This is a motion to dismiss fraud and breach of contract claims brought by plaintiff, a financial guaranty insurer of a residential mortgage backed securitization involving more than 15,000 mortgage loans (the Transaction). The insurer alleges that in deciding to issue its insurance policy (the Policy) it relied on various representations and warranties concerning the level of due diligence conducted by the originator of the mortgage loans, which turned out to be false. This required the insurer to pay out to purchasers of the mortgage securities hundreds of millions of dollars in insurance claims under the Policy, which it seeks to recover in this lawsuit from a variety of parties to the Transaction. The insurer entered statutory rehabilitation pursuant to the Wisconsin Insurance Law in 2010.

The facts are as alleged in the complaint.

Securities Issuance

The Transaction at issue in this case closed on May 29, 2007, and was sponsored by Merrill Lynch Mortgage Lending, Inc. (ML Lending) and marketed by Merrill Lynch, Pierce, Fenner & Smith, Inc. (MLPF & S). The loans were originated by First Franklin Financial Corporation (First Franklin)^[FN1] and deposited by Merrill Lynch Mortgage Investors, Inc. (ML Investors) into First Franklin Mortgage Loan Trust, Series 2007-FFC Trust (the Trust). ML Lending and First Franklin sold 15,812 subprime second-mortgage "balloon" loans with an aggregate principal balance of approximately $856 million to defendant ML Investors. ML Investors, as the depositor, sold the 15,812 loans to the Trust formed under a Pooling and [*2]Servicing Agreement (PSA). The PSA authorized the Trust to issue various classes of certificates, which would pay investors when borrowers on the underlying subprime mortgages repaid their loans. The PSA created a "waterfall" under which the senior class of certificates is paid with the first dollars received from the mortgages, and the more junior classes are paid with later-received funds. Investors bought the certificates pursuant to two Mortgage Loan Purchasing Agreements (MLPAs) after receiving a Prospectus and Prospectus Supplement (Offering Documents).

First Franklin, ML Lending, ML Investors and HLS (Merrill Lynch Contracting Parties) entered into an Insurance and Indemnity Agreement (I & I) with Ambac Assurance Corporation (Ambac), a guarantor of various financial products, under which Ambac agreed to insure payments of interest and principal due on the most senior tranche of certificates (Class A Certificates). The Class A Certificates benefited not only from a senior position in the waterfall, but also from credit protection provided by the Policy.

Transaction Negotiation and Closing

Starting in February 2007, after Ambac declined to insure a different transaction presented by MLPF & S, through the closing of the Transaction, First Franklin and/or MLPF & S made numerous representations to Ambac to induce it to insure the Transaction. The complaint details a wide variety of pre-contractual representations that First Franklin and MLPF & S made to Ambac concerning (a) the characteristics of the loans to be pooled for the Transaction, (b) the underwriting guidelines purportedly followed in originating loans in the operation of its business, and (c) the due diligence purportedly conducted to ensure the quality of originated loans.^[FN2]

First Franklin and MLPF & S also provided Ambac with various documents that characterized First Franklin's origination and underwriting practices as diligent and disciplined, designed to detect and prevent fraud while ensuring the quality of originated loans. These documents included First Franklin's underwriting guidelines (Wholesale Guidelines), Guideline Revisions, two versions of First Franklin's Financial Investor Book (December Investor Book and May Investor Book), a Merrill Lynch analyst report entitled "FFML Sub-Prime Monitor" and an analysis portraying first-payment defaults on First Franklin-originated loans as historically low. One of the Investor Books described First Franklin's underwriting and quality-control guidelines as including:

(i) 100% credit underwriting performed prior to funding;

(ii) 100% loan-by-loan fraud-prevention due diligence;

(iii) Pre-funding due diligence performed on every loan transaction;

(iv) Verbal verification of employment on all borrowers regardless of document type of the loan [*3]program; and

(v) Credit alerts: all fraud alert options available through First Franklin's credit vendors.

MLPF & S provided Ambac with a preliminary loan tape and numerous updated versions of the loan tape (Mortgage Loan Tape), which supposedly set forth key attributes for each of the loans, including the loan-to-value ratio (LTV), the borrower's debt-to-income ratio (DTI), credit score, and whether the property was owner-occupied. Ambac ran the data in those tapes through its computerized loss models to assess the risk of the Transaction, understanding the data on the tapes was accurate and would be represented and warranted to be accurate as a condition of insuring the Transaction.

After analyzing the loan tapes, Ambac sent MLPF & S a preliminary bid letter. In its bid letter, Ambac stated that it would perform on-site diligence of First Franklin's operations and that it required loan-level due diligence. Ambac visited First Franklin's offices in San Jose, California to conduct on-site operational due diligence and examine First Franklin's loan-origination practices. Ambac's request to review loan files for a sample of loans during that on-site visit was denied, but several of First Franklin's executives made oral representations to Ambac that, similar to the materials sent to Ambac during the months leading up to the visit, outlined First Franklin's underwriting and diligence guidelines, and characterized them as conservative in comparison to those of competing lenders. First Franklin provided Ambac with documents that contained information about the aggregate quality of loans originated by First Franklin, repeated the representations made in the materials previously sent to Ambac, outlined planned changes in First Franklin's underwriting and diligence guidelines intended to further ensure the integrity of the origination process, and explained Merrill Lynch's oversight role.

