Assured
Guaranty Municipal Corp., F/K/A FINANCIAL SECURITY ASSURANCE INC., and
ASSURED GUARANTY CORP., Plaintiffs,
against
DLJ Mortgage Capital, Inc., CREDIT SUISSE
SECURITIES (USA) LLC, CREDIT SUISSE BOSTON MORTGAGE SECURITIES
CORP., Defendants.
|
652837/2011
Patterson Belknap Webb & Tyler LLP, for Assured (in DBSP).
Quinn Emanuel Urquhart & Sullivan, LLP, for Assured (in DLJ).
Latham & Watkins LLP, for Deutsche Bank.
Orrick, Herrington & Sutcliffe LLP, for Credit Suisse.
Murphy & McGonigle, P.C., for GreenPoint.
Shirley Werner Kornreich, J.
This decision is being issued in conjunction with a decision in a related residential
mortgage backed securities (RMBS) case brought by a monoline insurance company,
styled Assured Guaranty Municipal Corp. v DB Structured Prods., Inc., Index.
No. 650705/2010 (DBSP). The decisions are meant to be read together. In the
instant case, the monoline alleges both fraud and contractual put-back claims, while in
DBSP, the monoline only asserts contractual put-back claims. The court assumes
familiarity with the DBSP decision, the procedural history of this action, and the
prior rulings of this court and the Appellate Division.Before the court are Motion
Sequence Numbers 004, 005, and 006, which are consolidated for disposition. In motion
006, defendants DLJ Mortgage Capital, Inc. (DLJ), Credit Suisse Securities (USA) LLC
(CSS), and Credit Suisse First Boston Mortgage Securities Corp. (CS Boston)
(collectively, Credit Suisse) seek dismissal of the Amended Complaint's (the AC): (1)
fraud claims (the first and second causes of action); and (2) claims against new defendant
CS Boston. The motion is granted and the fraud claims are dismissed for the reasons
stated below.
The dismissal of the fraud claims directly impacts motions 004 and 005,
which seek to compel discovery. In motion 004, plaintiffs Assured Guaranty Municipal
Corp. and Assured [*2]Guaranty Corp. (collectively,
Assured) move to compel Credit Suisse to produce documents concerning: (1) the
repurchase analysis Credit Suisse performed after Assured made pre-litigation repurchase
demands; and (2) credit default swaps (CDS) entered into by Credit Suisse. For the
reasons explained below, Assured is entitled to Credit Suisse's non-privileged repurchase
records but Assured is not entitled to Credit Suisse's CDS records.
In motion 005, Credit Suisse moves to compel Assured to produce
documents regarding Assured's: (1) knowledge of alternative loan documentation
programs; (2) internal RMBS policies and procedures; (3) understanding of risk in
RMBS transactions; (4) originator due diligence; and (5) retrospective review. The
motion is denied.
I.Procedural History
This litigation concerns six RMBS transactions for which Assured, a
monoline insurer, provided financial guaranty coverage. DLJ originated or acquired the
loans, CSS was the underwriter, and CS Boston was the depositor.
Assured
commenced this action on October 17, 2011, asserting contractual put-back claims
against DLJ and CSS. See Dkt. 2. Assured did not assert a fraud claim. On
October 21, 2013, Assured filed the AC, which asserted fraud claims and added CS
Boston as a defendant. See Dkt. 118.[FN1]
In an order dated February 27, 2014, the Appellate Division partially reversed this court's
decision on the original motion to dismiss [37 Misc 3d 1212(A)] regarding the "sole
remedy" clause. 114 AD3d 598. On May 6, 2014, the Appellate Division modified its
decision to reflect the scope of the issues appealed, and the rescissory damages claim
dismissed by this court on multiple grounds [37 Misc 3d 1212(A), at *6-7] was not
reinstated. 117 AD3d 450.One such ground was Assured's continued acceptance of
premiums, a well established bar to rescinding an insurance policy. See 37 Misc
3d 1212(A), at *7 (collecting cases). In fact, before the Appellate Division issued its
modified order, Assured voluntarily stipulated "not to seek rescissory damages."
See Dkt. 135. Hence, coming into this motion, Assured's sole avenue to a
rescission-type remedy was limited to its fraud claims. Since, for the reasons explained
below, the fraud claims are dismissed, Assured now is limited to litigating its contractual
put-[*3]back claims.[FN2]
On April 10, 2014, during oral argument on the instant motions, the parties were
directed to submit supplemental briefs on the applicability of the New York Insurance
Law. The parties filed these briefs on May 1, 2014. See Dkt. 137 &
138.
II.Credit Suisse's Motion to Dismiss (Seq. 006)
A. Legal Standard
On a motion to dismiss, the court must accept as true the facts alleged in the
complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v Gani Realty Corp., 60
AD3d 491 (1st Dept 2009); Skillgames, LLC v Brody, 1 AD3d 247, 250 (1st Dept
2003), citing McGill v Parker, 179 AD2d 98, 105 (1992); see also Cron v
Harago Fabrics, 91 NY2d 362, 366 (1998). The court is not permitted to assess the
merits of the complaint or any of its factual allegations, but may only determine if,
assuming the truth of the facts alleged, the complaint states the elements of a legally
cognizable cause of action. Skillgames, id., citing Guggenheimer v
Ginzburg, 43 NY2d 268, 275 (1977). Deficiencies in the complaint may be remedied
by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. "However,
factual allegations that do not state a viable cause of action, that consist of bare legal
conclusions, or that are inherently incredible or clearly contradicted by documentary
evidence are not entitled to such consideration." Skillgames, 1 AD3d at 250,
citing Caniglia v Chicago Tribune-New York News Syndicate, 204 AD2d 233
(1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon
documentary evidence, the motion will succeed if "the documentary evidence utterly
refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of
law." Goshen v Mutual Life Ins. Co. of NY, 98 NY2d 314, 326 (2002) (citation
omitted); Leon v Martinez, 84 NY2d 83, 88 (1994).
"The elements of a cause of action for fraud require a material
misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance,
justifiable reliance by the plaintiff and damages." Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d
553, 559 (2009); Perrotti v
Becker, Glynn, Melamed & Muffly LLP, 82 AD3d 495, 498 (1st Dept
2011). Pursuant to CPLR 3016(b), "the circumstances constituting the wrong shall be
stated in detail." Pludeman v
Northern Leasing Sys., Inc., 10 NY3d 486, 491 (2008).
