Opinion
No. 650705/2010.
07-03-2014
ASSURED GUARANTY MUNICIPAL CORP., formerly known as Financial Security Assurance Inc., D, Plaintiff, v. DB STRUCTURED PRODUCTS, INC., and Ace Securities Corp., Defendants.
Patterson Belknap Webb & Tyler LLP, for Assured (in DBSP). Quinn Emanuel Urquhart & Sullivan, LLP, for Assured (in DLJ). Latham & Watkins LLP, for Deutsche Bank. Orrick, Herrington & Sutcliffe LLP, for Credit Suisse. Murphy & McGonigle, P.C., for GreenPoint.
Patterson Belknap Webb & Tyler LLP, for Assured (in DBSP).
Quinn Emanuel Urquhart & Sullivan, LLP, for Assured (in DLJ).
Latham & Watkins LLP, for Deutsche Bank.
Orrick, Herrington & Sutcliffe LLP, for Credit Suisse.
Murphy & McGonigle, P.C., for GreenPoint.
Opinion
SHIRLEY WERNER KORNREICH, J.
This decision is being issued in conjunction with a decision in a related residential mortgage backed securities (RMBS) case brought by a monoline insurance company, styled Assured Guaranty Municipal Corp. v. DLJ Mortgage Capital, Inc., Index. No. 652837/2011 (DLJ ). The decisions are meant to be read together. This decision addresses put-back breach of contract claims, and the DLJ decision discusses fraud claims. Both decisions focus on the scope of damages recoverable by monolines in RMBS transactions. The court assumes familiarity with the procedural history of this action and the prior rulings of this court and the Appellate Division.The instant motion is brought by defendants DB Structured Products, Inc. (DBSP) and ACE Securities Corp. (collectively, Deutsche Bank), pursuant to CPLR 3212, seeking partial summary judgment against plaintiff Assured Guaranty Municipal Corp. (Assured). The motion seeks rulings on the scope of damages as impacted by the “sole remedy” clause, the adequacy of Assured's notice, the indemnification clause, and other provisions of the Insurance and Indemnity Agreement (the I & I). Defendants' motion is granted in part and denied in part for the reasons that follow.
On April 8, 2014, oral argument was held on motion sequence numbers 15, 16, and 18. Motions 15 and 16, filed by third-party defendant GreenPoint Mortgage Funding, Inc. (GreenPoint), sought disclosure of the settlement between Assured and Deutsche Bank and partial summary judgment against Assured. These motions were decided on the record. See Dkt. 439 (4/8/14 Tr.). The court reserved on the instant motion.
I. Legal Standard
Summary judgment may be granted only when it is clear that no triable issue of fact exists. Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 325 (1986). The burden is upon the moving party to make a prima facie showing of entitlement to summary judgment as a matter of law. Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980) ; Friends of Animals, Inc. v. Associated Fur Mfrs., Inc., 46 N.Y.2d 1065, 1067 (1979). A failure to make such a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. Ayotte v. Gervasio, 81 N.Y.2d 1062, 1063 (1993). If a prima facie showing has been made, the burden shifts to the opposing party to produce evidence sufficient to establish the existence of material issues of fact. Alvarez, 68 N.Y.2d at 324;Zuckerman, 49 N.Y.2d at 562. The papers submitted in support of and in opposition to a summary judgment motion are examined in the light most favorable to the party opposing the motion. Martin v. Briggs, 235 A.D.2d 192, 196 (1st Dept 1997). Mere conclusions, unsubstantiated allegations, or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman, 49 N.Y.2d at 562. Upon the completion of the court's examination of all the documents submitted in connection with a summary judgment motion, the motion must be denied if there is any doubt as to the existence of a triable issue of fact. Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223, 231 (1978)
II. Background
Here, as in all RMBS put-back cases, MLPAs, PSAs, and I & Is govern the parties' rights and set forth the risk structure of the subject transaction. Each contract contains representations and warranties, and the party with exposure to loan losses under the contract has protection from losses arising from loans that do not conform to the contract's representations and warranties (non-conforming loans). Investors receive this protection from the bank that structured the RMBS under the PSA. Monolines receive this protection under the I & I and, as third party beneficiaries, under the PSA, and the banks receive this protection under the MLPA from originators that sold them the loans. The precise scope of protection may differ based on the particular language in each contract.
