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Radian Insurance, Inc. v. Deutsche Bank National Trust Co.

July 15, 2009


The opinion of the court was delivered by: Baylson, J.


This case arises from a dispute over three insurance policies issued by Plaintiff, Radian Insurance, Inc. ("Plaintiff' or "Radian") to Defendant Deutsche Bank National Trust Company ("Deutsche Bank"). Presently before the Court is a Motion to Dismiss for failure to state a claim, filed by Deutsche Bank. Also before the Court are Motions to Dismiss, or In the Alternative, Stay Pending Arbitration, filed by Defendants Financial Guaranty Insurance Company ("FGIC"), Ambac Assurance Corporation ("Ambac"), and MBIA Insurance Corporation ("MBIA") (hereinafter, collectively, the "Certificate Insurers"). In addition, Radian has filed a Motion to Stay the arbitrations. For the reasons set forth below, this Court will grant the Certificate Insurers' Motions to Stay Pending Arbitration, in part, and deny Deutsche Bank's Motion to Dismiss, without prejudice, as well as Radian's Motion to Stay the arbitrations.

I. Background Information

A. Facts

Plaintiff filed its Complaint seeking a declaratory judgment to establish its right to rescind the three Insurance Policies (the 2006-2B Policy, 2006-3 Policy, and 2007-1 Policy; collectively, "the Policies") it had issued to Deutsche Bank. Plaintiff asserts it is entitled to rescission because Deutsche Bank allegedly breached certain warranties made therein or otherwise made fraudulent misrepresentations.

Each of the Policies at issue insured individual mortgages, which were originated by IndyMac and then bundled or pooled together into a corresponding trust (the 2006-2B Trust, 2006-3 Trust, and 2007-1 Trust; collectively, the "Trusts") pursuant to a Pooling Agreement between Deutsche Bank and Defendants IndyMac MBS and Indymac Bank, F.S.B. (Compl. ¶¶ 17-18, 20-21, 24-25). Deutsche Bank, the named trustee of the Trusts, issued certificates from the Trusts, backed by the mortgages in the pool, and sold those certificates, called Home Equity Mortgage Loan Asset Backed Certificates, to investors. (Compl. ¶¶ 19, 22, 26). Defendant IndyMac MBS was the depositor for the Trusts and Defendant IndyMac Bank, F.S.B. was the sponsor, seller, and servicer of the Trusts. (Compl. ¶ 17). The Federal Deposit Insurance Corporation ("FDIC") intervened in this suit once it was appointed Receiver for IndyMac MBS and Conservator for IndyMac Federal Bank, F.S.B.*fn1 (Doc. 5).

Under the Policies, Deutsche Bank would submit claims for defaulting mortgages to Plaintiff, and Plaintiff would then undertake an adjustment process to determine if the loan complied with the warranties and representations in the Policies. (Compl. ¶ 35). Those representations and warranties, referenced in § 2.3 of the Policies, pertain to the loans' conformity with the underwriting guidelines and with other coverage eligibility requirements. (Compl. ¶¶ 39-41, 47). If the defaulting loan satisfied the conditions for coverage set forth in the Policy, Radian would cover the loss for Deutsche Bank. (Compl. ¶¶ 32-35). However, if the defaulting mortgage did not meet the conditions for coverage, it was ineligible under the Policy, and Radian could refuse to cover any loss resulting from that loan defaulting. (Compl. ¶ 36). For each Trust, the Policies required that the total amount of loss from eligible defaulted loans exceed an agreed upon deductible amount before Radian would begin paying Deutsche Bank for the loss. (Compl. ¶ 32).*fn2

In addition to the insurance issued by Plaintiff for the underlying mortgages, each certificate issued from the Trusts was insured by a secondary insurer. FGIC provided coverage for the 2006-2B certificates; Ambac provided coverage for the 2006-3 certificates; and MBIA provided coverage for the 2007-1 certificates. (Compl. ¶¶ 28-30). Each of those insurance companies (collectively, the "Certificate Insurers") was named as a third-party beneficiary under the corresponding insurance policy between Radian and Deutsche Bank. (Compl. ¶¶ 28-30).

In its Complaint, Plaintiff alleges that "through the adjustment process, Radian has determined that an extraordinarily high percentage of the claims tendered by the Insured for coverage under the Policies relate to Loans that do not conform to the applicable representations and warranties." (Compl. ¶ 44). Plaintiff then alleges that "the extremely large proportion of Loans subject to rescission or denial indicates that the representations and warranties were materially false when made." (Compl. ¶ 45). Plaintiff suggests that it relied on those warranties and representations, which concerned the loans' eligibility for coverage, when agreeing to the Policies and determining the premiums it would pay. (Compl. ¶¶ 46, 67-70). Accordingly, Plaintiff argues that the entire Policies should be rescinded on the grounds of either fraud, mistake or breach of warranty, (Compl. ¶¶ 74, 82), though Plaintiff asserts breach of warranty as its primary ground for rescission, (Pl's Response to Ambac's Motion to Dismiss, Doc. 66 at 9-11;*fn3 Hr'g Tr. Pg. 23).

