Alison Frankel

Bank of America really, really does not want CEO Brian Moynihan to sit for a deposition in bond insurer MBIA’s breach-of-contract case against Countrywide and BofA.

According to the transcript of a hearing on the issue last Friday morning before Manhattan State Supreme Court Justice Eileen Bransten, the bank’s lawyers at O’Melveny & Myers said that under the so-called Apex rule — which essentially says that high-ranking executives shouldn’t have to waste their time responding to deposition questions that lesser-ranking officials can answer just as well — Moynihan should be shielded from testifying because he doesn’t have unique personal knowledge of the disputed facts in the case. He’s also a very busy man, said Jonathan Rosenberg of O’Melveny. Rosenberg displayed a slide that showed all of BofA’s “enormous operations,” which he said demanded “24/7 work from senior executives, especially the CEO.” MBIA’s insistence on taking testimony from Moynihan, when BofA has already offered up for deposition several senior bank executives with the same knowledge as the CEO, amounts to harassment, according to BofA.

“There’s no basis to say they have to have Brian Moynihan when they have access to all these other people,” including former BofA CEO Ken Lewis, Rosenberg said. “This effort to depose Brian Moynihan is for harassment purposes.” If Bransten allowed the deposition in MBIA’s case, other bond insurers suing Countrywide would “seek their own shot,” the O’Melveny lawyer said, which “would clearly be disruptive to the business of Bank of America to lose their CEO to substantial time in prepping for and taking depositions.”

You will not be surprised to hear that MBIA’s counsel, Peter Calamari of Quinn Emanuel Urqhart & Sullivan, told Bransten that Moynihan has unique knowledge that’s relevant to the bond insurer’s attempt to prove BofA’s successor liability for Countrywide’s failings. (You may, however, be surprised when you read the transcript and see that among those in the audience for Calamari’s argument were 30 grade school kids on a field trip to court, who were permitted to ask questions about what they’d heard; Calamari joked that the kids’ description of the proceeding as “jibber-jabber” put things into perspective.) MBIA said that only Moynihan can testify about why he made public statements such as “At the end of the day, we’ll pay for the things Countrywide did,” and “We’ll stand up, we’ll clean it up.”

“They’re sitting there and saying oh, no, no, no, it’s just some statement we made in the press, it doesn’t mean anything,” Calamari told Bransten. “Well, that’s their opinion, but that’s not our case. And these were statements made directly by Mr. Moynihan…. And more importantly, you know, Mr. Moynihan backed up these statements. It wasn’t that he just made naked statements, when he was CEO, case after case was settled where Bank of America ponied up the money for Countrywide’s liability…. All of those facts, when you put them together make out an assumption of liabilities case. We’re entitled to a deposition from the man who is behind it all.”

Bransten didn’t rule from the bench, noting that she wanted to review the case law that Rosenberg and Calamari had sparred over. She might also consider the precedents being developed in another case involving MBIA and BofA. On Friday afternoon, around the corner at the federal courthouse, Bank of America and three other banks in a coalition challenging MBIA’s 2009 restructuring argued alongside the hedge fund Aurelius for (among many other things) two days of depositions of MBIA CEO Jay Brown.

MBIA, in contrast to BofA, has offered up its CEO for all sorts of depositions, including a session in the insurer’s put-back case. Brown has also testified on two occasions in the bank group’s regulatory case, which alleges that the New York Insurance Department didn’t properly vet MBIA’s $5 billion spin-off of its healthy municipal bond business. In their fraud suits against MBIA that parallel the regulatory action, Aurelius, represented by Simpson Thacher & Bartlett, and the bank group, represented by Sullivan & Cromwell, argue that they need yet more deposition time with Brown.

MBIA’s counsel in the restructuring cases, Marc Kasowitz of Kasowitz Benson Torres & Friedman, asked U.S. District Judge Richard Sullivan (overseeing the Aurelius-led class action) and State Supreme Court Justice Barbara Kapnick (in charge of the bank case) to postpone any additional Brown depositions until after the conclusion of the regulatory trial, which is now scheduled for May. He also argued that the bank group’s S&C counsel already asked Brown questions beyond the scope of the regulatory case at Brown’s preceding depositions, including questions about Brown’s purchase of MBIA shares before the restructuring was approved. (Here’s a link to the letters the three sides submitted to the judges; here’s the transcript of the March 9 hearing, at which allegations of Brown’s insider trading led to considerable fireworks.)

