Lawyers for the bank’s Countrywide unit argued yesterday in Manhattan that State Supreme Court Justice Eileen Bransten was wrong when she ruled last year that MBIA doesn’t need to establish a “direct causal link” between misrepresentations about the loans and claims payments made by the insurer.
Countrywide attorneys also argued that Bransten was wrong when she said MBIA was entitled to rescissory damages if it proved its claims for fraudulent inducement and breach of contract. The insurer seeks damages in the amount it has paid on the insurance policies, minus premiums it has received, according to Bransten’s ruling.
Barry Ostrager, an attorney with Simpson Thacher & Bartlett LLP representing Countrywide, said that the insurer waived its rights to such damages by issuing the policies and reaffirmed the agreement by collecting premiums after learning of possible grounds for rescission. The only remedy in the contract is the repurchase of non-performing loans, he said.
“These are sophisticated parties who entered into complicated transactions at arm’s length,” Ostrager said during a hearing before the First Department of the New York State Supreme Court’s Appellate Division.
MBIA, which sued Countrywide in 2008, guarantees payments to investors that bought securities backed by pools of the lender’s loans. The insurer says the loans were riskier than portrayed by Countrywide, and as the loans went into default, the Armonk, New York-based company was forced to pay investors.
Countrywide, acquired by Charlotte, North Carolina-based Bank of America in 2008, had argued that MBIA had to establish that payments made on the financial guaranty policies resulted from Countrywide’s misrepresentations and not from the recession.
In her ruling from January 2012, Bransten said case law provides no basis to require MBIA to link Countrywide’s alleged misrepresentations and payments made because of the policies, saying that “it is upon the misrepresentation that induces action resulting in damages that fraud or breach occurs.”
Bransten said rescinding the policies would harm investors in the securities and “may lead to greater economic harm,” while rescissory damages would make MBIA whole “without providing a windfall.”
Philippe Selendy, an attorney with Quinn Emanuel Urquhart & Sullivan LLP representing MBIA, said the insurer’s agreements with Countrywide allow it to pursue “any and all remedies” to recover losses.
MBIA has “no adequate remedy at law” and the repurchase remedy is limited and only addresses individual loans, Selendy said. The insurer said in an earnings call in November that its claims against Bank of America total more than $4.5 billion.
“MBIA would have had zero exposure if it had not been for Countrywide’s fraud,” Selendy said.
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County (Manhattan).
To contact the reporters on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at