As loyal readers will recall, I laid it on the line a few weeks back and predicted that MBIA would win its loss causation argument against Countrywide/BofA, making the nation’s largest bank wish it had settled this bellwether piece of New York litigation. Well, I was right… to a point.
MBIA and other bond insurers with MBS exposure were certainly smiling after MBIA won the majority of its claims in Tuesday’s opinion on summary judgment (the “Order”). In particular, MBIA succeeded in convincing Judge Bransten that it did not have to tie specific claims payments to particular misrepresentations in order to prove its claims of fraud and breach of contract and recover the insurance proceeds it has paid on defective loans. “We are very pleased by today’s ruling,” MBIA Chief Executive Jay Brown said. “The ruling provides us with a straightforward path to recovery of our losses.”
However, the Judge stopped short of providing the complete relief that MBIA was seeking – to bar Countrywide’s defenses regarding intervening causes entirely. The Judge also kicked the can down the road on providing MBS plaintiffs with their first piece authority as to whether the materiality standard for mortgage putbacks required a showing that the breach in question caused the loan to go into default. Unfortunately, her Honor punted on this last (and arguably most important and far-reaching) issue, leaving bondholders without guidance on the strength of repurchase claims.
As per my MO, I will break down Bransten’s recent Order in a bit of detail. This time, I’ll include my real-time reactions from last Tuesday as I read each section of analysis in the Order.
Section 1 – Summary of Arguments on Fraud and Breach of Warranty
In this first section, Judge Bransten reiterates MBIA’s argument that in order to succeed on its claim for insurance fraud, it need only prove that the application for insurance contained a material misrepresentation that, had MBIA known the true facts, would have led it to change the terms or provision of insurance coverage. Bransten also notes that MBIA makes a similar argument on loss causation with respect to its claims for breach of warranty in its insurance agreements: it must only prove that the breach of warranty materially increased the insurer’s risk. Bransten then recites the counterargument from Countrywide: that MBIA must instead establish that the claims payments it made were caused directly by Countrywide’s misrepresentations or breaches of reps and warranties, and not by some intervening cause (e.g., the economic downturn, the housing market crash, or the price of tea in China).
At this point, it strikes me again how strained an interpretation of causation Countrywide/BofA is trying to sell the court. They’re essentially saying, “we can lie all we want to induce you to insure our bonds, and our lies might actually succeed in inducing you to insure our bonds when you wouldn’t have otherwise. But, if you can’t prove that our lies led directly to your payment of a claim, tough luck.” I’m as confident as ever that Bransten will side with MBIA.
Section 2A – Causation
Bransten next identifies the “base issue before this court… when causation occurs in claims for insurance fraud and breach of representations and warranties.” In reaching this issue, she must first address Countrywide’s argument that the First Department (New York’s Court of Appeals) had already held that MBIA must prove that Countrywide’s alleged wrongdoing caused MBIA’s losses. Bransten has little trouble disposing of this argument, holding:
the court disagrees with Countrywide’s characterization of this court’s holding and the Appellate Division’s June 30, 2011 decision with regard to causation. The Appellate Division decision did not hold, as Countrywide argues, that this court must determine which of MBIA’s losses were caused by countrywide’s alleged wrongdoing and which were caused by the “Mortgage Market Meltdown.” Rather, in the section that Countrywide quotes, the First Department rejected Countrywide’s contention that MBIA’s fraud claim must be dismissed for failure to plead a causal link between Countrywide’s alleged misrepresentations and MBIA’s alleged damages. (Opinion at 9-10 (citations omitted))
You may recall from my article analyzing these pleadings that I didn’t see how the First Department’s decision lent any support to Countrywide’s global catastrophe defense. Apparently, Bransten sees it the same way as she goes on to determine that no decision exists that must be treated as “the law of the case.” So far, so good.