After its visit, Ambac again asked for access to loan files, this time so a third party could perform due diligence. First Franklin said it was unable to accommodate Ambac's third party review within the time frame it had established for the Transaction. MLPF & S then provided Ambac with results of its own diligence of 1,968 loans in the Transaction (the Due Diligence Report). The Due Diligence Report indicated that only 7% of the loans had underwriting, legal compliance or documentation problems. Consistent with industry practice, Ambac understood that these non-conforming loans were to be removed from the loan pool prior to closing the Transaction.

MLPF & S delivered to Ambac the Offering Documents used to market the certificates, which contained detailed charts compiling the purported key characteristics of the loan pool as a whole, such as the average DTI, LTV, and proportion of owner-occupied properties. The Prospectus Supplement also included specific statements about First Franklin's underwriting guidelines, such as that all of the Mortgage Loans were originated generally in accordance with First Franklin's underwriting guidelines.

These pre-closing representations presented First Franklin as a prudent loan originator and the Transaction as comprised of loans that were generally compliant with specific [*4]underwriting guidelines and diligence practices, and thereby having a certain risk profile. Ambac relied on the information about the loans provided by the defendants, as well as defendants' description of their supposedly rigorous practices and procedures, to assess the risk of the Transaction and to agree to insure the Transaction.

The Merrill Lynch Contracting Parties executed several agreements (Operative Documents) that form the basis of Ambac's breach of contract claims and its request for indemnification and reimbursement. The Operative Documents include the I & I, the MLPAs, and the PSA. Ambac is an express third-party beneficiary of the MLPAs and the PSA, and a direct party to the I & I. The MLPAs contain loan-level representations and warranties that relate to the characteristics of the individual loans, as well as the practices used to originate, underwrite, and service those loans.

The Policy ensures the payment of principal and interest to Class A certificate holders. To induce Ambac to issue the Policy, the Merrill Lynch Contracting Parties entered into the I & I and made a series of representations and warranties in addition to those in the MLPAs and the PSA. They represented to the Merrill Lynch Contracting Parties' compliance with lending and securities law, their financial condition, operations, mortgage-loan portfolios, underwriting, due diligence and quality control practices, and the aggregate characteristics of the loans included in the Transaction. The transaction-level representations and warranties also verified the accuracy of the information provided to Ambac prior to closing.

The MLPAs and PSA specify the remedy available in the event that an individual loan is defective — i.e. is in breach of any of the 60 loan-level representations or warranties, which are contained in Section 7 of the MLPAs. The Merrill Lynch Contracting Parties agreed in such instances to repurchase any loan that contained a non-curable breach of a loan-level representation and warranty by paying the repurchase price to the Trust within 60 days of notice or discovery of the breach (the Repurchase Protocol). The Repurchase Protocol is incorporated in I & I Section 2. A loan-level representation and warranty breach occurs, for example, when an individual Mortgage Loan fails to conform to the applicable underwriting guidelines, does not bear the attributes disclosed in the Loan Schedule, or is in default.

In exchange for the risk it assumed under the Policy, Ambac alleges it demanded and received far broader rights and additional remedies in the I & I than it received as third-party beneficiary of the MLPAs and the PSAs. Under the I & I, an uncured breach that rises to the level of an Event of Default as described in Section 5.01, entitles Ambac to "take whatever action at law or in equity" it deems "necessary or desirable" to collect any amount due under the I & I "or to enforce performance and observance of any obligation, agreement or covenant of the Merrill Lynch Contracting Parties . . . under the I & I or any other Operative Documents." (I & I Section 5.02 [a][iii]).

First Franklin and several other Merrill Lynch entities (such as HLS) made a representation and warranted to Ambac regarding the truth of all of the written statements that First Franklin and these other Merrill Lynch entities had furnished to Ambac,

Neither the Operative Documents nor other information relating to the Mortgage Loans, the operations of the Sponsor, the Servicer, the Originator or the Depositor or the financial condition of the Sponsor, the Servicer, the Originator or the Depositor (collectively, the "Documents") . . . furnished or to be furnished to the Insurer in writing or in electronic form by [*5]the Sponsor, the Servicer, the Originator or the Depositor in connection with the Transaction contains or will contain any statement of a material fact which was untrue or misleading in any material respect when made . . .

(I & I Section 2.01[j]) (emphasis added). This representation and warranty covers all of the written materials that defendants gave to Ambac to induce it to insure the Transaction, including (i) the Prospectus Supplement, (ii) the loan tapes, (iii) the Investor Books, (iv) the Underwriting Guidelines, (v) the Due Diligence Report, and (vi) the FFML Sub-Prime Monitor. In addition, they also represented and warranted that, "[e]ach of the Servicer, the Sponsor, the Originator and the Depositor has no knowledge of any circumstances that could reasonably be expected to cause a Material Adverse Change." I & I Section 2.01(j).

Post-Closing Events

In October 2007 Merrill Lynch wrote off $100 million in relation to First Franklin. By March of 2008, less than one year after Ambac entered into the Transaction, Merrill Lynch shut down First Franklin's operations.