See generally HSH Nordbank AG v. Barclays Bank PLC, 42 Misc.3d 1231(A), at *2–3 (Sup Ct, N.Y. County 2014) (Friedman, J.) (setting forth “the process by which mortgages are securitized”).
Nonetheless, all of the contracts have a key similarity the “reasoned risk allocation” described by Assured in paragraphs 24, 25, and 41 of its Complaint:
[Deutsche Bank] was in privity with the sellers and originators that sold [Deutsche Bank] the HELOCs that [Deutsche Bank] conveyed to the Trust. [Deutsche Bank] owned the HELOCs and held the loan files, which afforded [Assured] access and control over information required to evaluate the loans. To the extent [Deutsche Bank] identified any deficit in the HELOCs, it had the right to demand that the seller of the HELOCs repurchase the loans. [Deutsche Bank] thus had the means before the closing of the Transaction to assess the quality of the HELOCs and to seek recourse in the event a defect was discovered. In contrast, [Assured] was not in privity with the sellers and originators before the closing of the Transaction, never owned the HELOCs or the loan files, and lacked recourse against the sellers and originators before the closing of the Transaction. It therefore made sense for the sophisticated parties to agree that [Deutsche Bank] would bear the risk and the burden of assessing the validity and accuracy of the characteristics and attributes of the HELOCs conveyed to the Trust, and [Assured] would bear the burden of evaluating whether HELOCs bearing these characteristics and attributes would perform after the closing of the Transaction as it had projected.
The representations and warranties that [Deutsche Bank] provided were the means by which the parties effectuated their reasoned and bargained-for risk allocation.
The stated agreement was that [Assured] was to assume the risk that loans in the pool would default [provided that the representations and warranties were accurate and Deutsche Bank] assumed the risk that its representations and warranties were incorrect.
Dkt. 1 at 11–12, 22 (bold added; italics in original).In other words, the party with a put-back right takes the economic risk that it will suffer a loss on conforming loans (i.e., that there was a loss on a loan which complied with the representations and warranties). Thus, monolines, who irrevocably guarantee revenue to RMBS investors in exchange for the payment of premiums, will pay out claims that exceed premiums received if loan losses are substantial (as they were in the recent economic crisis), and losses from loans which conformed to the representations and warranties in the I & I and PSA cannot be put-back.
On the other hand, when the loans causing the losses are non-conforming, investors (via the trustee) and monolines can avail themselves of the Repurchase Protocol and make put-back claims on banks and originators. For every non-conforming loan, the investor or monoline is entitled to a refund, calculated pursuant to the Repurchase Protocol, and paid out in accordance with the applicable waterfall. The net result, if such procedure is followed, is to make the investor or monoline break even on non-conforming loans. Revenue on non-conforming loans, such as premiums paid, mortgage payments, and foreclosure proceeds, are therefore accounted for in the repurchase price to ensure that the put-back mechanism does not function as a windfall.
The result of this risk structure is that RMBS losses are paid for by the party who expressly agreed to bear the risk of loss. So, for example, if every single securitized loan defaults, but only half of the loans are non-conforming, investors and monolines can only recover half their losses. This, of course, is a gross simplification, since the structure of the waterfall makes the allocation of put-back funds a complex calculation. Nonetheless, this risk structure is straightforward and encapsulates a fundamental truth of investing in RMBS: investors and monolines assume the risk of losing money on conforming loans.
It follows that Assured has but one breach of contract claim a put-back claim, under the Repurchase Protocol, for the portion of its claims paid to investors attributable to non-conforming loans. To compute damages, the percentage of the applicable loan pool that is non-conforming must first be determined. The non-conformance rate, then, is applied to the waterfall, generating the amount of money which should flow to Assured. The result is that Assured will absorb losses arising from conforming loans and the bank/originators will have to pay for losses arising from non-conforming loans. This is the very “reasoned risk allocation” described in Assured's Complaint. Of course, the parties dispute the non-conformance percentage, and their estimates vary widely. Determining the proper methodology for establishing that percentage is a matter for expert discovery, which, in this case, is well under way. The resolution of this dispute is not at issue on this motion.
