Mbia Insurance v Country Wide Home Loans, Pre-Argument Statement, Case No. 602825_2008 (Ny Supr. Ct. May 28, 2010)

SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION, FIRST DEPARTMENT

MBIA INSURANCE CORPORATION, Plaintiff-Respondent, -against- COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, LP and BANK OF AMERICA CORP., Defendants-Appellants.

Civil Appeal Index No.: 602825/08 PRE-ARGUMENT STATEMENT

Defendants-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp.,

Countrywide Financial Corp., Countrywide Home Loans Servicing, LP and Bank of America

Corp. submit the following pre-argument statement pursuant to Rule 600.17 of the Rules of the

Appellate Division, First Department:

1. The title of the action is accurately set forth in the caption above.

2. The parties in this action are:

A. Plaintiff: MBIA Insurance Corporation.

B. Defendants: Countrywide Home Loans, Inc., Countrywide Securities

Corp., Countrywide Financial Corp., Countrywide Home Loans Servicing, LP, and Bank of

America Corp.

3. The name, address and telephone number of counsel for Defendants-Appellants

Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp.,

Countrywide Home Loans Servicing, LP and Bank of America Corp. is:

GOODWIN PROCTER LLP The New York Times Building

FILED: NEW YORK COUNTY CLERK 05/28/2010 INDEX NO. 602825/2008

NYSCEF DOC. NO. 178 RECEIVED NYSCEF: 05/28/2010

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620 Eighth Avenue New York, New York 10018

(212) 813-8800

4. The name, address and telephone number of counsel for the Plaintiff-Respondent

MBIA Insurance Corporation is:

QUINN EMANUEL URQUHART & SULLIVAN LLP 51 Madison Avenue, 22nd Floor

New York, NY 10010 (212) 702-8100

5. This appeal is taken from the Decision and Order of Justice Eileen Bransten,

Supreme Court of the State of New York, County of New York, decided on April 27, 2010 and

entered in the Clerk’s Office of the Supreme Court, New York County, on April 29, 2010

(“Order”), attached hereto as Exhibit 1.

6. Plaintiff MBIA Insurance Corporation (“MBIA”) asserts claims for fraudulent

inducement, breach of contract, negligent misrepresentation, breach of implied covenant of good

faith and fair dealing and successor and vicarious liability. MBIA, a monoline insurer, issued

financial guaranty insurance policies in connection with securitizations of residential home

equity line of credit (“HELOC”) and closed-end second (“CES”) loans. MBIA alleges that a

significant percentage of the tens of thousands of mortgage loans contained in each securitization

failed to comply with Defendants’ underwriting guidelines or other representations and

warranties in the transaction documents. Defendants deny MBIA’s allegations, assert that the

guidelines, which permitted exceptions, were complied with, and contend that no representations

and warranties were breached. Defendants further assert that Plaintiff fully understood the risks

it was underwriting, failed to do its own necessary due diligence, and that any claims Plaintiff

was forced to pay were due to the decline in the housing market and not to misrepresentations by

Defendants.

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7. Plaintiff filed its initial complaint in this action on September 30, 2008.

Defendants moved to dismiss certain causes of action in that complaint. By decision and order

dated July 8, 2009, the court below granted in part and denied in part Defendants’ motion to

dismiss. That decision and order is currently the subject of an appeal and cross-appeal in this

Court. MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al., Index No. 602825/08.

After Justice Bransten issued her decision and order, MBIA filed an amended complaint adding

Countrywide Home Loans Servicing, LP and Bank of America Corp. as defendants and bringing

claims concerning five additional securitizations. Defendants moved to dismiss certain causes of

action in that amended complaint and Justice Bransten granted in part and denied in part

Defendants’ motion to dismiss. The trial court dismissed MBIA’s cause of action for negligent

misrepresentation. The trial court denied Defendants’ motion to dismiss MBIA’s cause of action

for fraud. The trial court also denied Defendants’ motion to dismiss MBIA’s cause of action for

breach of implied covenant of good faith and fair dealing against Countrywide Home Loans, Inc.

and Countrywide Home Loans Servicing, LP, but allowed that claim to survive “only as it relates

to [Plaintiff’s] allegations that [defendants] deliberately refused to take corrective action in order

to collect more fees.” (Order at 17.) The trial court denied Defendants’ motion to dismiss

MBIA’s cause of action for successor and vicarious liability against Bank of America Corp.

8. Defendants-Appellants seek reversal based on the following grounds:

A. As a matter of law, MBIA cannot demonstrate justifiable reliance – a

necessary element of its fraud claim. The trial court’s opinion runs contrary to the First

Department’s decisions in DDJ Management, LLC v. Rhone Group, LLC, 60 A.D.3d 421, 875

N.Y.S.2d 17 (1st Dep’t 2009) and UST Private Equity Investors Fund, Inc. v. Salomon Smith

Barney, 288 A.D.2d 87, 733 N.Y.S.2d 385 (1st Dep’t 2001). In those cases, among others, the

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First Department dismissed fraud claims as a matter of law on the ground that a sophisticated

plaintiff cannot establish that it entered into an arms-length transaction in justifiable reliance on

alleged misrepresentations if that plaintiff failed to make use of the means of verification that

were available to it. MBIA is a sophisticated monoline financial guaranty insurer. It bases its

allegations of fraud on the very same documents and information that were available to it for

review at the time it issued the financial guarantee policies. Moreover, MBIA possessed the

negotiating power to demand any additional information it desired to evaluate the transactions

with Defendants. DDJ Management and UST Private Equity Investors Fund required that

Defendants’ motion to dismiss the fraud claims against Countrywide Home Loans, Inc.,

Countrywide Securities Corp., and Countrywide Financial Corp. be granted as a matter of law.

B. Plaintiff has not pled fraud with sufficient particularity as required by

Section 3016(b) of the New York Civil Practice Law and Rules, as it has not identified any of the

loans that it believes did not conform with the contractual representations and warranties, or

which such representations and warranties it contends were breached. The trial court’s opinion

runs contrary to the Court of Appeals decision in Eurycleia Partners, LP v. Seward & Kissel,

LLP, 12 N.Y.3d 553, 883 N.Y.S.2d 147 (2009). In Eurycleia Partners, the Court of Appeals

held that “the complaint must ‘allege the basic facts to establish the elements of the cause of

action,’” and that such facts must “permit a ‘reasonable inference’ of the alleged misconduct.”

Eurycleia Partners, 12 N.Y.3d at 559 (quoting Pludeman v. Northern Leasing Systems, Inc., 10

N.Y.3d 486, 492, 493, 860 N.Y.S.2d 422 (2008)). Although the Plaintiff in this case has long

had access to documents that would enable it to do so, Plaintiff has failed to plead its fraud

claims with the specificity required by Section 3016(b) of the New York Civil Practice Law and

Rules. Eurycleia Partners and Pludeman required that Defendants’ motion to dismiss the fraud

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claims against Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide

Financial Corp. be granted as a matter of law.

C. Plaintiff’s fraud claim also should have been dismissed for the

independent reason that Defendants’ alleged fraud did not proximately cause MBIA’s losses.

The amended complaint fails to allege any facts showing that there was a direct relationship

between MBIA’s injury and Defendants’ purportedly fraudulent conduct in inducing MBIA to

issue the financial guarantee insurance. Rather, intervening causes, including the recent collapse

of the real estate market and credit crisis were a direct cause of MBIA’s losses. The trial court’s

refusal to recognize this runs contrary to the decisions in DDJ Management, LLC v. Rhone

Group, LLC, 60 A.D.3d 421, 875 N.Y.S.2d 17 (1st Dep’t 2009) and First Nationwide Bank v.

Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994), among other cases.

D. Plaintiff’s cause of action for fraud also is duplicative of its breach of

contract claim. The trial court’s opinion runs contrary to the First Department’s decision in

Hawthorne Group, LLC v. RRE Ventures, 7 A.D.3d 320, 776 N.Y.S.2d 273 (1st Dep’t 2004). In

Hawthorne Group, the First Department held that in a fraudulent inducement claim, “the alleged

misrepresentation should be one of then present fact, which would be extraneous to the contract

and involve a duty separate from or in addition to that imposed by the contract[.]” 7 A.D.3d at

323, 776 N.Y.S.2d at 276. In this case, Plaintiff makes no allegations of misrepresentations

extraneous to or independent from its breach of contract claim. The alleged misstatements

underlying Plaintiff’s fraud and misrepresentation claims mirror the representations and

warranties contained in the contracts. Hawthorne Group and other First Department decisions

required that Defendants’ motion to dismiss the fraud claims against Countrywide Home Loans,

6

Inc., Countrywide Securities Corp., and Countrywide Financial Corp. be granted as a matter of

law.

E. Plaintiff’s cause of action for breach of the implied covenant of good faith

and fair dealing is duplicative of its breach of contract claims. The trial court’s opinion runs

contrary to the Court of Appeals decision in New York University v. Continental Insurance Co.,

87 N.Y.2d 308, 639 N.Y.S.2d 283 (1995). In New York University, the Court of Appeals held

that a claim based on the alleged breach of the implied covenant of good faith and fair dealing

that is duplicative of a claim for breach of contract should be dismissed. As in New York

University, Plaintiff’s allegations in the complaint in this case simply restate the contract claims

and seek no damages separate from those sought in Plaintiff’s contract claims. New York

University required that Defendants’ motion to dismiss the breach of implied covenant of good

faith and fair dealing claims against Countrywide Home Loans, Inc. be granted as a matter of

law.

F. Plaintiff has not sufficiently pleaded its cause of action for successor and

vicarious liability against Bank of America Corp. The trial court’s holding that MBIA

adequately alleged that “Bank of America is a successor-in-interest to Countrywide . . . under a

theory of de facto merger” runs contrary to well-settled law. As Plaintiff concedes, the relevant

entities whom MBIA asserted were central to the successor liability analysis are incorporated in

Delaware, so Delaware law governs the successor liability issue. U.S. Fidelity & Guar. Co. v.

Petrolio Brasiliero S.A.-Petrobras, No. 98 Civ. 3099 (THK), 2005 WL 289575, at *5 (S.D.N.Y.

Feb. 4, 2005) (“The question of successor liability . . . should be governed by the law of . . . the

jurisdiction of the relevant entities’ incorporation.”). Under Delaware law, a party seeking to

plead a de facto merger must allege that (i) there was an asset transfer or purchase between the

7

two corporations and (ii) there are certain hallmarks that prove the transaction was a merger

without compliance with statutory requirements, and (iii) the transfer or purchase was structured

to disadvantage creditors or shareholders. See In re McKesson HBOC, Inc. Sec. Litig. 126 F.

