Summary
dismissing claims for consequential damages and fees on the ground that "[w]hat was contemplated was clearly expressed—that the Repurchase Protocol would be the sole remedy available to the Certificateholders."
Summary of this case from Mastr Adjustable Rate Mortgs. Trust 2006-OA2 v. UBS Real Estate Secs. Inc.Opinion
No. 652837/2011.
2012-10-11
ASSURED GUARANTY MUNICIPAL CORP. f/k/a Financial Security Assurance, Inc., Assured Guaranty Corp., Plaintiffs, v. DLJ MORTGAGE CAPITAL, INC. and Credit Suisse Securities (USA), LLC, Defendants.
Quinn, Emanuel, Urouhart, Oliver & Hedges, for Plaintiffs. Orrick, Herrington & Sutcliffe, LLP, for Defendants.
Quinn, Emanuel, Urouhart, Oliver & Hedges, for Plaintiffs. Orrick, Herrington & Sutcliffe, LLP, for Defendants.
SHIRLEY WERNER KORNREICH, J.
This action arises out of financial guaranty insurance policies (Policy, collectively, Policies) issued by plaintiffs Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Corp. (Assured), or Assured Guaranty Corp. (AGC, collectively with Assured, Plaintiffs or Insurers). The Policies were issued in connection with six transactions (Transaction, collectively, Transactions) for the sale of residential mortgage-backed securities (RMBS).
The complaint alleges five causes of action: 1) breach of contract, a Pooling and Service Agreements (PSAs) against both Defendants, seeking contract damages, rescissory damages, and Fees; 2) breach of a contractual repurchase obligation in § 2.03 of the PSAs against DLJ only, seeking contract damages and Fees; 3) breaches of contracts, specifically four Commitment Letters and two Engagement Letters, to obtain “shadow ratings” from the rating agencies Standard and Poor's and Moody's (collectively, Rating Agencies) against both Defendants, seeking rescissory damages and Fees; 4) declaratory judgment against DLJ only, declaring that it must repurchase mortgage loans as to which it breached representations and warranties in the PSAs; and 5) declaratory judgment against both Defendants, declaring that they breached the obligation in the Commitment Letters and Engagement Letters to obtain “shadow ratings” from the Rating Agencies and seeking indemnification. The demand for consequential damages is asserted in the prayer for relief, but not tied to a specific cause of action.
The six Transactions are: (i) CSAB Mortgage–Backed Pass–Through Certificates, Series 2006–2 (CSAB 2006–2); (ii) CSAB Mortgage–Backed Pass–Through Certificates, Series 2006–3 (CSAB 2006–3); (iii) CSAB Mortgage–Backed Pass–Through Certificates, Series 2006–4 (CSAB 2006–4); (iv) TBW Mortgage–Backed PassThrough Certificates, Series 2007–2 (TBW 2007–2); (v) CSMC Mortgage–Backed Pass–Through Certificates, Series 2007–3 (CSMC 2007–3); and (vi) CSAB Mortgage–Backed Pass–Through Certificates, Series 2007–1 (CSAB 2007–1).
Defendants, DLJ Mortgage Capital, Inc. (DLJ) and Credit Suisse Securities (USA), LLC, (CS Securities, collectively Defendants), move to dismiss: 1) Plaintiffs' demands for rescissory damages in connection with the first and third causes of action; 2) Plaintiffs' demands for attorneys' fees, accountants' fees and expenses (Fees) in the first through third causes of action; 3) Plaintiffs' demands for consequential damages in connection with the first and second causes of action; 4) Plaintiffs' demand for indemnification in connection with the fifth cause of action; and 5) the third and fifth causes of action in their entirety. CPLR 3211(a)(1),(7).
Background
As this is a motion to dismiss, the facts are drawn from the complaint and documentary evidence submitted by the parties.
The Transactions are substantially similar. In each of the Transactions, DLJ, acting as Sponsor, assembled a pool of first lien prime and Alt–A
residential mortgage loans, which were transferred to non-party Credit Suisse First Boston Mortgage Securities Corp. (Depositor, and together with CS Securities and DLJ, Credit Suisse).
“Alt–A” refers to loans that do not conform to the guidelines set by Fannie Mae and Freddie Mac.
