Opinion ID: 811311
Heading Depth: 2
Heading Rank: 1

Heading: Failure of cause.

Text: The primary issue on this appeal is whether LSED may rescind the bond insurance policy for failure of cause. Louisiana’s Civil Code requires that all contracts be supported by cause --- “the reason why a party obligates himself.” La. Civ. Code. Ann. art. 1966, 1967. “Cause” is a more expansive concept than consideration, because: [u]nlike the common law analysis of a contract using consideration, which requires something in exchange, the civil law concept of ‘cause’ can obligate a person by his will only. The difference has been analogized to a civilian contract-consent approach compared to a common law contract-bargain approach. Consideration is an objective element required to form a contract, whereas cause is a more subjective element that goes to the intentions of the parties. Therefore, in Louisiana law, a person can be obligated by both a gratuitous or onerous contract. Aaron & Turner, L.L.C. v. Perret, 22 So. 3d 910, 915 (La. App. 1st Cir. 2009). 5 Louisiana law recognizes at least two grounds for failure of cause. “Error can vitiate consent, so that a contract may be rescinded based upon an error.” Cyprien v. Bd. of Supervisors el rel. Univ. of La., 5 So. 3d 862, 868 (La. 2009). But “[e]rror vitiates consent only when it concerns a cause without which the obligation would not have been incurred, and that cause was known or should have been known to the other party.” La. Civ. Code art. 1949. Cause may also fail when circumstances change, even if the changes are created by the acts of third parties. Carpenter v. Williams, 428 So. 2d 1314, 1318 (La. App. 3d Cir. 1983) (“[t]he parties entered into a contract assuming certain facts or conditions to exist. When the assumed fact or condition was found not to exist or did not come into existence even through the act of third parties [], the contracts have been rescinded.”). Thus, under Louisiana law, a failure of cause that occurs after an agreement is entered into provides a basis for rescission, so long as that cause was known to the other party. While “[c]ause is the reason why a party obligates” itself, St. Charles Ventures, LLC v. Albertsons, Inc., 265 F. Supp. 2d 682, 687 (E.D. La. 2003), a party may also have “motive” to enter into an agreement. “Motive relates to a party’s internal, subjective reasons for entering a contract, which cannot be imputed to the knowledge of the other party.” Bluebonnet Hotel Venture LLC v. Wachovia Bank, N.A., No. 10-cv-489 (E.D. La. Sept. 29, 2011). Unlike cause, an error as to a party’s motive does not provide a ground for rescission of an agreement. St. Charles Ventures, 265 F. Supp. 2d at 692 (collecting cases discussing actionable cause and inactionable motive). A failure of cause is therefore a viable ground for rescission, but a failure of motive is not. 6 Cyprien is particularly instructive on the issue of failure of cause. There, plaintiff applied for a job as head coach of the University of Louisiana at Lafayette (“ULL”) basketball team. Cyprien, 5 So. 3d at 864. Plaintiff had a student worker at his former university fax a copy of plaintiff’s resume to ULL. Id. According to the resume, plaintiff had graduated from the University of Texas at San Antonio (“UTSA”) with a bachelor’s degree, which was false. Id. After ULL hired plaintiff, a newspaper revealed that plaintiff never graduated from UTSA. Id. ULL fired plaintiff the same day the article appeared, and plaintiff sued for breach of contract. Id. The Louisiana Supreme Court determined that ULL properly rescinded the contract based on failure of cause. Id. at 867-68. After considering affidavits from university officials stating that (1) a degree from an accredited four-year university was a job requirement; and (2) ULL would not have hired Cyprien if it knew he did not have a degree from UTSA, the court granted summary judgment to the university, finding: These affidavits establish that ULL would not have incurred the obligation if it had known that Mr. Cyprien did not have a degree from an accredited university. Mr. Cyprien clearly knew or should have known that his academic qualifications were an important factor in ULL's decision to hire him. Under these circumstances, we find ULL has established that it had a valid ground to rescind Mr. Cyprien's contract based on error in the cause. Thus, Mr. Cyprien will be unable to establish a bad faith breach of contract claim. The district court erred in denying ULL's motion for summary judgment on this claim. 