REDACTED - MBIA.com

					                                                                  REDACTED

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


MBIA INSURANCE CORPORATION,

                        Plaintiff,

                - against -
                                           Index No. 602825/08
                                           IAS Part: 3 (Bransten, J.)
COUNTRYWIDE HOME LOANS, INC.,
COUNTRYWIDE SECURITIES CORP.,
                                           Motion Sequence No. 37
COUNTRYWIDE FINANCIAL CORP.,
COUNTRYWIDE HOME LOANS SERVICING, L.P.,
and BANK OF AMERICA CORP.,

                        Defendants.


                 COUNTRYWIDE’S MEMORANDUM OF LAW
            IN OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL
          SUMMARY JUDGMENT AND MOTION TO STRIKE DEFENSES


GUNSTER YOAKLEY & STEWART, P.A.        GOODWIN PROCTER LLP
One Enterprise Center                  The New York Times Building
225 Water Street, Suite 1750           620 Eighth Avenue
Jacksonville, FL 32202                 New York, NY 10018
Telephone: (904) 354-1980              Telephone: (212) 813-8800

July 15, 2011                          Attorneys for Defendants
                                       Countrywide Home Loans, Inc.,
                                       Countrywide Securities Corp.,
                                       Countrywide Financial Corp., and
                                       Countrywide Home Loans Servicing, L.P.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                                                   Index No. 602825/08
                                                                                                                          Page i of 26

                                                   TABLE OF CONTENTS

FACTUAL BACKGROUND........................................................................................................2


ARGUMENT..................................................................................................................................6


I.        MBIA CANNOT EVADE ITS BURDEN OF PROVING CAUSATION.....................6


          A.         New York Law Requires MBIA To Prove Causation To Sustain Its Fraud
                     and Breach of Contract Claims for Damages..................................................... 6


          B.         Insurance Law Sections 3105 and 3106 Do Not Relieve MBIA of Its
                     Obligation To Prove Causation. .......................................................................... 9


                     1.         MBIA Does Not Seek the Remedy Provided by Sections 3105 and
                                3106............................................................................................................. 9


                     2.         Sections 3105 and 3106 Do Not Authorize an Insurer To Recover
                                Damages from a Third Party. ................................................................ 11


II.       MBIA MUST PROVE CAUSATION TO RECOVER FOR BREACH OF THE
          REPURCHASE PROVISIONS OF THE CONTRACTS. ...........................................16


CONCLUSION ............................................................................................................................25




                                                                       i
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                                                                                                                  Page ii of 26

                                              TABLE OF AUTHORITIES

                                                                                                                              Page(s)
CASES

ABN AMRO Bank, N.V. v. MBIA, Inc.,
  --- N.E.2d ----, 2011 N.Y. Slip Op. 05542 (June 28, 2011)...................................................4, 5

Albany Motor Inn & Restaurant, Inc. v. Watkins,
   85 A.D. 2d 797 (3rd Dep’t 1981).............................................................................................12

Anjay Corp. v. Those Certain Underwriters at Lloyd’s of London Subscribing to
   Certificate No. HN01AAF4393,
   33 A.D.3d 323 (1st Dep’t 2006) ..............................................................................................14

Awards.com, LLC v. Kinko’s Inc.,
  42 A.D.3d 178 (1st Dep’t 2007) ..............................................................................................11

Big Apple Car Co. v. City of New York,
   204 A.D. 2d 109 (1st Dep’t 1994) ...........................................................................................12

Christiania Gen. Ins. Corp. v. Great Am. Ins. Co.,
   979 F.2d 268 (2d Cir. 1992).....................................................................................................10

Cont’l Ins. Co. v. Helmsley Enterprises, Inc.,
   211 A.D. 2d 589 (1st Dep’t 1995) ...........................................................................................11

Credit Suisse Sec. (USA), LLC v. Ask Jeeves, Inc.,
   24 Misc.3d 1241(A) (Table; text at 2009 WL 2619396, at *5 (N.Y. Sup. Aug. 20,
   2009) (Bransten, J.)) ..........................................................................................................16, 24

Dress Shirt Sales, Inc. v. Hotel Martinique Associates,
   12 N.Y.2d 339 (1963) ..............................................................................................................12

E. 115th St. Realty Corp. v. Focus & Struga Bldg. Dev. LLC,
    27 Misc.3d 1206(A) (Table; text at 2010 WL 1407985 at *3, *6 (Sup. Ct. N.Y.
    County Mar. 9, 2010) (Bransten, J.)) .........................................................................................9

Equitable Life Assur. Soc’y v. Kushman,
   276 N.Y. 178 (1937) ..........................................................................................................13, 14

Equitable Life Assurance Soc’y v. Werner,
   286 A.D.2d 632 (1st Dep’t 2001) ......................................................................................12, 13

Ginsburg v. Pac. Mut. Life Ins. Co.,
   89 F.2d 158 (2d Cir. 1937).......................................................................................................10




                                                                   ii
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                                                                                                                   Page iii of 26

Glickman v. N.Y. Life Ins. Co.,
    291 N.Y. 45 (1943) ..................................................................................................................10

Grace v. Rosenstock,
   228 F.3d 40 (2d Cir. 2000).......................................................................................................11

Greenfield v. Philles Records, Inc.,
   98 N.Y.2d 562 (2002) ..............................................................................................................20

Helmsley-Spear, Inc. v. N.Y. Blood Center, Inc.,
   257 A.D.2d 64 (1st Dep’t 1999) ..............................................................................................21

In re MAXXAM, Inc.,
    659 A.2d 760 (Del. Ch. 1995)..................................................................................................11

Kenford Co. v. Erie,
   67 N.Y. 2d 257 (1986) .........................................................................................................7, 21

LaSalle Bank, N.A. v. Citicorp Real Estate, Inc.,
   No. 01 Civ. 4389, 2002 WL 181703 (S.D.N.Y. Feb. 5, 2002) ....................................22, 23, 24

LaSalle Bank, N.A. v. Nomura Asset Capital Corp.,
   2006 N.Y. Slip. Op. 33876U (Sup. Ct. N.Y. County Sept. 6, 2006) .......................................23

Lehman Bros. Holdings, Inc. v. Laureate Realty Serv., Inc.,
   No. 1:04-cv-1432, 2007 WL 2904591 (S.D. Ind. Sept. 28, 2007)...........................................23

Losei Realty Corp. v. City of N.Y.,
   254 N.Y. 41 (1930) ..............................................................................................................7, 21

MBIA Ins. Corp. v. Countrywide Home Loans, Inc.,
  2011 NY Slip Op. 05640 (1st Dep’t June 30, 2011)........................................................ passim

Merrill Lynch & Co. v. Allegheny Energy, Inc.,
   500 F.3d 171 (2d Cir. 2007).......................................................................................................8

Mooney v. Nationwide Mut. Ins. Co.,
  172 A.D.2d 144 (3d Dep’t 1991) .............................................................................................14

Morgan Guar. Trust Co. of N.Y. v. Bay View Franchise Mortg. Acceptance Co.,
  No. 00 CIV. 8613, 2002 WL 818082 (S.D.N.Y. Apr. 30, 2002).............................................24

Morgenthau v. Citisource, Inc.,
  68 N.Y.2d 211 (1986) ..............................................................................................................11

N.Y. Auto. Ins. Plan v. All Purpose Agency & Brokerage, Inc.,
   No. 97 Civ. 3164, 1998 WL 695869 (S.D.N.Y. Oct. 6, 1998) ................................................13



                                                                    iii
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                                                                                                                Page iv of 26

Nunez v. U.S. Underwriters Ins. Co.,
   31 Misc. 3d 418 (Sup. Ct. Queens County Feb. 10, 2011) ......................................................14

Olympia Mortg. Corp. v. Lloyd’s of London,
   2009 N.Y. Slip Op. 32623U (Sup. Ct. Kings County, Oct. 29, 2009).....................................15

Panepinto v. Allstate Ins. Co.,
   108 Misc. 2d 1079 (Sup. Ct. Monroe County 1981) ...............................................................13

Precision Auto Accessories, Inc. v. Utica First Ins. Co.,
   52 A.D.3d 1198 (4th Dep’t 2008)............................................................................................15