B.Assured's Fraud Claims and the RMBS Risk Structure
Assured alleges it was fraudulently induced to issue the subject financial
guarantee policies based on Credit Suisse's countless misrepresentations about the loans
in the transaction. Some of the alleged malfeasance expressly falls under the ambit of the
PSA's representations and warranties, such as lies about borrowers' income.[FN3]
Other malfeasance, such as "wholesale [*4]abandonment
of underwriting standards," does not.[FN4]
As discussed in DBSP, before a monoline agrees to guarantee
revenue to RMBS investors, the monoline and the bank negotiate their risk of loss.
Monolines take no risk on non-conforming loans and expressly negotiate the universe of
loan defects that constitute non-conformance, negotiations which result in the
representations and warranties. Banks want to limit their exposure by negotiating for as
narrow a universe of representations as possible (even if banks can put-back
non-conforming loans to originators under MLPAs,[FN5]
because originators pose more counterparty credit risk than global banks). The universe
of representations ultimately agreed-to is the only universe of non-conformance coverage
that monolines are entitled to. The monoline's risk is every possible problem with the
loans not covered by the representations and warranties. So, for instance, when
Assured does not negotiate for the inclusion of a "no fraud rep"[FN6]
(or any other representation not included in the PSA), perhaps, thereby, charging a higher
premium, it makes a conscious decision to take the risk that if such non-included
representations cause losses resulting in claims payments, Assured will not be reimbursed
by Credit Suisse via a put-back.[FN7]
Here, Assured agreed to issue insurance to investors for all loan
losses, while bargaining for partial reinsurance from Credit Suisse for
non-conforming loan losses. By asserting a fraud claim, Assured is trying to broaden the
scope of its bargained-for partial loan loss protection to cover all loan loss
risk. Stated another way, Assured is trying to rewrite the contract by broadening the
scope of its non-conformance protection. This is an attempt to retroactively alter the
parties' risk allocation the crux of this transaction. To allow this is not only commercially
unreasonable, it would violate the axiom that courts should interpret contracts "in accord
with the parties' intent" and may not "alter the contract to reflect its personal notions of
fairness and equity." Greenfield v Philles Records, Inc., 98 NY2d 562, 569-70
(2002).
Assured, in seeking a way around this problem, relies on the general
principle that one need not expressly list every possible way in which one might be
defrauded in a contract. This is true. See Silver Oak Capital L.L.C. v UBS AG, 82 AD3d 666,
667 (1st Dept 2011). Only specific, itemized waivers disclaiming reliance on particular
representations are valid. Basis
Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., 115 AD3d 128, 137
(1st Dept 2014); Steinhardt Group Inc. v Citicorp, 272 AD2d 255, 256 (1st Dept
2000), accord Danann Realty Corp. v Harris, 5 NY2d 317 (1959). Nonetheless,
"a fraud claim is barred where a sophisticated and well-counseled entity fails to include
an appropriate prophylactic provision in the agreement governing the transaction
from which the legal dispute arises to ensure against the possibility of
misrepresentation." ACA
Fin. Guar. Corp. v Goldman, Sachs & Co., 106 AD3d 494, 495 (1st Dept
2013) (emphasis added), accord Centro Empresarial Cempresa S.A. v América Móvil,
S.A.B. de C.V., 76 AD3d 310, 320-21 (1st Dept 2010). To be sure, appellate
authority [e.g., CIFG Assur. N.
Am., Inc. v Goldman, Sachs & Co., 106 AD3d 437, 437-38 (1st Dept
2013)] precludes this court, on a motion to dismiss, to deem Assured's failure to conduct
due diligence on the loan files as an absolute bar to a fraud claim. Cf. UST Private
Equity Invs. Fund v Salomon Smith Barney, 288 AD2d 87, 88 (1st Dept 2001) ("a
sophisticated plaintiff cannot establish that it entered into an arm's length transaction in
justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the
means of verification that were available to it").[FN8]
But the issue here is not whether Assured's reliance on the representations and warranties
that it bargained for was reasonable since, when one procures an express contractual
warranty, one may absolutely rely on it. CBS Inc. v Ziff-Davis Pub. Co., 75
NY2d 496, 503 (1990) ("The critical question is not whether the buyer believed in the
truth of the warranted information but whether [it] believed [it] was purchasing the
[seller's] promise [as to its truth].'"). Instead, the relevant inquiry here, where the contract
itself was insurance one big prophylactic mechanism and where all the risk was on the
negotiating table and expressly [*5]allocated between
sophisticated parties, is: can Assured sue for fraud arising from the very risk it bargained
to assume? The answer, of course, is no.[FN9]
See ACA, 106 AD3d at 496 ("because parties can seldom be certain that the
representations made by other contracting parties are indeed true, they must lest their
cause of action for fraud be barred insert the requisite prophylactic provision to ensure
against the possibility of misrepresentation.") (emphasis added).
C.The Scope
of Assured's Fraud Claims
Assured asserts fraud claims which are duplicative of the bargained-for
representations. The PSA's warranties cannot give rise to Assured's fraud claim because
they implicate the very contractual put-back duties covered by its breach of contract
claim. This makes the claim duplicative. See Mosaic Caribe, Ltd. v AllSettled Group, Inc., 117 AD3d
421, 422-23 (1st Dept 2014),[FN10]
citing Manas v VMS Assocs., LLC, 53 AD3d 451, 453 (1st Dept 2008). Fraud
claims, like all tort claims, are not viable when they arise from the same facts and
implicate the very same duties governed by the contract. See id. Indeed, by
reasserting the breach of contract claim as fraud, Assured, in effect, dispenses with its
burden of proving that its contractual damages arose from breaches of its bargained-for
representations and warranties, and the negotiated put-back remedy is undermined.
Assured's remaining fraud claims seek to recover for malfeasance that is not
contractually defined non-conformance that is, risk not covered by the representations
and warranties. The argument supporting these claims is that since Assured cannot
contractually recover for losses arising from such risk, these losses arise from a
"breach of duty distinct from, or in addition to, the breach of contract." See Shugrue v Stahl, 117
AD3d 527 (1st Dept 2014), quoting Non-Linear Trading Co. v Braddis Assocs.,
Inc., 243 AD2d 107, 118 (1st Dept 1998). However, just because losses are not
recoverable under the contract does not mean that a duty extraneous to the contract exists
or that such duty was breached. Though contracts do not and cannot cover every
eventuality and always include an implied duty of good faith and fair dealing [see 511
W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 (2002)], when the
contract itself sets forth an express risk allocation, one cannot claim that one's
counterparty had an unremunerated duty to warn of or prevent a loss when the duty to
diligence the risk of such loss cannot be fairly imputed to that counterparty.