Supp. 2d 1248, 1276-77 (N.D. Cal. 2000) (observing that the de facto merger doctrine does not

apply “unless the transaction has been structured to disadvantage creditors or shareholders”);

Orzeck v. Englehart, 195 A.2d 375, 378 (Del. Ch. 1963) (observing that “the doctrine of de facto

merger . . . has been recognized in cases of sales of assets for the protection of creditors or

stockholders who have suffered injury by reason of failure to comply with the statute governing

such sales”). Delaware law does not recognize a de facto merger when one corporation’s stock

is used to purchase the capital stock of another corporation, as was the case here. See Orzeck,

195 A.2d at 377 (concluding that there was no de facto merger where company purchased all the

outstanding shares of another company in exchange for stock and held the acquired company as

a subsidiary). The claims against Bank of America Corp. therefore should have been dismissed.

Id. MBIA’s de facto merger claim also fails under Delaware law because the complaint does not

allege, as it must, that Bank of America’s merger with Countrywide was engineered to

disadvantage Countrywide’s shareholders or creditors. See In re McKesson HBOC, 126 F. Supp.

3d 1276–77. Further, even the trial court’s application of New York law on this issue—to the

extent it differs from Delaware law—was erroneous. The trial court appears to have concluded

that New York’s test for de facto merger does not turn on the form of the transaction and might

be applicable even in the absence of pleading prejudice or fraud. This is incorrect. E.g., In re

New York City Asbestos Litigation, 15 A.D.3d 254, 258-259, 789 N.Y.S.2d 484, 488 (1st Dep’t

2005); Marenyi v. Packard Press Corp., No. 90-CV-4439, 1994 WL 16000129, at *8-9, 12

(S.D.N.Y. June 9, 1994). In applying New York law, the United States Court of Appeals for the

8

Second Circuit made clear in Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41 (2d Cir. 2003),

that the transaction’s form very much matters: where one corporation’s stock is used to purchase

the capital stock of another corporation, there is no de facto merger. See id. at 44-45 (citing TNS

Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335, 339, 703 N.E.2d 749, 751, 680 N.Y.S.2d

891, 893 (1998)).

G. Such other issues as may become apparent upon review of the papers on

appeal.

9. The following related actions are pending in this Court.

A. As previously noted, an appeal and cross-appeal taken from the Decision

and Order of the trial court on Defendants’ motion to dismiss the original complaint in this

action, decided on July 8, 2009 and entered in the Clerk’s Office of the Supreme Court, County

of New York, on July 13, 2009, is pending. A copy of the notice of appeal and preargument

statement is attached hereto as Exhibit 2.

B. Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., et al., Index

No. 650042/09, is pending before Hon. Eileen Bransten, J.S.C. in the Supreme Court of the State

of New York, County of New York. The Syncora case has been designated as related to this

action by the court below. The Syncora action originally named Countrywide Home Loans, Inc.,

Countrywide Securities Corp. and Countrywide Financial Corp. as defendants. Those

Defendants moved to dismiss certain claims in the original complaint. By decision and order

dated April 6, 2010, the trial court granted Defendants’ motion in part, and denied it in part.

That decision and order is currently the subject of an appeal and cross-appeal in this Court.

Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., et al., Index No. 650042-09. Syncora

9

Guarantee Inc. recently amended its complaint adding Bank of America Corp. as a defendant and

bringing claims concerning three additional securitizations.

C. Financial Guaranty Insurance Company v. Countrywide Home Loans,

Inc., et al., Index No. 650736/09, is also pending before Justice Eileen Bransten in the

Commercial Division of the Supreme Court of the State of New York, County of New York, and

has been designated as related to this action. The FGIC action originally named Countrywide

Home Loans, Inc. as the sole Defendant. Defendant’s motion to dismiss certain claims has been

fully briefed and argued and is sub judice. The Plaintiff recently amended its complaint to add

Countrywide Financial Corp., Countrywide Securities Corp., Countrywide Bank, F.S.B. and

Bank of America Corp. as defendants.

Dated: May 28, 2010 New York, New York

GOODWIN PROCTER LLP

By: /s/ Mark Holland Mark Holland Christopher J. Garvey Abigail Hemani Ashley H. Gray

The New York Times Building 620 Eighth Avenue New York, New York 10018 (212) 813-8800

Paul F. Ware, Jr. Sarah Heaton Concannon GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000

10

Attorneys for Defendants-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., Countrywide Home Loans Servicing, LP and Bank of America Corp.

Of Counsel:

Thomas M. Hefferon GOODWIN PROCTER LLP 901 New York Avenue, N.W. Washington, D.C. 20001 (202) 346-4000

Robert J. McGahan GOODWIN PROCTER LLP 601 S. Figueroa Street, 41st floor Los Angeles, CA 90017 (213) 426-2500

David M. Wells. William E. Adams, Jr. GUNSTER, YOAKLEY & STEWART, P.A. One Enterprise Center 225 Water Street Suite 1750 Jacksonville, Florida 32202 (904) 354-1980

To: Peter E. Calamari Philippe Z. Selendy Jonathan B. Oblak Manisha M. Sheth Nicholas F. Joseph QUINN EMANUEL URQUHART & SULLIVAN LLP 51 Madison Avenue, 22nd Floor New York, NY 10010 (212) 702-8100 Attorneys for Plaintiff-Respondent MBIA Insurance Corporation

EXHIBIT 1

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

MBIA INSURANCE CORPORATION,

Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, LP, and BANK OF AMERICA CORP.

Defendants.

Index No. 602825/08

lAS Part 3 (Bransten, J.)

NOTICE OF ENTRY

PLEASE TAKE NOTICE that the within is a true copy of the Decision and Order

duly entered by the office of the County Clerk of New York County on the 29th of April, 2010.

Dated: New York, New York April 29, 2010

QUINN EMANUEL URQUHART & SULLIVAN LLP

:?

By: -n~n-~--~--------Peter E. alarnari Philippe Z. Selendy Jonathan B. Oblak Manisha M. Sheth Eve S. Moskowitz 51 Madison Avenue New York, New York 10010 212-849-7000 (voice) 212-849-7100 (fax)

Attorneys/or PlaintiffMBIA Insurance Corp.

To: Marc Holland Abigail K. Hemani GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018-1405

Sarah H. Concannon Paul F. Ware GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109

Thomas M. Hefferon GOODWIN PROCTER LLP 901 New York Avenue, N.W. Washington, D.C. 20001

Robert J. McGahan GOODWIN PROCTER LLP 601 S. Figueroa Street, 41st floor Los Angeles, CA 90017

David M. Wells William E. Adams Christian Petersen GUNSTER, YOAKLEY & STEWART, P.A. One Enterprise Center 225 Water Street Suite 1750 Jacksonville, Florida 32202

Attorneys for Defendants Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., Countrywide Home Loans Servicing, LP, and Bank of America Corp.

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INDEX NO.

MOTIDNDATE

MOTION SEQ. NO.

MonON CAL. NO.

PART &n

fo~§d&/~ 12.!tt}d1 OlD

The following papelll, numbered 1 to __ were read on this motion to/for ______ _

PAPERS NUMBERED

Notice of Motion/ Order to Show Ceuse - Affidavits - Exhibits •••

Answering Affidavits - Exhibits ____ ------__ _

Replying Affidavits ________________ _

Cross~Motion: 0 Yes 0 No

Upon the foregoing papelll, It is ordered that this motion

Is decided in accordance with the Decision aQ Order _ signed under motion sequence number D I . .!

RECEIVJ;:O

APR .2 9 2010

~noH SUPPORT OFFICE - SI1PREME COURT-CIVIL

Dated: C:l .. ..oN. EILEEN BAANSTEN J.S.C.

Check one: 0 FINAL DISPOSITION I2R NON-FINAL DISPOSITION

Check if appropriate: 0 DO NOT POST 0 REFERENCE

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART THREE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --X


Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, LP and BANK OF AMERICA CORP.,

Defendants. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --X PRESENT: HON. EILEEN BRANSTEN, J.S.C.

Index No.: 602825108 Motion Date: 12/09109 Motion Sequence No.: 010

Defendants Countrywide Home Loans, Inc. ("Countrywide Home"), Countrywide

Securities Corp. ("Countrywide Securities"), Countrywide Financial Corp. ("Countrywide

Financial"), Countrywide Home Loans Servicing, LP ("Countrywide Servicing")

(collectively, "Countrywide") and Bank of America Corp. ("Bank of America," together with

Countrywide, "Defendants") move to dismiss the negligent misrepresentation, successor and

vicarious liability, fraud and breach of the implied covenant of good faith and fair dealing

causes of action in the amended complaint. Plaintiff MBIA Insurance Corporation

("MBIA") opposes the motion.

MBIA v Countrywide

BACKGROUND I

Index No.: 602825/08 Page 2

MBIA is one of the nation's oldest and largest monoline insurers, and provides

financial guarantee insurance and other forms of credit protection (Amended Compl at ~ 8).

Countrywide Financial is a Delaware corporation based in Calabasas, California (id.

at ~ 9). Countrywide Financial engages in mortgage lending and other real estate

finance-related businesses, including mortgage banking, securities dealing and insurance

underwriting (id.).

Countrywide Home, a wholly-owned subsidiary of Countrywide Financial, is a New

York corporation also based in Calabasas, California (id. at ~ 10). Countrywide Home

originates and services residential home mortgage loans (id.).

Countrywide Servicing, a wholly-owned subsidiary of Countrywide Financial, is a

limited partnership organized under the laws of Texas with offices in Plano, Texas and

Calabasas, California (id. at ~ 11). Countrywide Servicing services residential home

mortgage loans (id.).

Countrywide Securities, a wholly-owned subsidiary of Countrywide Financial, is a

Delaware corporation based in Calabasas, California and New York, New York (id. at ~ 12).

I This Court assumes familiarity with the facts recited in its prior decisions.

MEIA v Countrywide Index No.: 602825108 Page 3

Countrywide Securities is a registered broker-dealer and underwrites offerings of

mortgage-backed securities (id.).

Bank of America is a Delaware Cotporation based in Charlotte, North Carolina and

with offices and branches in New York, New York (id. at, 13). Bank of America is one of

the world's largest fmancial institutions, serving individual consumers, small- and

middle-market businesses and large cotporations with a full range of banking, investing,

asset-management and other financial and risk-management products and services (id.).

