Ambac Assurance Corporation v. US Bank National Association

Background

Ambac issued financial-guaranty insurance for certain certificates in a residential mortgage-backed securities trust. U.S. Bank served as trustee. After the trust suffered losses and Ambac paid approximately $79.2 million in insurance claims, Ambac alleged that U.S. Bank breached the pooling agreement by failing to account properly for later recoveries.

After an earlier order granted U.S. Bank’s motion to dismiss in part, one breach-of-contract claim remained. The parties filed cross-motions for summary judgment, asking the court to interpret the agreement on three issues: Ambac’s repayment rights, the order for applying recoveries to certificate balances, and whether recoveries could be offset against realized losses. The agreement and insurance policy were governed by New York law.

Rulings

The court granted in part and denied in part both parties’ motions for summary judgment.

Ambac’s repayment rights. The court granted U.S. Bank summary judgment on this issue. It held that the policy and pooling agreement unambiguously limited Ambac’s repayment to the Certificate Insurer Reimbursement Amount, or CIR Amount. Ambac was entitled to receive that amount in the Certificate Insurer’s position in the distribution waterfall—after senior certificate holders and before junior certificate holders. The court rejected Ambac’s argument that it had a separate repayment right as the subrogee of insured certificate holders in addition to its right to receive the CIR Amount.

Order of applying recoveries. The court granted Ambac summary judgment on this issue and denied U.S. Bank summary judgment. It held that the agreement unambiguously required the “write-up first” method: recoveries must first increase the applicable certificate principal balances, up to the amount allowed by the agreement, before monthly principal distributions are made. The resulting balance determines the maximum amount payable for that distribution date under the waterfall.

Offsetting recoveries against realized losses. The court granted Ambac summary judgment on this issue. It held that the agreement required U.S. Bank to account for recoveries and realized losses as separate amounts. The agreement unambiguously prohibited offsetting a recovery against a realized loss and recording only the net amount.

Unresolved issues and next steps

U.S. Bank raised defenses based on exculpatory provisions, New York’s six-year statute of limitations for breach-of-contract claims, and the amount-in-controversy requirement. The court held that deciding those defenses was premature because the motions were limited to interpreting the agreement. The parties were ordered to submit proposed next steps for resolving the remaining breach-of-contract claim. The court denied the request for oral argument as moot and directed the clerk to close the two motions.