Notably, MBIA has not argued in the restructuring cases or in its own case against BofA that Brown is an Apex witness who is too important to be tied up with a deposition. Nor, for that matter, did Aurelius claim that its chairman, Mark Brodsky, is too busy to sit for a deposition, even though he is the hedge fund’s sole portfolio manager (Simpson did request that the deposition be limited to one day.)

So is Bank of America talking out of both sides of its mouth, arguing in MBIA’s case that its CEO shouldn’t be deposed yet calling for the deposition of MBIA’s CEO in its case against the bond insurer?

Not according to BofA spokesperson Lawrence Grayson. “The positions are wholly consistent with each other and the applicable legal standards,” he told me. “We believe Mr. Brown has unique knowledge pertaining directly to the legal disputes at issue regarding MBIA’s restructuring. Further, the company Mr. Brown heads focuses solely on litigation. By contrast, Mr. Moynihan does not have unique knowledge relevant to MBIA’s claim against Bank of America and is the head of a global financial services institution.”

On Monday Sullivan and Kapnick both ruled that Brown’s deposition can’t be postponed until after the regulatory trial.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

The megabillion-dollar game of chicken between Bank of America and the bond insurer MBIA just got even more perilous. On Monday MBIA filed a notice that it is cross-appealing the ruling by Manhattan State Supreme Court Justice Eileen Bransten. MBIA wants reconsideration of Bransten’s finding that the bond insurer is not entitled to summary judgment on its claims that Countrywide breached representations and warranties on the mortgage-backed securities MBIA agreed to insure. You might think MBIA’s decision to appeal is a surprise, given the many routes to recovery Bransten gave MBIA on its insurance fraud claims against Countrywide. But as always in the incredibly complex litigation between Bank of America and MBIA, there are many layers to every move by either side.

Bransten’s rulings were undoubtedly a boon for the monolines Syncora and MBIA. The judge said the bond insurers don’t have to establish a direct causal link between the alleged deficiencies in the mortgage loans underlying the securities they agreed to insure and the subsequent payouts the insurers had to make on those MBS policies. Under Bransten’s opinion, MBIA and Syncora can prove insurance fraud merely by establishing that they relied on Countrywide’s alleged misrepresentations when they agreed to write the policies at issue in the litigation. And to prove a breach of the insurance agreements, they need only prove that Countrywide materially misrepresented the risk profile of the underlying mortgage pools.

Nevertheless, two days after Bransten issued her opinion, Syncora’s lawyers at Debevoise & Plimpton filed a notice of appeal. That’s because the decision wasn’t all good news for the monolines: Bransten denied Syncora and MBIA summary judgment on their interpretation of the MBS contracts they signed with Countrywide. The monolines argued that Countrywide was required to buy back every underlying mortgage that didn’t live up to the representations and warranties the issuer made about the mortgage pool. Bransten, however, said the contract language was too ambiguous for the issue to be decided on summary judgment. Syncora said it was seeking a reversal of that part of the ruling.

For Countrywide and Bank of America, Syncora’s appeal notice set off alarm bells. Bransten’s ruling on the reps and warranties question was actually more important to Bank of America — in the broad scope of MBS litigation — than the judge’s insurance-law conclusions. If Bransten had agreed with the monolines’ argument on Countrywide’s obligation to buy back deficient mortgages, the bank’s total MBS exposure could have increased drastically, because the ruling would have extended to MBS investors as well as bond insurers. The bank avoided a calamity in Bransten’s decision; Syncora’s appeal revived the prospect of reps and warranties disaster.

So on Jan. 25, Countrywide’s lawyers at Goodwin Procter filed their own notices of appeal of Bransten’s ruling in both the Syncora and MBIA cases. Countrywide’s biggest fear is that the state appeals court will disagree with Bransten on the reps and warranties issue, so its notice in the MBIA case pointed out to the appellate court that Bransten had sided with the bank on that issue. The notice asked only for a reconsideration of Bransten’s ruling that the bond insurers are entitled to damages on the insurance-law claims.

