                                                                                                                           Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-10-2009

MBIA Ins Corp v. Royal Indemnity Co
Precedential or Non-Precedential: Non-Precedential

Docket No. 07-4338




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                                                              NOT PRECEDENTIAL


                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT

                                    _____________

                                     No. 07-4338
                                    _____________

                 MBIA INSURANCE CORPORATION; WELLS FARGO
                    BANK, N.A., as TRUSTEE of CERTAIN SFC
                         GRANTOR and OWNER TRUSTS

                                           v.

                          ROYAL INDEMNITY COMPANY,

                                            Appellant


                   On Appeal From the United States District Court
                               for the District of Delaware
                                      (02-cv-01294)
                    District Judge: Honorable Joseph J. Farnan, Jr.

                               Argued March 10, 2009

           Before: FUENTES, CHAGARES, and ALDISERT, Circuit Judges

                                 Filed: April 10, 2009

Michael H. Barr (argued)
Sonnenschein, Nath & Rosenthal
1221 Avenue of the Americas, 24th Fl.
New York, NY 10020

Kenneth J. Pfaehler
Sonnenschein, Nath & Rosenthal
1301 K St., N.W.
Ste. 600, East Tower
Washington, DC 20005
Counsel for Appellant

Andre G. Castaybert
Guzov Ofsink
600 Madison Ave., 14th Fl.
New York, NY 10022

Dawn M. Jones
Melanie K. Sharp
John W. Shaw
Young, Conaway, Stargatt & Taylor
1000 West St., P.O. Box 391
Brandywine Bldg., 17th Fl.
Wilmington, DE 19899

Steven E. Obus (argued)
Ronald S. Rauchberg
Proskauer Rose
1585 Broadway
New York, NY 10036
Counsel for Appellees


                                    _____________

                              OPINION OF THE COURT
                                  _____________

CHAGARES, Circuit Judge.

      Royal Indemnity Company (Royal) appeals from the District Court’s grant of

summary judgment to Wells Fargo Bank, N.A. (Wells Fargo) on Royal’s breach of

contract claim. We will affirm.

                                         I.

      Student Finance Corporation (SFC) borrowed money from banks to make loans to



                                          2
vocational school students. SFC insured those loans through Royal. That is, Royal would

pay the banks if the students defaulted. SFC then “securitized” the loans. It created a

series of trusts, named Wells Fargo trustee, and then conveyed the loans to the trusts. The

trusts sold shares of their loan portfolio via notes called “certificates.” SFC arranged for

Royal to insure the trust corpus, and SFC named Wells Fargo as the beneficiary. If any

students defaulted, Royal would make sure Wells Fargo had enough resources to pay any

certificateholders looking to cash out.

       SFC used Student Loan Servicing (SLS) to service the loans. SLS opened a

lockbox account for the trusts and instructed student debtors to deposit payments into that

account. It collected those payments and transmitted them to Wells Fargo. SLS also

produced four computer files: (1) a monthly spreadsheet, called the “Delinquency Aging

Report,” listing each delinquent loan, the name of the debtor, how much principal is

owed, and the date by which that balance must be paid, see, e.g., Appendix (App.) 2087-

2208; (2) another monthly spreadsheet, called the “Default Schedule,” listing each

defaulted loan, the name of the debtor, how much principal is owed, and how much

interest is owed, see, e.g., App. 2086; (3) a monthly database listing each loan, the

debtor’s contact information, the principal and interest owed, the principal and interest

already paid, and dates and amounts of principal and interest payments made that month,

see, e.g., App. 2217-80; and (4) a weekly database listing similar information, but only as

to loans with activity during that week, see, e.g., App. 1984-2085. SLS sent the first two



                                              3
files to Wells Fargo Corporate Trust, a Wells Fargo affiliate in Minneapolis. It sent the

second two files to back-up servicers – entities that could have taken over SLS’s duties

should Royal have elected to replace SLS at any time during the life of the contract. The

first back-up servicer was FINOVA in Salt Lake City, and the second was Wells Fargo

Financial, a Wells Fargo affiliate in Des Moines. SLS also produced a monthly “Servicer

Report” that contained aggregate balance information for all current, delinquent, and

defaulted loans. See, e.g., App. 3327-29.