5 So. 3d at 868. Finally, the error in cause must be reasonable to support a claim under Louisiana law. See Quality Design and Constr., Inc. v. Capital Glass Co., 2008 WL 4764341, at  (La. App. 1st Cir. Oct. 31, 2008) (“unilateral error . . . does not vitiate consent if the reason for the error 7 was the complaining party’s own inexcusable neglect in discovery of the error”); Degravelles v. Hampton, 652 So.2d 647, 649 (La. App. 1st Cir. 1995) (“[a] contract may be invalidated for unilateral error as to a fact which was a principal cause for making the contract, but only when the other party knew or should have known it was a principal cause”). LSED argues that at the time it purchased the bond insurance, FGIC falsely represented that it invested conservatively, was creditworthy, and would take steps to maintain its creditworthiness going forward, and that the district court erred in finding this did not provide it with a viable cause of action under Louisiana law. (Blue 27) We agree with the district court’s analysis. The commitment letters entered into between the parties referenced the “Official Statement Disclosure Language,” which LSED was required to include in the Bonds. The disclosure language stated that FGIC's triple-A ratings reflected the “ratings agencies' current assessments of the insurance financial strength of [FGIC] . . . . These ratings are not recommendations to buy, sell or hold the Insured Bonds, and are subject to revision or withdrawal at any time by the rating agencies.” The disclosure language also explicitly stated that the Policies did “not insure any risk other than Nonpayment by the Issuer.” Plainly, LSED was aware that (1) there were no guarantees attached to FGIC’s credit rating over the life of the Bonds and (2) the Bonds’ only intended purpose was to insure the bondholders against the risk of nonpayment by LSED. This case turns on what LSED purchased from FGIC. As the disclosure language makes clear, LSED purchased bond insurance, not credit enhancement. The distinction is critical. LSED argues that the failure of cause was not FGIC’s inability to maintain a guaranteed triple-A 8 rating, but FGIC’s failure to operate its business in a careful and prudent manner. The problem with LSED’s argument is that it cannot sue based on a failure to pay out on the bonds, because it is undisputed that no bonds were ever presented for payment. Even if a failure to pay occurred, it is not clear that LSED would have standing to press that claim, which would appear to belong to the bondholders in the first instance. That leaves lack of credit enhancement as LSED’s only harm, and while credit enhancement may have been a hoped for benefit of the bonds, it cannot be said to be their primary cause. LSED’s failure to receive the hoped-for credit enhancement is a failure of motive, not a failure of cause. Indeed, every court to have considered the issue has found that absent an express contractual obligation, bond insurance policies cannot form the basis for a claim based on an insurer’s ruined credit rating. See Ambac Assurance Corp. v. Adelanto Pub. Util. Auth., No. 09 Civ. 5087(JFK), 2011 WL 5553444, at  6 (S.D.N.Y. Nov. 14, 2011) (“Regardless of the Authority’s subjective motivations for purchasing the insurance policies offered by Ambac, Ambac never assumed a contractual duty to maintain a certain credit rating or to engage in any conduct other than to make the promised payments pursuant to the Bond Insurance Policies and the Surety Bond.”); Water Works Bd. of City of Birmingham v. Ambac Fin. Group, Inc., 718 F. Supp. 2d 1317, 1320 (N.D. Ala. 2010) (“It would defy logic and common sense for Ambac to obligate itself to maintain for thirty-five (35) years the highest possible credit rating, when the determination and the award of credit ratings are by separate entities”); NPS, LLC v. Ambac Assur. Corp., 706 F. Supp. 2d 162, 177 (D. Mass. 2010) (“characterizing [lower interest rates] as a ‘principal’ purpose of the Agreement runs counter to the contractual document itself as well as to the nature of the contractual relationship between the parties”); see also Transcript of Oral 9 Argument at 41, City of New Orleans v. Ambac Assurance Corp. (E.D. La. Oct. 14, 2010) 083949 (applying Louisiana law to find that “here obtaining the credit enhancement that came with AAC’s financial guarantee was the advantage of entering into the Agreement but characterizing the receipt of these benefits as a principal purpose of the Agreement runs counter to the contractual document itself which does not guarantee credit enhancement over the period of time”). The Fifth Circuit's recent decision in Dameware Development, L.L.C. v. American General Life Insurance Co., 688 F.3d 203 (5th Cir. 2012), illustrates these concepts. There, a pension plan purchased life insurance policies, then