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Ambac Assurance Corporation v. Adelanto Public Utility Authority

May 7, 2012


The opinion of the court was delivered by: John F. Keenan, United States District Judge:


This action arises from the early termination of an interest rate swap agreement between Piper Jaffray & Company ("Piper Jaffray") and Defendant Adelanto Public Utility Authority, which is located in Adelanto, California (the "Authority" or "Defendant"). Plaintiff Ambac Assurance Corporation ("Ambac" or "Plaintiff"), a surety to the agreement, brings claims for reimbursement, breach of contract, and specific performance as a result of an early termination payment it made to Piper Jaffray that has not been reimbursed by the Authority. Before the Court are cross-motions for a protective order: Ambac seeks to limit the topics explored in an upcoming deposition, and the Authority seeks an order that its depositions take place in California. For the reasons that follow, Ambac's motion is denied in part and the Authority's motion is granted.


Ambac, a Wisconsin corporation with its principal place of business in New York City, is in the business of surety and financial guaranty insurance. The Authority is a public utility authority existing under the laws of California, with its principal place of business in Adelanto, California. (Am. Compl. ¶¶ 2-3).

In or about September 2005, the Authority issued $70,635,000 face amount of Variable Rate Revenue Bonds, 2005 Series A and B (Utility System Project) (the "Bonds"). The Bonds were underwritten by Piper Jaffray. Ambac issued a policy of bond insurance with respect to the Bonds, insuring payment of the principal and interest thereon. (Id. ¶ 7).

Contemporaneously with its issuance of the Bonds, the Authority entered into an interest rate swap agreement (the "Swap Agreement") with Piper Jaffray in order to hedge its risk as the issuer of the Bonds. The Swap Agreement stays in effect for the life of the Bonds, but it may be terminated upon the occurrence of certain events, such as a party's default or bankruptcy. In the event of an early termination of the Bonds, the Swap Agreement provides for certain payments to compensate for the termination. (Id. ¶¶ 8-10).

On September 7, 2005, Ambac issued a surety bond for the Swap Agreement (the "Surety Bond"). The Surety Bond provides that if the Authority were to fail to make certain payments required by the Swap Agreement, including certain termination payments, Ambac would make those payments. (Id. ¶ 11).

Ambac was not a party to the Swap Agreement, but it is specifically identified in it as the issuer of the Surety Bond and is given the title "Swap Insurer." The Swap Agreement further provides that the Authority shall unconditionally reimburse Ambac, as the Swap Insurer, for any incurred fees, costs, or other expenses resulting from a breach of the Authority's obligations under the Swap Agreement. The Authority is also obligated under the Swap Agreement to reimburse Ambac for any amounts paid under the Surety Bond and any costs of collection and enforcement thereof, with interest at a specified rate. (Id. ¶¶ 12-14).

On November 5, 2008 Moody's Investors Service downgraded Ambac's credit rating. Pursuant to the Swap Agreement, the downgrade of Ambac's credit rating required the Authority either to replace Ambac as the Swap Insurer or to obtain or maintain an unenhanced rating on the Bonds at or above a certain minimum within 30 days. The Authority's failure to satisfy either of those tasks within that time period would allow Piper Jaffray to terminate the Swap Agreement. According to Ambac, the Authority did not make a good faith effort to satisfy the terms of the Swap Agreement in either manner. Piper Jaffray chose not to immediately terminate the Swap Agreement; instead, in a letter dated February 5, 2009, Piper Jaffray stated that it "would like to resolve this matter without terminating," but it would do so if the Authority did not make "substantial and prompt progress" in resolving its financial difficulties. (Id. ¶ 16).

The Authority failed to resolve its financial difficulties to the satisfaction of Piper Jaffray, and as a result, Piper Jaffray terminated the Swap Agreement and demanded a termination payment of $4,524,000 by notice to the Authority dated June 1, 2009. That same day, June 1, 2009, Ambac filed the instant action against the Authority, seeking exoneration and to compel the Authority to make the termination payment. Ambac made that $4,524,000 payment to Piper Jaffray on June 3, 2009, two days after the notice of termination because, according to Ambac, the Authority "failed to pay the termination payment in a timely manner," rendering Ambac liable for that amount pursuant to its obligations under the Surety Bond. (Id. ¶ 26). After making the termination payment to Piper Jaffray, on June 24, 2009, Ambac amended the Complaint to assert claims for breach of contract, reimbursement, and specific performance.

The Authority moved to dismiss the Amended Complaint on the grounds that this Court lacked subject matter jurisdiction and that venue in the Southern District of New York was improper. On March 15, 2010, the Court denied the Authority's motion to dismiss, and the Authority subsequently answered the First Amended Complaint and brought counterclaims against Ambac. The Authority later filed its Amended Counterclaim, and Ambac moved to dismiss the Amended Counterclaim for failure to state a claim for which relief can be granted. In an Opinion and Order dated November 14, 2011, the Court dismissed each of the Authority's counterclaims. Ambac Assurance Co. v. Adelanto Pub. Util. Auth., No. 09 Civ. 5087, 2011 WL 55534444 (S.D.N.Y. Nov. 14, 2011)

The discovery deadline, which the Court extended once, was March 2, 2012. (Pl. Mem. at 4). On January 21, 2012, the Authority sent a notice to Ambac, requesting a deposition on March 1, 2012 listing seventeen topics for examination. (Id. at 5). Ambac, having already produced over 10,500 pages of documents to the Authority, objects to the broad nature of the proposed deposition and certain categories. (Id. at 5). Ambac asserts that several of the areas of inquiry were effectively eliminated when the Court dismissed the Authority's counterclaims in its November Opinion. According to Ambac, several of the Authority's affirmative defenses overlap with the dismissed counterclaims, and discovery should not be permitted. Consequently, Ambac is seeking a protective order to eliminate the following ten topics from Discovery:

1. Ambac's marketing of financial guaranty insurance policies;

2. Ambac's knowledge of Ambac's credit rating by any ...

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