2009 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 4-10-2009 

# MBIA Ins C orp v

. Royal Inde mnity C o P r e c e de nt i al or N on-P r e c e de nt i al : N on-P r e c e de nt i al D ocke t N o . 07-4338

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w . vi l l a nova . e du . Re c omme nde d C it at ion " MBIA In s C orp v

. Ro yal Inde mnity C o " (2009). 2009 D e cisio n s . P ape r 1555. http://d i git alc ommon s .l a

w . vi l l a nova . e du/thir dc ir c uit_2009/1555NOT P RE CE DE NT I AL UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT

_____________ No. 07-4338

_____________ MBIA I NSURANCE CORP ORATI ON; WELL S FARGO BANK, N.A ., as T RU S TEE of C ER TAI N S FC GRANTOR and O WNER TRUS TS

v. ROYAL I NDEMNITY COMPANY, Appellant O n A p p e a l F ro m th e U n ited S tate s D istric t C o u rt

fo r th e D istri ct of

D elaw are ( 02- cv- 01294) D istri ct Ju d g e: H o n o rab le Jo sep h J. F arn an , Jr.

A r gued M ar ch 10, 2009 B efor e: FU E N T E S, C H A G A R E S, and A L D I SE R T , C i r cui tJ udges

Fi l ed: A pr i l 10, 2009 M i chae l H . B arr( ar gued) Sonnens chei n, N ath & R os enthal 1 2 2 1 A v e n u e o f

th e A m e ric a s, 2 4 th F l. N ew Y or k, N Y 10020 K enneth J . Pfaehl er Sonnens chei n, N ath & R os enthal 1 3 0 1 K S t . , N . W. St e. 600, E as tT ow er W as hi ngt on, D C 200052

C ouns el forA ppel l ant A n d re G . C astayb ert G uzov O fs i nk 6 0 0 M a d iso n A v e ., 1 4 th F l. N ew Y or k, N Y 10022 D aw n M . J ones M elan ie K . S h arp J ohn W . Shaw Y oung, C onaw ay , St ar gat t& T ay l or 1000 W es tSt . , P. O . B ox 391 B ra n d yw in e B ld g ., 1 7 th F l. W i l m i ngt on, D E 19899 St even E. O bus ( ar gued) R o n ald S . R au ch b erg P roskauer R ose 1585 B r oadw ay N ew Y or k, N Y 10036 C ouns el forA ppel l ees

_____________ OPI NI ON O F THE COURT

_____________ C H A G A R E S, C i r cui tJ udge. R oy al I ndemni t yC om pany( R oy al ) appea l s fr om t he D i s t r i ctC our t ’ s gr antof s um m aryj udgm entt o W el l s Far go B ank, N . A . ( W el l s Far go) on R oy al ’ s br eac h of c o n t r a c tc l a i m. W e wi l l a f f i r m. I. S tu d e n t F in a n c e C o rp o ra tio n (S F C ) b o rro w e d m o n e yf ro m b a n k s to m a k e lo a n s to3

v o c a tio n a l sc h o o l stu d e n ts. S F C in su re d th o se lo a n s th ro u g h R o y a l. T h a t is, R o y a l w o u ld payt he banks i f the s tudent s defa ul t ed. SFC t hen “s ecur i t i zed” t he l oans . I tcr eat ed a s er i es of trus t s , named W el l s Far go t rus t ee, and then conve y ed the l oans t o t he trus t s . T he t rus t s s ol d s har es of thei rl oan por t fol i o vi a not es cal l ed “c er t i fi cat es . ” SFC arr anged f or R oy al t o i ns ur e the trus tcorpus , and SFC named W el l s Far go as t he bene fi ci ary . I f any s tudent s defa ul t ed, R oy al w oul d m ake s ur e W el l s Far go had enough r es our ces t o payany c e rtific a teh o ld e rs lo o k in g to c a sh o u t. SFC us ed StudentL oan Servi ci ng ( SL S) t o s ervi ce the l oans . SL S opened a l ockbox ac countforthe trus t s and i ns t ruct ed s tudentdebt or s t o depos i tpaym ent s i nt o t hat accou nt. Itcoll ect ed those pay m ents and t ransm i t t ed them t o W el l s Fargo. SL S al so pr oduced f

