MBIA, Inc. v. Certain Underwriters at Lloyd's, London et al
Filing
30
OPINION AND ORDER re: 23 CROSS MOTION for Judgment on the Pleadings [Partial]. filed by MBIA, Inc., 17 MOTION to Dismiss for Lack of Jurisdiction and Failure to State a Claim. filed by Wurttembergische Versicherung A G, Lexington Insurance Company, Certain Underwriters at Lloyd's, London. For the foregoing reasons, the Underwriters' Motion to Dismiss is GRANTED in regard to the Municipal Claims, and DENIED in regard to the Transformation Claim. MBIA 's Motion for Judgment on the Pleadings for the Transformation Claim is GRANTED. A conference is scheduled for July 28, 2014 at 4:30 p.m. The Clerk of the Court is directed to close these motions [Docket Nos. 17 and 23]., ( Status Conference set for 7/28/2014 at 04:30 PM before Judge Shira A. Scheindlin.) (Signed by Judge Shira A. Scheindlin on 7/16/2014) (lmb)
UNITED STATES DISTRICT COURT
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MBIA INC.,
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Plaintiff,
----
.
OPINION AND ORDER
- against -
14-cv-1769
CERTAIN UNDERWRITERS AT
LLOYD'S, LONDON, LEXINGTON
INSURANCE COMPANY and
WURTTEMBERGISCHE
VERSICHERUNG AG,
Defendants.
----------------------------------------------------
)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
MBIA, Inc. ("MBIA") brings this diversity action against certain
underwriters at Lloyd's, London ("Lloyd's"), Lexington Insurance Company
("Lexington"), and Wurttembergische Versicherung AG ("WurttVers")
(collectively, known as the "Underwriters") for breach of contract and declaratory
judgment.
Underwriters now move to dismiss the Complaint for lack of subject
matter jurisdiction and failure to state a claim. MBIA cross moves for judgment on
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the pleadings with respect to one of its causes of action – declaratory relief for duty
to pay defense costs for the Transformation Claims. For the following reasons,
Underwriters’ motion to dismiss is GRANTED in part and DENIED in part and
MBIA’s cross motion is GRANTED.
II.
BACKGROUND
A.
The Parties
MBIA is a corporation organized and existing under the laws of
Connecticut, with its principal place of business in Armonk, New York.1 The
members of Syndicates 2987 and 1274 are underwriters at Lloyd’s, whose
principal place of business is London, England2 and registration is in the United
Kingdom.3 These underwriters have substantial business in New York, but are not
citizens of New York.4 Lexington is a corporation organized and existing under
the laws of Delaware, with its principal place of business in Massachusetts, and it
has conducted substantial business in New York.5 WurttVers is incorporated in
Germany, with its principal place of business in Stuttgart, Germany, and it has
1
See Complaint (“Compl.”) ¶ 15.
2
See id. ¶ 16.
3
See Answer and Affirmative Defenses ¶ 16.
4
See Compl. ¶ 16.
5
See id. ¶ 17.
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conducted substantial business in New York.6
B.
The Policies
MBIA purchased a Primary Financial Institutions Professional
Indemnity Policy (No. 07GPOM2520)7 and an Excess Financial Institutions
Professional Indemnity Policy (No. 07GPOM2521)8 for Claims made from August
31, 2007 to August 31, 2008.9 MBIA renewed the Policies (Primary Policy No.
08GPOM252010; Excess Policy No. 08GPOM252111) from August 31, 2008 to
August 31, 2009.12 WurttVers did not subscribe to the 08-09 Policies. 13 The 07-08
Primary Policy and the 08-09 Primary Policy14 have a limit of liability of $15
6
See id. ¶ 18.
7
See Exhibit (“Ex.”) 1 to Declaration (“Decl.”) of James Manners
Wood, Claims Manager at Brit Global Speciality and Syndicate 2987 at Lloyd’s
(“07-08 Primary Policy”).
8
See Ex. 2 to Wood Decl. (“07-08 Excess Policy”).
9
See Compl. ¶¶ 8, 56(a–b).
10
See Ex. 3 to Wood Decl. (“08-09 Primary Policy”).
11
See Ex. 4 to Wood Decl. (“08-09 Excess Policy”).
12
See Compl. ¶¶ 8, 56(c–d)
13
See Defendants’ Answer and Affirmative Defenses ¶ 4.
14
See 07-08 Primary Policy and 08-09 Primary Policy (collectively, the
“Primary Policies”).
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million.15 The 07-08 Excess Policy and the 08-09 Excess Policy16 have a limit of
liability of $15 million excess of the Primary Policy covering the same period.17
C.
Definitions
The Primary Policies provide: “Underwriters shall pay on the behalf
of the Assureds for Loss resulting from any Claim first made during the Policy
Period for a Wrongful Act in the performance of Professional Services.”18
A “Claim” is “any judicial, administrative proceeding (including any
appeal therefrom) and written demands for monetary, non-monetary or injunctive
relief against any of the Assureds in which they may be subjected to a binding
adjudication of liability or any settlement agreed by Underwriters for damages or
other relief.”19 “More than one Claim involving the same Wrongful Act or
Interrelated Wrongful Acts shall be deemed to constitute a single Claim . . .”20
“Wrongful Act” is “any actual or alleged error, omission or act or
15
See Primary Policies Item C and Item D.