Prime Income Asset Mgmt., Inc. v. Am. Real Estate Holdings L.P.,
   82 A.D. 3d 550 (1st Dep’t 2011) ...............................................................................................7

Reliance Ins. Cos. v. Daly,
    38 A.D.2d 715 (2d Dep’t 1972) ...............................................................................................14

Resolution Trust Corp. v. Key Fin. Serv.,
   280 F.3d 12 (1st Cir. 2002)......................................................................................................24

Rodriguez v. Allstate Ins. Co.,
   No. CV-10673-05/QU, 30 Misc. 3d 1235(A) (Table; text at 2011 WL 873500 (Civ.
   Ct. Queens County Mar. 14, 2011)).........................................................................................10

Seneca Ins. Co. v. Wilcock,
   No. 01 Civ. 7620, 2002 WL 1067828 (S.D.N.Y. 2002) ....................................................12, 13

Steen v. Bump,
    233 A.D. 2d 583 (3d Dep’t 1996) ............................................................................................12

Stein v. Security Mut. Ins. Co.,
    38 A.D.3d 977 (3d Dep’t 2007) ...............................................................................................13

Sun Ins. Co. v. Hercules Sec. Unlimited,
   195 A.D.2d 24 (2d Dep’t 1993) ...............................................................................................10

Wells Fargo Bank, N.A. v. LaSalle Bank, N.A.,
   No. 2:08-cv-1448, 2011 WL 743929 (D. Nev. Feb. 23, 2011)................................................25

Wells Fargo Bank, N.A. v. LaSalle Bank, N.A.,
   No. 3:07-cv-449 (S.D. Ohio Nov. 24, 2009) ...........................................................................22

Wells Fargo Bank, N.A. v. LaSalle Bank, N.A.,
   No. 3:07-cv-449 (S.D. Ohio Oct. 27, 2009).............................................................................23

Wells Fargo Bank, N.A. v. LaSalle Bank Nat’l Ass’n,
   No. Civ-08-1125-C, 2011 WL 1303949 (W.D. Okla. Apr. 1, 2011).......................................24


                                                                 iv
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STATUTES

N.Y. Ins. Law § 3105............................................................................................................. passim

N.Y. Ins. Law § 3106.................................................................................................................9, 14

OTHER AUTHORITIES

AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE (4th ed. 2006)...........................20




                                                                    v
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                                                                                                Page 1 of 26

         Countrywide respectfully submits this memorandum of law and the accompanying Rule

19-a Counter-Statement of Facts (“CSOF”) in opposition to MBIA’s motion for partial summary

judgment and to strike Countrywide’s Fourteenth and Fifteenth affirmative defenses.1

                                   PRELIMINARY STATEMENT
         Following the mortgage market meltdown of 2007 and 2008, MBIA sued Countrywide

for damages for common law fraud and breach of contract. Both hornbook New York law and

the governing contracts require MBIA to prove causation to prevail on its claims. As the First

Department held just weeks ago in this case, MBIA must prove that its “losses were proximately

caused by [Countrywide’s] misrepresentations”—rather than by an “extrinsic force.” MBIA Ins.

Corp. v. Countrywide Home Loans, Inc., 2011 NY Slip Op. 05640, at 7 (1st Dep’t June 30,

2011).

         Nearly three years into this litigation, MBIA seeks to disregard the governing contracts,

common law, and the First Department. MBIA now argues that it should be allowed to recover

as damages every dollar that it has paid—or will pay—in claims on its financial guaranty

policies without first having to prove that the alleged breaches of representations and

warranties—and not the extrinsic forces of the mortgage market meltdown—proximately caused

the Mortgage Loans to default and, in turn, MBIA to pay claims. To support this argument,

MBIA cites two statutory provisions, New York Insurance Law Sections 3105 and 3106, that it

never before has mentioned in this case.

         MBIA’s new-found reliance on Sections 3105 and 3106 is misplaced. Those provisions

allow an insurer to rescind an insurance policy upon learning that the application for insurance

1
    Capitalized terms not otherwise defined have the definitions assigned to them in Plaintiff’s Memorandum of Law
in Support of Motion for Partial Summary Judgment and Motion to Strike Defenses (“Pl. Mem.”). Even though
MBIA’s motions for partial summary judgment and to strike defenses concern only issues of primary liability,
because MBIA seeks to strike BAC’s Fourteenth and Fifteenth Affirmative Defenses, BAC joins in this opposition.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                             Index No. 602825/08
                                                                                   Page 2 of 26
contained material misrepresentations. But MBIA does not seek rescission against its insureds.

Instead, MBIA has brought common law claims seeking monetary damages from Countrywide,

which is not an insured under the policies. Sections 3105 and 3106 do not provide for the

recovery of damages, and have no application to MBIA’s common law causes of action.

       MBIA’s second argument—that it need not prove causation to prevail on its claim that

Countrywide breached the contractual “repurchase remedy”—is equally meritless. The relevant

contracts require Countrywide to cure, substitute, or repurchase a mortgage loan that does not

comply with a representation or warranty if—but only if—the noncompliance “materially and

adversely affects” MBIA. MBIA asks this Court to erase the “materially and adversely affects”

language from the contracts, and to rule that Countrywide must repurchase any loan for which

there is the barest allegation of a breach—regardless of whether the breach has caused MBIA to

pay a claim, and even though that repurchase may harm the insured Trusts and their securities

holders. MBIA even demands that Countrywide repurchase paid-in-full loans (for which there

was no loss) and currently performing loans (which actually add value to the Trusts). That

position cannot be sustained: The contracts say “materially and adversely affects,” and that

language must be abided.

       Given the nationwide calamity that struck the housing market in 2007 and 2008, MBIA

understandably fears having to prove causation. But MBIA’s fear does not warrant disregarding

the First Department or rewriting controlling New York law and the governing agreements.

MBIA’s motion should be denied.

                                 FACTUAL BACKGROUND
       This action concerns 15 different residential mortgage-backed securitizations created

between 2004 and 2007. For each securitization, CHL sold to a Trust a pool of second-lien

residential mortgage loans (the “Mortgage Loans”), consisting of either closed-end second liens
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                          Index No. 602825/08
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(“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. The trustees use the payments that borrowers make on the

Mortgage Loans to pay the Securities investors. (CSOF ¶¶ 2-4.)

        MBIA insured that the payments due on the Securities would be made. In exchange for a

substantial premium, MBIA issued a Note or Certificate Guaranty Insurance Policy to the Trusts

(the “Insurance Policies”), which promised the Trusts that, to the extent that the payments

received from the Mortgage Loans were insufficient to cover the payments due under the

Securities, MBIA would cover the shortfall. (CSOF ¶¶ 5-6.)

        The rights and obligations of all of the parties to the Securitizations are set forth in

numerous contracts (the “Transaction Documents”).2 The Mortgage Loans were conveyed to the

Trusts through a Purchase Agreement (“Purchase Agmt.”) and a Sale and Servicing Agreement

(“SSA”) for HELOC transactions and a Pooling and Servicing Agreement (“PSA”) for CES

transactions. The Trusts issued the Securities through an Indenture and sold the Securities

pursuant to a Prospectus and Prospectus Supplement.3 (CSOF ¶¶ 7-9.)

        Separate and apart from the Insurance Policies, for each Securitization, MBIA and CHL

entered into a contract that governs their respective rights and obligations, called an Insurance

Agreement. Those Insurance Agreements incorporate many of the provisions contained in the

other Transaction Documents. Most notably, each Insurance Agreement incorporates numerous

representations and warranties about the individual Mortgage Loans that CHL sold to the Trust,


2
   Examples of these Transaction Documents are attached to the Affirmation of Mark Holland in Support of
Countrywide’s Opposition to Plaintiff’s Motion for Summary Judgment and Motion to Strike Defenses (“Holland
Aff.”), dated July 15 and filed here with as Exhibits 1 to 7, 9 and 10.
3
   The Securities are registered with the Securities and Exchange Commission under the Securities Act of 1933.
See, e.g., CWHEQ, Inc., Form S-3 (Registration Statement) (Mar. 12, 2006), Holland Aff., Ex. 33.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                        Index No. 602825/08
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including a representation that the Mortgage Loans complied with CHL’s underwriting

guidelines. If a Mortgage Loan fails to comply with such “loan-level” representations or

warranties, MBIA’s “sole remedy” is to ask CHL to cure the defect or substitute or repurchase

the noncompliant loan. (See e.g., 2006-S8 Purchase Agmt. § 3.02 (b), (c).) MBIA may only

make such a request, however, if it has been “materially and adversely affect[ed]” by the

Mortgage Loan’s failure to comply with the particular representation or warranty. (CSOF ¶¶ 10-

12; see also, e.g., 2006-S8 PSA § 2.03(f); 2006-E SSA § 2.04(b), (c).)

