Escolar Documentos
Profissional Documentos
Cultura Documentos
602825/2008
NYSCEF DOC. NO. 178 RECEIVED NYSCEF: 05/28/2010
-against- PRE-ARGUMENT
STATEMENT
COUNTRYWIDE HOME LOANS, INC.,
COUNTRYWIDE SECURITIES CORP.,
COUNTRYWIDE FINANCIAL CORP.,
COUNTRYWIDE HOME LOANS SERVICING, LP and
BANK OF AMERICA CORP.,
Defendants-Appellants.
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
1. The title of the action is accurately set forth in the caption above.
Corp., Countrywide Financial Corp., Countrywide Home Loans Servicing, LP, and Bank of
America Corp.
Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp.,
4. The name, address and telephone number of counsel for the Plaintiff-Respondent
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
faith and fair dealing and successor and vicarious liability. MBIA, a monoline insurer, issued
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
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.
2
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.
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
3
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.
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
4
claims against Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide
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.
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,
5
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
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
6
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
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
7
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
G. Such other issues as may become apparent upon review of the papers on
appeal.
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
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.,
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
8
Guarantee Inc. recently amended its complaint adding Bank of America Corp. as a defendant and
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
9
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
10
EXHIBIT 1
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
MBIA INSURANCE CORPORATION, Index No. 602825/08
Defendants.
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.
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)
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
fo~§d&/~
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PRESENT: HON. EILEEN BRANSTEN, J.S.C.
(collectively, "Countrywide") and Bank ofAmerica Corp. ("Bank of America," together with
vicarious liability, fraud and breach of the implied covenant of good faith and fair dealing
BACKGROUND I
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).
at ~ 9). Countrywide Financial engages in mortgage lending and other real estate
underwriting (id.).
York corporation also based in Calabasas, California (id. at ~ 10). Countrywide Home
limited partnership organized under the laws of Texas with offices in Plano, Texas and
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
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.).
From 2002 through 2007, MBIA provided credit enhancement for a total of 17
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.).
mortgages (id. at, 30). Countrywide Home or Countrywide Servicing serviced the mortgage
loans in each Securitization (id.). Countrywide Home then conveyed pools ofthese 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
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
that it would follow (id. at'1l78). A material deviation from underwriting guidelines suggests
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).
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
misrepresentation cause of action, adding a cause of action for successor and vicarious
to its breach of the implied covenant of good faith and fair dealing cause action and generally
vicarious liability, fraud and breach of the implied covenant of good faith and fair dealing
ANALYSIS
I. Neelieent misrepresentation
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]).
transaction - such as the Securitizations in this action - only if a special relationship exists
between the parties such that the plaintiffjustifiably 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]).
specialized expertise" or (2) occupies a "special position of confidence and trust" with the
injured party (Kimmell, 89 NY2d at 264; Laskin v Bank ofAm. 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
MBIA v Countrywide Index No.: 602825/08
Page 7
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
acquired, underwrote, and serviced all ofthe 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
relationship" under Kimmel, several principles come into focus. Only alleging that a party
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
Company of New York, Inc, 213 AD2d 283, 286 [1st Dept 1995] [reiterating the principle
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 ofNew York, 82 NY2d 66, 75
MBIA v Countrywide Index No.: 602825/08
Page 9
[1993] [plaintiff"was not a person wholly without knowledge seeking assurances from one
In Batas v Prudential Ins. Co. ofAm., 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
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
"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
Securities. MBIA merely alleges an "ordinary business relationship" upon which a negligent
3As 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 Index No.: 602825/08
Page 11
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.
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
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
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
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]).
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
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
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
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 v Countrywide Index No.: 602825/08
Page 14
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
. 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).
Furthermore, MBIA alleges that "Bank of America has paid to restructure certain of
4It 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.
MBIA v Countrywide Index No.: 602825/08
Page 15
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,
ill. Fraud
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
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
MBIA v Countrywide Index No.: 602825/08
Page 16
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],
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
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 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
Accordingly, it is
ORDERED that the motion to dismiss is GRANTED in part in that the negligent
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.
ENTER
Plaintiff,
-against-
Defendants.
NOTICE OF ENTRY
Counsellor Plaint!IJ
.MBIAlnsurance Corporation
EXHIBIT 2
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
Defendants.
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.
By: __~~______~~________
Christopher 1. Garve, sq.
Katherine S. Bromberg, Esq.
2
Of Counsel:
3
NOTICE OF APPEAL Index No 602825/08
Sir :Please take notice that the within is a
SUPREME COURT OF THE STATE OF NEW YORK
(certified) true copy of a Notice of Appeal
COUNTY OF NEW YORK
duly entered in the office of the clerk of the within named
court on.
MBIA INSURANCE CORPORATION,
Dated,
Plaintiff,
Yours, etc.
- against -
GOODWIN PROCTER, LLP
Attorneys for COUNTRYWIDE HOME LOANS, INC.,
COUNTRYWIDE SECURITIES CORP. and
Offices and Post Office Address COUNTRYWIDE FINANCIAL CORP.,
Defendants.