       Royal received the Servicer Report but not the computer files, and it was not

content to take that report on faith. It wanted some assurance that the numbers in the

report were not simply plucked from thin air. Wells Fargo agreed to vet the Servicer

Report numbers, but only to a limited extent. Wells Fargo would not look behind the data

provided by SLS. See, e.g., App. 817 (“Trustee may conclusively rely and shall be fully

protected in acting or refraining from acting upon any . . . statement, . . . report, . . . or

other paper or document believed by it to be genuine and to have been signed or

presented by the proper party or parties”) (§ 8.4(a)), (“Trustee shall not be required to

make any . . . examination of any documents or records related to the Student Loans for

the purpose of establishing the presence or absence of defects . . .”) (§ 8.4(g)). It would

instead check portions of the Servicer Report against certain computer files and bring

inconsistencies to Royal’s attention. Specifically, § 8.19 of the securitization contract

obligated Wells Fargo to



                                                4
       (a) in accordance with Section 3.8(b) hereof, not later than 12:00 noon
       Minneapolis time on the second Business Day preceding each Servicer Report
       Date, accept delivery of the Tape 1 used to calculate the information contained in
       the Servicer Report and shall accept delivery from the Servicer of a hard copy of
       the Servicer Report;

       (b) compare the information received on Tape from the Servicer to the same
       received on the Servicer Report with respect to delinquencies, ratios and the
       aggregate principal balance of the Student Loans; [and]

       ....

       (d) inform the Insurer [Royal], MBIA, the Servicer, and the Certificateholders as
       to any discrepancy on such Servicer Report . . . .

App. 826 (footnote added).

       And § 8.21(d) provided that Wells Fargo

       . . . shall receive an electronic transmission of all servicing and/or Student Loan
       File information (including all relevant Obligor contact information, such as
       address and telephone numbers, as well as Student Loan principal balance and
       payment information, including any comment histories and collection notes) and
       shall review such Student Loan File information to ensure that it is in readable
       form and verify that the data balances conform to the trial balance reports received
       from the Servicer. In addition, the Trustee shall store such Student Loan File
       information and verify certain information contained in each Servicer Report.



       1
       Section 1.1 explains that “unless the context otherwise requires . . . ‘Tape’ has the
meaning set forth in section 3.8(b) . . . .” App. 757, 772. Section 3.8(b) in turn provides

              The Servicer shall deliver to the Trustee on or prior to 12:00 noon Salt Lake
       City time on each Weekly Report Date and on each Servicer Report Date an
       updated of the computer tape, diskette or other computer readable medium, in a
       format acceptable to the Trustee which provides information as to the Student
       Loans reflecting the information set forth thereon as of the preceding Servicer
       Report Date (the “tape”) . . . .

App. 787.

                                             5
       The Trustee shall receive the data referenced in this paragraph on a weekly basis . .
       . .2

App. 828 (footnote added). Section 8.20, however, expressly disclaimed trustee liability

in connection with review conducted pursuant to § 8.21:

              The Trustee . . . shall monitor the performance of the Servicer on behalf of
       the Certificateholders as set forth in Section 8.21 hereof; provided, however, that
       the Trustee shall not have any liability in connection with the malfeasance or
       nonfeasance by the Servicer or for monitoring the Servicer . . . .

App. 827.

       As it turned out, the loans were not performing as well as SFC had hoped.

Students were missing payments in large numbers, making insuring the loans an

increasingly risky proposition for Royal. So, SFC used its own funds to make up the

shortfalls. These “forbearance payments,” as SFC internally called them, gave the

impression that the loans were performing up to par and therefore that insuring them was

a reasonable risk. SFC executed seven more securitizations, creating a total of eight

trusts. SFC continued to make payments, and Royal continued to insure new trusts.




