To Be Argued By:

Mark Holland
New York County Clerks Index No. 602825/08

New York Supreme Court

APPELLATE DIVISION

FIRST DEPARTMENT

!!!!
MBIA INSURANCE CORPORATION,
against Plaintiff-Respondent-Appellant,

COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, L.P.,
and Defendants-Appellants-Respondents,

BANK

OF

AMERICA CORP.,

Defendant-Respondent.

CONFIDENTIAL BRIEF FOR DEFENDANTS-APPELLANTS-RESPONDENTS

Of Counsel:

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 dwells@gunster.com badams@gunster.com

Mark Holland Larkin M. Morton Meghan K. Spillane GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018 212-813-8800 mholland@goodwinprocter.com lmorton@goodwinprocter.com mspillane@goodwinprocter.com Paul F. Ware, Jr. David J. Apfel Sarah Heaton Concannon Abigail K. Hemani GOODWIN PROCTER LLP Exchange Place, 53 State Street Boston, Massachusetts 02109 617-570-1000 pware@goodwinprocter.com dapfel@goodwinprocter.com sconcannon@goodwinprocter.com ahemani@goodwinprocter.com

Attorneys for Defendants-Appellants-Respondents Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp., and Bank of America, N.A., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) Printed on Recycled Paper

TABLE OF CONTENTS Page

QUESTIONS PRESENTED ............................................................................................1 PRELIMINARY STATEMENT .......................................................................................2 NATURE OF THE CASE ...............................................................................................7

A. B. C.

Factual Background. ..................................................................................7 MBIAs Motion For Partial Summary Judgment ....................................13 The IAS Courts Decision .......................................................................15

ARGUMENT ..............................................................................................................18 I. POINT I: THE IAS COURT ERRED BY EXEMPTING INSURANCE COMPANIES SEEKING TO RECOVER DAMAGES FOR FRAUD AND BREACH OF CONTRACT FROM HAVING TO PROVE LOSS CAUSATION ..................................................18

A. B.

All Plaintiffs Seeking Damages for Common Law Fraud Claims Must Prove Loss Causation. ........................................................18 All Plaintiffs Seeking Damages for Breach of Contract Claims Must Prove Proximate Causation. ...........................................................26

II.

POINT II: THE IAS COURT ERRED BY HOLDING THAT MBIA MAY RECOVER RESCISSORY DAMAGES ................................................................................27

A.

The IAS Court Erred By Holding That Insurance Law Sections 3105 And 3106 Inform[] MBIAs Claim For Rescissory Damages. ................................................................................................29 There Is No Basis For The IAS Courts Recognition Of The Possibility Of Rescissory Damages In Favor Of An Insurance Company That Has Made The Voluntary Choice Not To Seek To Rescind An Insurance Contract..........................................................37

B.

C.

MBIA Has Waived Its Entitlement To The Relief It Seeks Here By Continuing To Accept Premiums After Learning Of The Basis For Its Claims. .........................................................................................47 The IAS Court Erred In Failing To Consider Whether MBIA Has An Adequate Remedy At Law.................................................................50 That MBIA Has An Adequate Remedy At Law Is Further Demonstrated By The Contractual Sole Remedy To Which MBIA Agreed To Be Bound. ..................................................................51

D. E.

CONCLUSION............................................................................................................55

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TABLE OF AUTHORITIES Page(s) CASES Abbott v. Prudential Ins. Co. of Am., 281 N.Y. 375 (1939) ........................................................................................... 33 ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208 (2011) .....................................................................................7, 11 Aetna Cas. & Sur. Co. v. OConnor, 8 N.Y.2d 359 (1960) ........................................................................................... 44 Alper v. Seavey, 9 A.D.3d 263 (1st Dept 2004) ........................................................................... 50 Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., No. 652837/11, 2012 WL 5192752 (Sup. Ct. N.Y. Cnty. Oct. 11, 2012) .......................................................47, 48, 49 Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, No. 11 Civ. 23475(JSR), 2011 WL 5335566 (S.D.N.Y. Oct. 31, 2011) ............ 52 Bible v. John Hancock Mut. Life Ins. Co. of Bos., 256 N.Y. 458 (1931) ........................................................................................... 47 BW Sportswear, Inc. v. Those Certain Underwriters at Lloyds of London, 32 Misc. 3d 1245(A) (Table; text at 2011 WL 4357674 (Sup. Ct. N.Y. Cnty. 2011)) ........................................................................................................ 35 Centro Empresarial Cempresa S.A. v. Amrica Mvil, S.A.B. de C.V., 17 N.Y.3d 269 (2011) ......................................................................................... 18 Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134 (Del. Ch. 1994) .................................................................... 39, 40 Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268 (2d Cir. 1992) ............................................................................... 33 Dress Shirt Sales, Inc. v. Hotel Martinique Assocs., 12 N.Y.2d 339 (1963) ......................................................................................... 36
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Ellington v. Stony/ATV Music Publg LLC, 85 A.D.3d 438 (1st Dept 2011) ......................................................................... 50 Equitable Life Assurance Socy of U.S. v. Kushman, 276 N.Y. 178 (1937) .....................................................................................41, 42 First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994) ................................................................................. 24 Fruition, Inc. v. Rhoda Lee, Inc., 1 A.D.3d 124 (1st Dept 2003) ........................................................................... 26 Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261, 273 (1937) ................................................................................... 35 Ginsburg v. Pac. Mut. Life Ins. Co. of Cal., 89 F.2d 158 (2d Cir. 1937) ................................................................................. 33 Glick v. Campagna, 613 F.2d 31 (3d Cir. 1979) ................................................................................. 39 Glickman v. N.Y. Life Ins. Co., 291 N.Y. 45 (1943) ............................................................................................. 33 Gluck v. Exec. Risk Indem., Inc., 680 F. Supp. 2d 406 (E.D.N.Y. 2010) ................................................................ 32 Gozan v. Mut. Life Ins. Co. of N.Y., 40 N.Y.2d 707 (1976) ......................................................................................... 32 Grace v. Rosenstock, 228 F.3d 40 (2d Cir. 2000) ................................................................................. 41 Greene v. United Mut. Life Ins. Co., 38 Misc. 2d 728 (Sup. Ct. Bronx Cnty. 1963) .................................................... 35 GuideOne Specialty Mut. Ins. Co. v. Congregation Adas Yereim, 593 F. Supp. 2d 471 (E.D.N.Y. 2009) ................................................................ 34 Hechter v. N.Y. Life Ins. Co., 46 N.Y.2d 34 (1978) ........................................................................................... 31 Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 87 (1928) ....................................................................................... 24
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In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008) ............................................................................ 40 Interested Underwriters at Lloyds v. H.D.I. III Assocs., 213 A.D.2d 246 (1st Dept 1995) ....................................................................... 35 Kenford Co. v. County of Erie, 73 N.Y.2d 312 (1989) ......................................................................................... 26 Kiss Constr. NY, Inc. v. Rutgers Cas. Ins. Co., 61 A.D.3d 412 (1st Dept 2009) ......................................................................... 35 Laub v. Faessel, 297 A.D.2d 28 (1st Dept 2002) ..................................................................passim Losei Realty Corp. v. City of N.Y., 254 N.Y. 41 (1930) ............................................................................................. 26 Majestic Export Co., Inc. v. Katz & Greenfield, Inc., 248 A.D. 205 (1st Dept 1936) ........................................................................... 31 MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D. 3d 287 (1st Dept 2011) .................................................................passim MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept 2011) ......................................................................... 50 Mecca v. Gibraltar Corp. of Am., 746 F. Supp. 338 (S.D.N.Y. 1990) ..................................................................... 40 Megaris Furs, Inc. v. Gimbel Bros., Inc., 172 A.D.2d 209 (1st Dept 1991) ....................................................................... 18 Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144 (3d Dept 1991) .................................................................. 44, 45 Natl Union Fire Ins. Co. v. Christopher Assocs., 257 A.D.2d 1 (1st Dept 1999) ........................................................................... 20 New Paradigm Software Corp. v. New Era of Networks, Inc., 107 F. Supp. 2d 325 (S.D.N.Y. 2000) ................................................................ 50 Outdoor Life Network, LLC v. EMTA Corp., No. 2:06-cv-00463 JWS, 2006 WL 3834287 (D. Ariz. Dec. 29, 2006) ............. 38
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Randall v. Loftsgaarden, 478 U.S. 647, 656 (1986).................................................................................... 40 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442 (Del. Ch. 2011) .............................................................................. 39 Reliance Ins. Cos. v. Daly, 38 A.D.2d 715 (2d Dept 1972) ....................................................................44, 45 Rives v. Am. Ry. Express Co., 227 A.D. 375 (1st Dept 1929) ........................................................................... 31 Rudman v. Cowles Commcns, Inc., 30 N.Y.2d 1 (1972) ............................................................................................. 50 Small v. Lorillard Tobacco Co., 94 N.Y. 2d 43 (1999) ......................................................................................3, 20 St. Clair Shores Gen. Emps. Ret. Sys. v. Eibeler, 745 F. Supp. 2d 303 (S.D.N.Y. 2010) ................................................................ 42 Star City Sportswear, Inc. v. Yasuda Fire & Marine Ins. Co. of Am., 1 A.D.3d 58 (1st Dept 2003) ............................................................................. 35 Starr Found. v. Am. Intl Grp., Inc., 76 A.D.3d 25 (1st Dept 2010) ........................................................................... 23 Stein v. Security Mutual Insurance Co., 38 A.D.3d 977 (3d Dept 2007) .......................................................................... 36 Stutman v. Chem. Bank, 95 N.Y.2d 24 (2000) .....................................................................................18, 20 Sun Ins. Co. of N.Y. v. Hercules Sec. Unlimited, 195 A.D.2d 24 (2d Dept 1993) .......................................................................... 33 Telstra Corp. v. Dynegy, Inc., No. Civ. A 19369, 2003 WL 1016984 (Del. Ch. March 4, 2003) ...................... 40 Tudor v. Riposanu, 93 A.D.2d 718 (1st Dept 1983) ......................................................................... 34 U.S. Life Ins. Co. v. Blumenfeld, 92 A.D.3d 487 (1st Dept 2012) ......................................................................... 48
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U.S. Life Ins. Co. v. Grunhut, 83 A.D.3d 528 (1st Dept 2011) ......................................................................... 47 Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) ................................................................................... 40 STATUTES, RULES, REGULATIONS, CONSTITUTIONAL PROVISIONS N.Y. Ins. Law 3105 ........................................................................................passim N.Y. Ins. Law 3106 ........................................................................................passim N.Y. Stat. Law 301(b) .....................................................................................34, 38 N.Y. Veh. & Traf. Law 313 .................................................................................. 47 OTHER AUTHORITIES Bogert, George G., et al., The Law of Trusts and Trustees 862 (3d ed. 2012) ................................................................................................................... 40 Dobbs, Dan B., et al., The Law of Torts 693 (2d ed. 1991) .................................. 21 Insurance Department of New York, Insurance Law Revision of the State of New York (Tentative Draft) 63 (1937) ............................................................ 33 N.Y. Ins. Law 58 (McKinney 1926) ...............................................................32, 33 N.Y. Ins. Law 150, Ins. Dept Revision Note (McKinney 1949) ......................... 32 Report of the Joint Legislative Committee on Revision of Insurance Laws, 1938 N.Y. Legis. Doc. No. 77 (1938) ................................................................ 32 Restatement (Second) of Torts 546 ....................................................................... 19 Restatement (Second) of Torts 548A .............................................................passim Statement of Hon. Edwin W. Patterson, Chairman, Comm. on Insurance Law Revision, Proceedings of Joint Legislative Comm. for Recodification of Insurance Law (Nov. 16, 1938) ............................................ 32 Wolfe, Jr., Donald J. & Pittenger, Michael A., Corporate & Commercial Practice in the Delaware Court of Chancery 12.04 (2012) ............................ 40

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QUESTIONS PRESENTED
1. The IAS Court held that an insurance company seeking to recover

money damages for fraud need not establish a direct causal link between the alleged misrepresentations and claims the insurance company paid under the policies. Did the IAS Court err in exempting insurance companies from the

requirement that plaintiffs seeking to recover damages for fraud must establish that the alleged misrepresentations or other misconduct were the direct and proximate cause of the losses claimed? Laub v. Faessel, 297 A.D.2d 28, 30-31 (1st Dept 2002). Answer: Yes. 2. The IAS Court held that an insurance company seeking to recover

money damages for contractual breaches of representations and warranties in an insurance agreement need not prove a causal link between the alleged breaches and claims the insurance company paid under the policies. Did the IAS Court err in exempting insurance companies from the requirement that plaintiffs suing for breach of contract may recover only the direct and proximate damages which result from the alleged breach? Answer: Yes. 3. The IAS Court held that an insurance company suing for fraud and

breach of contract may recover rescissory damages, in the amount of all past and future claims paid under its insurance policies less premiums received, without demonstrating any loss causation, even though, among other things, the insurance

company (i) expressly waived its right to rescission in the insurance policies, and has not sought to rescind or avoid those policies, (ii) continued to accept premiums after learning of the alleged misconduct, and (iii) has a complete and adequate remedy at law in the form of monetary damages for claims it may have paid due to the defendants alleged misconduct, including a remedy that it agreed would be its sole remedy. Did the IAS Court err in so holding? Answer: Yes.