The issue here is whether the Repurchase Protocol is Assured's “sole remedy”. This, however, is a red herring because it is erroneously premised on the notion that the answer to that dispute matters when assessing the proper scope of Assured's damages. No matter the “remedy” applied, be it specific performance, the Repurchase Protocol, or simply an ordinary computation of compensatory damages, the result must effectively be the same. Assured's damages cannot reflect a recovery in excess of the percentage of claims attributable to non-conforming loans. This limit is not, in a strict sense, loss causation, since that concept is an element of fraud, which is not a claim in this case. However, this limit conforms to basic proximate causation principles, which warrants adherence to the risk structure in the RMBS contracts. Simply put, Assured, an insurer of financial risk, took the risk that it would have to pay claims attributable to conforming loan losses. Assured's ability to recoup claim payments via the put-back mechanism cannot be used as a means to also recover claims paid attributable to conforming loan defaults caused by a market crash the very risk it insured and for which it collected premiums.Nonetheless, assuming arguendo that the Repurchase Protocol does not apply, what does Assured think it is entitled to? There are cases in this court where the monoline was not limited to the Repurchase Protocol. See, e.g., AMBAC Assur. Corp. v. First Franklin Fin. Corp., 40 Misc.3d 1214(A), at *8–13 (Sup Ct, N.Y. County 2013) (Schweitzer, J.); Syncora Guar. Inc. v. EMC Mortg., LLC, 39 Misc.3d 1211(A), at *3–6 (Sup Ct, N.Y. County 2013) (Ramos, J.). However, escaping the Repurchase Protocol does not mean the monoline is automatically entitled to reimbursement of all of its paid claims. To explain, assuming only 10 out of the over 6,000 loans were non-conforming and the rest of the claims paid were solely attributable to the market crash, which resulted in conforming loan defaults, Assured could not reasonably contend that a de minimus breach rate entitles them to rescissory damages. If this were true, Assured's damages would be the same regardless if the non-conformance rate was 6% or 87%. This, of course, is not true. It, therefore, follows that a damages nexus between non-conformance and claims paid is required to be proven so that all instances of non-conformance do not automatically entitle Assured to be indemnified for all claims paid.
But it also is true that the non-conformance rate was not de minimus, even according to Deutsche Bank's own estimates. To calculate the percentage of its recoverable claims-paid, Assured must establish the actual rate of non-conformance. Claiming “pervasive breach” is merely a conclusory statement, which cannot substitute for the contract remedy contemplated by the sophisticated parties who negotiated the Repurchase Protocol and waterfall. Assured's own Complaint admits that all damages awarded in this action must have a nexus to losses caused by non-conforming loans. Though Assured can parse the I & I's sole remedy clause and compare it to other contracts, what Assured cannot do is legitimately argue that its remedy for claims-paid losses is not inexorably linked to the non-conformance rate. As the court explains in its DLJ decision, Assured cannot recover conforming loan losses with a fraud claim. Ergo, it cannot do so with a breach of contract claim.Moreover, though public policy considerations do not impact sophisticated parties' rights under a contract, this court does not and cannot resolve RMBS disputes in a vacuum. It is no secret that the current RMBS market is desperate for new private capital. Courts will further destabilize that market if they do not fashion damages in accord with the market's risk structure. In sum, recovery on non-conforming loans is Assured's sole remedy because losses arising from conforming loans are not proximately caused by a breach of contract. Deutsche Bank did not breach the contracts with respect to the conforming loans. To allow recovery on conforming loan losses would sanction damages where there is no breach. See Harris v. Seward Park Housing Corp., 79 AD3d 425, 426 (1st Dept 2010) (the elements of breach of contract claim are “the existence of a contract, the plaintiff's performance thereunder, the defendants breach thereof, and resulting damages) (emphasis added). As discussed below, this is now the consensus in New York courts.
