SDNY Construes ‘Material and Adverse Effect’

In numerous pending lawsuits in New York federal and state courts, monoline insurers are suing Wall Street banks for alleged breaches of representations and warranties about the quality and characteristics of residential loans in RMBS pools. At stake in these suits is the ultimate responsibility for billions of dollars in losses suffered by RMBS certificate holders insured by the monolines. In most of these deals, the applicable MLPA, PSA and insurance contracts provide that the securitization’s sponsor must repurchase a loan if a breach of a representation or warranty “materially and adversely affects” the interests of the insurer in the loan. The fighting issue is whether this provision requires an insurer to prove that the alleged breaches of representations and warranties proximately caused the loan to become delinquent or default. Now, for the first time, a New York federal court has squarely addressed this critical question. Read More

Monoline Insurer Hoist with its Own Petard

A common claim alleged by monoline insurers is that RMBS sponsors fraudulently induced them to provide the insurance by misrepresenting the quality of loans and underwriting.  As the story invariably goes, the insurer only discovered that it was defrauded after its vendor reviewed a sample of several hundred loan files, and was shocked to find that most loans, usually alleged to be somewhere between 75% to 95% of the sample, breached representations and warranties.  On May 4, a New York court turned these types of post-loss file reviews against the insurer in CIFG Assur. N.A., Inc. v. Goldman Sachs & Co., Index No. 652286/2011 (N.Y. Sup. Ct.).  Here, the court found that the very same file sampling and review easily could have been done – and legally should have been done – in the insurers’ due diligence.  The insurer’s failure to conduct adequate due diligence when it issued its policy required dismissal of its fraud claim for lack of reasonable reliance. Read More