Countrywide merged with Bank of America on July 1,2008 (id.).

From 2002 through 2007, MBIA provided credit enhancement for a total of 17

securitizations of second-lien mortgage loans (id. at , 29). This action concerns 15

securitizations of home equity lines of credit ("HELOC") and closed-end second liens

("CES") (the "Securitizations") (id.). Each securitization generally comprised one or two

pools of mortgage loans of between approximately 8,000 and 48,000 mortgage loans (id.).

For each of the Securitizations, Countrywide Home originated, or acquired through

external mortgage brokers or correspondent banks, the underlying second-lien residential

mortgages (id. at, 30). Countrywide Home or Countrywide Servicing serviced the mortgage

loans in each Securitization (id.). Countrywide Home then conveyed pools of these mortgage

loans to a depositor, also a CountryWide entity, in exchange for cash (id.). The depositor in

tum conveyed the pools of mortgage loans to Countrywide-created trusts (the "Trusts") for

MBIA v Countrywide Index No.: 602825/08 Page 4

the purpose of using the mortgage loans as collateral for asset-backed securities that would

be sold to investors (id.). The Trusts then worked with the underwriters, including

Countrywide Securities, to price and sell the residential mortgage-backed securities

("RMBS") notes to investors (id.).

By the fall of 2007, a material increase in delinquencies, defaults and subsequent

charge-offs of the loans underlying the Securitizations became apparent (id at '11 74).

Because of the number ofloan delinquencies and defaults and subsequent charge-oITs, the

total cash flow from the mortgage payments in several of the Securitizations was insufficient

for the Trusts to meet their payment obligations to holders of the RMBS notes (id.).

The Trusts submitted claims on MBIA' s note guaranty insurance policies, demanding

that MBTA cover the shortage of funds (id. at '11 75). Many of the delinquent loans defaulted

and were subsequently charged off, increasing MBIA' s exposure to even greater claims (id.).

MBIA contends that the loan files in the Securitizations exhibit an extremely high

incidence of material deviations from the underwriting guidelines Countrywide represented

that it would follow (id. at'1l78). A material deviation from underwriting guidelines suggests

that the loan should never have been made (id.).

MBIA commenced this action against Countrywide asserting causes of action for

fraud (first), negligent misrepresentation (second), breach of contract (third and fourth),

MBIA v Countrywide Index No.: 602825/08 PageS

breach of the implied covenant of good faith and fair dealing (fifth) and indemnification

(sixth).

Countrywide Home, Countrywide Securities and Countrywide Financial moved to

dismiss the original complaint and, on July 8, 2009, this Court granted the motion in part and

denied the motion in part: (1) dismissing MBIA's claims for negligent misrepresentation and

narrowing the scope ofMBIA's claim for breach of implied covenant of good faith and fair

dealing; and (2) dismissing MBIA's breach of contract, breach of the implied covenant of

good faith and fair dealing and indemnification causes of action as against Countrywide

Financial and Countrywide Securities.

MBIA subsequently amended the complaint, repleading its negligent

misrepresentation cause of action, adding a cause of action for successor and vicarious

liability (seventh) against Bank of America, adding Countrywide Servicing as a defendant

to its breach of the implied covenant of good faith and fair dealing cause action and generally

adding more supporting allegations to various claims.

Defendants now move to dismiss the negligent misrepresentation, successor and

vicarious liability, fraud and breach of the implied covenant of good faith and fair dealing

causes of action in the amended complaint.

MBIA v Countrywide

ANALYSIS

I. Neelieent misrepresentation

Index No.: 602825/08 Page 6

Defendants argue that MBIA' s repleaded negligent misrepresentation cause of action

must be dismissed because MBIA fails to sufficiently allege a "special relationship."

Analysis of MBIA's negligent misrepresentation claim's viability begins with

determining whether the relationship between MBTA and Countrywide imposed a duty on

Countrywide to provide MBIA with correct information (Kimmell v Schaefer, 89 NY2d 257,

264 [1996]).

A negligent misrepresentation claim may arise from an arms-length commercial

transaction - such as the Securitizations in this action - only if a special relationship exists

between the parties such that the plaintiff justifiably relied on the defendant's representation

(see id. at 263). Under New York law, a statement made in the context of an arms-length

commercial transaction, without more, cannot give rise to such a duty to provide correct

information (id.; Parisi v Metroflag Polo, LLC, 51 AD3d 424,424 [lst Dept 2008]).

A special relationship exists if the defendant either (1) possesses "unique or

specialized expertise" or (2) occupies a "special position of confidence and trust" with the

injured party (Kimmell, 89 NY2d at 264; Laskin v Bank of Am. NA, 242 NYLJ 37,2009 NY

Mise LEXIS 2574, * 3 3 [Sup Ct, Nassau County 2009J ['" since a vast maj ority of commercial

transactions are comprised of such casual statements and contacts' liability for negligent


misrepresentation has been imposed in the commercial context only on those persons who

possess unique or specialized expertise, or who are in a special position of confidence and

trust with the injured party"] [citation omitted]).

MBIA alleges that "Countrywide arranged the Securitizations, and originated or

acquired, underwrote, and serviced all of the underlying mortgage loans"; that "Countrywide

had unique and special knowledge about the loans in the Securitizations"; that "Countrywide

had unique and special knowledge and expertise regarding the quality of the underwriting

of those loans as well as the servicing practices employed as to such loans"; that "MBIA

could not evaluate the underwriting quality or the servicing practices ofthe mortgage loans

in the Securitizations on a loan-by-Ioan basis"; that "it relied on Countrywide's unique and

special knowledge regarding the underlying mortgage loans when determining whether to

provide credit enhancement for each of the Securitizations"; that "MBIA engaged in its own

due diligence of the Securitizations" and "was entirely reliant on Countrywide to provide

accurate information regarding the loans in engaging in that analysis" (Amended Compl at

'\1 157).

Also, MBIA alleges that "[f]or at least a five year period, MBIA relied on

Countrywide's unique and special knowledge regarding the quality of the underlying

Mortgage Loans and their underwriting when determining whether to provide credit

enhancement for each of the Securitizations" (id. at '\1158).


In determining whether a commercial relationship rises to the level of a "special

relationship" under Kimmel, several principles come into focus. Only alleging that a party

possesses "unique or special expertise" is insufficient (M&TBank Corp. v Gemstone CDO

VII, Ltd, 68 AD3d 1747, 1750 [4th Dept 2009], citing Kimmell, 89 NY2d at 264; Pacnet

Network v KDDl Corp., 25 Misc 3d 1203 [A], 2009 NY Slip Op 51963[U), *4 [Sup Ct, NY

County 2009]; accord JP Morgan Chase Bank v Winnick, 350 F Supp 2d 393, 402 [SD NY

2004) [explaining that, in Kimmel, "the duty did not arise simply from the existence of the

contract or from its terms, but rather, from the particular factual circumstances underlying

the plaintiffs' decision to invest"]). Nor are vague allegations of general expertise enough

to support a special relationship (United Safety of America, Inc. v Consolidated Edison

Company of New York, Inc, 213 AD2d 283, 286 [1st Dept 1995] [reiterating the principle

that an "arm's length business relationship" is insufficient]).

Furthermore, a defendant's knowledge of "the particulars" of its own business does

not constitute the type of "specialized knowledge" that is required (JP Morgan Chase Bank,

350 F Supp 2d at 402 ["if it were, every bank would have a claim against every borrower

who failed to exercise due care in the context of commercial bank loans"]; MBIA Ins. Co. v

Residential Funding Co., LLC, 243 NYLJ 10, 26 Misc 3d 1204[A], 2009 NY Slip Op

52662[U], *6 [Sup Ct, NY County]; compare Heard v City of New York, 82 NY2d 66, 75


[1993] [plaintiff"was not a person wholly without knowledge seeking assurances from one

with exclusive knowledge"]).

In Batas v Prudential Ins. Co. of Am., the Appellate Division affirmed the trial court's

finding of no special relationship between an insured and her health insurance carrier (281

AD2d 260, 265 [1st Dept 2001]). The Court explained that it was not enough that "the only

claimed basis for such a relationship [was] alleged to be defendants' superior knowledge of

their product, and a posting of promotional material on their web page in which they tout[ ed]

themselves as a 'trusted name' in health insurance" (id. at 265). Further, the Court affinned

the conclusion that "in the absence of some additional allegation showing a more direct or

affirmative effort by defendants to gain plaintiffs' trust and confidence," plaintiff failed to

allege a special relationship (id.).2

Finally, the special relationship must have existed before the contractual relationship

giving rise to the alleged wrong, and not as a result of it (Emigrant Bank v UBS Real Estate

Securities, Inc., 49 AD3d 382, 385 [1st Dept 2008]; MBIA Ins. Co., 2009 NY Slip Op

52662[UJ, at *6; Tech. Support Servs. Inc. v IBM, 236 NYLJ 43, 2006 NY Misc LEXIS

2421, *10 [Sup Ct, Westchester County 2006]).

2 Like fraud, claims of negligent misrepresentation must be pleaded with particularity (CPLR 3016 [b)).


To borrow an observation from the court in JP Morgan Chase Bank, parties to an

"arm's length commercial transaction ... must comply with the negotiated terms of [their]

contract, and may not defraud [each other] by deliberate falsehood, but [one] is not liable in

tort for mere carelessness about its representations" (350 F Supp 2d at 402).

Applying the principles above, MBIA fails to replead a cause of action for negligent

misrepresentation against Countrywide Financial, Countrywide Home and Countrywide

Securities. MBIA merely alleges an "ordinary business relationship" upon which a negligent

misrepresentation claim may not be based. Accordingly, Countrywide'S motion to dismiss

the repleaded cause of action for negligent misrepresentation is granted.3

3 As the United States Court of Appeals for the Second Circuit has remarked, "[i]t is also worth noting that Kimmell's finding that the defendant in that case was liable because there was a special relationship between the parties rested largely on the fact that the defendant testified that 'he expected plaintiffs to rely on [his] projections,' that he informed plaintiffs 'that he could provide 'hot comfort' should plaintiffIs] entertain any reservations about investing,' and that he 'represented' his projections as 'reasonable'" (Dallas Aero., Inc. v CIS Air Corp., 352 F3d 775, 789 [2d Cir 2003] [alterations in original] [citation omitted]).