PRELIMINARY STATEMENT
This is an appeal from a decision by the IAS Court holding, for the first time, that an insurance company asserting common law fraud and breach of contract claims may recover what the Court called rescissory damages measured as all past and future claims payments, less premiums receivedwithout actually seeking rescission and without having to prove the bedrock element of loss causation. Not only is this ruling contrary to fundamental common law principles requiring a plaintiff to prove loss causation to recover damages, it turns the business relationship between the parties upside down. In exchange for substantial premiums, MBIA, a financial guaranty insurance company, agreed to insure the 15 residential mortgage-backed securitizations (the Securitizations) at issue in this litigation against the risk that the loans in the Securitizations would not generate the expected principal and interest, including because of adverse macroeconomic conditions. The rescissory damages that the

IAS Court entertained would relieve MBIA entirely of its insurance obligation, shifting the cost of all past and future claims payments, regardless of cause, to Countrywide. In essence, Countrywide would be transformed into the insurer, without MBIA having to prove that any of the payments it has made or will make under the policies are the result of Countrywides actions as opposed to the macroeconomic risks against which MBIA agreed to insure, or even that the payments were made on loans that breached any representation or warranty. This result finds no support in New York law, common sense, or the parties contracts. The IAS Courts decision ignores settled New York law requiring all plaintiffs seeking to recover damages for fraud or breach of contract to prove that a defendants alleged misrepresentations or breach of contract directly caused the loss about which the plaintiff complains. See, e.g., Small v. Lorillard Tobacco Co., 94 N.Y. 2d 43, 57 (1999). In derogation of these settled principles, and

analogizing from inapt circumstances in which an insurer seeks to rescind or avoid an insurance policywhich MBIA has not done herethe IAS Court held that no basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy. [See R83, Memorandum Decision and Order of the Supreme Court of the State of New York, New York County, I.A.S. Part 3 (Bransten, J.) entered on January 3, 2012 (Ord.) at 14.] At bottom, the IAS Court held that MBIA could

satisfy its burden of proving causation for its common law damages claims merely by showing transaction causation, i.e., that it would not have issued the policies (or would have issued them on different terms) if the alleged misrepresentations had not been made. [R84, Ord. 15.] The IAS Courts ruling effectively eviscerates the requirement under New York law (and general common law principles) that plaintiffs must also prove loss causation to recover damages for fraud or breach of contract. The IAS Court compounded its error by ruling that MBIA is entitled to recover so-called rescissory damages. There is no dispute, as the IAS Court recognized, [R86, Ord. 17], that MBIA knowingly and irrevocably bargained away its right to seek rescission of the insurance policies, and it does not even purport to seek that remedy in this litigation. But even though MBIA does not and could not seek actual rescission, the IAS Court fashioned out of whole cloth a new, unprecedented equitable remedy of rescissory damagesi.e., all past and future claims payments made less premiums receivedthat, in effect, allows MBIA both to avoid its obligations under the policies without actually having to rescind those policies and to recover money damages without having to prove loss causation. There is no support for such an extraordinary remedy under New York (or any other) law. Moreover, the IAS Courts ruling disregards the fact that MBIA (1) negotiated a full and adequate remedy at law for breaches of Countrywides

representations and warranties, and (2) has ratified the policies by continuing to accept premiums to this day, and therefore is estopped from seeking rescissory relief. MBIAs position, endorsed by the IAS Court, is not just a litigation tactic; MBIA is forced to that position by its extremely aggressive (if not reckless) business model. MBIA insured highly complex and obviously risky securitizations using a business model that it called no loss underwriting, that is, its entire financial structure was built on the assumption that MBIA would structure and underwrite transactions in such a way that it would never have to pay a claim. Its minimal reserves are based on that assumption. When MBIA decided to become a major player in the structured finance business and insure billions of dollars in residential mortgage-backed securities, it ignored the possibility of a national real estate bubble that could burstwith catastrophic consequences for MBIA. And MBIA did so knowing that Countrywide couldand wasmaking loans on a stated income basis, with little or no documentation from the borrower, and with exceptions to its underwriting guidelines if it considered (in its sole judgment) that compensating factors warranted the credit. When the national real estate market collapsed, all of MBIAs insured residential mortgage-backed securitizations, not just the Countrywide deals at issue

here, suffered catastrophic losses and MBIA was caught.1 MBIA had chosen, for competitive reasons, to contract that under no circumstances could it rescind the insurance it had writteni.e., that its obligation to provide that insurance is unconditional[] and irrevocabl[e]. [See, e.g., R2343, 2006-E Note Guaranty Insurance Policy, at 1.] MBIA had bargained for representations and warranties from Countrywide covering the loans, but in return it had agreed in unequivocal contractual language that its sole remedy for any breach would be Countrywides obligation to either cure the breach or repurchase the breaching loan from the trust if the breach materially and adversely affected MBIA.2 That loan-by-loan remedy no longer meets MBIAs business needs, however, because MBIA has no right to seek compensation from Countrywide for the claims MBIA was obliged to pay on fully-compliant loans that defaulted as a result of the financial crisis rather than any breach of a representation or warranty by Countrywide. Faced with the

imperative of its model that it suffer no losseven as a financial guarantee insurer stuck in the worst financial crisis since the Great DepressionMBIA was

See, e.g., Complaint, MBIA Ins. Co. v. J.P. Morgan Securities LLC, No 64676/2012 (Sup Ct. Westchester Cnty. filed Sept. 14, 2012); Complaint, MBIA Ins. Co. v. IndyMac, F.S.B., 1:09cv1011-ABJ (D.D.C. filed May 29, 2009); Complaint, MBIA Ins. Co. v. Credit Suisse Securities (USA) LLC, No. 603751/2009 (Sup. Ct. N.Y. Cnty. filed Dec. 14, 2009); Complaint, MBIA Ins Co. v. Residential Funding Co., No. 603552/2008 (Sup. Ct. N.Y. Cnty. filed Dec. 4, 2008); Complaint, MBIA Ins. Co. v. GMAC Mortg., LLC, No. 600837/2010 (Sup. Ct. N.Y. Cnty. filed Apr. 1, 2010). [R4144-45, Countrywides Rule 19-a Counter-Statement of Material Facts (CSOF) 12.]

forced to craft the unprecedented and (we submit) entirely unwarranted theory that, even though it does not seek rescission, it is entitled to recover rescissory damages without having to prove loss causation. Only by that course could MBIA claim to be entitled to payment from Countrywide for all claims MBIA has paid under its insurance policiesincluding on loans that fully complied with Countrywides representations and warranties. The IAS Courts decision therefore should be reversed.

NATURE OF THE CASE A. Factual Background.

During the relevant period, MBIA was in the business of providing financial guarantee insurance and other forms of credit protection on financial obligations. MBIA exclusively wrote financial guarantee insurance policies and did not offer other forms of insurance. It is therefore referred to as a monoline insurer. 3 Until 2008, MBIA touted its expertise and its underwriting standards, which anticipated no losses even under a worst probable case scenario. R4633.] Defendant Countrywide Financial Corporation, itself or through subsidiaries (collectively, Countrywide), engaged in mortgage lending and other real estate financial related business. Defendant Countrywide Home Loans, Inc. ( CHL) [R4243; see also

See ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 216-17 (2011).

originated residential home mortgage loans. Other Countrywide entities serviced those loans and underwrote offerings of mortgage-backed securities.4 MBIA sued Countrywide in 2008 for, inter alia, fraudulent inducement, breach of contract, and indemnification in connection with financial guarantee insurance policies that MBIA issued between 2004 and 2007 on 15 Securitizations with a face value at origination of $21 billion. Countrywide sponsored the

Securitizations and originated many of the approximately 390,000 mortgage loans (the Mortgage Loans) in the Securitization pools. MBIA alleges that

Countrywide made material misrepresentations and breached representations and warranties concerning the quality of the Mortgage Loans underlying the Securitizations. For each Securitization, CHL sold to a Trust a pool of second-lien residential Mortgage Loans, consisting of either closed-end second liens (CES) or revolving home equity lines of credit (HELOCs). Each Trust, in turn, issued securities that were sold to investors (the Securities). The Securities promised to pay the investors interest and principal via the Trusts using the payments that borrowers make on the Mortgage Loans. [R4141-42, Countrywides Rule 19-a CounterStatement of Material Facts (CSOF) 3-4.]

After the events set forth in the amended complaint, defendant Bank of America acquired Countrywide. See MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D. 3d 287, 290 n.1. (1st Dept 2011).

MBIA guaranteed that the payments due to Securities investors would be made. In exchange for substantial premiums paid by the Trusts, MBIA issued Note or Certificate Guaranty Insurance Policies to the Trusts (the Insurance Policies), in which it promised that if the payments received from the Mortgage Loans were insufficient to cover the payments due under the Securities, MBIA would pay the shortfall to the Trusts. [R4142, CSOF 5.] MBIA unconditionally and irrevocably guaranteed the Insurance Policies. [See, e.g., R2343, 2006-E Note Guaranty Insurance Policy, at 1.] Countrywide is not a party to the Insurance Policies. [R4142, CSOF 6.] Before MBIA issued the insurance on each Securitization, Countrywide provided MBIA with extensive information about the underlying mortgage loans. This included loan data tapes, third-party due diligence results, underwriting guidelines, shadow ratings from credit rating agencies, prospectuses, and prospectus supplements. MBIA also had the opportunity to request any additional information that it wanted from Countrywide before deciding to insure the Securitizations. [R4430-32.] The rights and obligations of all of the parties to the Securitizations are set forth in a set of contracts (the Transaction Documents). The Mortgage Loans were conveyed to the Trusts through a Purchase Agreement (Purchase Agmt.) and a Sale and Servicing Agreement (SSA) for the HELOC transactions and a

Pooling and Servicing Agreement (PSA) for the CES transactions. The Trusts issued the Securities through an Indenture and sold the Securities pursuant to a Prospectus and Prospectus Supplement. [R4142-43, CSOF 7-9.] 5 For each Securitization, MBIA and CHL entered into a contract that governs their respective rights and obligations, called an Insurance Agreement. The

Insurance Agreements incorporate many of the provisions contained in the other Transaction Documents. Each Insurance Agreement incorporates loan-level

representations and warranties CHL made about the individual Mortgage Loans that CHL sold to the Trust, including a representation that each Mortgage Loan was originated in accordance with CHLs underwriting guidelines.6 The

Transaction Documents provide that, if a Mortgage Loan breaches such loanlevel representations or warranties, MBIAs sole remedy is to request that CHL cure the defect, substitute a new loan for the defective loan, or repurchase the noncompliant loan. [See, e.g., R1912, 2006-E Purchase Agmt. 3.02 (b), (c).] MBIAs right to such a remedy only arises, however, if it has been materially and adversely affect[ed] by the breach of the particular representation or warranty. [See, e.g., R2138, 2006-S8 PSA 2.03(f); R3501, 2006-E SSA 2.04(b), (c).]

