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

June 19, 2012


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


Syncora Guarantee Inc. ("Syncora") alleges that EMC Mortgage Corporation ("EMC") breached its representations and warranties made to induce insurance provided by Syncora for a securitization transaction (the "Transaction") involving 9,871 Home Equity Line of Credit ("HELOC") residential mortgage loans. EMC aggregated these mortgage loans and sold them to a trust, which in turn issued notes to investors. Many of these HELOCs were "subprime," which defaulted after the housing market collapsed in 2008. Syncora, formerly known as XL Capital Assurance Inc., insured the Transaction to guarantee payments on the securities to senior note holders (the "Policy"). Syncora also entered into an Insurance and Indemnity Agreement ("I&I") with EMC, which contained representations and warranties from EMC, as well as remedies for breach of those warranties. The I&I made Syncora a third-party beneficiary of EMC's representations and warranties contained in a Mortgage Loan Purchase Agreement ("MLPA"), and gave Syncora the right to enforce remedies in the MLPA. Syncora alleges that as a result of EMC's breaches of the representations and warranties, Syncora paid over $168.6 million in claims, and that it continues to face exposure under the Policy.

On March 31, 2009, Syncora filed its Complaint alleging breach of contract, breach of the representations and warranties, and indemnification. Syncora also seeks attorneys' fees and costs. Discovery is ongoing and contentious. Syncora now moves for partial summary judgment and requests three rulings: (1) pursuant to a repurchase provision in the MLPA, EMC was obligated to repurchase loans at the time its representations and warranties were breached (i.e. at the time of the closing of the Transaction), regardless of whether EMC's breaches caused any loan to default; (2) that Syncora may establish EMC materially breached the I&I by showing EMC's breaches of representations and warranties as of the closing date of the Transaction materially increased Syncora's risk of loss on the Transaction, even if EMC's breaches did not directly cause Syncora's claim payments; and (3) notwithstanding that the Policy is irrevocable, the Court may grant Syncora equitable relief equivalent to rescission (claim payments less premiums). For the reasons discussed below, the Court grants Syncora's first and second requested rulings but denies its third request concerning the availability of equitable relief.


In late 2006, EMC, a subsidiary of Bear Stearns, purchased 9,871 HELOCs with an aggregate principal balance of over $666 million from mortgage lender GreenPoint Mortgage Funding, Inc. (Compl. ¶ 30). In March, 2007, EMC, acting on the direction of Bear Stearns, securitized these loans by pooling them into mortgage-backed securities (the "Notes"), which were issued to investors through a trust. (Id. ¶¶ 30, 32). The principal and interest payments from the HELOCs were to provide cash flow for principal and interest payments on the Notes. (Id. ¶ 36). Syncora insured the investors' returns on a class of these Notes.

When the Transaction closed on March 6, 2007 (the "Closing Date"), the parties executed several agreements that form the basis for this litigation. These agreements include the Insurance and Indemnity Agreement (Declaration of Philip R. Forlenza ("Forlenza Decl.") Ex. 1 ("I&I")); Financial Guaranty Insurance Policy (Forlenza Decl. Ex. 2 (the "Policy")); Mortgage Loan Purchase Agreement (Forlenza Decl. Ex. 3 ("MLPA")); and the Sale and Servicing Agreement (Forlenza Decl. Ex. 4 ("SSA")) (collectively the "Operative Documents"). Although Syncora did not sign the MLPA and SSA, Syncora is a third-party beneficiary of those agreements. (I&I §§ 2.01(n), 2.02(j).)

The Policy provided by Syncora insures the most senior, or investment grade, note holders against any shortfall from the underlying loans. (Compl. ¶ 35.) The insurance obligation is irrevocable and unconditional. (Forlenza Decl. Ex. 2.) Syncora asserts that as an inducement to issue the Policy, EMC entered into the I&I and made a series of representations and warranties which Syncora relied upon in evaluating the risk of insuring the Transaction. (Compl. ¶ 33.) These representations and warranties included "transactional warranties," regarding EMC's operations and the Transaction as a whole, (I&I § 2.01(i), (l), (m)); and "loan-level warranties," which relate to the characteristic of the underlying loan pool and individual loans, as well as the practices used to originate, underwrite, and service those 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 Section 7 of the MLPA, "for the benefit of [Syncora]." (Id. §§ 2.01(n), 2.02 (j)).

The I&I grants Syncora broad rights and remedies in exchange for the risk it assumed under the Policy. Specifically, the I&I provides Syncora indemnification rights against EMC "from and against any and all claims, losses, [and] liabilities . . . of any nature arising out of or relating to the breach by EMC . . . of any of the representations or warranties contained in Section 2.01 [of the I&I]" or those contained in the Operative Documents. (Id. § 3.04(a)(iv).)

The I&I also specifies that if any of EMC's representations or warranties in the I&I or Operative Documents "shall prove to be untrue or incomplete in any material respect," the breach "shall constitute an Event of Default . . . unless remedied under the Operative Documents." (Id. § 5.01

(a).) In the event of a default by EMC, provided Syncora has not defaulted and other conditions are satisfied, the I&I allows Syncora to "take whatever action at law or in equity" is necessary to collect any amounts due under the I&I "or to enforce performance and observance of any obligation, agreement or covenant of EMC . . . under [the I&I] or any other Operative Documents." (Id. § 5.02(a)(vi).)

The MLPA, in turn, grants Syncora (the "Note Insurer") additional remedies in the event that EMC (the "HELOC Seller") breaches any representation or warranty contained in Section 7 of the MLPA. One of these remedies, a "repurchase provision," states in relevant part:

Upon discovery or receipt of notice by the HELOC Seller . . . or the Note Insurer of a breach of any representation or warranty of the HELOC Seller set forth in this Section 7 which materially and adversely affects the value of the interests of the Purchaser, the Noteholders, the Indenture Trustee or the Note Insurer in any of the HELOCs . . . or which adversely affects the interests of the Note Insurer, the party discovering or receiving notice of such breach shall give prompt written notice to the others. In the case of any such breach of a representation or warranty set forth in this Section 7, within 90 days from the date of discovery by the HELOC Seller, or the date the HELOC Seller is notified . . . , the HELOC Seller will either (i) cure such breach in all material respects, (ii) repurchase the affected HELOC at the applicable Purchase Price or (iii) if within two years of the Closing Date, substitute a qualifying Substitute HELOC in exchange for such HELOC . . . . (MLPA § 7.)

On June 25, 2010, Syncora moved for partial summary judgment, arguing that under the repurchase provision, it was not required to identify the breaches as to each loan. Rather, Syncora sought a pool-wide remedy based on sampling and extrapolation from the total loan portfolio. Alternatively, it sought a ruling in limine that proof of its claims for breach of loan- level warranties would not be limited to those loans submitted to EMC under the repurchase protocol. On March 25, 2011, the Court granted Syncora's motion for partial summary judgment. See Syncora Guarantee Inc. v. EMC Mortg. Corp., No. 09 Civ. 3106, 2011 WL 1135007 (S.D.N.Y. Mar. 25, 2011). Syncora now seeks to resolve threshold ...

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