Reorganization and Liquidation

The District Court for the Northern District of Illinois dismissed a complaint filed by Plaintiff-Rehabilitator, the Illinois Director of Insurance, against Defendant-Reinsurer, Twin Rivers, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and a violation of the Real Estate Settlement Procedures Act (RESPA).

The underlying reinsurance agreement stemmed from a previous “rehabilitation” proceeding under which the Illinois Department of Insurance was appointed as the rehabilitator for a now-defunct insurer, Triad, and as such was authorized to “bring any action, claim, suit or proceeding against any person with respect to that person’s dealings with Triad.” The present dispute concerns a reinsurance arrangement by which Twin Rivers agreed to reinsure certain private mortgage insurance (PMI) policies issued by Triad on mortgages originated by banks affiliated with Twin Rivers. In exchange for the reinsurance, Triad would pay a certain percentage of each referred borrower’s PMI premiums to Twin Rivers. These so-called “ceded” premiums were deposited into a trust account and invested and used to fund any payments due to Twin Rivers under the reinsurance agreement. Twin Rivers would periodically receive dividends out of the trust account for the benefit of itself and its affiliated banks. A balance of approximately $1,741,655 remained in the trust account as of the filing of the original complaint in this action.

With regard to the breach of contract claim, the Illinois Director of Insurance alleged that Twin Rivers breached its agreement by failing to provide certain disclosures to borrowers whose PMI policies it would be reinsuring consistent with U.S. Department of Housing and Urban Development (HUD) regulations requiring the disclosure of the benefits that Twin Rivers was receiving through the captive reinsurance arrangement. In its motion to dismiss, Twin Rivers argued that no provision in the agreement obligated it to provide HUD disclosures to borrowers and, in any event, the Illinois Department of Insurance was not harmed by the absence of disclosures. The Director argued that language in the agreement requiring that Twin Rivers not violate any “agreement with, or condition imposed by, or consent required by… any governmental… body” imposed a continuing commitment on the part of Twin Rivers to provide the HUD disclosures. Ultimately, the Court found the language “fairly susceptible to Defendant’s interpretation, but not [to] Plaintiff’s.” In so finding, the Court found more plausible the meaning attributed by Twin Rivers, that the language was merely a representation that, at the time of contracting, it was not specifically and individually subject to any legal constraints that would preclude it from agreeing to and fulfilling its obligations under the agreement.

The Court also dismissed the good faith and fair dealing claim, citing the Director’s failure to allege that Twin Rivers exercised its discretion in bad faith, unreasonably, or in a manner inconsistent with the reasonable expectations of the parties. The RESPA claims were also dismissed on account of statute of limitations, and the unjust enrichment claim was dismissed in light of the express contract governing the relationship between the parties.

State of Illinois ex rel. Hammer v. Twin Rivers Ins. Co., No. 16 C 7371 (USDC N.D. Ill. Jul. 5, 2017).

This post written by Gail Jankowski.

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A district judge in the Northern District of Illinois has dismissed all claims brought by the Illinois Director of Insurance, acting as rehabilitator for Triad Guaranty Insurance Corporation and Triad Guaranty Assurance Corporation (collectively “Triad”), after it was placed in rehabilitation, against AAMBG Reinsurance, Inc. and Bank of America (“BOA”).

The dispute arose out of an arrangement under which AAMBG provided reinsurance to Triad for private mortgage insurance (PMI) provided by Triad to borrowers with mortgages from a set of lenders that were affiliates of AAMBG. The complaint alleged that AAMBG and BOA breached a contractual duty to disclose to borrowers any benefits the loan originators received from PMI premiums, breached the duty of good faith and fair dealing by only referring borrowers with the highest default risk to Triad, violated RESPA by accepting excessive reinsurance premiums, and were unjustly enriched by these practices. AAMBG and BOA moved to dismiss, and the court dismissed the complaint in its entirety.

In dismissing the breach of contract claim, the court found that the plaintiff had not pointed to anything creating a duty on the part of AAMBG to make any disclosures to borrowers. The court also found that the complaint failed to “allege who the affected borrower was, the specific regulation violated, how it was violated, and, most important, how Triad was damaged.”  The court found that the good faith and fair dealing claim was “totally implausible,” as it did “not make economic sense” for AAMBG to send poor risks to Triad when, under a hypothetical offered by the plaintiff,  AAMBG would actually be responsible for a larger portion of the loss than would Triad.  Fourth, the court found that the plaintiff had made no attempt to show that the safe harbor provision of RESPA Section 8(c) did not apply to AAMBG’s reinsurance contract with Triad, as the complaint did not allege that the agreement to provide reinsurance was illusory. The court also found that the RESPA claim was barred by the statute of limitations, rejecting a “continuing violation” theory put forth by the plaintiff and finding that the limitations period began to run when Triad last purchased reinsurance from AAMBG.  Finally, the court rejected the unjust enrichment claim because the parties’ relationship was governed by a contract.

People ex rel. Dowling v. AAMBG Reinsurance, Inc., 16 C 7477 (N.D. Ill. June 1, 2017)

This post written by Jason Brost.
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