The Securities are registered with the Securities and Exchange Commission under the Securities Act of 1933. [See, e.g., R3696, CWHEQ, Inc., Form S-3 (Registration Statement) (Mar. 12, 2006).] [See, e.g., R1905, 2006-E Purchase Agmt. 3.02(a)(37).]

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Beginning in late 2007, the United States suffered a historic economic crisis, and an unprecedented number of borrowers began to default on their mortgages. 7 Despite the worst economic recession since the 1930s, approximately 80% of the Mortgage Loans in the Securitizations have been paid in full or continue to perform. [R153.] Nevertheless, some borrowers were unable to pay their

mortgages, and the Trusts could not make all the payments due to the Securities holdersin other words, the very risk against which MBIA insured came to pass. The Trusts therefore filed claims with MBIA, in accordance with the terms of the Insurance Policies. At the time it filed its Amended Complaint in 2009, MBIA had paid approximately $1.4 billion in claims to the Trusts on the Insurance Policies.8 [R4149, CSOF 21-22.] The impact of the economic crisis and recession on MBIA is welldocumented. As the Court of Appeals recently observed: Beginning in 2007 and continuing through 2008, the health of the real estate market deteriorated. In turn, the risks associated with certain financial products tied to real estate, such as structured-finance products, increased concomitantly. Not surprisingly, MBIA Insurances exposure to liability with respect to its structured-finance policy portfolio grew exponentially as the real estate market crumbled during this period. ABN AMRO Bank, 17 N.Y.3d at 217.

7 8

See ABN AMRO Bank, 17 N.Y.3d at 216-17. [R300, Am. Compl. 3.] As of July 15, 2011, more than $12.8 billion of the $21 billion 11

MBIA has admitted in discovery in this case that the economic crisis, rather than breaches of any of Countrywides representations and warranties, caused a significant portion of its losses on the Insurance Policies. Carl Webb, the former head of MBIAs Structured Finance Division for Mortgage Backed Securities, testified at his deposition that 60% of the defaults and delinquencies on Mortgage Loans in the Securitizations were caused by the recession, and not anything Countrywide did. [R4151, CSOF 28.] Other MBIA witnesses agree that

MBIAs losses were caused, at least in part, by the recession and not by Countrywide. David Glehan, a Managing Director of MBIA, told his supervisors: [A] portion of the current delinquencies are the result of macro economic issues. The ability to refinance is virtually impossible for all but a small percentage of the population. Prior to the meltdown of the mortgage market, a borrower had several options prior to not paying on a loan. The borrower had the option to refinance with the lender at a lower rate or the borrower could rely on significant housing price appreciation to sell the home and prepay the loan. Because these options no longer exist, the only option for many borrowers is to not to pay on the loan . . . . [See R4350 (emphasis added).] Stacey Terezakis, a senior analyst in MBIAs Structured Finance Division and a team member on many of the Countrywide Securitizations, testified that there were many factors that contributed to the[se] losses, including macroeconomic issues. [R5368.]

worth of Mortgage Loans already had been paid-in-full. [Id., Abdou Aff. 8.]

12

MBIA undertook its own retrospective analyses in 2008 that concluded that its own poor risk controls contributed significantly to MBIAs losses. MBIAs internal documents acknowledge that MBIA failed to: (1) take account of changes in the macroeconomic environment, including the risk of a housing bubble, an increased supply of homes in the market, and diminishing job growth; (2) provide adequate resources, oversight, and limits to its underwriting of structured products; and (3) consider adequately the information that Countrywide had provided about the Mortgage Loans. [See R5792-859; R5860-84.] In this action, MBIA nevertheless has sought to have Countrywide pay for all of the claims payments it has had to make under the Insurance Policies, even those having nothing to do with breaches of Countrywides representations and warranties. MBIA alleges, inter alia, that Countrywide falsely represented that it had originated the Mortgage Loans in compliance with its underwriting standards and guidelines; systematically abandoned its underwriting guidelines in pursuit of market share; and knowingly issued loans to borrowers who could not afford to repay the loans, who committed fraud in loan applications, or who otherwise did not meet Countrywides guidelines.

B.

MBIAs Motion For Partial Summary Judgment.

On May 25, 2011, in the midst of fact discovery, MBIA filed a motion for partial summary judgment. In its motion, MBIA requested a ruling that it can

13

recover on its damages claims for fraud and breach of the Insurance Agreements without having to show any causal connection between Countrywides alleged misrepresentations and MBIAs losses. More specifically, MBIA requested

judgment that to prevail on its fraud cause of action, MBIA need establish only that Countrywides alleged misrepresentations induced MBIA to issue the Insurance Policies on terms to which it would not otherwise have agreed; and it need not prove that Countrywides alleged misrepresentations caused MBIAs claims payments under the Insurance Policies. Similarly, MBIA requested judgment that to prevail on its cause of action for breach of the Insurance Agreements, MBIA need only establish that CHLs alleged warranty breaches materially increased MBIAs risk of loss, and need not prove that any warranty breach caused any actual claims payments under the policy. [R448, Pl.s Mem. of Law in Supp. of Mot. for Partial Summ. J. & Mot. to Strike Defenses at 10 (MBIA Mem.); R457, MBIA Mem. at 19.] MBIA further argued that once it had established these elements, it was entitled to be returned to the position it would have occupied had it not issued the Insurance Policies, by recovering an award of what it termed rescissory damages, i.e., all claim payments MBIA has made or will make under the policies (less premiums received), including payments on perfectly compliant loans that defaulted.9
9

[R452-53, MBIA Mem. at 14-15.]

14

In support of its motion, MBIA relied on two provisions of the New York Insurance Law, Sections 3105 and 3106, that it had never before cited or even mentioned in the case and that, on their face, do nothing more than govern the circumstances in which an insurance policy may be rescinded or declared void ab initio. MBIA argued that, despite the fact that it seeks damages and not rescission, these provisions supersede New Yorks general common law requirements for fraud and breach of contract and, thus, MBIA is not required to make any showing of a causal link between Countrywides misrepresentations and warranty breaches, on the one hand, and MBIAs claims payments under the policies, on the other. [R456, MBIA Mem. at 18.]

C.

The IAS Courts Decision.

On January 3, 2012, the IAS Court (Bransten, J.) granted, in part, MBIAs motion for partial summary judgment. The IAS Court stated that no basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy. [R83, Ord. 14.] The IAS Court held that MBIA could prevail claims for fraud and breach of the Insurance Agreements without proving a direct causal nexus between Countrywides alleged misrepresentations and the claims payments that MBIA seeks to recover as damages. [R84, Ord. 15.] The IAS Court also concluded that MBIA may recover what it called rescissory damages. [R87, Ord.

15

18.] Relying on cases in which an insurer has sought to rescind a policy or have it declared void ab initio, the IAS Court held that, to recover such damages on its fraud and breach of contract claims, MBIA need only establish that an alleged misrepresentation by Countrywide induced MBIA to issue insurance policies on terms to which it otherwise would not have agreed. [R94, Ord. 25.] To reach this result, the IAS Court relied upon New York Insurance Law Sections 3105 and 3106, which, as noted above, address only the circumstances under which an insurer may rescind or avoid an insurance policy based on misrepresentations made by an insured. According to the IAS Court, in this insurance context, with MBIA as an insurance company and Countrywide as an applicant for insurance . . . [MBIAs] claims are informed by New York common law and Insurance Law Sections 3105 and 3106. [R82, Ord. 13 (emphasis

added).] Therefore, despite the fact that MBIA does not seek rescissionand, rather, advances common law damages claims for fraud and breach of contract the IAS Court concluded that MBIA need only prove that any alleged misrepresentations Countrywide made were material to MBIAs decision to insure the Securitizations, and not that they caused MBIA to experience any losses.10

10

The IAS Court held that, to prove materiality, MBIA must show that it relied on Countrywides alleged misrepresentations in that the alleged statements induced MBIA to take action which MBIA might otherwise not have taken, or would have taken in a different manner. [R83, Ord. 14.]

16

The IAS Court also held that MBIA may seek what it termed rescissory damages, even though it has not sought to rescind the Insurance Policies and, indeed, irrevocably bargained away its right to do so.. [R86-87, Ord. 17-18.]

Relying predominantly on inapplicable Delaware case law addressing a wholly distinct form of damages unique to the corporate and securities law contexts, the IAS Court stated: While rescission will bring the parties back to base point prior to contract formation, and in effect, unmake the contract, as the Delaware Chancery Court stated in 2003: Rescissory damages are designed to be the economic equivalent of rescission in a circumstance in which rescission is warranted, but not practicable. [R85-86, Ord. 16-17 (citations omitted).] The IAS Court thus held that, should MBIA successfully prove its case, it could recover all amounts it has paid under the Insurance Policies, less any premiums received, without demonstrating that any of those payments were caused by Countrywides conduct.11

11

MBIA also moved for partial summary judgment on the contractual interpretation of certain language in the governing Transaction Documents at issue in this litigation. The IAS Court found that the meaning of the repurchase provision of those documents is ambiguous and cannot be determined as a matter of law. [See R93, Memorandum Decision entered on January 3, 2012 at 24.] MBIA filed a Notice of Cross-Appeal on this issue. 12 Other commentators have offered the following example:

17

ARGUMENT POINT I THE IAS COURT ERRED BY EXEMPTING INSURANCE COMPANIES SEEKING TO RECOVER DAMAGES FOR FRAUD AND BREACH OF CONTRACT FROM HAVING TO PROVE LOSS CAUSATION. A. All Plaintiffs Seeking Damages for Common Law Fraud Claims Must Prove Loss Causation.

Until the IAS Courts decision, every plaintiff seeking to recover monetary damages for fraud was required to prove loss causation. As the Court of Appeals recently explained, to recover damages for fraudulent inducement, a plaintiff must establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury. Centro Empresarial Cempresa S.A. v. Amrica Mvil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011) (emphasis added) (quotation marks omitted). And as this Court stated in a prior appeal in this case: [a] fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance. MBIA v. Countrywide, 87 A.D.3d at 295 (quoting Stutman v. Chem. Bank, 95 N.Y.2d 24, 30 (2000)); accord Megaris Furs, Inc. v. Gimbel Bros., Inc., 172 A.D.2d 209, 213 (1st Dept 1991) (affirming dismissal of fraud claim where

18

[p]laintiffs pleadings are devoid of any attempt to demonstrate the requisite nexus between the misrepresentation alleged to have been made and the injury said to have been sustained). Causation in the context of a fraud claim includes both transaction causation and loss causation. This Court has made clear that a plaintiff asserting a cause of action for fraud must prove both. To establish causation, plaintiff must show both that defendants misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which the plaintiff complains (loss causation). Laub, 297 A.D.2d at 31 (emphasis added). The IAS Courts decision erroneously conflates these two distinct elements. Transaction causation requires evidence that the plaintiff relied on the alleged material misrepresentation in entering into the transaction. Laub, 297

A.D.2d at 31 (citing Restatement (Second) of Torts 546). A plaintiff must show that he justifiably relie[d] upon the truth of the matter misrepresented, if his reliance is a substantial factor in determining the course of conduct that results in his loss. Restatement (Second) of Torts 546. The IAS Court recognized that MBIA must prove this element: Of particular[] importance here, MBIA must prove that Countrywide made misrepresentations that were material to its decisions to issue the Insurance Policies. In order to show materiality, as defined by N.Y. Insurance Law
19