Even more threatening to the future of the RMBS market is the lack of respect given to the repurchase protocol. Banks need to give investors sufficient assurances that, if loans are actually non-conforming, banks will promptly make good on their repurchase obligations without the need to resort to litigation. If litigation is an effective condition precedent to recovering on a put-back claim, the cost of suing banks may have to be priced into RMBS since the intent of the put-back mechanism is to serve as an efficient repurchase protocol, not costly, protracted litigation over matters better resolved by underwriting experts rather than courts.
III. Recent Cases
In the last year, this court issued three decisions in investor put-back cases which discussed how the RMBS risk structure impacts damages. In the first case (reversed on unrelated statute of limitations grounds), ACE Secs. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc., 40 Misc.3d 562, 569 (May 13, 2013) (SL2 ), the court noted:
DBSP does not bear the risk of loss on all loans that default. Conforming loans, where the Representations are true, will sometimes default for reasons that have nothing to do with borrowers lying or underwriter fraud. If “good” mortgages did not have real default risk, mortgage interest rates would be even lower than their current historically depressed levels. In reality, borrowers will occasionally default due to myriad unexpected circumstances, such as losing their job. In those cases, the Certificateholders bear the risk of loss and their recovery is limited to whatever proceeds can be obtained through foreclosure. In contrast, where, as here, borrowers allegedly defaulted due to the Representations being false, such risk is meant to be borne by DBSP. In the second case, ACE Secs. Corp., Home Equity Loan Trust, Series 2007–HE1 v. DB Structured Prods., Inc., 41 Misc.3d 1229(A), at *2–3 (Nov. 21, 2013), the court noted:
Plaintiff's lawsuit, and indeed all put-back actions, seek a refund for loans that do not comply with the representations and warranties in [MLPAs] and PSAs. These contracts specify the types of loan defects that call for a refund and the amount of the refund. If 8 out of 10 loans are non-compliant, plaintiff gets a refund for those 8. Plaintiff, however, does not get a refund for the 2 compliant loans, regardless of how bad the other 8 may be.
In the third case, Bank of N.Y. Mellon v. WMC Mort., LLC, 41 Misc.3d 1230(A), at *2–3 (Nov. 21, 2013), the court noted:
This court and virtually all of the federal and state courts in New York that have recently considered this issue have held that a Trust's ability to recoup its RMBS losses is limited to the defined repurchase price for non-conforming loans. That is, no matter the basis for plaintiff's put-back cause of action, it is a claim for an amount of money under the Repurchase Protocol for non-compliant loans. Consequently, much of the parties' dispute namely, how to properly characterize the breach (e.g. failure to repurchase vs. failure to notify) and which loans qualify for repurchase (e.g. liquidated loans) does not merit further discussion. Regardless of the sufficiency of defendants' notifications and the adequacy of their production of loan files, damages in this action are capped at the total repurchase price of the Trust's non-conforming loans.
A review of recent RMBS case law suggests that other judges have similarly held. See, e.g., Deutsche Bank Nat'l Trust Co. v. WMC Mortg., LLC, 2014 WL 1289234, at *16 (D Conn Mar. 31, 2014) (Haight, J.) (“To resort to the vernacular, this Court's conclusions on [the sole remedy] dispute contain good news and bad news for WMC. The good news is that I agree with WMC that the sole remedies' provision in the PSA precludes the Trustee from pleading a claim for general damages [ ] or a separate and independent claim for breach of the repurchase obligation[ ]. The bad news is that on the ultimate issue of WMC's potential liability to the Trustee, this good news may not make much difference”); ACE Secs. Corp., Home Equity Loan Trust, Series 2007–HE3 v. DB Structured Prods., Inc., 2014 WL 1116758, at *2–3 (SDNY Mar. 20, 2014) (Nathan, J.) (HE–3 ) (noting that “the question of whether DBSP's failure to repurchase breached loans constitutes a separate breach of contract is of limited relevance” and quoting from this court's WMC decision the proposition that “a Trust's ability to recoup its RMBS losses is limited to the defined repurchase price for non-conforming loans”); MASTR Adjustable Rate Mortgages Trust 2006–OA2 v. UBS Real Estate Secs. Inc., 2013 WL 4399210, at *4, (SDNY Aug. 15, 2013) (Baer, J.) (“I disagree with the Trusts to the extent that they argue that breach of the repurchase obligation somehow entitles them to damages that are greater than those that are commensurate with the sole remedy clause. No matter how the breach is characterized, Plaintiffs' repurchase remedy is limited to the Purchase Price' under the PSAs.”). These and other courts, albeit occasionally based on slightly different reasoning, conclude that the ultimate damages calculation must reflect the discussed RMBS risk structure.