Bransten next turns to MBIA’s arguments that its claims under New York law are informed and influenced by New York Insurance Law Sections 3105 and 3106. First, she holds that MBIA’s insurance law claims are valid in this action for damages and that Countrywide is the proper defendant for the misrepresentations alleged by MBIA. The court then finds that MBIA’s common law claims are indeed informed by New York common law and Insurance law Sections 3105 and 3106.
This is a critical win for MBIA and the first sign that MBIA might score a complete victory on its motion. Remember that the familiar understanding of materiality in the insurance context under New York common law and Insurance Law is that a misrepresentation that would have affected the insurer’s willingness to insure the risk or the terms on which it would have insured the risk constitutes a material misrepresentation. The fact that the court will be using these sources to determine causation and materiality bodes extremely well for MBIA.
Sure enough, in the following paragraph of the Order, the court finds that, “no basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy.” (Order at 14) Instead, Bransten holds that to recover for fraud or breach of warranty, MBIA must prove only that Countrywide’s misrepresentations were material to MBIA’s decisions to issue the insurance policies, and that materiality means that Countrywide’s statements,
induced MBIA to take action which MBIA might otherwise not have taken, or would have taken in a different manner… MBIA must prove for its fraud claim that it issued the Insurance Policies on representations made in the policies’ applications, and that it would not have done so or would have issued the policies on different terms had the alleged misrepresentations not been made. Similarly, MBIA must prove for its breach of warranty claim that Countrywide’s alleged misrepresentations materially increased MBIA’s risk of loss. ” (Id. at 14-15)
At this point, the court’s analysis has squared precisely with my own, and I am as confident as ever that the court will strike a decisive blow to Countrywide’s loss causation argument across the board. If common law claims for fraud and breach of insurance contract reps and warranties only require a showing of a material misrepresentation, then why should putbacks require anything more, especially when the contract language is “materially adverse impact” on the insurer’s interest in the mortgage loans?
Section 2B – Rescissory Damages
Before handing down what I’m certain will be a sparkling affirmation of MBIA’s argument on putbacks, Bransten first deals Countrywide another crucial setback. As part of its Partial Summary Judgment Motion, MBIA had sought a declaration that it could recover its alleged economic injury through rescissory damages. Countrywide had countered that to recover under New York Insurance Law, MBIA could seek only to rescind or avoid the policies, which would be both unfair to the bondholders and barred by the provisions of MBIA’s financial guaranty policy.
Here, though there was little governing case law in New York regarding the application of rescissory damages in lieu of actual rescission, Bransten shows a surprising openness to the idea that rescissory damages may be awarded as the economic equivalent to rescisison where rescission is not practical. After finding that rescission would indeed be impractical in this case, even though it may ultimately be warranted, Bransten finds that “rescissory damages are appropriate in this instance under persuasive case law and this court’s power to award relief.” (Order at 17-18)
To support this finding, which has MBIA and the other monolines smiling because it will provide them with the most direct and complete pathway to recovery, the court is forced to rely on cases from such diverse sources as the Delaware Chancery Court, the U.S. District Court for the Southern District of New York, and the U.S. District Court for the District of Arizona. The fact that the court is willing to broadly interpret the law and the scope of its powers in this regard, and to apply substance over form in fashioning an equitable remedy for the insurer, bodes well for MBIA’s chances on the rest of this motion. Bransten seems to be going out of her way to ensure that MBIA has an avenue for recovering its losses.
At the end of this section called “Causation,” Bransten sums up her findings: MBIA may prove fraud or breach of warranty based upon a misrepresentation by Countrywide that induced action resulting in damages, and rescissory damages may make MBIA whole for any wrongdoing which it is able to prove. She then writes: “However, the court does not find that this disposes of Countrywide’s fourteenth and fifteenth affirmative defenses. The burden of proof remains upon MBIA to prove all elements of its causes of action.”
