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Syncora Guarantee Inc., F/K/A Xl Capital Assurance Inc v. Emc Mortgage Corp

March 25, 2011

SYNCORA GUARANTEE INC., F/K/A XL CAPITAL ASSURANCE INC.,
v.
EMC MORTGAGE CORP., DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:

USDC SDNY DOCUMENT

OPINION & ORDER

This breach of contract lawsuit arises out of a securitization transaction ("Transaction"), involving 9,871 Home Equity Line of Credit ("HELOC") residential mortgage loans, which were purchased and used as collateral for the issuance of $666 million in publicly offered securities ("Notes"). (Mem. in Supp. Mot. to Am. 3). Defendant EMC Mortgage Corp. ("EMC") aggregated the HELOCs, sold the loan pool to the entity that issued the Notes, and contracted with Plaintiff Syncora Guarantee Inc., formerly known as XL Capital Assurance Inc., ("Syncora") to provide a financial-guaranty insurance policy protecting the investors in the Note. (Id.) Syncora claims that EMC breached its representations regarding 85% of the loan pool. It now moves for partial summary judgment or, alternatively, a ruling in limine, that it was not required to comply with a repurchase protocol as the exclusive remedy for all such claims. The Court GRANTS the motion for partial summary judgment on the grounds that, in light of the broad rights and remedies for which Syncora contracted, any such remedial limitation would have to be expressly stated.

I.Facts

The Transaction, which closed on March 6, 2007, involved the securitization of a pool of HELOCs. EMC, acting for its affiliate Bear Stearns, sponsored the securities in the Transaction, purchasing 9,871 HELOCs from their originator (mortgage lender GreenPoint Mortgage Funding, Inc. ("GreenPoint"), and pooling them into mortgage-backed securities. (Compl. ¶ 30). These securities were then issued to investors through various classes of notes with an aggregate balance of over $666 million. (Id. ¶ 32). The principal and interest payments from the HELOCs were supposed to provide the cash flow to make the monthly principal and interest payments on the Notes. (Id. ¶ 36). Syncora insured the investors' returns on a class of these mortgage-backed securities.

The Transaction was accomplished through several separate agreements ("Operative Documents") governing the rights and obligations of the various parties. These agreements include the Insurance and Indemnity Agreement (Forlenza Decl. Ex. 1 ("I&I")), Mortgage Loan Purchase Agreement (Forlenza Decl. Ex. 2 ("MLPA")), Sale and Servicing Agreement (Forlenza Decl. Ex. 3 ("SSA")), and Indenture Agreement.

Pursuant to the I&I, Syncora issued a Financial Guaranty Insurance Policy ("Policy"), in which it agreed to insure certain payments of interest and principal for the most senior, or investment-grade, class of issued securities. This obligation to pay insured security holders for any shortfall in cash flow from the underlying loans was irrevocable and unconditional. (Mem in Supp. Mot. Summ. J. 18; Mem. in Opp. Mot. Summ. J. 1). EMC made a series of representations and warranties, contained in the I&I, upon which Syncora relied in evaluating the risk of insuring the Transaction. Among these representations and warranties were the transactional warranties, regarding EMC's operations and the Transaction as a whole, (I&I § 2.01(i), (l), (m)); and the loan-level warranties, which relate to the characteristic of the underlying loan pool and individual loans, (id. § 2.01(j), (n)) . The I&I's loan-level warranties largely "incorporate[] and restate[]" the guarantees in the other Operative Documents, particularly the MLPA, "for the benefit of [Syncora]." (Id. § 2.01(n)). They cover the attributes of the loan pool and individual loans, as well as the practices used to originate, underwrite, and service the loans. (Mem. in Supp. Mot. Summ. J. 6-7).

In exchange for the high level of risk borne by Syncora, the I&I confers broad rights and remedies. Under the I&I, (a) Upon the occurrence of an Event of Default and so long as no Note Insurer Default shall have occurred and shall have continued beyond any period of cure applicable thereto, the Insurer may exercise any one or more of the rights and remedies set forth below: . . .

(iv) take whatever action at law or in equity as may appear necessary or desirable in its judgment to collect the amounts, if any, then due under this Insurance Agreement or any other Operative Document or to enforce performance and observance of any obligation, agreement or covenant of EMC, the Issuer or the Depositor under this Insurance Agreement or any other Operative Documents. . . .

(b) Unless otherwise expressly provided, no remedy herein conferred or reserved is intended to be exclusive of any other available remedy, but each remedy shall be cumulative and shall be in addition to other remedies given under this Insurance Agreement, the Indenture or existing at law or in equity.

(I&I § 5.02). An Event of Default with regard to an EMC representation exists only when "[a]ny representation or warranty made by EMC . . . hereunder or under the Operative Documents . . . shall prove to be untrue or incomplete in any material respect, unless remedied under the Operative Documents." (I&I 5.01(a)). In addition to the common law remedies available, the I&I provides for reimbursement, indemnification, and subrogation. (I&I §§ 3.03(b), (c), 3.04(a), 3.07). It also entitles Syncora to certain incremental rights as a third party beneficiary of the Operative Documents:

Each of EMC, the Issuer, the Depositor, and the Servicer agrees that the Insurer shall have all rights provided to the Insurer in the Operative Documents and that the Insurer shall constitute a third-party beneficiary with respect to such rights in respect of the Operative Documents.

(I&I § 2.02(j)). Finally, the I&I makes EMC's obligations to Syncora under the agreement "absolute and unconditional and . . . [to be] performed strictly in accordance with this Insurance Agreement under all circumstances . . . irrespective of . . . any . . . defense . . . that EMC . . . may have at any time against [Syncora]." (I&I § 4.03(a)).

The MLPA between EMC (designated the "HELOC Seller") and another Bear Stearns entity (designated the "Purchaser") is also relevant. The MLPA is a sales agreement and serves the limited purpose of transferring a pool of HELOC loans from EMC to the Purchaser. Section 7 of the MLPA includes 71 representations and warranties by EMC regarding the underlying loan pool and individual loans, all of which are incorporated into the I&I. It further creates a repurchase ...


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