Here, Credit Suisse had neither the duty nor the incentive to thoroughly vet
the loan pool. Just as Assured claims it reasonably declined to review loan files since it
had warranty protection, so too can Credit Suisse claim that it declined to make similar
diligence efforts since it had put-back rights to the originators.[FN11]
Credit Suisse, like so many banks sponsoring RMBS transactions, had no interest in
making the sort of underwriting or due diligence efforts that insurance companies
typically perform. Banks wanted a fee for structuring RMBS transactions,[FN12]
not RMBS market risk.[FN13]
By having Assured issue insurance, the burden of [*6]diligencing risk not covered by the representations and
warranties could be shifted from Credit Suisse to Assured. Though Credit Suisse still had
some incentive to diligence non-conforming loan loss risk, it had no incentive to
diligence conforming loan loss risk, since the former is the only liability Credit Suisse
was left with under the negotiated transaction documents (and which was supposed to be
mitigated by put-backs to originators).
It is not Credit Suisse's job to conduct Assured's due diligence. Moreover,
Assured, a sophisticated financial insurance company, is supposed to decide for itself the
relevant universe of risk it deems to be material to diligence before issuing insurance.
And Assured did just that. Assured made the business decision to forgo conducting a
thorough investigation of the state of the origination market and, instead, relied on
warranty protection as a cheap proxy that it hoped would correlate to all origination risk.
Reasonable minds may disagree about whether this was a prudent strategy. In hindsight,
Assured's decision looks terrible. But hindsight is irrelevant. What matters is whether
Assured, when it decided to issue the insurance, made a conscious decision to not
conduct robust due diligence on the U.S. mortgage origination industry, and, instead,
took the risk that it would be sufficiently protected by representations and warranties.
This is no nettlesome inquiry; it is clearly what occurred.
So, to summarize, there are an infinite number of "bad" facts that make
lending money to prospective homeowners a risky venture. Insufficient income,
substantial debt, and poor credit are only some of the risks. But, when a sophisticated
insurance company and global bank sit down at the negotiating table to bargain for the
exclusive list of conditions entitling the insurance company to put-back loans, courts
must give deference to the outcome of that negotiation. Insuring a billion dollar
transaction is not a casual pastime that one does without a profound understanding of the
relevant market risks. An insurer might not review the loan files if the cost of doing so is
incompatible with its business model.[FN14]
However, if an insurer forgoes conducting [*7]due
diligence on the loan files and negotiates to bear the risk of malfeasance that such
diligence would reveal, it then cannot claim it was fraudulently induced to enter into the
transaction. Conduct due diligence or procure a sufficient prophylactic coverage to
protect against your undiligenced risk. Do neither, and you are limited to your contractual
bargain. At the end of the day, Assured cannot use a fraud claim to broaden the scope of
its warranties.[FN15]
D.Monoline Caselaw
Assured's fraud claims, however, cannot be dismissed without a discussion
of MBIA Ins. Corp. v
Countrywide Home Loans, Inc., 87 AD3d 287 (1st Dept 2011) (Countrywide
I); MBIA Ins. Corp. v
Countrywide Home Loans, Inc., 105 AD3d 412 (1st Dept 2013)
(Countrywide II); and MBIA Ins. Corp. v Credit Suisse Secs. (USA)
LLC, Index No. 603751/2009 (MBIA).[FN16]
1.MBIA
In an order dated July 30, 2010 (MBIA I), this court initially declined
to dismiss fraud claims raised by MBIA, another monoline. See Index No.
603751/2009, Dkt. 40. MBIA I, rendered in 2010, was the first decision in which
this court grappled with the complexities of RMBS. Over the next four years, this court
handled numerous RMBS cases, including investor RMBS put-back and fraud claims
involving RMBS, CDOs, CDSs, other synthetic securities, and, of course, other
monoline cases, such as DBSP. Involvement with these cases has given the court
a deeper understanding of RMBS transactions. What has become clear is that not all
RMBS cases are the same. Contractual put-back cases are very different from securities
fraud cases. Additionally, the factors relevant to fraudulent inducement of investments in
RMBS and synthetic CDOs differ greatly.
Shortly after the court's initial decision in MBIA I, it realized it had
erred.[FN17]
In an order dated June 1, 2011 (MBIA II), the court sua sponte vacated its
MBIA I decision and dismissed the fraud claims. See 32 Misc 3d 758.
MBIA II, in painstaking detail, parsed all of the relevant contracts, the prospectus
supplement and case law, explaining why MBIA's fraud claims were not legally viable.
However, less than a month later, on June 30, 2011, the Appellate Division
issued Countrywide I, in essence, overruling MBIA II. MBIA, therefore,
moved for renewal. In an order dated October 7, 2011 (MBIA III), the court felt
compelled to reinstate MBIA's fraud claim, but it, nonetheless, extensively analyzed the
transaction documents setting the case up for appeal. See 33 Misc 3d 1208(A).
The court focused heavily on the prospectus and prospectus supplement, which provided
MBIA with clear notice of the very loan issues that formed the gravamen of its fraud
claims. For example, the decision noted:
[T]he Prospectus and ProSupp disclose that neither DLJ nor any of
its affiliates re-underwrote any of the mortgage loans, the information in the
Loan Schedule with respect to 83.73% of the mortgage loans was
unverified, 59.65% of the loans had substantial balloons
posing a special risk of non-payment in the event they could not be paid
off or refinanced, and 14.87% were originated by New Century whose
underwriting procedures might have been undermined by bankruptcy. In sum, the
specific allegations in the complaint and the documentary evidence suggest that MBIA
could not have reasonably "believe[d] in the truth of the warranted information ... but
[only that] it was purchasing [DLJ's] promise as to its truth." [emphasis
supplied] This type of reliance is sufficient to sustain a breach of warranty claim, not
a fraud claim based on misrepresentation.
MBIA III, 33 Misc 3d 1208(A), at *15 (bold in original; italics
added). But Credit Suisse did not appeal, and MBIA II and MBIA III
were never expressly considered at the appellate level.[FN18]
This court will not make the same mistake here. The primary purpose of the
instant decision is to set forth what this court hopes is a compelling explanation of why
the risk allocation in RMBS transactions makes the allowance of Assured's fraud claims
unreasonable both legally and economically.
