The New York Supreme Court on Monday denied Credit Suisse Securities’ motion to dismiss MBIA Insurance Corp.’s claims of mortgage-related fraud and breach of contract.
MBIA Insurance is a guarantor of structured finance products and a former leader of wrapping municipal bonds. Its domestic public finance portfolio was ceded to a new entity — National Public Finance Guarantee Corp. — in a February 2009 company restructuring.
The legal dispute began last December, when MBIA Insurance filed a complaint alleging it was “fraudulently induced” by the Swiss bank to provide $900 million of guarantees on residential mortgage-backed securities. The insurer charged Credit Suisse with “pervasive and material misrepresentations” in its 2007 descriptions of various mortgages, which were pooled together, deposited into a trust, and then securitized into an asset MBIA Insurance guaranteed.
Since the loans began defaulting with the onset of the credit crisis, MBIA Insurance has incurred $296 million in claims, court documents show. It is also plaintiff in nine similar cases in which it seeks to recover billions of dollars.
Judge Shirley Kornreich ruled that while Credit Suisse could point to various contractual disclaimers suggesting possible risks for MBIA, it could not point to disclosures “that would have conclusively alerted MBIA to the pervasive loan fraud of which it complains.”
Indeed, in her 17-page ruling for the case to go forward, she cited previous court cases suggesting that the very disclaimers relied upon by Credit Suisse may themselves be misleading statements that concealed the poor quality of the loans.
“In moving to dismiss the fraudulent inducement claim, defendants’ do not challenge the allegation that Credit Suisse made false of misleading statements,” Kornreich said. “Rather, they argue that MBIA was a sophisticated party who could not have relied on any such misrepresentations as a matter of law.”
However, Kornreich agreed there was “justifiable reliance” on the part of MBIA Insurance.
She referenced documents showing that Credit Suisse told MBIA its loans “were underwritten to strict guidelines” and that it performed “rigorous due diligence” on them, rejecting “a large number of loans from the pool.” Warranty information indicated the loans were provided under prudent guidelines and that no material in the documents was “untrue or misleading.”
In contrast to those claims, a third-party consultant hired by MBIA Insurance determined that 87% of a sample of nearly 1,400 defaulted loans did not meet contractual standards. The sample is worth $78 million.
Kevin Brown, spokesman for MBIA Insurance, said he was pleased the judge recognized the validity of MBIA’s position.
“Even sophisticated entities are not impervious to and may justifiably rely on fraudulent statements made by counterparties such as Credit Suisse,” Brown said in an e-mailed statement. “MBIA has been substantially harmed by Credit Suisse and we will continue to aggressively pursue our remedies.”
The judge rejected MBIA Insurance’s request for a jury trial, citing clear provisions within the insurance contracts.
The ruling to move forward is consistent with the court’s April decision to allow MBIA Insurance to pursue claims of fraud against Countrywide Financial Corp.
Credit Suisse and MBIA each have 30 days to respond to the decision.
MBIA Inc., the insurer’s parent, earlier this week increased its total expected recoveries from similar lawsuits to $2.1 billion from $1.9 billion. In addition, it entered into a settlement with unnamed sponsors of mortgage loan securitizations in which the parent company received an undisclosed amount of money for resolving a dispute relating to warranty claims against the sponsor.
“I am extremely pleased that after a very productive dialogue with one mortgage securitization sponsor, we reached a resolution recovery a few weeks ago on mutually beneficial terms,” Jay Brown, MBIA’s chief executive officer, told investors Tuesday in a second-quarter earnings conference call.
“We still have a long way to go in recovering amounts that we should never have had to pay out on our insured mortgages,” he said. “But we are firmly convinced of the validity of our claims and remain determined to aggressively pursue them for the benefit of other policyholders and our shareholders.”
MBIA’s litigation expenses have increased tenfold to $100 million per year, Brown told investors, noting those costs play an important role in determining whether to settle or to continue through the courts.
Another positive development for MBIA, announced Monday, was that its muni-only insurer, National Public Finance Guarantee, received approval from the New York Insurance Department to reset its unassigned surplus to zero as of Jan. 1. That allows the bond insurer to create dividend capacity through retained earnings, which can eventually be used to create revenue for the holding company.
That capacity was $171 million at the end of the second quarter, though NPFG said it has no plans to pay dividends to MBIA “in the near future.”
The holding company held a cash and short-term balance of $390 million as of June 30, its earnings statement said. Combined with expected flows, MBIA said that money should cover its cash needs through 2015 even if no dividends are received from its subsidiaries.
Company stock closed Thursday 1.40% lower at $9.18. In the past month, however, share value has risen nearly 43%.