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Syncora Guarantee Inc. v. J.P. Morgan Securities LLC

Supreme Court of New York, First Department

August 13, 2013

Syncora Guarantee Inc., formerly known as XL Capital Assurance Inc., Plaintiff-Respondent,
v.
J.P. Morgan Securities LLC, formerly known as Bear, Stearns & Co. Inc., Defendant-Appellant.

Defendant appeals from the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered May 4, 2012, which denied defendant's motion for summary judgment dismissing the complaint as barred by the principles of res judicata or for dismissal under CPLR 3211(a)(4) on the grounds that there is another action pending.

Sullivan & Cromwell LLP, New York (Robert A. Sacks, Sharon L. Nelles and Darrell S. Cafasso of counsel), and Greenberg Traurig, LLP, New York (Richard A. Edlin, Eric N. Whitney and Anastasia A. Andelova of counsel), for appellant.

Patterson Belknap Webb & Tyler LLP, New York (Philip R. Forlenza, Harry Sandick, Matthew J. Shepherd, Lia M. Brooks and Anthony C. DeCinque of counsel), for respondent.

David Friedman, J.P., John W. Sweeny, Jr., Karla Moskowitz, Paul Feinman, JJ.

MOSKOWITZ, J.

This matter arises out of the collapse of the residential housing market following the global financial crisis of 2007 and 2008. Plaintiff Syncora Guarantee Inc. (Syncora), formerly known as XL Capital Assurance, Inc., is a monoline insurance company that provides insurance for structured finance transactions, including residential mortgage backed securities (RMBS). In March 2007, Syncora agreed to insure an RMBS transaction known as the GreenPoint Mortgage Funding Trust 2007-HE1 (the transaction) [1]. In exchange for monthly premiums, Syncora guaranteed principal and interest payments in the event the underlying mortgage loans failed to perform. EMC Mortgage Corporation (EMC) [2] served as sponsor of the transaction, while Bear, Stearns & Co. Inc. (Bear Stearns) served as manager and underwriter [3]. The transaction was backed by nearly 10, 000 home equity lines of credit (HELOCs). EMC purchased the HELOCs from GreenPoint Mortgage, Inc. (GreenPoint) and sold them into a trust. In turn, the trust issued securities to investors.

To satisfy its agreement to insure the transaction, Syncora issued an insurance and indemnity agreement to EMC (the I & I Agreement) under which Syncora agreed to issue a financial guaranty policy (the policy). The I & I Agreement contains a series of EMC's broad warranties as a condition to, and as consideration for, Syncora's issuance of the policy. Those warranties refer to, among other things, the quality of the loan collateral as well as EMC's and GreenPoint's underwriting, due diligence and quality control policies. The I & I Agreement also contains a provision requiring EMC to promptly disclose each loan that failed to conform to EMC's warranties, and to either cure, repurchase, or provide adequate substitutes for each loan (the repurchase provision).

After the transaction closed in March 2007, the underlying mortgage loans began defaulting, following the collapse of the residential housing market. The defaults required Syncora to take write offs and pay claims under the policy.

When the transaction began to underperform, Syncora hired a third-party consultant to review a large subset of the loan pool. The review allegedly revealed that more than 85 percent of a randomly selected sample of loans had failed to conform to EMC's contractual warranties — for example, by violating EMC's own underwriting guidelines and mortgage-lending practices. According to Syncora, the most prevalent of the breaches involved either Bear Stearns's misrepresentations about the borrowers' ability and willingness to pay or GreenPoint's failure to adhere to its own underwriting guidelines when originating the loans. Syncora alleges that it has so far invoked its rights under the repurchase provision for 1, 315 breaching loans, but that EMC has refused to repurchase all but 32 of the loans. Further, Syncora alleges, it has so far paid out over $320 million in unreimbursed insurance claims.

In March 2009, Syncora filed a breach of contract action against EMC in federal court [4]. In that action, captioned Syncora Guarantee Inc. v EMC Mortgage Corp., No. 09-Civ-3106 (SD NY) [Crotty, J.] (the federal action), Syncora asserted causes of action for, among other things, breach of the repurchase provision and material breach of the I & I Agreement. When Syncora commenced the federal action, a financial guarantor, Ambac Assurance Corp (Ambac), was already litigating similar contract claims against EMC (Ambac Assurance Corp. v EMC Mortgage Corp., No. 08-Civ-9464 [SD NY] [Berman, J.]) (the Ambac Action). The same counsel represents both Ambac and Syncora in their litigations against EMC, Bear Stearns, and JP Morgan.

In November 2010, Syncora moved to amend its federal complaint, asserting that discovery had revealed the scope of the intentional misrepresentations Bear Stearns had made before the transaction. In support of its motion, Syncora stated that discovery had uncovered a "fraudulent scheme developed and executed by [Bear Stearns] and its affiliate EMC" and that EMC was "acting under the control of [Bear Stearns]" when it purchased the HELOCs, sold them into the trust, and contracted with Syncora to provide the policy that protected investors. Syncora also claimed to have discovered that EMC was initially prepared to honor its repurchase obligations under the I & I Agreement but that JP Morgan abruptly reversed those decisions in the summer of 2008, shortly after it acquired Bear Stearns.

According to Syncora, once it had a sufficient factual basis to satisfy the heightened pleading standard for fraud, it informed the court that it intended to amend its complaint, and moved to add fraudulent inducement and securities fraud claims against both Bear Stearns and EMC and a tortious interference claim against Bear Stearns. Similarly, in the Ambac Action, Ambac moved to amend its complaint to add the same claims.

Judge Richard M. Berman ruled first in the Ambac Action, finding that Ambac had a good faith basis to amend its complaint to add a fraudulent inducement claim against Bear Stearns and EMC. The court ruled, however, that Ambac's federal securities claims were futile for lack of standing, and that absent the federal claims, the court did not have subject matter jurisdiction over non-diverse Bear Stearns because Ambac is a Wisconsin corporation with its principal place of business in New York. Thus, the court granted Ambac's motion to add the fraudulent inducement claims against Bear Stearns and EMC but then immediately dismissed the case for lack of jurisdiction. Ambac refiled its action in state court, where it is currently pending (Ambac Assurance Corp. v EMC Mortgage Corp., No. 650421/2011 [NY Sup Ct]).

In March 2011, Judge Paul Crotty denied Syncora's motion to amend the complaint as untimely under the Federal Rules of Civil Procedure. The court ruled that Syncora had failed to demonstrate the good cause necessary to permit its late amendment or justify its delay of over a year in doing so. The court noted that the "intricacies of the fraud" were not necessary to bring the claim and that Syncora was on notice of Bear Stearns's alleged fraud "long before documents were produced." Thus, the court concluded, in filing the initial complaint, "Syncora made a conscious choice not to move Bear Stearns as a party defendant because to do so would prevent diversity jurisdiction." The court also found that the proposed securities claims were futile for lack of standing because Syncora was "neither a buyer nor a seller of the securities at issue." Finally, the court noted that, had ...


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