The Depositor then assigned the mortgage loans to a trust (Trust). US Bank National Association is the trustee (Trustee) of all of the Trusts. The Trusts then issued securities (Certificates), collateralized by the pool of mortgage loans. Defendant CS Securities, marketed the Certificates to investors. By purchasing Certificates, investors acquired the right to receive a portion of the principal and interest flowing from the mortgage loans owned by the Trust.
CS Securities, DLJ and the Depositor are affiliated companies.
The Policies issued by the Insurers are financial guaranty Policies issued to the holders of certain classes or tranches (Certificateholders) of Certificates (Insured Certificates). All of the Policies provide that they cannot be canceled and that the premiums are non-refundable. For each Policy, the Insurers receive a premium and, in exchange, guaranteed that if cash flows from the mortgage loans are insufficient to make the payments of interest and principal due to the Certificateholders, the Insurer would pay the shortfall. It is undisputed that the Trusts paid, and the Insurers received, the premiums due under the Policies after this action was filed, and that the Insurers continued to receive premiums at the time this motion was submitted.
For each of the Transactions, the Depositor, the Trustee and DLJ, inter alia, entered into a PSA, of which the Insurers were express third-party beneficiaries, but not signatories. CS Securities is not a party to the PSAs. Representations and warranties for the benefit of the Insurers were made by DLJ in the PSAs, including that (i) the information on the mortgage loan schedule was accurate, (ii) the mortgage loans complied with the originator's underwriting guidelines, (iii) no mortgage loan had a loan-to-value ratio (LTV) of greater than 100 percent, i.e., no loan was greater than the value of the underlying property, (iv) the mortgage loans were free from material defaults, and (v) each loan file contained all necessary documentation.
Before each Transaction closed, Credit Suisse issued a Prospectus and a Prospectus Supplement, which described certain characteristics and risks associated with the mortgage loans, the real estate market and the Certificates. In addition, before the closing of each Transaction, the mortgage loan schedule or “tape” (warranted in the PSAs to be true, complete and accurate) was given to the Insurer and the Rating Agencies. Complaint, ¶ 21. The tape disclosed characteristics of the underlying mortgage loans, including i) each borrower's Fair Isaac & Co. (“FICO”) score; (ii) the appraised value of the mortgaged property; (iii) the LTV; and (iv) the borrower's debt-to-income ratio (DTI), i.e., the ratio of the borrower's monthly debt to income. In addition, the complaint alleges that Defendants gave the Rating Agencies “pool-level data derived from the loan-level information” on the tape and “information as to the Transaction's structure.”
Two of the Transactions (CSAB 2007–1 and TBW 2007–2), in connection with which AGC issued a Policy, utilized Engagement Letters, between AGC and CS Securities. Four of the Transactions (CSAB 2006–2, CSAB 2006–3, CSAB 2006–4 and CSMC 2007–3), in which Assured issued a Policy, utilized Commitment Letters between Assured and DLJ. CS Securities signed the Commitment Letters solely to bind itself to paragraph seven, which provided that CS Securities would pay up to $24,000 of Assured's Fees. The complaint alleges that pursuant to the Engagement Letters and Commitment Letters, “shadow ratings” on the Insured Certificates by the Rating Agencies of AAA or Aaa, their highest ratings (AAA Ratings), were a condition precedent to issuance of the Policies. A “shadow rating” is a credit rating obtained without consideration of financial guaranty insurance. Plaintiffs allege that based upon false information Defendants supplied to the Rating Agencies, they gave the Insured Certificates shadow AAA Ratings at or around the date that the relevant Transaction closed.
The Transactions closed in 2006 or early 2007.
The complaint alleges that after the closings, there were a staggering number of delinquencies among the mortgage loans. Plaintiffs conducted a forensic reunderwriting of the mortgage loans that were in default in the Transactions, which disclosed severe and pervasive breaches of the representations in the PSAs that materially affected the Insurers. The breaches included: failure to verify income; failure to verify employment; failure to investigate the borrowers' debts; LTV or combined loan to value that exceeded maximum guidelines; missing documents in loan files; and failure to conform to underwriting guidelines. Among the breaches were the following: the borrower's income was overstated, the borrower's debts were understated, the borrower's employment was incorrectly described in the mortgage application, and LTVs were based upon inflated appraisals. Moreover, plaintiffs discovered that the shadow AAA Ratings “did not accurately reflect the credit quality of the Insured Certificates” because they were based upon the same false data. Complaint, ¶¶ 60 & 61.