Ambac's financial condition deteriorated as a result of subprime mortgage loan defaults in 2007 and 2008, and it entered statutory rehabilitation pursuant to Wisconsin Insurance Law in 2010.

After a large percentage of loans defaulted, Ambac received and analyzed over 1,750 loan files. It found that the loans were not originated or underwritten pursuant to First Franklin's ostensible originating and underwriting guidelines, nor pursuant to prudent lending practices, and instead the loans were made to borrowers with no ability to repay them. Ambac exercised the Repurchase Protocol and demanded repurchase of the breaching loans. Ambac provided the Merrill Lynch Contracting Parties with a detailed explanation for each of the material breaches it found in each of the defective loans. Merrill Lynch Contracting Parties have refused to buy back the majority of those defective loans.

Ambac's Claims

Ambac asserts six causes of action, including (1) fraudulent inducement against First Franklin and MLPF & S, (2) breach of representations and warranties against the Merrill Lynch Contracting Parties, (3) breach of Repurchase Protocol against the Merrill Lynch Contracting Parties, (4) material breach of the I & I against the Merrill Lynch Contracting Parties, (5) indemnification against the Merrill Lynch Contracting Parties, and (6) reimbursement for claims paid and attorneys' fees and costs against the Merrill Lynch Contracting Parties. Defendants have brought a motion to dismiss claims one through five, and the portion of claim six that relates to attorney's fees pursuant to CPLR 3211 (a) (1) and (7).

Ambac alleges that MLPF & S and First Franklin knowingly and with the intent to defraud, caused their employees and agents to make materially false and misleading statements, and omitted material facts to induce Ambac to issue the Policy. Ambac alleges that MLPF & S and First Franklin knowingly and with the intent to defraud, delivered to Ambac materially false and misleading documents, including the Mortgage Loan Tape, the Due Diligence Report, the May Investor Book and December Investment Book and the Offering Documents. Ambac claims it justifiably relied on First Franklin and MLPF & S's statements when it entered into the I & I Agreement and issued the Policy. Ambac contends that as a result of First Franklin and MLPF & S's false and misleading statements it has suffered damages, including claims payments under the Policy.

The elements of a fraud claim have been long established in New York State courts. The court in Reno v Bull stated that the plaintiff must show the defendant

made the representations alleged; that such representations were false; that they knew they were false; that they were made for the purpose of deceiving . . ., and that [the plaintiff], believing the same to be true, made the purchase and was thereby damaged; in other words, the plaintiff ha[s] to prove . . ., [r]epresentation, falsity, scienter, deception and injury.

Reno v Bull, 226 NY 546, 550 (1919) (internal citation omitted).

The first three elements of a fraud claim: misrepresentation of a material fact, falsity, and scienter are not in contention in this case. Ambac has alleged numerous instances of misrepresentation of material fact by MLPF & S and First Franklin, that the defendants knew of the falsity when they made the misrepresentations, and that they did so to deceive Ambac into issuing the Policy. Ambac further alleges that the Due Diligence Report indicated that 7% of loans were non-conforming to the underwriting guidelines, whereas Ambac's analysis after loans began to default indicated that 94% of the loans contained material defects. Ambac's detailed allegations provide a "who, what, when and where" of First Franklin and MLFP & S's false characterization of First Franklin's underwriting guidelines, misrepresentation of the key attributes of the loans, and MLPF & S's loan-level review of a sample of loans in the Transaction.

Reasonable reliance has recently been discussed in two opinions in the First Department. The defendants cite ACA Financial Guaranty Corp. v Goldman, Sachs (ACA Fin. Guar. Corp. v Goldman, Sachs & Co., No 9037, 650027/11, 2013 NY App Div LEXIS 3355, at *1 [1st Dept 2013]) for the point that justifiable reliance requires a heightened degree of diligence in the face [*7]of warning signs that there is a misrepresentation. In ACA an insurer sued Goldman Sachs & Co. (Goldman) for fraudulently inducing it to insure an investment transaction. ACA,2013 NY App Div LEXIS 3355, at *1 (1st Dept 2013). ACA claimed that Goldman misrepresented that a nonparty hedge fund was taking a long position in the investment when, in fact, the hedge fund was taking a massive short position. The First Department held, with respect to justifiable reliance, that if a sophisticated party is put on notice that a representation is false or misleading, it is under an obligation to inquire about the representation. ACA was alerted to Goldman's misrepresentation by a disclosure in a prospectus, but conducted no further inquiry. ACA's claim was dismissed.

Defendants claim that Ambac received disclosures that called into question representations and warranties Ambac asserts it was relying on. Its claim is based on the following paragraph in the Prospectus Supplement.

"In accordance with First Franklin Financial's guidelines for acquisition, all of the mortgage loans of a type similar to the Mortgage Loans were required to be underwritten by the third party originator's underwriters having the appropriate signature authority. Each underwriter is granted a level of authority commensurate with their proven judgment, maturity and credit skills. On a case by case basis, a third party originator may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category guidelines described below warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicant's current address. It is expected that a substantial portion of the Mortgage Loans may represent such underwriting exceptions."