MBIA v Countrywide

II. Successor and vicarious liability

Index No.: 602825/08 Page 11

In the amended complaint, MEIA adds Bank of America as a defendant. MBTA

contends that Bank of America is a successor-in-interest to Countrywide and is vicariously

liable for the conduct of Countrywide under a theory of de facto merger.

Countrywide argues that the separate corporate identities of Bank of America and

Countrywide should be enforced and that there is no basis to impose Bank of America with

successor liability.

Relying onArgent Classic Convertible Arbitrage FundL.P. v Countrywide Financial

Corp. (07-cv-07097-:MRP-MAN, *8-9 [CD Ca 2009] [hereinafter "Argent"]), Countrywide

argues that Bank of America did not assume Countrywide's liabilities and, therefore,

MBIA's claims against Bank of America must be dismissed. Countrywide urges this Court

to reach the same result as the court in Argent. However, with little discussion, the District

Court in Argent simply concluded that the

"[Third Amended Complaint], together with judicially noticeable documents, does not allege actions that have been taken in bad faith to prejudice Countrywide's creditors - and the [Third Amended Complaint] certainly does not allege bad faith with the specificity required for alleging fraud. Nor does anything properly before the Court suggest that BofA has de facto merged with Countrywide. Finally, BofA is not a 'continuation' of Countrywide" (id.).

MBIA v Countrywide Index No.: 602825108 Page 12

Countrywide offers nothing for this Court to follow and, more importantly, fails to

demonstrate that each of the four exceptions, including de facto merger, are unavailable to

MBIA as a matter of law.

Although, generally, an acquiring corporation does not become responsible for the

pre-existing liabilities of the acquired corporation, New York law provides an exception

under the de facto merger doctrine (Fitzgerald v Fahnestock & Co., 286 AD2d 573, 574 [1 st

Dept 200 I D. When the acquiring corporation has not purchased another corporation merely

for the purpose of holding it as a subsidiary, but has effectively merged with the acquired

corporation, the de facto merger doctrine may apply (id).

"The hallmarks of a de facto merger include: continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets and general business operation" (id).

The exception is premised on the concept "that a successor that effectively takes over

a company in its entirety should carry the predecessor's liabilities as a concomitant to the

benefits it derives from the good will purchased" (Grant-Howard Assocs. v General

Housewares Corp., 63 NY2d 291,296 [1984]). Also, "factors are analyzed in a flexible

manner that disregards mere questions of form and asks whether, in substance, it was the

MBJA v Countrywide Index No.: 602825/08 Page 13 .

intent of the successor to absorb and continue the operation of the predecessor" (Matter of

AT&S Transp., LLC v Odyssey Logistics & Tech. Corp., 22 AD3d 750, 752 [2d Dept 2005]).

Here, MBIA first sufficiently alleges continuity of ownership. "[C]ontinuity of

ownership, exists where the shareholders of the predecessor 90rporation become direct or

indirect shareholders of the successor corporation as the result of the successor's purchase

ofthe predecessor's assets, as occurs in a stock-for-assets transaction" (Van Nocker vA. W.

Chesteron, Co. (In re N.Y City Asbestos Litig.), 15 AD3d 254, 256 [1st Dept 2005] [no

continuity of ownership between the acquired company and acquiring company, since the

acquiring company paid for the acquired company's assets with cash, not with its own stock,

and neither the acquired company nor any of its shareholders has become a shareholder of

the acquiring company]).

MBIA alleges, and Countrywide does not dispute, that Bank of America acquired

Countrywide Financial and the other Countrywide defendants on July 1,2008, through an

all-stock tTansaction involving a Bank of America subsidiary that was created for the sale

purpose offacilitating the acquisition of Countrywide (Amended Compl at ~~ 119-22; see

Defendant's Memorandum of Law in Support of their Motion to Dismiss the Amended

Complaint ["Mem in Supp"] at 21).

MBIA next establishes the factor analyzing the assumption of the liabilities ordinarily

necessary for the uninterrupted continuation of the business of the acquired corporation.


MBIA asserts, among other things, that the Countrywide brand had been retired and that the

"old Countrywide website redirects customers to the mortgage and home loans section of

Bank of America's website" (Amended Compl at ~~ 123-24).

. MBIA also establishes the factor analyzing the cessation of ordinary business and

dissolution of the acquired corporation as soon as possible. "So long as the acquired

corporation i,s shorn of its assets and has become, in essence, a shell, legal dissolution is not

necessary before a finding of a de facto mergerwiII be made" (Fitzgerald, 286 AD2d at 575).

MBIA alleges that

"[ s ]ubstantially all of Countrywide's assets were transferred to Bank of America on November 7, 2008, 'in connection with Countrywide's integration with Bank of America's other businesses and operations,'4 along with certain of Countrywide's debt securities and related guarantees. Countrywide Financial ceased filing its own financial statements in November 2008, and instead its assets and liabilities have been included in Bank of America's recent financial statements" (Amended Compl at ~ 126).

Furthermore, MBIA alleges that "Bank of America has paid to restructure certain of

Countrywide's home loans on its behalf, including settling predatory-lending lawsuits

brought by state attorneys general" (id. at ~ 127).

4 It is unclear from what source MBIA quotes. Presumably, MBIA quotes from an interview in the May 2009 issue of Housing Wire magazine - the source cited just before paragraph 126 in the amended complaint.


Based on the foregoing, MBIA sufficiently alleges a de facto merger in which Bank

of America intended to absorb and continue the operation of Countrywide (see Holme v

Global Mins. & Metals Corp., 63 AD3d 417, 418 [1st Dept 2009]). Accordingly,

Countrywide's motion to dismiss the complaint as against Bank of America is denied.

ill. Fraud

Although this Court previously denied Countrywide'S motion to dismiss MBIA's

fraud claim, Countrywide again seeks dismissal of the fraud claim.

The only difference between the amended and original complaints in connection with

MBIA's fraud cause of action is the addition oftlve securitizations on which MBIA brings

its fraud claim. The substance, the claim, the theory and the relief sought remain the same.

Citing no authority for this Court to do so, Countrywide asks this Court to review their

"properly modified arguments, which they believe require a different result as to [MBIA's]

fraud claim" (Mem in Supp at 23). In the interest of judicial economy, however, this Court

brietly reviews Countrywide's arguments.

In its motion to dismiss the fraud claim from the amended complaint, Countrywide

simply asserts the same arguments from its motion to dismiss the original complaint

(compare Mem in Supp at 23-26 [no justifiable reliance], 26-31 [fraud claim duplicative of

breach of contract claim], 35-38 [fraud not pleaded with particularity]; with Countrywide


Defendants' Memorandum of Law in Support Their Motion to Dismiss [the original

complaint] at 19-24 [no justifiable reliance], 12-18 [duplicative], 27-29 [particularity]).

These arguments were previously rejected; the arguments are again rejected upon the same

grounds (see MBIA Ins. Co. v Countrywide Home Loans, Inc., 2009 NY Slip Op 31527[U],

*6-14 [Sup Ct, NY County 2009]).

Countrywide further argues that MBIA fails to sufficiently plead causation.

Countrywide fails to demonstrates as a matter of law that MBIA cannot establish the

causation it alleges (see Campbell v Rogers & Wells, 218 AD2d 576, 580 (1st Dept 1995]

[judgment as a matter oflaw "should be granted only ifthere is no rational process by which

the jury could find for plaintiff as against the moving defendant"]). On a motion addressed

to the pleadings in this highly complex action, it would be premature to make a determination

as to whether an economic downturn constituted an intervening cause in the link between

Countrywide's alleged conduct and MBIA's alleged injury.

Accordingly, Countrywide offers nO basis for this Court to revisit its prior order

denying Countrywide's motion to dismiss MBIA's fraud claim and that branch of

Countrywide's motion to dismiss is denied.

MEIA v Countrywide

IV. Breach of the implied covenant of 200d faith

and fair dealing

Index No.: 602825108 Page 17

Countrywide fails to assert a basis for this Court to dismiss :MBIA's breach of the

implied covenant of good faith and fair dealing cause of action. Countrywide's motion to

dismiss :MBIA's claim is therefore denied. However, consistent with this Court's Decision

and Order dated July 8, 2009, MBIA's cause of action remains viable only as it relates to

:MBIA's allegations that Countrywide deliberately refused to take corrective action in order

to collect more fees.

Accordingly, it is

ORDERED that the motion to dismiss is GRANTED in part in that the negligent

misrepresentation (second) cause of action is dismissed; and it is further

ORDERED that Defendants are directed to serve an answer to the amended complaint

within twenty (20) days after service of a copy of this order with notice of entry.

This constitutes the Decision and Order of the Court.

Dated: New York, New York April'1..'},2009

ENTER

Hon. Eileen Bransten

Index No. 08/602825

SUPREME COURT OFTHE STATE OFNEW YORK COUNTY OF NEW YORK


Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE. SECURITIESCORP.,.COUNTRYWIDEFINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICiNG, LP and BANK OF AMERICA CORP., .

Defendants.

NOTICE OF ENTRY

QurnN EMANUEL URQUHART & SULLIVAN, LLP 51 Madisoll Avenue, 22ndFloor New York, New York 10010 (212)849-7000

Counsellor Plaint!IJ . MBIAlnsurance Corporation

EXHIBIT 2

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK


Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., and COUNTRYWIDE FINANCIAL CORP.,

Defendants.

Index No.: 602825/08 lAS Part 3

Hon. Eileen Bransten

NOTICE OF APPEAL

PLEASE TAKE NOTICE that, pursuant to Sections 5513(a) and 5515 ofthe New York

Civil Practice Law and Rules, Defendant-Appellants Countrywide Home Loans, Inc., Countrywide

Securities Corp. and Countrywide Financial Corp. hereby appeal to the Appellate Division ofthe

Supreme Court of the State of New York, in and for the First Department, from that part of the

Order of the Supreme Court, New York County, LAS. Part 3 (per Justice Eileen Bransten) dated

July 8, 2009, and duly entered with the Clerk of the Court on July 13,2009: (1) denying

Defendants' motion to dismiss Plaintiff s first cause of action sounding in fraud as to Countrywide

Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.;

(2) denying Defendants' motion to dismiss Plaintiff s fifth cause of action for breach of the implied

covenant of good faith and fair dealing as to Countrywide Home Loans, Inc.

Dated: July 14, 2009 New York, New York

GOODWIN PROCTER LLP

By: __ ~~ ______ ~~ ______ __ Christopher 1. Garve, sq. Katherine S. Bromberg, Esq.