After Plaintiff filed its Complaint, the Certificate Insurers made demands for arbitration to determine the eligibility for coverage of certain defaulting loans that were denied by Plaintiff in its adjustment process. The Certificate Insurers then filed in this litigation Motions to Stay Pending Arbitration, attaching their demands for arbitration as exhibits. (Doc. 33; Doc. 38-3; Doc. 49-3). In requesting the stay, the Certificate Insurers rely on the Policies' mandatory arbitration provisions, which they assert give them a right to arbitration as third-party beneficiaries. Those provisions read, in relevant part, as follows:

Unless prohibited by applicable law, or otherwise mutually agreed by the Company and Insured, all controversies, disputes or other assertions of liability or rights arising out of or relating to this Policy, including the breach, interpretation or construction thereof, shall be settled by arbitration. Notwithstanding the foregoing, the Company or the Insured both retain the right to seek a declaratory judgment from a court of competent jurisdiction on matter of interpretation of this Policy. (Doc. 1, Exs. A, B, C, § 7.4). The clause in the Policies naming the Certificate Insurers as third-party beneficiaries reads in relevant part,

The Certificate Insurer shall be a third party beneficiary of this Policy and shall be entitled to rely upon and directly enforce the provisions of this Policy against the Company, provided, however, that to the extent that any enforcement of the provisions of this Policy is being sought by the Insured, such enforcement shall control. (Doc. 1, Exs. A, B, C, § 7.8).

B. Procedural History

Plaintiff filed its Complaint for declaratory relief in this Court on June 26, 2008. (Doc. 1). The following day, IndyMac filed a separate declaratory judgment action in California state court, IndyMac Bank, F.S.B. v. Radian Ins., No. BC393388 (Los Angeles Super. Ct.). (Pl.'s Response to Ambac's Motion to Dismiss, Doc. 66 at 4 and Ex. A). Deutsche Bank was added as a party to that case, and the case was later removed to federal district court in that state (C.D. Cal., 08-cv-4775). (Id. at 4-5). On July 11, 2008, the FDIC was appointed Receiver for IndyMac Bank, MBS and Conservator for IndyMac Federal Bank, F.S.B. (Id. at 5). On August 29, 2008, this Court granted the FDIC's Motion to Intervene and Stay (Doc. 5) for a statutorily mandated 90-day period. (Doc. 15). On January 19, 2009, the parties to the California litigation stipulated to dismissal, with the FDIC and Deutsche Bank agreeing to bring any claims against Radian as counterclaims in the instant litigation. (Pl.'s Response to Ambac's Motion to Dismiss, Doc. 66 at 5 and Ex. B).

Once the stay period granted in this litigation expired, the Defendants filed various motions in response to the Complaint. Specifically, Deutsche Bank moved to dismiss for failure to state a claim, (Doc. 35), while the FDIC filed a Motion to Dismiss on grounds of subject matter jurisdiction, or in the alternative, a Motion to Strike Immaterial or Impertinent portions of the Complaint, (Doc. 47). The Certificate Insurers all filed Motions to Dismiss, or in the Alternative, to Stay the Litigation Pending Arbitration. (Docs. 31, 38, 49). After the Certificate Insurers filed their Motions, Deutsche Bank filed a response, explicitly assenting to a stay of the litigation. (Doc. 71). As a result, Plaintiff filed a Motion to Stay, requesting this Court stay the pending arbitrations instead of the litigation so the Court could address the rescission claim. (Doc. 89).

The Court held Oral Argument on all open motions on June 15, 2009. (Doc. 96). The Court then received additional briefing on the issue of arbitration from Plaintiff. (Pl's Letter Brief, June 19, 2009). Because staying the litigation pending arbitration will moot, at least temporarily, the Motions to Dismiss, the Court will first turn to the issues regarding arbitration.*fn4

II. Parties Arguments

A. The Certificate Insurers' Motions to Stay Pending Arbitration

The Certificate Insurers request that this Court stay the litigation, pending arbitration. The Certificate Insurers' arbitration demands assert that Plaintiff improperly withheld coverage for certain defaulting loans, which the Certificate Insurers suggest is squarely within the scope of the mandatory arbitration provisions. The Certificate Insurers argue that the eligibility of these loans for coverage is a threshold issue to Plaintiff's rescission claim, as Plaintiff's argument assumes it was entitled to withhold overage on the "extraordinarily high" number of allegedly ineligible, defaulting loans. According to the Certificate Insurers, the appropriate forum for deciding both the eligibility of the loans for coverage and the ultimate rescission issue is thus arbitration, in accordance with the Policies' arbitration clauses.

The Certificate Insurers also assert that the mandatory arbitration provisions in the Policies allow for the third-party beneficiaries to enforce the Policies through arbitration and that there is a strong presumption in favor of arbitration, expounded in the Federal Arbitration Act. These Defendants further explain that none of the exceptions in the mandatory arbitration provisions apply here, as none of the parties have mutually agreed to litigate rather than arbitrate and the issue of coverage for defaulted loans is not a matter of interpretation falling within the declaratory judgment exception.

B. Radian's Response

Plaintiff responds that the mandatory arbitration provisions are inapplicable or unenforceable in the instant situation for several reasons. First, Plaintiff argues that the need for arbitration to determine the coverage eligibility of individual loans will be moot if this Court decides to rescind all of the Policies in their entirety. Thus, Plaintiff argues that this Court should decide the rescission claim first. Plaintiff also suggests that the Federal Arbitration Act's presumption in favor of arbitration does not necessarily apply here because of the numerous exceptions contained in the arbitration provisions at issue.

Furthermore, Plaintiff asserts that its declaratory judgment action fits within either the "mutual agreement" exception to the arbitration provisions or the exception for declaratory judgment on matters of interpretation, thus allowing this Court to hear the case despite the arbitration provisions. As to mutual agreement, Plaintiff argues that Deutsche Bank agreed to litigate these issues by through the stipulation in the California litigation, which contemplated that Deutsche Bank would file its claims as counterclaims in this case. Plaintiff suggests that agreement precludes the Certificate Insurers from pursuing their claims in arbitration because, as third-party beneficiaries, they can only enforce the contract ...

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