        Beginning in late 2007, the United States suffered an historic economic crisis, and an

unprecedented number of borrowers began to default on their mortgages (the “Mortgage Market

Meltdown”).4 As a result, the Trusts experienced a shortfall of cash necessary to make payments

to the Securities holders, and they called upon MBIA to make up the shortfall, as it was obligated

to do under the Insurance Policies. At the time it filed the Amended Complaint, MBIA had paid

approximately $1.4 billion in claims to the Trusts on the Insurance Policies.5 (CSOF ¶¶ 21-22.)

        The impact of the Mortgage Market Meltdown on MBIA is well-documented. As the

New York 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 Insurance’s exposure to liability with respect to its
                 structured-finance policy portfolio grew exponentially as the real
                 estate market crumbled during this period.




4
   See ABN AMRO Bank, N.V. v. MBIA, Inc., --- N.E.2d ----, 2011 N.Y. Slip Op. 05542 (June 28, 2011), Holland
Aff., Ex. 37.
5
    Am. Compl. ¶ 3. The total unpaid principal balance of the Mortgage Loans at the time each Securitization
closed was approximately $21 billion. See Abdou Aff. ¶ 7. More than $12.8 billion worth of these Mortgage Loans
already have been paid-in-full. Id. At ¶ 8.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                            Index No. 602825/08
                                                                                  Page 5 of 26
ABN AMRO Bank, 2011 N.Y. Slip Op. 05542, at *3-4, Holland Aff., Ex. 37. MBIA has admitted

in discovery in this case that the 2007-08 Mortgage Market Meltdown caused a significant

portion of its losses.




                                            (CSOF ¶ 28). Other MBIA witnesses agree that

MBIA’s losses were caused, at least in part, by the Mortgage Market Meltdown and not

Countrywide.6




See id. Ex. 40 (MBIA00760421 (                                                                     )

(emphasis added)).7

         Following the Mortgage Market Meltdown, in an attempt to recover its contractually-

6
    See, e.g., Holland Aff. Ex. 42 (

                                                                                  )); id. Ex. 43
(
                                   )).
7




                                                                              See Holland Aff.
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required insurance payments, MBIA began to demand that Countrywide repurchase Mortgage

Loans from the Trusts. See Am. Compl. ¶ ¶ 77, 81. In its most recent repurchase demands alone

MBIA has asked Countrywide to repurchase nearly 9,000 Mortgage Loans. These nearly 9,000

Mortgage Loans include almost 800 loans (8.8 percent) that have been paid-in-full and over 500

loans to borrowers who, at the time of MBIA’s repurchase demand, were continuing to make

timely payments of principal and interest. These loans financially benefit the Trusts and MBIA

by injecting additional cash in the Trusts to pay the Securities holders. See Abdou Aff. ¶ 5.

Countrywide agreed to repurchase some loans, but refused to repurchase (1) loans that comply

with the Transaction Documents in all material respects, or (2) loans where MBIA has not

demonstrated that the alleged breach of a representation or warranty in the Transaction

Documents has harmed MBIA. Id. ¶ 6; CSOF ¶¶ 24-26.

         In light of the evidence being uncovered during fact discovery, it is becoming

increasingly clear that MBIA will find it difficult, if not impossible, to prove that its losses were

caused by Countrywide’s alleged misconduct. MBIA’s last-ditch argument that it should not

have to prove proximate causation therefore comes as no surprise.

                                           ARGUMENT
I.       MBIA CANNOT EVADE ITS BURDEN OF PROVING CAUSATION.

         A.     New York Law Requires MBIA To Prove Causation To Sustain Its Fraud
                and Breach of Contract Claims for Damages.

         MBIA has sued Countrywide for common law fraud and breach of contract. Causation is

an essential element of MBIA’s claims. As the First Department stated in its recent decision in

this case: “To demonstrate fraud, a plaintiff must show, inter alia, that a defendant’s




Exs. 45, 46.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                            Index No. 602825/08
                                                                                                  Page 7 of 26
misrepresentations were the direct and proximate cause of the claimed losses.”8 Likewise, 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); see

Kenford Co. v. Erie, 67 N.Y. 2d 257, 261 (1986).9

         Here, the damages MBIA seeks to recover—claim payments that MBIA has made (and

has yet to make) to the Trusts—occurred years after the alleged misstatements by Countrywide

and directly following a nationwide real estate market collapse. Accordingly, both this Court

and the First Department have made clear that MBIA must establish that its losses were caused

by Countrywide’s alleged wrongdoing, and not by “extrinsic factors,” such as the Mortgage

Market Meltdown. As the First Department explained, the fact-finder in this action will be

required to “determine which losses were proximately caused by misrepresentations and which

are due to [the] extrinsic force” of the Mortgage Market Meltdown. MBIA, 2011 NY Slip Op

05640 at *7 (citing Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 87 (1928) (“[T]he defendants

should not be held liable for any part of plaintiff’s loss caused by subsequent events not

connected with such fraud.”)). Similarly, this Court has recognized that the fact-finder

ultimately will be required to decide “whether an economic downturn constituted an intervening

cause in the link between Countrywide’s alleged conduct and MBIA’s alleged injury.” Decision

and Order at 16, entered Apr. 27, 2010. These decisions are now the law of this case and cannot


8
    MBIA, 2011 NY Slip Op. 05640 at *6, Holland Aff., Ex. 50.
9
   Causation is so fundamental that, for several years, MBIA never questioned it. For example, both MBIA’s initial
and amended complaints expressly allege that “Countrywide’s misconduct is both a substantial and direct cause of
the non-performance of Mortgage Loans in the Securitizations, and … a proximate cause of MBIA’s harm.”
Compl. ¶ 60 (emphasis added); Am. Compl. ¶ 80 (emphasis added). In response to Countrywide’s argument on its
motion to dismiss that MBIA failed adequately to allege its losses were caused by Countrywide’s conduct—rather
than the intervening global credit crisis and housing market downturn—MBIA never once claimed that it need not
make such a showing. MBIA instead conceded that its fraud claim requires proof that “the misrepresentations
directly caused the loss about which plaintiff complains” and argued that it had adequately pleaded facts to satisfy
that requirement. MBIA Opp. to Motion to Dismiss Am. Compl. at 36-41 (emphasis added).
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                                                                                              Page 8 of 26
be revisited. See Prime Income Asset Mgmt., Inc. v. Am. Real Estate Holdings L.P., 82 A.D. 3d

550, 551 (1st Dep’t 2011).

        Despite this wealth of precedent, in its motion for partial summary judgment, MBIA

repeats the argument that it unsuccessfully raised before the First Department—that “New

York’s general common law … does not require that MBIA make any showing of a causal link

between Countrywide’s misrepresentations and warranty breaches, on the one hand, and MBIA’s

claims payments under the policies, on the other.” Pl. Mem. at 18.10 To support this proposition,

MBIA cites a single federal case: Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171

(2d Cir. 2007)—the same case on which MBIA unsuccessfully relied before the First

Department. As the First Department implicitly recognized, Merrill Lynch does not stand for the

proposition MBIA advances. In Merrill Lynch, the plaintiff sought damages reflecting “the

extent that the purchase price [for a business unit] overstated [the unit’s] value on the date of sale

as a result of Merrill Lynch’s misrepresentations and omissions.” Id. at 183 (emphasis added).

The plaintiff did not seek damages for losses that it suffered after that date. The court held that,

in such circumstances, the plaintiff could prove proximate causation by demonstrating

“overpayment alone,” without regard to events transpiring after the date of sale. Id. at 183

(emphasis added). In other words, because the plaintiff’s claimed damages were complete once

it had paid for the business unit, evidence of what happened after the sale was not relevant.