Paul F. Ware, Jr., Esq. GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000

Attorneys for Defendants Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.

2

To: Peter E. Calamari, Esq. Philippe Z. Selendy, Esq. Jonathan B. Oblak, Esq. Manisha M. Sheth, Esq. Nicholas F. Joseph, Esq. QUINN EMANUEL URQUHART

OLIVER & HEDGES LLP

51 Madison Avenue, 22nd Floor New York, NY 10010 (212) 702-8100

Attorneys for Plaintiff MBIA Insurance Corporation

Of Counsel:

Thomas M. Hefferon, Esq. GOODWIN PROCTER LLP

901 New York Avenue, N.W. Washington, D.C. 20001 (202) 346-4000

David J. Apfel, Esq. GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000

Robert J. McGahan, Esq. GOODWIN PROCTER LLP

601 S. Figueroa Street, 41st floor Los Angeles, CA 90017 (213) 426-2500

David M. Wells, Esq. William E. Adams, Esq. GUNSTER, YOAKLEY & STEWART, P.A. One Enterprise Center 225 Water Street Suite 1750 Jacksonville, Florida 32202 (904) 354-1980

3

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SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION, FIRST DEPARTMENT

MBIA INSURANCE CORPORATION, Civil Appeal

Plaintiff-Respondent, Index No.: 602825/08

-against- PREARGUMENTSTATEMENT

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., and COUNTRYWIDE FINANCIAL CORP.,

Defendant-Appellants.

Defendant-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp. and

Countrywide Financial Corp. submit the following pre-argument statement pursuant to

Rule 600.17 of the Rules of the Appellate Division, First Department:

1. The title of the action is accurately set forth in the caption above.

2. The original parties in this action are:

A. Plaintiff: MBIA Insurance Corporation.

B. Defendants: Countrywide Home Loans, Inc., Countrywide Securities

Corp. and Countrywide Financial Corp.

3. The name, address and telephone number of counsel for Defendant-Appellants

Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.

is:

GOODWIN PROCTER LLP The New York Times Building

620 Eighth Avenue New York, New York 10018

(212) 813-8800

4. The name, address and telephone number of counsel for the Plaintiff-Respondent

MBIA Insurance Corporation is:

QUINN EMANUEL URQUHART OLIVER & HEDGES LLP 51 Madison Avenue, 22nd Floor

New York, NY 10010 (212) 702-8100

5. This appeal is taken from the Decision and Order of Justice Eileen Bransten,

Supreme Court of the State of New York, County of New York, decided on July 8, 2009 and

entered in the Clerk's Office of the Supreme Court, New York County, on July 13,2009

("Order"), attached hereto as Exhibit A.

6. This case was brought by a Plaintiff mono line bond insurer that issued financial

guaranty insurance policies in connection with securitizations of residential mortgage loans.

Defendants contributed the mortgage loans to the securitization trusts. Plaintiff alleges that a

significant percentage of the tens of thousands of mortgage loans contained in each securitization

failed to comply with defendants' underwriting guidelines, or other representations and

warranties in the transaction documents. Plaintiff filed an action to recover monies paid out on

its financial guaranty policies as a result of the allegedly noncompliant mortgage loans alleging

fraud, negligent misrepresentation, breach of contract as to the Insurance Agreement and the Sale

and Servicing Agreement, breach of implied duty of good faith and fair dealing and

indemnification.

7. The Court below granted Defendants' motion to dismiss Plaintiffs second cause

of action for negligent misrepresentation as against all defendants and also granted Defendant's

motion to dismiss Plaintiff s third and fourth causes of action for breach of contract, fifth cause

of action for breach of the implied covenant of good faith and fair dealing and sixth cause of

action for indemnification as against Countrywide Financial Corp. and Countrywide Securities

2

Corp. The Court below denied Defendants' motion to dismiss Plaintiffs first cause of action

(fraud) as against all defendants. The Court below also denied Defendants' motion to dismiss

Plaintiff s fifth cause of action (breach of the implied covenant of good faith and fair dealing) as

to defendant Countrywide Home Loans, Inc. The Court below allowed the breach of the implied

covenant of good faith and fair dealing claim against Countrywide Home Loans, Inc. to survive

"to the limited extent that it asserts that corrective action - such as investigating loans which

became other 30-days delinquent - would have preserved [Plaintiffs] benefits under the bargain,

but that Countrywide Home [Loans, Inc.] deliberately refused to take such action in order to

collect more late payment fees and service charges." Order at 18.

8. Defendant-Appellants seek reversal based on the following grounds:

A. Plaintiff s first cause of action sounding in fraud is duplicative of its

breach of contract claims. The trial court's opinion runs contrary to the First Department's

decision in The Hawthorne Group, LLC v. RRE Ventures, 7 AD.3d 320, 776 N.Y.S.2d 273 (1st

Dep't 2004). In Hawthorne Group, the First Department held that in a fraudulent inducement

claim, "the alleged misrepresentation should be one of then present fact, which would be

extraneous to the contract and involve a duty separate from or in addition to that imposed by the

contract." Id at 323, 276. In this case, Plaintiff makes no allegations of misrepresentations

extraneous to or independent from its breach of contract claim. The alleged misstatements

underlying Plaintiffs fraud and misrepresentation claims mirror the representations and

warranties contained in the contracts. Hawthorne Group and other First Department decisions

required that Defendants' motion to dismiss the fraud claims against Countrywide Home Loans,

Inc., Countrywide Securities Corp. and Countrywide Financial Corp. be granted as a matter of

law.

3

B. Plaintiff s Complaint merely alleges that Defendants did not intend to

abide by their contractual statements and does not rely on facts present at the time of the

contracts. The trial court's opinion runs contrary to the First Department's decisions in Parisi v.

Metroflag Polo, LLC, 857 N.Y.S.2d 110 (1st Dep't 2008) and Elghanian v. Harvey,

671 N.Y.S.2d 266 (1st Dep't 1999). In Parisi and Elghanian, the First Department dismissed

fraud claims based on allegations of future intentions. Where, as in this case, a Plaintiffs

Complaint does not rely on present facts, but instead alleges that Defendants had no intention of

abiding by their contractual representations and warranties, the fraud claims should be dismissed.

Parisi and Elghanian required that Defendants' motion to dismiss the fraud claims against

Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.

be granted as a matter of law.

C. Plaintiff is a sophisticated monoline financial guaranty insurer, and as a

matter of law Plaintiff cannot demonstrate justifiable reliance. The trial court's opinion runs

contrary to the First Department's decision in UST Private Equity Investors Fund, Inc. v.

Salomon Smith Barney, 288 AD. 2d 87, 733 N.Y.S.2d 385 (1st Dep't 2001). In UST, the First

Department dismissed fraud claims and held that a sophisticated plaintiff cannot establish that it

entered into an arms length transaction in justifiable reliance on alleged misrepresentations if that

plaintiff failed to make use of the means of verification that were available to it. Plaintiff bases

its allegations of fraud on the very same documents available for review at the time Plaintiff

entered into the contracts with Defendants. Moreover, Plaintiff possessed the negotiating power

to demand any additional information or time to evaluate the transactions with Defendants. UST

required that Defendants' motion to dismiss the fraud claims against Countrywide Home Loans,

4

Inc., Countrywide Securities Corp. and Countrywide Financial Corp. be granted as a matter of

law.

D. Plaintiff has not pled fraud with sufficient particularity as required by

Section 3016(b) of the New York Civil Practice Law and Rules. The trial court's opinion runs

contrary to the Court of Appeals decision in Pludeman v. Northern Leasing Systems, Inc.,

10 N.y'3d 486,860 N.Y.S.2d 422 (2008). In Pludeman, the Court of Appeals held that a

complaint must include specific facts sufficient to permit a reasonable inference of the alleged

conduct. Although the Plaintiff in this case has long had access to documents that would allow it

to do so, Plaintiff has failed to plead its fraud claims with the specificity required by

Section 3016(b) of the New York Civil Practice Law and Rules. Pludeman required that

Defendants' motion to dismiss the fraud claims against Countrywide Home Loans, Inc.,

Countrywide Securities Corp. and Countrywide Financial Corp. be granted as a matter of law.

E. Plaintiff s fifth cause of action for breach of the implied covenant of good

faith and fair dealing is duplicative of its breach of contract claims. The trial court's opinion

runs contrary to the Court of Appeals decision in New York Univ. v. Continental Insurance Co.,

87 N.Y.2d 308,639 N.Y.S.2d 283 (1995). In New York University, the Court of Appeals held

that a claim based on the alleged breach of the implied covenant of good faith and fair dealing

that is duplicative of a claim for breach of contract should be dismissed. Plaintiff s allegations in

the complaint in this case simply restate the contract claims. New York University required that

Defendants' motion to dismiss the breach of implied covenant of good faith and fair dealing

claims against Countrywide Home Loans, Inc. be granted as a matter of law.

F. Such other issues as may become apparent upon review of the papers on

appeal.

5

9. A related case, Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., et al.,

Index No. 650042/09, is pending before Justice Eileen Bransten in the Supreme Court of the

State of New York, County of New York. The Syncora case has been designated as related to

this action by the Supreme Court ofthe State of New York, County of New York. Defendants in

the Syncora action are identical to the defendants in this action. Defendants Countrywide Home

Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp. have moved to

dismiss certain claims in the Syncora action, the motion is fully briefed and argued and is

currently sub judice.

10. There is no additional appeal pending in this action.

Dated: July 14,2009 New York, New York

GOODWIN PROCTER LLP

BY:~ Christopher J. Garvey, Esq. Katherine S. Bromberg, Esq.


Paul F. Ware, Jr., Esq. GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000

Attorneys for Defendant-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.

6

To: Peter E. Calamari, Esq. Philippe Z. Selendy, Esq. Jonathan B. Oblak, Esq. Manisha M. Sheth, Esq. Nicholas F. Joseph, Esq. QUINN EMANUEL URQUHART

OLIVER & HEDGES LLP 51 Madison Avenue, 22nd Floor New York, NY 10010 (212) 702-8100

Attorneys for Plaintiff-Respondent MBIA Insurance Corporation

Of Counsel:

Thomas M. Hefferon, Esq. GOODWIN PROCTER LLP 901 New York Avenue, N.W. Washington, D.C. 20001 (202) 346-4000

David J. Apfel, Esq. GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000

Robert J. McGahan, Esq. GOODWIN PROCTER LLP 601 S. Figueroa Street, 41st floor Los Angeles, CA 90017 (213) 426-2500

David M. Wells, Esq. William E. Adams, Esq. GUNSTER, YOAKLEY & STEWART, P.A. One Enterprise Center 225 Water Street Suite 1750 Jacksonville, Florida 32202 (904) 354-1980

7

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SUPREME COURT OF THE STATE OF NEW YORK - NEW YORK COUNTY

PRESENT: PART~.

