Back in October 2011, New York State Supreme Court Justice
Shirley Kornreich issued a pair of strange decisions in parallel
cases against Credit Suisse by the bond insurers MBIA and Ambac.
The monolines, both represented by Patterson Belknap Webb &
Tyler, had sued the bank in 2010, asserting claims for both
fraud and breach of contract in connection with Credit Suisse
mortgage-backed securities they agreed to insure. Kornreich had
previously dismissed the fraud counts, holding that they merely
duplicated the monolines' contract claims. But that ruling put
her at odds with at least six other state and federal judges,
and when the New York Appellate Division, First Department,
affirmed the consensus view in a different case, Kornreich had
little choice but to reinstate the Ambac and MBIA fraud claims.
As expected, she did so in those October 2011 decisions.
But what Kornreich gave the bond insurers with one hand, she
took away with the other. In the same 2011 decisions, the judge
ruled that Ambac and MBIA had waived their rights to a jury
trial in the contracts they signed with Credit Suisse. That
meant that she, rather than a jury, would decide the merits of
those newly reinstated fraud allegations -- and she didn't think
there was much merit to them. Kornreich's decisions said that
Ambac and MBIA couldn't just point to the MBS offering materials
and claim they were duped. Credit Suisse, she said, had offered
ample notice of potential weaknesses in the underlying loan
pool. To prove fraudulent inducement, she ruled, Ambac and MBIA
would have to show that the bank engaged in outright deception.
The judge did order discovery on the bond insurers' fraud
claims, though not much has taken place. In the meantime, Ambac
and MBIA appealed Kornreich's holding that they'd waived their
right to a jury trial. They argued that the waiver should not
apply, since it was part of a contract they claimed they'd been
fraudulently induced to enter. Credit Suisse, represented in
both cases by Orrick, Herrington & Sutcliffe, countered that
although New York law does hold that contract waivers are not
enforceable when a plaintiff is suing to invalidate the
contract, Ambac and MBIA are not asking for rescission of the
contract, but only for money damages. In that circumstance,
Credit Suisse said, Kornreich correctly ruled that the bond
insurers don't have the right to trial by jury.
The appeals court thoroughly disagreed with the bank. In
one-paragraph rulings, a five-judge panel of the Appellate
Division, First Department said that it is not of consequence
that Ambac and MBIA aren't expressly challenging the terms of
the insurance agreements. "The complaint alleges repeatedly that
the insurance agreement was obtained through various types of
fraud, making it clear that fraudulent inducement is plaintiff's
primary claim," the court said, citing its 2005 holding in Wells Fargo v. Stargate Films. "Thus, the provision of the agreement
that waives the right to trial by jury does not apply." (I've
just quoted pretty much the entire ruling.)
The appellate ruling is certainly good news for the
monolines, but it's not a certainty that Ambac and MBIA will
actually get to try their case to a jury any time soon, if at
all. Discovery has barely even begun -- and Credit Suisse will
still have a shot to eliminate the bond insurers' cases via
summary judgment motions. Those motions, by the way, will be
decided by none other than Kornreich.
Follow us on Twitter: @AlisonFrankel, @ReutersLegal | Like us on Facebook