16
See 07-08 Excess Policy and 08-09 Excess Policy (collectively, the
“Excess Policies”).
17
See id. Schedule: Limit of Liability.
18
Primary Policies § I.
19
Id. § II(C).
20
Id. § IV(C).
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breach of professional duty in rendering or failing to render the Professional
Services.”21 “Interrelated Wrongful Acts” means “Wrongful Acts which have as a
common nexus any fact, circumstance, situation, event, transaction or series of
facts, circumstances, situations, events or transactions.”22 “Professional Services”
includes “any past or present activities allowed under the law and regulations
governing services provided by the Assureds which are or were performed for
[MBIA and/or its Subsidiaries] and, in addition those activities, which are declared
in the Application Form or which are commenced during the Policy Period.”23
“Loss” includes “Costs, Charges and Expenses incurred by any of the
Assureds,” with several exceptions not applicable here.24 “Costs, Charges and
Expenses” are “reasonable and necessary legal fees and expenses . . . incurred by
the Assureds in defense of any Claim . . .” with several exceptions not applicable
here.25 “Underwriters shall reimburse Loss only upon the final disposition of any
Claim; provided, however, that Underwriters at their sole discretion agree to
21
Id. § II(N).
22
Id. § II(H).
23
07-08 Primary Policy § II(L); 08-09 Primary Policy § II(L) (“. . .
during the Policy Period and any other related services thereto”).
24
Primary Policies § II(I).
25
Id. § II(F).
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advance Costs, Charges and Expenses every 90 days.”26
The Preamble to the Primary Policies states: “This policy does not
provide for any duty by Underwriters to defend any of the Assureds.” 27 The
Primary Policies’ “Settlements and Defense” states: “It shall be the duty of the
Assured and not the duty of Underwriters to defend Claims.”28
“No action shall lie against Underwriters unless, as a condition
precedent thereto, the Assureds shall have fully complied with all of the terms of
this Policy, nor until the amount of the Assureds’ obligation to pay shall have been
fully and finally determined either by judgment against them or by written
agreement between them, the claimant and Underwriters.”29
D.
Events Preceding the Complaint
MBIA writes financial guarantee policies through its subsidiaries –
MBIA Insurance Corporation (“MBIA Insurance”) and National Public Finance
Guarantee Corporation of Illinois (“National”) – for structured finance products
(e.g., collateralized debt obligations or mortgage-backed securities) and public
26
Id. § IV(F).
27
Id. Preamble.
28
Id. § V(B).
29
Id. § X.
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finance bonds (e.g., municipal bonds), respectively.30 In February 2009, MBIA
separated their subsidiaries31 to provide municipal and state issuers frozen out of
the public finance market with financial guarantee policies, while attracting capital
investment to the benefit of the holding company and all policyholders (the series
of transactions that implemented this change is referred to as the
“Transformation”).32 This action was subsequently approved by the New York
State Insurance Department (“NYID”),33 which is the body that regulates the
insurance services provided by MBIA.
E.
Underlying Cases
1.
Bond Cases
In July 2008, MBIA was named as a defendant in a number of
lawsuits by several public entities and others who had purchased bond insurance
from MBIA (collectively, the “Bond Cases”).34 In these suits plaintiffs alleged that
MBIA committed negligence, among other things, in the sale and underwriting of
30
See Compl. ¶¶ 3, 7, 22, 44.
31
See id. ¶ 6.
32
See id. ¶¶ 44-45.
33
See id. ¶ 44. See also ABN Amro Bank N.V. v. Dinallo, 962 N.Y.S.2d
854 (Sup. Ct. N.Y. Co. 2013).
34
See id. ¶¶ 26, 27.
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financial guarantee insurance for the plaintiffs’ public finance bonds as well as
wrongful acts in the bidding for and sale of municipal derivatives to plaintiffs.35
On March 11, 2010, MBIA was named as a defendant in City of Phoenix v. Ambac
Financial Group, Inc., et al. (“Phoenix”) based on improper credit ratings resulting
in unfair insurance premiums.36 Many of the Bond Cases are still pending.37
MBIA sought coverage for the Bond Cases as a single Claim under the 07-08
Policies.38
2.
Derivatives Cases
In July 2008, lawsuits were filed against MBIA alleging that MBIA
and others allocated the municipal derivatives market among themselves and
rigged the bidding system through which plaintiffs purchased municipal
derivatives and assigned plaintiffs lower interest rates, charged them higher fees,
and subjected them to unnecessarily high risks (collectively, “Derivatives
Cases”).39 The Derivatives Cases remain pending in the consolidated proceeding
35
See id. ¶ 5.
36
See id. ¶ 34.
37
See Defendants’ Memorandum of Law in Support of Their Motion to
Dismiss (“Def. Mem.”) at 9.
38
See id. at 6.
39
See Compl. ¶¶ 35-37.
