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BAC's Second Letter

BAC's Second Letter

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Published by Chris Herzeca
BAC's Second Letter re 1st Department decision
BAC's Second Letter re 1st Department decision

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Categories:Business/Law
Published by: Chris Herzeca on Apr 12, 2013
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02/03/2014

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SIMPSON TRACKER & BARTLETT LLP
425 LEXINGTON Avicrzuz
NEW
Ironic, N.Y. 10017-3954
(212) 455-2000
FACSINZLE; (212) 455-2502
DIRECT DIAL NEI:CBE:a
-MAIL ADDRESS
(212) 455-2655
ostrager@stblaw.com
BY E-MAIL AND BY HAND
pril 10, 2013Re:
MBIA Insurance Corporation v. Countrywide Home LoansInc., et al.,
Index No. 602825/2008Hon. Eileen BranstenNew York Supreme Court60 Centre Street, Room 442New York, NY 10007Dear Justice Bransten:On behalf of the Countrywide Defendants,' we respectfully submit this letterto respond to certain points in Plaintiff MBIA's letter dated April 8, 2013 ("MBIA Letter")that we believe are contrary to the First Department's April 2, 2013 Decision and Order
("Decision"), Your Honor's January 3, 2012 Order,
see MBIA Ins. Corp. v. CountrywideHome Loans, Inc.,
936 N.Y.S.2d 513 (Sup. Ct. N.Y. Cnty. 2012) ("Order"), or the record onthe pending motions for summary judgment.As Countrywide pointed out in its letter dated April 3, 2013 ("Letter"),MBIA's motion for summary judgment was premised on the availability of rescissorydamages, a point MBIA made repeatedly in its motion papers and at oral argument.
See
Letter at 2 n.2. Remarkably, notwithstanding the First Department's decisive rejection of
rescissory damages—i.e., a measure of damages that would allow MBIA to recoup all itsclaims payments minus premiums—MBIA now argues that it is entitled to precisely thesame relief under a different name. And despite acknowledging that the First Departmentaffirmed this Court's Order with respect to causation in its entirety, MBIA attempts to gloss
over Your Honor's rulings (1) that,
if MBIA.
satisfies its burden of proving liability on itsfraud and breach-of-contract claims, MBIA must then prove that it was damaged
as a direct
The Countrywide Defendants are Countrywide Home Loans, Inc., CountrywideSecurities Corp., and Countrywide Financial Corp., and Bank of America, N.A., solely in itscapacity as successor by July 2, 2011
de jure
merger to BAC Home Loans Servicing, L.P.(f/k/a Countrywide Home Loans Servicing, L.P.) (together, "Countrywide").
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SIMPSON THACHER & BAJITLETT LLP
Hon. Eileen Bransten
2-
pril 10, 2013
result
of material misrepresentations by Countrywide, and (2) declining to strikeCountrywide's Fourteenth and Fifteenth Affirmative Defenses, which allow Countrywide toestablish (subject to its burden of proof) that all or some portion of MBIA's losses werecaused by intervening or superseding events as opposed to any wrongdoing by Countrywide.Order at 516, 522, 524. Finally, even though the First Department declined to endorseMBIA's argument that any material increase in risk of loss on day one could constitute a"material and adverse effect" requiring Countrywide to repurchase a loan, and held only thatit was a question of proof whether a performing loan could have the requisite material andadverse effect,
2
MBIA attempts to engraft its "risk of loss" theory onto the Decision.
MBIA's arguments are wholly without merit.
MBIA's bald assertion that its motion papers "show as a matter of undisputedfact" that Countrywide materially misrepresented over half of the loans in the securitizations
is a complete distortion of the record. MBIA Letter at 2. Countrywide has disputed
MBIA's allegations with respect to every loan that Countrywide has not already agreed torepurchase—these disputes present classic issues of fact that cannot be resolved on summary
judgment. Countrywide has disputed MBIA's allegations with a host of distinguished
experts in the fields of underwriting, compliance, and appraisals, who challenge MBIA'sassertion of breach and/or its assertion of materiality, with regard to each of the 3,246purported "undisputed" breaches of representations and warranties among the 6,000 Sample
loans.
See
Defs.' Mem. of Law in Opposition to MBIA's Mot. for Summ. J., at 3-4, 14-35;
Expert Rebuttal Report of K. Godfrey, Concannon Aff. Ex. 40; Expert Rebuttal Report of F.Lucco, Concannon Alf. Ex. 37; Expert Rebuttal Report of L. Murphy, Concannon Aff. Ex.
39; Hr'g Tr. 96:3-106:17, Dec. 12, 2012. Countrywide has also submitted evidence from
two of the world's leading economists showing (1) that MBIA would not have experiencedany losses but for macroeconomic factors beyond Countrywide's control and (2) that theopinions of MBIA's expert Steven Butler regarding what constitutes a material increase inrisk of loss at origination—MBIA's sole evidence on that issue—are demonstrably wrong.Indeed, the loans Butler claimed had significant defects that meaningfully increased risk ofloss actually experienced defaults and delinquencies at a
lower
rate than the loans he founddid not have such defects.
See
Expert Report of R. Hubbard TT 13, 62; Expert Report of J.Hausman TT 18, 47; Expert Rebuttal Report of R. Hubbard ¶J 12-14, Concannon Aff. Ex.
35; Expert Rebuttal Report of J. Hausman ¶¶ 9-10, Concannon Aff. Ex. 38. This evidence
demonstrates that, even accepting MBIA's erroneous "risk of loss" theory, therepresentation and warranty breaches MBIA alleges
did not increase its risk of loss or causeit to suffer any harm.
Accordingly, MBIA's motion for summary judgment should bedenied for the separate reason that the material facts about breach, materiality, and resultingdamage remain squarely in dispute.
2
ndeed, the First Department expressed skepticism that it would be possible forMBIA to prove that a breach with respect to a performing loan had a material and adverseeffect on MBIA's interests, noting that "[w]hether or not such proof is actually possible"
was irrelevant to MBIA's summary judgment motion.
See
Decision at 33.
 