See also Nomura Asset Acceptance Corp. Alternative Loan Trust, Series 2006–S4 v. Nomura Credit & Capital, Inc., 2014 WL 2890341, at *6–11 (Sup Ct, N.Y. County 2014) (Friedman, J.) (setting forth an excellent compilation of the New York state and federal case law demonstrating an emerging consensus on the scope of damages recoverable under RMBS contracts).
IV. Adequacy of Notice
Although Assured's damages are limited to non-conforming loan losses, Assured nonetheless may recover all non-conforming loan losses, regardless of the notice given to Deutsche Bank. During oral argument, this court held (as it has in other cases) that forcing Assured to re-underwrite all of the loans is commercially unreasonable and that sampling may be used to compute damages. See Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 FSupp2d 475, 512–13 (SDNY 2013) (Rakoff, J.) (Flagstar II ) (“Sampling is a widely accepted method of proof in cases brought under New York law, including in cases relating to RMBS and involving repurchase claims.”); see also MBIA Ins. Corp. v. Credit Suisse Secs. (USA) LLC, Index No. 603751/2009, Dkt. 655 (holding that MBIA may use sampling to compute damages). This holding is especially warranted in this case because there was only one originator, GreenPoint, who cannot reasonably maintain that it lacked actual notice of nonconformance. Moreover, Deutsche Bank itself made put-back claims to GreenPoint for the same reasons Assured made put-back claims to Deutsche Bank (Deutsche Bank, however, deems the very proof of nonconformance it proffered to GreenPoint inadequate). As Judge Sweet explained, since “DBSP's obligation to repurchase would have been triggered upon its own discovery and does not require notice by Plaintiff” and “the material uniformity of the underlying loan population,” Assured's notification to Deutsche Bank of “pervasive breaches' affecting the loans was sufficient to render the defendant constructively aware-or, at minimum put [defendant] on inquiry notice of the substantial likelihood that these breaches extended beyond' the specified loans into the broader loan portfolio.' “ Deutsche Alt–A Securities Mortg. Loan Trust, Series 2006–OA1 v. DB Structured Prods., Inc., 958 FSupp2d 488, 497, n. 3 (SDNY 2013), quoting Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 2011 WL 5335566, at *7 (SDNY 2011) (Rakoff, J.) (Flagstar I ); see also Flagstar II, 920 FSupp2d at 512–13 (same); see also Nomura, 2014 WL 2890341, at *16 (collecting cases).
Judge Haight recently explained the absurdity of banks' insufficient notice arguments:
[O]ne conjures up a mental picture of platoons of experienced, highly motivated WMC employees, each one ready, able and eager at the drop of a seemingly troubled mortgage loan file to examine the file, evaluate any discernible potential deficiencies, and by the laying on of healing hands, cure any deficiencies that could be remedied, to the benefit of all concerned, or have WMC repurchase any mortgage beyond salvation. It is a reassuring, even a comforting, vision. But its relationship to reality may plausibly be questioned. [I]n April 2012 the Trustee gave WMC specific notice that WMC had breached warranties or representations, a description of each breach, and documentation showing the nature and fundamental materiality of that breach: documentary support that ran into the hundreds of thousands of pages. It is common ground that since April 2012 and the present day, WMC has not repurchased any [ ] loans not a single one. WMC does not seem to deny that for almost two years, it has had with respect to each of [the loans] the “opportunity to evaluate and cure” the breaches of which the Trustee gave WMC detailed and supported notice. Where were the platoons of WMC evaluators and healers, arrayed in ranks in the mind's eye? What have they been doing since April 2012?