The court notes that the closings took place on the verge of what many economists describe as the worst financial crisis experienced by the United States since the Great Depression, caused in part by the collapse of the real estate market.
Pursuant to the PSAs, the Insurers gave notice to DLJ of mortgage loans that allegedly breached representations and warranties. According to Plaintiffs' Memorandum of Law in Opposition (Plaintiffs' Memo, Doc 23), DLJ has refused to replace or repurchase 7,320 out of 7,336 loans contained in the notices within the 90–day period required by the PSAs. Plaintiffs' Memo, p 6, fn 4. Contractual Provisions Relevant to the Motion The Policies
In each Policy, the Insurer “unconditionally and irrevocably” agreed to pay (or guaranteed the payment of)
the principal and interest due on the RMBS to the Insured Certificateholders, and waived all defenses to such payments. Each Policy provides that it may not be canceled and that the premiums cannot be refunded.
The Assured and AGC policies contain slightly different language.
The PSAs
Section 2.03 of each PSA contains a provision (Repurchase Protocol), which provides:
Upon discovery by any of the parties hereto of a breach of a representation or warranty made pursuant to Section 2.03(b) that materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties and the Certificate Insurer. The Seller [DLJ] hereby covenants that within 90 days of the earlier of its discovery or its receipt of written notice from any party of a breach of any representation or warranty made by it pursuant to Section 2.03(b) which materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Mortgage Loan sold by the Seller to the Trust, it shall cure such breach in all material respects, and if such breach is not so cured, shall (i) if such 90–day period expires prior to the second anniversary of the Closing Date, remove such Mortgage Loan (a “Deleted Mortgage Loan”) from the Trust Fund and substitute in its place a Qualified Substitute Mortgage Loan, in the manner and subject to the conditions set forth in this Section; or repurchase the affected Mortgage Loan or Mortgage Loans at the Purchase Price in the manner set forth below.... The Seller shall promptly reimburse the Trustee, the Trust Administrator and the related Servicer for any actual out-of-pocket expenses reasonable incurred by the Trustee, the Trust Administrator and such related Servicer in respect of enforcing the remedies for such breach. With respect to any representation and warranties in this Section which are made to the best of the Seller's knowledge if it is discovered by ... the Certificate Insurer ... that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Mortgage Loan or the interests of the Certificateholders or the Certificate Insurer therein, notwithstanding the Seller's lack of knowledge with respect to the substance of such representation or warranty, such inaccuracy shall be deemed a breach of the applicable representation or warranty....
It is understood and agreed that the obligation under this Agreement of any Person to cure, repurchase or substitute any Mortgage Loan as to which a breach has occurred and is continuing shall constitute the sole remedy against such Persons respecting such breach available to Certificateholders, the Depositor, the Trustee or the Trust Administrator on their behalf.
The PSAs contain the following terms regarding the Insurers:
unless a Certificate Insurer Default has occurred and is continuing, the Certificate Insurer shall have the right to exercise all rights of the Holders of the Insured Certificates under this Agreement....
PSAs, §§ 13.01, 14.01 or 15.01.
As long as there are Insured Certificates outstanding or any Reimbursement Amounts due to the Certificate Insurer, the Certificate Insurer shall be deemed a third-party beneficiary of this Agreement to the same extent as if it were a party hereto, and shall have the right to enforce the provisions of this Agreement.
PSAs, §§ 13.07, 14.07 or 15.07.
Commitment & Engagement Letters
The Commitment Letters provide:
It shall be a condition precedent to the issuance of the Policy that FSA [Assured] shall have received oral confirmation from Standard and Poor's Ratings Services, ... and Moody's Investors Service, Inc., that the Guaranteed Certificates would have been rated AAA and Aaa, respectively, without regard to the issuance of the Policy.
Section 7 of each of the Commitment Letters says:
it is a condition to the issuance of the Policy that [CS Securities] shall pay [Assured] $24,000 for expenses of counsel and accountants to [Assured], such payment to be at the closing in cash or available funds.
CS Securities signed the Commitment Letters under a legend, which states:
[CS Securities] hereby agrees to pay the amount of fees and expenses of counsel to and accountants to [Assured] set forth in paragraph 7 of the commitment letter in accordance with the terms thereof.