ourcomput erfi l es : ( 1) a mont hl ys pr eads heet , cal l ed the “D el i nquencyA gi ng R e p o rt,” listin g e a c h d e lin q u e n t lo a n , the n a m e o f th e d e b to r, h o w m u c h p rin c ip a l is ow ed, and the dat e byw hi ch thatbal ance m us tbe pai d, s ee, e. g. , A ppendi x ( A pp. ) 2087- 2208; ( 2) anotherm ont hl ys pr eads heet , cal l ed the “D efa ul tSchedul e, ” l i s t i ng eac h defa ul t ed l oan, t he name of the debt or , how m uch pr i nci pal i s ow ed, and how m uch i nt er es ti s ow ed, s ee, e. g. , A pp. 2086; ( 3) a mont hl ydat abas e l i s t i ng eac h l oan, t he deb t or’ s contacti nfo rm at i on , t he p ri ncipal and i nter estow ed, t he p ri ncipal and i nter est al r eadypai d, and dat es and amount s of pr i nci pal and i nt er es tpaym ent s m ade thatm ont h, s ee, e. g. , A pp. 2217- 80; and ( 4) a w eekl ydat abas e l i s t i ng s i m i l ari nfor m at i on, butonl yas t o l o a n s wi t h a c t i v i t yd u r i n g t h a twe e k , s e e , e . g . , Ap p . 1 9 8 4 - 2 0 8 5 . S L S s e n tt h e f i r s tt wo4

fi l es t o W el l s Far go C orpor at e Trus t , a W el l s Far go aff i l i at e i n M i nneapol i s . I ts entt he s econd tw o fi l es t o back- up s ervi cer s – ent i t i es t hatcoul d have t aken ove rSL S’ s dut i es s houl d R oy al have e l ect ed t o r epl ace SL S atanyt i m e dur i ng t he l i fe of t he contr act . T he fi r s tback- up s ervi cerw as FI N O V A i n Sal tL ake Ci t y , and the s econd w as W el l s Far go Fi nanci al , a W el l s Far go aff i l i at e i n D es M oi nes . SL S al s o pr oduced a m ont hl y“Servi cer R epor t ” thatcont ai ned aggr egat e bal ance i nfor m at i on foral l curr ent , del i nquent , and defa ul t ed l oans . See, e. g. , A pp. 3327- 29. R oy al r ece i ved the Servi cerR epor tbutnott he comput erfi l es , and i tw as not cont entt o t ake thatr epor ton fai t h. I tw ant ed s om e as s ur ance t hatt he number s i n t he r epor tw er e nots i m pl ypl ucked f r om t hi n ai r . W el l s Far go agr eed t o vett he Servi cer R e p o rt n u m b e rs, b u t o n lyto a lim ited e x ten t. W e lls F a rg o w o u ld n o t lo o k b e h in d th e d a ta p ro v id e d b yS L S . S e e , e.g ., A p p . 8 1 7 (“ T ru ste e m a yc o n c lu siv e lyre lya n d sh a ll b e f u lly pr ot ect ed i n act i ng orr efr ai ni ng fr om act i ng upon any. . . s t at ement , . . . r epor t , . . . or ot herpaperordocumentbel i eved byi tt o be genui ne and t o have be en s i gned or p re se n ted b yth e p ro p e r p a rtyo r p a rties ” ) (§ 8 .4 (a )), (“ T ru ste e sh a ll n o t b e re q u ire d to m ake a ny. . . exami nat i on of anydocument s orr ecor ds r el at ed t o t he StudentL oans for th e p u rp o se o f

e sta b lish in g th e p re se n c e o r a b se n c e o f d e f e c ts . . . ” ) (§ 8 .4 (g )). It w o u ld i ns t ead c heck port i ons of the Servi cerR epor tagai ns tcert ai n comput erfi l es and br i ng in c o n sis ten c ies to R o y a l’s a tten tio n . S p e c if ica lly , § 8 .1 9 o f

th e se c u ritiza tio n c o n tra c t o b lig a ted W e lls F a rg o toSect i on 1. 1 expl ai ns t hat“unl es s t he cont extot herw i s e r equi r es . . . ‘ T ape’ has t he 1 m eani ng s etfor t h i n s ect i on 3. 8( b) . . . . ” A pp. 757, 772. Sect i on 3. 8( b) i n tur n pr ovi des

