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MBIA Insurance Corp. v. Royal Indemnity Co.

October 3, 2005

MBIA INSURANCE CORPORATION; WELLS FARGO BANK MINNESOTA, N.A., AS TRUSTEE OF SFC GRANTOR TRUST, SERIES 2000-1, SFC GRANTOR TRUST, SERIES 2000-2, SFC GRANTOR TRUST, SERIES 2000-3, SFC GRANTOR TRUST, SERIES 2000-4, SFC GRANTOR TRUST, SERIES 2001-1, SFC GRANTOR TRUST 2001-2, SFC OWNER TRUST 2001-I AND SFC GRANTOR TRUST, SERIES 2001-3
v.
ROYAL INDEMNITY COMPANY, APPELLANT, NO. 03-4382
v.
ROYAL INDEMNITY COMPANY, THIRD-PARTY PLAINTIFF
v.
PNC BANK, N.A.; STUDENT LOAN SERVICING LLC; ANDREW N. YAO; SFC ACCEPTANCE II LLC; SFC ACCEPTANCE III LLC; SFC ACCEPTANCE IV LLC; SFC ACCEPTANCE V LLC; SFC ACCEPTANCE VIII LLC; SFC ACCEPTANCE IX LLC; SFC FINANCIAL I LLC; SFC FINANCIAL II LLC; SFC ACCEPTANCE VI LLC; SFC ACCEPTANCE VII LLC, THIRD-PARTY DEFENDANTS
WILMINGTON TRUST OF PENNSYLVANIA
v.
ROYAL INDEMNITY COMPANY, APPELLANT, NO. 04-2207 AND 04-3487
v.
ROYAL INDEMNITY COMPANY, THIRD-PARTY PLAINTIFF
v.
SFC FINANCIAL I, LLC, THIRD-PARTY DEFENDANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE. District Court Nos. 02-cv-01294 and 02-cv-01361 District Court Judge: The Honorable Joseph J. Farnan, Jr.

The opinion of the court was delivered by: Alito, Circuit Judge

PRECEDENTIAL

Argued January 19, 2005

Before: ALITO, McKEE, and SMITH, Circuit Judges

OPINION

In these consolidated appeals, we are called upon to construe a series of contracts. Appellant Royal Indemnity Company ("Royal") agreed in these contracts to insure the repayment of principal and interest on several hundred million dollars of student loans. The named beneficiaries of the policies, Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") and Wilmington Trust of Pennsylvania ("Wilmington Trust"),*fn1 sued after the loans went into default and Royal failed to pay the claims they submitted. Royal defended on the ground that the lender on the underlying obligations fraudulently induced it to issue the policies and that this fraud entitled it to rescission.

The District Court entered summary judgment for the beneficiaries, and this appeal followed. We agree with the District Court that Royal's policies unambiguously and effectively waive defenses to its obligations based on fraud, but we conclude that Royal has raised a triable issue as to whether all of the losses claimed by the beneficiaries were covered under its policies. We thus affirm in part and reverse in part.

I.

Student Finance Corporation ("SFC") was founded in 1992 to cater to the vocational segment of the student loan market. Some of the loans it originated itself; others it acquired from the original lenders. Many of the loans were apparently made to students at truck-driving schools. At all relevant times, SFC was owned and controlled by its founder and chief executive officer, Andrew N. Yao.

The capital for SFC's business came from financial institutions like Wilmington Trust and Wells Fargo. In 1999, Wilmington Trust issued SFC a $75 million loan, taking a pool of student loans as security. Wells Fargo, by contrast, helped finance SFC by securitizing the older loans in its portfolio. In each securitization, student loans were packaged and sold to a trust settled for the specific purpose of holding title to the loans. Wells Fargo, as trustee, funded the purchase by selling certificated shares in the trust to institutional investors. The record reflects that Wells Fargo raised approximately $450 million for SFC in eight securitizations from 1999 to 2002.

To encourage Wilmington Trust and the investors in Wells Fargo's trusts to part with their capital, SFC contracted with Royal to insure the repayment of interest and principal on the student loans. At issue in this case are ten "Credit Risk Insurance Policies" issued by Royal. Eight of them insured the loans held by the Wells Fargo trusts (one per trust), and two of them insured the loans pledged as collateral to Wilmington Trust. Each policy named either Wells Fargo or Wilmington Trust as beneficiary. The following table summarizes their terms:

Table 1. Summary of Policy Terms

Policy NumberBeneficiaryInceptionLiability Limit RST 293334Wells Fargo1/22/99$50,000,000.00 RST 293309Wells Fargo12/3/99$53,053,642.08 RST 147522Wells Fargo4/30/00$48,459,255.76 RST 147524Wells Fargo8/30/00$29,999,999.94 RST 147525Wells Fargo11/27/00$55,616,550.00 RST 147526Wells Fargo1/31/01$48,286,713.44 RST 147538Wells Fargo10/19/01$120,000,000.0 RST 147536Wells Fargo11/15/01$80,000,000.00 RST 321276Wilmington Trust1/22/99$75,000,000.00 RST 147533Wilmington Trust8/17/01$5,518,459.00