Index Number: 602825/2008

MBIA INSURANCE CORPORATION

vs.

IIIIDEX NO.

MOTION DATE , J $ COUNTRYWIDE HOME LOANS, INC.,

MOTION SEQ. NO.

SEQUENCE NUMBER: 004 MOTION CAL. NO.

DISMISS

In this motion toltor ______ _

PAPERS NUMBEReD

Notice of Motionl Order to Show Cause - Affidavits - Exhibits ...

Answering Affidavits - Exhibits ____________ _

Replying Affidavits ________________ _

Cross-Motion: .. -.) Ves 11 No

Upon the foregoing papers, It Is ordered that this motion

J U l. ·i 0 ;'009

~ IA~ i'<lll'lle:~ :)UrJI'O:'(l O~FlCE NYS Sl.JPREMF: r:oulrr • CIVIl..

Dated: __ 3--J--",_D-=----'"'_O_C_) ~~~i;~: Check one: FINAL DISPOSITION X NON-FINAL DISPOSITION

Check if appropriate: DO NOT POST

_. _._ ...... _------------

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART THREE ---------------------------------------x


Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURlTIES CORP., and COUNTRYWIDE FINANCIAL CORP.,

Defendants. ---------------------------------------x PRESENT: HON. EILEEN BRANSTEN, lS.C.

Index No.: 602825108 Motion Date: 1/22/09 Motion Sequence No.: 004

· '. Pursuant to CPLR 3016 (b) and 3211 (a) (1) and (a) (7), Countrywide Securities Corp.

("Countrywide Securities") and Countrywide Financial Corp. ("Countrywide Financial")

seek dismissal of the entire complaint against them and Countrywide Home Loans, Inc.

("Countrywide Home") moves to dismiss the causes of action for fraud, negligent

misrepresentation and breach of the implied covenant of good faith and fair dealing asserted

against it. MBIA opposes the motion.

BACKGROUND

A residential mortgage-backed security ("RMBS") "is a type of security whose cash

flows come from residential debt such as mortgages, home-equity loans and subprime

mortgages" (http://www.investopedia.comlterms/r/rmbs.asp). An entity, typically a trust,

issues notes secured by the RMBS (Compl at ~ 28). The cash flows from these securitized

MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825108 Page 2

residential loans-in the fonn of payments of interest and principal-are used to pay

obligations on the RMBS notes (the "Notes") (id. at ~ 28).

Countrywide Financial is engaged in mortgage lending and other real-estate finance

related businesses, including mortgage banking, securities dealing and insurance

underwriting (id. at ~ 9). Countrywide Home, which originates and services residential home

mortgage loans, and Countrywide Securities, which is a re~istered broker-dealer and

underwrites offerings of mortgage-backed securities, are both wholly owned subsidiaries of

Countrywide Financial (id. at ~~ 10-11) (collectively, "Countrywide").

MBIA is a monoline! insurer and provides financial guarantee insurance and other

fonns of credit protection to issuers (Compi at ~ 8).

Beginning in 2004, Countrywide expanded its origination and securitization ofriskier

products, including sub-prime mortgages, interest-only loans, closed-end second liens

("CES"), and home equity lines of credit ("HELOCs"), with a much broader base of potential

borrowers (id. at ~ 22).

! Monoline refers to a business that focuses specifically in one financial area. (http://www.investopedia.comltenns/mlmonoline.asp.) "The main advantage of mono lines is that these companies have specialized skills and provide expertise beyond what can usually be expected from companies that businesses are spread across many different fmancial areas" (id.).

___ • ___________________ . ____ . ______ ~ ______________________ ---J

MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08 Page 3

From 2002 through 2007, MBIA provided credit enhancement in a total of 17

Countrywide securitizations of mortgage loans (id. at ~ 34). However, this action only

concerns the 10 securitizations underwritten between 2005 and 2007, involving home equity

lines of credit and closed-end second liens2 (id. at ~~ 27, 34). Because the mortgages are the

only collateral supporting the RMBS, their credit quality is of critical importance to an

RMBS noteholder (id at ~ 28).

To increase the marketability of the Notes, Countrywide engaged MBIA to provide

credit enhancement-in the fonn of a guarantee of repayment of principal and interest for

the RMBS notes in each securitization (id. at ~ 30).

To induce MBIA to guarantee the securitizations, Countrywide made representations

and warranties to MBIA concerning the origination and quality of the mortgage loans,

including that the mortgage loans had been underwritten pursuant to its extensive set of

approved guidelines (id at ~ 32). Countrywide made available to MBIA a summary orits

underwriting procedures for each securitization and represented that its underwriting of the

mortgage loans confonned to its stated underwriting procedures as well as industry standards

2A HELOC is a second lien on residential property (Compi at ~ 22). The borrower's equity in the property (the value of the property that is not used as collateral for the first lien) collateralizes a specified line of credit that may be drawn down by the borrower (id). A CBS is also collateralized by the borrower's equity, but the loan is of a fixed amount (id). Since both are second liens, they are junior in priority to the first lien, and, if the property is foreclosed, the proceeds must be used to fully satisfy the first lien before the second lien is paid (id).

MBlA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08 Page 4

(id. at ~ 34). It also provided specific data points for each loan in what is known as a loan

tape, which reported infonnation such as the loan-to-value ratio ("LTV") for each loan and

the debt-to-income ("DTI") ratio for each borrower, as well as each borrower's FICO

score-a measure of creditworthiness (id.). Additionally, Countrywide provided to MBIA

shadow credit ratings3 on the proposed pool of mortgage loans intended for securitization,

submitted a December 14, 2004 Prospectus filed with the Securities and Exchange

Commission ("SEC") and supplemental prospectuses also filed with the SEC, and made

fonnal presentations concerning its expertise and capabilities in loan origination and

servicing (id. at~' 35-37).

Countrywide further agreed that, in the event of a breach of any representation or

warranty related to a mortgage loan (a "Defective Loan"), it would either cure the breach or

repurchase or substitute eligible mortgage loans for the Defective Loan (id. at ~ 33),

Components of a securitization

Countrywide arranged and securitized each of the ten securitizations through a similar

series of contracts, including: (a) a Purchase Agreement, which provided for the sale of

3This is a rating perfonned on an issuing party, but without any public announcement of the results (http://www.investopedia.com/tenns/s/shadowrating.asp). "Shadow ratings are useful for companies trying to assess how much a debt issue might be worth to investors. Rather than publicly releasing the results of a credit analysis by a third party, companies might wish to first know what the results are before it is released to the public" (id.).


mortgage loans to a Countrywide affiliate created to effect the securitizations; (b) a Sale and

Servicing Agreement which transferred the mortgage loans to a single purpose trust (the

"Trust"), and confirmed the terms of Countrywide's engagement by the Trust to service the

mortgage loans; (c) a Prospectus and Supplemental Prospectus filed by the Trust, which

Countrywide used to sell the mortgage-backed securities; and (d) a Trust Indenture, which,

among other things, established the rights of holders of securities and the obligations of the

Trustee (collectively, the "Transaction Documents") (id. at ~ 38).

Countrywide, the Trust, and MBIA then entered into an Insurance Agreement which

provided the terms for the issuance of an MBIA financial guaranty policy that would be

issued to the Trust (id. at' 39). In each transaction, the Insurance Agreement incorporated

the representations and warranties and the obligations of the parties in the Transaction

Documents and gave MBIA the right to rely on these representations and warranties, to

enforce their terms, and to exercise remedies for any breach (id.).

Securitizations deteriorate

Starting in 2007, there was a marked increase in loan delinquencies from the

securitizations (id. at ~ 55). The total cash flow from the mortgage payments in several of

the securitizations was insufficient for the Trusts to meet their payment obligations to holders

of the RMBS notes (id.). These deficiencies caused the Trusts to submit claims on MBIA's

insurance policies, demanding that MBIA cover the shortage of funds (id.).

~---------------'----'-'--'--'

MBIA Insurance Corporation v Countr)lYVide Home Loans, Inc. Index No. 602825/08 Page 6

By September 2008, MBIA had paid over $459 million on its policies that covered the

Countrywide securitizations (id. at ~ 56).

In 2008, MBIA commenced this action asserting causes of action for (1) fraud; (2)

negligent misrepresentation; (3) breach ofthe insurance agreement; (4) breach ofthe sale and

servicing agreement; (5) breach of the implied covenant of good faith and fair dealing; and

(6) indemnification.

ANALYSIB

Fraudulent inducement

Duplicative claims

MBIA's fraud claim is based on allegations that "Countrywide made available to

MBIA ... a summary of its underwriting procedures for each Securitization, and represented

that its underwriting of the Mortgage Loans conformed to its stated underwriting procedures

as well underwriting standards"; "provided 1vfBIA with specific data points for each loan in

what is known as a loan tape," which "reported information such as the loan-to-value ratio

(LTV) for reach loan and the debt-to-income (DTI) ratio for each borrower, as well as each

borrower's FI CO score, which is a measure of creditworthiness"; and "represented that it was

not aware of any reason why a borrower would not be able to repay a mortgage loan" (Compl

at 'Il34; see id at 'Il32).

.---------------------------------_.- ... - .. -


At the outset, Countrywide argues that MBIA's fraud claim must be dismissed

because "[ a] fraud-based cause of action is duplicative of a breach of contract claim 'when

the only fraud alleged is that the defendant was not sincere when it promised to perform

under the contract'" (MaNas v VMS Assoc., LLC, 53 AD3d 451, 453 [1st Dept 2008]

[insufficient to allege that defendants did not intend to compensate plaintiff in conformity

with their promises D.