T he Servi cers hal l del i vert o t he Trus t ee on orpr i ort o 12: 00 noon Sal tL ake C i t yt i m e on ea ch W eekl yR epor tD at e and on e ach Servi cerR epor tD at e an updat ed of the comput ert ape, di s ket t e orot hercomput err eada bl e medi um , i n a for m atacc ept abl e t o t he Trus t ee w hi ch pr ovi des i nfor m at i on as t o t he Student L oans r efl ect i ng t he i nfor m at i on s etfor t h t her eon as of the pr ece di ng Ser vi cer R e p o rt D a te (t h e “ ta p e ” ) . . . . A pp. 787. 5 ( a) i n acc or dance w i t h Sect i on 3. 8( b) her eof, notl at ert han 12: 00 noon M inn ea p o li s ti m e o n the s ec o n d B u sine ss D ayp rec ed ing ea ch S erv icer R ep o rt D a te, a c c e p t d e liv e ryo f th e T a p e u se d to c a lcu late th e in f o rm a tio n c o n tain e d in 1 t he Servi cerR epor tand s hal l acc eptdel i veryfr om t he Servi cerof a ha r d copyof th e S e rv ice r R e p o rt; ( b ) c o mp a r e t h e i n f

o r ma t i o n r e c e i v e d o n Ta p e f r o m th e S e r v i c e rt o t h e s a me r ece i ved on the Servi cerR epor tw i t h r es pectt o del i nquenci es , r at i os and the aggr egat e pr i nci pal bal ance of the StudentL oans ; [and]

. . . . ( d) i nfor m t he I ns ur er[R oy al ] , M B I A , t he Servi cer , and the C er t i fi cat ehol der s as to a n yd is c re p a n c yo n s u c h S e rv ic e r R e p o rt . . . . A p p . 8 2 6 (fo o tno te ad d ed ). A nd § 8. 21( d) pr ovi ded thatW el l s Far go

. . . s hal l r ece i ve an e l ectr oni c tr ans m i s s i on of al l s ervi ci ng and/ orSt udentL oan Fi l e i nfor m at i on ( i ncl udi ng al l r el evantO bl i gorcont acti nfor m at i on, s uch as addr es s and t el ephone number s , as w el l as St udentL oan pr i nci pal bal ance and paym enti nfor m at i on, i ncl udi ng anycomm enthi s t or i es and col l ect i on not es ) and sh a ll rev iew su c h S tu d e n t L o a n F ile in f o rm a tio n to e n su re th a t itis in re a d a b le for m and ver i fyt hatthe dat a bal ance s conform t o t he tr i al bal ance r epor t s r ece i ved f ro m th e S e rv ice r. In a d d iti o n , the T ru ste e sh a ll sto re su c h S tu d e n t L o a n F ile in f o rm a tio n a n d v e ri f

yc e rt a in in f

o rm a tio n c o n ta in e d in e a c h S e rv ic e r R e p o rt .R oy al w as nota part yt o t he s ecur i t i zat i on contr actand w as notm ent i oned i n § 2 8. 21. Sect i on 11. 9 of the contr actexpr es s l yaddr es s ed w ho m ayand maynotbe a thi r dp a r t y b e n e f

i c i a r y: E xceptas ot herw i s e s peci fi cal l ypr ovi ded her ei n w i t h r es pectt o t he C er t i fi cat ehol der s , t he part i es t o t hi s A gr eementher ebym ani fes tt hei ri nt entt hat n o thir d p artyo ther tha n ea ch C erti fica teho lder, th e In su rer [R o y al] an d M B IA s h a ll b e d e e m e d a th ir d p a rt yb e n e f ic ia ry o f th is A g re e m e n t . . . . A pp. 835. 6 T h e T ru s te e s h a ll r e c e iv e th e d a ta re f e re n c e d in th is p a ra g ra p h o n a w e e k ly b a s is . .