Defendants claim that this paragraph should have alerted Ambac that it could not rely on general representations about underwriting guidelines without actually investigating how the loans in the pool were underwritten.

When third-party originators grant exceptions on a case-by-case basis because of compensating factors, they are not a breach of the underwriting guidelines, but an implementation of them. The Prospectus Supplement provides that exceptions will be granted only when compensating factors are present. For example, if a mortgagor does not strictly qualify under the underwriting guidelines, but there is a low LTV or DTV ratio, the mortgagor may be accepted under these compensating factors. Other compensating factors include: substantial liquid assets, good credit history, stable employment, and time in residence at the applicant's current address. The statement, read in context, does not call into question the accuracy of defendants' representations and warranties regarding its underwriting practices. As this is the only statement that defendants point to as putting Ambac on notice, it is an unpersuasive argument, given the mechanics of the exception process.

If a spark of life remains in defendants' position, it is extinguished by the succeeding observation.

The quoted paragraph does not appear in the Section of the Prospectus Supplement titled Risk Factors. The Risk Factors Section is such an exhaustive list of, in some instances, extremely remote, possible events that could improbably go wrong. That the issuer's failure to [*8]include this item in that list demonstrates its belief that it posed absolutely not the slightest hint of attenuated risk to certificateholders.

This case is similar to CIFG Assurance N. Am. v Goldman, Sachs & Co., (No 9147, 652286/11, 2013 NY App Div LEXIS 3184 [1st Dept 2013], revg CIFG Assurance N. Am. v Goldman, Sachs & Co., No 652286/2011, 2012 NY Misc LEXIS 3986 [Sup Ct NY Co 2012]). In CIFG the insurer conducted due diligence, and secured a warranty regarding the characteristics that were diligenced. The court found that because due diligence was conducted; it became a question of fact as to whether reliance was justifiable. The court held that a financial guaranty insurer that insured a residential mortgage-backed securitization is "not required, as a matter of law, to audit or sample the underlying loan files" to state a claim for fraud.

The issue of justifiable reliance generally implicates questions of fact which are not to be resolved at this early stage in the proceedings. See e.g. Bonacci v Lone Star Int'l Energy, Inc., 1999 US Dist LEXIS 1564 (SDNY 1999) ("Ordinarily, a plaintiff need only plead that he relied on the defendant's misrepresentations' to survive a motion to dismiss a federal securities fraud claim, since the reasonableness of reliance raises factual issues."); DDJ Mgt., LLC v Rhone Group LLC, 15 NY3d 147, 156 (2010) ("If plaintiffs can prove the allegations in the complaint, whether they were justified in relying on the warranties they received is a question to be resolved by the trier of fact."); Knight Secs., LP v Fiduciary Trust Co, 5 AD3d 172, 173 (1st Dept 2004) ("on a motion to dismiss for failure to state a cause of action, a plaintiff . . . need only plead that he relied on misrepresentations made by the defendant . . . since the reasonableness of his reliance [generally] implicates factual issues whose resolution would be inappropriate at this early stage").

Ambac conducted extensive due diligence, including visiting the offices of First Franklin in San Jose, California in order to conduct an in person review of First Franklin's loan origination and underwriting procedures. On at least two occasions, it requested access to sample loan files, but was rebuffed. Other due diligence steps taken include:

(i) Modeling the risk of loss on the Transaction based on the characteristics of each loan as represented on the loan tapes;

(ii) Reviewing offering documents that described First Franklin's origination, underwriting, due diligence and quality control practices;

(iii) Reviewing First Franklin's Investor Books and other marketing materials;

(iv) Assessing the quality of First Franklin's underwriting guidelines; and

(v) Obtaining and reviewing MLPF & S's due diligence of 1,968 loans in the Transaction.

Given Ambac's extensive due diligence,it is the court's view that questions of fact have not been raised with respect to its justifiable reliance on the alleged misrepresentations set out in the complaint.

Finally, it is clear that Ambac has properly pled injury.

Breach of Contract

Defendants claim that as a matter of law Ambac has not satisfied its pleading requirements under CPLR 3013. CPLR 3013 requires that the pleading be specific enough to give the court notice of the transactions and provide a basis for the complaint. In assessing this requirement, the court now looks to Gorelik (supra) and determines whether the complaint states a valid cause of action, rather than whether evidence supports the claim.

The court is of the opinion that Ambac's detailed complaint amply satisfies the requisite standard for contract claims. Ambac identifies the transaction and the Operative Documents, including relevant Sections of these documents. Ambac also has alleged in detail the multiple ways in which Merrill Lynch Contracting Parties breached the Operative Documents. Ambac has alleged how it has been damaged as a result, namely that it is obligated to pay hundreds of millions of dollars in insurance claims as a result of Merrill Lynch Contracting Parties breaches. The court thus finds that Ambac has sufficiently pled its claims.

Defendants claim that Ambac is contractually limited to the Repurchase Protocol as a remedy for breach of loan-level representations and warranties in the MLPAs.

