A New York state court dismissed an insurer’s rescissionary damages claim against DLJ Mortgage Capital and Credit Suisse Securities, finding that the insurer’s continued acceptance of premiums foreclosed all rescission-related claims. Assured Guar. Municipal Corp. v. DLJ Mortg. Capital, Inc., 2012 WL 5192752 (N.Y. Sup. Ct. Oct. 11, 2012).
Assured issued financial guaranty policies in connection with several transactions involving the sale of residential mortgage-backed securities. In each transaction, DLJ transferred a pool of mortgage loans to Credit Suisse, which then assigned them to trusts. The trusts issued securities collateralized by the loans, which were marketed to investors. Assured’s policies guaranteed that Assured would pay any shortfall if cash flow from the loans was insufficient to make payments due to the securities-holders. Ultimately, a substantial number of the loans became delinquent. During re-underwriting of the defaulted loans, Assured discovered purportedly “severe and pervasive breaches of the representations” in various documents “that materially affected the Insurers.” Assured filed suit alleging breach of contract claims and seeking rescissionary and consequential damages. Defendants moved to dismiss several causes of action, including Assured’s demand for rescissionary damages. The court granted the motion in part.
The court dismissed Assured’s rescissionary damages claims, reasoning that Assured was estopped as a matter of law from “avoiding the Policies” because it accepted premiums after discovering the alleged misrepresentations. Rejecting the notion that an insurer can accept premiums in order to “protect” a policyholder during the pendency of a rescission action, the court held that New York law prohibits an insurer from rescinding a policy if it continues to accept premiums after learning of misrepresentations. See Security Mut. Life Ins. Co. of N.Y. v. Rodriguez, 880 N.Y.S.2d 619 (1st Dep’t 2009).
The court also dismissed Assured’s breach of contract claims based on statements in the commitment and engagement letters issued in connection with the transactions. The court noted that the defendants had not made any promises of credit quality in the commitment letters and that the engagement letters were “unenforceable agreements to agree.” Finally, the court rejected Assured’s claims for consequential damages and fees, explaining that certain transactional documents, to which Assured was a third-party beneficiary, set forth the exclusive forms of available damages and that common law did not permit the recovery of extra-contractual damages where such damages were not contemplated by the parties.