SIMPSON" THACHER & BARTLETT LLP
Hon.
Eileen Bransten
3-
pril 10,2013
I. By holding that rescissory damages are legally unavailable, the First
Department indicated that MBIA must prove its damages on a loan-by-
loan basis in accordance with the contractual "sole remedy" to which itagreed
Far from "clear[ing] the path for this Court to grant MBIA's pending motionfor summary judgment," MBIA Letter at 1, the First Department's Decision
rejected
MBIA's basic theory of the case—namely, that MBIA would be entitled to recover"rescissory damages" in the form of all its claims payments made pursuant to the insurancepolicies merely by establishing that it would not have issued the policies but for
Countrywide's alleged misrepresentations. Nevertheless, MBIA now attempts to argue that
the First Department rejected rescissory damages in name only, and that MBIA maynevertheless "recoup all its losses" in claims payments—which it now re-labels
"compensatory damages"—merely upon showing "that Countrywide's pervasive breaches
materially increased the risk profile of the insurance." MBIA Letter at 1-2. Of course, this
is precisely the rescissory damages relief the First Department held was "legally
unavailable." Decision at 33. MBIA's argument improperly treats the First Department's
rejection of rescissory damages as if it decided nothing of consequence.
3
MBIA seizes upon the First Department's observation that New YorkInsurance Law §§ 3105 and 3106 mention "defeating recovery" under an insurance policy,which the panel concluded could "refer to the recovery of payments made pursuant to an
insurance policy without resort to rescission." Decision at 31-32. But MBIA lifts this
observation wholly out of context. The First Department apparently reasoned that eventhough MBIA is bringing an affirmative action to recover damages, that does not meanMBIA cannot avail itself of the lesser causation standard for which provision is made under
§§ 3105 and 3106. The First Department did
not,
as MBIA now claims, "endors[e] a
compensatory-damages remedy of 'recovery of payments made' without any requirement of
a causal link between the defendant's misrepresentations and those payments." MBIALetter at 3-4 n.4. To the contrary, the panel's rejection of rescissory damages in the verynext paragraph forecloses this form of relief. MBIA badly misreads the First Department's
decision, as if that Court contradicted itself from one paragraph to the next. And, as thisCourt has held, even if MBIA is able to prove liability on its fraud and breach-of-contract
3
BIA now attempts to argue that it "never tied its ability to recover claims paymentsto the availability of a rescissory-damages remedy" and instead sought "a non-rescissory,compensatory-damages remedy" under New York Insurance Law § 3106. MBIA Letter at
3. Tellingly, MBIA cannot offer a
single
record cite at which MBIA seeks compensatory, asopposed to rescissory, damages; instead MBIA cites to statements in its briefing that "MBIAseeks rescissory damages" and that MBIA "may obtain rescission
or equivalent relief" Id
at 3 n.3. Countrywide's April 3 Letter pointed to numerous additional statements by MBIA
in its motion papers and in hearings before this Court demonstrating that MBIA's entiretheory of the case was based on the availability of rescissory damages. Letter at 2 n.2.

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