MBIA obviously wasn’t going to permit Syncora and Countrywide to argue at the appeals court without having a say of its own. The bond insurer’s notice raises the stakes for the Appellate Division, First Department, by explicitly citing Bransten’s ruling that Countrywide may assert an affirmative defense that the monolines’ losses were due to economic circumstances, not to alleged deficiencies in MBS underwriting. MBIA wants the appeals court to reverse Bransten not only on the reps and warranties ruling, but also on Countrywide’s affirmative defenses.

For all three of these litigants, sending the case to the appellate division means more uncertainty and a much longer wait for an ultimate resolution. MBIA and Bank of America each seem to be waiting for the other side to run out of time; cash-strapped MBIA is already booking almost $3 billion in expected reps and warranties revenue from BofA; and BofA’s stockholders would doubtless appreciate resolution of the MBIA mess. But to return to the chicken-game metaphor, neither the bank nor the bond insurer appears willing to be the first to get out of the way.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Tuesday’s parallel rulings by Manhattan State Supreme Justice Eileen Bransten in MBIA and Syncora suits against Countrywide were a big win for the bond insurers. The judge concluded that MBIA and Syncora need only show that Countrywide materially misled them at the time they agreed to write insurance on Countrywide mortgage-backed notes, not that the alleged misrepresentations led directly to MBS defaults and subsequent insurance payouts. Bransten is considered a leading judge on MBS issues, so her grant of summary judgment on the insurance fraud and contract issues should be a boon to all of the monolines engaged in do-or-die litigation with MBS issuers.

But for MBS investors hoping Bransten would set a low bar for claims that Countrywide breached mortgage-backed securitization agreements, the rulings have to be considered a disappointment. Both Syncora’s lawyers at Debevoise & Plimpton and MBIA’s counsel at Quinn Emanuel Urquhart & Sullivan had moved for summary judgment on a baseline question: could they demand that Countrywide repurchase any underlying mortgage loan that materially breached the MBS issuer’s representations and warranties in securitization agreements?

If Bransten had agreed with the Syncora and MBIA interpretations of the agreements’ put-back clauses, the bond insurers would have had to show only that an underlying loan was deficient, not that the alleged deficiency contributed to the mortgage’s default — or, for that matter, that the underlying loan even was in default. The insurers wanted the judge to rule that as a matter of contract, Countrywide was required to repurchase every flawed mortgage in underlying pools.

Had Bransten adopted that reading of the contracts, she could have swung untold billions in MBS liability from investors to issuers. As you surely recall, the embattled BofA $8.5 billion settlement with Countrywide MBS investors was the result of put-back claims of an institutional investor group led by Black Rock and Pimco and represented by Gibbs & Bruns. The same investors have since asserted put-back claims against Morgan Stanley (based on notes with a face value of $6 billion) and JPMorgan Chase (based on $95 billion in MBS). Other investors, publicly and anonymously, have called upon MBS trustees to act on their put-back claims; most recently, U.S. Bank, as trustee in some Bear Stearns MBS trusts, filed a $95 million summons against JPMorgan Chase in New York state court. A ruling from a leading judge that set a low bar for put-backs would have given the investors asserting reps and warranties claims huge leverage over MBS issuers.

But Bransten denied the MBIA and Syncora summary judgment motions on Countrywide’s put-back liability. Specifically, she found that the securitization contracts were ambiguous on several points so the bond insurers’ contract-related claims couldn’t be decided on summary judgment. That doesn’t necessarily mean that after considering the two sides’ interpretations of the contract, as well as industry practice, an ultimate fact-finder won’t agree with Syncora and MBIA on put-backs; Bransten said, in fact, that MBIA had “posited a strong argument” for its view of one securitization contract. Moreover, MBIA and Syncora have alternate routes to the same recovery they’re claiming from alleged reps and warranties breaches.