In Assured Guar. Corp. v EMC Mtge., LLC (39 Misc 3d 1207[A], 2013 NY Slip Op 50519[U], 2013 NY Misc LEXIS 1371 [Sup Ct, NY County, 2013]) a case by an insurer against a financial institution for breach of contract, the parties executed multiple integrated agreements. In that case, like this one, the insurer was a third-party beneficiary to the MLPA and the SSA (equivalent to the PSA), and a direct beneficiary to the I & I Agreement. The court held that language in the MLPAs and SSA providing for the repurchase protocol as the "sole remedy" available would be given effect. The court noted that the insurer was named in the list of parties for which the repurchase protocol was the exclusive remedy for breaches under the MLPA and that the I & I expressly incorporated that language.

In Syncora Guar. Inc. v EMC Mtge., LLC (39 Misc 3d 1211[A], 2013 NY Slip Op 50569[U], 2013 NY Misc LEXIS 1519 [Sup Ct, NY County, 2013]), the court held that the language of the contract was not sufficiently explicit to disallow the insurer's use of suit to redress a breach under the MLPA. In that case, the I & I Agreement did not specifically incorporate the section of the MLPA limiting the remedies to the repurchase protocol, and included a section which made clear that the insurer's remedies were not limited.

In this case, each MLPA contains 60 loan-level representations and warranties, which cover a variety of topics. They state, for example, that with respect to each individual loan, "[t]he Mortgage Loan was underwritten in accordance with the Seller's underwriting guidelines" and that "[t]he information set forth in the Final Mortgage Loan Schedule is complete, true and correct."

Section 7.03 of each MLPA specifies a detailed remedy, the Repurchase Protocol, for a breach of these loan-level representations and warranties. It provides that if Ambac discovers a "breach of a representation or warranty which materially affects the value of a Mortgage Loan," [*9]Ambac "shall give prompt written notice," to First Franklin or ML Lending, which must then "(i) use its best efforts promptly to cure such breach in all material respects" or (ii) "repurchase such Mortgage Loan at the Repurchase Price." Neither Section 7 of the MLPAs, nor any other MLPA provision, specifies any other remedy for breach of the loan-level representations and warranties.

Unlike in Assured, the MLPA and PSA do not contain language flatly stating that the Repurchase Protocol is the sole remedy for breach of loan-level representations and warranties. However, the I & I states "the remedy for any breach of a representation and warranty of (i) the Sponsor in Section 7 of the MLML Purchasing Agreement . . . shall be limitedto the remedies specified in the MLML Purchasing Agreement" (I & I Section 2.01[l]) (emphasis added). As noted above, the only remedy specified in the MLPAs for breaches of loan-level representations and warranties is the Repurchase Protocol.

As the MLPAs specify only one remedy for breaches of loan-level representations and warranties, the Repurchase Protocol, the plaintiff is limited to the Repurchase Protocol for remedy of such breaches.

Ambac claims breach of the Repurchase Protocol, contending that defendants refused to repurchase, cure or provide substitutes for the vast majority of loans that have breached the representations and warranties in Section 7 of the MLPAs. This breach is independent of the loan-level representation and warranty breaches. Ambac claims this enables it to pursue actions at law or in equity pursuant to Section 5.02 (Remedies) of the I & I.

In order for this assertion to be correct, a breach of the Repurchase Protocol must constitute an Event of Default as defined in Section 5.01 (Default) of the I & I, and there must not be an exclusive remedy for such default otherwise expressly provided [I & I Section 5.02(b)]. I & I Section 5.01(b) states that an Event of Default includes, inter alia, events when "[t]he Sponsor . . . shall fail to pay when due any amount payable by the Sponsor . . . hereunder" (emphasis added). I & I Section 5.02 states that "[u]nless otherwise expressly provided, no remedy herein conferred or reserved is intended to be exclusive of any other available remedy, but each remedy shall be cumulative..." (emphasis added).

If the Merrill Lynch Contracting Parties fail to honor the Repurchase Protocol and this failure causes Ambac to pay insurance claims, Ambac contends it has the right to sue the Merrill Lynch Contracting Parties for direct reimbursement of payments. Ambac argues that a breach of the Repurchase Protocol is outside the loan-level representations and warranties, and falls within the category of Event of Default as defined in Section 5.01(b) of the I & I. Ambac concludes by asserting that as there is no exclusive remedy for a breach of the Repurchase Protocol in any of the Operative Documents, I & I Section 5.02 does not bar any action by Ambac against the Merrill Lynch Contracting Parties.

In attempting to refute this claim, defendants cite to I & I Section 5.01(a) which defines an Event of Default as when a representation or warranty made by the Sponsor proves to be untrue or incomplete, and claim that the Repurchase Protocol is not a representation or warranty. The court agrees with the defendants that I & I Section 5.01(a) does not apply here, but finds that I & I Section 5.01(b) encompasses a breach of the Repurchase Protocol. [*10]

The court thus holds that a breach of the Repurchase Protocol is an Event of Default under the terms of the I & I Section 5.01(b) and allows Ambac to pursue any remedy at law or in equity.

The Fourth Cause of Action alleges that defendants breached transaction-level representations and warranties. The I & I extends a broad range of transaction-level representations and warranties to Ambac, including that the Merrill Lynch Contracting Parties are financially and operationally sound, that the Merrill Lynch Contracting Parties are bound by the I & I, that the Merrill Lynch Contracting Parties have complied with various laws and regulations regarding the Transaction, and that the Operative Documents are true and correct. Ambac contends that defendants breached I & I Section 2.01(j), with respect to representing and warranting that, inter alia, the Operative Documents were true and correct.