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in In re Municipal Derivatives Antitrust Legislation.40 MBIA submitted all of the
Derivative Cases as a single Claim under the 07-08 Policies.41
MBIA has incurred millions of dollars in defense costs defending the
Bond Cases, the Phoenix Case, and the Derivatives Cases (collectively, the
“Municipal Claims”).42 MBIA has settled two of the Municipal Claims for
approximately $1.2 million.43 All of the other underlying lawsuits are still
pending.44
3.
Transformation Cases
MBIA, MBIA Insurance, and National were named defendants in
lawsuits alleging that MBIA’s Transformation was improper because it deprived
plaintiffs of the benefits of the financial guarantee insurance MBIA sold to the
plaintiffs and lowered the credit rating of MBIA Insurance (collectively,
“Transformation Cases”):45 Plaintiffs alleged that this had the effect of decreasing
40
See Def. Mem. at 11.
41
See id. at 6.
42
See Compl. ¶ 40.
43
See id. ¶ 41.
44
See id.
45
See id. ¶¶ 7, 46-48.
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the value of the structured finance instruments MBIA guaranteed.46 Moreover,
plaintiffs alleged that following the Transformation, MBIA lacked the necessary
assets to perform its obligations under the structured finance guarantee policies and
MBIA favored its public finance bond insurance clients over its structured finance
clients.47 The lawsuits include: (1) Aurelius Capital Master, Ltd., et al. v. MBIA,
Inc., et al. (“Aurelius Action”); (2) ABN Amro Bank N.V., et al. v. MBIA, Inc., et
al. (“ABN Amro Action”); (3) ABN Amro Bank N.V., et al. v. Dinallo, et al.
(“Article 78 Action”). The New York Supreme Court rendered judgment in favor
of MBIA in the Article 78 Action.48
MBIA submitted all of the Transformation Cases as a single Claim
under the 08-09 Policies.49 A few years later a similar lawsuit was filed against
MBIA, MBIA Insurance, and National.50 The rest of the Transformation Cases,
except the CQS Claim, were settled or dismissed by the time the Complaint was
46
See id.
47
See id. ¶ 49.
48
See id. ¶ 54.
49
See Def. Mem. at 6.
50
See CQS ABS Master Fund Ltd., et al. v. MBIA Inc., et al., No. 12 Civ.
6840 (S.D.N.Y.) (the “CQS Claim”). See also Compl. ¶ 53.
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filed.51 On May 2, 2014, after the Complaint was filed, the CQS Claim was settled
and dismissed with prejudice.52 MBIA’s counsel informed Underwriters of this
fact on May 2, 201453 and Underwriters acknowledged this notice.54 MBIA has
incurred tens of millions of dollars defending against the Transformation Cases,55
an amount greater than the limits of the 08-09 Policies.56
Underwriters issued insurance policies to MBIA to provide insurance
coverage for MBIA and its subsidiaries for losses from services which MBIA
provides.57 Underwriters have refused to advance MBIA money for their defense
costs or settlement, arguing that the Policies only require the Underwriters to make
payment after the final disposition of all related or identical underlying claims.58
Thus, Underwriters take the position that MBIA is not yet entitled to reim
51
See id. ¶¶ 55, 69.
52
See CQS Claim’s Stipulation of Dismissal with Prejudice Pursuant to
Fed. R. Civ. P. 41(A)(1)(a)(ii), No. 12 Civ. 6840 [Docket No. 98].
53
See Ex. A to Declaration of Robin L. Cohen (“Cohen Decl.”), counsel
to MBIA (“MBIA’s Letter to Underwriters RE CQS”).
54
See Ex. B to Cohen Decl.
55
See Compl. ¶ 52.
56
See id. ¶ 69.
57
See id. ¶ 4.
58
See id. ¶¶ 9, 10, 67.
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bursement.
III.
LEGAL STANDARDS
A.
Rule 12(b)(1) Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(1) provides for the dismissal of
a claim when a federal court lacks subject matter jurisdiction, “the statutory or
constitutional power to adjudicate [a claim].”59 Plaintiff bears the burden of
establishing subject matter jurisdiction by a preponderance of the evidence.60 A
federal court may only exercise jurisdiction over live cases and controversies.61
“[T]he Supreme Court has made clear that [there should be] federal jurisdiction
over only a special and small category of cases.”62
In considering a motion to dismiss for lack of subject matter
jurisdiction, “‘the court must take all facts alleged in the complaint as true and
59
Diagnostic Cardioline Monitoring of N.Y., Inc. v. Leavitt, 171 Fed.
App’x 374, 375 (2d Cir. 2006).
60
See Luckett v. Bure, 290 F.3d 493, 497 (2d Cir. 2002). See also
Goonewardena v. New York, No. 05 Civ. 8554, 2007 WL 510097, at * 6 (S.D.N.Y.
Feb. 14, 2007) (“[T]he burden of demonstrating that the court has subject matter
jurisdiction over the case falls on the plaintiff[,] as it is the plaintiff who seeks to
invoke the court’s jurisdiction.”).
61
See Van Wie v. Pataki, 267 F.3d 109, 113 (2d Cir. 2001) (citation
omitted).