        But MBIA’s damages claim is quite different. MBIA seeks to recover all payments it has

ever made—and ever will make—under the financial guaranties at issue. MBIA’s alleged

damages did not arise on the date MBIA issued the insurance, but rather occurred years later and

following a catastrophic market decline. Having chosen to seek these damages, MBIA must

10
   Compare Pl. Mem. at 18, with Brief for Plaintiff-Respondent-Appellant MBIA at 24-27, dated October 6, 2010,
Holland Aff., Ex. 49.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                 Index No. 602825/08
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establish that its claims payments were caused by Countrywide’s alleged misrepresentations and

not the intervening market collapse.

       B.      Insurance Law Sections 3105 and 3106 Do Not Relieve MBIA of Its
               Obligation To Prove Causation.

       Faced with the unequivocal body of New York common law requiring proof of causation,

MBIA, in its motion, adopts an entirely new theory for its case. MBIA now argues that its

causes of action are governed not by common law, but by two statutory provisions—New York

Insurance Law Sections 3105 and 3106—that appear nowhere in MBIA’s complaints, discovery

responses, or the numerous briefs previously filed in this action. According to MBIA, Sections

3105 and 3106 enable it to recover from Countrywide the full amount of the claims paid on the

financial guaranties, merely by “showing that a misrepresentation or warranty breach was

‘material’ to the insurer’s decision or the risk profile of the insurance as of the time the insurer

issued the policies.” Pl. Mem. at 2 (emphasis in original). Because Sections 3105 and 3106

have no bearing on MBIA’s common law claims, MBIA cannot rely on these sections to

circumvent its burden to prove causation.

               1.      MBIA Does Not Seek the Remedy Provided by Sections 3105 and
                       3106.

       Section 3105 defines when an insured’s “misrepresentation shall avoid any contract of

insurance or defeat recovery thereunder.” N.Y. Ins. Law § 3105; see also E. 115th St. Realty

Corp. v. Focus & Struga Bldg. Dev. LLC, 27 Misc.3d 1206(A) (Table; text at 2010 WL 1407985

at *3, *6 (Sup. Ct. N.Y. County Mar. 9, 2010) (Bransten, J.)) (upholding affirmative defense by

an insurer that “the Policy is void ab initio due to Plaintiff's material misrepresentation on its

application”), aff’d, --- N.Y.S.2d ---, 2011 WL 2314729 (1st Dep’t June 14, 2011). Likewise,

Section 3106 defines when a “breach of warranty shall [] avoid an insurance contract or defeat

recovery thereunder.” N.Y. Ins. Law § 3106 (emphasis added). By their terms, Sections 3105
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                             Index No. 602825/08
                                                                                                   Page 10 of 26
and 3106 govern the circumstances in which an insurance contract can be declared void ab initio,

or rescinded, and, as a result, the insurer may avoid paying claims on the policy.

         An insurance company may invoke Sections 3105 and 3106 in one of two ways: It may

file a declaratory judgment action against its insured seeking to void the insurance policy;11 or,

alternatively, it may rely on Section 3105 or 3106 as an affirmative defense or counterclaim to an

action by its insured to obtain payment.12 In either case, Sections 3105 and 3106 are invoked for

the purpose of having the insurance policy declared void ab initio—allowing the insurer to

rescind the policy and putting the insurer and its insured back in the positions they would have

been in if the policy had never been issued in the first place.

         In contrast, MBIA does not seek to have the insurance policies in this case declared void.

MBIA’s initial complaint in this action did seek rescission, but MBIA dropped that requested

remedy when it filed its amended complaint.13 MBIA stands by that choice in the instant motion,

and expressly disavows any interest in rescinding its financial guarantees. See Pl. Mem. at 14

(“MBIA is seeking damages, rather than to void the policies.”). Notably, MBIA has not named

the actual insureds—the Trusts—as parties to this case, as required to obtain a declaration under

Section 3105 or 3106 that the policies are void. See, e.g., Rodriguez v. Allstate Ins. Co., No. CV-

10673-05/QU, 30 Misc. 3d 1235(A) (Table; text at 2011 WL 873500, at *2 (Civ. Ct. Queens

County Mar. 14, 2011) (“[T]he question of whether an insurance company can issue an ab initio


11
   See, e.g., Sun Ins. Co. v. Hercules Sec. Unlimited, 195 A.D.2d 24, 27 (2d Dep’t 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) (filing declaratory judgment action seeking “to rescind the agreements”).
12
    See, e.g., Glickman v. N.Y. Life Ins. Co., 291 N.Y. 45, 49 (1943) (invoking “insurer’s defense” that “although a
policy was issued, no insurance thereunder ever took effect”); Ginsburg v. Pac. Mut. Life Ins. Co., 89 F.2d 158, 158
(2d Cir. 1937) (insurance company sought “rescission” in counterclaim).
13
    Compare Compl. ¶ 110 (“MBIA is further entitled to rescission of the Insurance Agreements because of
Countrywide’s fraudulent inducement.”), with Am. Compl. ¶ 152 (“MBIA is further entitled to rescissory damages
in connection with the Insurance Agreements because of Countrywide’s fraudulent inducement.”) (emphasis added).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                                Index No. 602825/08
                                                                                                      Page 11 of 26
cancellation of a policy can only arise between the insurance company and the policyholder.”).

And, by electing to continue to collect premiums after learning of Countrywide’s alleged

misrepresentations, MBIA has affirmatively waived its right to seek rescission under Sections

3105 and 3106.14 MBIA therefore is not entitled to relief under these provisions.

                  2.       Sections 3105 and 3106 Do Not Authorize an Insurer To Recover
                           Damages from a Third Party.

         Having elected not to sue under Section 3105 or 3106 or to avail itself of the remedy

those provisions impart, MBIA argues that this Court should assume the role of the legislature

and graft onto these statutes a remedy that neither provision remotely contemplates. MBIA

invites this Court to be the first to rule that Sections 3105 and 3106 authorize an insurer to sue an

entity other than its insured to recover damages sufficient to put MBIA “back into the position it

would have occupied had it not issued the insurance policy.” Pl. Mem. at 14-15. And MBIA

wants to obtain such “rescissory damages” without having to prove, as required under its

common law causes of action, that its losses were caused by Countrywide’s alleged

misconduct.15

         MBIA’s argument improperly asks this Court to rewrite Sections 3105 and 3106. See,

e.g., Morgenthau v. Citisource, Inc., 68 N.Y.2d 211, 223 (1986) (“It is not the role of the courts

14
    See, e.g., Cont’l Ins. Co. v. Helmsley Enterprises, Inc., 211 A.D. 2d 589, 589 (1st Dep’t 1995) (“Where an
insurer accepts premiums after learning of an event allowing for cancellation of the policy”—such as “discovery of
the alleged misrepresentations upon which it claimed to have relied when it issued the policies”—“the insurer has
waived the right to rescind or cancel”); Awards.com, LLC v. Kinko’s Inc., 42 A.D.3d 178, 188-89 (1st Dep’t
2007).
15
    To support its contention that Sections 3105 and 3106 create a right to recover “rescissory damages,” MBIA first
relies on a footnote in a Delaware Chancery Court case that simply defines “rescissory damages” as “a money award
designed to be as nearly as possible the financial equivalent of rescission.” Pl. Mem. at 14-15 (citing In re
MAXXAM, Inc., 659 A.2d 760, 775 n.15 (Del. Ch. 1995)). That case does not, however, award rescissory damages
and instead holds that such damages are recoverable for breach of fiduciary duty—not contract. MAXXAM further
explains that, in Delaware, rescissory damages “may be an appropriate substitutionary form of equitable relief”
where “rescission is found to be impractical,” but not where, as here, the plaintiff does not seek rescission at all. Id.
at 775. In any event, New York courts—unlike Delaware—do not recognize an equitable right to rescissory
damages in lieu of rescission. See, e.g., Grace v. Rosenstock, 228 F.3d 40, 50 (2d Cir. 2000) (New York does not
recognize a claim for “rescissory damages” in an action arising out of a freeze-out merger).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                              Index No. 602825/08
                                                                                                    Page 12 of 26
to rewrite statutes that have been promulgated by the legislative branch of government . . . .”). In

promulgating these provisions, the legislature mirrored the common law rule that allows a party

to rescind a contract without requiring proof of either scienter or damages. The legislature did

not, however, make any exception to the well-established rule that, where a party elects to seek

monetary damages rather than rescission, it has a greater burden, including the requirement that

it must prove that its damages were proximately caused by the alleged wrongdoing.16

