A New York state judge has reinstated fraudulent inducement claims brought by Ambac Assurance Corp and MBIA Insurance Corp. against a unit of Credit Suisse Securities .
The New York state judge, Shirley Werner Kornreich reinstated the fraudulent inducement claim in an order filed Thursday in Ambac's suit to recover $46 million in insurance payments it made related to a mortgage-backed securities offering sponsored by the Credit Suisse unit.
According to a report in Law 360, Ambac sued for "pervasive and material misrepresentations" in the mortgage-backed security transaction pooling over 2,000 residential mortgage loans that Credit Suisse underwrote and its affiliate, DLJ Mortgage Capital Inc, sponsored.
In March 2007, New York-based Ambac issued a policy insuring payment of the principal and interest due under the $175 million securitization of 2,563 adjustable-rate home equity lines of credit.
Ambac claimed that Credit Suisse misrepresented attributes of the loans, applied more lax underwriting guidelines and less due diligence than it had claimed. Ambac also alleged that Credit Suisse said the transaction mirrored a prior securitization while failing to disclose that loan pool was filled with borrowers with little or no ability to repay.
Ambac's suit alleges that loans representing over 33 percent of the original loan balance, or more than $58 million, had defaulted, requiring Ambac to make over $46 million in claim payments.
The New York state judge has also reinstated claims made by MBIA against the Credit Suisse unit over insurance payments on a pool of mortgage-backed securities.
According to the Law 360 report, MBIA accused Credit Suisse, DLJ Mortgage Capital and Select Portfolio Servicing Inc. of inducing it to insure payments on a pool of mortgage-backed securities, which resulted in serious losses.
The judge earlier ruled that MBIA failed to do its own due diligence and also said that its fraud claim was based on "alleged misrepresentations that were nonmaterial or corporate puffery and that it duplicated MBIA's breach of contract claim," according to the report.
But in its recent motion to reinstate the claim, MBIA argued that a New York appellate court's decision in MBIA v. Countrywide Home Loans Inc — which held that similar claims were not duplicative merely because some of the allegedly false representations also formed a basis for a breach of contract claim — mandated reinstatement of the fraud claim.
As a result, Kornreich said she was bound by this higher court ruling and therefore reinstated.