To NOTICE OF APPEAL
Attorney for
To
Attorney for
SUPREME COURT OF THE STATE OF NEW YORK
APPELLATE DIVISION, FIRST DEPARTMENT
-against- PREARGUMENTSTATEMENT
COUNTRYWIDE HOME LOANS, INC.,
COUNTRYWIDE SECURITIES CORP., and
COUNTRYWIDE FINANCIAL CORP.,
Defendant-Appellants.
1. The title of the action is accurately set forth in the caption above.
Countrywide Home Loans, Inc., Countrywide Securities Corp. and Countrywide Financial Corp.
is:
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
6. This case was brought by a Plaintiff mono line bond insurer that issued financial
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
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.
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
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.
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.
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
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
6
Of Counsel:
7
EXHIBIT A
SCANNED ON 7/1312009
PRESENT: PART~.
Index Number: 602825/2008
IIIIDEX NO.
MBIA INSURANCE CORPORATION
vs. MOTION DATE , $
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COUNTRYWIDE HOME LOANS, INC., MOTION SEQ. NO.
PAPERS NUMBEReD
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_. _._ ...... _------------
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: PART THREE
---------------------------------------x
MBIA INSURANCE CORPORATION, Index No.: 602825108
Motion Date: 1/22/09
Plaintiff, Motion Sequence No.: 004
-against-
Defendants.
---------------------------------------x
PRESENT: HON. EILEEN BRANSTEN, lS.C.
· '.
Pursuant to CPLR 3016 (b) and 3211 (a) (1) and (a) (7), Countrywide Securities Corp.
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
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
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
underwriting (id. at ~ 9). Countrywide Home, which originates and services residential home
MBIA is a monoline! insurer and provides financial guarantee insurance and other
("CES"), and home equity lines of credit ("HELOCs"), with a much broader base of potential
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 liens 2 (id. at ~~ 27, 34). Because the mortgages are the
only collateral supporting the RMBS, their credit quality is of critical importance to an
credit enhancement-in the fonn of a guarantee of repayment of principal and interest for
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
(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
shadow credit ratings 3 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
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 ofthe ten securitizations through a similar
series of contracts, including: (a) a Purchase Agreement, which provided for the sale of
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
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
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 ... 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
not aware of any reason why a borrower would not be able to repay a mortgage loan" (Compl
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 7
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
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 ofthe Americas v Motor Car Funding, Inc.,
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]).
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 8
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 ofthe 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"]).
Bank, 257 AD2d at 292 ["A warranty is not a promise of performance, but a statement of
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 9
warranties will be dismissed ifno other misrepresentation other than the warranty is alleged.
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
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.
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
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 10
into signing a land sales contract by a number ofmisrepresentations 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
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
Here, MBIA alleges that Countrywide misrepresented, among other things, the
origination and quality of the mortgage loans to induce it into entering the Insurance
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. Index No. 602825/08
Page 11
Countrywide also seeks dismissal of the fraud claim based on MBIA's allegation that
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
received detailed loan information, but failed to avail itself of readily available information
"As a matter of law, a sophisticated plaintiff cannot establish that it entered into an
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
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 12
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.
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,
Justifiable reliance has been sufficiently alleged and Countrywide has not demonstrated its
Partie ularity
Countrywide maintains that MBIA's fraud claim also fails because it is not pleaded
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
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
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 14
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,
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
Countryvvide's motion to dismiss the fraud claim is denied (Leon v Martinez, 84 NY2d 83,
88 [1994]).
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 15
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
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
"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,
MBIA responds that, at this stage, determining whether a special relationship existed
Whether a special relationship exists between parties is generally a factual issue (see
MBIA, however, has not alleged the violation of any special relationship of trust or
confidence (see Batas v Prudential Ins. Co. ofAm., 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 ofAmerica, Inc. v Consolidated Edison Company ofNew York,
Inc, 213 AD2d 283, 286 [1st Dept 1995] [An "arm's length business relationship" is
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. Index No. 602825/08
Page 17
implied covenant of good faith and fair dealing are the same as those asserted in support of
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
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
. - - - - _.......
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 18
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).
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 Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 19
"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).
While Countrywide contends that the fraud and negligent misrepresentation causes
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
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 20
her complaint, the plaintiff in Henry failed to plead with the required specificity under Rule
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
A "parent company can be held liable as a party to its subsidiarfs contract if the
MetallgesellschaJt AG, 239 AD2d 171, 172 [1st Dept 1997] [plaintiffs "alleged extensive
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"]).
MBIA Insurance Corporation v Countrywide Home Loans, Inc. Index No. 602825/08
Page 21
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
Here, MBIA does not allege sufficient facts to infer that either Countrywide Financial
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
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
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
Accordingly, it is
ORDERED that the motion to dismiss is GRANTED in part and the negligent
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.
Defendants.
To PREARGUMENT STATEMENT
Attorney for
To
Attorney for