The Engagement Letters state:
This letter sets forth the basis upon which [AGC] is willing to consider the potential issuance of the FG Policy [Financial Guaranty Policy] with respect to the Certificates; provided, however, that this does not represent the commitment of [AGC] to issue the FG Policy, which will only be issued upon terms and subject to conditions provided herein and pursuant to legal documentation acceptable to Assured Guaranty. The issuance by [AGC] or its FG Policy in connection with the Proposed Transaction is subject to, among other things: ...
(e) confirmation acceptable to [AGC] that a minimum rating of AAA and Aaa from S & P and Moody's, respectively, will be assigned to the Certificates (before giving effect to the FG Policy)....
Each of the parties hereto hereby acknowledges and agrees that this indicative proposal has been prepared solely for discussion purposes and that it does not constitute any commitment on the part of [AGC] to provide credit enhancement to, or to take any other action in connection with the Proposed Transaction.
the terms of this letter will be superseded by definitive agreements executed in connection with the issuance of the [Policy] upon the closing of the Proposed Transaction....
[Emphasis added].
Discussion
On a motion to dismiss, the facts alleged in the complaint are accepted as true and the plaintiff is entitled to the benefit of every favorable inference. Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 634, 389 N.Y.S.2d 314, 357 N.E.2d 970 (1976); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Wise Metals Group, LLC, 19 A.D.3d 273, 275, 798 N.Y.S.2d 14 (1st Dept 2005). Where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion should be denied unless “the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted].” Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 (2002); Leon v. Martinez, 84 N.Y.2d 83, 88, 614 N.Y.S.2d 972, 638 N.E.2d 511 (1994).
Rescissory Damages—1st Cause of Action & 3rd Causes of Action
Defendants move to dismiss Plaintiffs' prayer for rescissory damages on the following grounds: 1) Plaintiffs do not seek rescission; 2) the Policies on their face are irrevocable and non-cancellable; 3) Plaintiffs waived their right to rescission because they continue to perform under Policies, accept premium payments and seek to enforce the Repurchase Obligation in the PSAs; 4) the Repurchase Obligation is Plaintiffs' sole remedy under the PSAs, § 2.03; and 5) Plaintiffs' have an adequate remedy at law.
Plaintiffs oppose on the grounds that: 1) rescissory damages that are the equivalent of rescission may be obtained in lieu of rescission; 2) it is premature to foreclose certain types of relief at the pleading stage; 3) rescission is available under the common law for pervasive and material breaches that undermine the purpose of a contract, and, pursuant to Insurance Law §§ 3105 and 3106, for breach of a representation or warranty made in connection with procuring a policy that materially increases an insurer's risk; 4) under common law and Insurance Law §§ 3105 and 3106, rescissory damages may be awarded in the absence of a claim for rescission, where rescission would be impracticable and would harm innocent parties, i.e., the Certificateholders; 5) Plaintiffs are not among the parties limited to the Repurchase Obligation in the PSAs; 6) the remedy at law is inadequate because Plaintiffs would never have issued the Policies but/for the representations, damages for breach will not protect them from future losses due to non-performing mortgage loans, and they are entitled to be restored to their pre-contractual position; and 7) Plaintiffs did not waive their claim for rescissory damages because they accepted premiums from the Trusts, not Defendants, and waiver only applies where an insurer continues to accept premiums from its counter-party after knowledge of a breach of a representation.
