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People ex rel. Dowling v. Aambg Reinsurance, Inc.

United States District Court, N.D. Illinois, Eastern Division

June 1, 2017

PEOPLE OF THE STATE OF ILLINOIS, ex rel., ANNE MELISSA DOWLING, ACTING DIRECTOR OF INSURANCE OF THE STATE OF ILLINOIS, as Rehabilitator for TRIAD GUARANTY INSURANCE CORPORATION and TRIAD GUARANTY ASSURANCE CORPORATION, Plaintiff,
v.
AAMBG REINSURANCE, INC., and BANK OF AMERICA CORPORATION, Defendants.

          MEMORANDUM OPINION AND ORDER I. BACKGROUND

          Harry D. Leinenweber, Judge

         Normally a home purchaser is required to pay 20% of the purchase price as a down payment in order to compensate for the risk of default. In order to increase the supply of home purchasers, lenders started to allow under-qualified home purchasers (those who could not make the 20% down payment) to borrow more than the 80% if they purchased Private Mortgage Insurance (“PMI”) to compensate the lender in case the borrower defaults. In order to protect themselves from losses due to defaults, insurance providers of PMI would purchase reinsurance in order to shift some of the risk of default. The PMI provider would pass on the reinsurance premium to the borrower in the form of a higher premium for the PMI. The PMI provider would split the premium with the reinsurer, which is called a “ceding payment, ” in accordance with the risk assumed. Some lenders, which is apparently the case here, have found it economical to have “captive” reinsurers, i.e., reinsurers that are owned or controlled by the lender. Apparently, this enables the lender to figure its risk based more closely on its own loss experience rather than on the experience of the industry as a whole. Thus, the captive reinsurer does not reinsure the loans of any lender other than those it specifically lists in its agreement with the PMI provider.

         This case arises because a PMI provider, Plaintiffs in this case, Triad Guaranty Insurance Corporation and Triad Guaranty Assurance Corporation (hereinafter, collectively, “Triad”), was placed in rehabilitation on December 12, 2012. The Plaintiff Anne Melissa Dowling, acting Director of Insurance for the State of Illinois (since replaced by Jennifer Hammer, Director of Insurance), was appointed the Rehabilitator on that date.

         In 2016, this suit was filed by the Rehabilitator on behalf of Triad against AAMBG Reinsurance, Inc. (“AAMBG”), and Bank of America Corporation (“BOA”). As the name suggests, AAMBG had provided reinsurance to Triad for mortgage loans insured by Triad on behalf of certain lenders, referred to as “approved originators, ” pursuant to a written agreement (Exhibit B to the Amended Complaint). Under the agreement, AAMBG was obligated to pay Triad a portion of all cumulative net losses suffered by Triad during a given policy year. The losses were to be divided as follows: Triad was to pay the first 4% of cumulative Net Losses that occurred during the policy year, AAMBG was to pay the next 10% of cumulative Net losses, and Triad was to be liable for cumulative net losses that were 14% or more. In other words, AAMBG had a 10% reinsurance band between net losses of 4% and 14%. Triad suffered the first 4% of net losses and all losses that exceeded 14%. While AAMBG was obligated to reinsure Triad for all loans that originated from the approved originators, Triad could reject any loan from the approved originators and decline to issue PMI to the proposed borrower.

         In Count I of the First Amended Complaint, Plaintiffs allege that AAMBG warranted and represented in its agreement with Triad that the approved originators would disclose “the dividends and the benefits it derived from the mortgage reinsurance premiums to the borrowers whose loans were subject to the agreement, ” which the approved originators did not do, and as a result Triad suffered damages. Count II of the Complaint alleges that AAMBG and the approved originators violated the duty of good faith and fair dealing implied in the contract by “vetting” the borrowers to be referred to Triad for PMI so as only to refer those having the highest level of default risk. This, according to the Complaint, allowed AAMBG and the approved originators “to minimize their risk of reinsuring loans that could go into default, while maximizing profits for AAMBG and its affiliated Approved Originators.” Count III applies only to AAMBG and alleges that AAMBG violated Section 8 of RESPA by accepting excessive reinsurance premiums from Triad, which constituted an illegal kickback because the premiums received exceeded the value of the reinsurance provided. Count IV seeks unjust enrichment against both, apparently as an alternative to the breach of contract counts.