62
In re Standard & Poor’s Rating Agency Litigation, No. 13 MDL
2446, 2014 WL 2481906, at *10 (S.D.N.Y. June 3, 2014).
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draw all reasonable inferences in favor of plaintiff.’”63 However, “‘jurisdiction
must be shown affirmatively, and that showing is not made by drawing from the
pleadings inferences favorable to the party asserting it.’”64 In fact, “where
jurisdictional facts are placed in dispute, the court has the power and obligation to
decide issues of fact by reference to evidence outside the pleadings, such as
affidavits.”65 “In deciding the motion, the court ‘may consider affidavits and other
materials beyond the pleadings to resolve the jurisdictional issue, but [it] may not
rely on conclusory or hearsay statements contained in the affidavits.’”66
1.
Ripeness
The “ripeness doctrine is drawn both from Article III limitations on
judicial power and from prudential reasons for refusing to exercise jurisdiction.” 67
63
Natural Res. Def. Council v. Johnson, 461 F.3d 164, 171 (2d Cir.
2006) (quoting Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000)).
64
APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003) (quoting Shipping
Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998)). Accord London v.
Polishbook, 189 F.3d 196, 199 (2d Cir. 1999) (citations omitted) (“[I]t is the
affirmative burden of the party invoking [federal subject matter] jurisdiction . . . to
proffer the necessary factual predicate [—] not just an allegation in a complaint
[—] to support jurisdiction.”).
65
LeBlanc v. Cleveland, 198 F.3d 353, 356 (2d Cir. 1999).
66
Mosdos Chofetz Chaim, Inc. v. Village of Wesley Hills, 701 F. Supp.
2d 568, 580–81 (S.D.N.Y. 2010) (alteration in original) (quoting J.S. ex rel. N.S. v.
Attica Cent. Sch., 386 F.3d 107, 110 (2d Cir. 2004)).
67
Reno v. Catholic Soc. Servs., Inc., 509 U.S. 43, 57 n.18 (1993).
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In its constitutional dimension, the ripeness doctrine “‘prevents a federal court
from entangling itself in abstract disagreements over matters that are premature for
review because the injury is merely speculative and may never occur.’”68 In this
respect, ripeness overlaps with standing, and a showing that a claim is sufficiently
“actual and imminent” to constitute an Article III injury in fact is normally
sufficient to establish that the claim is constitutionally ripe for review.69
Under the prudential doctrine of ripeness, “when a court declares that
a case is not prudentially ripe, it means that the case will be better decided later and
that the parties will not have constitutional rights undermined by the delay.”70
“[T]he fitness of the issues for judicial decision and the hardship to the parties of
withholding court consideration must inform any analysis of ripeness.”71
“A claim is not ripe for adjudication if it rests upon contingent future
events that may not occur as anticipated, or indeed may not occur at all.”72
68
Ross v. Bank of Am., N.A.(USA), 524 F.3d 217, 226 (2d Cir. 2008)
(quoting Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83,
90 (2d Cir. 2002)).
69
Id.
70
Simmonds v. INS, 326 F.3d 351, 357 (2d Cir. 2003).
71
Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 581
(1985).
72
Texas v. United States, 523 U.S. 296, 300 (1998) (quotation marks
omitted).
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However, “[t]hat the liability may be contingent does not necessarily defeat
jurisdiction of a declaratory judgment action. Rather, courts should focus on the
practical likelihood that the contingencies will occur.”73
B.
Rule 12(b)(6) Motion to Dismiss
In deciding a motion to dismiss under Rule 12(b)(6), the court must
“accept[] all factual allegations in the complaint as true, and draw[] all reasonable
inferences in the plaintiff’s favor.”74 The court evaluates the complaint under the
“two-pronged approach” set forth in Ashcroft v. Iqbal.75 First, a court may
“identify[] pleadings that, because they are no more than conclusions, are not
entitled to the assumption of truth.”76 “‘Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice”’ to
withstand a motion to dismiss.77 Second, “‘[w]hen there are well-pleaded factual
allegations, a court should assume their veracity and then determine whether they
73
E.R. Squibb & Sons, Inc. v. Lloyd’s & Cos., 241 F.3d 154, 177 (2d
Cir. 2001).
74
Freidus v. Barclays Bank PLC, 734 F.3d 132, 137 (2d Cir. 2013)
(citing Gorman v. Consolidated Edison Corp., 488 F.3d 586, 591-92 (2d Cir.
2007)).
75
556 U.S. 662, 679 (2009).
76
Bigio v. Coca-Cola Co., 675 F.3d 163, 173 (2d Cir. 2012) (citing
Iqbal, 556 U.S. at 678).
77
Id. (quoting Iqbal, 556 U.S. at 678).