Nevertheless, the implication of Bransten’s rulings is that put-backs will remain a loan-by-loan slugfest, at least until another judge considers the issue. That’s good news for BofA — which has signaled in regulatory filings that an adverse ruling on put-back loss causation would significantly change its reported liability — and for other MBS issuers as well. Bank disclosure of put-back liability has become a heated topic, and several banks beefed up disclosures in third-quarter 2011 filings. But MBS issuers escaped calamity thanks to Bransten’s refusal to endorse the bond insurers’ liberal reading of securitization agreements.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

There’s a cautionary note to MBIA deep in Manhattan State Supreme Court Justice Eileen Bransten‘s long-awaited, 27-page loss-causation decision in MBIA’s mortgage-backed securities case against Countrywide. The bond insurer, Bransten warned, must prove that it was damaged as a “direct result” of Countrywide’s allegedly material misrepresentations about the MBS certificates MBIA agreed to insure. “As has been aptly pointed out by Countrywide, this will not be an easy task,” the judge wrote.

But unless I am seriously misreading Bransten’s ruling (and her companion decision in Syncora’s case) it’s going to be a lot easier for the bond insurers to recover against Countrywide as a result of the judge’s reasoning. Yes, MBIA and Syncora have to prove they were duped into writing insurance policies on Countrywide mortage-backed securities. The monolines have never asserted that they don’t have to show Countrywide made material misrepresentations at the time they agreed to issue insurance. They believe they’ve got plenty of evidence — from the MBS pooling and servicing agreements, from the loan tapes they were permitted to see, and from the shadow credit ratings conferred on the MBS notes — that Countrywide misled insurers about the quality of the mortgages in the underlying loan pools.

Instead, the key question before Bransten was whether the insurers would also have to show that Countrywide’s alleged misrepresentations were the direct cause of the MBS failures for which insurers had to pay out policy claims. And on this issue, the judge sided squarely with the monolines. “No basis in law exists to mandate that MBIA establish a direct causal link,” she concluded.

Her rulings will permit the bond insurers to argue both that Countrywide committed fraud in inducing them to write policies and that Countrywide breached its insurance agreements with Syncora and MBIA. To establish fraud, MBIA and Syncora will have to show that they relied on Countrywide’s alleged misrepresentations when they agreed to write the specific policies at issue in the litigation. To prove a breach of the insurance agreements, they need only prove that Countrywide materially misrepresented the risk profile of the underlying mortgage pools. There are, in other words, a lot of routes to recovery for Syncora and MBIA — and given that Bransten is the leading jurist in the monoline MBS litigation, for other bond insurers as well, assuming other New York state-court judges adopt her thinking.

MBIA and Syncora even still have a possibility of recovery on their alternate put-back theory, although Bransten denied them summary judgment on put-backs in Tuesday’s rulings. The bond insurers had argued that Countrywide breached MBS pooling and servicing agreements when it allegedly misrepresented the quality of the underlying loan pools so it’s liable, under those contracts, to put back any deficient mortgages — the same put-back claims some MBS investors have made against issuers. The judge denied summary judgment because she found that the Countrywide pooling and servicing contract language is ambiguous. That’s a boon to Countrywide’s parent, Bank of America, and to other MBS issuers facing put-back claims. (More on that tomorrow.) But for the bond insurers, the put-back contract claims — which are still alive, even though Bransten denied summary judgment — were always an alternative route to the damages they also sought under their insurance-law claims.

And under Bransten’s rulings, even if the bond insurers end up with nothing on their put-back claims, they can still recover everything they’ve paid out on Countrywide MBS claims. That’s because the judge adopted the monolines’ theory of “rescissory damages,” finding that if MBIA and Syncora prove their cases, they’re entitled to be made whole by Countrywide, as if they’d never written insurance on Countrywide MBS. Again, if Bransten’s reasoning on rescissory damages guides other New York State judges, Ambac and Assured Guaranty also have reason to cheer her rulings.