2.Countrywide
In the MBIA decisions, this court principally relied on DDJ Mgmt., LLC v Rhone Group
L.L.C., 15 NY3d 147 (2010),[FN19]
which, along with Countrywide I and its progeny, preclude [*8]dismissal based on reasonable reliance for failure to review
the loan files.[FN20]
However, as explained earlier, the reasonable reliance issue is not at stake; the
prophylactic provision rule is a rule reaffirmed by the Appellate Division in
2013,[FN21]
even after Countrywide II was decided. Though ABACUS (see ACA, 106
AD3d 494) and the subject transaction are different (ABACUS was a synthetic CDO, not
an RMBS), the prophylactic provision rule should apply to similarly sophisticated
monolines like ACA and Assured when they protest the conduct of the sponsor bank, be
it Goldman Sachs or Credit Suisse.
When read closely, neither Countrywide I nor Countrywide II
expressly preclude dismissal of Assured's fraud claims on the grounds discussed
herein. The Countrywide decisions concerned three main issues: (1) reasonable
reliance; (2) duplication of contract and fraud [*9]claims;
and (3) loss causation. The first issue is inapposite because, as explained earlier,
Assured's failure to review loan files is not, on its own, enough to grant a pre-discovery
motion to dismiss. But see MBIA Ins. Corp v J.P. Morgan Secs. LLC,
supra, 43 Misc 3d 1221(A) (failure to review fraudulent report supposedly relied
on by MBIA warrants dismissal of fraud claim on summary judgment motion); Phoenix Light, SF Ltd. v Goldman
Sachs Group, Inc., supra, 43 Misc 3d 1233(A) (granting motion to dismiss
RMBS fraud claim due to failure to review loan files).
However, the second issue, the duplication of contract and fraud claims, has
become an issue of much confusion. Lately, it seems that virtually every commercial
breach of contract case in New York involves fraud claims. This is regrettable.[FN22]
In fact, a fair reading of the majority of non-monoline appellate precedent in
this state does provide clear guidance as to when fraud claims are barred as duplicative:
if the contract governs the scope of the disputed subject matter, there cannot be a fraud
claim unless "a breach of duty which is collateral or extraneous to the contract" is
identified. Rather v CBS
Corp., 68 AD3d 49, 59 (1st Dept 2009), quoting Krantz v Chateau Stores of
Canada Ltd., 256 AD2d 186, 187 (1st Dept 1998) (collecting cases); see Vue
Mgmt., Inc. v Photo Assocs., 81 AD3d 569 (1st Dept 2011) (fraud claim not allowed
where it "was premised upon factual allegations germane to its initial claim for
breach of contract") (emphasis added). This has always been the law. As the Court of
Appeals explained:
A tort obligation is a duty imposed by law to avoid causing injury to others.
It is "apart from and independent of promises made and therefore apart from the
manifested intention of the parties" to a contract. Thus, [a] defendant may be liable in tort
when it has breached a duty of reasonable care distinct from its contractual obligations,
or when it has engaged in tortious conduct separate and apart from its failure to fulfill its
contractual obligations. The very nature of a contractual obligation, and the public
interest in seeing it performed with reasonable care, may give rise to a duty of reasonable
care in performance of the contract obligations, and the breach of that independent duty
will give rise to a tort claim. Where a party has fraudulently induced the plaintiff to enter
into a contract, it may be liable in tort, or where a party engages in conduct outside the
contract but intended to defeat the contract, its extraneous conduct may support an
independent tort claim. Conversely, where a party is merely seeking to enforce its
bargain, a tort claim will not lie.
NY Univ. v Continental Ins. Co., 87 NY2d 308, 316 (1995)
(citations omitted; emphasis added).
In 2011, when Assured commenced this action by making contractual
put-back claims, it merely sought to enforce its bargain with Credit Suisse. The parties'
loan loss risk was on the negotiating table and allocated pursuant to warranties and
prospectus supplements.[FN23]
Although [*10]RMBS transactions have lots of moving
parts and involve lots of parties (banks, originators, insurance companies, trusts,
investors, etc.), the contract between the monoline and the bank is not that broad. To wit,
the only real subject matter of the contract is insurance. The very purpose of the contract
is the allocation of risk between Assured and Credit Suisse. To contend that Assured's
unprotected risk [FN24]
can be deemed to arise from an independent, extra-contractual duty, misses the point of
the contract and is flatly contradicted by Assured's own pleadings. See AC
¶ 265 (loans not "underwritten in accordance with the applicable Underwriting
Guidelines" are non-conforming and may be put-back).Turning now to loss causation,
Countrywide II held that the "[trial] court was not required to ignore the
insurer/insured nature of the relationship between the parties to the contract in favor of
an across the board application of common law." Countrywide II, 105 AD3d at
412. The context was whether the loss causation principle of ruling out intermediate
causes (e.g., the market crash) was required where New York Insurance Law
§§ 3105 & 3106 applied. See 34 Misc 3d 895, 905-09; see
generally Loreley, supra, 42 Misc 3d at 863-64 (collecting cases). Justice Bransten
held §§ 3105 & 3106 applied and the Appellate Division affirmed. Based
on the parties' supplemental briefs, this court agrees that §§ 3105 & 3106
applies to Assured's financial guarantee policies.However, if the elements of a monoline's
common law fraud claim are to be informed by the Insurance Law, then the whole of
insurance law ought to be considered. It is well settled that "an insurer has no right of
subrogation against its own insured for a claim arising from the very risk for which the
insured was covered even where the insured has expressly agreed to indemnify the party
from whom the insurer's rights are derived.'" ELRAC, Inc. v Ward, 96 NY2d 58,
75 (2001), quoting Penn. Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 468
(1986). The purpose of this rule is to prevent an insurance company from recovering for
"the very claim for which the insured was covered." Jefferson Ins. Co. of NY v
Travelers Indem. Co., 92 NY2d 363, 373 (1998); Fireman's Ins. Co. of Newark,
N.J. v Wheeler, 165 AD2d 141, 144 (3d Dept 1991) ("A person not named in an
insurance policy is considered an insured for purposes of preventing subrogation when,
under the circumstances, the insurer seeking subrogation is attempting, in effect, to
recover from the insured on the risk the insurer had agreed to take upon payment of
the premium") (emphasis added), quoting 6A Appleman, Ins. Law and Prac. §
4055, at 77 (1990 supp).