. . 2 A p p . 8 2 8 (f

o o tn o te a d d e d ). S e c tio n 8 .2 0 , h o w e v e r, ex p re ss lyd isc laim e d tru ste e liab ili ty i n connec t i on w i t h r evi ew conduct ed pur s uantt o § 8. 21:

T he Trus t ee . . . s hal l m oni t orthe per for m ance of the Servi ceron behal f of t he C er t i fi cat ehol der s as s etfor t h i n Sect i on 8. 21 her eof; pr ovi ded, how ever , t hat t he Trus t ee s hal l nothave a nyl i abi l i t yi n connec t i on w i t h t he mal fea s ance or n o n f e a s a n c e b yth e S e rv ic e r o r f o r m o n ito ri n g th e S e rv ic e r . . . . A pp. 827. A s it tu rn e d o u t, th e lo a n s w e re n o t p e rf o rm in g a s w e ll a s S F C h a d h o p e d . St udent s w er e mi s s i ng paym ent s i n l ar ge number s , m aki ng i ns ur i ng t he l oans an i ncr eas i ngl yr i s kypr opos i t i on forR oy al . So, SFC us ed i t s ow n funds t o m ake up the s hor t fal l s . T hes e “f

orbear ance paym ent s , ” as SFC i nt ernal l ycal l ed them, gave the i m pr es s i on t hatt he l oans w er e per for m i ng up t o parand ther efor e thati ns ur i ng t hem w as a r eas onabl e r i s k. SFC exec ut ed s even mor e s ecur i t i zat i ons , cr eat i ng a t ot al of ei ght t rust s. S F C con t i nu ed to m ake p aym ents , and R oy al con t i nu ed to i nsure new t rust s.E a c h se c u ritiza tio n c o n tra c t w a s m a ter iallyid e n tica l. 3 7 W e lls F a rg o n e v e r d is c o v e re d th is p ro b le m d u ri n g th e c o u rs e o f its d a ta re v ie w s . It c o m p a re d lo a n -sp e c if ic d a ta g iv e n in th e D e lin q u e n c yA g in g R e p o rt w ith th e a g g re g a te dat a gi ven i n t he Servi cerR epor tand found no di s cr epanc i es . See A pp. 2727- 38, 5832- 3 5 . Italso ex am ined the m o n thlyan d w ee k lyd atab ase s to m ak e su re the yw ere co m p u terre a d a b le a n d c o n tain e d th e rig h t ca teg o rie s o f in f o rm a tio n in th e e v e n t W e lls F a rg o h a d to st ep in for SL S and con t actstud ent debt ors, and fou nd no problem s. E v e n tu a lly , S F C ’s f

o rb e a ra n c e p a ym e n t p ro c e d u re c ru m b led , ex p o sin g R o y a l to hundr eds of m i l l i ons of dol l ar s w or t h of l i abi l i t yon cert i fi cat es t hatSFC no l ongerhad t he r es our ces t o cover . R oy al s ued W el l s Far go, ar gui ng t hatW el l s Far go br eac hed the s ecur i t i zat i on contr act w hen i tfai l ed t o det ectt he forbear ance paym ent s and br i ng t hem 3 t o R oy al ’ s at t ent i on. R oy al di d noti dent i fyanynum er i cal i ncons i s t enci es among t he var i ous fi l es and document s . N evert hel es s , i tcont ended thatt he dat a compar i s on cal l ed by§§ 8. 19 and 8. 21, i f pr oper l yper for m ed, w oul d have r evea l ed SFC ’ s pl ot— and t her efor e w oul d have c aus ed R oy al t o s t op i ns ur i ng new t rus t s — beca us e the forbear ance paym ent s s t ood outverycl ear l yon t he comput erfi l es W el l s Far go r ece i ved, namel y : ( 1) t he l as tw eek of

eac h m ont h s aw a huge i ncr eas e i n t ot al i nt er es tpai d compar ed t o ear l i er w eeks , butt ot al pr i nci pal pai d r emai ned r el at i vel ys t eady ; ( 2) m or e than hal f of the paym ent s m ade dur i ng t he ent i r e mont h w er e made on a s i ngl e dayof thatw eek; ( 3) near l yal l of thos e paym ent s w er e i nt er es t - onl y , w her eas r egul arpaym ent s cont ai ned a8

pr i nci pal componentas w el l ; and ( 4) near l yal l of thos e paym ent s w er e code d as t ype