While the parties dispute whether the Insurers are entitled to rescission or its equivalent, the court need not resolve the issue because Defendants have established as a matter of law that Plaintiffs are estopped from avoiding the Policies by their acceptance of premiums after knowledge of the alleged misrepresentations. It is black letter law that acceptance of premiums after knowledge of an existing breach of condition gives rise to waiver or, more properly, estoppel of the right to avoid the policy. Bible v. John Hancock Mut. Life Ins. Co., 256 N.Y. 458, 462, 176 N.E. 838 (1931) (Cardozo, J.); United States Life Ins. Co. v. Blumenfeld, 92 A.D.3d 487, 489, 938 N.Y.S.2d 84 (1st Dept 2012)(breach of representation); United States Life Ins. Co. v. Grunhut, 83 A.D.3d 528, 920 N.Y.S.2d 659 (1st Dept 2011); Security Mutual Life Ins. Co. of N.Y. v. Rodriguez, 65 A.D.3d 1, 880 N.Y.S.2d 619 (1st Dept 2009)(acceptance of premiums after commencement of action to rescind); American General Insurance v. Salamon, 2012 U.S.App. LEXIS 10226, 2012 WL 1847175 (2d Cir2012) (nor) (“well settled rule” of New York insurance law that the continued acceptance of premiums by the carrier after learning of facts which allow for rescission of the policy, constitutes a waiver of, or more properly an estoppel against, the right to rescind.' ”); Julian v. Commercial Assur. Co., 220 Mo.App. 115, 279 S.W. 740 (Mo.App.1926); Liverpool & London & Globe Ins. Co. v. Ende, 65 Tex. 118 (TX 1885); McMurray v. Capital Ins. Co., 87 Iowa 453, 54 N.W. 354 (IA 1893); Davis v. Phoenix Ins. Co., 111 Cal. 409, 43 P. 1115 (Ca.1896); Trustees of St. Clara Female Academy v. Northwestern Nat. Ins. Co., 98 Wis. 257, 73 N.W. 767 (Wi.1898); Gulf Guaranty Life Ins. Co. v. Middleton, 361 So.2d 1377 (Sup Ct MI 1978) (nor); Luther v. Choice Plus of New Eng., 2005 Vt.Super. LEXIS 22, 2005 WL 5895237 (VT Super. Ct. July 15, 2005)(nor);16c–325 Appleman, Insurance Law and Practice–1st Ed., § 9271, (c) 2012, Matthew Bender & Company, Inc. The estoppel remains even if the insurance company accepts premiums in order to “protect” the insured while the action for rescission is pending. United States Life Ins. Co. v. Blumenfeld, supra; United States Life Ins. Co. in the City of New York v. Grunhut, supra. Nor is it premature to dismiss prior to discovery based upon waiver by acceptance of premiums. United States Life Ins. Co. v. Blumenfeld, (rejecting insurer's claim that discovery was needed); Security Mutual Life Ins. Co. of N.Y. v. Rodriguez, supra (granting 3211 motion).
As a result of their acceptance of premiums after their knowledge of the alleged breach, Plaintiffs are estopped from rescinding the Policies and from obtaining the equivalent of rescission in the form of rescissory damages. It is undisputed that the Insurers are still accepting premiums. Their argument that the rule is inapplicable because the Trusts pay the premiums is not supported by citation to authority. The court's independent research has uncovered no such authority. Moreover, the rationale for the rule is that an “attempt to both accept premiums and reserve its right to rescind is unenforceable for lack of mutuality and timeliness.” Continental Ins. Co. v. Helmsley Enters., 211 A.D.2d 589, 622 N.Y.S.2d 20 (1st Dept 1995). Thus, the rule focuses on the insurer's conduct-acceptance of premiums—not on who pays them.
The remaining arguments of the parties concerning rescissory damages need not be considered in light of this ruling.
Breach of Commitment & Engagement Letters—3d Cause of Action
Defendants move to dismiss the claim for breach of the Commitment Letters upon the grounds that it is undisputed that the Rating Agencies gave the Insured Certificates AAA Ratings and the Commitment Letters did not promise credit quality. They cite MBIA Ins. Corp. v. Merrill Lynch International, 81 A.D.3d 419, 916 N.Y.S.2d 54 (1st Dept 2011) ( Merrill Lynch ), where the court held:
Nor does [the amended complaint] state a cause of action for breach of the promise to provide AAA-rated securities since it is undisputed that defendants in fact provided securities with AAA ratings. Nowhere in the plain language of the documents does there appear a promise of credit quality.
Additionally, Defendants urge dismissal of the third cause of action against CS Securities on the ground that it did not agree in the Commitment Letters to obtain AAA Ratings. Finally, they seek dismissal on the basis that the Engagement Letters are unenforceable agreements to agree and specifically provided that they would be superceded by the issuance of the Policies at the closing of the Transactions.
Plaintiffs oppose, arguing that Merrill Lynch is distinguishable because the complaint here alleges that Defendants gave the Rating Agencies false data. They also point to China Development Industrial Bank v. Morgan Stanley & Co., 86 A.D.3d 435, 927 N.Y.S.2d 52 (1st Dept 2011), which upheld a fraud claim based upon false representations that collateralized debt obligations (CDOs) were better than AAA rated. Also, they deny that the Engagement Letters are non-binding agreements to agree.
