Defendants Bank of America, N.A. (BOA), Banc of America Funding Corporation (BAFC), and Merrill Lynch, Pierce, Fenner & Smith, Inc., formerly known as Banc of America Securities, LLC (BAS) move to dismiss the complaint pursuant to CPLR §§ 3211 (a) (1), and (7), 3016, and 214 (2).

This action concerns two financial guaranty policies CIFG issued in 2006 in which CIFG guaranteed payments to investors on certain tranches of securities issued in two re-resecuritization transactions (re-REMICS). Re-REMICs are previously securitized residential mortgage backed securities transactions (RMBS) that are re-packaged and re-sold, and are typically comprised of unsold RMBS being held in defendants' inventory of RMBS.

The re-REMICs at issue are Banc of America Funding 2006-R1 (BAFC 2006-R1) and Banc of America Funding 2006-R2 (BAFC 2006-R2).

In each re-REMIC, the original RMBS are deposited into a trust, and certificates (the Certificates) representing rights to the cash flows are sold to investors in private placement transactions. In order to obtain higher credit ratings for the Certificates, a depositor typically secures financial guaranty insurance, which guarantees the repayment of principal and interest on certain tranches of the Certificates. The depositor then sells the securities to one or more underwriters, who market and sell the securities to investors.

With respect to BAFC 2006-R1, BOA and non-parties served as originator, BOA served as the seller/sponsor, BAFC and BAMSI served as depositor, BAS served as underwriter, and BOA and other non-parties served as servicer of the original RMBS.

With respect to BAFC 2006-R2, BOA and other non-parties served as the originator, BOA and other non-parties served as sponsor/seller, BAFC, BAMSI and other non-parties serves [*2]as depositor, BAS served as underwriter, and BOA and other non-parties served as servicer of the original RMBS.

Defendants provided written offering materials which contained descriptions of the original RMBS, including the types of loans, underwriting guidelines used to underwrite the loans, LTV ratios, borrowers' debt-to-income ratios, property type, and owner occupancy, amongst other information. Defendants also gave CIFG term sheets, loan tapes and other tables containing detailed information about the loans, and credit ratings of the original RMBS and the proposed Certificates.

Defendants also provided Pooling and Servicing Agreements applicable to the original RMBS, which contained representations and warranties as to the servicing practices employed with respect to the mortgage loans.

CIFG alleges that it conducted initial due diligence including the use of stress tests and other modeling techniques to assess the risk profile and credit-worthiness of the Certificates. CIFG did not have access to the underlying loan files, and was reliant on defendants to provide the information required to conduct CIFG's initial due diligence.

CIFG agreed to provide financial guaranty insurance to the Class A-1, A-2 and A-3 Certificates of the BAFC 2006-R1 and the Class A-1 and A-2 Certificates of the BAFC 2006-R2. For each transaction, CIFG's agreement to issue the policy was evidenced by an Insurance and Indemnification Agreement (I & I Agreement).

Defendants' Misrepresentations

CIFG alleges that defendants made material misrepresentations and omissions in the offering materials regarding compliance with underwriting standards and practices, due diligence results, owner-occupancy statistics, appraisal procedures, LTV ratios, loan servicing, transfers of title, and credit ratings. Further, defendants did not disclose that they learned through their quality review process that a substantial percentage of loans in the collateral pools did not meet the stated guidelines, and that a significant percentage of these defective loans were "waived" back in. CIFG alleges that defendants also provided false data that underestimate the true level of risk embedded in the Certificates.

CIFG alleges that the extremely high default rates of the mortgage loans and the decline in the credit ratings of the original RMBS to below investment grate are evidence of defendants' misrepresentations concerning the quality of the mortgage loans underlying the Certificates. CIFG's allegations are also purportedly supported by a forensic analysis of over 800 loans at issue, 20 confidential witnesses, government investigations, and media reports which describe systematic, fraudulent underwriting practices. CIFG alleges that default rates among the original RMBS range from 5.59% to 40%.