“ 1 2 ,” w h e re a s re g u la r p a ym e n ts w e re c o d e d a s typ e “ 1 0 .” W el l s Far go m oved fors um m aryj udgm ent , and the D i s t r i ctC our tgr ant ed the m o tio n . R o y a l th e n f

iled th is a p p e a l. II. T h e D istri ct C o u rth ad juri sd ict ion p u rsua n t t o 2 8 U . S . C . § 1 3 3 2 (a), an d this C o u rt has j ur i s di ct i on pur s uantt o 28 U . S. C . § 1291. T hi s C our tr evi ew s t he D i s t r i ctC our t ’ s gr antof s um m aryj udgm entde novo, us i ng t he sam e t estt hat the D i stri ctC ou rtw as obli gated t o ap ply . In r e Ikon O ffi ce S olut i on s, I nc. , 277 F. 3d 658, 665 ( 3d C i r . 2002) . Sum m aryj udgm ents houl d be aw ar ded w hen “the p lea d in g s, d e p o sitio n s, a n sw e rs to in ter ro g a to rie s, a n d a d m iss io n s o n f ile, to g e th e r w ith t he af fi davi t s , i f any , s how t hatt her e i s no genui ne i s s ue as t o anym at er i al fac tand that t he movi ng par t y[her e, W el l s Far go] i s ent i t l ed t o a j udgm entas a mat t erof l aw . ” Fed. R . C i v. P. 56( c) . A l l r eas onabl e i nfer ence s fr om t he r ecor d m us tbe dr aw n i n favorof the nonm ovi ng par t y , her e R oy al . B r ew erv. Q uakerSt at e O i l R efi ni ng C orp. , 72 F. 3d 326, 6 6 6 (3 d C ir. 1 9 9 5 ). T h is C o u rt m a yn o t w e ig h th e e v id e n c e o r a ss e ss c re d ib ili ty . B o y le v . C o u n ty o f

A lle g h e n y , 1 3 9 F .3 d 3 8 6 , 3 9 3 (3 d C ir . 1 9 9 8 ). III . W e have r evi ew ed the part i es ’ br i efs and hea r d or al ar gum enton t he i s s ues pr es ent ed. W e bel i eve thatt he D i s t r i ctC our t ’ s anal y s i s veryabl yi dent i fi ed the nub of the9

c o n tro v e rsy. R o y a l ar g u e s th a t W e lls F a rg o h a d th e c o n tra c tu a l o b lig a tio n to a n a ly z e d a ta u sin g c e rta in f

in a n c ial a c c o u n tin g p rin c ip les a n d to d e tec t an ya n o m a lies th a t an a ly sis m igh t hav e u n co v ere d . A s R o y al su g g ests, this an aly sis m ayn o t hav e b ee n v erylabo rin ten siv e . Y e t, th e c o n tra c t d id n o t ca ll fo r a n ya n a ly sis a t all. It sim p lyre q u ire d W e lls Far go t o per for m r ot e compar i s ons betw een thatdat a and da t a cont ai ned i n var i ous ot her s o u rc e s , a n d to re p o rt a n yn u m e ri c a l in c o n s is te n c ie s . W e lls F a rg o d id ju s t th a t. T her efor e, appl y i ng t he above s t andar d of r evi ew , w e w i l l aff i r m t he D i s t r i ct C our t ’ s j udgm enti n al l r es pect s , es s ent i al l yfort he r eas ons s etfor t h i n i t s w el l - r eas oned, compre hens i ve opi ni on.