Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc., Index No. 652853/2014, 2/19/2017 (Friedman, J.)

Motion to dismiss; Failure to state a claim; Breach of contract; Breach of warranty

By: Kristen Barone | Staff Writer

Plaintiff, a monoline insurer, issued an insurance policy guaranteeing payments on certain securities issued in the Transaction (“the Transaction”). The Transaction was a securitization of thousands of residential mortgage loans; it was effectuated through a series of agreements executed by Defendants. Defendants obtained a financial guaranty insurance policy from Plaintiffs (the “Insurance Agreement”). Plaintiffs issued its policy based on Defendants’ warranties (the “Underlying NIM Warranties”). Defendants made further warranties to Plaintiff that the Transaction Documents did not “contain any statement of material fact which was untrue or misleading” (the “Transaction Warranties”). A forensic analysis of the underlying mortgage loans revealed that Defendants’ assertions about the quality of the loans was materially false, which would adversely affect Plaintiff’s risk of loss as the insurer. Soon after, Plaintiff commenced suit for breach of contract and asserted three causes of action: (1) Defendants breached the Transaction Warranties and Underlying NIM securities; (2) the breaches were a material breach of the Insurance Agreement; and (3) Defendants breached the Insurance Agreement by failing to provide written notice of default to Plaintiff. Defendants moved to dismiss the claims under CPLR 3211 (a)(1) and (7) on the grounds that the complaint both failed to state a claim that they breached the warranties, and it did not adequately plead causation.

Defendants argued that (1) Plaintiff sought future damages, (2) the Insurance Agreement limited Plaintiff’s damages to past claims payments only, and (3) that Plaintiff, in effect, sought rescissory damages that are not available. Additionally, Defendants argued that New York Insurance Law § 3106(b) requires the insurer to show that the breaches materially increased the risk of loss to Plaintiff, and that they were damaged as a direct result. Defendants maintained that Plaintiff failed to plead causation because the misrepresentations had no sufficient connection to a material increase in the both the risk of loss and loss the Plaintiff suffered. Whereas, Plaintiff argued that pursuant to Insurance Law § 3105 and 3106 they were not required to establish causation.

The Court determined that Plaintiff’s first two causes of action adequately plead damages attributable to the breaches. The Court denied Defendants’ first argument regarding future damages because Defendants failed to analyze the Insurance Agreement’s remedies. Further, Defendants did not persuasively distinguish Plaintiff’s future damages from “other amounts, if any due” under the Insurance Agreement. The Court reasoned that Plaintiff’s request for all claims paid and due in the future, constitutes rescissory damages. The Court further determined that the issue of recovery for future claims payments was insufficiently plead. Regarding Plaintiff’s third cause of action, the Court determined that Plaintiff’s complaint sufficiently alleged actionable harm committed by Defendants. Finally, the Court held that at the pleading stage in a breach of contract action, Plaintiff was not required to specify the precise basis for its calculation of damages, so long as facts are alleged from which the damage may be inferred.

Therefore, the Court denied Defendants’ motion to dismiss Plaintiff’s first and second causes of action for breach of warranty and declined to dismiss the third cause of action as Defendant failed to sufficiently plead their argument.

Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc., Index No. 652853/2014, 2/19/2017 (Friedman, J.).

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