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MBIA Letter to Bransten

MBIA Letter to Bransten

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Published by Chris Herzeca
mbia letter re applicability of assured guaranty v flagstar to mbia v bac
mbia letter re applicability of assured guaranty v flagstar to mbia v bac

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categoriesBusiness/Law
Published by: Chris Herzeca on Feb 12, 2013
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gllillll emanuel trial lawyers I new York
51 Madison Avenue, 22nd Floor, New York, New York iooio
I TEL 212
-849
-7000 FAX 212-849-7100
WRITER'S DIRECT DIAL No.
(212) 849-7260
WRITER'S INTERNET ADDRESS
February 11, 2013
hilippeselendy@quinnemanuel.com
BY E-MAIL AND BY HAND
Hon. Eileen Bransten
New York Supreme Court
60 Centre Street, Room 442New York, NY 10007
Re:
BIA Insurance Corporation v. Countrywide Home Loans, Inc., et al.,
Index No.
60282
5/2008
Dear Justice Bransten:We represent Plaintiff MBIA Insurance Corporation ("MBIA") in the above-captioned
action, and write to bring to the Court's attention the Findings of Fact, Conclusions of Law, and
Order recently issued by Judge Rakoff of the Southern District of New York in
AssuredGuaranty Municipal Corp. v. Flagstar Bank, F.S.B.,
11-CV-2375, -- F. Supp. 2d --, 2013 WL
440114 (S.D.N.Y. Feb. 5, 2013). This comprehensive decision was issued after a bench trial on
the merits of a monoline insurer's ("Assured") claims arising out of defendant bank's
("Flagstar") pervasive breaches of representations and warranties in two residential mortgage
backed securitizations. The decision awarded Assured damages of $90.1 million (essentially theentire amount of the claim) plus contractual interest and attorneys' fees and costs. The decisionbears directly on numerous issues raised in MBIA's Motion for Summary Judgment on Breachof the Insurance Agreements (Mot. Seq. No. 58), Countrywide's Motion for Summary Judgment(Mot. Seq. No. 57) and Countrywide's Motion to Strike the Butler Reunderwriting Report, the
Butler Rebuttal Report, and the Butler Affidavit (Mot. Seq. No. 62), all currently pending before
this Court, and strongly supports MBIA's position on those motions.
Specifically, Judge Rakoff held that:
nuinn emanuel urpuhart & sullivan, lip
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• Statistical sampling may be used to prove both liability and damages.
Assured,
2013 WL
440114
at 36-38.
• Borrower fraud (which affects more than 600 loans in the 6,000 loan sample in this case)
is inherently material.
Id.
at 33.
• The test for repurchase of a breaching loan is whether the breach materially increased the
risk of loss
(i.e.,
a "day one" test), and thus there is no need to prove post-closing loss
causation.
Id.
at 33-35.
• The repurchase obligation may be triggered by constructive notice of material breaches,
which may in turn be triggered by repurchase demands.
Id.
at 36-37.
The first two of these holdings, taken together with this Court's prior partial summaryjudgment decision' and the evidence of undisputed and indisputable breaches put forward by
MBIA in support of its summary judgment motion, strongly support an award of summary
judgment for MBIA on its claim for rescissory damages based on Countrywide's pervasive andmaterial breaches of representation and warranty. In addition, all four of these holdings, taken
together with the evidence put forward by MBIA as to (1) indisputable breaches and
(2) Countrywide's failure to repurchase all but a fraction of loans for which MBIA has made
repurchase demands, strongly support an award of summary judgment for MBIA on its claim for
rescissory damages based on Countrywide's repudiation of its repurchase obligations and/or
frustration of the purpose of the contracts.
Further, Judge Rakoff also denied Flagstar's motion to disqualify Assured's
reunderwriting expert, Ms. Walzak, rejecting arguments materially identical to those made by
Countrywide in its motion to strike the expert report of MBIA's reunderwriting expert, Mr.
Butler.
Id.
at 28-31. Thus, although MBIA's summary judgment motion only relates to
undisputed and/or indisputable breaches, and does not depend on Mr. Butler's report,
Assured
nevertheless supports denial of Countrywide's motion to strike this report.Finally, Judge Rakoff awarded Assured attorneys' fees and costs based on a
reimbursement provision materially identical to that in the Insurance Agreements here,supporting an award of summary judgment for MBIA on this claim.
Below is a summary of Judge Rakoff's holdings and their relevance.
Sampling May
Be Used to Prove Both Liability and Damages.
Judge Rakoff approved the use of statistical sampling to prove both liability and
damages.
Assured,
2013 WL
440114
at 36-38. Thus, he concluded, by extrapolation from
Assured's reunderwriting expert's conclusions as to the material defects present in the sample,
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.,
936 N.Y.S.2d 513, 522(Sup. Ct. N.Y. Cnty. 2012).
0)
 
"that the loans underlying the Trusts here at issue pervasively breached Flagstar's contractualrepresentations and warranties."
Id.
at 36.
Judge Rakoff's holding is directly applicable here. Moreover, the sample used in
Assured
was at the same confidence level and margin of error as that used by MBIA.
2
Coupling
this with Countrywide's failure to rebut MBIA's sampling expert,
3
there is no dispute—much
less one necessitating a trial—that the sampling and extrapolation on which MBIA relies is
appropriate. Since, as MBIA has shown, more than half of the loans in the statistically
significant sample reviewed by Mr. Butler indisputably materially breached representations andwarranties,
4
this Court may properly conclude that more than half of the loans in the entire loan
pool did so. As discussed at the summary judgment hearing, this issue is ripe for resolution bythe Court itself as to MBIA's contract-based claims.
Borrower Fraud Is Inherently Material.
Judge Rakoff held that "evidence of fraud is inherently material," since in such a case
"th[e] borrower's overall truthfulness is compromised and the risk of loss associated with that
loan increases."
Assured,
2013 WL 440114 at 33. Here, MBIA submitted unrebutted evidence
showing that borrowers committed fraud as to their income and/or employment in more than 600loans in the 6,000 loan sample, thus breaching the representation that "no default exists under
any Mortgage Note" (because the Mortgage Note defines "default" to include "any
misrepresentation" by the borrower).
5
Since, as Judge Rakoff held, such breaches are inherently
material,
id.,
there is no dispute as to either the fact of these breaches or their materiality.
The formula applied by Assured's expert on statistical sampling, Dr. Lipshutz, was
designed to ensure that "the estimate derived from the sample has a 95% chance of being
within ... plus or minus five percentage points of the actual population proportion."
Assured,
2013 WL 440114 at * 10. As Judge Rakoff noted, this is "a standard measure for a high level of
statistical confidence."
Id.
It is the same measure applied by MBIA's expert on statistical
sampling, Dr. Cowan.
See
Cowan Aff. ¶ 11; Cowan Report, dated February 27, 2012, Ex. F.
3
See Pl.
Mem. at 39;
see also
Sheth Aff. Ex. 154, at 60:2-61:15 (one of Countrywide'sexperts testified that MBIA's sampling expert did "not introduce any biases or errors into the
sample" and that the sampling procedure and extrapolation are "correct").
4
See Pl.
Mem. Of Law in Supp. Of Its Mot. for Summ. Judg., dated Sept. 19, 2012
("Pl. Mem."), at 14-39.
5
See id.

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