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plausibly give rise to an entitlement for relief.”’78
To survive a Rule 12(b)(6) motion to dismiss, the allegations in a
complaint must meet a standard of “plausibility.”79 A claim is facially plausible
“when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”80
Plausibility “is not akin to a probability requirement,” rather, plausibility requires
“more than a sheer possibility that a defendant has acted unlawfully.”81
In considering a motion to dismiss for failure to state a claim pursuant
to Rule 12(b)(6), a district court may consider “only the complaint, . . . any
documents attached thereto or incorporated by reference and documents upon
which the complaint relies heavily.”82 Allegations in the complaint that are
“contradicted by more specific allegations or documentary evidence” are not
78
Taveras v. UBS AG, 513 Fed. App’x 19, 22 (2d Cir. 2013) (quoting
Iqbal, 556 U.S. at 679).
79
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 564 (2007).
80
Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
81
Id. (quotation marks and citation omitted).
82
Building Indus. Elec. Contractors Ass’n v. City of New York, 678 F.3d
184, 187 (2d Cir. 2012) (citing In re Citigroup ERISA Litig., 662 F.3d 128, 135 (2d
Cir. 2011) (quotation marks omitted)).
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entitled to a presumption of truthfulness.83
C.
Rule 12(c) Judgment on the Pleadings
At any time after the pleadings are closed, but before trial
commences, a party may move for judgment on the pleadings under Rule 12(c).84
“A grant of a motion pursuant to Rule 12(c) is proper ‘if, from the pleadings, the
moving party is entitled to judgment as a matter of law.’”85
“[T]he legal standards of review for motions to dismiss and motions
for judgment on the pleadings ‘are indistinguishable.’”86 “On a motion to dismiss
or for judgment on the pleadings [courts] ‘must accept all allegations in the
complaint as true and draw all inferences in the non-moving party’s favor.’”87
Courts are not bound to accept as true legal conclusions couched as factual
83
Kirkendall v. Halliburton, Inc., 707 F.3d 173, 175 n.1 (2d Cir. 2013)
(citing L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011)).
84
See Fed. R. Civ. P. 12(c).
85
Dargahi v. Honda Lease Trust, 370 Fed. App’x 172, 174 (2d Cir.
2010) (quoting Burns Int’l Sec. Servs., Inc. v. International Union, 47 F.3d 14, 16
(2d Cir. 1995) (per curiam)).
86
LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475
(2d Cir. 2009) (quoting DeMuria v. Hawkes, 328 F.3d 704, 706 n.1 (2d Cir.
2003)).
87
Miller v. Wolpoff & Abramson, L.L.P., 321 F.3d 292, 300 (2d Cir.
2003) (quoting Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126
(2d Cir. 2001)).
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allegations.88 The court “may consider the facts alleged in the complaint,
documents attached to the complaint as exhibits, and documents incorporated by
reference in the complaint.”89
IV.
APPLICABLE LAW
A.
Breach of Contract
The elements of breach of contract under New York law are well
established: “(1) the existence of a contract between [the plaintiff] and th[e]
defendant; (2) performance of the plaintiff’s obligations under the contract; (3)
breach of the contract by th[e] defendant; and (4) damages to the plaintiff caused
by th[e] defendant’s breach.”90
“Under New York law, a condition precedent is an act or event which
must occur before another party’s duty to perform its promise arises.”91
“Conditions are not favored under New York law, and in the absence of
88
See Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555).
89
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
90
Diesel Props S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 52
(2d Cir. 2011).
91
LaSalle Bank Nat. Assoc. v. Citicorp Real Estate, Inc., No. 02 Civ.
7868, 2003 WL 21671812, at *3 (S.D.N.Y. July 16, 2003).
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unambiguous language, a condition will not be read into the agreement.”92
B.
Duty to Defend
An insurer’s duty to defend is “exceedingly broad”—much broader
than the duty to indemnify.93 The insurer must defend “‘whenever the four corners
of the complaint suggest—or the insurer has actual knowledge of facts
establishing—a reasonable possibility of coverage’” under the policy. 94 An insurer
cannot ignore information supplied by the insured in assessing its duty to defend. 95
92
Ginett v. Computer Task Group, Inc., 962 F.2d 1085, 1100 (2d Cir.
1992).
93
See International Bus. Mach. Corp. v. Liberty Mut. Fire Ins. Co., 303
F.3d 419, 424 (2d Cir. 2002) (quoting Continental Cas. Co. v. Rapid–Am. Corp.,
80 N.Y.2d 640, 648 (1993)). Accord Automobile Ins. Co. of Hartford v. Cook, 7
N.Y.3d 131, 137 (2006).
94
Maryland Cas. Co. v. Continental Cas. Co., 332 F.3d 145, 160 (2d
Cir. 2003) (quoting Continental, 80 N.Y.2d at 648). Accord Feldman Law Grp.
P.C. v. Liberty Mut. Ins. Co., 819 F. Supp. 2d 247, 256–57 (S.D.N.Y. 2011)
(noting that New York law permits consideration of facts extrinsic to the four
corners of the complaint in determining a duty to defend); Fitzpatrick v. American
Honda Motor Co., Inc., 78 N.Y.2d 61, 67 (1991) (holding that “rather than
mechanically applying only the ‘four corners of the complaint’ rule . . . the sounder
approach is to require the insurer to provide a defense when it has actual
knowledge of facts establishing a reasonable possibility of coverage”).