For the record (as if you didn’t know), MBIA is represented by Quinn Emanuel Urquhart & Sullivan; Syncora by Debevoise & Plimpton; and Countrywide by Goodwin Procter.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

The folks who follow every development in the mega-billions poker match between Bank of America and the bond insurer MBIA have last week been buzzing even more loudly than usual about the prospect of a global deal. Tuesday’s settlement between MBIA and Morgan Stanley leaves BofA as the most important remaining member of the dwindling bank group challenging MBIA’s 2009 restructuring. There’s a de facto deadline of Dec. 30 for settlements in that case, since that’s the day New York’s top financial regulator, Benjamin Lawsky of the Department of Financial Services, has to file a key response to the banks’ allegations. Both Lawsky and MBIA execs have been very clear: they want resolution. So the pressure is on BofA to make a deal.

Moreover, MBIA really needs a global settlement with BofA, in which the bank not only drops out of the restructuring case but also ponies up to resolve the bond insurer’s mortgage-backed securities claims. MBIA filed an 8K with the Securities and Exchange Commission Thursday, disclosing the good news that its commutation deals have wiped out $20 billion in exposure, including more than $10 billion its has eliminated just in the fourth quarter of 2011. The bad news in the filing, however, is that MBIA’s payments to banks have exceeded its statutory loss reserves by $500 million, and the insurer may not have enough liquidity to reach more settlements. Remember, MBIA has already booked a $2.8 billion anticipated recovery on MBS put-back claims. Clearly, the bond insurer is counting on getting some big money from BofA on the MBS side.

The wild card in this poker game is loss causation and MBS liability for BofA (and other issuers). You’ll recall that in early October, New York State Supreme Court Justice Eileen Bransten heard arguments on a summary judgment motion by MBIA in its case against Countrywide. MBIA asked the judge to rule on the issue that will determine the magnitude of bank exposure to MBS claims by bond insurers: are the banks liable for misrepresenting the underwriting on loans in underlying mortgage pools starting from the day they signed deals with monoline insurers? Or can the banks cite the economic crisis — and not their own deficient underwriting — as the reason so many mortgage loans have gone bad? Bransten’s reasoning on loss causation could swing billions, or even tens of billions, of dollars of liability between the banks and the monolines.

Banks, bond insurers, and MBS investors have been waiting anxiously for the judge’s loss causation ruling since that October hearing. But Friday is Bransten’s last day in chambers before she leaves for a vacation that will keep her out of court until after New Year’s. So with BofA and MBIA looking at a December 30 deadline for settlement in the restructuring case, is there a chance that a global deal will moot Bransten’s loss causation ruling in the MBS case?

Never fear, MBS players. Even if MBIA and BofA settle, Bransten still has to rule, thanks to Syncora. MBIA’s case against Countrywide gets all the ink, but the much-smaller bond insurer Syncora also has an MBS case against Countrywide — and has also moved for summary judgment on the loss causation issue. Syncora counsel Donald Hawthorne of Debevoise & Plimpton argued for an expansive interpretation of bank liability at the October hearing before Bransten, alongside MBIA counsel Philippe Selendy of Quinn Emanuel Urquhart & Sullivan.

Unless BofA also reaches a deal with Syncora, come January it and other MBS issuers are going to have to face the consequences of a crucial ruling from a judge who has so far sided against the bank at just about every turn.

A BofA spokesman declined comment.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Last month, as U.S. banks began reporting their third-quarter financials, I noted that the banks had beefed up their disclosure of potential liability for mortgage-backed securities activity. Morgan Stanley revealed that it had received a demand letter from Gibbs & Bruns, the firm that represents the big funds that negotiated the proposed $8.5 billion MBS breach-of-contract settlement with Bank of America. Goldman upped its reported MBS exposure to $15.8 billion, from a mere $485 million in the second quarter. The new emphasis on disclosure, I said, was partly the result of more claims, but also partly due to pressure from the Securities and Exchange Commission and the Public Company Accounting Oversight Board to improve MBS disclosures.

The bond insurers’ trade group, the Association of Financial Guaranty Insurers, has also been agitating for banks to acknowledge their MBS exposure — and particularly their exposure to MBS breach-of-contract (or put-back) claims. In September 2010 AFGI sent a blistering letter asserting that Bank of America’s MBS put-back liability to its members was more than $10 billion. This September the bond insurers targeted Credit Suisse, which, according to AFGI, had failed to account for billions in put-back claims.

