Mortgage Guaranty

Ninth Circuit Overturns Remand to State Court and Orders Lower Court to Consider Arbitration Motion

On June 15, 2011, the Ninth Circuit overturned a district court’s order to remand this declaratory judgment action to state court. The action was brought by Countrywide and BAC Home Loans Servicing LP against Mortgage Guaranty Insurance Co. (“MGIC”) and seeks a declaration concerning the terms of an insurance policy covering borrower defaults. The policy provides for a reduction in the claimed loss amount in cases of “fraud, misrepresentation, or negligence” on the part of Countrywide, and on the basis of this provision, MGIC denied coverage on several Countrywide claims. The insurance agreement also contains an arbitration clause, and MGIC argued that the district court was required to consider its motion to stay the action pending resolution in arbitration under the Federal Arbitration Act (“FAA”) before exercising its discretion to remand under the Declaratory Judgment Act (“DJA”). The Court of Appeals, in a question of first impression in the Ninth Circuit, agreed with MGIC and found that the FAA did require the district court to reach the merits of MGIC’s motion to stay before exercising its discretion to remand under the DJA. Decision.