         No New York court has construed Section 3105 or 3106 to grant the relief MBIA now

seeks. To the contrary, the principal decision on which MBIA relies, Seneca Ins. Co. v. Wilcock,

No. 01 Civ. 7620, 2002 WL 1067828 (S.D.N.Y. 2002) (Pl. Mem. at 15), suggests that, to recover

damages for fraudulent inducement committed by a party who is not the insured (as MBIA seeks

here), an insurer must bring common law claims against that party, and it must prove all of the

elements of those common law causes of action. See id. at 5. In Seneca, an insurance company

sought indemnification from its brokers for payments made on behalf of an insured because of

misrepresentations the brokers made in an insurance application. Id. The insurance company

purported to bring those claims under Section 3105. Id. Judge Pauley recognized that Seneca

was not seeking to avoid or rescind the policy under Section 3105, but allowed the insurer to

pursue a common law claim for indemnification against the brokers to recover the payments

made under the policy, apparently on the theory that the brokers had breached their common law

16
    “[I]t is well settled that a defrauded party to a contract may elect to either disaffirm the contract by a prompt
rescission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud.”
Big Apple Car Co. v. City of New York, 204 A.D. 2d 109, 110-11 (1st Dep’t 1994). Parties electing rescission are
held to a lesser burden than parties seeking damages because they are not required to prove either scienter or that the
alleged wrongdoing caused them to suffer any harm. See, e.g., Dress Shirt Sales, Inc. v. Hotel Martinique
Associates, 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.”); Steen v. Bump, 233 A.D. 2d 583, 584 (3d Dep’t 1996) (“When a party seeks
rescission and not damages on the basis of fraud, proof of scienter is not necessary; even an innocent
misrepresentation is sufficient for rescission.”); Albany Motor Inn & Restaurant, Inc. v. Watkins, 85 A.D. 2d 797,
797 (3rd Dep’t 1981) (“An action for rescission of a contract based on fraud, unlike a cause of action for damages
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                             Index No. 602825/08
                                                                                                   Page 13 of 26
duties to their principal, the insurer. Id. In so doing, he relied on Equitable Life Assurance Soc’y

v. Werner, 286 A.D.2d 632, 632-33 (1st Dep’t 2001), a case that did not involve Section 3105 or

3106, but only a “common-law cause of action for indemnification.” Id. at 632-33. Judge

Pauley did not hold that Seneca did not have to prove lost causation.

         Seneca is consistent with New York law. In other cases where an insurer has sought

damages from someone other than the insured stemming from that third party’s

misrepresentations, New York courts have invoked ordinary common law principles, including a

requirement that the insurance company prove causation. For example, in Stein v. Security Mut.

Ins. Co., 38 A.D.3d 977 (3d Dep’t 2007), the insurance company sought to rescind an insurance

policy under Section 3105 and also pursued negligence and breach of contract claims against the

insurance broker who submitted the inaccurate insurance application. The Appellate Division

held that the insurance company could prevail on its common law claims against the broker only

if the broker’s conduct was “the proximate cause of [the insurance company’s] damage.” Id. at

979. Indeed, the Stein court ultimately 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 company’s losses. See id. (holding that the insurance

company’s decision to cancel the policy as of a later date, rather than seek to rescind it ab initio,

“proximately caused the damages alleged”).17

         MBIA’s other cases are not to the contrary. See Pl. Mem. at 14-15. None of the cases


on the same ground, does not require that scienter either be pleaded or proved. Even an innocent misrepresentation
is a sufficient ground for rescission.”).
17
    Accord Panepinto v. Allstate Ins. Co., 108 Misc. 2d 1079, 1082-83 (Sup. Ct. Monroe County 1981) (rejecting
attempt by insurance company to obtain indemnification from insurance broker that submitted erroneous insurance
application, reasoning that insurer’s own “intervening acts of negligence were the proximate cause of its loss”); N.Y.
Auto. Ins. Plan v. All Purpose Agency & Brokerage, Inc., No. 97 Civ. 3164, 1998 WL 695869, at *7 (S.D.N.Y. Oct.
6, 1998) (finding insurance companies’ claims for fraud against insurance broker were “well founded,” where
“record contain[ed] uncontroverted evidence satisfying each of [the common law] elements” for fraud, including
that the “misrepresentations resulted in damage ….”).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                         Index No. 602825/08
                                                                                               Page 14 of 26
MBIA cites involves an insurer’s attempt to recover damages from a third party. In Equitable

Life Assur. Soc’y v. Kushman, 276 N.Y. 178, 184 (1937), for example, the court merely stated

that “[d]amages may be recovered as incident to an action in equity for a rescission”—it said

nothing about the requirements for obtaining damages. Id. at 184. Reliance Ins. Cos. v. Daly, 38

A.D.2d 715, 716 (2d Dep’t 1972), says only that New York law, which precludes rescission of

auto insurance policies under Section 3105, does not preclude an insurer from bringing claims

for damages against the insured. Id. at 716. Indeed, the court suggested that causation would be

a required element, holding that the insurance company would be entitled only to “damages

arising from the insured’s fraud.” Id. Similarly, Mooney v. Nationwide Mut. Ins. Co., 172

A.D.2d 144, 149 (3d Dep’t 1991), simply holds that an auto insurer can obtain damages from its

insured that it incurred “as a result of” the insured’s fraud; it does not say the damages could be

recovered without proof of causation. Id. at 149.

        Moreover, the cases MBIA cites to suggest that Section 3106 eliminates any causation

requirement are contradicted by a more recent decision of the First Department. In Anjay Corp.

v. Those Certain Underwriters at Lloyd’s of London Subscribing to Certificate No.

HN01AAF4393, 33 A.D.3d 323 (1st Dep’t 2006), the First Department held that, under Section

3106, a breach of warranty that increases “the risk of loss generally … is irrelevant when the

[actual] loss is caused by an event” other than the breach. Id. at 324.18

        Absent any precedent in its favor—and in the face of this wealth of unfavorable

precedent—MBIA argues that Sections 3105 and 3106 should be judicially amended to allow it

to recover “rescissory damages” from Countrywide, because MBIA’s decision not to seek to


18
   See also Nunez v. U.S. Underwriters Ins. Co., 31 Misc. 3d 418, 422 (Sup. Ct. Queens County Feb. 10, 2011)
(holding that an insurance company “cannot deny coverage [under Section 3106] based on … lack of a smoke
detector” when the actual damage was caused by water, not smoke or fire, and therefore “the lack of a smoke
detector was not material”).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                              Index No. 602825/08
                                                                                                    Page 15 of 26
void the policies—as it could have done under Sections 3105 and 3106—was intended “to

protect the interests of the Noteholders (the beneficiaries of the policies …).” Pl. Mem. at 16.19

Such policy arguments are appropriately addressed to the legislature, and not to this Court.

Moreover, both the evidence and common sense suggest that, in fact, MBIA’s decision was not

intended to protect the Noteholders but rather to protect its own reputation and prospects for

future business. If MBIA sought to avoid its obligations under the financial guaranties, then no

reasonable investor would be willing to rely on MBIA’s guaranties going forward, and future

business prospects would be lost. Additionally, public documents suggest that any attempt by

MBIA to back out of its insurance obligations would place its own credit rating—and, thus, its

ability to do future business—in jeopardy. See Holland Aff. ¶ 47. And, had MBIA pursued a

claim for rescission,

            . See Holland Aff. ¶ 48. In short, MBIA’s decision to sue Countrywide for damages

under the common law instead of suing the insureds—the Trusts—to obtain a declaration of

rescission under Sections 3105 and 3106 was a decision MBIA made in its own self-interest, and

cannot “as a matter of New York law or fairness,” (Pl. Mem. at 16), excuse MBIA’s obligation

to prove that Countrywide’s wrongful conduct caused its claimed losses.