 3105(b) and case law, MBIA must show that it relied on Countrywides alleged misrepresentations in that the alleged statements induced MBIA to take action which MBIA might otherwise not have taken, or would have taken in a different manner. [R83-84, Ord. 14-15 (emphasis added).] transaction causationnot loss causation. But it is not enough for a plaintiff seeking damages for fraud to show that the defendants misrepresentations induced it to enter into a transaction that resulted in a loss. A fraud plaintiff also must prove loss causation. This requires the plaintiff to establish that the alleged misrepresentations or other misconduct were the direct and proximate cause of the losses claimed. Laub, 297 A.D.2d at 30-31 (emphasis added) (citing Restatement (Second) of Torts 548A); accord Lorillard Tobacco Co., 94 N.Y.2d at 57 ([A]n act of deception, entirely independent or separate from any injury, is not sufficient to state a cause of action under a theory of fraudulent concealment.). Thus, the loss the plaintiff seeks to recover must have been a reasonably foreseeable risk of harm resulting from the misrepresentation. Stutman, 95 N.Y.2d at 30 (quoting Restatement (Second) of Torts 548A). A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance. Restatement (Second) of Torts 548A; accord Natl Union Fire Ins. Co. v. Christopher Assocs., 257 A.D.2d 1, 9 This, of course, is a description of

20

(1st Dept 1999) ([T]he fraudulent conduct must be related to the resultant damages in order to satisfy the requirement of proximate causation.). New York courts frequently refer to the Restatement (Second) of Torts 548A when addressing issues of loss causation. That section explains: Causation, in relation to losses incurred by reason of a misrepresentation, is a matter of the recipients reliance in fact upon the misrepresentation in taking some action or in refraining from it. . . . Not all losses that in fact result from reliance are however, legally caused by the misrepresentation. In general, the misrepresentation is a legal cause only of the pecuniary losses that are within the foreseeable risk of harm that it creates. . . . Pecuniary losses that could not reasonably be expected to result from the misrepresentation are, in general, not legally caused by it and are beyond the scope of the makers liability. Restatement (Second) of Torts 548A, cmts. a, b (emphasis added).12 The IAS Courts decision disregards this principle. Indeed, the IAS Court never even discussed foreseeability, let alone found that borrower defaults caused by the economic crisis were a foreseeable risk of harm from Countrywides alleged

12

Other commentators have offered the following example: Suppose the plaintiff purchases shares in the X Rocket Company in reliance upon the defendants fraudulent misrepresentations that the government has awarded it a valuable contract. No such contract exists, but the next day the companys entire rocket plant is demolished in an explosion and the plaintiffs shares become worthless. [T]he loss from the explosion is not the same kind of loss that would foreseeably result from the defendants misrepresentation. Under the Restatement [ 548A], the plaintiff cannot recover for unforeseeable losses, that is, those different from the losses risked by the misrepresentation.

3 Dan B. Dobbs et al., The Law of Torts 693, at 733-34 (2d ed. 1991) (emphasis added).

21

misrepresentations. Instead, despite acknowledging that [i]t is . . . axiomatic that proximate cause is inherent in causation, [R78, Ord. 9], the IAS Court held that MBIA could satisfy the causation requirement of its fraud claim simply by proving transaction causation, and that MBIA did not need to establish a direct causal link between misrepresentations allegedly made by Countrywide and claims made under the policy. [R83, Ord. 14.] According to the IAS Court, if MBIA can prove that it relied upon material misrepresentations that Countrywide made about the loans, then MBIA can recover for every claim payment it made under the policies, regardless of whether the borrower defaulted as a result of the alleged misrepresentation or for some other reason (e.g., job loss, illness, or other personal circumstances). To the Court, simply exposing MBIA to the risk of having to make claims payments sufficed to prove both transaction and loss causation. The IAS Courts holding is contrary to numerous decisions of this Court. In Laub, 297 A.D.2d at 31-32, for example, this Court affirmed the dismissal of a fraud claim bought by an investor who sought to recoup investment losses on technology stocks recommended by the defendant, an investment advisor who allegedly misrepresented his training, expertise and experience. (The defendant provided a second opinion regarding the investment advice the plaintiff was receiving from this broker, Bear Stearns & Co.) Id. at 29-30. This Court held that the plaintiff failed to show that the defendants alleged misrepresentations were

22

the direct and proximate cause of the losses claimed, i.e., the drop in the prices of the technology stocks the plaintiff purchased. Id. at 30-31. The Court explained that [l]oss causation is the fundamental core of the common law concept of proximate cause. . . . [T]here [must] be some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered. Id. at 31. Because the plaintiff did not produce any evidence that the defendants misrepresentations about his background directly and proximately caused his investment losses, his claims failed. Id. (citing Restatement (Second) of Torts 548A, cmt. b). Similarly, in Starr Foundation v. American International Group, Inc., 76 A.D.3d 25, 26-27 (1st Dept 2010), this Court affirmed the dismissal of a stockholders claim that it was induced to hold common stock of the defendant, AIG, because AIG misrepresented the degree of risk in its credit default swap (CDS) portfolio. This Court concluded that it was AIGs subsequent decision to enter into certain CDS transactions, rather than any earlier misrepresentations about the safety of its CDS portfolio, that was the proximate cause of the decline in its stock price: [s]ince the CDS losses would have been incurred regardless of any earlier misrepresentations AIG made concerning the risk of the CDS portfolio, such alleged misrepresentations could not have been the cause of the decline of AIGs stock price. Id. at 29 (emphasis added). The Court therefore held that the

23

stockholders loss was not proximately caused by the alleged misrepresentations. Id. at 31 (citing Restatement (Second) of Torts 548A). Applying this settled law of proximate causation, New York courts repeatedly have held that a plaintiff may not recover damages resulting from an unforeseeable intervening cause. As the Court of Appeals explained long ago in Hotaling v. A.B. Leach & Co., while [t]he plaintiff should be entitled to recover from the defendants the loss which is the proximate result of the fraud that induced the investment, the defendants should not be held liable for any part of plaintiffs loss caused by subsequent events not connected with such fraud. 247 N.Y. 84, 87 (1928) (cited with approval in MBIA, 87 A.D.3d at 295). Numerous courts have held that macroeconomic events, such as the recent financial crisis, constitute just such an intervening cause. Accordingly, where, as here, a plaintiff suffers losses that may have been caused by a market-wide downturn or other macroeconomic event, that plaintiff cannot prevail on its fraud claim unless it can prove that the asserted misrepresentationsrather than market forcescaused plaintiffs alleged losses. Laub, 297 A.D.2d at 32; see also First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 772 (2d Cir. 1994) ([W]hen the plaintiffs loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiffs loss was caused by the fraud decreases.).

24

Indeed, this Court has already applied these principles in a prior ruling in this case. Addressing Countrywides motion to dismiss MBIAs fraud claim for failure to plead loss causation, this Court explained that it will be the job of the fact-finder to determine which losses were proximately caused by

misrepresentations and which are due to extrinsic forces. See MBIA, 87 A.D. 3d at 296 (quotation marks and citations omitted). The Court denied Countrywides motion to dismiss, explaining that whether MBIAs losses were caused by Countrywides alleged misrepresentations or the financial crisis involved a question of fact. Yet the IAS Court made no such factual findings. Nor did the IAS Court find that MBIAs losses from the largest recession since the Great Depression were a foreseeable risk of harm from Countrywides alleged misrepresentations. Disregarding this Courts prior decision, as well as the settled law discussed above, the IAS Court instead ruled that [i]t is without basis in case law to require MBIA to provide a causal link between the alleged misrepresentations and payments made pursuant to the policies. [R87, Ord. 18.]13 The IAS Courts ruling is reversible error.

13

See also id. at 14 (The court therefore finds no basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy.)

25

B.

All Plaintiffs Seeking Damages for Breach of Contract Claims Must Prove Proximate Causation.

Similarly, it is hornbook law that a plaintiff suing for breach of contract may recover only the direct and proximate damages which result from the violation. Losei Realty Corp. v. City of N.Y., 254 N.Y. 41, 46 (1930) (quotation marks omitted). Yet the IAS Court held, on the erroneous basis that MBIA may seek what it termed rescissory damages, see pp. 22-23, supra, that MBIA is not required to establish a direct causal connection between proven warranty breaches by CHL and MBIAs claims payments made pursuant to the insurance policies at issue. [R94, Ord. 25.] Again, the IAS Court improperly departed from the common law by removing the fundamental element of causation from MBIAs cause of action for breach of contract. See Kenford, 73 N.Y.2d at 319 ([I]t is well established that in actions for breach of contract, the nonbreaching party may recover general damages which are the natural and probable consequence of the breach.); Fruition, Inc. v. Rhoda Lee, Inc., 1 A.D.3d 124, 125 (1st Dept 2003) (breach of contract damages are such as ordinarily and naturally flow from the nonperformance and must be proximate and certain, or capable of certain ascertainment, and not remote, speculative or contingent ). As with its fraud claim, in order to recover damages for breach of representations and warranties, MBIA must prove that its losses were caused by Countrywides alleged
26

misrepresentations, and not by the intervening economic crisis and recession. The IAS Courts failure to require MBIA to do so is reversible error.

POINT II THE IAS COURT ERRED BY HOLDING THAT MBIA MAY RECOVER RESCISSORY DAMAGES
The IAS Court held that MBIA is entitled to recover what it termed rescissory damagesthat is, damages for all payments [MBIA] has [made] or will make pursuant to the Insurance Policies [R77, Ord. 8]without any need for MBIA to provide a causal link between the alleged misrepresentations and payments made pursuant to the policies. [R87, Ord. 18.] Not only is this ruling contrary to fundamental common law principles, discussed above, requiring a plaintiff to prove loss causation to recover damages; it also turns the business relationship between the parties upside down. MBIA committed to insure the Securitizations against the risk that the loans would not perform as expected, including as a result of adverse macroeconomic conditions, and it agreed that its sole remedy against Countrywide would be repurchase of loans that breach representations and warranties and have a material and adverse effect on MBIA. If MBIA is allowed to recover the rescissory damages it seeks, it will effectively transform Countrywide into the insurer of every loaneven loans that breached no representation and warranty whatsoever and defaulted only because

27

the very macroeconomic risks against which MBIA insured came to pass. The Insurance Policies would remain unrescinded, and the Trusts would receive all insurance payments to which they have been or ever will be entitled, but Countrywide would bear the cost of those payments while MBIA walks away scotfree. And MBIA will achieve all of this without having to prove a fundamental element of its common law damages claims: loss causation. Such a result is unprecedented. Before the IAS Courts ruling, no court anywhere had ever

sanctioned the concept of an insurance company being able to escape its financial responsibility entirely by seeking relief in the form of rescissory damages, with the effect of foisting its insurance obligation onto another party. As set forth below, the IAS Courts ruling cannot be permitted to stand for several reasons. First, the Court erred in holding that Sections 3105 and 3106 of the New York Insurance Law relieve MBIA of the need to demonstrate loss causation. Those sections deal with rescission of an insurance contract by an insurer, not common law damages claims of the sort MBIA asserts, and they do nothing to change the loss-causation requirements for those claims. Second, the case law the IAS Court cited in support of rescissory damages does not support the relief MBIA seeks. That case law was developed in a unique corporate-law context to deal with circumstances that are inapplicable in this case. Third, and in any event, MBIA has affirmatively waived its entitlement to rescission and thus

28

any relief that is the purported equivalent of rescissionby (i) continuing to accept premiums for years after learning of the conduct that allegedly gives rise to its claims, and (ii) negotiating a full and adequate remedy at law through the sole remedy of repurchase for which it bargained.

A.

The IAS Court Erred By Holding That Insurance Law Sections 3105 And 3106 Inform[] MBIAs Claim For Rescissory Damages.