These questions are legitimate, given the alleged circumstances, but the present record does not reveal the answers. The present record does not reveal whether, after careful and good-faith use of that bargained-for [Repurchase Protocol], WMC concluded that it was not obligated by the PSA to repurchase a single one of [the loans]. However, these rather stark circumstances give rise to the legitimate suspicion that the grief WMC professes in its brief over a lost opportunity to evaluate and cure the [loans not identified in plaintiff's repurchase demands] is not genuinely felt: rather, that purported lost opportunity is a fiction, fashioned for the sake of advocacy.
Deutsche Bank, 2014 WL 1289234, at *10. Though Judge Haight's decision was on a motion to dismiss, his observations resonate on the instant summary judgment motion, four years since this action was commenced.V. Rescissory Damages
Allowing Assured to recover rescissory damages (all claims paid without regard to whether the claims arose from non-conforming loan losses) is incompatible with the RMBS risk structure discussed earlier. In addition, notwithstanding this risk structure, Assured cannot recover rescissory damages because it is well settled that a party may not simultaneously seek performance and rescission of a contract. Assured commenced this action to enforce its contractual put-back rights, and, as a result, forfeited a claim to rescission or rescissory damages. As Justice Schweitzer recently explained:
DLJ argues that the Trust abandoned any claim to rescission or rescissory damages by suing to enforce the PSA. Clearview Concrete Prods. Corp. v. Charles Gherardi, Inc., [88 A.D.2d 461, 466] (2d Dept 1982) (party abandoned right to rescind when “it accepted the benefits of the contract and thereby affirmed it”); see also Bernstein v. Cooke, [103 A.D.2d 725, 728] (1st Dept 1984) (“One elects either to continue with the contract fraudulently induced or to rescind it. If one elects to continue with it, one accepts all the burdens contained in the contract as well as the benefits.”) [T]he court agrees with DLJ's position. Like consequential damages, rescission is a “rarely used equitable tool.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 AD3d 412, 413 (1st Dept 2013). Rescissory damages are generally available only where rescission is impracticable and there are no alternative legal remedies. See MBIA Ins. Corp., 105 AD3d at 413[ ];Alper v. Seavey, 9 AD3d 263, 264 (1st Dept 2004). The Trust's arguments supporting an award of rescissory damages are unavailing because they do not seek rescission and also because there is an available alternative remedy.
U.S. Bank N.A. v. DLJ Mortg. Capital, Inc., 2014 WL 1621046, at *5–6 (Sup Ct, N.Y. County Apr. 21, 2014) ; see also ACE Secs. Corp ., Home Equity Loan Trust, Series 2006–HE4 v. DB Structured Prods., Inc., 2014 WL 1384490, at *5 (Sup Ct, N.Y. County Apr. 4, 2014) (Bransten, J.) (“neither rescission nor rescissory damages are available where sole remedy clause is undoubtedly applicable to Plaintiff.”). Indeed, even if the Repurchase Protocol was not Assured's “sole remedy”, Assured still could not recover rescissory damages. See U.S. Bank N.A. v. DLJ Mortg. Capital, Inc ., 42 Misc.3d 1213(A), at *5 (Sup Ct, N.Y. County Jan. 15, 2014) (Bransten, J.). Finally, Assured cannot recover rescissory damages because of the well settled rule that the continued acceptance of premiums, as has happened here, is an absolute bar to rescission. See Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 37 Misc.3d 1212(A), at *7 (Sup Ct, N.Y. County 2012) (collecting cases).