Recall that Countrywide’s 14th Affirmative Defense is that Defendants were not the proximate cause of MBIA’s losses. Countrywide’s 15th Defense is that there were superceding or intervening causes which were the actual cause of MBIA’s losses, “including but not limited to macroeconomic and mortgage industry events.” Based on Bransten’s other findings in her Order, that MBIA must still show proximate causation connecting the misrepresentations that induced it to issue the insurance policies and its losses, it makes sense that she would leave these defenses intact. She certainly could have been more proactive here and barred any defenses suggesting that proximate causation must connect a policy payment and a misrepresentation, or any defenses pertaining to intervening causes that occurred after MBIA insured the policies, but I can understand that Bransten would want to stick to addressing MBIA’s particular request to bar the defenses entirely, and not go too far afield. I still have little inkling that all is not rosy in Loss Causation Land.
Section 3 – MBIA’s Claims for Breach of the Repurchase Obligation
Finally, the moment I have been waiting for. I have been saying for years that insurers’ and bondholders’ putback claims were relatively strong because the standard was “materially adverse impact” rather than “proximately causes loss.” Since this is the first post-crisis MBS case to reach this question, it’s the first real guidance we’ll have on a critical and far-reaching issue in MBS litigation.
Yet, if I was hoping that Bransten would come right out of the box with an answer, I was sorely disappointed. Instead, the court takes the next five pages to lay out in excruciating detail each side’s arguments on this issue. Her Honor had summed up the parties’ arguments in the prior sections with a few sentences or a paragraph at the most. The fact that Bransten is now going into this much detail in recapping the same arguments we’ve read in the pleadings and heard at oral argument sets off alarm bells in my head: the court is setting up a genuine dispute of material fact.
You see, summary judgment is only appropriate if there is no genuine dispute of material fact; that is, looking only at the facts agreed upon by both parties, it is apparent to the court that judgment must issue for one side or the other. Contractual disputes are usually particularly well-suited for summary judgment because the parties agree that the contracts are the contracts, and the court is thus left to interpret the contracts and the parties’ intent based on the plain language of their written agreements.
Summary judgment seems especially appropriate here in MBIA v. Countrywide, as we have heard little about any oral agreements or other facts outside of the four corners of the contracts that might inform their interpretation. Thus, I would have expected Bransten at this point to be running through her analysis of the contractual language on putbacks, not the parties’ arguments. The fact that she’s instead spending pages rehashing the parties’ interpretations feels distinctly like a football team running a draw play on 3rd and 14 – they’re playing it safe and preparing to punt.
Sure enough, at the bottom of the fifth page of recap, Bransten finally reaches her conclusion. Noting that “MBIA has posited a strong argument,” she nonetheless finds that “summary judgment is not here appropriate.” (Order at 23) Her reasons? MBIA only cites contract language from one of the 15 MBS Trusts, and though it states that a similar repurchase remedy exists across all 15 trusts, it hasn’t sufficiently laid out the contract language for those 15 trusts in its Rule 19-a statement of material facts. Then, as if it was an afterthought, Bransten throws in an extra sentence about how the words “interest” and “aggregate” in the contracts are subject to varying interpretations.
Suddenly, Bransten has gone from flexible rulings, bending to give MBIA a pathway to recovery, to strict rulings that rely on technicalities for support. Yes, technically, the particular facts upon which a party wants the court to rely must be laid out in its statement of facts. But, must MBIA go through and lay out the relevant contract language from multiple sections of every one of 15 trusts? Isn’t it sufficient for MBIA to provide a sample and to state that this is representative of the other contracts – a fact that can be verified from the record?
Keep in mind, this is the same judge that approved statistical sampling to present loan-level evidence because the court did not want to spend the time going through every one of the 300,000+ loans at issue. Wasn’t it reasonable for MBIA to assume that this judge would not want to see 15 separate factual statements for each trust? Moreover, if Bransten had wanted to rule on this issue, she certainly could have had her clerk go through the pertinent sections of the various Trust Agreements (which are presumably part of the record) and determine whether there was any relevant difference in their language.