The IAS Court concluded that MBIA did not have to prove the loss causation element of the fraud and breach of contract claims it pleads because those claims are informed and influenced by Sections 3105 and 3106 of the New York Insurance Law. [R82, Ord. 13.] Neither section is even mentioned in MBIAs Amended Complaint. Neither section lends any support to the notion of rescissory damages or remotely suggests that an insurer may be relieved of the burden of proving the elements of its claims. Section 3105 provides in pertinent part: (a) A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false. (b)(1) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer
29

of the facts misrepresented would have led to a refusal by the insurer to make such contract. N.Y. Ins. Law 3105 (McKinney 2011). Section 3106 provides in pertinent part: (a) In this section warranty means any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurers liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract. . . . (b) A breach of warranty shall not avoid an insurance contract or defeat recovery thereunder unless such breach materially increases the risk of loss, damage or injury within the coverage of the contract. . . . N.Y. Ins. Law 3106 (McKinney 2011). On their face, neither section has anything to do with rescissory damages or any damages at all; their plain words demonstrate (as the legislative history discussed below confirms) that the sections were designed to protect insureds by limiting an insurers right to avoid (i.e., rescind) an insurance policy by requiring that any claimed misrepresentation or breach of warranty be material. Thus, Section 3105(b)(1) states: No misrepresentation shall avoid any contract of

insurance or defeat recovery thereunder unless such misrepresentation was material. (emphasis added). And Section 3106(b) provides: A breach of

warranty shall not avoid an insurance contract or defeat recovery thereunder unless

30

such breach materially increases the risk of loss, damage or injury within the coverage of the contract. (emphasis added). Neither Section 3105 nor Section 3106 contains anything approaching a statement of legislative intent to abrogate the common law requirement that an insurer, or any plaintiff, prove causation in order to obtain damages for fraud or breach of contract. [I]t is a general rule of statutory construction that a clear and specific legislative intent is required to override the common law. Hechter v. N.Y. Life Ins. Co., 46 N.Y.2d 34, 39 (1978); see also N.Y. Stat. Law 301 (McKinney 2012) (The common law is never abrogated by implication, but on the contrary it must be held no further changed than the clear import of the language used in a statute absolutely requires.). 14 The legislative history of Sections 3105 and 3106 confirms what the statutes plain language makes clear: they were not intended to expand insurers rights or to make it easier for insurers to prove damages claims, but rather to protect insureds by limiting insurers ability to avoid policies on the basis of immaterial misrepresentations or breaches of warranty.
14

Specifically, Sections

It is indisputable that loss causation was an established element of the common law causes of action for fraud and breach of contract at the time Sections 3105 and 3106 were enacted. See, e.g., Majestic Export Co., Inc. v. Katz & Greenfield, Inc., 248 A.D. 205, 206 (1st Dept 1936) (in a cause of action for fraud, the true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong) (emphasis added); Rives v. Am. Ry. Express Co., 227 A.D. 375, 376 (1st Dept 1929) (noting that [i]t is well settled that damages for breach of contract are only those which are incidental to, and directly caused by, the breach) (quotation marks omitted; emphasis added).

31

3105 and 3106 were intended to clarif[y] the meaning of materiality of a misrepresentation for the benefit of insureds, so as to abolish[] the implication of [the predecessor statute] that a fraudulent immaterial misrepresentation avoids the contract. Report of the Joint Legislative Committee on Revision of Insurance Laws, 1938 N.Y. Legis. Doc. No. 77 at 14; Ins. Dept of N.Y., Insurance Law Revision of the State of New York (Tentative Draft) 63 cmt., at 143-44 (1937) (emphasis added); see also N.Y. Ins. Law 150, Ins. Dept Revision Note (McKinney 1949) (predecessor to Section 3106 was enacted to abolish the technical rule that an immaterial breach of warranty avoids an insurance contract.).15 This pro-insured purpose was consistent with the predecessor statute to Sections 3105 and 3106, former Section 58, which was likewise directed toward the protection of the insured. Gozan v. Mutual Life Ins. Co. of N.Y., 40 N.Y.2d 707, 711 (1976).16 Thus, there is no basis for the IAS Courts reliance on

15

See also, e.g., Proceedings of Joint Legislative Comm. for Recodification of Insurance Law, at 400 (Nov. 16, 1938) (statement of Hon. Edwin W. Patterson, Chairman, Comm. on Insurance Law Revision) ([W]e think that it is high time to put an end to that old contract doctrine that an immaterial breach of warranty would void a contract.); Gluck v. Exec. Risk Indem., Inc., 680 F. Supp. 2d 406, 418 (E.D.N.Y. 2010) (legislative history demonstrates purpose of stop[ping] an insurer from ex post disclaiming an insurance contract, which proved to be a bad deal only in hindsight, by nitpicking the insurance application for minor misrepresentations). Former Section 58 had provided in relevant part that [e]very policy of insurance issued or delivered within the state . . . by any life insurance corporation doing business within the state shall contain the entire contract between the parties and nothing shall be incorporated therein by reference . . . and all statements purporting to be made by the insured shall in the absence of fraud be deemed representations and not warranties. N.Y. Ins. Law 58 (McKinney 1926). The purpose of this provision, requiring the whole insurance contract to 32

16

Sections 3105 and 3106 to inform[] MBIAs entitlement to an expanded neverbefore-contemplated form of damages. [R82, Ord. 13.] The IAS Court erred by transforming Sections 3105 and 3106 into a pro-insurance company excuse to avoid any payments whatsoever by inequitably shifting all of its responsibilities, even as to fully compliant, non-breaching loans, onto Countrywide. New York case law applying Sections 3105 and 3106 has, consistent with the statutes text and history, arisen solely in situations in which an insurer has sought either to avoid a policy pursuant to these statutes17 or to invoke them as an affirmative defense or counterclaim to an action by an insured seeking payment of a claim.18 Tellingly, the case law is devoid of instances in which Section 3105 or 3106 have been used to create or inform[] distinct causes of action unsupported

be stated in the policy, was for the protection of those insured and of the beneficiaries claiming thereunder, and not the relief of the insurer. Abbott v. Prudential Ins. Co. of Am., 281 N.Y. 375, 383-84 (1939). The comments to former Section 58, however, had provided that [u]nder this section a statement in an application for life insurance, constituting or having the effect of a warranty, whereof a breach would necessarily and ipso facto avoid the policy must be characterized by and include the element of fraud. N.Y. Ins. Law 58 cmt. (McKinney 1926). As noted above, the potential implication of this language, which current Sections 3105 and 3106 were intended to eliminate, was that a fraudulent immaterial misrepresentation avoids the contract. Ins. Dept of N.Y., Insurance Law Revision of the State of New York (Tentative Draft) 63 cmt., at 143-44 (1937).
17

See, e.g., Sun Ins. Co. of N.Y. v. Hercules Sec. Unlimited, 195 A.D.2d 24, 27 (2d Dept 1993) (seeking declaratory judgment that the policies are void from the inception of coverage); Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 273 (2d Cir. 1992) (declaratory judgment action seeking to rescind the agreements). See, e.g., Glickman v. N.Y. Life Ins. Co., 291 N.Y. 45, 49 (1943) (invoking insurers defense that although a policy was issued, no insurance thereunder ever took effect); Ginsburg v. Pac. Mut. Life Ins. Co. of Cal., 89 F.2d 158, 158 (2d Cir. 1937) (insurance company sought rescission in counterclaim).

18

33

by those provisions plain terms.

Cf. GuideOne Specialty Mut. Ins. Co. v.

Congregation Adas Yereim, 593 F. Supp. 2d 471, 486 (E.D.N.Y. 2009) (In point of fact, 3105(b) lacks any language creating causes of action relating to misrepresentations by an insured or defining any defense to such an action. This silence does not impede rescission rights, of course, for an insurers right to seek to void an insurance contract ab initio derives from the common law.). Although MBIA purported to seek rescission of the Insurance Policies in its initial complaint, it dropped that request in its Amended Complaint. [Compare R256, Compl. 110 (MBIA is further entitled to rescission of the Insurance Agreements because of Countrywides fraudulent inducement.), with R354, Am. Compl. 152 (MBIA is further entitled to rescissory damages . . . .)]. In its motion for partial summary judgment, MBIA explicitly disavowed rescission, stating that MBIA is seeking damages, rather than to void the policies. [See R452, MBIA Mem. at 14.]19 Yet the IAS Court concluded that Sections 3105 and 3106 still applied, notwithstanding that MBIA is not seeking rescission. The IAS Court reasoned that Countrywide has made no showing that MBIA may only use Sections 3105 and 3106 in a request for declaratory judgment or as an affirmative

19

That MBIA is not seeking rescission is also clear from its decision to sue only Countrywideit has not joined the Trusts, the actual insured under the policies, and the parties that have received all of MBIAs claims payments under the Insurance Policies. Cf. Tudor v. Riposanu, 93 A.D.2d 718, 718 (1st Dept 1983) (under New York law, in an action for rescission, all parties to the agreement must be joined as necessary parties).

34

defense and New York insurance statutes make no such statement. [R81, Ord. 12.] Placing this burden on Countrywide was error: under the settled principles of statutory interpretation discussed above, the absence of an express statement in the statutes limiting their application should not be read as license to use them affirmatively to inform[]really, createnew damages causes of action that abrogate established common law requirements. 301(b). Indeed, all of the cases the IAS Court relied upon in concluding that MBIA need not demonstrate loss causation to prove its damages claims arise in the context of an insurance company seeking either (1) to avoid a policy affirmatively or (2) to interpose a defense to a claim for payment.20 And that is the limited domain of Sections 3105 and 3106dealing with rescission in a manner that is entirely consistent with the common law.
20

See, e.g., N.Y. Stat. Law

[R83-84, Ord. 14-15 (citing BW Sportswear, Inc. v. Those Certain Underwriters at Lloyds of London, 32 Misc. 3d 1245(A) (Table; text at 2011 WL 4357674, at *2 (Sup. Ct. N.Y. Cnty. 2011)) (insurer sought to rescind a policy ab initio on basis of material misrepresentations in application); Kiss Constr. NY, Inc. v. Rutgers Cas. Ins. Co., 61 A.D.3d 412, 413 (1st Dept 2009) (addressing insurers entitlement to a declaration that the policy was void ab initio based on the material misrepresentations in the insurance application); Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261, 273 (1937) (Finch, J., dissenting) (insurer asserted material misrepresentation as defense to action by beneficiary of life insurance policy to recover on the policy); Interested Underwriters at Lloyds v. H.D.I. III Assocs., 213 A.D.2d 246, 247 (1st Dept 1995) (action by insurer to avoid insurance contract based on material misrepresentation in application); Greene v. United Mut. Life Ins. Co., 38 Misc. 2d 728, 728 (Sup. Ct. Bronx Cnty. 1963) (insurer sought to avoid policy as defense to action for recovery thereunder); Star City Sportswear, Inc. v. Yasuda Fire & Marine Ins. Co. of Am., 1 A.D.3d 58, 60-62 (1st Dept 2003) (affirming grant of summary judgment to insurer, based on material breach of warranty, as to plaintiffs claim to recover on insurance policy)).]

35

When, as here, the insurer is seeking not to rescind the policy but to obtain damages, the case law makes clear that the relevant causation standard remains whether the defendants conduct proximately caused those damages. See, e.g., Dress Shirt Sales, Inc. v. Hotel Martinique Assocs., 12 N.Y.2d 339, 343 (1963) (In contrast to an action for rescission, in an action for damages for fraud actual pecuniary loss must be shown.). Insurance companies do not, and ought not, enjoy some special status that excuses them from the fundamental requirement of proving causation linking the defendants action and the insurance companys alleged damages. For example, in Stein v. Security Mutual Insurance Co., an insurance company sought to rescind an insurance policy under Section 3105 while also pursuing negligence and breach of contract claims against the insurance broker who submitted the inaccurate insurance application. 38 A.D.3d 977, 978-79

(3d Dept 2007). The Third Department held that the insurance company could prevail on its common law claims against the broker only if the brokers conduct was the proximate cause of [the insurance companys] damage. Id. at 979. Indeed, in Stein, the court granted summary judgment dismissing the claims against the broker, concluding that intervening events occurring after issuance of the policy were the true proximate cause of the insurance companys losses. See id. (holding that the insurance companys decision to cancel the policy as of a later

36

date, rather than seek to rescind it ab initio, proximately caused the damages alleged). Here, MBIAs entire theory of rescissory damages is an effort to pretend that the economic crisis and recession never happened. By adopting this theory, the IAS Court allowed MBIA to recover a greater measure of damagesall of the claims it has had to or will have to pay under the policies with a lesser standard of proof. This was error: MBIA should not be allowed to avoid the established causation standard for its common law damages claims.