Late Wednesday AFGI struck again. The recipient this time was UBS. According to the letter AFGI sent to UBS CEO Sergio Ermotti, the Swiss bank has reported a $93 million reserve for put-back claims in its most recent financial report — even though it has received more than $800 million in put-back claims from just one bond insurer, and that insurer (presumably Assured Guaranty) has indicated its intention of demanding a total of $4 billion in put-backs from UBS.

UBS has included disclaimers about the uncertainty of the volume of put-back claims and its success in rebutting put-back demands, but AFGI asserts the boilerplate language is misleading. “AFGI submits that neither refusing legitimate repurchase requests nor failing to discharge legitimate liabilities constitutes ‘success’ nor in any way reduces or eliminates the liabilities,” the letter said.

The bond insurers also sent the UBS letter to the bank’s regulators, the Swiss Financial Markets Supervisory Authority and the New York State Department of Financial Services, as well as to UBS’s auditor, Ernst & Young.

In a statement, a UBS spokesperson said: “The letter from the AFGI — a trade association for monoline insurers — is inaccurate and we dispute AFGI’s numerous unfounded allegations. In particular, UBS stands behind its financial reporting, including its disclosures and provisions concerning its potential RMBS-related liabilities as entirely appropriate and fully compliant with all legal and regulatory requirements. We take issue with the quality and integrity of the industry loan reviews cited in the letter and note that UBS has received numerous unfounded loan repurchase demands — and these demands are fully reflected in UBS’s disclosures. Moreover, the AFGI’s membership includes ultra-sophisticated insurers that accepted significant premiums to insure risks and that now seek to evade these obligations. Today’s letter adds nothing new, and is merely the latest in a series of efforts by the Association and its members to shift responsibility for their actions.”

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Last week a rumor made the rounds of hedge funds that trade in Bank of America and MBIA shares: The bank had reputedly agreed to settle the bond insurer’s mortgage-backed securities fraud and put-back claims for $5 billion. The rumor turned out to be false, or at least premature, since no settlement is in the offing at the moment. But the size of the rumored deal gives you a sense of the magnitude of the litigation between the banks that packaged and sold mortgage-backed securities and the bond insurers that wrote policies protecting MBS investors. We are talking about billions of dollars — perhaps tens of billions — at stake in suits by MBIA, Syncora, Ambac, and Financial Guaranty against Countrywide, Credit Suisse, GMAC, Morgan Stanley, and other MBS defendants.

Last week, Manhattan state supreme court judge Eileen Bransten, who has been the leading jurist in the bond insurer cases against MBS issuers, heard oral arguments on the issue that will determine the magnitude of the banks’ liability: Can bond insurers demand damages based on banks’ misrepresentations on the day deals were signed? Or can MBS issuers point to the housing bust, and not their deficient underwriting, as the reason so many loans have gone bad in the years after the MBS were sold? The case argued Wednesday before Judge Bransten concerned summary judgment motions in the MBIA and Syncora suits against Countrywide, but as the judge noted in her introductory remarks to the overflow crowd in her courtroom, “I understand that this [argument] has a major impact on lots of people.”

For everyone who couldn’t squeeze into Judge Bransten’s courtroom, I’ve gotten hold of transcripts of the day-long hearing. I’m going to focus on the morning session on the loss causation issue, but here’s a link to the afternoon session on consolidating the issue of Bank of America’s successor liability for Countrywide MBS, which is specific to BofA.

The loss causation question is central to two of the bond insurers’ categories of claims. The insurers assert they never would have agreed to cover Countrywide mortgage-backed securities offerings if Countrywide hadn’t misrepresented the quality of the underlying mortgages. They claim Countrywide fraudulently induced them to enter those contracts, so it must pay what they call “recissionary damages” in compensation. The insurers also assert that Countrywide must agree to buy back any underlying loans that breach the representations and warranties it made about them, regardless of whether the loans subsequently went into default or not. The monolines want Judge Bransten to keep things simple: If Countrywide lied in order to obtain insurance on MBS offerings, it’s liable to the insurers.

