Summary Judgment Denied in Monoline Insurer Lawsuit Against J.P. Morgan

On June 6, 2016, Justice Alan D. Scheinkman of the New York Supreme Court for Westchester County denied J.P. Morgan’s motion for summary judgment on MBIA’s fraudulent concealment claim. The court had previously granted summary judgment in favor of J.P. Morgan on MBIA’s fraud claim, but permitted MBIA to amend its complaint to add a fraudulent concealment claim that J.P. Morgan failed to disclose complete and accurate third-party due diligence results regarding the collateral underlying the securitization. First, Scheinkman rejected J.P. Morgan’s argument that it did not owe MBIA an affirmative duty to disclose the results of the due diligence review. The Court held that the bid letter between J.P. Morgan and MBIA evinced a contractual relationship between the parties, and that even in the absence of such a relationship, J.P. Morgan was acting as an agent for the deal’s sponsor, who was obligated to share the due diligence results with MBIA.  Second, Scheinkman held that issues of fact precluded summary judgment on actual reliance, because withholding, disguising the significance, and delivering an altered version of due diligence results may have thwarted MBIA’s ability to protect itself.  Last, the Court held that whether MBIA justifiably relied on J.P. Morgan’s failure to disclose the due diligence results is a question for the jury.  Decision & Order.

MBIA and Bank of America Settle MBS Litigation for $1.7 Billion

On May 6, monoline insurer MBIA announced that it had reached a $1.7 billion settlement with Bank of America in connection with alleged fraud and breach of contract claims related to Countrywide-issued mortgage-backed securities insured by MBIA.  Under the terms of the settlement, Bank of America will make a $1.6 billion cash payment, will transfer back $134 million of MBIA’s securities, and will extend MBIA a $500 million credit line.  The settlement ends litigation pending in the Supreme Court for the State of New York since 2008.  The agreement also affected other MBIA-issued policies insuring Bank of America’s credit default swaps, and grants Bank of America warrants to purchase approximately 10 million shares of MBIA common stock.  The settlement is subject to approval by the New York State Department of Financial Services.  Press Release.

Court Issues Summary Judgment Ruling in MBIA’s RMBS Action Against Countrywide

On April 29, Justice Eileen Bransten of the New York State Supreme Court issued an opinion granting in part and denying in part competing motions for summary judgment filed by MBIA and Countrywide in connection with tort and contract claims MBIA asserted concerning its insurance policies wrapping certain Countrywide RMBS.  With respect to Countrywide’s motion, the Court i) granted Countrywide’s motion to dismiss MBIA’s claim for indemnification because the contract did not unequivocally provide MBIA with a right to indemnification for claims between the parties; (ii) denied the motion as to MBIA’s fraudulent inducement claim because of  Countrywide’s failure to demonstrate that justifiable reliance is a required element of the claim under either statutory or common law; (iii) denied the motion as to claims for breach of the insurance agreements, holding that the language of the insurance agreement at issue did not limit MBIA to a “sole remedy” of repurchase and that MBIA had presented sufficient evidence to raise a triable issue that Countrywide was on notice of breaches throughout the collateral pools backing the RMBS at issue; (iv) ruled that MBIA had created issues of fact as to whether Countrywide committed servicing breaches with gross negligence; and (v) found triable issues of fact exist with respect to MBIA’s request for punitive damages in connection with its fraudulent inducement claim.

With respect to MBIA’s motion for summary judgment, the Court i) ruled that loans need not be in default in order to be eligible for repurchase; ii) found factual issues as to whether loans Countrywide classified as “severely unsatisfactory” breached Countrywide’s representations; iii) rejected MBIA’s argument that Countrywide’s refusal to repurchase loans constituted an anticipatory repudiation of its repurchase obligations; and iv) found that Countrywide had failed to raise triable fact issues on a loan-by-loan basis concerning  the falsity of representations including as to appraisals, defaults, the accuracy of the mortgage loan schedule, and the contents of mortgage loan files.  The Court ruled that whether those breaches were sufficiently material and adverse to trigger Countrywide’s repurchase obligation was a question for trial.  Because that issue remains for trial, the Court declined MBIA’s request to extrapolate breach findings within a loan sample to the entire pool of loans at issue.  Order.

New York State Appeals Court Affirms Denial of BofA’s Motion to Sever and Consolidate Successor Liability Claims

On April 5, 2012, a five-judge panel for the New York’s First Department intermediate appellate court affirmed a lower court’s ruling that denied Bank of America’s motion to sever successor liability claims brought against it from the primary claims in four separate actions brought by four monoline insurers. Bank of America had requested that, once severed from the underlying lawsuits, the successor liability claims should be consolidated into a separate proceeding for discovery purposes. The four insurers, Ambac Assurance Corp, Financial Guaranty Insurance Co, MBIA Inc, and Syncora Guarantee Inc., claim in their respective lawsuits that Countrywide ignored underwriting guidelines, resulting in loans that were riskier than had been represented to the insurers and thus subjecting the insurers to billions of dollars in insurance claims when the loans defaulted. They seek to hold Bank of America liable under theories of successor liability related to Bank of America’s acquisition of Countrywide. In affirming the denial of Bank of America’s motion, the appeals court reasoned that the four actions were at different stages of discovery and that consolidation would result in undue delay.  Order.

