Assured Guaranty Municipal Corp. v. Flagstar Bank FSB, U.S. District Court for the Southern District of New York
On July 7, 2011, New York federal Judge Jed Rakoff slashed Assured Guaranty Municipal Corp’s suit for reimbursement and indemnification against Flagstar Bank FSB alleging that defendant misrepresented the quality of some $900 million in mortgage-backed securities insured by AGM.
Two of the four-count complaint against Flagstar was cut by U.S. District Judge Jed Rakoff, who partially granted and partially denied Flagstar’s motion to dismiss the case. Flagstar argued that AGM failed to state claims for breach of contract, reimbursement and indemnity. Under the contract terms, Flagstar said, AGM was only entitled to reimbursement for material breach. According to Flagstar, AGM never alleged that the bank itself committed fraud or that it knew of alleged misrepresentations at the time of the securitizations. Judge Rakoff held that the two counts of breach of contract would survive but the remedies would be limited to “cure or repurchase” obligations laid out in the transaction documents surrounding the sale of the securities.
On April 7, 2011, AGM filed suit against Flagstar accusing Flagstar of lying about the origination and underwriting of thousands of defective home equity loans grouped into two pools and insured under AGM’s financial guaranty policies. Specifically, AGM alleges that when Flagstar applied for the policies it misled AGM about the characteristics of the loans, as well as the mortgagers and the mortgaged properties, promising none of the loans was issued through negligence or fraud. In fact, the loans — which were pooled in one $600 million and one $300 million trust — were plagued by deficiencies.
AGM conducted its own investigation when the securities began to falter following their sale in 2005 and 2006 and found that the majority of the loans that it sampled violated Flagstar’s underwriting guidelines.
AGM claims that according to its investigation, a substantial number of loans bore marks of fraud or negligence in the origination process, and contained misrepresentations about the financial means and occupational status of mortgagers.
AGM says it has paid at least $69.2 million in insurance claims on the first pool and $13.2 million on the second.
For a copy of the Order click here
Sarah Fang and Dan Gerber