Where, as here, there are no grounds to rescind the contract (e .g.fraud), rescissory damages are unavailable since the RMBS risk structure must be adhered to. It should be noted that some courts seem hesitant to dismiss rescissory damages claims due to what appears to be a fear that doing so will deprive the plaintiff of recovery if specific performance (i.e. actual repurchase, say, when loans are liquidated) is impossible. See, e.g., HE–3, 2014 WL 1116758, at *10–11;see Nomura, 2014 WL 2890341, at *14 (noting “that a number of federal Courts have declined to dismiss rescissory damages claims at the pleading stage”). However, as this court and others have held, technical repurchase (e.g., transfer of title) is not the only compensatory damages option; a cash payment under the repurchase protocol and applicable waterfall may be recovered. See Deutsche Alt–A, 958 FSupp2d at 504–05, citing SL2, 40 Misc.3d at 569;see also Flagstar I, 2011 WL 5335566, at *7;see also Nomura, 2014 WL 2890341, at *14 (“This holding is consistent with the decisions of the New York State Courts dismissing rescission claims based on the plaintiffs' waiver of the rescissory remedy or the adequacy of damages provided by the sole remedy provision”).
The Appellate Division's reversal on other grounds did not address this bedrock principle of insurance law. It also should be noted that, despite the Appellate Division's initial inadvertent reinstatement of a rescissory damages claim in DLJ [114 AD3d 598, vacated by 117 AD3d 450], the parties in DLJ recognized that the dismissal of the rescissory damages claim was not exclusively based on the “sole remedy” clause and Assured voluntarily stipulated “not to seek rescissory damages.” See Index No. 652837/2011, Dkt. 135.
V. Indemnification
The parties dispute the meaning of § 3.04(a)(ii) of the I & I, which sets forth the scope of Deutsche Bank's indemnification obligation to Assured. It states:
In addition to any and all rights of reimbursement, indemnification, subrogation and any other rights pursuant hereto or under law or in equity, [Deutsche Bank agrees] to pay, and to protect, indemnify and save harmless [Assured] from and against any and all claims, losses, liabilities (including penalties), actions, suits, judgments, demands, damages, costs or expenses (including, without limitation, fees and expenses of attorneys, consultants and auditors and reasonable costs of investigations) of any nature arising out of or relating to the transactions contemplated by the Transaction Documents by reason of (ii) the breach by [Deutsche Bank] of any representation and warranty under any of the Transaction Documents.
Dkt. 389 at 38.
The parties agree that § 3.04 is a third-party indemnification provision (despite the actual language of § 3.04 arguably covering all of Assured's losses caused by non-conforming loans). They disagree as to whether Assured's claims are third-party claims. This dispute is immaterial because the marginal benefit Assured seeks to procure from § 3.04 is the recovery of its costs and legal fees. However, Assured need not rely on § 3.04 because it is expressly entitled to such amounts under § 3.03(b)(iii). Judge Rakoff recognized this in Flagstar II, where he also held “that awarding costs and fees would not be contrary to its prior ruling that Assured was limited to the contractual cure-or-repurchase remedy as its sole remedy.' “ See Flagstar II, 920 FSupp2d at 516 ; see also Assured Guar. Corp. v. EMC Mtge., LLC, 39 Misc.3d 1207(A), at *7–8 (Sup Ct, N.Y. County 2013) (Ramos, J.) (“the reimbursement provision at issue in Flagstar II is nearly identical to the one at issue set forth in this action”). Hence, given Assured's right to recover all claims paid arising from non-conforming loans and its rights under § 3.03(b)(iii), recovery under § 3.04(a)(ii), even if such section was applicable, would be duplicative. Accordingly, it is
The first-party/third-party issue is different in investor cases, where § 3.03(b)(iii) is inapplicable and where the parties often do not concede that a similar indemnification clause only applies to third-party claims. See Bank of N.Y. Mellon, supra, 41 Misc.3d 1230(A), at *5–6.
ORDERED that the summary judgment motion by defendants DB Structured Products, Inc. and ACE Securities Corp. is granted to the extent that: (1) all of plaintiff Assured Guaranty Municipal Corp.'s breach of contract causes of action are deemed to be a single claim for recovery of the portion of its paid claims attributable to non-conforming loans; (2) sampling and expert evidence may be used to calculate damages; (3) defendants' defenses based on inadequate notice are stricken; (4) plaintiff cannot recover rescissory damages and any compensatory damages calculation shall not effectively take the form of rescissory damages or reimbursement for losses arising from conforming loans; and (5) plaintiff may recover its reasonable litigation costs and expenses in an amount to be determined after trial.