95
See Auriemma v. Biltmore Theatre, LLC, 82 A.D.3d 1, 13 (1st Dep’t
2011) (finding duty to defend where insurer had “actual notice of the possibility of
coverage from [insured’s] answers to the complaints . . . and its deposition
testimony”); Staten Island Molesi Soc. Club, Inc. v. Nautilus Ins. Co., 39 A.D.3d
843, 845 (2d Dep’t 2007) (insurer cannot ignore information supplied by the
insured in determining duty to defend).
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An insurer may avoid its duty to defend only if it establishes, as a matter of law,
that “there is no possible factual or legal basis on which [the insurer] might
eventually be obligated to indemnify [the insured] under any provision of the
insurance policy.”96
C.
Declaratory Judgment
The party seeking a declaratory judgment bears the burden of
“establishing the existence of an actual case or controversy.”97 An actual
controversy has been defined as one that is “real and substantial . . . admitting of
specific relief through a decree of a conclusive character, as distinguished from an
opinion advising what the law would be upon a hypothetical state of facts.” 98 That
a party’s liability may be contingent “‘does not necessarily defeat jurisdiction of a
declaratory judgment action.’”99 Instead, “‘courts should focus on the practical
96
Allianz Ins. Co. v. Lerner, 416 F.3d 109, 115 (2d Cir. 2005) (quotation
marks and citations omitted). Accord Maryland Cas. Co., 332 F.3d at 160; State
Farm Fire & Cas. Co. v. Joseph M., 106 A.D.3d 806, 807 (2d Dep’t 2013).
97
Nike, Inc. v. Already, LLC, 663 F.3d 89, 98 (2d Cir. 2011) (quoting
Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 95 (1993)); 28 U.S.C. §
2201(a).
98
E.R. Squibb & Sons, Inc., 241 F.3d at 177 (citation omitted).
99
SR Int’l Bus. Ins. Co. v. Allianz Ins. Co., 343 Fed. App’x 629, 632 (2d
Cir. 2009) (citation omitted) (quoting Associated Indem. Corp. v. Fairchild Indus.,
Inc., 961 F.2d 32, 35 (2d Cir. 1992)).
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likelihood that the contingencies will occur[].’”100
In a declaratory judgment case, the court will consider: “‘(1) whether
the judgment will serve a useful purpose in clarifying or settling the legal issues
involved[,] and (2) whether a judgment would finalize the controversy and offer
relief from uncertainty.’”101 In deciding whether a plaintiff has stated a claim for
declaratory relief, a federal court applies the substantive state law of the forum in
which it sits.102
V.
DISCUSSION
This Court has subject matter jurisdiction over this action pursuant to
28 U.S.C. § 1332. This action is between a citizen of a State and citizens or
subjects of foreign states, and the amount in controversy exceeds $75,000. The
Policies provide that coverage is governed by New York law.103
A.
Definition of Claim
100
Employers Ins. of Wausau v. Fox Entm’t Grp., 522 F.3d 271, 278 (2d
Cir. 2008) (citation omitted) (alteration in original) (quoting E.R. Squibb & Sons,
Inc., 241 F.3d at 177).
101
Niagara Mohawk Power Corp. v. Hudson River-Black River, 673 F.3d
84, 105 (2d Cir. 2012) (quoting Dow Jones & Co. v. Harrods Ltd., 346 F.3d 357,
359 (2d Cir. 2003)).
102
See NAP, Inc. v. Shuttletex, Inc., 112 F. Supp. 2d 369, 372 (S.D.N.Y.
2000).
103
See Primary Policies: Choice of Law.
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“More than one Claim involving the same Wrongful Act or
Interrelated Wrongful Acts shall be deemed to constitute a single Claim . . .”104
Consistent with this definition, MBIA submitted the Bond Cases as a single Claim,
the Derivative Cases as a single Claim, and the Transformation Cases as a single
Claim.105 MBIA cannot now argue that Claims involving identical or interrelated
wrongful acts constitute a single Claim with respect to submission, but do not
constitute a single Claim for other applications of the Policies. A Claim can be
brought only when all underlying lawsuit involving identical or interrelated
wrongful acts have reached final disposition.
Underwriters have no obligation to pay any Loss until final
disposition of a Claim.106 Therefore, if one underlying lawsuit involving the same
or interrelated wrongful acts is not yet resolved, Underwriters are not required to
reimburse MBIA for any Loss.107 Thus, Underwriters have no obligation to cover
the Municipal Claims, because some of the underlying suits are still pending.108
B.
Underwriters Have a Duty to Indemnify But Not to Defend
104
Id. § IV(C).
105
See Def. Mem. at 6.
106
See Primary Policies § IV(F).
107
See Def. Mem. at 16.
108
See Compl. ¶ 41.
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The “Declarations” and “Settlements and Defense” sections of the
Primary Policies explicitly state that Underwriters do not have a duty to defend. 109
By reading the Policies as they would be “interpreted in light of common speech
and the reasonable expectations of a businessperson,”110 Underwriters have no duty
to defend MBIA. “[I]n the absence of a policy provision expressly imposing a
duty to defend, New York courts will not find such a duty.” 111
“The duty to defend is measured against the allegations of [the]
pleadings but the duty to [indemnify] is determined by the actual basis for the
insured’s liability to a third person.”112 The Policies state that “Underwriters shall
reimburse Loss only upon the final disposition of any Claim; provided, however,
that Underwriters at their sole discretion agree to advance Costs, Charges and
Expenses every 90 days.”113 The second clause provides an exception to the first
109
See Primary Policies Preamble; Primary Policies § V(B).
