation that the defendant had a duty to disclose material information and that it failed to do so." [emphasis supplied] P.T. Bank Central Asia v ABN AMRO Bank N.V., 301 AD2d 373, 376 (1st Dept 2003). Under the "special facts" doctrine, that duty arises "where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair." Swersky v Dreyer and Traub, 219 AD2d 321, 327 (1st Dept 1996).
"As a threshold matter, the [ special facts'] doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge' of [defendant], and that the information was not such that [it] could have been discovered . . . through the exercise of ordinary intelligence.'" Jana L. v West 129th Street Realty Corp., 22 AD3d 274, 278 (1st Dept 2005). Ambac does not appear to allege that CS Securities knew that "the earlier securitized loan pool was replete with loans that were made to borrowers that had little or no ability to repay their loans," or that if it knew, such information was "peculiarly within [CS Securities'] knowledge." Id. In fact, if the two securitizations had the same structure - as alleged - the borrowers' income and assets and, consequently, their ability to pay back the loans would have been unverified in 66% of the loans. Moreover, Ambac does not allege that the relevant "information was such that [it] could [not] have been discovered . . . through the exercise of ordinary intelligence.'" Id. In sum, the allegations in the complaint do not seem to support the "special facts" doctrine which would give rise to a duty to disclose on the part of CS Securities.
Indeed, as plaintiffs remark, easy access to refinancing of the loans could have masked a borrower's inability to repay the loans. Amend. Comp. ¶34.
This analysis notwithstanding, the court declines to dismiss plaintiffs' claim for fraudulent inducement at this time. The question of reasonable reliance is fact-intensive. Schlaifer Nance & Co. v Estate of Warhol, 119 F3d 91, 98 (2d Cir 1997). It would benefit from a complete record created after the completion of the parties' discovery.
B.Demand for a Jury Trial
The court granted defendants' motion to strike plaintiffs' demand for a jury trial based on its decision to dismiss the fraudulent inducement claim. Since the fraudulent inducement claim is being reinstated, this reason for striking the jury demand is no longer valid. The court, however, is adhering to its prior decision to strike plaintiffs' demand for a jury trial. The I & I between Ambac and DLJ contains a jury waiver provision that applies to Ambac's fraudulent inducement claim.
"A party who has signed an agreement may not simultaneously rely upon it as the foundation of the claim for damages and repudiate a provision contained therein to the effect that the right to a trial by jury is waived." O'Brien v Moszynski, 101 AD2d 811, 812 (2d Dept 1984), citing, inter alia, Leav v Weitzner, 268 AD 466, 467-68 (1st Dept 1944). By contrast, where a fraudulent inducement claim challenges the validity of the contract containing the jury waiver provision, the jury waiver provision is inapplicable to the fraudulent inducement claim. China Development Industrial Bank v Morgan Stanley & Co., 86 AD3d 435 (1st Dept 2011); see also Wells Fargo Bank, National Association v Stargate Films Inc., 18 AD3d 264, 265 (1st Dept 2005) ("waiver does not apply to a sufficiently pleaded defense that amounts to a claim of fraudulent inducement challenging the validity of the agreement" [emphasis supplied]).
However, where "plaintiffs do not question the validity of the contract on the basis of a claim for fraudulent inducement, [thereby requiring rescission] plaintiffs' reliance upon the tenet that one who disaffirms for fraud a writing which contains a jury waiver clause should not be required to proceed to trial without a jury until there has been a determination as to the validity of the disputed instrument' is misplaced ." [emphasis supplied] O'Brien, 101 AD2d at 812; see also Leav, 268 AD at 468 ("plaintiffs are not in a position to contend, as they might contend in an action for rescission , that the stipulation waiving a jury trial perished with all the rights and obligations under the lease") [emphasis supplied].
Section 6.09 of the I & I provides:
Each party hereby waives, to the fullest extent permitted by law, any right to a trial by jury in respect of any litigation arising directly or indirectly out of, under or in connection with any of the Company Documents or any of the transactions contemplated hereunder . Each party hereto (A) certifies that no representative, agent or attorney of any party hereto has represented, expressly or otherwise, that it would not, in the event of litigation, seek to enforce the foregoing waiver and (B) acknowledges that it has been induced to enter into the Company Documents to which it is a party by, among other things, this waiver.
Teshima Aff., Exh. E, §6.09. "Company Documents" is a defined term under the I & I and refers, inter alia, to the I & I and the LPA - the two documents containing the representations and warranties at issue in this case. Teshima Aff., Exh. E, §1.01.
The jury waiver provision of the I & I is sufficiently broad to cover plaintiffs' fraudulent inducement claim against CS Securities, which, by plaintiffs' own allegations, arises "in connection with" the I & I. Amend Compl. ¶¶ 86-88 ("Ambac relied on CS Securities' statements and omissions when it entered into the I & I."). Hence, unless Ambac's fraudulent inducement claim challenges the validity of the I & I or seeks rescission, the jury waiver provision applies to the fraudulent inducement claim as a matter of simple contract interpretation. O'Brien, 101 AD2d at 812; Leav, 268 AD at 468.
Ambac does not expressly challenge the validity of the I & I. Nor does it seek rescission on the basis of its claim for fraudulent inducement. Amend. Compl. ¶¶ 88-89, & "Prayer for Relief" ("As a result of CS Securities' false and misleading statements and omissions, Plaintiffs have suffered, and will suffer, damages including claim payments under the Policy . Because CS Securities committed these acts and omissions maliciously, wantonly, oppressively, and with the knowledge that they would affect the general public - which they have - Plaintiffs are entitled to punitive damages .") [emphasis supplied]; see also Plaintiffs MOL, at 21-22.
A challenge to the validity of the I & I cannot properly be implied either. In fact, Ambac's allegation of "reasonable reliance" on CS Securities' representations - and, a fortiori, the validity of the fraudulent inducement claim against CS Securities - depends in part on the warranties contained in the I & I. Without these warranties, Ambac's reliance on the representations of CS Securities would be unreasonable as a matter of law. DDJ Management, 15 NY3d at 154; Schumaker, 133 NY at 596; Rodas, 159 AD2d at 342-43; UST Private Equity Investors Fund, 288 AD2d at 88; see also Plaintiffs' MOL, at 15 ("a party that secures warranties may be justified in accepting a written representation instead of conducting its own investigation") [citations omitted]. In other words, far from challenging the validity of the I & I, Ambac's fraudulent inducement claim affirms it. Accordingly, it is
ORDERED that plaintiffs' motion for leave to reargue is granted; and it is further
ORDERED that, upon reargument, the court denies defendants' motion to dismiss plaintiffs' fraudulent inducement claim and grants defendants' motion to strike plaintiffs' demand for a jury trial; and it is further
ORDERED that plaintiffs' fraudulent inducement cause of action is reinstated and plaintiffs' demand for a jury trial is stricken.
ENTER:
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J.S.C.