Here, monolines paid claims to investors and made put-back claims that are
both direct and derivative of the investors' rights. Though monolines are not actually
suing their own insured, and hence strict antisubrogation does not apply, a prohibition on
insurance companies recovering their claims paid in a manner which retroactively
eliminates for themselves the very risk they insured (conforming loan losses) is precisely
the sort of insurance law principle that should "inform" Assured's fraud claims because
this court is not supposed to ignore the "insurer/insured nature of the relationship
between the parties." If the court is to fashion a special, less burdensome common law
loss causation standard on a monoline, it is fair game to [*11]apply quasi-antisubrogation risk shifting limits to that
fraud claim.
That being said, and even if the fraud claims were not dismissed, the applicability of
§§ 3105 & 3106 does not affect the need to prove basic proximate
causation. Even though Assured does not have to parse out losses caused by
non-conformance from losses caused by market forces, it still must prove that its losses
were caused by non-conforming, as opposed to conforming loans. Put another way,
non-conforming loan losses that would have been caused by market forces are
recoverable, but conforming loan losses are not recoverable because conforming
loan losses do not arise from a breach.
This, at the end of the day, is really the point: a monoline cannot recover for
the very risk it assumed, no matter if one frames the matter as an issue of
quasi-antisubrogation or basic proximate causation. Assured and Credit Suisse, highly
sophisticated parties, bargained for a specific risk distribution. That bargain precludes
Assured's fraud claim, which is dismissed.
Finally, notwithstanding all of the above, the instant case is very much a viable
breach of contract action. The allegation that Credit Suisse has unjustifiably refused to
repurchase non-conforming loans, if proved, is galling for the reasons explained by
Judge Haight. See Deutsche Bank Nat'l Trust Co. v WMC Mortg., LLC, 2014
WL 1289234, at *10 (D Conn Mar. 31, 2014) ("the grief WMC professes over a lost
opportunity to cure is not genuinely felt: rather, that purported lost opportunity is a
fiction, fashioned for the sake of advocacy").
III.Assured's Motion to Compel (Seq. 004)
The court now turns to the motions to compel.
Assured requests documents concerning Credit's Suisse CDS transactions.
Since the fraud claims are dismissed, CDS transactions, where Credit Suisse was "short"
RMBS, are irrelevant because motive is not an element of a put-back claim. Loans were
either conforming or not, no matter what Credit Suisse thought of the RMBS
market.
However, banks often use CDSs or other shorting mechanisms for reasons
that have nothing to do with the subject transaction. Banks hedge their market exposure
in ways that make it difficult, if not impossible, to align a hedge with a corresponding
transaction.[FN25]
Nonetheless, even where the netting process can be untangled, banks' hedging is usually
not nefarious, even if [*12]it looks that way in
hindsight.[FN26]
Banks will often take short term exposure on client trades, and then immediately offload
or hedge the exposure. Banks pocket a fee on the transaction, and their profit is their fee
minus the cost of the hedge. Without a showing that such information is directly material
and necessary to the claim at issue, this court will not compel banks to reveal their net
position on a market.
As for Assured's request for Credit Suisse's repurchase analysis conducted in
response to Assured's repurchase demands, this issue has been dealt with extensively by
Magistrate Judge Francis in similar litigation in federal court in the Southern District of
New York. See Assured Guar. Mun. Corp. v UBS Real Estate Secs. Inc., 2013
WL 1195545 (Mar. 25, 2013); MASTR Adjustable Rate Mortgages Trust 2006-OA2
v UBS Real Estate Secs. Inc., 2013 WL 6405047 (Dec. 6, 2013) and 2014 WL
25709 (Jan. 2, 2014); see also Syncora Guarantee Inc. v EMC Mortg. Corp.,
2013 WL 2552360 (ND Cal Jun. 10, 2013) (concurring with Judge Francis' analysis).
Judge Francis explained:
[B]ecause the agreements governing the certificates at issue in this litigation
obligated defendant [UBS] to conduct reviews of loans subject to repurchase demands,
"UBS would have performed [ ] repurchase analyses even had there been no threat of
litigation." More specifically, such an analysis was required so that UBS could
determine, within the 90-day period allowed in the agreements, whether to cure the
alleged breach, substitute a conforming loan, or repurchase the loan. [In footnote 1,
Judge Francis states that "UBS' assertion that the agreements did not obligate UBS to
perform such an analysis in order to decide how to respond to a repurchase demand is
untenable."]. Because they were created in accordance with a contractual obligation, such
analyses are not protected by the work product doctrine unless UBS can show that they
were specifically directed to litigation strategy or defenses and were therefore created in
a form significantly different than they otherwise would have been.
2013 WL 6405047, at *1 (citations omitted).
This court agrees with Judge Francis' analysis. Indeed, the Appellate
Division has held that "documents and information concerning defendants' repurchase
review, generated in response to plaintiff's repurchase requests, are discoverable." MBIA Ins. Corp. v Countrywide
Home Loans, Inc., 93 AD3d 574, 575 (1st Dept 2012). Here, as in these other
monoline cases, Credit Suisse has a contractual obligation to conduct a repurchase
analysis, making the documents discoverable. Of course, if Credit Suisse contends that
some of the requested repurchase documents are privileged, Credit Suisse must serve
Assured with a privilege log. Disputes will be referred to Special Referee Jeremy
Feinberg.
IV.Credit Suisse's Motion to Compel (Seq. 005)
Credit
Suisse seeks documents about Assured's: (1) knowledge of alternative loan
documentation programs; (2) internal RMBS policies and procedures; (3) understanding
of risk in RMBS transactions; (4) originator due diligence; and (5) retrospective review.
These documents are irrelevant given that the fraud claim was dismissed. In this put-back
action, Assured's knowledge, policies, understanding, due diligence, and retrospective
review are all irrelevant to whether Assured can recover losses caused by
non-conforming loans. Assured's [*13]reliance on a
particular warranty is irrelevant since Assured negotiated and purchased the right to rely
on the warranted fact being true. See Ziff-Davis, 75 NY2d at 503.
Ziff-Davis concerned a transaction where the seller made "express warranties as
to the truthfulness of the previously supplied financial information. Thereafter, pursuant
to the purchase agreement, the buyer conducted its own investigation which led it to
believe that the warranted information was untrue." Id. at 498-99 (emphasis
added). Nonetheless, the Court of Appeals allowed the buyer to enforce the
warranty.
