New Orleans City v. AMBAC Assurance Corporation, e
2016 U.S. App. LEXIS 3960
| 5th Cir. | 2016Background
- In Dec. 2000 New Orleans issued variable-rate municipal bonds and purchased bond insurance from Ambac for an up-front nonrefundable premium of $6,388,658.80; Ambac promised to guarantee payment of principal and interest to bondholders if the City defaulted.
- Ambac had a Aaa rating at issuance; the insurance attenuated perceived credit risk and aided marketability of the bonds.
- Beginning in 2007 Ambac’s rating fell due to exposure to structured-finance assets; the City’s bonds likewise lost rating support, remarketing failed, and the City incurred substantial additional debt service and refinancing costs.
- The City sued Ambac alleging breach of a broader “credit enhancement” agreement (oral and written), error in cause (vitiated consent), bad faith, and detrimental reliance; Ambac moved to dismiss and the district court dismissed all claims.
- The Fifth Circuit reviewed de novo under Rule 12(b)(6), considered the written Policy (attached to the motion), and affirmed dismissal, holding the Policy unambiguous and that no broader contractual obligation to maintain underwriting standards or ratings was pled.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract — existence of a larger “credit enhancement” agreement | City: Ambac agreed (via Policy, resolutions, and oral/written communications) to provide credit enhancement beyond insurer-of-payment duties, including maintaining underwriting/credit standards. | Ambac: Only the written Policy governed; no written amendment created any broader obligation; premium paid covered only transfer of credit risk per Policy language. | Affirmed dismissal — Court held the Policy unambiguous, lack of written amendment precluded implying a broader contract, and plaintiff’s allegations were implausible. |
| Error in principal cause (vitiation of consent) | City: It contracted believing it was buying enduring credit enhancement; that error vitiates consent and warrants rescission/damages. | Ambac: Any City error was unilateral and unreasonable given the clear Policy terms and the City’s sophistication. | Affirmed dismissal — unilateral error was not reasonable/excusable; consent not vitiated. |
| Bad faith (mismanagement to increase Ambac’s profits) | City: Ambac knowingly mismanaged its business and pursued risky exposures, breaching duties in bad faith. | Ambac: Bad-faith claim depends on existence of the broader credit-enhancement contract; absent that contract, bad-faith claim fails. | Affirmed dismissal — because no larger agreement was plausibly alleged, bad-faith claim failed. |
| Detrimental reliance (promissory estoppel) | City: Reliance on Ambac’s representations (including Ambac’s role in drafting resolutions and general statements) was reasonable and induced detrimental change. | Ambac: Representations are foreclosed by the unambiguous integrated Policy; reliance unreasonable as a matter of law given the written agreement and parties’ sophistication. | Affirmed dismissal — City failed to plead a representation that Ambac would maintain underwriting/ratings; reliance unreasonable given the explicit Policy. |
Key Cases Cited
- In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007) (standard of review and consideration of documents attached to Rule 12(b)(6) motions)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard for complaints)
- Cunningham & Co. v. Consol. Realty Mgmt., Inc., 803 F.2d 840 (5th Cir. 1986) (contract interpretation is generally a question of law)
- Dameware Dev., LLC v. Am. Gen. Life Ins. Co., 688 F.3d 203 (5th Cir. 2012) (elements of contract formation under Louisiana law)
- Drs. Brethea, Moustoukas and Weaver LLC v. St. Paul Guardian Ins. Co., 376 F.3d 399 (5th Cir. 2004) (unambiguous contracts may be interpreted as a matter of law)
- La. Stadium & Exposition Dist. v. Fin. Guar. Ins. Co., 701 F.3d 39 (2d Cir. 2012) (bond insurance contracts do not imply an obligation to maintain a particular insurer credit rating)
- Scott v. Bank of Coushatta, 512 So. 2d 356 (La. 1987) (reluctance to vitiate agreements for unilateral error by sophisticated parties)