       2
        Royal was not a party to the securitization contract and was not mentioned in §
8.21. Section 11.9 of the contract expressly addressed who may and may not be a third-
party beneficiary:

              Except as otherwise specifically provided herein with respect to the
       Certificateholders, the parties to this Agreement hereby manifest their intent that
       no third party other than each Certificateholder, the Insurer [Royal] and MBIA
       shall be deemed a third party beneficiary of this Agreement . . . .

App. 835.

                                             6
       Wells Fargo never discovered this problem during the course of its data reviews.

It compared loan-specific data given in the Delinquency Aging Report with the aggregate

data given in the Servicer Report and found no discrepancies. See App. 2727-38, 5832-

35. It also examined the monthly and weekly databases to make sure they were computer-

readable and contained the right categories of information in the event Wells Fargo had to

step in for SLS and contact student debtors, and found no problems.

       Eventually, SFC’s forbearance payment procedure crumbled, exposing Royal to

hundreds of millions of dollars worth of liability on certificates that SFC no longer had

the resources to cover. Royal sued Wells Fargo, arguing that Wells Fargo breached the

securitization contract3 when it failed to detect the forbearance payments and bring them

to Royal’s attention. Royal did not identify any numerical inconsistencies among the

various files and documents. Nevertheless, it contended that the data comparison called

by §§ 8.19 and 8.21, if properly performed, would have revealed SFC’s plot — and

therefore would have caused Royal to stop insuring new trusts — because the forbearance

payments stood out very clearly on the computer files Wells Fargo received, namely: (1)

the last week of each month saw a huge increase in total interest paid compared to earlier

weeks, but total principal paid remained relatively steady; (2) more than half of the

payments made during the entire month were made on a single day of that week; (3)

nearly all of those payments were interest-only, whereas regular payments contained a



       3
           Each securitization contract was materially identical.

                                                7
principal component as well; and (4) nearly all of those payments were coded as type

“12,” whereas regular payments were coded as type “10.”

       Wells Fargo moved for summary judgment, and the District Court granted the

motion. Royal then filed this appeal.

                                              II.

       The District Court had jurisdiction pursuant to 28 U.S.C. § 1332(a), and this Court

has jurisdiction pursuant to 28 U.S.C. § 1291.

       This Court reviews the District Court’s grant of summary judgment de novo, using

the same test that the District Court was obligated to apply. In re Ikon Office Solutions,

Inc., 277 F.3d 658, 665 (3d Cir. 2002). Summary judgment should be awarded when “the

pleadings, depositions, answers to interrogatories, and admissions on file, together with

the affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party [here, Wells Fargo] is entitled to a judgment as a matter of law.” Fed.

R. Civ. P. 56(c). All reasonable inferences from the record must be drawn in favor of the

nonmoving party, here Royal. Brewer v. Quaker State Oil Refining Corp., 72 F.3d 326,

666 (3d Cir. 1995). This Court may not weigh the evidence or assess credibility. Boyle

v. County of Allegheny, 139 F.3d 386, 393 (3d Cir. 1998).

                                             III.

       We have reviewed the parties’ briefs and heard oral argument on the issues

presented. We believe that the District Court’s analysis very ably identified the nub of the



                                              8
controversy. Royal argues that Wells Fargo had the contractual obligation to analyze data

using certain financial accounting principles and to detect any anomalies that analysis

might have uncovered. As Royal suggests, this analysis may not have been very labor-

intensive. Yet, the contract did not call for any analysis at all. It simply required Wells

Fargo to perform rote comparisons between that data and data contained in various other

sources, and to report any numerical inconsistencies. Wells Fargo did just that.

       Therefore, applying the above standard of review, we will affirm the District

Court’s judgment in all respects, essentially for the reasons set forth in its well-reasoned,

comprehensive opinion.




                                              9
