NY appeals court: Bond insurers have right to jury in MBS cases

January 15, 2013

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.

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