Similarly, relying on the fact that there are “varying interpretations” regarding the word “interest” without making any value judgment about the strength of those interpretations falls short of the judicial diligence I expected. There will always be varying interpretations of any contract in litigation. It is entirely within the court’s province to decide which one most closely effectuates the intent of the parties. This is especially true when Bransten has just called MBIA’s argument “strong.” Heck, she just walked through the case law providing that insurers are entitled to know the nature of the risks they’re assuming. How difficult would it have been to find that an insurer’s interest in the loans is the same as its interest in the policies – the riskiness of the asset it was insuring? All told, this portion of the Order feels distinctly like a cop-out – the judge guided us 3/4 of the way across a rickety rope bridge, and had everything she needed to get us to the other side, but for some reason stopped short and told us “good luck!”
Loss Causation Fallout
Of course this decision, and the mirror-image decision Bransten issued in the case of Syncora v. Countrywide, et al., do provide the monolines with fodder that they can use in their ongoing MBS cases. But applying this decision to bondholder cases will be more of a stretch. Shortly after reading the opinion, I tweeted, “J. Bransten goes 3/4 of way toward giving MBIA & Syncora complete wins v. BofA on MSJ but stops short of applying same reasoning to putbacks.” Soon, a response came from Scott Walker (@scottleewalker), a litigator in the Structured Finance group at Lowenstein Sandler: “@isaacgradman — I had the exact same thought. Have been waiting for some guidance in that area. Oh well.”
All of which raises the immediate question: why did Bransten stop short? I have a theory, but obviously this is just speculation on my part. By way of the first 3/4 of the Order, Bransten provided MBIA with a shorter, cheaper and more complete pathway to recovery than putbacks by allowing it to seek rescissory damages. Now, instead of having to go loan-by-loan (at least through a sample of some 6,000+ loans), and being able to recover only those losses on loans it can prove were defective, MBIA can just prove that it was induced to issue the policies by a misrepresentation and thereby recover all of its losses.
Maybe Bransten hopes that MBIA be happy with that decision (they were), not appeal her on putbacks (still an open question) and opt to go down the fraud and breach of insurance contract paths exclusively, saving Bransten one huge headache of a trial. Or at least she hopes that by providing MBIA this weapon in its arsenal, it will make BofA more likely to settle.
Bransten also made several comments on the record during oral argument on this motion recognizing the unique attention this case was attracting and the impact it would have. She stated,
It is a very full courtroom so we’re going to have a few things that we have to talk about before I even address my attorneys here today. In the first place, I have my other attorneys sitting the jury box, am I right? Okay. Usually I wouldn’t permit any standing room. However, I understand that this has a major impact on lots of people and some people didn’t get here quick enough to get a seat, so if there is an empty seat anywhere I want it filled and we can squeeze as much as we can, that’s number one.
Number two, the strict rule that I will enforce is I do not want anyone to speak during any of our arguments. We have to be absolutely silent. For those of you standing, the only thing I can say is if you get uncomfortable or you want to speak or you have anything to say, just go outside and do it. I think from now on, this is it. I think we have reached maximum capacity, so that will be it. Anybody who is here, if we take a break and come back, no new people, because I really do think that we’re maxed out. (Transcript, Oral Argument on MBIA’s Motion for Partial Summary Judgment at 3:2-22 (emphasis added))
These comments certainly don’t give me the impression that Bransten presides over cases with this much national interest very often. With this decision, Bransten avoids the spotlight on appeal and possibly avoids having to try this dog of a case. Let’s be clear: as an analyst following these issues, I find this case fascinating and important, but to a state court judge, a case dealing with hundreds of thousands of loans and 15 complex mortgage securitizations that has taken 3 years just to get this far is probably beginning to look distinctly dog-like.
So maybe she was hesitant to stick her neck out, risk getting overturned on appeal, and at the very least have her opinion bandied about in every MBS case in the country. I get it, but part of me was hoping that Bransten would be inspired by the judicial courage shown recently but Jed Rakoff and put to rest an issue that IMHO was plenty ripe for determination.