Overview
In a key decision that will likely boost similar claims by bond insurers against banks, Judge Crotty ruled that bond insurer Syncora could force EMC, a former Bear Stearns business unit now owned by JP Morgan, to buy back home equity loans that were pooled together and used as collateral for notes sold to investors, when those loans did not meet the standards warranted, even without a showing that the breaches caused the loans to default:
The repurchase provision requires EMC to cure, repurchase, or substitute HELOC loans in the event that EMC breaches any loan-level representation or warranty. This duty arises only where the breach “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 where the breach “adversely affects the interests of the Note Insurer.” (MLPA § 7.) Under Syncora’s reading, a breach of the representations and warranties is itself an “adverse effect” on its interests as an insurer sufficient to trigger the repurchase remedy. EMC argues that Syncora’s interpretation renders the “adversely affects” requirement meaningless, and that the language requires Syncora to show actual pecuniary loss resulting from a breach. Whether a breach of representations and warranties alone can trigger the repurchase provision turns in part on the nature and scope of an insurer’s “interests” under New York law. New York law provides that an insurer has an interest in receiving complete and accurate information before deciding whether to issue a policy. See Lin v. Metropolitan Life Ins. Co., No. 07 Civ. 3218, 2009 WL 806572, at *1 (S.D.N.Y. Mar. 30, 2009); N.Y. Ins. Law § 3105(a) (defining “representation” as “a statement as to past or present fact, made to the insurer by . . . the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof”). “Insurance is the business of pricing risk; and it cannot function efficiently if the insured conceals or misrepresents the risks a policy covers.” Lin, 2009 WL 806572, at *1 . . . . . A breach of these warranties, if proven, would have adversely affected Syncora’s interests as an insurer. . . . . EMC contends that any increased risk to Syncora as a result of the alleged breaches does not adversely affect Syncora’s interest unless the breach caused a loan to default. (Def’s Mem. at 15-16.) In essence, EMC argues, the repurchase provision contemplated a remedy only where breached representations and warranties caused actual adverse effect, and not simply an increase in risk. But nothing in the language of the parties’ agreements provides for this result, and New York law does not support EMC’s construction. See, e.g., Paneccasio v. Unisource Worldwide, 532 F.3d 101, 111 (2d Cir. 2008). Contrary to EMC’s argument, the parties’ written agreements do not provide that breaches of representations or warranties must cause any HELOC loan to default, before the Note Insurer can enforce its remedies under the repurchase provision. Had the parties intended this requirement, they could have included such language. They did not, and the Court will not do so now “under the guise of interpreting the writing.” See Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 199 (2001) (citation omitted).(H/T Alison Frankel)