I & I Section 2.01(j) broadly warrants the accuracy of information provided to Ambac, stating, "[n]either the Operative Documents nor other material information relating to the Mortgage Loans, the operations of the Sponsor, the Servicer, the Originator or the Depositor . . . will contain any statement of a material fact which was untrue or misleading in any material way when made." Ambac contends that the phrase — "other material information" — encompasses pre-contractual documents including the Prospectus, the Prospectus Supplement, the Analyst Report, the Due Diligence Report and the Investor Books provided by the Merrill Lynch Contracting Parties in order to induce Ambac to insure the Transaction. Additionally, Ambac alleges that the defendants failed to disclose First Franklin's wholesale abandonment of its due diligence and quality control processes.

Defendants rely on Assured v EMC to support its argument that the alleged transaction-level representation and warranty breach is derivative of a loan-level representation and warranty breach, thus restricting Ambac to the Repurchase Protocol as a remedy. 39 Misc 3d 1207(A), 2013 NY Slip Op 50519(U), 2013 NY Misc LEXIS 1371 (Sup Ct, NY County, 2013). In Assured the court found that "all of the Transaction Warranties that Assured premises its additional breach of contract claims largely relate to, and overlap with, the Loan Warranties, which are specifically subject to the Repurchase Protocol." Assured 39 Misc 3d at ¶ 33. Assured (the Insurer) was limited to the Repurchase Protocol as a remedy for any breach of "representations and warranties pertaining to characteristics of the pooled loans." Id. Defendants argue that based on the ruling in Assured and the perceived overlap between the transaction-level representations and warranties and loan-level representations and warranties, Ambac must be limited to the Repurchase Protocol as a remedy.

Ambac argues that to the extent the loan-level representations and warranties in the MLPAs overlap with the transaction-level representations and warranties, there is no basis in the I & I or in law to allow the Repurchase Protocol to trump the Event of Default language. The court does not agree. In Assured, the court found exactly that result — that loan-level representations and warranties that were also transaction-level representations and warranties were to be dealt with by the exclusively provided remedy stating:

"This court cannot ignore the language of the parties' agreements that plainly restricts Assured to the remedy of the Repurchase Protocol to enforce EMC's obligations under the Operative Documents (courts cannot, under the guise of interpretation, rewrite parties' agreements to impose additional terms or relieve parties from the consequences of their bargain). Consequently, Assured is limited to the remedy of compelling EMC to repurchase defective [*11]loans that breach any representations and warranties pertaining to characteristics of the pooled loans."

Assured 39 Misc 3d at ¶ 32.

Ambac argues that because the parties were clearly sophisticated enough to limit the remedy for breach of the transaction-level representations and warranties in Section 2.01(l), the absence of such language indicates in Section 2.01(j) that the remedy is not meant to be exclusive. The court finds this argument unpersuasive. Contracts need not be repetitive to clearly make a point.

If this cause of action were based solely upon overlap between loan-level and transaction-level representations and warranties, the court would hold as in Assured v EMC. However, the court reads the complaint to allege far more than breaches of representations and warranties relating to the pool of mortgage loans underlying the certificates issued in the Transaction, and the underwriting guidelines relating to such mortgage loans.

The complaint clearly alleges abandonment by First Franklin of its underwriting guidelines in connection with its mortgage loan business, not just in connection with the loan pool relating to the certificates issued in the Transaction. First Franklin is alleged to have ceased operating its business in a prudent fashion.

The complaint quotes First Franklin's President and Chief Executive Officer, L. Andrew Pollock's assurances to the United States Senate regarding the prudence and caution embedded in the company's operational practices. Mr. Pollack testified,

[First Franklin] employ[s] underwriting standards that assure the quality of the loans [it] originate[s]. These underwriting standards are designed to ensure that borrowers can afford to repay the mortgages [it] originate[s], as well as those [it has] originated in recent years. . . . [First Franklin] do[es] not make loans based solely on collateral value; specifically, all loans are underwritten based on the applicants' credit history and ability to repay the debt.^[FN3]

(emphasis added).

The complaint juxtaposes this testimony with allegations that First Franklin had in fact gone rogue, abandoning its traditional insurance underwriting guidelines for a risky, bet the company gambit, based on a business operations plan of unstructured mortgage credit extension aimed at immediately inflating results of operations. No regard was given to the consequences of lending money to people with few or no prospects of repayment.

To cite one example, paragraph 35 of the complaint reads: [*12]

"Despite its repeated pronouncements about its sound lending practices, First Franklin was a prolific originator of risky, higher-yielding loans that put volume ahead of all else, including in particular the quality of the loans that were being originated. With the collapse of the residential real-estate market, First Franklin's abysmal lending practices are now coming to light as borrowers who could never afford the loans they received from First Franklin default in droves. Statistics compiled by Standard & Poor's in 2010 place the performance of First Franklin-originated loans at or near the very bottom of the list of major issuers for the 2006 and 2007 loan vintages. Moreover, a recent complaint filed by American International Group, Inc. details the underwriting practices at First Franklin as told by former First Franklin underwriters, one of whom described the lending practices at First Franklin as "basically criminal."