The third cause of action is dismissed. There is no opposition insofar as it is against CS Securities for breach of the Commitment Letters. Plaintiffs do not counter the arguments that CS Securities never promised to obtain AAA Ratings in the Commitment Letters.
With respect to DLJ's liability under the Commitment Letters, the court is constrained to dismiss the claim based upon the decision in Merrill Lynch. Assured admits that DLJ obtained the AAA ratings from the Rating Agencies. There is no promise of credit quality in the Commitment Letters. The allegations of the amended complaint in Merrill Lynch are indistinguishable from the allegations in the complaint before this court. The Amended Complaint in Merrill Lynch alleged that the defendant gave the Rating Agencies false data upon which to base the ratings of loans and concealed internal loan performance data that would have led to lower ratings. See, MBIA Ins. Corp. v. Merrill Lynch International, Index No. 601324/2009, First Amended Complaint, New York State Court Electronic Filing System Doc No 7–1, ¶¶ 32 & 51.
The Supreme Court dismissed the breach of contract claim, and the decision was affirmed for the reasons quoted above. While China Development Industrial Bank v. Morgan Stanley & Co. upheld a fraud claim based upon alleged misrepresentations of ratings quality, there was no contract claim in that case. Hence, the binding precedent is Merrill Lynch.
The complaint stated:
Ҧ 32 Merrill Lynch knew and banked on the fact that, based on the published methodologies of S & P and Moody's, as we1l as its extensive collaboration with the rating agencies in its capacity as an arranger and broker-dealer, the rating agencies would not look through the RMBS and CDOs to the performance of the underlying loans in order to rate the new CDO transactions. In light of the actual data on performance, that meant, as Merrill Lynch intended, that the resulting credit ratings would not accurately reflect the true characteristics of the CDO securities but instead would overstate the credit quality....
¶ 51. In effect, while marketing the CDOs based upon ratings as well as related indicia of credit quality, Merrill Lynch calculated its own profit and loss based on undisclosed data of the real-time performance of the tens of thousands of mortgages comprising the collateral. With this information at its disposal, and with its extensive experience issuing CDOs and RMBS, Merrill Lynch was aware, as of the closing of each CDS Contract, that the assets it was repackaging into the ML-series CDOs were not “high grade,” were worth less than their par values, and were in fact deteriorating. Merrill Lynch, therefore, knew that the subordination structure of each CDO was compromised and that the AAA ratings of the super-senior/senior tranches were illusory, as both were dependent upon that collateral quality.”
With respect to the AGC Engagement Letters, the court agrees that they are unenforceable agreements to agree; they provided that they would be superceded by the issuance of the Policies and the other Transaction documents at the closing of the Transactions. “A mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541 (1981). Here, the Engagement Letters expressly state that they are not a commitment, are for discussion purposes only and are terms upon which AGC is willing to consider the potential issuance of a Policy. The Engagement Letters also clearly provide that they will be superceded by the issuance of a Policy and other documents at the closing. There is no dispute that the AGC Policies were issued at the closings of the Transactions. Hence, the Engagement Letters are classic agreements to agree, not binding contracts, and were superceded.
In sum, the third cause of action for breach of contract for failing to obtain AAA Ratings pursuant to the Engagement Letters and Commitment Letters is dismissed against both Defendants.
Declaratory Judgment & Indemnification—5th Cause of Action
The fifth cause of action must be dismissed because it depends on the viability of the now dismissed claims for breach of the Commitment and Engagement Letters. The fifth cause of action seeks a declaratory judgment that Defendants must indemnify Plaintiffs for breaching the Engagement and Commitment Letters. As the court has held that Plaintiffs do not have a claim for breach of the Engagement and Commitment Letters, the fifth cause of action based upon the same agreements must be dismissed. It is unnecessary to consider the parties' remaining arguments regarding declaratory judgment and indemnification.
Consequential Damages & Fees
Defendants move to dismiss Plaintiffs' claims for consequential damages and Fees. The complaint seeks “consequential losses including lost profits and business opportunities” as part of Plaintiffs' damages. Complaint, ad damnum clause. Further, the complaint seeks indemnification for Plaintiffs' “attorneys' fees and accountants' fees and expenses” associated with enforcing its rights under the PSAs, the Commitment Letters and the Engagement Letters. Complaint, ¶¶ 80, 87, & 96. Paragraph 44 of the complaint alleges that section 2.03 of the PSAs entitles the Insurers to expenses reasonably incurred as a result of DLJ's breach of the Repurchase Protocol.