B.

There Is No Basis For The IAS Courts Recognition Of The Possibility Of Rescissory Damages In Favor Of An Insurance Company That Has Made The Voluntary Choice Not To Seek To Rescind An Insurance Contract.

Despite the clear irrelevance of Sections 3105 and 3106 to MBIAs damages claims, the IAS Court imported the lessened causation standard for rescission of an insurance policy into this common law damages action by holding that MBIA which does not seek rescission or avoidance of its policiescould recover as rescissory damages every penny of insurance coverage it has paid or will pay without ever proving that such damages were caused by Countrywides conduct. [R86-87, Ord. 17-18.] This holding was based on an unwarranted extension of cases from the Delaware Court of Chancery and other jurisdictions, arising in very different and unique contexts. [R86, Ord. 17.] These cases do not support the IAS Courts holding in favor of MBIA.
37

The rescissory damages remedy discussed in the cases on which the IAS Court relied was developed and applied in the corporate-law context, in very specific circumstances in which, by virtue of a freeze-out merger or similar transaction, a minority shareholder has been divested of his or her shares at an unfair price due to a breach of fiduciary duty by the defendant (typically, a controlling shareholder who has abused its control power).21 In such

circumstances, the unfair transaction has already occurred and cannot as a practical matter be unwound, rendering actual rescission impossible or impracticable. Faced with the fact that rescission is called for by the defendants conduct but is no longer possible, the Delaware courts have permitted rescissory damagesthat is, allowing the injured minority shareholders to recover in money damages not just the fair price of their shares on the date of the wrongful transaction, but also any accretion in their value from the date of the transaction through the time of

21

Of the cases cited by the IAS Court to support MBIAs purported entitlement to rescissory damages, [R85-86, Ord. 16-17], all but one involve Delaware law and allegations of breach of fiduciary duty in the context of a sale of stock or other equity interest in a merger, tender offer, or similar transaction. The sole remaining case does not support MBIAs position. That case, Outdoor Life Network, LLC v. EMTA Corp., applying Arizona law, addressed rescission of a contract to disseminate advertising. No. 2:06-cv-00463 JWS, 2006 WL 3834287, at *1 (D. Ariz. Dec. 29, 2006). The court noted in passing that, since the advertising that had already been disseminated pursuant to the contract could not be returned and the status quo ante could not be recreated, some measure of rescissory damages could be appropriate. Id. at *5. But the court did not address the availability of those damages in the posture of the case, and explicitly stated that it expresse[d] no opinion as to the measure of those damages or the manner in which they are to be established. Id. at *5 n.48. And it certainly did not hold that any such rescissory damages, if available at all, could be established without any showing of causation.

38

judgment. That measure of damages allows the injured minority stockholders to be put in as close a position as possible to that which they would have occupied had the wrongful transaction not occurred (hence, the rescissory nature of the damages), while preventing the wrongdoer from being unjustly enriched by keeping the benefit of the appreciation in the stock it purchased. See, e.g.,

Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1144-47 (Del. Ch. 1994) [cited at R86, Ord. 17.]22 The Delaware Chancery Court has explained the purpose of rescissory damages in that unique corporate-law context as follows: At the most general level, this remedy is premised upon the idea that (1) the transaction whereby the party gave up an asset was wrongful in some way and (2) the nature of the wrong perpetrated is such that plaintiff is entitled to more than his out-of-pocket harm, as measured by the market value of the asset at or around the time of the wrong.
22

By way of example, consider a situation in which a controlling shareholder caused minority shareholders to sell their stock at an unfair price of $1 per share. At the time of the transaction, $2 would have been a fair price, but by the time of the courts judgment, the value of the stock had risen to $3. If rescission were practicable, the wronged minority shareholders would be returned stock with a value of $3 per share; awarding damages of only $2 minus $1 would give the benefit of the subsequent appreciation in the stock price to the wrongdoer controlling shareholder, which now owns stock worth $3, rather than to the minority shareholders who were injured by the controlling shareholders breach of fiduciary duty. Thus, in these circumstances, rescissory damages of $3 minus $1 might be awarded. See generally Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 468 (Del. Ch. 2011) ([R]escissory damages are not calculated as of the merger date . . . but rather generally reflect the value of the wrongfully taken property at the time of judgment . . . or the highest intervening value between the time of the wrong and the time of judgment); Glick v. Campagna, 613 F.2d 31, 37 (3d Cir. 1979) (rescissory damages place the plaintiff in the same financial position he would have been [in] were it possible to return the stock).

39

Id. at 1144 (emphasis added); see also, e.g., Mecca v. Gibraltar Corp. of Am., 746 F. Supp. 338, 348 (S.D.N.Y. 1990) (in securities law, [u]nder a rescissory measure of damages, the plaintiff is entitled to a return of the consideration paid, reduced by the amount realized when he sold the security and by any income received on the security (quoting Randall v. Loftsgaarden, 478 U.S. 647, 656 (1986)). In this respect, such damages are restitutionary, based on an idea of precluding unjust enrichment. Cinerama, 663 A.2d at 1144. They have been

described as an exceptional remedy, In re Transkaryotic Therapies, Inc., 954 A.2d 346, 362 n.55 (Del. Ch. 2008), appropriate in circumstances in which an out-of-pocket or merger appraisal remedy may be inadequate to compensate a shareholder for losses suffered as a result of an unfair transaction, Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983). By contrast, the Delaware courts continue to adhere to the normal common law doctrine that where a plaintiffs claims are based in contract, an award of rescissory damages is not an appropriate remedy. Telstra Corp. v. Dynegy, Inc., No. Civ. A 19369, 2003 WL 1016984, at *1 (Del. Ch. March 4, 2003).23

23

This limited remedy appears to have had its genesis in the law of trusts, Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate & Commercial Practice in the Delaware Court of Chancery 12.04, under which, where a trustee has sold property that he was directed to retain the courts may measure his liability by the amount of subsequent appreciation in the value of the property, George Gleason Bogert et al., The Law of Trusts and Trustees 862. Its origin underscores the inapplicability of that remedy here.

40

Whether New York joins Delaware in recognizing rescissory damages even in this specific corporate-transaction fiduciary-breach context is questionable. See Grace v. Rosenstock, 228 F.3d 40, 50 (2d Cir. 2000) (finding no authority under New York law, in context of freeze-out merger, for an action for rescissory damages encompassing post-merger surges in value). But in any event, there is no support in New York law for rescissory damages of the sort the IAS Court permitted here. Rather, apart from the Delaware corporate-law cases shown to be inapplicable above, the IAS Court cites a single 1937 Court of Appeals case for the proposition that [d]amages may be recovered as incident to an action in equity for rescission. [R87, Ord. 18 (citing Equitable Life Assurance Socy of U.S. v.

Kushman, 276 N.Y. 178, 184 (1937).] But Equitable Life does not support the availability of rescissory damages in this context. To the contrary, Equitable Life addressed only whether an insurer could maintain an action in equity to have a policya life insurance policy with a disability componentdeclared null, void and of no effect as a result of misrepresentations by the insured, while also seeking a monetary judgment for amounts previously paid to the insured under the disability component of the policy. 276 N.Y. at 181. The Court of Appeals concluded that the insurer did not have an adequate remedy at law, since the beneficiary under the life insurance component of the policy would not be a proper party to such a suit, and thus the

41

insurer could maintain an action in equity for rescission against the insured and the beneficiary notwithstanding the additional claim for monetary damages against the insured. Id. at 183-84. Equitable Life thus does not support anything like the rescissory damages that the IAS Court held to be available here.24 Even if (as remains unclear) rescissory damages are ever available in this State, this unique remedy has no application to the circumstances of this case. This is not a situation in which Countrywide holds an asset that it obtained through a breach of a duty to MBIA. (MBIAs insurance claims payments have gone not to Countrywide, but to the Trusts.) Nor would Countrywide be unjustly enriched if it were ordered to pay compensatory damagesor to repurchase loansin the amount of harm that its alleged wrongdoing actually caused MBIA to sustain. If MBIA is able to prove the elements of its claims, and Countrywide repurchases every loan that is shown to have breached representations and warranties and caused damage to MBIA, Countrywide will not be left with anything that rightfully belongs to MBIA and that would otherwise be returned if true rescission were possible and effected.

24

The one case from the United States District Court for the Southern District of New York that the IAS Court cites in support of the availability of rescissory damageswhich denied a request for such damagesapplies Delaware law in the context of a corporate transaction. See St. Clair Shores Gen. Emps. Ret. Sys. v. Eibeler, 745 F. Supp. 2d 303, 307-10 (S.D.N.Y. 2010) (cited at R86, Ord. 17.)

42

Indeed, if the Insurance Policies were actually rescindedthe result that the IAS Court considered to be the financial equivalent of rescissory damages [R86, Ord. 17.]the policies would be void, and of no further effect, going forward. Far from resulting in Countrywides becoming obligated for all past and future claims, rescission of the policies would presumably result in the recipients of past claims paymentsthe Trusts, not Countrywidereturning what they previously received, with no claims being paid in the future. The concept of rescissory damages, whatever its validity in other contexts, simply does not fit this casewhere money damages and the contractually specified remedy for breach would make MBIA whole, provided that it can prove the elements of its claims. The IAS Court was also incorrect that rescissory damages are warranted because actual rescission is rendered impractical by MBIAs agreement in the Insurance Policies that it unconditionally and irrevocably guarantees payment. [R86, Ord. 17.] This is not a situation in which rescission would have been appropriate but has become impractical. To the contrary, rescission is not

impractical in the circumstances of this case; it is unavailable as a result of MBIAs own choices. Unlike the Delaware cases discussed above, in which the infeasibility of rescission was not the result of any action on the part of the injured partybut rather of the unavoidable fact that a completed merger of two corporations cannot be unwoundthe unavailability of rescission in this case

43

results from a voluntary decision by MBIA to issue unconditional[] and irrevocabl[e] Insurance Policies. Moreover, MBIA has not even sought to rescind those policies in this action (since it cannot) and has instead continued to accept years of premiums. MBIA cannot now avoid the consequences of its decision to waive the availability of rescission by seeking to turn Countrywide into the insurer of all loans for all time, while conveniently avoiding the financial and reputational consequences of actual rescission. In any event, common sense aside, there is no support in New York law for the relief MBIA seeks here. Below, MBIA relied on cases from the auto insurance context permitting auto insurers to bring claims for damages against insureds in lieu of rescission. [See R6701, Pl.s Reply Mem. of Law in Further Supp. of Mot. for Part. Summ. Judg. and Mot. to Strike Defenses (MBIA Reply Mem.) (citing Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144, 149 (3d Dept 1991); R45354, MBIA Mem. at 14-15 (citing Reliance Ins. Cos. v. Daly, 38 A.D.2d 715, 716 (2d Dept 1972).] In that context, rescission was impossible because, for sound public policy reasons and in light of New Yorks statutory compulsory auto insurance framework, New York has determined to prohibit the ab initio rescission of auto insurance policies. See, e.g., Aetna Cas. & Sur. Co. v. OConnor, 8 N.Y.2d 359, 363 (1960) (New Yorks statutory law abrogate[s] the common law right to rescind on the ground of fraud or misrepresentation); see also N.Y. Veh. & Traf.

44

Law 313 (McKinney 2011). In those limited circumstances, auto insurers may instead seek damages for claims made under their policies. Mooney, 172 A.D.2d at 149. But these cases provide no support for the extraordinary remedy MBIA seeks here. Unlike in the auto insurance context, there is no settled legislative determination that the public interest in the type of financial guaranty insurance MBIA provided exceeds that of the parties to the insurance contract. Id.

