MBIA Insurance Corporation today received a favorable ruling from the New York Appellate Court, First Department, against Bank of America Corporation and Countrywide Home Loans, Inc.
The court overturned a summary judgment ruling from New York State Supreme Court Justice Eileen Bransten regarding how MBIA can seek to recover BAC-related losses.
“We are very pleased by today’s Appellate Division rulings on the appropriate test of causation and the proper interpretation of the ‘material and adverse’ provision in the insurance agreements, which conclusively resolve any lingering questions over the strength of MBIA’s legal positions on the most significant issues in this case,” said MBIA managing director Kevin Brown. “While we respectfully disagree with the Court’s decision concerning rescissory damages, it does not limit our ability to achieve or change our expectation of a full recovery of all our losses.”
The court stated that Bransten had erred in granting summary judgment to MBIA on rescissory damages, which meant that the bond insurer could rescind the insurance contract. The opinion stated that MBIA “voluntarily gave up the right to seek recession — under any circumstances.”
However, the court ruled in favor of MBIA on the issue of loss causation, saying that to the extent it can prove that a loan which continues to perform “materially and adversely affect[ed]” its interest, it is entitled to have BAC repurchase that loan.
“Plaintiff is entitled to finding that the loan need not be in default to trigger defendants’ obligation to repurchase it,” according to the court opinion. “There is simply nothing in the contractual language which limits defendants’ repurchase obligations in such a manner.”
BAC did not immediately respond to a request for comment.
The decision is related to MBIA’s lawsuit against BAC and its Countrywide Financial unit regarding claims of breach of contract and fraud relating to mortgage-backed securities it insured. MBIA is seeking up to $4.5 billion in damages.
BTIG analyst Mark Palmer said the ruling should in no way impact the bond insurer’s ability to recover damages from BAC and Countrywide.
“If the appellate court’s ruling is bad news for anyone, it’s BAC, in our view,” Palmer said. “The bank in its SEC filings has acknowledged that its current reserve against mortgage putback-related losses may be insufficient if the courts uphold the loss causation argument. And now we have an appellate court ruling that is binding on lower New York state courts.”
He added that the clock for BAC to settle has just become “considerably louder.”
The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County.
MBIA shares tumbled midday after the ruling was released, but climbed back up to close at $10.15 — .10% up from Monday.