Credit Suisse further argues that Assured's knowledge about the riskiness of loans is
relevant to determining whether a false warranty "materially and adversely affect[ed] its
interest." Credit Suisse is reading this as a subjective standard, dependent on Assured's
expectations. Credit Suisse is wrong. It is well settled that this is an objective standard.
See Countrywide II, 105 AD3d at 413, citing Syncora Guarantee Inc. v EMC
Mortg. Corp., 874 FSupp2d 328, 339 (SDNY 2012).
As for the rest of Credit Suisse's requests, which seek information about
Assured's general knowledge of the RMBS market, such discovery demands have been
rejected by most courts. See Ambac Assur. Corp. v Countrywide Home Loans,
Inc., 2013 WL 6816251 (Sup Ct, NY County Dec. 17, 2013),[FN27]
citing MBIA Ins. Corp. v
Countrywide Home Loans, Inc., 27 Misc 3d 1061, 1077 (Sup Ct, NY County
2010); see also Assured Guar. Mun. Corp. v UBS Real Estate Secs. Inc., 2012
WL 5927379 (SDNY 2012) (Francis, J.) ("Assured's general knowledge of the RMBS
market, however, is too tenuously related to any plausible defense to be a proper subject
of discovery"). Only transaction-specific documents are relevant to this case. Credit
Suisse's motion, therefore, is denied. Accordingly, it is
ORDERED that defendants' motion to dismiss the fraud claims is granted,
and the first and second causes of action in the Amended Complaint are dismissed; and it
is further
ORDERED that plaintiffs' motion to compel is (1) denied on the CDS
documents; but (2) granted on defendants' repurchase analysis, which must be produced
within 30 days of the entry of this order on the NYSCEF system, along with a privilege
log if defendants claim that any portion of the documents are privileged; and it is
furtherORDERED that defendants' motion to compel is denied; and it is further
ORDERED that the parties are to appear in Part 54, Supreme Court, New
York County, 60 Centre Street, Room 228, New York, NY, for a status conference on
July 24, 2014 at 11:00 in the forenoon.
Dated: July 3, 2014ENTER:
__________________________
J.S.C.
Footnotes
Footnote 1: The AC cannot be
dismissed for failure to satisfy CPLR 3016(b)'s particularity requirements. Credit Suisse's
dim view of the loans [AC ¶¶ 18, 23-24], knowledge of a broken due
diligence process [¶ 19], relationship to systemic underwriting and post-origination
misconduct [¶¶ 20-21], and violation of SEC regulatory reporting rules
[¶ 22] are discussed with a level of detail that is to be commended. To be sure, all
of this is problematic, if not criminal. But, the morality or legality of Credit Suisse's role
in the financial crisis is not at issue. Scores of dismissed lawsuits across the country
demonstrate that banks' involvement in the crisis does not mean that every RMBS related
investment can be rescinded. Indeed, the monolines themselves played a key role in
propping up the RMBS market, since without their AAA credit rating (discussed further
below), non-investment grade RMBS would not have been sold to certain institutional
investors, and the size of the RMBS market would have been drastically smaller.
Nonetheless, even if a complaint sets forth particularized, specific, interesting, and even
scandalous detail, the wealth of such detail is no substitute for actually stating a claim for
fraud.
Footnote 2: The parties' disputes
concerning whether CS Boston was properly added as a new defendant or if the fraud
claims asserted against it are time-barred are moot because the fraud claims against all
defendants are dismissed on the merits.
Footnote 3: Assured admits that
loans not "underwritten in accordance with the applicable Underwriting Guidelines" are
non-conforming and may be put-back. See AC ¶ 265. This is a breach of
contract issue, for which Assured might recover. Assured does not need a fraud claim for
this. However, if loans complied with their Underwriting Guidelines and were not
otherwise non-conforming, not only was Assured not defrauded, there was no breach of
contract.
Footnote 4: The "wholesale
abandonment" claim is viable in investor RMBS fraud suits, where the trustee and
monolines, but not the investors, have put-back protection. See Allstate Ins. Co. v
Credit Suisse Secs. (USA) LLC, 42 Misc 3d 1220(A), at *10 (Sup Ct, NY County
2014) (Friedman, J.) (collecting cases); see generally Walnut Place LLC v Countrywide Home Loans,
Inc., 96 AD3d 684 (1st Dept 2012).
Footnote 5: It should be noted that
some MLPAs provide broader representations and warranties (reps) to banks than the
corresponding PSA does to the monoline (e.g., early payment defaults). Consequently,
just because a loan was put-back by a bank to an originator, it does not necessarily follow
that the inclusion of such loan in the trust is a breach of the monoline's reps. However,
since non-conforming loans may simultaneously breach multiple reps (and indeed, early
payment defaults likely correlate to other breaches), a bank cannot nominally invoke a
rep it has but the monoline does not, receive put-back funds from the originator, and
place the loan in the trust if that loan also breaches another rep in the PSA. If the
subject loan actually breaches a PSA rep, the monoline can put it back. What the
monoline cannot do is obtain loan refunds for conforming loans. Of course, if banks
improperly diverted put-back funds rightfully belonging to the trust (which might flow to
investors and monolines under the waterfall), that would be a breach.
Footnote 6: See generally
NECA-IBEW Health & Welfare Fund v Goldman Sachs & Co., 693 F3d
145, 151 (2d Cir 2012) (example of a no fraud rep).
Footnote 7:Moreover, if Assured
was uncomfortable with the level of protection it was capable of bargaining for, it should
not have entered into the transaction. When time is limited and the opportunity to
conduct due diligence is not available, there is more of a risk that things will go wrong.
Unless this risk is contractually protected against, a sophisticated party cannot invoke its
rush to enter into the transaction as a factor militating in favor of its reliance being
deemed reasonable. If anything, such haste traditionally weighs against the risk taker,
whose actions imply it was so desirous of the opportunity it was willing to accept
substantial risk without conducting due diligence.
Footnote 8: See also Phoenix Light SF Ltd. v
Goldman Sachs Group, Inc., 43 Misc 3d 1233(A), at *5-6 (Sup Ct, NY County
2014) (Ramos, J.) (dismissing RMBS fraud claim because "[t]he true nature of the risk
being assumed could, admittedly, have been ascertained from reviewing these loan files
and plaintiffs never asked for them."), accord Stuart Silver Assoc. v Baco Dev.
