SYNCORA GUARANTEE INC., formerly known as XL CAPITAL ASSURANCE INC., Plaintiff,
J.P. MORGAN SECURITIES LLC, formerly known as BEAR STEARNS & CO., INC., Defendant Index No. 651566-11
RECEIVED NYSCEF: 05/04/2012
DECISION AND ORDER
Charles Edward Ramos, J.S.C.
This is the second civil lawsuit brought by plaintiff Syncora Guarantee, Inc. (Syncora), a monoline insurance company, for damages related to claims it paid or will pay under a financial guaranty insurance policy issued for the benefit of investors in a residential mortgage-backed securities transaction known as the GreenPoint Mortgage Funding Trust-HE1 (the Transaction), which closed on March 6, 2007 with EMC Mortgage LLC, f/k/a EMC Mortgage Corporation (EMC Mortgage), an affiliate of Bear Stearns & Company.
Defendant J.P. Morgan Securities, LLC (JP Morgan) moves for an order granting (1) summary judgment, pursuant to CPLR 3212, on res judicata principles, and (2) dismissal of the complaint, pursuant to CPLR 3211(a)(4), on the ground that this action is duplicative of a first-filed federal action.
For the reasons that follow, JP Morgan's motion is denied.
Syncora, formerly known as XL Capital Assurance Inc., is incorporated in New York State, and its corporate headquarters is located in New York City. EMC Mortgage is a Delaware corporation with its principal place of business in Texas. At the time of the Transaction, EMC Mortgage was a wholly-owned subsidiary of The Bear Stearns Companies, Inc. (Bear Stearns), a holding company that provided investment banking services and derivative trading securities to clients through its subsidiaries. On May 30, 2008, JP Morgan became the successor in interest by merger to the now defunct Bear Stearns. EMC Mortgage remains a wholly-owned subsidiary of JP Morgan.
Syncora contends that the Transaction is one of hundreds of securitization that Bear Stearns effectuated between 2004 and 2007 as part of a scheme to generate huge profits from the origination, collection and securitization of faulty mortgage loans, while passing the risk of those loans to investors and financial guarantors. The Transaction was backed by nearly 10, 000 loans called home-equity lines of credit (HELOCs). EMC Mortgage, acting as the Transaction sponsor, purchased the HELOCs from a single origator, GreenPoint Mortgage Inc., and sold them into a trust, which, in turn, issued securities to investors through various classes of notes that were to be paid down by the cash flow from the loans. Syncora agreed to insure payments of interest and principal for the benefit of the note holders. The insurance policy made the securities more attractive to investors, guaranteeing payments to them.
Syncora entered into an Insurance & Indemnity Agreement (the I & I Agreement) with EMC Mortgage, pursuant to which Syncora agreed to issue a Financial Guaranty Policy (the Policy). Thus, Syncora assumed the risk that underlying mortgage loans might default. Bear Stearns, which acted as the Transaction's deal manager and underwriter, allegedly made certain representations and warranties to Syncora concerning the safety of the underlying loans and the company's internal policies and procedures used to originate, underwrite and service the loans. These representations were allegedly made to induce Syncora to insure the Transaction's senior class of notes, and to enhance their value and marketability as insured bonds. Syncora allegedly relied on these representations when analyzing the risks associated with the Transaction.
The I & I Agreement includes a series of broad warranties made by EMC Mortgage as a condition to, and as consideration for, Syncora's risk in issuing the Policy. Those warranties, in part, pertain to the quality of the loan collateral, as well as EMC Mortgage's and GreenPoint's policies and procedures related to underwriting, due diligence and quality control. The I & I Agreement also contains a provision that requires EMC Mortgage to disclose, and thereafter cure, repurchase or provide adequate substitutes for, each loan that fails to conform to EMC Mortgage's warranties (the repurchase protocol).
After the Transaction closed, the residential housing market collapsed, mortgage delinquencies soared, and securities backed with mortgages lost value. The underlying loans started defaulting, which resulted in significant write-offs and required Syncora to make payments of more than $320 million under the Policy to cover the shortfall in payments due investors, which was created by borrowers' defaults. A third-party consultant was hired by Syncora to perform a review of a subset of the loan pool. That review allegedly revealed that more than 85% of a randomly-selected sample of loans contained defects that failed to conform to EMC Mortgage's contractual warranties, and that an even higher percentage of loans in adverse samples, which contained only defaulted or delinquent loans, were non-conforming.
Consequently, Syncora invoked its rights, under the repurchase protocol, for 1, 315 breaching loans and demanded that EMC Mortgage comply with its obligation to cure the breaches, repurchase or substitute the breaching loans. EMC Mortgage refused to repurchase the vast majority of these loans. EMC Mortgage allegedly agreed to repurchase 32 loans. On March 31, 2009, Syncora filed five contract-based claims related to the Transaction in the District Court for the Southern District of New York, naming EMC Mortgage as defendant. Federal jurisdiction was based on diversity of citizenship, pursuant to 28 USC § 1332. The federal action, captioned Syncora Guarantee Inc. v EMC Mortgage Corp., No. 09-CV-3106 [Crotty, J.], asserts claims for EMC Mortgage' s breach of the repurchase protocol and breach of warranties. On May 6, 2009, the District Court issued a scheduling order, setting June 12, 2009, as the deadline for joining additional parties or amending the pleadings. That date was extended to July 13, 2009.
On November 22, 2010, 17 months past the deadline set in the scheduling order, and 20 months after commencing the federal action, Syncora moved to add fraudulent inducement and federal securities fraud and tortious interference claims to the complaint, and to add these new defendants. Finding that Syncora had failed to demonstrate good cause for the undue delay in seeking leave to amend the complaint, Judge Paul A. Crotty, on March 25, 2011, denied the motion as untimely. Judge Crotty found that Syncora was unjustified in waiting to file the motion because "the intricacies of the fraud are not necessary to bring the claim, " and that Syncora was aware of the "gist" of Bear Stearns's fraud before it filed suit against EMC Mortgage (plaintiff's exhibit 2, Crotty Order, at 6-7).
Undeterred, on June 6, 2011, Syncora filed this state court action against JP Morgan, as successor by merger to Bear Stearns, in which Syncora set forth the claims it had unsuccessfully sought to add against Bear Stearns in the federal complaint.Syncora maintains that it had learned that EMC Mortgage was prepared to honor its repurchase obligations, but that JP Morgan reversed those decisions in summer 2008, after its acquisition of Bear Stearns. That reversal is the basis for the tortious interference claim. The District Court action remains ongoing, and trial is scheduled for November 2012.
In its motion to dismiss, JP Morgan argues that the District Court's denial of Syncora's motion for leave to amend constitutes res judicata, or, more precisely, claim preclusion of the present state court claims. JP Morgan insists that Syncora filed the state court complaint in an attempt to rectify the consequences of its own ...