110
Zahler v. Twin City Fire Ins. Co., No. 04 Civ. 10299, 2006 WL
846352, at *4 (S.D.N.Y. Mar. 31, 2006) (quotations omitted).
111
Lowy v. Travelers Prop. and Cas. Co., No. 99 Civ. 2727, 2000 WL
526702, at *3 (S.D.N.Y. May 2, 2000).
112
Euchner-USA, Inc. v. Hartford Cas. Ins. Co. (citing Servidone Constr.
Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419, 424 (1985)).
113
Primary Policies § IV(F).
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clause;114 it does not change the meaning of the first clause. Underwriters have no
duty to reimburse MBIA for any Loss until final disposition, although
Underwriters may – “at their sole discretion” – do so. “The Court construes the
policy in a way that affords a fair meaning to all of the language employed by the
parties in the contract and leaves no provision without force and effect.”115
Underwriters are not required to pay any defense costs until final disposition.
C.
Condition Precedent
No action shall lie against Underwriters unless, as a condition
precedent thereto, the Assureds shall have fully complied with
all of the terms of this Policy, nor until the amount of the
Assureds’ obligation to pay shall have been fully and finally
determined either by judgment against them or by written
agreement between them, the claimant and Underwriters.116
When there is a contractual condition that has not been met, the
insured’s claim against the insurer is barred and is not ripe for adjudication. 117
Because MBIA has failed to satisfy a condition precedent with respect to the
114
See Defendants’ Reply in Further Support of Their Motion to Dismiss
and in Opposition to Plaintiff’s Cross-Motion for Partial Judgment on the
Pleadings at 8-9.
115
Admiral Indem. Co. v. Travelers Cas. & Sur. Co. of America, 881 F.
Supp. 2d 570, 574 (S.D.N.Y. 2012).
116
Primary Policies § X.
117
See Sirob Imps., Inc. v. Peerless Ins. Co., 958 F. Supp. 2d 384,
388–90 (E.D.N.Y. 2013).
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Municipal Claims118 – i.e., the resolution of the underlying Claims – it cannot
assert a Claim for breach of contract.
D.
The Transformation Claim
The CQS Claim was still pending when the Complaint was filed.119
Subsequently, MBIA’s counsel made Underwriters aware of the final disposition
of the CQS Claim.120
This Court “must take judicial notice if a party requests it and the
court is supplied with the necessary information.”121 This Court can take judicial
notice of a fact “that is not subject to reasonable dispute because it: . . . (2) can be
accurately and readily determined from sources whose accuracy cannot reasonably
be questioned.”122 “A court may take judicial notice of a document filed in another
court not for the truth of the matters asserted in the other litigation but rather to
establish the fact of such litigation and related filings.”123 Because consideration is
118
See Compl. ¶ 41.
119
See id. ¶ 55.
120
See MBIA’s Letter to Underwriters RE CQS.
121
Fed. R. Evid. 201(c)(2).
122
Fed. R. Evid. 201(b)(2).
123
Kavowras v. N.Y. Times Co., 328 F.3d 50, 57 (2d Cir. 2003) (SEC
filings).
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extended to “matters of which judicial notice may be taken” on a Rule 12(b)(6)
motion to dismiss124 and on a Rule 12(c) motion for judgments on the pleadings,125
the Court takes notice that the CQS claim has been finalized. MBIA can seek
recovery of Loss from the Transformation Cases because, unlike the Municipal
Cases, all underlying lawsuits involving identical or interrelated wrongful acts
have a final disposition.
E.
Coverage Defenses
Underwriters argue that they still have two separate coverage defenses
even if MBIA’s Transformation Claim is timely: (1) MBIA’s acts were not
professional services and (2) MBIA’s Transformation falls within the Financial
Guarantee Exclusion. I will discuss each in turn.
1.
MBIA’s Actions Constitute Professional Services
“Professional Services” includes “any past or present activities
allowed under the law and regulations governing services provided by [MBIA]
which are or were performed for [MBIA and/or its Subsidiaries] and, in addition
those activities, which are declared in the Application Form or which are
124
Staehr v. Hartford Fin. Svcs. Group, Inc., 547 F.3d 406 (2d Cir.
2008).
125
Faconti v. Potter, 242 Fed. App’x 775, 777 (2d Cir. 2007).
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commenced during the Policy Period.”126
The Article 78 Action held that NYID’s approval of MBIA’s
restructuring was legal and not arbitrary,127 that the restructuring will aid the
municipal bond market128 and that MBIA had “retain[ed] sufficient surplus to
support its obligations.”129 The Transformation involved core operations of
MBIA’s business which are an ancillary part of MBIA’s provision of insurance to
its policy holders – namely, how to invest and allocate its available pool of assets
to insure against different classes of claims.130 This activity is covered unless
Underwriters can “rule out the possibility that [MBIA] performed covered
professional services.”131 Underwriters cannot do so.
