892 F. Supp. 2d 596
S.D.N.Y.2012Background
- Assured Guaranty Ins. Corp. sues Flagstar for breaches of Transaction Documents (SSAs, MLPA, I&Is) on ~1B in Flagstar HELOC-backed securities.
- Alleged breaches concern Flagstar’s representations and warranties about loan origination quality and absence of fraud or misrepresentation.
- Assured asserts Flagstar failed to service loans properly and breached repurchase obligations when breaches occurred.
- Parties dispute causation; court ultimately adopts that breaches need only have materially increased Assured’s risk of loss, not necessarily cause defaults.
- Pre-trial due diligence by Clayton and Bohan is acknowledged; court rejects waiver of warranties based on pre-closing due diligence.
- Court denies summary judgment on multiple issues and sets trial to proceed, focusing on materiality, risk of loss, and servicing standards.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Causation standard for damages | Assured argues breaches need only increase loss risk. | Flagstar argues actual loss causation required. | Breaches need only materially increase risk of loss. |
| Material and adverse breach standard | Warranties breached if material and adverse to Assured. | Adverse requires actual loss to be shown. | Adverse means opposed to Assured’s interests; material breaches that increase risk suffice. |
| Waiver via pre-closing due diligence | Due diligence cannot bar warranty claims if data later proves breaches. | Pre-closing reviews may waive breaches. | CBS/Ziff-Davis framework preserves warranties; no waiver here. |
| Remedies and cure vs. repurchase usage | Repurchase remedies and damages align with breach of warranty. | Cure provisions and timing limit enforcement. | Cure and repurchase interplay; materiality governs remedies. |
| Servicing liability standard | Servicer liability extends beyond gross negligence per SSA. | Liability limited to bad faith, gross negligence, or willful misfeasance. | Genuine dispute as to gross negligence standard; summary judgment denied for servicing claim. |
Key Cases Cited
- Syncora Guarantee Inc. v. EMC Mortg. Corp., 874 F. Supp. 2d 328 (S.D.N.Y. 2012) (contractual causation and material/adverse breach framework for HELOC securitizations)
- MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 34 Misc.3d 895, 936 N.Y.S.2d 513 (N.Y. Sup. Ct. 2012) (materiality and breach concepts in insurance-backed securitizations)
- CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 554 N.Y.S.2d 449, 553 N.E.2d 997 (N.Y. Ct. of Appeals 1990) (buyer can recover breach of warranty despite pre-closing doubts)
- Galli v. Metz, 973 F.2d 145 (2d Cir. 1992) (basis-of-the-bargain approach to warranties and disclosure)
- Rogath v. Siebenmann, 129 F.3d 261 (2d Cir. 1997) (whether disclosure from seller defeats warranty depends on source of knowledge)
- Mut. Benefit Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30 (2d Cir. 1988) (breach of warranty and reliance principles in contract claims)
- Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 738 N.Y.S.2d 658, 764 N.E.2d 958 (N.Y. 2001) (interpretation of contract terms and materiality in New York law)
- UBS Fin. Servs., Inc. v. W.V. Univ. Hosp., 660 F.3d 643 (2d Cir. 2011) (contract interpretation and materiality under New York law)
- United Air Lines, Inc. v. Ins. Co. of State of Pa., 439 F.3d 128 (2d Cir. 2006) (interpretation of insurance contract terms and risk allocation)