The court holds that this and other allegations clearly implicate a breach of the transaction-level representation and warranty made by First Franklin that neither the Operative Documents nor other material information relating to the operation of First Franklin contained an untrue statement of a material fact. This transaction-level representation and warranty does not relate to the loan pool, but, rather, the business operations plan used by First Franklin in assembling many loan pools in the course of its business, and does not overlap with loan-level representations and warranties.

First Franklin also represented and warranted that it had no knowledge of any circumstance that could reasonably be expected to cause a Material Adverse Change with respect to Ambac.

Material Adverse Change is defined in the I & I as:

"Material Adverse Change means, in respect of any Person, a material adverse change in the ability of such Person to perform its obligations under any of the Operative Documents to which it is a party, including any material adverse change in the business, financial condition, results of operations or properties of such Person on a consolidated basis with its subsidiaries which might have such effect."

First Franklin allegedly having abandoned prudent underwriting and credit extension operations, knew that many of the loans it made would soon default, creating grave financial instability.

Giving Ambac every favorable inference, as the court must, First Franklin's representation as to Material Adverse Change is alleged to be incorrect, also violating a transaction-level representation and warranty that did not relate to the Transaction's loan pool, and did not overlap with the loan-level representations and warranties.

These transaction-level representations and warranties regarding the operations and financial health of First Franklin were in the same category as those related to due incorporation and compliance with government regulations. They had nothing to do with the loan pool that would underlie the certificates. They were meant to ensure Ambac that First Franklin was a reputable business entity Ambac could safely do business with. If one or more of these representations turned out to be false, the architecture of the transaction afforded Ambac recourse to the assets of First Franklin, not just the loan pool. Breaches of these transaction-level [*13]representations and warranties are not limited to the Repurchase Protocol. Plaintiff is entitled to pursue remedies at law or in equity.

Indemnification

Merrill Lynch Contracting Parties argue that Section 3.04 of the I & I applies only to third-party claims, and that Ambac's claim fails because a third-party claim has not been alleged. They argue that because the Trustee under the Trust is a party to the I & I its demand that Ambac make payment under the Policy is not a third-party claim in the context of an "action or proceeding" as required for indemnification under Section 3.04(d). The Merrill Lynch Contracting Parties contend that the terms of Section 3.03 of the I & I demonstrate that the parties did not intend Section 3.04 to cover indemnification for claims arising out of Ambac's liability to the trust. Section 3.03 specifically provides for circumstances under which the Merrill Lynch Contracting Parties must reimburse Ambac for its payments to the Trust.

Section 3.03(a) states, "[a]s and when due . . . the Insurer shall be entitled to reimbursement for any payment made by the Insurer under the Policy." Section 3.04(d) states, "[i]f any action or proceeding . . . shall be brought or asserted against any Person . . . in respect of which the indemnity . . . may be sought from the Sponsor, the Servicer, the Originator or the Depositor . . . each such Indemnified Party shall promptly notify the Indemnifying Party in writing."

To evaluate this claim, the court looks to Hooper Assoc., Ltd. v AGS Computers, Inc. (74 NY2d 487 [1989]). In Hooper the Court of Appeals held that in order for an indemnification claim to overcome the presumption that attorney fees are not recoverable the "obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed." Id. at 491. The Court of Appeals does not require, however, that the language be express, but rather that the intention of the parties is clear when the indemnification clause is read with the contract as a whole. Id. at 492.

As in Hooper, the I & I in this case contains both a broadly written indemnification clause (Section 3.03[a]) and a notice-and-assumption of defense clause (Section 3.04[d]). The I & I's indemnification provision "is typical of those which contemplate reimbursement when the indemnitee is required to pay damages on a third-party claim." Hooper, 74 NY2d at 492. The parties agree that Section 3.04 refers to only third-party claims.

Ambac categorizes its claim as premised on third-party claims asserted by the Trustee on behalf of the certificate holders for payment under the Policy. As the Trustee is an express party to the I & I, this claim is without merit. Ambac is clearly seeking indemnification for claims from a party to the I & I, which is outside the intent of the I & I indemnification clause.

Ambac fails to allege a third-party claim within the scope of Section 3.04, as the Trustee is a party to the I & I and its demand that Ambac make payment under the Policy is not a third-party claim as is required for indemnification under Section 3.04(d). If the indemnification clause applied to parties to the Transaction the requirement of notice would be superfluous, and this interpretation would violate the rule of construction that a contract must be read to "give effect to each and every part." Maxine Co., 94 AD3d at 56.

Reimbursement [*14]

Ambac claims that Section 3.03 of the I & I entitles it to reimbursement for attorneys' fees and payments to the Trust. Defendants allege that Ambac's claim cannot be upheld because the language of Section 3.03 is not unmistakably clear. Section 3.03(c) provides:

The Sponsor, the Originator and the Depositor agrees [sic] to pay to the Insurer any and all charges, fees, costs and expenses that the Insurer may reasonably pay or incur, including reasonable attorneys' and accountants' fees and expenses, in connection with (i) the enforcement, defense or preservation of any rights in respect of [sic] any of the Operative Documents, including defending,monitoring or participating in any litigation or proceeding relating to...any party to any of the Operative Documents or the Transaction(emphasis added).