Royal alleges, and the beneficiaries do not dispute, that SFC procured this insurance through a spectacular fraud. According to Royal, SFC misrepresented the creditworthiness and employment history of its student borrowers and conspired with schools to generate as many loans as possible by altering or forging loan documents. As loans went into default, SFC allegedly paid some of them down by surreptitiously diverting the proceeds of later loans. By thus masking the default rates of the older loans, SFC allegedly induced Royal to insure still more loans, whose proceeds then had to be applied in Ponziesque fashion to pay down the earlier ones. According to Royal, some of the proceeds were also diverted to Yao's personal accounts.

SFC's business proved unsustainable. In a March 2002 telephone call to Royal, Yao allegedly confessed that SFC had been paying down defaulted loans and explained that this practice could no longer be continued. An investigation launched by Royal revealed that SFC's loans had been defaulting at rates -- over 80% in the case of one pool -- well in excess of reported figures. Within three months of Yao's call, SFC was in Chapter 7 bankruptcy, where it apparently remains to this day. With SFC no longer paying down student loans, the defaults fell on the shoulders of Wilmington Trust and Wells Fargo, who turned to Royal to make good on its policies. Claims on those policies, which totaled only $38.6 million between 1999 and the spring of 2002, had piled up to $380 million by the end of 2002.

A flurry of lawsuits followed. Royal filed suit in Texas state court to rescind the policies, but this case was dismissed after limited discovery for lack of personal jurisdiction. In July 2002, Wells Fargo and MBIA Insurance Corporation ("MBIA")*fn2 sued Royal in the US District Court for the District of Delaware. Their complaint, which invoked the Court's diversity jurisdiction, alleged that Royal had wrongfully repudiated the trusts' eight policies by filing the Texas action and sought relief in the form of specific performance, a declaratory judgment that the policies were in effect, and damages. Wilmington Trust filed its own suit in Delaware federal court, alleging essentially the same claims.

Royal defended on the ground that SFC's fraudulent inducement entitled it to rescission. The beneficiaries countered that the policies unambiguously waived this defense. In separate opinions, the District Court entered summary judgment for the beneficiaries. See MBIA Ins. Corp. v. Royal Indem. Co., 312 F. Supp. 2d 583 (D. Del. 2004); MBIA Ins. Corp. v. Royal Indem. Co., 286 F. Supp. 2d 347 (D. Del. 2003). It found that the ten policies unambiguously waived fraud in the inducement as a defense to payment, and it predicted that Delaware's highest court would enforce them. The Court acknowledged that Delaware law was reluctant to enforce boilerplate waivers against unsophisticated parties, but it believed a clear waiver negotiated by sophisticated parties could be enforced. See 312 F. Supp. 2d at 586; 286 F. Supp. 2d at 355.

Since the Court concluded that Royal's waivers were enforceable, and that they clearly covered the defense Royal sought to present, it found further discovery on that defense unnecessary. It awarded summary judgment to the beneficiaries, ordering Royal to pay $269,851,527 plus interest to Wells Fargo and $12,908,966.43 plus interest to Wilmington Trust, and it further ordered Royal to pay subsequent claims as they came due. Royal timely appealed to this Court.

II.

We review an award of summary judgment de novo, applying the same test on review that the District Court should have applied. 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 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. Brewer v. Quaker State Oil Refining Corp., 72 F.3d 326, 333 (3d Cir. 1995). The Court may not weigh the evidence or assess credibility. Boyle v. County of Allegheny Pa., 139 F.3d 386, 393 (3d Cir. 1998).

Royal attacks the District Court's award of summary judgment on several grounds. It first argues that the Court erred in finding that the text of its policies unambiguously waived its defense to payment based on SFC's fraud. It further argues that waivers of the breadth and generality found in its policies are unenforceable under Delaware law. Finally, it argues that triable issues remain as to whether the policies covered all of the losses claimed by the beneficiaries. Since it is undisputed that Delaware provides the substantive law for this dispute, we turn to that state's law of contract to determine whether summary judgment was properly awarded.

III.

A.

Delaware follows the objective theory of contract. See Haft v. Haft, 671 A.2d 413, 417 (Del. Ch. 1995); Progressive Int'l Corp. v. E.I. Du Pont de Nemours & Co., No. C.A. 19209, 2002 WL 1558382, at *7 (Del. Ch. 2002) (unpublished opinion). Although the law of contract generally strives to enforce agreements in accord with their makers' intent, the objective theory considers "objective acts (words, acts and context)" the best evidence of that intent. Haft, 671 A.2d at 417. Unambiguous written agreements should be enforced according to their terms, without using extrinsic evidence "to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity." Eagle ...


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