                                                       * * *
         Courts interpret statutes, they do not rewrite them. Nothing in the plain language of

19
    MBIA tries to analogize to cases in which courts permitted an insurer to pursue monetary damages against an
insured because the insurer was precluded by statute from seeking to rescind the policy under Sections 3105 or
3106. See Pl. Mem at 16 (citing Mooney, 172 A.D.2d at149). But unlike the cases involving car insurance policies
that MBIA cites, no statute precludes rescission under Sections 3105 or 3106 of the insurance policies in this case.
MBIA suggests that it could not have sought to rescind the policies under Sections 3105 or 3106, because the
policies contain provisions stating that they are “irrevocable” and “unconditional.” E.g., Pl. Mem. at 5. Under New
York law, however, a waiver of revocability contained in the policies “would be ineffective if the [policies] were
void under Insurance Law § 3105 from the very beginning.” Olympia Mortg. Corp. v. Lloyd’s of London, 2009
N.Y. Slip Op. 32623U (Sup. Ct. Kings County, Oct. 29, 2009); see also Precision Auto Accessories, Inc. v. Utica
First Ins. Co., 52 A.D.3d 1198, 1201 (4th Dep’t 2008) (“[W]hen an insurance policy is void ab initio based on
material misrepresentations in the application, it is as if the policy never came into existence, and an insured cannot
create coverage by relying on the terms of a policy that never existed.”).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                           Index No. 602825/08
                                                                                                 Page 16 of 26
Sections 3105 or 3106 allows MBIA to escape the well-established common law requirement

that, to recover damages for fraud or breach of contract, a plaintiff must first prove that the

damages it seeks were caused by the wrongdoing alleged. MBIA’s motion should be denied.

II.       MBIA MUST PROVE CAUSATION TO RECOVER FOR BREACH OF THE
          REPURCHASE PROVISIONS OF THE CONTRACTS.

          MBIA alleges in its Amended Complaint that Countrywide has breached its obligation

under the Transaction Documents to repurchase any Mortgage Loan that fails to comply with a

representation or warranty.20 MBIA now argues that, with respect to this claim, Countrywide

must repurchase loans even if their failure to comply with the relevant representations and

warranties has not caused MBIA to suffer any actual harm. See Pl. Mem. at 21-24. The plain

language of the Transaction Documents belies MBIA’s position. Moreover, unless the

Transaction Documents unambiguously support MBIA’s position, summary judgment is not

appropriate. See, e.g., Credit Suisse Sec. (USA), LLC v. Ask Jeeves, Inc., 24 Misc.3d 1241(A)

(Table; text at 2009 WL 2619396, at *5 (N.Y. Sup. Aug. 20, 2009) (Bransten, J.)) (“[A] party

seeking summary judgment has the burden of establishing that the construction it favors is the

only construction which can fairly be placed thereon.”) (internal citations omitted).

          MBIA contends that the repurchase provisions require nothing more than a showing that

“the characteristics of a loan was [sic] not as represented by Countrywide” before a repurchase is

required. Pl. Mem. at 22. That is not what the contracts say. The contracts state, over and over

again, that there is no remediable breach, and no obligation to repurchase, unless an untrue

representation or warranty “materially and adversely affects” the interests of Certificateholders

or MBIA. 2006-S8 PSA § 2.03(f); see also 2006-E SSA § 2.04(b)-(d); (CSOF ¶ 12).21

20
      See Am. Compl. ¶¶ 169, 172-74.
21
    Even MBIA’s own Chief Executive Officer, Jay Brown, has acknowledged that MBIA may seek repurchase
only if the “breach materially and adversely affects [MBIA’s] rights in [the] loan.” Written Testimony for Hearing
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                              Index No. 602825/08
                                                                                                    Page 17 of 26
          Section 2.03(f) of the PSA, the repurchase provision for the CES Trusts, provides that

notice of a breach of a representation or warranty is only required for breaches “that materially

and adversely affect[]” Certificateholders or MBIA; that Countrywide only has the obligation to

cure breaches that “materially and adversely affect[]” them; that Countrywide need only cure

breaches in “all material respects”; and that, only if a material breach is not cured, does a

repurchase obligation arise:

                   Upon discovery by any of the parties hereto of a breach of a
                   representation or warranty … that materially and adversely affects
                   the interests of the Certificateholders or the Certificate Insurer
                   [MBIA] in any Mortgage Loan, the party discovering such breach
                   shall give prompt notice thereof to the other parties … and the
                   Certificate Insurer. [Countrywide] hereby covenants … that within
                   90 days of [discovery of or notice] from any party of a breach of
                   any representation or warranty set forth herein made that
                   materially and adversely affects the interests of the
                   Certificateholders in any Mortgage Loan or the Certificate Insurer,
                   [Countrywide] shall cure such breach in all material respects and,
                   if such breach is not so cured, shall [substitute or repurchase the
                   affected loan] ….

2006-S8 PSA § 2.03(f) (emphasis added). (CSOF ¶¶ 12-13.)

          The words “materially and adversely affects” are likewise essential to the breach and

remedy provisions of the controlling contracts for the HELOC Trusts. Under the HELOC SSA,

a party is required to provide notice only if it “discovers a breach of any of the foregoing

representations and warranties, without regard to any limitation concerning the knowledge of the

Sponsor, that materially and adversely affects the interests of the Trust, the Indenture Trustee

under the Indenture, the Noteholders, or the Credit Enhancer in the Mortgage Loan.” 2006-E

SSA § 2.04(c) (emphasis added).22 The SSA then provides that Countrywide must “use all


before New York State Assembly Standing Committee on Insurance, at 5, Feb. 16, 2011,
http://investor.mbia.com/events.cfm (last visited Jul. 15, 2011). See Holland Aff. Ex. 34.

22
     The SSA also explains that an inaccurate representation made to the best of the Sponsor’s knowledge or as to
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                               Index No. 602825/08
                                                                                                     Page 18 of 26
reasonable efforts to cure [a breach of a representation or warranty regarding a mortgage loan] in

all material respects,” or else “retransfer[],” i.e., repurchase, the loan. 2006-E SSA § 2.04(d). It

is perfectly obvious from the neighboring notice provision that the repurchase provision is

intended to apply to breaches with material and adverse effects on the trusts, noteholders, or

insurer. (CSOF ¶¶ 12-14.)

         The Prospectus Supplement (“Pro. Supp.”) for the HELOC Trusts confirms this reading.

In very plain terms, this disclosure explains that the repurchase obligation is triggered only by

breaches of representations and warranties that “materially and adversely affect[] the interests”

of the trust, noteholders, or MBIA:

                  Upon discovery of a breach of any representation and warranty that
                  materially and adversely affects the interests of the issuing entity,
                  the indenture trustee, the holders of the Notes, or the Note Insurer
                  in the related mortgage loan and Related Documents, the sponsor
                  will have a period of 90 days after discovery or notice of the
                  breach to effect a cure. If the breach cannot be cured within the
                  90-day period, the sponsor must accept a transfer of the Defective
                  Mortgage Loan from the issuing entity. The same procedure and
                  limitations as in the second preceding paragraph for the transfer of
                  Defective Mortgage Loans will apply to the transfer of mortgage
                  loan that must be transferred because of a breach of a
                  representation or warranty in the sale and servicing agreement that
                  materially and adversely affects the interests of the holders of the
                  Notes or the Note Insurer.

2006-E, Pro. Supp., S-76 (emphasis added). (CSOF ¶ 15.)23

         This pervasive “materially and adversely affects” language requires that, before MBIA

can require Countrywide to repurchase a loan, MBIA must show that the Mortgage Loan’s


which the Sponsor has no knowledge constitutes a breach only if “the inaccuracy materially and adversely affects
the interest of the Trust, the Noteholders or the Credit Enhancer in the related Mortgage Loan.” 2006-E SSA
§ 2.04(b).
23
   See also 2006-E, Pro. Supp., S-14 (disclosing that Countrywide may be required to repurchase a loan “as to
which there has been an uncured breach of any representation or warranty relating to the characteristics of the
mortgage loans that materially and adversely affects the interests of the noteholders or the note insurer in those
mortgage loans”) (emphasis added). (CSOF ¶ 15.)
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                           Index No. 602825/08
                                                                                                 Page 19 of 26
failure to comply with a representation or warranty caused it material harm.