The Court of Appeals has said, "the court should not infer a party's intention to waive the benefit of the rule [the parties are responsible for their own attorney's fees] unless the intention to do so is unmistakably clear from the language of the promise. Hooper 74 NY2d at 492.

Here, it is the case that the party's intention is unmistakably clear with respect to waiver of the benefit of the rule that the parties are responsible for their own attorney's fees.

The motion to dismiss the claim for attorney's fees is denied.

Duplicate Claims

Defendants argue that the fraud claim plead by plaintiff is duplicative of the contract claims, and the fraud claim must be dismissed. The defendants allege that Ambac's fraud claim rests on breaches of the same representations as its breach of contract claims. The contract, defendants contend, specifically anticipated that these representations might be incorrect and provided an explicit remedy — the Repurchase Protocol. Ambac's claim that the loans did not comply with underwriting guidelines is expressly addressed through a loan-level representation and warranty the Repurchase Protocol, therefore, according to the defendants, the fraud claim must be dismissed.

The court rejected defendant's position in this respect in its holding above relating to breaches of transactional-level representations and warranties.

A duplicative claim is one which "the fraud [was] alleged to have occurred by virtue of the representations made in the [contract]." Varo v Alvis PLC, 261 AD2d 262, 265 (1st Dept 1999). The fraud claim must be dismissed where it alleges "no misrepresentations collateral or extraneous to the agreements." RGH Liquidating Trust v Deloitte & Touche LLP, 47 AD3d 516, 517 (1st Dept 2008). A decision from the Southern District of New York is instructive in the standard applied. In Bank of Tokyo-Mitsubishi Ltd. v Enron Corp., 2005 US Dist LEXIS 2134 (SDNY Feb 14, 2005), the plaintiff sued for breach of contract and fraud. Because the parties' contract included representations that were "the precise misrepresentations on which [plaintiff's] fraudulent inducement claim is based, [and] specifically envisioned the remedies that should be available in the event that those misrepresentations came to light," the court dismissed the fraud claim on the ground that "those misrepresentations cannot also form the basis of a separate fraudulent inducement claim." Id. at *11. However in MBIA Ins. Corp. v Countrywide Home Loans, Inc., the court declined to dismiss a fraud claim on the ground of duplication even though "some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim." 87 AD3d 287, 294 (1st Dept 2011) (emphasis added). [*15]

If Ambac's fraud claim were based entirely on misrepresentations regarding loan-level representations and warranties and if the contract breach claim was also based on breaches of loan-level representations and warranties, the court would follow the reasoning in Enron and hold that the fraud claim was duplicative. The facts here, however, are that Ambac's fraud claim is based on false and misleading pre-contractual information not just relating to matters covered by loan-level representations and warranties. This false and misleading information did have some similarities to the loan-level representations and warranties, but, as discussed, went far beyond in its scope. It involved a breach of transactional-level representations and warranties which permit Ambac to bring claims at law or in equity. The fraud claim, explicitly permitted by the I & I, cannot be duplicative to the contract claim.

It is within the rule in Enron, and the exception in MBIA, to permit Ambac's fraud and contract claims to proceed.

Punitive Damages

Defendants ask the court to dismiss the claim for punitive damages because their alleged fraud was just an ordinary fraud, nothing remarkable. Defendants' alleged systematic fraud and total disregard of the represented underwriting guidelines can not be described as ordinary. It was "aimed at the public generally" and involved "high moral culpability," and is precisely the type of fraud that warrants punitive damages. Walker v Sheldon, 10 NY2d 401, 405 (1961). Punitive damages are merely helpful quinine, useful to counter the malarial sweep of infection loosed by such a viral scheme.

Far from a minor private wrong, First Franklin's lending practices, described as "basically criminal" resulted in thousands of borrowers receiving loans that they could not repay. This conduct by First Franklin, one of the nation's largest mortgage originators involved a high degree of moral culpability, contributed to the collapse of the real estate market, and resulted in hardship for millions of Americans. Motions to strike punitive damage claims in similar cases brought by insurers have often not been successful. MBIA Ins. Co. v Credit Suisse Sec. (USA) LLC, 33 Misc 3d 1208A, 2011 NY Misc LEXIS 4787 (Sup Ct NY Co, Oct 7, 2011); MBIA Ins. Co. v Residential Funding Co., LLC, No 26 Misc 3d 1204(A), 2009 Misc LEXIS 3523 (Sup Ct NY Co, Dec 22 2009).

The court agrees with the statement in Walker v Sheldon that "[t]hose who deliberately and coolly engage in a far-flung fraudulent scheme, systematically conducted for profit, are very much more likely to pause and consider the consequences if they have to pay more than actual loss suffered by an individual plaintiff." Here, the complaint recounts First Franklin's Chief Executive Officer's tall tale to the United States Senate regarding his company's thorough and careful due diligence process in connection with extending mortgage credit. The court can think of no more egregious example of public fraud.