Republic Mtge. Ins. Co. v Countrywide Fin. Corp.

[*1] Republic Mtge. Ins. Co. v Countrywide Fin. Corp. 2010 NY Slip Op 51323(U) [28 Misc 3d 1214(A)] Decided on July 22, 2010 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 22, 2010
Supreme Court, New York County

Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina, Plaintiffs,

against

Countrywide Financial Corporation, Countrywide Home Loans, Inc., The Bank of New York Mellon Trust Company, N.A. BAC Home Loans Servicing, LP, and Bank of America, N.A., as successor interest to Countrywide Bank, N.A., , Defendants.



603915/2009



APPEARANCES:

BUTLER RUBIN SALTARELLI & BOYD LLP

Attorneys at Law

70 West Madison Street, Suite 1800

Chicago, IL 60607-4527

BY: MICHAEL R. HASSAN, ESQ. CHAFFETZ LINDSEY LLP

Attorneys at Law

1350 Avenue of the Americas

New York, NY 10019

BY: CELIA FROELICH MOSS, ESQ.

REED SMITH LLP

Attorneys at Law

599 Lexington Avenue

New York, NY 10022

BY: JOHN N. ELLISON, ESQ.

JEAN M. FARRELL, ESQ.

PILLSBURY WINTHROP SHAW PITTMAN LLP

Attorneys at Law

1540 Broadway

New York, NY 10038-4039

BY: LEO T. CROWLEY, ESQ.

Bernard J. Fried, J.

This case involves Republic Mortgage Insurance Company and Republic Mortgage Insurance Company of North Carolina (collectively "RMIC"), and Countrywide Financial Corporation ("CFC"), Countrywide Homes Loans, Inc. ("CHL"), BAC Home Loan Servicing, LP (formerly Countrywide Home Loan Servicing, LP) ("Servicing LP"), and Bank of America, N.A., as successor in interest to Countrywide Bank, N.A ("BANA") (collectively "Countrywide Defendants"), and The Bank of New York Mellon Trust Company, N.A., as trustee for certain investors ("BNY Mellon Defendant").

Motion Sequence No.001 (motion by Countrywide Defendants to dismiss this action and to compel arbitration or to stay the court proceedings pending completion of arbitration) and Motion Sequence #

002 (motion by BNY Mellon Defendants seeking similar relief [FN1]), together with RMIC's cross-motion to stay arbitration are consolidated for disposition.

The lawsuit principally concerns the interpretation of the Arbitration Clause found in § 7.6 (a) of RMIC's Master Policies ("the Policies"), (Farrell Aff. Ex. C-G.), which provides, in relevant part, that "[u]nless prohibited by applicable law, the Insured, at its option, may elect to settle by arbitration a controversy, dispute, or other assertion of liability or rights which it [*2]initiates arising out of or relating to this Policy, including the breach, interpretation, or construction thereof ." (Farrell Aff. Ex. C-G, § 7.6(a)).

It is undisputed that RMIC and Countrywide Defendants were undergoing negotiations to settle a dispute surrounding unpaid claims under five mortgage insurance policies.[FN2] (See Affirmation of Jean M. Farrell ("Farrell Aff.") ¶ 3.) Countrywide Defendants requested that RMIC enter into a tolling agreement to facilitate discussions. Id. RMIC did not enter into the tolling agreement; instead, they filed this action on December 31, 2009 [FN3] seeking a declaration that "[their] rescissions were proper and consistent with the terms of the mortgage insurance policies [,][and] a declaration that the procedures [they used] to investigate defaulted loans and claims submitted by Countrywide were consistent with the terms of the [five] Policies and applicable law." (See Plaintiffs' Response to Defendants' Motion to dismiss and Compel Arbitration and Cross-Motion to Stay Arbitration. ("RMIC's Response") at 4.) Defendants CHL, CFC, and Servicing LP were served with the Amended Summons and Amended Complaint.[FN4] (Farrell Aff. ¶ 3.) Thereafter, on January 29, 2010, Countrywide Defendants filed a Demand for Arbitration in Los Angeles, California. Id. at ¶ 4.