CIFG maintains that had it known the truth about defendants' due diligence processes, and that the Certificates had a significantly higher risk profile because of such diligence failures, it would never have issued the policies.

CIFG asserts causes of action for fraudulent inducement against all defendants; misrepresentation under Insurance Law § 3105; negligent misrepresentation against all defendants; breach of contract against BAS and BAFC; breach of implied duty of good faith and fair dealing against BAS and BAFC; and indemnification against BAS and BAFC. CIFG seeks payment on past, current and future claims under the policies, or in the alternative, rescissory damages under Insurance Law § 3105.

Defendants move to dismiss the complaint in its entirety. On a motion to dismiss under CPLR 3211 (a) (7), the court accepts facts as alleged in the complaint as true, accords the plaintiff the benefit of every possible favorable inference, and determines only whether facts as alleged fit within any cognizable legal theory (Leon v Martinez, 84 NY2d 83 [1994]).

I. Fraudulent Inducement

Defendants move to dismiss the cause of action for fraudulent Inducement for several reasons. Defendants assert that CIFG does not allege any false or misleading statements with the requisite particularity required by CPLR 3016 (b), and fails to plead that defendants acted with the requisite scienter. Further, defendants maintain that, as a sophisticated market participant, CIFG cannot allege that it justifiably relied on any alleged representations where it failed to fulfill its duty to investigate the accuracy of the information received.

To plead a cause of action for fraudulent inducement, a plaintiff must assert the misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury (Braddock v Braddock, 60 AD3d 84 [1st Dept 2009], appeal withdrawn 12 NY3d 780 [2009]). The issue of justifiable reliance is fact-intensive and often, though not always, one of fact (compare DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 154-55 [2010]; with HSH Nordbank AG v UBS AG, 95 AD3d 185, 191-94 [1st Dept 2012]). Fraudulent inducement claims, like any fraud cause of action, must set forth the circumstances surrounding the wrong in details (CPLR 3016 [b]; Shea v Hambros PLC, 244 AD2d 39 [1st Dept 1998]).

CIFG's generalized allegations of fraud do not satisfy the particularity requirement of CPLR 3016 (b). CIFG alleges that, with respect to the original RMBS, defendants completely abandoned underwriting guidelines and originators issued loans based upon falsified information, which are contained in the offering materials and prospectus for each transaction, upon which CIFG relied. CIFG alleges that the high default rates of the original RMBS, the plummeting credit ratings of the Certificates, and the results of its 2012 forensic review evidence defendants' abandonment of underwriting standards. It should be noted that unlike other monoline insurance cases alleging fraud, these defendants did not have access to the underlying loan files (compare MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 295 [1st Dept 2011]).

The complaint paints a general picture of the lending environment that encouraged banks and originators to offer unqualified borrowers non-traditional loans, the abandonment of sound underwriting practices, and the securitization of these faulty loans, which led to disastrous results. However, CIFG fails to attribute specific statements or conduct on the part of defendants with any of the alleged misrepresentations.

CIFG does not distinguish between the three sets of corporate defendants and the distinct roles they each played as originators, sponsors, depositors, underwriters, and servicers, and does not identify what roles they played in the alleged fraud. A claim involving multiple defendants must make specific and separate allegations for each defendant (see MBIA Ins. Corp., 87 AD3d at 234; Aetna Casualty & Surety Co. v Merchants Mutual Insurance Co., 84 AD2d 736 [1st Dept 1981]). Nor does CIFG connect any of the alleged fraud relating to faulty underwriting and falsified loan information to any specific loans in the Transactions.

