A New York judge denied bond insurer MBIA Inc.’s bid for a pretrial ruling on whether Bank of America is liable for about $4.5 billion of soured mortgages made by a lender that the bank acquired in 2008.

In a 77-page ruling released late Monday, New York State Supreme Court Justice Eileen Bransten denied MBIA’s motion for a summary judgement on the issue of successor liability, while also rejecting Bank of America summary judgment on motions that it should not be held liable for claims against the mortgage bank, Countrywide Financial Corp. In response to both motions, Judge Bransten said there are issues of fact in dispute that cannot be decided in an instant ruling. The lawsuit may now proceed to trial.

Following the decision, MBIA shares dropped 7.01% to $9.16 by Tuesday afternoon. 

“While the rulings as a whole may have been a disappointment for MBIA investors looking for the company to gain leverage to force BAC’s hand and finally achieve a reasonable settlement, several elements of the ruling were distinctly in the bond insurer’s favor and augur well for its prospects if the case were to go to trial,” said BTIG analyst Mark Palmer. “They could also help to convince BAC that going to trial would not be a fruitful endeavor.”

Judge Bransten’s statement that “after consideration of the relevant factors, MBIA’s de facto merger claim is properly governed by New York law” is one positive element in the ruling, according to Palmer. He said this could help MBIA establish that Bank of America does have successor liability for Countrywide.

The judge’s ruling went into detail as to why New York law is a more appropriate choice to determine whether Bank of America’s acquisition of Countrywide was a de facto merger, instead of Delaware, as the bank’s attorneys had argued.

The judge ruled in favor of MBIA over the question of its “sole remedy” — whether its remedies included monetary relief in addition to the repurchase of its loans. Attorneys for Bank of America had argued that the bond insurer’s potential recovery of its losses were limited to the repurchase of loans, which are estimated to be around $4.5 billion.

“Upon considering this issue, this court concludes that the contractual provisions referenced by Countrywide do not limit MBIA’s potential recovery to the repurchase remedy, but appear to accommodate other forms of monetary relief,” Judge Bransten wrote in the decision.

The judge also knocked down Bank of America’s arguments that the bond insurer should have relied on its own due diligence instead of Countrywide’s representations and warranties.

“Taken as a whole, we think Judge Bransten’s rulings sent a very strong message to BAC about how difficult it would be for it to win at trial,” Palmer said.

Monday’s ruling is the latest development in a nearly five-year dispute over who is responsible for losses tied to loans packaged into mortgage-backed securities by Countrywide. MBIA sued Countrywide in 2008, claiming that it had fraudulently induced MBIA to provide financial guarantee on securitizations of home equity lines of credit by misrepresenting the underlying quality of the loans.

Kevin Brown, a spokesman for MBIA, declined to comment. Lawrence Grayson, a spokesman for Bank of America, also declined to comment.

The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County.

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