At issue is whether the Arbitration Clause conditions Countrywide Defendants' right to demand arbitration on Countrywide Defendants initiating arbitration before litigation is brought by RMIC.

Countrywide Defendants contend that under the Arbitration Clause, "which it initiates" modifies "arbitration," permitting them to initiate arbitration regardless of the prior suit by RMIC. (See Transcript of Proceedings, May 25, 2010 ("Transcript") at 6.) Under this interpretation, the clause is: "Unless prohibited by applicable law, the [I]nsured at its option may elect to settle by arbitration which it initiates a controversy, dispute, or other assertion of liability or rights." Id. Countrywide Defendants further argue that any other interpretation "of the Arbitration Provisions would lead to absurd results, contrary to the reasonable expectations of the parties, and would undermine the parties' obvious purpose to permit [Countrywide Defendants] to arbitrate claims arising under the Policies." (See Countrywide Defendants' Reply Memorandum of Law in Further Support of Their Motion to Dismiss and Compel Arbitration, or to Stay Arbitration, and in Opposition to RMIC's Motion to Stay Arbitration ("Countrywide Defendants' Response") at 6.) In addition, Countrywide Defendants claim RMIC's argument that the clause requires any arbitration to be brought before a lawsuit is commenced "defies law and logic that the parties would have willingly agreed to such a procedure, which would pervert the [*3]twin goals of arbitration[:] to settle disputes efficiently, and avoid long and expensive litigation." Id. at 4. Therefore, they contend that their motion to compel arbitration should be granted and RMIC's motion to stay arbitration should be denied.

In opposition, RMIC argues that the words "which it initiates" modify the phrase "a controversy, dispute, or other assertion of liability or rights." (RMIC's Response at 6.) Under this interpretation, "the clause permits the [I]nsured to arbitrate disputes which it initiates and does not permit the [I]nsured to require arbitration of any dispute initiated by RMIC." Id. Therefore, so the argument runs, Countrywide Defendants' option to elect arbitration is limited to only disputes they — Countrywide Defendants — have initiated. Id. at 7. RMIC further argues that since the disputes were initiated by them and not by Countrywide Defendants, Countrywide Defendants have lost the option to demand arbitration. Id Additionally, RMIC claims that if the interpretation offered by Countrywide Defendants is accepted, RMIC would be forced to participate in an arbitration it has not agreed to, which would violate both federal and state law, which provide that a party cannot be compelled to participate in an arbitration to which it had not agreed.

It is basic law that "arbitration agreements are contracts and must be interpreted under contract law." (E.g., Matter of Salvano v. Merrill Lynch, Pierce, Fenner & Smith, 85 NY2d 173, 182 [1995]). It is also basic law that when interpreting a contract, "the Court should arrive at a construction which will give fair meaning to all of the language employed by the parties to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized." (E.g., Herzfeld v. Herzfeld, 50 AD3d 851, 851 [2d Dept. 2008]). After close review of the Arbitration Clause, it is clear that the only logical interpretation of the clause is that offered by Countrywide Defendants.

There is no merit to the claim that, if compelled to arbitration, RMIC would be subjected to arbitration they did not agree to. Indeed, it is evident that the phrase "a controversy, dispute, or other assertion of liability or rights" is a dependent clause modifying the word "arbitration," and that it therefore falls within the broad scope of the Arbitration Clause. Thus, it is disingenuous to claim that they did not agree to submit the subject matter of the dispute to arbitration, and having done so, they certainly can be compelled to submit to arbitration. (E.g., Gerling Global Reins. Corp. v. Home Ins. Co., 302 AD2d 118, 123 [1st Dept. 2002]).