Instead, CIFG relies upon allegations taken from another complaint filed in the Southern District of New York, confidential witness statements, reports of government investigations and media reports in an effort to demonstrate defendants' knowledge of the misrepresentations (4/25/13 Tr 25:5-21, 24-26). However, CIFG does not allege that any of the loans at issue in [*4]these statements, reports and articles are related to the RMBS at issue in this action, nor is there any suggestion that counsel in this action spoke with the confidential witnesses (compare Jew Jersey Carpenters Health Fund v Royal Bank of Scotland Group, PLC, 709 F 3d 109, 117 [2d Cir 2013 [plaintiff interviewed seven of eight employees that had worked at the underwriting firm during the six months prior to the time period when 90% of the mortgages in the trust at issue had been originated, and who all testified as to the systematic loosening of underwriting guidelines]).

Broad allegations regarding defendants' knowledge of deteriorating underwriting standards and loan quality, which fail to identify specific statements or to provide information linking defendants' practices to actual loans backing the Transaction at issue in this action, are insufficient to plead fraud with the requisite particularity (see Union Cent. Life Ins. Co. v Credit Suisse Securities [USA], LLC, 2013 WL 1342529 [SD NY 2013]; Woori Bank v Citigroup Inc., 2013 WL 1235648 [SD NY 2013]; In re Lehman Brothers Securities & ERISA Litigation, 10 Civ 6637 [SD NY 2013] [fraud claim asserted by an RMBS investor was dismissed as insufficiently pled where the complaint relied on allegations unrelated to loans underlying the RMBS at issue, including confidential witness allegations copied from other complaints, loan-level investigation conducted by the Federal Housing Finance Agency for a separate action, and Clayton due diligence reports]; compare MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 295 [1st Dept 2011]).

The cases upon which CIFG rely in support, where such claims were upheld premised upon similar allegations, are distinguishable. For instance, CIFG cites to numerous cases which upheld the viability of claims asserted under sections 11 and 12 (a) (2) of the Securities Act, under which a plaintiff need not include allegations of fraud, and are only subject to the "short and plain statement" requirement of the Federal Rules of Civil Procedure (see Capital Ventures Intl. v J.P. Mortg. Acquisition Corp., 2013 WL 535320 [SD Mass 2013]; Federal Housing Finance Agency v UBS Americas, Inc., 858 F Supp 2d 306, 322-324 [SD NY 2012]; New Jersey Carpenters Health Fund, 709 F 3d 109; Plumbers' Union Local No. 12 v Nomura Asset Acceptance Corp., 632 F 3d 762 [1st Cir 2011]; Employees Ret. Sys. Of the Govt. Of the V.I. v J.P. Morgan Chase & Co., 804 F Supp 2d 141, 152-53 [SD NY 2011]; N.J. Carpenters Health Fund v Residential Capital, LLC, 2010 WL 1257528 [SD NY 2010]; In re IndyMac Mortg.-Backed Sec. Litig., 718 F Supp 2d 495, 509-510 [SD NY 2010]).

In contrast to claims under sections 11 and 12 (a) (2) of the Securities Act, fraudulent inducement claims must set forth the circumstances surrounding the wrong in detail (Shea, 244 AD2d 39; see also Union Cent. Life Ins. Co., 2013 WL 1342529 [conclusory allegations pertaining to defendants' misrepresentation about loan originators' abandonment of underwriting guidelines and knowledge of the falsity of statements contained in offering materials did not compel an inference of scienter, necessary to support claims for common law fraud and violation of section 10 (b) and 10 (b) (5) of the Securities Act]; accord Woori Bank, 2013 WL 1235648 [plaintiffs fail to specify allegedly fraudulent statements and do not proffer factual allegations demonstrating their falsity, and instead "paints a general picture of a business group allegedly engaging in various forms of serious misconduct that would call into question the integrity of its business operations and the reliability of RMBS-related financial products" but is not sufficient to state a claim for common law fraud]; In re Lehman Brothers Securities & ERISA Litigation, 10 Civ 6637).

Moreover, CIFG alleges that using "forensic tools" that have only recently become [*5]available, it has conducted an analysis of 800 loans, to review the metrics contained within the offering materials in order to conduct a risk assessment of the Certificates. This forensic analysis has purportedly demonstrated that defendants materially misrepresented the risk of the loans.