Bank of America’s Motion to Consolidate Actions by Bond Insurers Denied

On October 31, 2011, Justice Bransten of the Supreme Court for the State of New York denied Bank of America’s (“BofA”) motion to split the successor liability claims from four separate lawsuits pending against the bank and consolidate those claims into a single case. Four monoline insurers that insured Countrywide mortgage-backed securities – MBIA Inc., Syncora Guarantee Inc., Ambac Assurance Corp., and Financial Guaranty Insurance Co. – have sued BofA and Countrywide for fraud and breach of contract. BofA argued that the nearly identical successor liability claims in the four suits should be severed from the individual cases, consolidated, and stayed until after primary liability is decided. Justice Bransten agreed the claims were similar but found severance and consolidation would prejudice MBIA, the first to file suit, by unduly delaying its claims while the other insurers conduct discovery. Decision.

Federal Judge Dismisses MBIA Lawsuit Against the FDIC

On October 6, 2011, Judge Amy Jackson of the Federal District Court in the District of Columbia dismissed an action brought by MBIA Insurance Corporation (“MBIA”) against the FDIC, both in its capacity as receiver for IndyMac Bank and in its corporate capacity, arising out of losses MBIA incurred in connection with its agreements to insure investors in certain IndyMac RMBS. MBIA attempted to distinguish itself from other general creditors of IndyMac by arguing that its losses were actually “administrative expenses” of the FDIC, which are entitled to priority distribution. The court granted the FDIC’s motion to dismiss based on lack of subject matter jurisdiction and failure to state a claim, finding that the FDIC had not expressly approved the insuring agreements between MBIA and IndyMac as necessary administrative expenses. It rejected MBIA’s theory that the FDIC had approved the expenses by not specifically repudiating the agreements because “approval by omission” was inconsistent with the applicable statutes and regulations, and potentially could transform all general creditor claims based on unrepudiated obligations of the failed bank into administrative expenses entitled to priority. Opinion.

New York Court Orders Rating Agencies to Produce Internal Communications Regarding RMBS Ratings in Monoline Insurer Lawsuit

Justice Eileen Brantsen of the Supreme Court of the State of New York ordered non-parties Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. to produce their internal communications concerning their “shadow ratings” of certain RMBS certificates at issue in an action between monoline insurer MBIA and several Countrywide affiliates. MBIA maintains that it received and relied upon the “shadow ratings” in deciding whether to insure the Countrywide RMBS. MBIA argued that the requested documents were directly relevant to Countrywide’s alleged misrepresentations and the reasonableness of MBIA’s reliance on Countrywide’s representations regarding the quality of the loans underlying the RMBS. Order.

New York Appellate Court Preserves MBIA’s Fraud Claim in RMBS Suit Against Countrywide

On June 30, 2011, a New York appellate court affirmed the denial of Countrywide Home Loans, Inc.’s and certain of its affiliates’ (“Countrywide”) motion to dismiss MBIA, Inc’s (“MBIA”) claim that it had been fraudulently induced to insure 15 Countrywide RMBS securitizations. The court held that MBIA’s fraudulent inducement claim was not duplicative of its contract claims and that the fraudulent inducement claim adequately alleged misstatements of fact that could be argued to have caused MBIA’s losses. The court, however, sustained the dismissal of MBIA’s negligent misrepresentation claim, holding that an arm’s length business transaction does not create the special relationship of trust or confidence required to establish such a claim. The court also dismissed MBIA’s claim for breach of the implied duty of good faith and fair dealing, holding that the claim was duplicative of MBIA’s breach of contract claim. Decision.

New York Court Preserves MBIA’s Fraud and Breach of Contract Claims Against Morgan Stanley

On May 26, 2011, Justice Gerald Loehr of the Supreme Court of the State of New York granted in part and denied in part Morgan Stanley’s motion to dismiss MBIA’s claims for breach of contract, fraud, and unjust enrichment arising out of MBIA’s wrap of a $269,000,000 second-lien RMBS transaction. The Court denied Morgan Stanley’s motion to dismiss MBIA’s fraudulent inducement and contract claims, finding that those counts were pled with sufficient particularity. The Court further held that MBIA’s fraudulent inducement claim was not duplicative of its contract claim. The Court also refused to strike MBIA’s request for punitive, consequential, and future damages. The Court, however, granted the defendants’ motion to dismiss the unjust enrichment claim, finding that such a claim was precluded by the relevant servicing agreement. Decision.

Orrick Obtains Dismissal of MBIA’s Fraud Claim Against Credit Suisse

Justice Shirley Kornreich of the Supreme Court of the State of New York dismissed MBIA Insurance Corporation’s claim that it was fraudulently induced to insure a Credit Suisse RMBS issuance. The Court dismissed the fraudulent inducement claim because MBIA, a sophisticated party, had access to and failed to investigate all relevant information, had failed to obtain certain contractual warranties, because certain of the alleged misrepresentations were not material or amounted to non-actionable opinions of value or future expectations, and because the fraud claim was largely duplicative of MBIA’s contract claim. The Court also dismissed several other aspects of MBIA’s claims, including the prayers for punitive and consequential damages. MBIA may proceed, however, with certain other claims, including its claims for breach of contract and indemnification. Orrick represents Credit Suisse in this matter. Decision.