Instead, the unavailability of rescission here is a result of MBIAs own choice. Moreover, fundamentally, the auto insurance cases do not support the conclusion that MBIA may seek damages without demonstrating causation. To the contrary, and putting aside their inapplicability in the first instance, the very cases MBIA cites support precisely the opposite conclusion. See id. (holding that auto insurer may recover damages for amounts the insurer was obligated to pay to an injured third party as a result of the insureds fraud (emphasis added)); Reliance, 38 A.D.2d at 716 (holding that insurer may seek damages arising from the insureds fraud (emphasis added)). MBIA deliberately chose not to seek rescission of these Insurance Policies for its own self-interested reasonsto avoid the adverse business consequences of attempting to seek to rescind the policies, and to enable it to manufacture a theory that it is entitled to every penny of claims it has paid regardless of whether any

45

Countrywide breach caused the payment.

MBIA has taken an extraordinary

approach: it has continued to accept premiums from the Trusts, while seeking in this action what it calls rescissory damages, but what is in reality a wholesale transfer of its insurance obligations, both past and future, to Countrywide (including MBIAs obligation to make payments in respect to loans that breached no representation and warranty and that defaulted for reasons having nothing to do with Countrywide). Though purportedly directed at protecting noteholders,

common sense more readily suggests that this course of action is designed to protect MBIA: if MBIA sought to rescind the policies, no future investor would be willing to rely on MBIAs financial guarantees.25 MBIA cannot have it both ways. The contractual covenant on MBIAs part not to rescind the Insurance Policies was obviously of MBIAs own making. It chose to make that promise. It ought not be permitted to use that promise as a sword in support of its effort to foist all of its insurance obligations onto Countrywide. As discussed below, the Transaction Documents here specify with great particularity what rights and remedies exist as between MBIA and Countrywide in the event of breaches of loan-level representations and warranties. MBIAs attempt to use its own

25

In addition, public documents suggest that any attempt by MBIA to back out of its insurance obligations would place its own credit ratingand, thus, its ability to do future businessin jeopardy. [See R4049.] Any such action would have also jeopardized MBIAs ability to seek reimbursement from its reinsurers [R5893, Article 4(d).]

46

agreement with the Trusts not to rescind the Insurance Policies to dramatically expand its rights as against Countrywide is inequitable and unsound.

C.

MBIA Has Waived Its Entitlement To The Relief It Seeks Here By Continuing To Accept Premiums After Learning Of The Basis For Its Claims.

As set forth above, there is no legal basis for the remedy MBIA seeks here. But, just as fundamentally, MBIA has unequivocally waived its right to seek rescission or any remedy equivalent to rescission by continuing to accept premiums long after learning of the basis for its claims. In New York, [i]t is black letter law that acceptance of premiums after knowledge of an existing breach of condition gives rise to waiver or, more properly, estoppel of the right to avoid the policy. Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., No.

652837/2011, 2012 WL 5192752, at *5 (Sup. Ct. N.Y. Cnty. Oct. 11, 2012); see also, e.g., Bible v. John Hancock Mut. Life Ins. Co. of Bos., 256 N.Y. 458, 462 (1931) (Cardozo, J.) (the keeping of . . . premiums by an insurer with knowledge of a then existing breach of the conditions in the policy gave rise to a waiver or, more properly an estoppel); U.S. Life Ins. Co. v. Grunhut, 83 A.D.3d 528, 528 (1st Dept 2011) (by accepting premiums for three months after commencing this action to rescind the insurance policies, insurer waive[d] its right to rescind). This makes perfect sense: an insurer cannot sit on its hands

47

after learning of facts that give rise to a right to rescind, only to rely later upon rescission when convenient. Here, MBIA has accepted and retained years of premiums, to the current day, since learning of the purported basis for its claims. [R110, Hearing at 15.] Thus, it has clearly waived its right to the relief it seeks here. It is of no moment for purposes of waiver that MBIA claims to seek rescissory damages rather than rescissionbelow, MBIA went to great lengths to convince the IAS Court that rescission and rescissory damages are equivalent remedies. [R6700, MBIA Reply Mem. at 8.] As Supreme Court Justice Kornreich has recently held, in rejecting a different monoline insurers prayer for rescissory damages, there is no basis for treating a claim for rescissory damages different than rescission when it comes to waiver: As a result of their acceptance of premiums after their knowledge of the alleged breach, Plaintiffs are estopped from . . . obtaining the equivalent of rescission in the form of rescissory damages. Assured Guar., 2012 WL 5192752, at *6. And MBIA cannot evade this well-settled rule by disingenuously asserting that it has continued to accept premiums to protect noteholders this Court has repeatedly held that waiver of the right to rescind applies even where the insurer claims it accepted premiums after commencing a rescission action to protect th e insured pending a determination of the action. U.S. Life Ins. Co. v. Blumenfeld, 92 A.D.3d 487, 489 (1st Dept 2012); Grunhut, 83 A.D.3d at 528 (similar);

48

Assured Guar., 2012 WL 5192752, at *5 (The estoppel remains even if the insurance company accepts premiums in order to protect the insured while the action for rescission is pending.). Moreover, there is no unfairness to noteholders in rejecting MBIAs grandiose claim to rescissory damages. MBIA has whatever rights exist under settled common law principles, consistent with its contracts with Countrywide, to seek recovery should it determine for its own reasons, as it has, to continue to accept premiums and continue to pay on its policies. And noteholders, likewise, have the rights provided for with great specificity, in the underlying PSAs and SSAs, vis--vis Countrywide and/or the Trustee in the event of loans that fail to comply with the representations and warranties.26 Protection of noteholders is no basis for recognizing MBIAs entitlement to rescissory damages and certainly is no warrant for ignoring or radically undermining Countrywides rights vis --vis MBIA as specifically set forth in the contracts between the two companies. See Point II.E, infra.

26

The Transaction Documents provide certificateholders with considerable protections in the event of breaches of CHLs representations and warranties, including typically obliging the Trusteewhich is tasked with acting for the benefit of the Certificateholderson notice of a breach that materially and adversely affects the interests of the Certificateholders in the Mortgage Loan, to give notice requiring cure or repurchase of the loan if the breach has a material and adverse[] effect on certificateholders interests. [R2138, 2006-S8 PSA 2.03(f),] In addition, certificateholders with 25% of the Voting Rights of each Class may direct the Trustee to make investigations. [R2195, 2006-S8 PSA 8.02(a)(4).]

49

D.

The IAS Court Erred In Failing To Consider Whether MBIA Has An Adequate Remedy At Law.

The IAS Court further erred in holding that rescissory damages are appropriate [R86, Ord. 17] without first assessing whether MBIA has an adequate remedy at law. It is settled New York law that the equitable remedy of rescission only is available where a party lacks a complete and adequate remedy at law. Alper v. Seavey, 9 A.D.3d 263, 264 (1st Dept 2004) (quotat ion marks omitted); see also MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419, 420 (1st Dept 2011) (affirming holding of lower court that MBIA could not seek rescission since [it] failed to demonstrate that [it] could not be compensated by damages ).27 Since MBIA here seeks what the IAS Court considered to be the financial equivalent of rescission [R86, Ord. 17], any such so-called rescissory damages would be available only if legal damages are inadequate, and the IAS Court never so concluded. See New Paradigm Software Corp. v. New Era of Networks, Inc., 107 F. Supp. 2d 325, 330 (S.D.N.Y. 2000) (Plaintiff has asserted no reason why damages would not be an adequate remedy. In New York, the law awards damages for breach of contract to compensate for injury caused by the breach. (quotation marks omitted)).
27

See also, e.g., Rudman v. Cowles Commcns, Inc., 30 N.Y.2d 1, 13 (1972) (holding that the equitable remedy [of rescission] is to be invoked only when there is lacking complete and adequate remedy at law); Ellington v. Stony/ATV Music Publg LLC, 85 A.D.3d 438, 439 (1st Dept 2011) (The extraordinary remedy of rescission was unwarranted since, among other reasons, there was an adequate remedy at law.). 50

E.

That MBIA Has An Adequate Remedy At Law Is Further Demonstrated By The Contractual Sole Remedy To Which MBIA Agreed To Be Bound.

Finally, there can be no question that MBIA has an adequate remedy at law since it contracted for an express remedy that it agreed would suffice to address any breaches of representations and warranties covering the loans it insured. The contracts between MBIA and Countrywide, which govern MBIAs issuance of the Insurance Policies to the Trusts, make clear that MBIAs sole remedy for breaches of Countrywides representations and warranties is to require Countrywide to repurchase breaching loans that materially and adversely affected MBIA on a loan-by-loan basis, after providing Countrywide with notice and an opportunity to cure. Section 3.02 of the HELOC Purchase Agreements provides that [t]he sole remedy of . . . the Credit Enhancer [i.e., MBIA] against a Seller for the breach of a representation or warranty is CHLs obligation to [repurchase the Mortgage Loan]. [See, e.g., R1912, 2006-E Purchase Agmt. 3.02(c) (emphasis added).] Likewise, subsection 2.04(e) of the SSAs for the HELOC deals provides that the sole remedy of the Credit Enhancer for breaches of representations and warranties is the right to ask Countrywide to cure, substitute, or repurchase a breaching mortgage loan. [See, e.g., R3502, 2006-G SSA 2.04(e).]28 Section
28

The relevant transaction documents for the CES securitizationsthe PSAscontain several similar sole remedy provisions. Section 2.01 of the PSAs provides, for example, that the obligation under Section 2.03(f) of this Agreement of the applicable Seller, to cure, repurchase or replace such Subsequent Mortgage Loan shall constitute the sole remedy 51

2.01 of the Insurance Agreements, in which Countrywide represents to MBIA that the representations and warranties in the related Transaction Documents (i.e., the Purchase Agreements) are true and correctprovides that [t]he remedy for any breach of this paragraph with respect to representations or warranties relating to a Mortgage Loan shall be limited to the remedies specified in the related Transaction Document[s]. [R2729, 2006-G Insurance Agreement 2.01(l) (emphasis added).] The IAS Courts ruling disregards Countrywides contractual rights, and the parties agreed-to remedy at law for breaches of CHLs representations and warranties, by allowing MBIA to end-run that bargained-for remedy by seeking an entirely different form of damages that is completely unrelated to the contractedfor loan-by-loan repurchase sole remedy. See, e.g., Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, No. 11 Civ. 23475(JSR), 2011 WL 5335566, at *4-*5 (S.D.N.Y. Oct. 31, 2011) (concluding, under nearly identical contractual language, that the cure or repurchase obligation [is] the exclusive remedy available to a monoline insurer for breach of a representation or warranty). This outcome is untenable. In allowing MBIA to seek rescissory damages, the IAS Courts ruling permits MBIA to circumvent the contractual sole remedy for which it bargained

against such Seller respecting such breach available to Certificateholders, the Depositor, the Certificate Insurer [i.e., MBIA] or the Trustee. [R2112, 2006-S8 PSA 2.01(e)(4) (emphasis added).]

52

without having to disavow or rescind the policies. In so doing, it permits MBIA to avoid the reputational consequences of rescissionallowing it to seek the purported equivalent of requiring Countrywide to reimburse MBIA for all past and future claims payments made to the Trusts under the policies, even on loans as to which no breach of a representation or warranty can be shown. It thus permits MBIA to transform Countrywide into the insurer of every loan, without regard to whether Countrywide breached its contractual obligations in any way with respect to the loan. And, inexplicably, it allows MBIA to achieve all of this without having to prove a fundamental element of its common law damages claims: loss causation. This result cannot be permitted to stand.

The consequences of the IAS Courts recognition of rescissory damages in this case would extend far beyond the context of residential mortgage-backed securitizations and financial guarantee insurance. The IAS Courts ruling threatens to transform Sections 3105 and 3106 into tools that can be usedcontrary to their plain words and unequivocal legislative historyto expand dramatically the rights of insurance companies in untold contexts to forego the recognized remedy of rescission and instead attempt to foist their insurance obligations onto other parties,

53

even where, as here, that other party not only never bargained for the possibility of that bizarre result but in fact contracted for a specific remedy in the event of a breach of a representation or warranty. In that fundamental respect, the ruling below threatens to license courts to ignore or contravene the bargained-for contractual rights of highly sophisticated parties when a clearly unanticipated event occurs (here, the economic crisis and recession) which leads one party to the contract to incur losses greater than it expected. Worse yet, the IAS Courts r uling does so in favor of a highly sophisticated insurance company that seeks to disavow any cost to itself whatsoever of its having written financial guarantee insurance. MBIA should not be permitted to let itself off the hook for the insurance it agreed to write. MBIA should be allowed to pursue the sole remedy for which it bargained when it wrote the insurance, and only that remedy. MBIA should not be allowed, as the IAS Court countenanced, to dodge its obligations entirely by claiming an unsupportable and contrary-to-precedent remedy of rescissory damages that would so plainly contravene Countrywides contract rights. Settled principles of causation and contract ought not be broken, or bent, in service of this insurance companys effort to evade its financial responsibilities.