CIFG cites to case law where the plaintiff-financial guaranty insurers conducted similar analysis and the courts upheld the fraudulent inducement claim. However, in each of these cited cases, the plaintiffs reviewed actual loan files to demonstrate abandonment of underwriting guidelines (e.g. Capital Ventures Intl., 2013 WL 535320 [forensic analysis of 3,500 of the specific loans underlying the certificates supports allegations of misstatements]; Federal Housing Finance Agency v JP Morgan Chase & Co., 902 F Supp 2d 476, 486-87 [SD NY 2012]). It is unclear what forensic analysis CIFG has conducted post facto that it was unable to conduct ex-ante that would have alerted it to defendants' alleged misrepresentations.

In any event, the Court concludes that the broad, conclusory allegations, while painting a general picture of abysmal regulatory and business practices, and even misconduct, do not raise an inference that defendants acted with scienter.

The complaint fails to sufficiently allege that defendants made false statements with the requisite particularity required by CPLR 3016 (b), and fails to plead that defendants acted with scienter. The Court need not address the element of justifiable reliance.

II. Negligent Misrepresentation

CIFG's cause of action for negligent misrepresentation is premised upon allegations that a special relationship arose between the parties in light of defendants' exclusive control of relevant information, including loan files, servicing practices, and how credit ratings were obtained.

Defendants move to dismiss the cause of action for negligent misrepresentation on the ground that the parties' arms-length transaction cannot give rise to a special relationship to support such a claim. The Court agrees.

A cause of action for negligent misrepresentation can only stand in the presence of a special relationship of trust or confidence, which creates a duty for one party to impart correct information to another (United Safety of America, Inc. v Consolidated Edison Co. of New York, Inc., 213 AD2d 283, 285-86 [1st Dept 1995]). An arms length relationship is not of a confidential or fiduciary nature and thus does not support a cause of action for negligent misrepresentation (MBIA Ins. Corp. v Countrywide Home Loans, 87 AD3d 287, 296-97 [1st Dept 2011]; River Glen Assocs, Ltd. v Merrill Lynch Credit Corp., 295 AD2d 274 [1st Dept 2002]).

CIFG has failed to allege facts demonstrating that these sophisticated commercial entities engaged in anything more than an arm's length business transaction. Defendants alleged superior knowledge of their own misrepresentations is not the type of unique or specialized expertise that would support a cause of action for negligent misrepresentation (see generally Dobroshi v Bank of America, N.A., 65 AD3d 882, 884 [1st Dept 2009], lv to appeal dismissed 14 NY3d 785 [2010]).

III. Rescission or Rescissory Damages

Defendants move to dismiss the cause of action for misrepresentation under Insurance Law § 3105 and to strike the prayer for rescissorry damages on the ground that such damages are unavailable, and to the extent that such a claim exists, is barred by the three-year statute of limitations governing such claims.

CIFG has waived the right to rescind the policies or recover rescissory damages because it has continued to accept premiums after learning of an event allowing for termination of the policy (see MBIA Ins. Corp. v Countrywide Loans, Inc., 105 AD3d 412, 412 [1st Dept 2013]; [*6]Security Mut. Life Ins. Co. of New York v Rodriguez, 65 AD3d 1, 9-10 [1st Dept 2009]). Accordingly, the request for rescission and rescissory damages under the Insurance Law for CIFG's breach of contract and Insurance Law causes of action must be struck.

IV. Contractual Indemnification

Defendants move to dismiss the cause of action for contractual indemnification, which CIFG seeks for its payments to the trustees of the re-REMIC trusts.

Section 3.04(a) of the I & I Agreement states:

[T]he Seller agrees to pay, and to protect, indemnify and save harmless, the Insurer ... from and against, any and all claims, losses, liabilities (...), actions, suits, judgements ... (I & I Agreement, § 3.04 [a]).

"When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed. The promise should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances" (Great Northern Ins. Co. v Interior Const. Corp., 7 NY3d 412 [2006]).