Defendants argue that: 1) section 2.03 limits the Certificateholders' damages for breach of warranties to the Repurchase Protocol and the Insurers, as third-party beneficiaries can have no greater rights; and 2) the PSA's give only the Trust, the Trustee and the Servicer the right to recover Fees for enforcing the Repurchase Protocol. Plaintiffs counter that the “Certificate Insurer” is referred to in section 2.03 numerous times, but not in the sole remedy clause, from which the court should infer that the Insurers' rights are not limited to the rights of the Certificateholders. Stated in the affirmative, Plaintiffs claim that they have broader rights than the Certificateholders.
The Insurers are not entitled to consequential damages in connection with the first and second causes of action for breach of the PSAs. The Insurers are third-party beneficiaries of the PSAs with all the rights of the Certificateholders. PSAs, §§ 13.01, 14.01 or 15.01 and 13.07, 14.07 or 15.07. A third-party beneficiary has no greater rights than the promisee. Gennett v. Smith, 244 A.D. 3, 278 N.Y.S. 478 (3d Dept 1935); United Steel Workers v. Rawson, 495 U.S. 362, 375, 110 S.Ct. 1904, 109 L.Ed.2d 362 (1990); Publrs. Consortium, Inc. v. Arsenal Pulp Press, Black Books, Comics One Corp. (In re Publrs. Consortium, Inc.), 345 Fed. Appx. 710 (2d Cir.Conn.2009). Consequently, the Insurers' damages for breach of contractual warranties are limited to the Repurchase Protocol.
Then too, under the common law, damages for lost profits are denied if the contract itself does not provide for their recovery “and no factual issue is otherwise raised” as to whether the parties intended that they would be able to recover damages due to lost profits. Brody Truck Rental, Inc. v. Country Wide Ins. Co., 277 A.D.2d 125, 125–126, 717 N.Y.S.2d 43 (1st Dept 2000). Damages in an action for breach of contract are intended to restore the injured party to the position he would have been in had the contract been fully performed. Brushton–Moira Cent. School Dist. v. Fred H. Thomas Associates, P.C., 91 N.Y.2d 256, 262, 669 N.Y.S.2d 520, 692 N.E.2d 551 (1998). Lost profits are recoverable under this general rule, but only if: 1) it is certain that the loss was caused by the breach; 2) the amount of loss is established with reasonable certainty; and 3) the particular damages were fairly within the contemplation of the parties at the time of entering into the agreement. Kenford Co., Inc. v. Erie County, 67 N.Y.2d 257, 262, 502 N.Y.S.2d 131, 493 N.E.2d 234 (1986).
Here, the PSAs conclusively establish that lost profits and business opportunities were not contemplated by the parties. What was contemplated was clearly expressed—that the Repurchase Protocol would be the sole remedy available to the Certificateholders. As third-party beneficiaries standing in the shoes of the Certificateholders, Plaintiffs have no greater rights.
With respect to Fees, Defendants are correct that the PSAs limit their recovery to parties other than the Insurers. Plaintiffs oppose this branch of the motion on the ground that it is premature to determine this issue because Fees could only be awarded to a prevailing party.
Plaintiffs are not entitled to recover Fees. The clear language of the PSAs excludes the Insurers and the Certificateholders from the sentence in section 2.03 allowing the Trust, the Trustee and the Servicer to recover out-of-pocket expenses. Further, the American rule is that attorneys' fees are not recoverable absent an express agreement, statute or court rule. Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491, 549 N.Y.S.2d 365, 548 N.E.2d 903 (1989). A right to attorney's fees may not be inferred from an agreement unless the authorizing language is “unmistakably clear.” Id., 74 N.Y.2d at 492, 549 N.Y.S.2d 365, 548 N.E.2d 903. Here, no contract, statute, court rule authorizes the Insurers to be reimbursed for attorneys' fees. Accordingly, it is
ORDERED that the motion of defendants DLJ Mortgage Capital, Inc. and Credit Suisse Securities (USA), LLC, to dismiss 1) plaintiffs' demands for: a) rescissory damages in connection with the first and third causes of action; b) indemnification in connection with the fifth cause of action; c) attorneys' and accountants' fees and expenses; and d) consequential damages; and 2) to dismiss the third and fifth causes of action entirely against said defendants, is granted in all respects.