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CONCLUSION
For the foregoing reasons, Defendants-Appellants-Respondents respectfully submit that the decision of the lAS Court, to the extent it granted MBIA's Motion for Partial Summary Judgment, should be reversed.

Dated:

New York, New York November 7,2012

By:111~

Mark Holland

Mark Holland Larkin M. Morton Meghan K. Spillane GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018 (212) 813-8800 Paul F. Ware, Jf. David J. Apfel Sarah Heaton Concannon Abigail K. Hemani GOODWIN PROCTER LLP 53 State Street Boston, MA 02109 (617) 570-1000

Attorneys for Defendants-AppellantsRespondents Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., Bank of America, NA., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.)

55

Of Counsel: 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

56

PRINTING SPECIFICATIONS STATEMENT Pursuant to 22 NYCRR 600.10(d)(1)(v) The foregoing brief was prepared on a computer. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: Line spacing: 14, with 12 point in footnotes Double

The total number of words in the brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, or any authorized addendum containing statutes, rules, regulations, etc. is 13,917.

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Pre-Argument Statement by Defendants, dated January 25, 2012 [pp. 1 - 9]

FILED: NEW YORK COUNTY CLERK 01/25/2012

NYSCEF DOC. NO. 1465-5

INDEX NO. 602825/2008 RECEIVED NYSCEF: 01/25/2012

SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION, FIRST DEPARTMENT MBIA INSURANCE CORPORATION, Plaintiff-Respondent, -againstCOUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, L.P. and BANK OF AMERICA CORP., Defendants-Appellants. Defendants-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp., and Bank of America, N.A., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) (Countrywide) submit the following Pre-Argument Statement under Rule 600.17 of the Rules of this Court: 1. 2. The title of the action is accurately set forth in the caption above. The original parties to this action are: a, b. Plaintiff-Respondent: MBIA Insurance Corporation, Inc. (MBIA). Defendants-Appellants: Countrywide Home Loans, Inc., Countrywide Index No. 602825/08 IAS Part 3 Hon. Eileen Bransten PRE-ARGUMENT STATEMENT

Securities Corp., Countrywide Financial Corp., and Bank of America, N.A., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) c. Defendant: Bank of America Corp. (BAC).

2
3. The name, address, and telephone number of counsel for Defendants-Appellants

Countrywide 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 Defendant BAC is: OMELVENY & MYERS LLP 7 Times Square New York, New York 10036 (212) 326-2000 5. MBIA is: QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 (212) 849-7000 6. This appeal is taken from the Order of the Supreme Court, New York County, The name, address, and telephone number of counsel for Plaintiff-Respondent

I.A.S. Part 3 (per Justice Eileen Bransten) dated January 3, 2012, and duly entered with the Clerk of the Court on January 3, 2012, granting in part and denying in part MBIAs Motion for Partial Summary Judgment and Motion to Strike Defenses (Mot. Seq. No. 37) (the Order). A true and correct copy of the Order is attached hereto as Exhibit A. 7. This case was brought by MBIA, a monoline bond insurer that issued financial

guaranty insurance policies in connection with securitizations of residential second-lien mortgage loans. Countrywide sponsored the securitizations and contributed the mortgage loans underlying the securitizations. MBIA alleges that a significant percentage of mortgage loans underlying each of the fifteen securitizations at issue failed to comply with representations and warranties in the governing agreements and alleges claims for fraudulent inducement and breach 2

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of contract. MBIA seeks to recover monies paid out on its financial guaranty policies as a result of allegedly noncompliant loans. 8. On May 25, 2011, MBIA filed a Motion for Partial Summary Judgment and

Motion to Strike Defenses (Mot. Seq. No. 37), seeking a declaration that: (i) to be entitled to what it terms rescissory damages on its fraudulent inducement claim (measured, in MBIAs view, by the total claims it has paid or may pay on the insurance it issued, less premiums it received), MBIA need only establish that it was induced to insure the Securitizations by fraudulent misrepresentations or omissions, and nothing about whether the alleged misrepresentations proximately caused the claims payments that MBIA seeks to recover; (ii) to prevail on its claim of breach of the Insurance and Indemnity Agreement, MBIA need only establish that an alleged misrepresentation was untrue or misleading in a material respect at the time it was made, and nothing about whether the alleged misrepresentations proximately caused the claims payments that MBIA seeks to recover; and (iii) to prevail on its claim that Countrywide was required to repurchase allegedly defective mortgage loans under its contract claims under the governing agreements for the Securitizations, MBIA need only establish that a loan breached a representation or warranty in a way that increased the risk profile of the insurance, and nothing about whether that breach caused the loan to default (and therefore caused a claims payment under the policy) or even that the loan ever defaulted (i.e., MBIA contends that it is entitled to seek repurchase even of loans that have always been fully performing to date). 9. On July 15, 2011, Defendants-Appellants opposed MBIAs Motion arguing that:

(i) MBIA cannot evade its burden of proving causation on its claims for fraudulent inducement and breach of the Insurance and Indemnity Agreement because (a) to recover damages at law,

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MBIA must prove that its losses were caused by Countrywides actual wrongdoing, and not by other causes, such as the intervening housing and financial markets collapse, and (b) under New York law, MBIA may not recover rescissory damages; and (ii) to prevail on its claim that Countrywide breached its obligation to repurchase certain allegedly defective loans in the securitizations, MBIA must establish that it has suffered actual, material harm as a result of each alleged representation or warranty breach, i.e., MBIA must show that a particular representation or warranty breach caused a loan to defaultand forced MBIA to pay more in claimsfor repurchase to be required under the governing agreements. 10. The Supreme Court of the State of New York, County of New York (the IAS

Court) granted in part and denied in part MBIAs Motion for Partial Summary Judgment and Motion to Strike Defenses by a decision and order decided January 3, 2012, entered in the Clerks Office of the Supreme Court, New York County, on January 3, 2012. a. The IAS Court granted MBIAs motion seeking a declaration that to be

entitled to rescissory damages on its claims of fraudulent inducement and breach of the Insurance and Indemnity Agreement, MBIA need only establish that it was induced to insure the Securitizations by Countrywides alleged misrepresentations, and does not need to show a direct causal link between Countrywides alleged misrepresentations and MBIAs claims payments. The IAS Court placed several key limitations on this holding, finding that MBIA must prove that: (i) Countrywide made misrepresentations that were material to [MBIAs] decisions to issue the Insurance Policies; (ii) [MBIA] relied on

Countrywides alleged misrepresentations in that the alleged statements induced MBIA to take action which MBIA might otherwise not have taken, or would have
taken in a different manner; (iii) [MBIA] was damaged as a direct result of the material

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misrepresentations. As has been aptly pointed out by Countrywide, this will not be an easy task; and (iv) [u]pon reaching its burden of proof for each claim . . . the amount of its damages. b. The IAS Court denied MBIAs motion to strike Countrywides fourteenth

and fifteenth defenses, stating [t]he burden of proof remains upon MBIA to prove all elements of its causes of action. Defendants fourteenth and fifteenth affirmative defenses are not dismissed. c. The IAS Court denied MBIAs motion seeking a declaration that to

prevail on its claim that Countrywide was required to repurchase certain allegedly defective loans in the securitizations, MBIA need only establish that a loan breached a representation or warranty in a way that materially and adversely affected MBIA by increasing the risk profile of the insurance at the time of making the allegedly inaccurate representation or warranty. The IAS Court concluded that summary judgment was not appropriate because, among other reasons, the relevant provisions of the governing agreements are subject to varying interpretations. The IAS Court found that MBIA failed to show that the language of the contract is unambiguous and reasonable minds could not differ as to its meaning. 11. The IAS Court erred in law and fact and in the exercise of its discretion in

granting MBIAs motion in part. Defendants-Appellants seek the reversal of the Order to the extent that it declares that: a. MBIA may seek rescissory damages upon proving all elements of its

claims for fraudulent inducement and breach of the Insurance and Indemnity Agreement;

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b. To be entitled to rescissory damages on its claims of fraudulent

inducement and breach of the Insurance and Indemnity Agreement, MBIA need not establish a direct causal link between Countrywides alleged misrepresentations and the claims payments made by MBIA pursuant to the insurance policies and, instead, need only establish (i) that it was induced to insure the securitizations on terms to which it otherwise would not have agreed, and/or (ii) that Countrywide made misrepresentations that increased the risk profile of the issued insurance policies; and c. appeal. 12. The following related actions are pending: a. Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., et al., Index Such other issues that may become apparent upon review of the papers on

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. On January 3, 2012, the Supreme Court of the State of New York, County of New York also granted in part and denied in part Syncoras substantially similar motion for partial summary judgment. Syncora has noticed an appeal and Defendants-Appellants have cross-noticed an appeal from the IAS Courts Order on Syncoras substantially similar motion. b. Financial Guaranty Insurance Company v. Countrywide Home Loans,

Inc., et al., Index No. 650736/09, is also pending before Hon. Eileen Bransten, J.S.C. in the Supreme Court of the State of New York, County of New York. The Financial Guaranty case has been designated as related to this action by the Court below.

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c. Ambac Assurance Corporation, et al. v. Countrywide Home Loans, Inc., et

al., Index No.: 651612/2010, is also pending before Hon. Eileen Bransten, J.S.C. in the Supreme Court of the State of New York. The Ambac case has been designated as related to this action by the Court below. 13. Two appeals currently are pending in this action. a. A consolidated appeal taken by Countrywide from the Decisions and

Orders of the IAS Court denying Countrywides Motion to Compel Disclosure Concerning Plaintiffs Remediation Efforts (Mot. Seq. No. 17), granting Plaintiff MBIAs Motion to Compel (Mot. Seq. No. 29) and denying Countrywides Cross-Motion for a Protective Order (Mot. Seq. No. 31) is pending in this Court. Exhibit B is a copy of the Notice of Appeal and Pre-Argument Statement for the appeal on Motion Sequence Number 17. Exhibit C is a copy of the Notice of Appeal and Pre-Argument Statement for the appeal on Motion Sequence Numbers 29 and 31. b. A notice of appeal, dated November 3, 2011 and attached hereto as

Exhibit D, was filed by BAC with this Court appealing the order of Justice Eileen Bransten, dated and entered on October 31, 2011, denying BACs motion to sever and consolidate successor liability claims. Dated: January 25, 2012 New York, New York

Respectfully submitted, By: /s/Mark Holland Mark Holland GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018 (212) 813-8800

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Paul F. Ware, Jr. Sarah Heaton Concannon Abigail K. Hemani GOODWIN PROCTER LLP Exchange Place 53 State Street Boston, MA 02109 (617) 570-1000 Of Counsel: 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 Attorneys for Defendants-Appellants Countrywide Home Loans, Inc., Countrywide Securities Corp.,and Countrywide Financial Corp., and Bank of America, N.A., solely in its capacity as successor by July 2, 2011 de jure merger to BAC Home Loans Servicing, L.P. (f/k/a Countrywide Home Loans Servicing, L.P.) To: Peter E. Calamari, Esq. Philippe Z. Selendy, Esq. Jonathan B. Oblak, Esq. Manisha M. Sheth, Esq. QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, NY 10010 Tel. (212) 849-7000 Attorneys for Plaintiff-Respondent MBIA Insurance Corporation

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Jonathan Rosenberg William J. Sushon Asher L. Rivner OMELVENY & MYERS LLP 7 Times Square New York, New York 10036 (212) 326-2000 Attorneys for Defendant-Appellant Bank of America Corporation