If Patterson Belknap Webb & Tyler were the kind of firm where lawyers say “I told you so” to a judge—which it most certainly is not—there’d be a lot of that going on today.
Earlier this month, OTC told you about New York state supreme court judge Shirley Kornreich’s dismissal of MBIA’s fraud allegations against Credit Suisse. The judge reversed her own previous finding that the insurer could proceed with both fraud and breach of contract claims for Credit Suisse’s alleged misrepresentations about the mortgage loans underlying securitizations MBIA insured. Judge Kornreich ruled that the fraud claims merely duplicated the contract claims so, under New York law, must be dismissed.
The ruling matched a decision the judge had reached in Ambac’s parallel case against Credit Suisse—but it put her at odds with at least six other state and federal judges, who have found the fraud claims aren’t duplicative. MBIA’s lawyers at Patterson Belknap also pointed out to Judge Kornreich that a New York appeals court was poised to rule on the very question of whether the contract allegations cancel MBIA’s fraud claims. The issue had been briefed and argued to an appellate panel in MBIA’s case against Countrywide. Patterson Belknap asked Judge Kornreich to wait until the appeals court issued an opinion before she decided the Credit Suisse case.
Well, now the opinion is in, and it looks like Patterson was right to suggest Judge Kornreich wait. In a unanimous ruling Thursday, the New York appellate division, first department ruled that Manhattan state supreme court judge Eileen Bransten correctly denied Countrywide’s motion to dismiss MBIA fraud claims.
The ruling leaves no ambiguity that in the context of the bond-insurer allegations against MBS issuers, contract claims don’t preclude parallel fraud allegations. “A fraud claim will be upheld when a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, even though the same circumstances also give rise to the plaintiff's breach of contract claim,” wrote Judge Roslyn Richter for the court. “Because MBIA alleges misrepresentations of present facts, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives…. It is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim.”
So where does that leave Judge Kornreich? She has reached a contrary conclusion in cases against Credit Suisse brought by both Ambac and MBIA. (The lawyers are the same in both cases: Patterson Belknap for the insurers; Orrick, Herrington & Sutcliffe for Credit Suisse.) OTC checked in with Patterson, Orrick, and Judge Kornreich’s chambers, but Orrick’s Barry Levin and the judge didn’t return calls; Erik Haas of Patterson declined to comment. I’m betting that Patterson will file motions asking the judge to reconsider her rulings in both the Ambac and MBIA cases in light of the appellate division’s holding.
Peter Calamari of Quinn Emanuel Urquhart & Sullivan told OTC that the ruling is a boon to MBIA. “We’re really happy about it,” he said, noting that the opinion should put to rest any doubt that the bond insurers can move forward with fraud claims against MBS issuers. “There are many billions of dollars at stake.”
Countrywide did get MBIA’s implied duty claim tossed in the appeals court. Countrywide counsel Mark Holland of Goodwin Procter referred a call to Countrywide. A BofA spokeswoman didn’t return a call.
(Reporting by Alison Frankel)