While professional indemnity policies do not “protect against all
126
07-08 Primary Policy § II(L) (emphasis added); 08-09 Primary Policy
§ II(L) (“. . . during the Policy Period and any other related services thereto”).
127
See ABN Amro Bank N.V., 962 N.Y.S.2d at 862-64.
128
See id. at 864.
129
Id. at 863.
130
See Plaintiff’s Opposition to Defendants’ Motion to Dismiss and
Cross-Motion for Partial Judgment on the Pleadings at 6.
131
Continental Cas. Co. v. JBS Constr. Mgmt., Inc., No. 09 Civ. 6697,
2010 WL 2834898, at *5 (S.D.N.Y. July 1, 2010).
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business vicissitudes,”132 what constitutes “Professional Services” is defined very
broadly in the Primary Policies and thus encompasses the Transformation. The
Transformation goes to the heart of MBIA’s business and therefore is considered a
professional service.
2.
The Financial Guarantee Exclusion Is Not Applicable133
To show that a Claim is barred by a Policy exclusion, Underwriters
must prove that they can bring the Transformation Claim “solely and entirely
within th[at] policy exclusion.”134 “The rule that insurance policies are to be
construed in favor of the insured is most rigorously applied in construing the
meaning of exclusions incorporated into a policy of insurance or provisions
seeking to narrow the insurer’s liability.”135 The Underwriters raise only the
Financial Guarantee Exclusion, which states:136
Underwriters shall not be liable to make any payment in
connection with any Claim . . . for legal liability assumed by
132
Albert J. Schiff Assocs., Inc. v. Flack, 51 N.Y.2d 692, 700 (1980).
133
While there are other exclusions in the Policies, none are asserted by
Underwriters as a bar to this Claim.
134
Bodewes v. Ulico Cas. Co., 336 F. Supp. 2d 263, 272 (W.D.N.Y.
2004).
135
Id. Accord Hartford Fire Ins. Co. v. Mitlof, 208 F. Supp. 2d 407, 411
(S.D.N.Y. 2002).
136
Primary Policies § III(I).
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the Company not in the ordinary conduct of the Assureds
Professional Services or any guarantee provided by the
Assured as to the performance of investments . . . provided
that, for the avoidance of doubt, this Exclusion shall not
apply in respect of the insurance operations of the Assured.
However, this policy excludes coverage of the financial
guarantees made in insurance policies or similar instruments
issued by the Assured.
Underwriters argue that the Financial Guarantee Exclusion would
preclude coverage as the Transformation Cases revolve around “financial
guarantees made in insurance policies or similar instruments issued by the
Assureds.”137 MBIA, by contrast, argues that because the Transformation Cases
are matters “in respect of the insurance operations” of MBIA they are not covered
by the exclusion.138
In the ABN Amro Action the court found that the plaintiffs “did not
allege that the company failed to pay them on any outstanding claims, or even that
they suffered any other monetary damages.”139 Based on that finding the court
held that the claim was not based on “financial guarantees made in insurance
policies”140 or that MBIA failed to pay out under their policies. Accordingly, the
137
Id.
138
Id.
139
ABN AMRO Bank. N.V. v. MBIA Inc., 916 N.Y.S.2d 12, 17
(1st Dep’t 2011).
140
Primary Policies § III(I).
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Financial Guarantee does not apply.
F.
Declaratory Judgment
Because the Transformation Cases have all reached final disposition,
concern MBIA’s professional services, and do not fall under any Policy
exclusions asserted by Underwriters, MBIA’s claim for declaratory relief
regarding the Underwriters’ duty to pay defense costs for the Transformation
Claim is ripe. A judgment would “serve a useful purpose in clarifying or settling
the legal issues involved; and . . . would finalize the controversy and offer relief
from uncertainty.”141 The Underwriters must make payment to MBIA on the
Transformation Claim under their Financial Institutions Professional Indemnity
Policy.
VI.
CONCLUSION
For the foregoing reasons, the Underwriters’ Motion to Dismiss is
GRANTED in regard to the Municipal Claims, and DENIED in regard to the
Transformation Claim. MBIA’s Motion for Judgment on the Pleadings for the
Transformation Claim is GRANTED. A conference is scheduled for July 28,
2014 at 4:30 p.m. The Clerk of the Court is directed to close these motions
[Docket Nos. 17 and 23].
141
Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d
384, 389 (2d Cir. 2005).
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Dated:
New York, New York
July 16, 2014
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- Appearances -
For Plaintiff:
For Defendants:
Robin L. Cohen, Esq.
Kenneth H. Frenchman, Esq.
Kasowitz, Benson, Torres & Friedman
LLP
1633 Broadway
New York, NY 10019
(212) 506-1770
Edward J. Kirk, Esq.
Bryce K. Guingrich, Esq.
Clyde & Co US LLP
405 Lexington Avenue, 16th Floor
New York, NY 10174
(212) 710-3900
-32-
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