The bond insurer Syncora got just about everything it wanted when U.S. District Judge Paul Crotty of Manhattan issued his long-awaited ruling on loss causation in Syncora's breach-of-contract case against EMC, the erstwhile mortgage arm of Bear Stearns. Crotty's analysis didn't track the same way as that of New York State Supreme Court Justice Eileen Bransten in the Syncora and MBIA rulings against Countrywide, and, unlike Bransten, he did not grant Syncora summary judgment on its theory of rescissionary damages, which would have entitled the bond insurer, as a matter of law, to recover everything it has paid out in claims on the EMC mortgage-backed securities it insures, less premiums. Crotty said it's too early to decide that fact-based question.

But on every other point, the federal judge sided with Syncora and its lawyers at Patterson Belknap Webb & Tyler, and in ways that may protect Syncora when the state appeals court reviews Bransten's ruling in the Countrywide case. Bransten began her analysis with the insurance contracts between the monolines and Countrywide, concluding that under state insurance law the bond insurers simply had to show that Countrywide misstated the risk profile of the underlying mortgage pool when it induced MBIA and Syncora to insure the mortgage-backed notes. She declined, however, to grant summary judgment to Syncora and MBIA on the broader question of whether Countrywide breached MBS servicing agreements -- as opposed to insurance contracts -- merely by misrepresenting the quality of the underlying loans, or whether insurers (and, by extension, investors) could only assert put-back demands for defaulted loans.

Crotty, by contrast, said the contracts between Syncora and EMC are clear: EMC is liable for breaches in representations and warranties about the underlying home equity loans, regardless of whether those loans are in default. The insurance contract, he said, refers back to the loan servicing agreements, which, according to Crotty, "do not provide that breaches of representations or warranties must cause any ... loan to default, before (Syncora) can enforce its remedies under the repurchase provision. Had the parties intended this requirement, they could have included such language. They did not." In essence, Crotty conflated his analysis of the insurance and loan pooling contracts, unlike Bransten, who examined them separately. He concluded that the insurance contract incorporates the loan pooling contract, which does not require Syncora to show that breaches in EMC's representations on the underlying loans led to their default in order to demand repurchase of deficient loans.

That's a strong holding, and because Crotty based it on the relationship between the insurance contract and the underlying home equity loan servicing contract, the ruling probably won't be affected if New York's First Department overturns Bransten's insurance-law findings. (A state appellate ruling would have no direct bearing on the appeal of a federal court decision, but the 2nd Circuit Court of Appeals would surely make note of it when the federal appeals court considers Crotty's decision.) So Crotty's ruling is undoubtedly bad news for EMC parent JPMorgan Chase, which is facing state and federal court suits by, in addition to Syncora, the monolines Assured Guaranty and Ambac. Only one other EMC case is in federal court, but between Crotty's federal court holding and Bransten's state court precedent in the Countrywide case, it's going to be an uphill battle for JPMorgan and its lawyers at Sullivan & Cromwell -- or, for that matter, any other MBS issuer fending off bond insurer put-back claims -- to argue in any monoline litigation that insurers can only make repurchase demands based on loans in default. Both courts ruled that insurers need only show that they were deceived about the risk profile of the underlying loan pool.

But what about MBS noteholders? As I previously wrote, Bransten's loss causation ruling in the Countrywide case was a disappointment for MBS investors. The monolines had asked for summary judgment on the question of whether, under pooling and servicing agreements, Countrywide had to repurchase any underlying loan that breached reps and warranties, regardless of whether the loan was in default. Even though she sided with the monolines on the insurance law issues, Bransten declined to grant summary judgment based on the pooling and servicing agreements, holding that they are open to interpretation.

Crotty said the MBS contract in the Syncora case was not ambiguous. That might seem like a good omen for EMC noteholders, but the judge went out of his way to distinguish Syncora from investors. "Here, the language of the parties' repurchase provisions reflects this distinction; EMC's repurchase obligation is triggered when a breach of a representation or warranty 'adversely affects the interests of the note insurer,'" he wrote, italicizing "note insurer," distinguishing it from noteholders. He also noted that a breach of underlying representations and warranties "would have adversely affected Syncora's interests as an insurer." Crotty clearly intended his ruling to apply to monolines, not more broadly to noteholders.

Reps and warranties claims by MBS noteholders, as you know, are procedurally quite complicated, since the claims technically reside with MBS trustees and only revert directly to investors who jump through a series of prelawsuit hoops. A powerful group of institutional investors has, however, asserted put-back demands on JPMorgan, based on notes with a face value of $95 billion. You can be sure the group's lawyers at Gibbs & Bruns are scrutinizing Crotty's opinion, looking for ways to persuade the judge that noteholders, like insurers, don't have to wait for an underlying loan to default to assert a put-back claim.

If any noteholder can extend Crotty's reasoning in a put-back case, bank MBS liability will skyrocket. But I think investors still have some heavy lifting to do on loss causation.

(Reporting by Alison Frankel)

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