Section 3.04 (c) of the I & I Agreement states:

If any action or proceeding... shall be brought or asserted against any Person (individually, an "Indemnified Party" and, collectively, the "Indemnified Parties") in respect of which the indemnity provided in Section 3.04(a) or (b) may be sought from the Seller or the Depositor ... each such Indemnified Party shall promptly notify the Indemnifying Party... (I & I Agreement § 3.04[c]).

The claim for contractual Indemnification against defendants is dismissed. Section 3.04 of the I & I Agreement plainly limits CIFG's indemnity rights to losses that relate to third party claims only, insofar as the provisions refer to actions or proceedings which shall be "brought or asserted against" CIFG, and CIFG shall be indemnified "from and against" any applicable claims.

Although CIFG attempts to characterize its claim as arising out of third party claims, it is plainly seeking coverage for its own losses that it is pursing on its own behalf, i.e. repayment of insurance claims payments made to the trustee. Such claims are classic first party claims and beyond the contemplation of the indemnification provision, which is subject to a strict interpretation (Hooper Assocs., Ltd. v AGS Computers, Inc., 74 NY2d 487, 491 [1989]; Cahn v Ward Trucking, Inc., 101 AD3d 458, 458 [1st Dept 2012]).

V. Breach of Contract

CIFG asserts a cause of action for breach of contract arising out of section 2.01 (I) of the I & I Agreements which states that the operating documents and other material written information relating to the Certificates do not contain any untrue or misleading statements. Section 2.01 (j) of both agreements provides that the offering documents do not contain any untrue statement of material fact. CIFG alleges that BAS and BAFC breached the terms of the I & I Agreements because the offering materials contained untrue and misleading representations and omissions.

Defendants move to dismiss the claim on the ground that CIFG fails to allege a breach of a representation. Defendants seek to graft a particularity requirement onto the claim, arguing that because CIFG has alleged breach of contract by misstatement, the circumstances surrounding the wrong must be set forth in detail, under CPLR 3106 (b). [*7]

Under CPLR 3013, a party asserting a claim for breach of contract need only provide notice of the transactions or occurrences underlying the claim. Particularly in a contract action is not required (Shilkoff, Inc. v 885 Third Ave., Corp., 299 AD2d 253, 254 [1st Dept 2002]).

CIFG has alleged the existence of a valid contract, the I & I Agreement, that defendants breached particular representation and warranties provisions of that agreement, and that CIFG has been harmed by having to pay claims payments. The pleadings give sufficient notice of the claim, and is sustained.

CIFG also attempts to state a claim for breach of the covenant of good faith and fair dealing, premised upon allegations that defendants acted in bad faith by encouraging reliance on their representations while failing to disclose facts that rendered those representations misleading.

Causes of action for breach of contract and breach of the covenant of good faith and fair dealing may stand together where the defendants engage in conduct that injures or frustrates the other party's right to receive the fruits of the contractual bargain (Frydman v Credit Suisse First Boston Corp., 272 AD2d 236 [1st Dept 2000]).

Here, CIFG does not allege that defendants have frustrated its right to the fruits of the bargain, and both claims arise from same set of facts, namely, breach of obligations imposed by contract (Amcan Holdings, Inc. v Canadian Imperial Bank of Commerce, 70 AD3d 423, 426 [1st Dept], lv to appeal denied 15 NY3d 704 [2010]). The claim for breach of the covenant of good faith and fair dealing is thus dismissed as duplicative.

Accordingly, it is hereby

ORDERED that defendants' motion to dismiss is granted, in part, and the first, second, third, fifth and sixth causes of action are severed and dismissed, and the prayer for rescissory damages is struck, and the motion is otherwise denied as to the fourth cause of action for breach of contract; and it is further

ORDERED that defendants are directed to serve an answer within 20 days after service of a copy of this order with notice of entry; and it is further

ORDERED that plaintiff is granted leave to replead the first cause of action for fraudulent inducement, if so advised.

Dated: September 23, 2013

ENTER:

_______________________

J.S.C.