Moreover, this issue is not a matter of chronology or priorities; Countrywide Defendants' right to initiate arbitration is not dependent on which party filed suit first. If Countrywide Defendants initiate the arbitration, that claim must be arbitrated, even if RMIC may have brought a pre-existing lawsuit. To hold otherwise, in face of the unambiguous language of the Arbitration Provision, would sanction "procedural gamesmanship and [reward RMIC] for winning a race to the courthouse which [they] had completed before [their] adversary heard the starting gun." (Hartford Accident and Indem. Co. v. Hop-On Int'l Corp., 568 F. Supp. 1569, 1573 [1983]). A "race to the courthouse should not be determinative [and] the case should be heard by the forum with the most reason to hear the case." (E.g., White Light Prods. v. On The Scene [*4]Prods., 231 AD2d 90, 99 [1st Dept. 1997]). Here, that forum, as agreed upon by the parties, is arbitration and the fact that RMIC reached the courthouse first does not change this.

RMIC further argues that BNY Mellon's motion to compel arbitration and dismiss RMIC's complaints should be denied because BNY Mellon has not demanded that RMIC arbitrate any disputes and is not a party to Countrywide Defendants' arbitration. (RMIC's Response at 8.) In opposition, Countrywide Defendants argue that BNY Mellon is a party because "Servicing LP is fully authorized to bring the arbitration on behalf of BNY Mellon" under the Pooling and Servicing agreements. (Countrywide Defendants' Response at 15.)

The Pooling and Servicing agreements state, in relevant part, "the Master Servicer [Servicing LP] agrees to present, on behalf of itself, the Trustee [BNY Mellon] and the Certificateholders, claims to the insurer under any primary insurance policies, and, in this regard, to take any reasonable action necessary to permit recovery ." (Farrell Aff., Ex H). In addition, BNY Mellon has, through counsel, "ratif[ied]the Servicer's defending, filing and maintaining Countrywide Arbitration and defense of the Claims in the Countrywide Litigation for the benefit of the BNY Mellon Companies [and] will be bound by the outcome [of the litigation and arbitration] as to the Claims." (Farrell Aff., Ex. I.) As demonstrated by these submissions, Servicing LP is authorized to bring claims on behalf of BNY Mellon; therefore, RMIC's argument is rejected.

Finally, RMIC's request to stay arbitration because the disputes allegedly are not arbitrable is denied. This goes to the merits of the claims and is a matter left to the arbitrators. (Silverman v. Bennor Coats, Inc., 61 NY2d 299, 301 [1984]).

Turning to that portion of the motion to dismiss the complaint on grounds that under the FAARMIC's claims are covered by the Arbitration Provisions and there will be nothing left for this Court to adjudicate, Countrywide Defendants cite Spencer-Franklin v. Citigroup/Citibank N.A.,No. 06 Civ. 3475, 2007 WL 521295, at *4 (S.D.NY Feb. 21, 2007), which provides that when "all of the issues raised in the Complaint must be submitted to arbitration, the Court may dismiss an action rather than stay proceedings," dismissal is appropriate. Countrywide Defendants also seek dismissal under New York Civil Practice Law and Rules ("CPLR") § 3211(a)(1). Since the documentary evidence presented by Countrywide Defendants demonstrates that arbitration will dispose of all the claims asserted in the Amended Complaint, Countrywide Defendants' motion to dismiss RMIC's claims is granted.

Accordingly, it is

ORDERED that the motions (Seq. Nos. 001 and 002) to compel arbitration and to dismiss the Amended Complaint are granted; and it is further

ORDERED that the cross-motion is denied; and it is further [*5]

ORDERED that the Clerk is directed to enter judgment dismissing the action, with prejudice, and with costs and disbursements to defendants as taxed by the Clerk.

DATED:_____________________

ENTER: ________________________________

J.S.C. Footnotes

Footnote 1:

BNY Mellon Defendant joined in the motion of the Countrywide Defendants.

Footnote 2:

The Policies consist of Flow Policy 06854 and Bulk Policies 067L5-00, 067L5-01, 067L5-02, and 6854-42. (Farrell Aff., Ex. C-G.)

Footnote 3:

Plaintiffs later filed an Amended Complaint on January 5, 2010.

Footnote 4:

CHL was served on January 11, 2010. CFC and Servicing LP were served on January 15, 2010. (Farrell Aff. ¶ 3.)