Corp., 245 AD2d 96, 98-99 (1st Dept 1997) ("Where a party has the means to
discover the true nature of the transaction by the exercise of ordinary intelligence, and
fails to make use of those means, he cannot claim justifiable reliance on defendant's
misrepresentations").
Footnote 9: The court is aware that
the "prophylactic provision" rule is controversial, since, broadly read, it might appear to
bar fraud claims among all sophisticated parties. Justice Schweitzer explained the need
for caution in applying this rule in an overbroad manner. See Syncora Guarantee Inc.
v Alinda Capital Partners LLC, 2013 NY Slip Op 31489(U), at *16-18 (Sup Ct, NY
County 2013). This court does not profess to know the full scope of this rule.
Nonetheless, if the prophylactic provision rule does not apply here, it is hard to see how
it ever applies.
Footnote 10: Mosaic
Caribe is noteworthy because it expressly reaffirms two critical, well established
principles of law: (1) loss causation must be pled and cannot simply be ignored until
summary judgment; and (2) failure to conduct due diligence is a real ground for dismissal
["Plaintiff cannot credibly claim that it had no available means of verification, as such
information would have been available from defendant or the proposed defendants
had plaintiff requested it] (emphasis added). Id. at 422.
Footnote 11: Though all of the
loans in the transaction flowed though Credit Suisse's "Conduit" [see AC ¶
44], the majority of the loans in the transaction were originated by entities others than
Credit Suisse. See AC ¶¶ 48-54. Assured alleges that "Credit Suisse
and DLJ were contractually entitled to and did conduct ongoing due diligence on pools
of mortgage loans originated by originators in order to identify problems such as elevated
levels of early payment defaults, and were also afforded the opportunity to question
officers of the originators about the mortgage loans opportunities that Assured and the
rating agencies did not have." AC ¶ 45. Credit Suisse allegedly kept "this
unparalleled inside knowledge' to themselves." AC ¶ 46. These allegations gloss
over many issues, such as the fact that Credit Suisse cared about certain breaches more
than others (as mentioned earlier, non-overlapping reps such as early payment defaults
mattered to Credit Suisse), and while Credit Suisse likely had certain originator access
that Assured did not, this does not obviate the need for Assured, the insurer, also to
critically assess the state of the origination market.
Footnote 12: Of course, "the
motive to earn fees alone is, without more, insufficient for the court to infer scienter
under CPLR 3016(b)." Basis Pac-Rim Opportunity Fund (Master) v TCW Asset
Mgmt. Co., 40 Misc 3d 1240(A) at *5-6 (Sup Ct, NY County 2013) (collecting
cases). The analysis of scienter in RMBS cases should distinguish between a bank's
motive to earn fees for structuring a deal and a bank's motive for lying about aspects of
the deal so that the bank can trade against the client or otherwise facilitate a bank's net
position on the RMBS market (e.g., structuring a CDO so the bank can transfer RMBS
exposure from its own balance sheet to the CDO). Though reasonable minds can surely
disagree about profit motive being insufficient to infer scienter, there are good reasons
why this is the law. See In re Merrill Lynch & Co., Inc. Research Reports Secs.
Lit., 289 FSupp2d 416, 428 (SDNY 2003) ("If this Court were to accept the
plaintiffs' allegations of scienter as adequate, it would essentially read the scienter
element out of existence. All firms in the securities industry want to increase profits and
all individuals are assumed to desire to increase their compensation.").
Footnote 13: Banks' prop trading
desks, of course, did take substantial RMBS market risk. However, the only parties to the
subject transaction who took direct market risk (as opposed to indirect market risk via
counterparty credit risk) were uninsured investors and Assured, who had exposure to
conforming loan losses. Though Credit Suisse had nominal non-conformance liability to
Assured, its net non-conformance exposure was substantially minimized by its put-back
rights to originators under MLPAs. Therefore, Credit Suisse's due diligence incentives
were minimal and Assured, as a sophisticated insurance company, should have
understood this when making its own decision about how much diligence to conduct.
Assured's major exposure was substantial losses arising from market toxicity not covered
by its warranties and Credit Suisse's major exposure was substantial aggregate defaults
leading to originator insolvency, putting Credit Suisse on the hook for non-conforming
losses (i.e. originator credit risk).
Footnote 14: The primary value
added by a monoline to an RMBS transaction was the monoline's AAA credit rating. No
matter the true risk of the RMBS, an investor with financial guarantee coverage was
taking monoline credit risk (nominally AAA, but subject to the risk that if the market
crashes, and there are massive defaults across the market, even a AAA rated monoline
likely will not have the capital reserves to pay out all claims), not mortgage default risk.
Hence, in a sense, monolines were the real RMBS investors, in that they were the true
risk takers on conforming loan defaults. If the underwriting industry was corrupted
("wholesale abandonment of underwriting standards"), this was an inherent investment
risk taken by the monolines. The monolines are effectively arguing that they have no
duty to review loan files, no duty to pay for sufficiently broad prophylactic provisions,
and no duty to adequately assess the risk of the market they are insuring. These
considerations need to be seriously taken into account when considering what securities
should be deemed investment grade and how monoline capital requirements ought to be
regulated. Of course, the costlier the due diligence process and the higher the capital
requirements, the more expensive mortgages become for ordinary Americans. These
trade-offs are matters of public policy, not law, but the recognition that such trade-offs
exist are legally relevant to the understanding of the nature of the parties' risk allocation
(i.e. "the insurer/insured nature of the relationship between the parties").
Footnote 15: The court is not
ignoring the notion that a monoline is not expected to divine every way in which it might
be defrauded. See Basis Yield, 115 AD3d at 137. This principle means that a
monoline need not predict every permutation of origination malfeasance that may cause
loan losses. But, again, that is why there were representations and warranties. No one
needed to guess how loans might have gone bad, since both itemized warranty defects
(e.g., excessive borrower debt) and general failure to conform to Underwriting
Guidelines subject loans to put-back claims. Much of the alleged fraud is covered by
these breaches. Hence, the alleged fraud goes beyond such defects, into broad based
misconduct like "wholesale abandonment", a market risk that needs to be diligenced (to
the extent it was, it was not taken seriously, as most assumed that aggregate default rates
would not be so high that is, the assumption was made that not everything would go bust
at once, leading to massive foreclosure rates, a flooding of the foreclosure market, and
hence a crash in real estate prices, leading to even more defaults). It also should be noted
that, to prove fraud, substantial, expensive, and time consuming discovery on intent and
reliance is necessary, all of which are irrelevant to a contractual put-back claim. This
could (and based on similar cases would likely) take years.
