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With awards last week of more than $123 million, a federal judge in Delaware has to date awarded nearly $400 million to a trio of banks in their disputes with Royal Indemnity Co., the American subsidiary of the London-based insurance giant Royal & SunAlliance, over its refusal to cover defaulted student loans. The ruling in MBIA Insurance Corp. v. Royal Indemnity was a victory for Philadelphia attorneys David H. Pittinsky and Lawrence D. Berger of Ballard Spahr Andrews & Ingersoll, whose client, PNC Bank, was awarded $110.4 million — a sum that Pittinsky said would grow to at least $114 million because the judge also awarded “any additional sums” that become due under the policy. In a 23-page opinion handed down March 26, U.S. District Judge Joseph J. Farnan Jr. rejected Royal Indemnity’s claim that it was entitled to deny coverage on the grounds that the policies were procured through fraud. In a separate suit pending in U.S. District Court in Tennessee, Royal has accused the Student Finance Corp. of Newark, Del., and the Commercial Driver Institute Inc., a Nashville-based chain of truck driving schools, of operating a ”loan mill” that churned unqualified students through trucking schools. The suit says the loans defaulted ”at an astonishing rate of over 80 percent,” a statistic that Royal claims was masked by SFC when it obtained credit-risk insurance from Royal. But Farnan concluded that Royal’s fraud claims simply couldn’t relieve its obligations to the banks — Wells Fargo Bank, PNC and Wilmington Trust of Pennsylvania. Under the language of the policies, Farnan said, Royal had “an unconditional obligation to pay [the banks] for their claims on the defaulted loans, regardless of any fraud in the inducement or validity defenses.” Together, the three banks have now won judgments worth nearly $400 million. In October, Farnan awarded nearly $270 million to Wells Fargo. In last week’s decision, Farnan awarded more than $110.4 million to PNC and more than $12.9 million to Wilmington Trust. Farnan found that under the insurance policies, a student loan was considered “defaulted” when it was delinquent for more than 90 days. The policies provided that Royal would pay the outstanding principal and 90 days’ worth of interest for every default, Farnan noted. Lawyers for the banks argued that in the policies, Royal had waived all the defenses it might have had, including fraud in the inducement. The banks also noted that even if Royal’s claims of fraud against SFC were valid, the banks themselves were not a party to the fraud. SFC was founded by Pennsylvania investor Andrew N. Yao. It arranges financing for students attending vocational training schools — truck driving schools in particular. In 2002, SFC was the subject of an involuntary bankruptcy petition by four creditors. The Chapter 7 was later converted to a Chapter 11 case and then converted back to a Chapter 7 last year, according to court records. In the insurance dispute, Royal’s lawyer Ronald Rauchberg of Proskauer Rose in New York argued that the waiver of defenses in the policy was broad but nonetheless did not contain a specific waiver of a fraud defense and that Royal’s fraud in the inducement defense was therefore a valid one. Royal also argued that it was entitled to rescind the policies on the basis of SFC’s alleged fraud. But Farnan rejected Royal’s argument that Delaware law prohibits disclaimers of fraud claims. “Although Delaware case law demonstrates a reluctance to honor such disclaimers where the parties are unsophisticated and where the disclaimers are boilerplate and contain language they did not bargain for, Delaware courts have honored disclaimers of fraud, and specifically fraud in the inducement, where the contract at issue involves sophisticated parties and negotiated disclaimer language,” Farnan wrote. Farnan also rejected Royal’s argument that since the policies were insurance policies and not guaranties, the banks were not entitled to summary judgment. “The policies operate like guaranties,” Farnan found, because they define a “default” as 90 days’ delinquency, and identify the banks as the beneficiaries of any “loss.” “The language of the policies supports the conclusion that the policies are guaranties, where the policies define Royal’s obligations as ‘absolute and unconditional.’ . . . These are customary words used to make guaranties,” Farnan wrote. The fact that the policies were labeled “credit risk insurance,” Farnan said, “does not negate the guaranty nature of the policies, where credit risk is often defined as ‘financial guaranty.’” Finding that no Delaware court had addressed a similar case, Farnan turned to decisions from New York courts that addressed cases of a guaranty in which the obligation to pay was also “absolute and unconditional.” In two decisions, Farnan said, courts in New York upheld the policies’ waiver of defenses — including a fraud in the inducement defense. In both cases, Farnan found, the courts held that since the parties were sophisticated, and since the language of the policies was not boilerplate but negotiated, the waiver of the defenses was valid. Royal’s policies, Farnan found, contained language that clearly waived defenses to payment on the basis of “any fraud.” Royal’s lawyers argued that the language of the policies did not rise to the level of the “touchstone of specificity” that courts require. Farnan disagreed, saying, “Sophisticated parties are not required to provide a laundry list of specific situations where defenses are waived when the negotiated language clearly states that any defenses are waived.” (Copies of the 23-page opinion in MBIA Insurance Corp. v. Royal Indemnity , PICS No. 04-0488, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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