A New York appeals court ruled that bond insurer MBIA Insurance Corp. can proceed with fraud claims against Countrywide Home Loans when the court Thursday denied Countrywide's motion to dismiss the case.
In a 5-to-0 ruling by the first department of the appellate division of the Supreme Court, all five judges affirmed a ruling by the lower court allowing MBIA to go forward with fraud and contract claims against the originator of home loans. Parent company Countrywide Financial was
acquired by Bank of America at the height of the financial crisis in 2008.
The ruling also affirmed the lower court's ruling in April 2010 to dismiss negligent misrepresentation claims made by MBIA, which insured securities backed by home mortgages originated by Countrywide.
"We find that MBIA has sufficiently pleaded fraud," Judge Roslyn Richter wrote in the opinion, and that "because MBIA alleges misrepresentations of present facts, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives."
Further, Richter wrote, "There is no merit to Countrywide's claim that the fraud cause of action fails to satisfy the particularity pleading requirements."
The amended complaint filed by MBIA alleges that Countrywide provided the bond insurer with loan documentations that had representations that were false and misleading. The complaint also alleges that Countrywide prospectuses contained false representations about Countrywide's compliance with its underwriting guidelines. Further, the complaint alleges Countrywide made regular presentations to MBIA falsely representing its risk-management systems and loan origination practices.
According to court documents MBIA alleges "all of these representations were made with knowledge of their falsity and to induce MBIA to enter into the insurance agreements."
A spokesman for MBIA said: "We are pleased that the Appellate Division has unanimously upheld MBIA's right to pursue fraud claims against Countrywide, particularly in light of the growing public recognition of the fraud and misrepresentations perpetrated by Countrywide and other industry participants. Today's decision represents yet another important victory in MBIA's efforts to hold banks and other transaction sponsors accountable for improperly originated structured products."
MBIA lost its triple-A ratings after losses tied to MBS battered its books as the real estate market imploded. It is banking on recovering substantial sums in litigation with loan originators such as Countrywide. Such recoveries could allow MBIA to regain a credit rating that would make it possible for the bond insurer to start issuing new policies and revive its moribund business.
A spokeswoman for Bank of America said: "We are pleased that the appeals court confirmed the dismissal of the negligent misrepresentation claim and also reversed the lower court and dismissed the good faith and fair dealing claim."
"The court's decision on MBIA's fraud claim is a pleadings matter," she added. "We continue to believe MBIA is a sophisticated counterparty that cannot sustain a fraud claim, and we continue to have the ability to raise that point with the court at the summary judgment phase."