Footnote 16:The
procedural history of MBIA, discussed below, is similar to another of this court's
monoline cases, styled Ambac Assur. Corp. v DLJ Mortg. Capital, Inc., Index
No. 600070/2010. See 31 Misc 3d 1208(A) (Apr. 7, 2011) and 33 Misc 3d
1208(A) (Oct. 7, 2011). The Ambac case settled.
Footnote 17: Somewhat
ironically, the court realized this during the first oral arguments in the Assured
and Ambac cases.
Footnote 18: See 102
AD3d 488 (1st Dept 2013) (reversing the court's striking of MBIA's jury demand, the
only issue appealed).
Footnote 19: DDJ's
holding that assessing the reasonableness of reliance is typically too "nettlesome" an
inquiry for resolution on a motion to dismiss has nothing to do with whether the failure
to procure adequate prophylactic coverage bars a fraud claim based on the very risk a
plaintiff failed to diligence. In other words, Credit Suisse cannot argue that Assured
unreasonably relied on the representations and warranties in the PSA. However, Assured
cannot claim fraud for malfeasance not covered by the representations and warranties,
such as an origination industry gone bad, since that is a distinct, systemic risk that
Assured is supposed to assess before getting into the business of insuring RMBS.
Footnote 20: Notwithstanding
this rule, another court recently issued a comprehensive and compelling decision (albeit
on summary judgment) dismissing MBIA's fraud claim because MBIA did not review the
very fraudulent report supposedly relied on by MBIA in deciding to enter into the
transaction (though leave to amend to assert claims under the Insurance Law was
granted). See MBIA Ins. Corp v J.P. Morgan Secs. LLC, 43 Misc 3d 1221(A)
(Sup Ct, Westchester County, May 6, 2014) (Scheinkman, J.)
Footnote 21: The Appellate
Decision's recent decision in Loreley Financing (Jersey) No. 3 Ltd. v Citigroup
Global Markets Inc., 2014 NY Slip Op 03358, 2014 WL 1809781 (1st Dept May 8,
2014) did not disclaim ACA's prophylactic provision rule. Rather, the Court
purported to distinguish ACA on other grounds [see Slip Op at 15],
implying ACA is still good law. As explained earlier, if the prophylactic
provision rule does not apply here, it can never apply.
It should be noted that the securities at issue in Basis Yield Alpha
Fund (Master) v Goldman Sachs Group, Inc., Index No. 652966/2011, 37 Misc 3d
1212(A) (Sup Ct, NY County 2012), aff'd in relevant part, 115 AD3d 128 (1st
Dept 2014), may be fairly characterized as part of extraordinarily complex transactions
involving considerations this court's decision on the motion to dismiss did not come
close to addressing. To be sure, there are overlapping allegations in Loreley and
Basis Yield. But, Basis Yield survived a motion to dismiss by alleging a
fraudulent scheme that had many distinct components (e.g., Goldman's margin calls,
improper sourcing of collateral, etc.). However, not all "schemes" are fraudulent, even if
they make one uneasy (to grossly simplify, purging your own balance sheet of RMBS
exposure is not the same as facilitating an insider edge for another short investor in
exchange for a fee, though these goals are not necessarily mutually exclusive). No matter
what one thinks of the so-called "Magnetar scheme" in Loreley, it was far more
similar to ABACUS in ACA, which also involved a secret short-side collateral
manager (Paulson), than the "scheme" in Basis Yield. It should be noted that
buying the equity tranche, as Paulson did in ACA, is not incompatible with a
strategy of shorting the senior tranche. Even if you are told that the collateral selector is
long on the equity, it is still unreasonable to simply assume that he is also not shorting the
senior tranches. See Loreley
Financing (Jersey) No. 4 Ltd. v UBS Ltd. 42 Misc 3d 858, 859 n.2 (Sup Ct, NY
County 2013) (explaining that a fund net-short on a CDO may want to purchase the
equity to finance its short bet so its investors will not pull their money before the bet pays
off).
Footnote 22: Nonetheless, this
may be inevitable if it is true that "[t]he entire edifice of modern financial capitalism is
built on 100-page documents drafted by exhausted 26-year-olds and read by nobody
[and] [t]he reason disputes like this always bring out people talking about how important
it is to dig deep into the documents is that nobody ever does." See Matt
Levine, BloombergView, Caesars and the $450 Million And',
http://www.bloombergview.com/articles/2014-05-13/caesars-and-the-450-million-and
(May 13, 2014) (emphasis in original).
Footnote 23: As in
MBIA, the AC relies heavily on prospectus supplements. The court will not
rehash its position on Credit Suisse's prospectus supplements, which was discussed at
length in MBIA III.
Footnote 24: If there is any doubt
that part of a monolines' risk was fraud, consider that RMBS often contained NINA (no
income no asset) loans, where the borrower does not provide documentary proof of his
ability to pay the mortgage, and the duly imposingly named NINJA loans, where the
borrower provides no evidence of having any income, assets, or even a job.
Footnote 25: There are many
legitimate reasons why Credit Suisse might want to use a CDS to "bet" against the very
transaction it structured. For instance, if the originator goes bankrupt and cannot make
put-back payments to Credit Suisse, Credit Suisse will be on the hook for Assured's
claims even though the MLPA's purpose was to pass-through non-conforming loan
losses to the originator. In other words, purchasing protection on the transaction with a
CDS can be used to hedge originator credit risk. To be sure, Credit Suisse, like many
other banks, appears to have shorted the RMBS market when it came to believe that a
collapse was imminent, but still wanted to earn fees for structuring deals, a perhaps
morally-bankrupt decision. Yet, even if Credit Suisse used CDSs to do this, merely
piecing together Credit's Suisse's net position on the RMBS market at a particular
moment in time is immensely difficult, if not impossible given the chaos of collateral
pricing in late 2006 and early 2007.
Footnote 26: Cf. Basis
Yield, 37 Misc 3d 1212(A), at *8, accord Dodona I, LLC v Goldman, Sachs
& Co., 847 FSupp2d 624 (SDNY 2012).
Footnote 27: Aff'd 2014
WL 2882908, 2014 NY Slip Op 04866 (1st Dept Jun. 26, 2014)