        MBIA grasps for the opposite conclusion by selectively quoting from an inapposite

provision contained only in the HELOC contracts. MBIA asserts that Section 2.04(d) of the SSA

provides that “[t]he cure for any breach of a representation and warranty relating to the

characteristics of the Mortgage Loans … shall be a repurchase of or a substitution for … the

Mortgage Loans.” Pl. Mem. at 22 (alterations in original). Based on this incomplete quotation,

MBIA argues that any breach, material or not, for any loan, whether the breach has a material

effect on the loan or not, requires repurchase. Id. That is not what the contract says. The

complete sentence reads: “The cure for any breach of a representation and warranty relating to

the characteristics of the Mortgage Loans in the related Loan Group in the aggregate shall be a

repurchase of or a substitution for only the Mortgage Loans necessary to cause the

characteristics to comply with the related representation or warranty.” 2006-E SSA § 2.04(d)

(emphasis added). This provision does nothing more than define the cure for breaches of a

particular category of representations—those made about the loans in a loan group in the

aggregate, not individually—as the repurchase or substitution of loans as necessary.24 Thus, this

provision creates an exception to the general “materially and adversely affects” requirement for

repurchase—but only for breaches of “Loan Group”-type representations. But MBIA has not

asserted breaches of these “Loan Group” representations and warranties as the basis for any of its

repurchase requests. See Abdou Aff. ¶ 6. And, beyond this limited category of “Loan Group”

representations, the rest of the contractual provisions in Sections 2.04(b)-(d) make clear that the

breach of a representation or warranty must be incurable in “all material respects” and must


24
   Hypothetically, for example, if Countrywide breached the representation that no more than 3% of the loans in a
“Loan Group” were secured by properties in a single zip code, see 2006-E, Purchase Agmt., Adoption Annex (18), it
could cure that breach by repurchasing or substituting only the number of loans necessary to return to the 3% mark.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                              Index No. 602825/08
                                                                                                    Page 20 of 26
“materially and adversely affect[]” MBIA’s interests to trigger a repurchase. (CSOF ¶¶ 12,14.)

         MBIA also argues that Section 2.10 of the HELOC contracts contemplates the repurchase

of performing loans. See Pl. Mem. at 23. But nothing in that provision undermines or conflicts

with the “materially and adversely affects” requirement. Section 2.10 expressly refers to

substitutions or repurchases made “pursuant to” Sections 2.02, 2.03, and 2.06 of the SSA, which

are unrelated to breaches of the representations and warranties regarding the Mortgage Loans

that are at issue in this case.25 And while Section 2.10 also refers to substitutions or repurchases

made “pursuant to” Section 2.04, as discussed above, Section 2.04 only authorizes the

repurchase or substitution of a Mortgage Loan that is not in default or imminent risk of default in

very limited circumstances— breaches of “Loan-Group”-type representations— which are not at

issue here. (CSOF ¶¶ 14, 16.)

         As an alternative argument, MBIA suggests that, even if the “materially and adversely

affects” requirement applies, it is satisfied if the breach of the representation or warranty causes a

“material increase in the risk profile” of the loan, even if the loan never defaults or defaults for

reasons having nothing to do with the allegedly breached representation and warranty. Pl. Mem.

at 22. That argument side-steps the contractual causation requirement and ignores New York

law of contract construction. A contract that is “complete, clear and unambiguous on its face”—



25
     Section 2.10 provides:

         Notwithstanding any contrary provision of this Agreement, with respect to any Mortgage
         Loan that is not in default or as to which default is not imminent, no repurchase or
         substitution pursuant to Sections 2.02, 2.03, 2.04, or 2.06 shall be made unless the party
         repurchasing or substituting [i.e., Countrywide] delivers to the indenture Trustee an
         Opinion of Counsel to the effect that the repurchase or substitution would not result in the
         imposition of the tax on prohibited transactions of the Trust or contributions after the
         Startup Date, as defined in Sections 860F(a)(2) and 860G(d) of the [Internal Revenue
         Code], respectively ....

SSA § 2.10 (emphasis added).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                 Index No. 602825/08
                                                                                       Page 21 of 26
like the PSA and the SSA—“must be enforced according to the plain meaning of its terms.”

Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002). The contracts’ causation

requirement, evidenced by the phrase “materially and adversely affects,” is clear from the plain

meaning of “affects”: produces, or causes, a “change in.” AMERICAN HERITAGE DICTIONARY OF

THE ENGLISH LANGUAGE      (4th ed. 2006) (emphasis added). The fact that the contracts

persistently use the present tense (“affects”) and not the subjunctive mood (“may affect”), and

the fact that “affect” means to cause a “change,” means breaches that have not caused actual,

existing harm, do not count. MBIA’s complaint that breaches changed the “risk profile” of loans

is an attempt to claim a repurchase obligation for breaches that “may” potentially adversely

affect it—a contingent and speculative future “[e]ffect”—and not for breaches that actually do

“materially and adversely affect” it. If the contract meant the former, it could have said so. But

it did not.

        MBIA made a similar type of “risk profile” argument to the First Department, which did

not accept it. See Brief for Plaintiff-Respondent-Appellant MBIA Insurance Corporation, at 24-

27. The damages MBIA seeks are not merely the increased premiums it might have charged

based on a higher risk profile, but all claims it has paid or will pay under the policies for

defaulted loans. The First Department recognized as much in holding that whether MBIA’s

losses were caused by Countrywide’s conduct rather than by “extrinsic forces”—here, the “2007

housing and credit crisis,” MBIA, 2011 N.Y. Slip Op. 05640, at *7—is a factual issue. This

ruling of the First Department would be meaningless if MBIA could establish causation by

pointing to an increased “risk profile.” And, although the First Department’s ruling was made

with respect to MBIA’s fraud claim, the underlying causation principles are equally applicable to

MBIA’s contract claim. See Losei Realty Corp., 254 N.Y. at 46; see Kenford, 67 N.Y. 2d at 261.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                  Index No. 602825/08
                                                                                        Page 22 of 26
       MBIA’s interpretation not only ignores the contract’s plain meaning, it also renders the

phrase “materially and adversely affects” meaningless. Courts must “construe a contract so as to

give meaning to all of its language and avoid an interpretation that effectively renders

meaningless a part of the contract.” Helmsley-Spear, Inc. v. N.Y. Blood Center, Inc., 257 A.D.2d

64, 69 (1st Dep’t 1999). MBIA asks this Court to do the opposite. With no explanation and no

citation to any supporting case law, MBIA posits that if a breach creates a “material increase in

the risk profile” of a loan, then the breach “materially and adversely affects” its interests in that

loan. Pl. Mem. at 22. But a breach that materially increases the risk profile of a loan is nothing

more than a material breach (if that). Of course, MBIA must prove that a breach is material to

assert a repurchase claim. But it must also prove that the breach caused a material and adverse

effect. Contrary to MBIA’s contention, there are numerous situations where a breach may be

“material” but would not “materially and adversely affect” MBIA. For example, even if a loan

violates a representation, the borrower may default on the loan for any number of reasons having

nothing to do with the breach, such as the loss of a job, unforeseen medical expenses, a sudden

decline in the value of the property, or the death of a spouse.

       In accordance with the contractual language and these elemental canons of construction,

courts have imposed a requirement of causation in addressing like cases, requiring proof not only

of “a breach of a representation or warranty”—but also of “a material and adverse effect caused

by the breach.” LaSalle Bank, N.A. v. Citicorp Real Estate, Inc., No. 01 Civ. 4389, 2002 WL

181703, at *3 (S.D.N.Y. Feb. 5, 2002). They have required not only proof that “one or more of

the express warranties was materially breached by the Defendant,” but also proof “that the

breach caused a material and adverse effect.” General Jury Charge at 14, Wells Fargo Bank,

N.A. v. LaSalle Bank, N.A., No. 3:07-cv-449 (S.D. Ohio Nov. 24, 2009).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                            Index No. 602825/08
                                                                                                  Page 23 of 26
        In Wells Fargo, for instance, the court rejected precisely the argument MBIA makes here.