A tort claim cannot be recast as a breach of contract claim (see Kaminer v Wexler, 40

AD3d 405, 406 [1st Dept 2007]). On the other hand, "if a plaintiff alleges that it was

induced to enter into a transaction because a defendant misrepresented material facts, the

plaintiffhas stated a claim for fraud even though the same circumstances also give rise to the

plaintiff's breach of contract claim" (First Bank of the Americas v Motor Car Funding, Inc.,

257 AD2d 287,291-92 [1st Dept 1999] [hereinafter "First Bank"]).

While the same transaction may give rise to a claim for fraud or for breach of

warranty, a fraud claim based on misrepresentations made in a warranty that does not arise

out of collateral facts, may be precluded as duplicative (see Varo, Inc. v Alvis PLC, 261

AD2d 262,265 [1 8t Dept 1999] [claim for fraud did not arise out of collateral facts because

"the fraud is alleged to have occurred by virtue of the representations made in the

environmental warranty"] [dicta], Iv denied sub nom. IMO Indus. v Alvis PLC, 95 NY2d 767

[2000] [table]).


As the cases cited by both MBIA and Countrywide illustrate, fraud claims have been

dismissed as duplicative of breach of a contract claim when a plaintiff merely alleged that

the defendant misrepresented its intent to perform under an agreement (see, e.g., 767 Third

Ave. LLC v Greble & Finger, LLP, 8 AD3d 75, 76 [1st Dept 2004] ["It is well established

that a fraud claim must fail if the alleged fraudulent misrepresentations only relate to a

party's claimed intent to breach a contractual obligation"]; Brine v 65th Street Townhouse

LLC, 2008 WL 3915784, "'3 [Sup Ct, NY County 2008] [duplicative when the only alleged

fraud was that the defendant was not sincere when it promised to perform under the

contract]).

Another basis is when the alleged misrepresentation is the breach of the warranty itself

(see, e.g., Pramco 111, LLC v Partners Trust Bank, 15 Misc 3d 1142[A], 2007 NY Slip Op

51119[U], '" 2 [Sup Ct, Monroe County 2007] ["the only misrepresentation alleged by

(plaintiff) was the contractual warranty itself']; Martian Entertainment, LLC v Harris, 12

Misc 3d 1190[A], 2006 NY Slip Op S1517[U], "'5 [Sup Ct, NY County 2006] [the "alleged

misrepresentations are simply allegations that the best efforts provision ofthe ... Agreement

had not been performed that is, that (it) was breached"]).

Although warranties generally constitute statements of fact instead of intent (First

Bank, 257 AD2d at 292 ["A warranty is not a promise of performance, but a statement of


present fact"]), fraudulent-misrepresentation allegations in connection with contractual

warranties will be dismissed ifno other misrepresentation other than the warranty is alleged.

In contrast, a fraudulent inducement claim will be sustained when it is alleged that

misrepresentations were made to induce the plaintiff to enter into the contract in the first

place (see, e.g., WIT Holding Corp. v Klein, 282 AD2d 527, 528-29 [2d Dept 2001] [fraud

claim sustained when plaintiff alleged that, during discussions about an agreement to

purchase an interest in a company, defendants made misrepresentations of fact to induce

plaintiff to enter into the agreement]; B & F Prod. Dev., Inc. v Fasst Prods. LLC, 22 Mise

3d 1107[A], 2009 NY Slip Op 50063[U], *5 [Sup Ct, Kings County 2009] [extraneous when

plaintiff alleged that fraudulent misrepresentations were made by defendants prior to, and as

an inducement for it to enter into the Agreement]; JA.o. Acquisition Corp. v Stavitsky, 192

Misc 2d 7, 13 [Sup Ct, NY County 2001] ["The core of plaintiffs , claim is that defendants

intentionally misrepresented material facts about the inventory, the accounts, and the

financial viability and net worth of the company, so that those warranties appeared satisfied.

This is an appropriate fraud claim"]).

Even when the alleged misrepresentations are also contained in the agreement, a

fraudulent inducement claim has been permitted to proceed along with a breach of contract

claim (see Jo Ann Homes at Bellmore, Inc. v Dworetz, 25 NY2d 112, 118-19 [1969]

[reinstating the fraud cause of action when plaintiff alleged that he was fraudulently induced


into signing a land sales contract by a number of misrepresentations concerning the condition

of the property, even though the alleged misrepresentations were set forth in the contract as

warranties]; see also VTechHoldingsLtd. v Lucent Techs. Inc., 172F Supp2d435,439 [SD

NY 2001] [alleged misrepresentations of present fact in certifications, submitted at the

closing, induced plaintiff into believing that the conditions precedent to the closing were

satisfied and therefore based on allegations that it was "induced to enter into a contract and

then complete the closing by a series of misrepresentations of present fact, rather than a

series offalse promises"]; but see Bank ofTokyo-Mitsubishi Ltd. v Enron Corp. (In re Enron) ,

2005 US Dist LEXIS 2134, *43 [SD NY 2005] [alleged misrepresentations could not form

the basis of a separate fraudulent inducement claim when, in defining an "Event of Default"

to include the misrepresentations, the agreement specifically envisioned the remedies that

should be available if those misrepresentations materialized]).

Here, MBIA alleges that Countrywide misrepresented, among other things, the

origination and quality of the mortgage loans to induce it into entering the Insurance

Agreement. Because MBIA's claim relates to representations in connection with entering

into the Insurance Agreement, and not simply a breach of its terms, the fraud claim is not

duplicative.

-- -- -------------------'

MBIA Insurance Corporation v Countrywide Home Loans, Inc.

Statement offact or promise offuture action

Index No. 602825/08 Page 11

Countrywide also seeks dismissal of the fraud claim based on MBIA's allegation that

it "had no intention of abiding by its contractual representations and warranties" (Compl at

'il66). Defendants' argument is unpersuasive. The misrepresentations MBIA alleges are

specific affirmations not mere hopes or expectations (see Channel Master Corp. v Aluminium

Ltd. Sales, Inc., 4 NY2d 403, 408 [1958]). "Such statements and representations when false

are actionable" (id.). Indeed, MBIA alleges that Countrywide misrepresented that certain

things occurred, knowing they did not (see Compl at 'iI'iI 66-81, 98). Accordingly,

Countrywide fails to demonstrate that MBIA' s fraud claim is not based on allegations offact.

Justifiable reliance

Additionally, Countrywide asserts that MBIA fails to allege any justifiable

reliance-an essential element of fraud. Specifically, Countrywide contends that MBIA

received detailed loan information, but failed to avail itself of readily available information

or wilfully ignored it.

"As a matter of law, a sophisticated plaintiff cannot establish that it entered into an

arms length transaction in justifiable reliance on alleged misrepresentations ifthat plaintiff

failed to make use of the means of verification that were available to it, such as reviewing

the files of the other parties" (UST Private Equity Investors Fund, Inc. v Salomon Smith


Barney, 288 AD2d 87, 88 [1st Dept 2001]). To sustain a fraud claim, sophisticated investors

"must have discharged their own affinnative duty to exercise ordinary intelligence and

conduct an independent appraisal of the risks they are assuming" (DDJ Mgt., LLC v Rhone

Group L.L.c., 60 AD3d 421, 424 [1st Dept 2009] [no reasonable reliance when plaintiffs

failed to conduct due diligence related to financial statements, on which they primarily relied

in making a loan]; Valassis Communs., Inc. v Weimer, 304 AD2d 448,449 [1st Dept 2003]

[sophisticated business entities failed to verify the accuracy of the financial infonnationD.

It is unclear, however, how much infonnation regarding the securitizations MBIA

could access. Even assuming MBIA conducted a full inquiry under the circumstances in

relation to the bidding process, it is not conclusive that MBIA could have discovered the

alleged fraud. In P. T. Bank Cent. Asia v. ABN AMRO Bank N V., the Appellate Division,

First Department, reasoned:

"While the evidence might ultimately demonstrate that the infonnation [defendant] allegedly had regarding the true value of the loan collateral was either nonexistent or available to plaintiff with the exercise of reasonable diligence-and thus that [defendant] did not misrepresent what it knew about the value of the collateral or that plaintiff was not justified in relying on [defendant's] misrepresentations-it is inappropriate to detennine those issues as a matter of law based solely on the allegations in plaintiffs complaint, at this point in the proceedings" (301 AD2d 373,378 [1st Dept 2003]).

Justifiable reliance has been sufficiently alleged and Countrywide has not demonstrated its

non-existence as a matter of law so as to warrant dismissal.


Partie ularity


Countrywide maintains that MBIA's fraud claim also fails because it is not pleaded

with sufficient particularity as required by CPLR 3016 (b).

However, as Countrywide points out, "section 3016 (b) may be met when the facts

are sufficient to pennit a reasonable inference ofthe alleged conduct" (Pludeman v Northern

Leasing Sys., Inc., 10 NY3d 486, 491 [2008]). Although under section 3016 (b) the

complaint must suffiCiently detail the allegedly fraudulent conduct, that requirement should

not be confused with unassailable proof of fraud" (id. at 492).

In the cases Countrywide cited, in which fraud claims were di~missed for being

insufficiently supported with particularity, the allegations were simply conc1usory (Cal/as

v Eisenberg, 192 AD2d 349, 350 [1st Dept 1993] ["allegations of 'fraudulent billing',

'misstatements concerning patient's condition post surgery' and' indicating that surgery was

necessary' do not satisfy the statutory pleading requirement"]; Lakeville Pace Mech., Inc. v

Elmar Realty Corp., 276 AD2d 673, 676 [2d Dept 2000] ["not pleaded with sufficient

particularity, since they did not articulate what representations were made by the Bank and

how the alleged representations were fraudulent or otherwise injured the defendant

contractors"]; see also Orix Credit Alliance, Inc. v R.E. Hable Co., 256 AD2d 114, 116 [1 st

Dept 1998] [lacking the requisite particularity when plaintiff offered nothing but general

rumors of misconduct based on conversations that may not have even occurred]); or


insufficient under Rule 9 (b) of the Federal Rules of Civil Procedure (Forrest v Unifund

Financial Group, Inc., 2005 WL 1087490, *4 [SD NY 2005] ["with respect to each of the

allegedly fraudulent statements or representations, the pleadings fail to identify the speaker,

when, where, or even by what means each was made"]).

Here, in contrast, MBIA alleges sufficient facts to permit a factfinder to infer that the

alleged conduct was committed (see Pludeman, 10 NY3d at 492-93 ["Lest we willfully

ignore the obvious--or the strong suspicion of a fraud-we have always acknowledged that,

in certain cases, less than plainly observable facts may be supplemented by the circumstances

surrounding the alleged fraud"]; Caprer v Nussbaum, 36 AD3d 176, 202 [2d Dept 2006]

["the standard is simply whether the allegations are set forth in sufficient detail to clearly

inform a defendant with respect to the incidents complained of and this rule of pleading must

not be interpreted so strictly as to prevent an otherwise valid cause of action in situations

where it may be impossible to state in detail the circumstances constituting fraud"]).