         The Defendants have filed Motions to Dismiss all counts. BOA seeks dismissal of itself from the entire lawsuit contending that it is not a successor to any of the Approved Originators. BOA, in the alternative, joins with AAMBG in seeking dismissal of Counts I and II on multiple grounds. First, they claim that the Complaint alleges that the contract between Triad and AAMBG is illegal under RESPA and as such Plaintiffs cannot sue on an illegal contract. Second, AAMBG asserts that Count I does not state the source giving rise to any alleged duty it owed to Triad to provide information to the borrowers. Third, they assert that the Complaint fails to allege any damages to Triad resulting from the alleged failure to provide information to the borrowers regarding the amount of the reinsurance premium. With respect to Count II, they assert that the agreement does not address or restrict the referral of borrowers to Triad nor obligate Triad to insure any potential borrower so referred. Moreover, they assert that Count II does not make economic sense and as a consequence is implausible. AAMBG asserts that Count III, RESPA violation, is time-barred. It also asserts that government regulations specifically allow for captive reinsurance arrangements, such as existed between itself and the approved originators, provided there is a legally binding reinsurance contract, the reinsurer complies with capital and reserve requirements of state law, and there is a real transfer of risk with the likelihood of losses occurring to the reinsurer. It asserts that the Complaint fails to allege any facts to show that AAMBG failed to meet any of these RESPA requirements and, for this reason, Count III is implausible and falls afoul of Iqbal/Twombly. AAMBG also points out that Triad certified to HUD, the appropriate regulatory agency, that its agreement with AAMBG met all RESPA requirements. Finally with respect to Count IV, AAMBG asserts that Plaintiffs may not proceed with an unjust enrichment claim because the complaint alleges that there is a contract between Triad and AAMBG under which Triad is suing in Count I. As an alternative, AAMBG asserts that Count IV is barred by a five-year statute of limitations. (BOA asserts that Count IV is not directed against it, an assertion to which Plaintiffs have apparently assented by failing to respond to this assertion in their responsive brief.)

         Plaintiffs reply with respect to BOA that at least one of the Approved Originators, Standard Federal, was owned by BOA during some of the time period set forth in the Amended Complaint and say that they will amend the Complaint if necessary to allege the correct ownership connection. With respect to Count I of the Amended Complaint, Plaintiffs reply that they have adequately pleaded that AAMBG and BOA had a duty of disclosure to the borrowers of the cost of the reinsurance premiums and that they did not comply with this duty. They also reply that the Complaint alleges that Plaintiffs suffered damages and that this is sufficient at this stage to get past a motion to dismiss. They also reply that Count II of the Complaint does in fact make economic sense and does allege that they suffered damages. With respect to Count III, the Rehabilitator replies that she was not appointed until December 12, 2012, and therefore she could not have been aware of the RESPA violation, so that Count III does not violate the five-year statute of limitations. She further replies that Triad's RESPA certification concerning the legality of its agreement with AAMBG cannot be imputed to her and that Plaintiffs adequately allege a RESPA violation. With respect to Count IV, Plaintiffs assert that they are merely pleading unjust enrichment as an alternative to Count I as they are allowed to do. With respect to the statute of limitations argument, she asserts that, like Count III, she could not have reasonably known about the breaches of contract or the unjust enrichment in the time allowed by the statute of limitations.

         II. DISCUSSION

         A. Count I

         With respect to Count I, Plaintiffs argue that the provisions of AAMBG's agreement with Triad give AAMBG the right to notify Triad if a loan is withdrawn at the borrower's request and give AAMBG the right to add an affiliate to the Schedule of Approved Providers so long as the affiliate is shown on AAMBG's holding company disclosure statement, and that these provisions amount to the acceptance by AAMBG of the duty to notify the borrowers of the cost of the reinsurance premiums. However, these contractual provisions are the only ones mentioned by Plaintiffs in Count I, and they say nothing which could give rise to a duty requiring AAMBG to make any disclosures to the borrowers at all.

         With respect to Count I as it applies to BOA, Plaintiffs have argued that they have provided plenty of information in their Amended Complaint to put BOA on notice of the nature of the claim it needs to defend against. The specific allegations supporting Count I are contained in paragraphs 42 through 45 of the amended complaint. These paragraphs read as follows:

42. Pursuant to the Agreement, each Approved Originator was to give or cause to be given to each borrower whose loan is or may be subject to the Agreement a disclosure as appropriate regulatory authorities may suggest or require.
43. The United States Department of Housing and Urban Development (“HUD”) is an appropriate regulatory agency.
44. HUD requires the disclosure of the benefits that they were receiving including the premiums and other ...

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