Delaware Business Litigation Report

District Court Finds No Ambiguity or Third Party Beneficiary Status, Grants Motion for Summary Judgment

MBIA Ins. Corp. v. Royal Indem. Co., 2007 WL 3125319 (D.Del. Oct. 25, 2007)

In this opinion the District Court resolved cross-motions for summary judgment on the defendant’s counterclaim for breach of contract. The relationship between the plaintiffs and the defendant arose out of the underwriting of student loans. Student Finance Corporation (“SFC”) underwrote loans to students using funds from banks, then allegedly fraudulently issued “forbearance payments” in order to hide delinquent and defaulting loans. SFC transferred the loans to several trusts, which then issued fixed income notes, called Certificates, to investors. Plaintiff #1 was the trustee of trusts holding the securitized student loans. Defendant insured the loans that backed the Certificates with insurance policies that unconditionally guaranteed the students’ repayment of principal plus 90 days interest. Plaintiff #2 guaranteed payment of the Certificates in the event that the Defendant failed to honor its policies on the loans. Plaintiffs sued Defendant seeking to enforce its unconditional guarantee to repay the loans. Defendant counterclaimed against Plaintiff #1 for breach of contract, arguing that Plaintiff #1 did not adequately fulfill its oversight responsibilities under applicable Pool Servicing Agreements (“PSAs”) with respect to the servicing of the loans, and thus did not discover the allegedly fraudulent forebearance payments, resulting in Defendant engaging in continual transactions with SFC. Plaintiffs’ claim for enforcement of Defendant’s guarantee obligation was settled, leaving the Court only Defendant’s counterclaim to resolve. 

The parties presented competing arguments regarding the Plaintiff #1’s oversight responsibilities under the PSAs. Defendant argued that under the applicable provision, the term “tape” referred to weekly tapes that the loan servicer provided. Plaintiff #1 argued that the provision’s context made clear that “tape” referred to the monthly tapes provided. The Court concluded that the term was not ambiguous as used in the provision. The Court found that although the PSAs defined “tape” generally to mean the weekly tapes, the definitions also explicitly provided for another definition where “the context otherwise require[d].”   The Court concluded context made it clear that the meaning in that provision was monthly tapes. The Court also rejected Defendant’s argument that even if “tape” meant monthly tapes, Plaintiff #1 should have discovered discrepancies between the tapes and the servicer’s reports. The Court concluded that the content of the monthly tapes would not have revealed the discrepancies. Defendant also argued that Plaintiff #1 breached the provision of the PSAs related to its responsibilities to monitor the loan servicer, and that Defendant was a third-party beneficiary of that provision. The Court found that although Defendant was a third-party beneficiary of other provisions, the PSAs explicitly limited beneficiary status for the provision at issue to the Certificate holders. The Court concluded even if Defendant was an intended beneficiary, the PSAs provided that no liability could be incurred for monitoring of the loan servicer. The Court therefore found that Plaintiff was entitled to summary judgment on Defendant’s breach counterclaims. 

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