MBIA has sufficiently pleaded a cause of action sounding in fraud; therefore,

Countryvvide's motion to dismiss the fraud claim is denied (Leon v Martinez, 84 NY2d 83,

88 [1994]).


Neelieent misrepresentation


MBIA alleges that "Countrywide was aware that MBIA relied on Countrywide's

expertise and experience and depended upon Countrywide for accurate and truthful

information, Countrywide also knew that the facts regarding Countrywide's compliance with

its underwriting standards were exclusively within Countrywide's knowledge" (Compl at ~

114); "Countrywide had a duty to provide MBIA complete, accurate, and timely information

regarding the Mortgage Loans and the Securitizations. Countrywide breached its duty to

provide such information to MBIA" (id. at ~ 115).

"A claim for negligent misrepresentation can only stand where there is a special

relationship of trust or confidence, which creates a duty for one party to impart correct

information to another, the information given was false, and there was reasonable reliance

upon the information given" (Hudson River Club v Consolidated Edison Co., 275 AD2d 218,

220 [1 st Dept 2000]).

Countrywide urges that MBIA's negligent misrepresentation claim fails because no

underlying duty supports the claim.

MBIA responds that, at this stage, determining whether a special relationship existed

is unwarranted. It nevertheless contends that it has sufficiently pleaded a relationship to

support the negligent misrepresentation claim.


Whether a special relationship exists between parties is generally a factual issue (see

Kimmell v Schaefer, 89 NY2d 257, 264 [1996]).

MBIA, however, has not alleged the violation of any special relationship of trust or

confidence (see Batas v Prudential Ins. Co. of Am., 281 AD2d260, 264 [lstDept2001] ["No

special relationship of trust or confidence arises out of an insurance contract between the

insured and the insurer; the relationship is legal rather than equitable"]). Furthermore, its

vague allegations of general expertise in mortgage lending is not enough to support a special

relationship (United Safety of America, Inc. v Consolidated Edison Company of New York,

Inc, 213 AD2d 283, 286 [1st Dept 1995] [An "arm's length business relationship" is

insufficient]). Consequently, the negligent misrepresentation cause of action must be

dismissed (see, e.g., Emigrant Bank v UBS Real Estate Sec., Inc., 49 AD3d 382, 385 [1st

Dept 2008] [dismissal appropriate absent requisite underlying relationship of trust and

confidence]; Sheridan v Trs. of Columbia Univ., 296 AD2d 314, 316 [1 st Dept 2002]

[negligent misrepresentation must be dismissed when the parties were clearly acting at arm' s

length"]).

MEIA Insurance Corporation v Countrywide Home Loans, Inc.

Implied covenant of eood faith and fair deaUne


Countrywide contends that because MBIA's allegations related to breach of the

implied covenant of good faith and fair dealing are the same as those asserted in support of

the breach of contract claim, the cause of action must be dismissed.

MBIA counters that the Insurance Agreement was premised on representations that

Mortgage Loans had been evaluated consistently with Countrywide's underwriting standards

and that the implied covenant of good faith required application of those standards (see

CompI at ~~ 146-47).

The implied covenant of good faith and fair deaUng in the performance of contractual

duties "is breached when a party' acts in a manner that, although not expressly forbidden by

any contractual provision, would deprive the other party of the right to receive the benefits

under their agreement'" (Skillgames, LLC v Brody, 1 AD3d 247 at 252, quoting Jaffe v

Paramount Communications lnc., 222 AD2d 17,22 [1996]).

The implied obligation to exercise good faith embraces a pledge that "neither party

shall do anything which will have the effect of destroying or injuring the right of the other

party to receive the fruits ofthe contract" (Dalton v Educ. Testing Serv., 87 NY2d 384,389

[1995], citing Kirke La Shelle Co. v Armstrong Co., 263 NY 79, 87 [1933]). "Where the

contract contemplates the exercise of discretion, this pledge includes a promise not to act

arbitrarily or irrationally in exercising that discretion" (id.). "While the duties of good faith

.----_ ...... .


and fair dealing do not imply obligations inconsistent with other terms of the contractual

relationship, they do encompass any promises which a reasonable person in the position of

the promisee would be justified in understanding were included" (511 W. 232nd Owners

Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002] [internal quotations marks and

citations omitted]).

MBIA maintains that "Countrywide exercised its discretion in bad faith to deprive it

of the fruits of the agreements and unfairly shifted the risks of default and delinquencies to

MEIA" (Mem in Opp, at 39). Accepted as true and viewed in a light most favorable to

plaintiff, MEIA's allegations are sufficient to state a claim. However, the claim survives to

the limited extent that it asserts that corrective action-such as investigating loans which

became over 30-days delinquent-would have preserved ME lA's benefits under the bargain,

but that Countrywide Home deliberately refused to take such action in order to collect more

late payment fees and service charges (see, e.g., CompI at ~ 78).

Accordingly, Countrywide's motion to dismiss the breach of the implied covenant of

good faith and fair dealing cause of action is denied.

Causes of action aaainst C9untrywide Securities and Countrywide Financial

As to the fraud cause of action, Countrywide argues that MBIA has not pleaded

sufficient facts upon which Countrywide Securities could be liable for fraud.


MBIA alleges, however, that Countrywide participated in various capacities with

respect to the securitizations:

"First, Countrywide Home originated or acquired all the Mortgage Loans for each Securitization, and sold (or otherwise conveyed) the Mortgage Loans to the Trusts that issued the RMBS. Second, Countrywide Securities arranged and underwrote each Securitization, structuring and marketing the transaction as well as making SEC filings. Third, Countrywide Home acted as servicer for the Mortgage Loans in each Securitization, contracting with each of the Trusts that it caused to be created to issue the RMBS" (Compl at ~ 29).

"Through the Trust, Countrywide Securities, securitized the mortgage loans, and then, through offerings of securities, offloaded the risks associated with the mortgage loans that Countrywide Home had originated. Although the securities were collateralized by the risk-challenged mortgage loans, Countrywide Securities marketed the securities by fraudulently representing that the mortgage loans had been originated consistently with Countrywide Financial and Countrywide Home's traditional underwriting standards, and the strength of their reputation for conservative lending practices and high quality loans" (id. at ~ 96).

Accordingly, MBIA sufficiently alleges that fraud was committed through

Countrywide Financial and its subsidiaries-Countrywide Home and Countrywide Securities.

While Countrywide contends that the fraud and negligent misrepresentation causes

of action should be dismissed as against Countrywide Securities and Countrywide Financial

because MBIA's allegations lack particularity, its reliance on Henry v City o/New York is

unwarranted (2007 WL 1062519, *5 [ED NY 2007]). After being granted leave to amend


her complaint, the plaintiff in Henry failed to plead with the required specificity under Rule

9 (b) of the Federal Rules of Civil Procedure (id.).

With respect to the pertinent rule, CPLR 3016 (b), the Court of Appeals has stated:

"This provision requires only that the misconduct complained of be set forth in sufficient detail to clearly inform a defendant with respect to the incidents complained of and is not to be interpreted so strictly as to prevent an otherwise valid cause of action in situations where it may be 'impossible to state in detail the circumstances constituting a fraud" (Jered Contr. Corp. v New York City Tr. Auth., 22 NY2d 187, 194 [1968]).

Here, MBIA's allegations are sufficiently detailed to give Countrywide notice ofthe

substance of the claims (see Bernstein v Kelso & Co., 231 AD2d 314,320 [1997]).

As to the breach of contract, breach of the implied covenant of good faith and fair

dealing and indemnification causes action, Countrywide contends that dismissal is warranted

as against Countrywide Securities and Countrywide Financial because neither are signatories

to the relevant agreements.

A "parent company can be held liable as a party to its subsidiarfs contract if the

parent's conduct manifests an intent to be bound by the contract" (Horsehead Indus. v

MetallgesellschaJt AG, 239 AD2d 171, 172 [1st Dept 1997] [plaintiffs "alleged extensive

participation in the negotiations leading up to the Shareholders Agreement, during which

time (the subsidiary) was wholly owned by (the parent) itself and allegedly had no purpose

other than to hold (plaintiffs) shares, manifests (the parent's) intent to be bound thereby"]).


The "intent is inferable from the parent's participation in the negotiation of the contract, or

if the subsidiary is a dummy for the parent, or if the subsidiary is controlled by the parent for

the parent's own purposes" (id.).

Here, MBIA does not allege sufficient facts to infer that either Countrywide Financial

or Countrywide Securities intended to be bound. Further, its assertion that Countrywide

Financial "manifested its intent to be bound under the contracts by exercising domination and

control over [Countrywide Home's] daily operations, and that [Countrywide Securities]

manifested this same intent during the bid and negotiation process" (Mem in Opp, at 34) is

unsupported by any factual allegations in the Complaint or in the supporting affidavits

submitted in opposition to the motion to dismiss. Allegations that either entity was

"inVolved" with Countrywide Home to some degree does not rise to a level such that

contractual liability may be imposed (see Billy v Consolidated Machine Tool Corp., 51 NY2d

152, 163 [1980] [in order to disregard separate corporate identities, "there must be direct

intervention by the parent in the management of the subsidiary to such an extent that 'the

subsidiary's paraphernalia of incorporation, directors and officers' are completely ignored"]).

Because MBIA fails to sufficiently allege that Countrywide Financial or Countrywide

Securities intended to be bound under the agreements, the breach of contract, breach of the

implied covenant of good faith and fair dealing and indemnification causes action are

dismissed as against them.


Accordingly, it is


ORDERED that the motion to dismiss is GRANTED in part and the negligent

misrepresentation (second) cause of action is dismissed; and it is further

ORDERED that the breach of contract (third and fourth), breach of the implied

covenant of good faith and fair dealing (fifth) and indemnification (sixth) causes of action

are dismissed solely as against Countrywide Financial and Countrywide Securities; and it is

further

ORDERED that Defendants are directed to serve an answer to the complaint within

twenty (20) days after service of a copy of this order with notice of entry.

This constitutes the Decision and Order of the Court.

Dated: New York, New York July -+--, 2009

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Mbia Insurance v Country Wide Home Loans, Pre-Argument Statement, Case No. 602825_2008 (Ny Supr. Ct. May 28, 2010)

Documents

countrywide financial

defendants motion

againstcountrywide home

mortgage loans

ces loans

county of new york

avenue new york

new york times