As MBIA counsel Philippe Selendy of Quinn Emanuel Urquhart & Sullivan told Judge Bransten: “It is immaterial that there is no causal or other relationship between the actual loss which is sustained under the policy and the falsity of the representation.The insurer has to be able to elect what risks to insure, and its assessment of whether to issue the policy at all is based on Day One risk attributes,” he said. Debevoise & Plimpton partner Donald Hawthorne, who represents Syncora, followed Selendy. “In order to prove our entitlement to rescission for breach of contract, rescission for fraud, and in order to show our entitlement to put-backs,” he said, “all we have to show is that these provisions were breached at the time of the transaction, and there is no need to provide any evidence of whether loans defaulted or what might have caused them to default.”

Both Selendy and Hawthorne pointed Judge Bransten to an April 2011 ruling from Oklahoma City federal judge Robin Cauthron, who held in Wells Fargo Bank v. LaSalle Bank that Wells Fargo, as securitization trustee in a commercial mortgage-backed securities offering, only had to show that LaSalle had committed material and adverse breaches as of the closing date of the offering. “Evidence regarding the post-securitization market conditions is inadmissible,” she wrote.

If Judge Bransten followed Judge Cauthron’s reasoning, a main line of defense for Countrywide and the other MBS issuers would be knocked out. Countrywide counsel Mark Holland and Paul Ware of Goodwin Procter, however, argued that Judge Bransten must consider the meltdown in the U.S. housing market. That’s been the banks’ defense in every MBS case, in which they assert that the real reason underlying mortgages soured isn’t because pieces of paper were missed from loan files or because underwriters didn’t check whether mortgaged houses were primary residences but because the recession hit, people lost their jobs, and housing prices fell. That was a risk, Holland argued, that the bond insurers assumed when they agreed to write MBS policies.

“The insurance companies are trying to make Countrywide pay for risks that they assumed by asking you to exclude all evidence of the mortgage market meltdown,” he told Judge Bransten. “It is our position that before the monolines can recover any damages, they have to show that their losses were caused by something Countrywide did and not by a risk that they agreed to insure.” (The Goodwin lawyers also distinguished between the LaSalle ruling and their case because LaSalle didn’t involve New York law.)

But Judge Bransten’s repeated questions for Holland showed that the bond insurers’ arguments made an impression. “My problem, Mr. Holland, is that can’t we agree that is this not a case concerning the decline of the housing market, but rather a case involving claims for fraud and breach of contract?” the judge said. “So, therefore, when does the issue — at what point does Countrywide say it should be [that] fraud and breach of contract should be shown?” The judge went on to ask virtually the same question twice again, with Holland never exactly answering. Instead, he continued to try to reframe the questions, arguing that Countrywide didn’t commit fraud, but suffered from the mortgage meltdown.

Countrywide’s argument did prompt one question from Judge Bransten for the bond insurance lawyers. (“There was one thing that I think Mr. Holland pointed out that interested me,” she said.) The insurers had argued that they can seek so-called recessionary damages under an old insurance law. Countrywide countered that the law was actually passed to protect policyholders from insurers attempting to cancel policies. The bond insurers were now “overreaching” in asking Judge Bransten “to use a statute designed to protect consumers from the sharp practice of insurance companies to somehow expand the right of insurance companies to seek damages,” Holland said.

The judge asked MBIA counsel Selendy to respond. He said that the insurance law “simply clarified that rescissionary relief can be awarded provided there is this threshold showing, either a material increase in risk in the event that it is a breach of conditions precedent, warranties, and the insurance agreement, or a material misrepresentation but for which the insurer wouldn’t have written the policy on the same terms.”

The judge didn’t give any clear indication of how she was leaning or even when she’ll rule. But if I were Countrywide, I’d be thinking hard about the power and appeal of Philippe Selendy’s words to Judge Bransten. “The housing crisis does not give Countrywide a defense to its Day One misconduct and its misconduct leading into these transactions. There would be no insurance policies and no losses but for that fraud,” he said. “When you think about it, what Countrywide is trying to do here, having first caused the housing crisis, together with other reckless loan originators and underwriters, they want to turn around and profit from it again. They want you to rule that the crisis is in effect a Get Out of Jail Free card that allows them to escape liability for their fraud and shift the costs to innocent parties. Well, luckily we’re in a country governed by the rule of law, and the law doesn’t work that way.”

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter