MBIA confident in Countrywide lawsuit

Bank of America Corp. on Jan. 25 appealed a key causation ruling in its lawsuit with MBIA Inc. that could have billion dollar implications for both parties involved in the mortgage-repurchasing lawsuit.

The Jan. 3 ruling and subsequent appeal stem from a 2008 lawsuit in New York State Supreme Court, MBIA Insurance vs. Countrywide Home Loans, in which MBIA has alleged fraud and breach of contract on the part of Bank of America”™s Countrywide unit and is seeking rescissory damages.

To date, MBIA has paid nearly $3 billion in claims on mortgage-backed securities that were originated by Countrywide prior to the housing collapse.

At stake is whether MBIA need only prove that Countrywide made misrepresentations that influenced its decision to issue the insurance policies, or whether MBIA must prove that there was a direct correlation between the alleged misrepresentations and the bonds”™ failure.

In her ruling, Justice Eileen Bransten largely sided with MBIA in what could amount to a major blow to Bank of America.

She wrote that MBIA first would need to prove that it would not have issued the policies had the alleged misrepresentations not been made; second, that it would need to prove that any misrepresentations significantly increased MBIA”™s risk of loss; and finally, that it was damaged as a direct result of the material misrepresentations.

However, even Bransten noted that proving all of the above would not be simple.

“As has been aptly pointed out by Countrywide, this will not be an easy task,” Bransten wrote. She concluded, saying that upon reaching its burden of proof in each claim, MBIA would then be required to prove the amount of damages.

After word broke of Bransten”™s decision, MBIA CEO Jay Brown said the ruling boosted the company”™s prospects of recovering its losses stemming from Countrywide-issued securities.

“We are very pleased by the court”™s ruling granting our motion for summary judgment on key issues in MBIA”™s case against Bank of America and Countrywide,” Brown said in a statement. “The ruling provides us with a straightforward path to recovery of our losses.”

Bank of America expressed disappointment with the ruling and with a similar ruling by Bransten in a second lawsuit between bond insurance company Syncora Holdings and Countrywide.

“Although many aspects of the court”™s decisions were favorable to Countrywide, we believe that the court erred when it determined that MBIA and Syncora may be entitled to recover rescissory damages, a remedy that is not recognized in the state of New York,” said bank spokesman Lawrence Grayson.

Sources with knowledge of the MBIA proceedings differed on whether Bransten”™s ruling would have an impact on the outcome of the case, with some analysts suggesting that the ruling could lead to billions of dollars more in losses by Bank of America relating to this lawsuit and others.

Several people have also suggested in light of the ruling that Bank of America may be more apt to approach MBIA with a settlement offer before the case reaches trial.

However, at this point any trial is still far off. The next step will be for both sides to file expert reports, which will take place in the end of February and could last several months. After expert discovery is finished, either side may file for rejudgment motions, with a trial possibly beginning in the end of this year or the beginning of 2013.

With Bank of America appealing the causation ruling, the matter now moves to the state Appellate Division level.

Despite the appeal, MBIA is confident that the ruling will be upheld.

“The court”™s opinion is well reasoned, consistent with New York law, and we are confident it will be upheld on appeal,” said MBIA spokesman Kevin Brown.