sued the insurance company after the purchase failed to yield the tax benefits the pension plan had hoped for. Specifically, the pension plan intended to use the insurance policies “to establish a pension plan that qualified for favorable tax treatment pursuant to section 412 of the Internal Revenue Code.” Id. at 205. The pension plan argued, in part, that its contract with the insurance company was rendered invalid by an error concerning cause. Id. at 207. The Fifth Circuit, applying Louisiana law, turned to the language of the contract at issue in finding there was no error of cause. It noted that the agreements between the parties “disclaim[] any responsibility on the part of the” insurer for creating a 412(I) Plan; and also contained a list of providers who could create such a plan, and that whichever provided chosen by the pension plan would be “solely responsible” for establishing a 412(I) Plan. Id. Thus, the Fifth Circuit concluded, the language of the agreement between the pension plan and the insurer “demonstrates that ‘the reason [the pension plan] obligated itself’ in its contract with [the insurer] was to secure life insurance policies for its employees.” Id. Similarly, here the agreements make clear that (1) LSED was purchasing bond 10 insurance, and nothing more; and (2) FGIC made no representations or promises to maintain its credit rating over the life of the bonds. We find nothing in Louisiana law that would allow a party to recover damages based on a belief that certain conditions would be maintained by the other party when the contract explicitly disclaimed any guarantee of a continuance of those conditions. The underlying transaction here is similar to buying title insurance when obtaining a mortgage to buy a house. The mortgagor buys a title insurance policy that provides coverage to the bank as mortgagee. The fact the mortgagor pays a lower interest rate, or even that the title insurance entices the bank to make the loan, is the benefit the mortgagor receives from purchasing the policy. But the purpose of the policy itself is to provide the bank with insurance in case title turns out to be flawed. The contract is fulfilled when the premium is paid and the insurer agrees to pay if the title is later found flawed. The only breach is if the insurer refuses to pay in accordance with the terms of the policy. On a much grander scale, that is what happened here. LSED bought bond insurance from FGIC. The purpose of buying the bond insurance was to protect the bondholders in event of a default by LSED. A side benefit may have been a lower interest rate — credit enhancement — but it was not part of the contract. The contract is explicit that it protects only the bondholders, and that there is no guarantee that FGIC will maintain any particular credit rating. Further, there is a line of Louisiana cases indicating that a party’s “error in judgment founded upon its own evaluation of future market conditions” does not permit rescission based on an error of cause. Hanover Petroleum Corp. v. Tenneco Inc., 521 So. 2d 1234, 1240 (La. App. 3d Cir. 1988). In Hanover, defendant sought to rescind a contract on the ground of error of 11 cause - specifically “the unforeseen collapse of the natural gas market and governmental restructuring of the industry,” which “rendered its performance under the contract untenable.” Id. The state court refused, finding defendant’s claim of error was simply based on its own error in judgment. Id.; see also Esplanade Oil & Gas Inc. v. Templeton Energy Income Corp., 889 F.2d 621, 625 (5th Cir. 1989) (rejecting the assertion that the principal cause of the agreement was to obtain an “income stream,” which had failed as a result of the plunge in the market price of oil and noting that the contract language did not provide for the purchase of an income stream); Superior Oil Co. v. Transco Energy Co., 616 F. Supp. 98, 109 (W.D. La. 1985) (holding that the fact that the “market has simply not evolved in the manner anticipated” is not error in the principal cause of the contract). The facts here are similar. LSED argues that had it known FGIC would act to denigrate its own credit rating, it would never have paid the $13 million premium up front. However, as detailed above, the commitment letters specifically disclaimed any guarantee to maintain a AAA-credit rating agency. This explicit disclaimer language - of which LSED was well aware - placed LSED on notice of the possibility that FGIC’s credit rating would be reduced in the future. LSED took a calculated commercial risk that did not perform as it hoped. Even under Louisiana’s civil law, it is not the role of this court to relieve LSED of its bad bargain.