In Wells Fargo, the plaintiff trustee argued that it could “prove a material and adverse effect on

the loans or the mortgaged property by showing that th[e] loan would have been rejected by the

investors” if they had known of the alleged breach of misrepresentation and warranty. Decision

and Order Granting in Part and Denying in Part Plaintiff’s Motion for Clarification, Wells Fargo

Bank, N.A. v. LaSalle Bank, N.A., No. 3:07-cv-449 (S.D. Ohio Oct. 27, 2009). The judge would

have none of this:

                 In the Court’s opinion, that position begs the question. To put it
                 another way, the fact that an investor might have made a different
                 decision had he or she had different information may make that
                 information material to the investor’s decision, but it does not
                 make the omission of that information cause a material and adverse
                 effect on the loan. “Material information” and “material effect” are
                 not the same thing.

Id. at 2 (emphasis added).26

        Similarly, in LaSalle Bank, N.A. v. Citicorp, the court held that a plaintiff states a claim

for breach of a repurchase agreement when it has alleged a causal link between the breach of a

representation and warranty and the defaulted loan. See 2002 WL 181703, at *3. The borrower

in that case defaulted on its hotel franchise agreement, which was later terminated, and then

defaulted on its mortgage loan. See id. at *2. The plaintiff trustee alleged that the loan seller

breached multiple representations that caused the borrower to default. Id. One alleged breach

was that the borrower had not taken adequate reserves for collateral improvements required

under the franchise agreement. See id. at *4. The court sustained this claim only after finding a

causal link between this breach and the borrower’s default:

26
   See also Lehman Bros. Holdings, Inc. v. Laureate Realty Serv., Inc., No. 1:04-cv-1432, 2007 WL 2904591, at
*13 (S.D. Ind. Sept. 28, 2007) (plaintiff’s showing that borrower’s default caused $13MM loss created issue of fact
with respect to material and adverse effect); LaSalle Bank, N.A. v. Nomura Asset Capital Corp., 2006 N.Y. Slip. Op.
33876U (Sup. Ct. N.Y. County Sept. 6, 2006) (requiring, in addition to breach, a finding that breach “had a material
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                            Index No. 602825/08
                                                                                                  Page 24 of 26
                  Plaintiff alleges … that repayment of the mortgage loan depended
                  upon operation of the hotel … and that [the] failure to make the
                  [hotel] improvements … at least contributed to [the] termination of
                  the franchise. From this, it may be inferred that loss of the
                  franchise was at least a partial cause of [the borrower’s] eventual
                  default on the loan. That default is both material and adverse.”

Id. (emphasis added). Because the plaintiff seeking repurchase pleaded a direct causal link

connecting the loan’s failure to comply with the defendant’s representation, the borrower’s

inability to make loan payments, and the borrower’s ultimate default, the court declined to

dismiss the claim. In so doing, the court made clear that a breach of a representation and a

material and adverse effect (causation) are both required.

         MBIA’s cases (Pl. Mem. 23-24) are not to the contrary. They all involve repurchase

provisions where the parties bargained for language different than the “materially and adversely

affects” language that controls here. See Resolution Trust Corp. v. Key Fin. Serv., 280 F.3d 12,

14 n.2 (1st Cir. 2002) (contract required repurchase of any loan in “material breach” of

applicable representations and warranties); Morgan Guar. Trust Co. of N.Y. v. Bay View

Franchise Mortg. Acceptance Co., No. 00 CIV. 8613, 2002 WL 818082, at *4 (S.D.N.Y. Apr.

30, 2002) (repurchase obligation applied to “any” breach of warranty, though the court required

proof of a material breach in accordance New York law).27 As a sophisticated party, MBIA

could have negotiated similar contract language omitting any “materially and adversely affects”

requirement. Indeed, other Countrywide counterparties did just that. But MBIA failed to


and adverse effect in the maintenance of the loans”).
27
    In addition, MBIA misleadingly characterizes a ruling whether a representation was breached at all as a ruling on
the meaning of “materially and adversely affects.” Pl. Mem. at 24 (citing Orix Capital Mkts., LLC v. Love Funding
Corp., No. 04 Civ. 9890, 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11, 2005)). Nor does Wells Fargo Bank, N.A. v.
LaSalle Bank Nat’l Ass’n, No. Civ-08-1125-C, 2011 WL 1303949 (W.D. Okla. Apr. 1, 2011), help MBIA. There,
the court excluded evidence of “the post-securitization market meltdown” only to the extent that plaintiff asserted
harm as of the closing date of the securities, while explicitly acknowledging that such evidence would have been
relevant if harm occurring after the closing date were asserted. Id. at *8. The First Department already has held in
this case that whether MBIA’s losses were caused “by the 2007 housing and credit crisis” is a question of fact that
must be decided, i.e., that causation is an element. MBIA, 2011 NY Slip Op. 05640, at *7.
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                                            Index No. 602825/08
                                                                                                  Page 25 of 26
negotiate a different contract, and is bound by the contracts to which it did agree.

         MBIA has not met its burden to establish that its construction of the relevant provisions

of the Transaction Documents is “the only construction which can fairly be placed thereon.” See

Credit Suisse Sec.(USA), LLC, 24 Misc.3d 1241(A), at *5. The contracts make clear that

causation is an essential part of to MBIA’s repurchase-based claim. If the evidence ultimately

shows that an intervening “decline in the housing and real estate markets … caused material

adverse effects, not a breach of any representation,” then MBIA will not be entitled to the relief

it seeks. See Wells Fargo Bank, N.A. v. LaSalle Bank, N.A., No. 2:08-cv-1448, 2011 WL

743929, at *4 (D. Nev. Feb. 23, 2011) (refusing to exclude evidence about market conditions “in

Las Vegas in 2007-2009”). Indeed, the independent expert opinion recently posted by the

Trustee in the Article 77 proceeding seeking approval of a settlement with respect to 530

Countrywide RMBS Trusts28 concludes that “based solely on general contract principles, and

taking the language of the provision at face value, it appears to be a reasonable position that a

determination of whether a breach materially and adversely affects the interests of

Certificateholders should turn on the harm caused by the breach”—precisely the opposite of

MBIA’s position here.29 Accordingly, MBIA’s motion for summary judgment on this issue

should be denied.

                                                CONCLUSION
         For the reasons set forth above, this Court should deny Plaintiff’s motion for partial

summary judgment and motion to strike defenses.

28
    Countrywide RMBS Settlement Court Documents, Material and Adverse Opinion of Professor Barry E. Adler,
http://www.cwrmbssettlement.com/docs/Opinion %20Regarding%20Material%20and%20Adverse%20Affect.pdf.
Material and Adverse Opinion of Professor Barry E. Adler (relating to the action In the Matter of the Application of
The Bank of New York Mellon, No. 651786/2011 (Sup. Ct. N.Y. County filed June 29, 2011) (pending before
Kapnick, J.)). That settlement does not include fully insured trusts such as those at issue here.
29
  Holland Aff. Ex. 36, at p. 13; see also id. at 10 (noting that requiring repurchase without causation would
amount to “buyer opportunism,” which is a doubtful interpretation of the parties’ agreement).
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.                       Index No. 602825/08
                                                                             Page 26 of 26
Dated: New York, NY                          GOODWIN PROCTER LLP
       July 15, 2011
                                             By: /s/Mark Holland_____________
                                                 Mark Holland
                                                 Abigail K. Hemani
                                                 Larkin M. Morton

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

Thomas M. Hefferon                           Paul F. Ware, Jr.
GOODWIN PROCTER LLP                          Sarah Heaton Concannon
901 New York Avenue, N.W.                    GOODWIN PROCTER LLP
Washington, D.C. 20001                       Exchange Place
(202) 346-4000                               53 State Street
                                             Boston, MA 02109
David M. Wells                               (617) 570-1000
William E. Adams, Jr.
GUNSTER, YOAKLEY & STEWART, P.A.             Attorneys for Defendants
One Enterprise Center                        Countrywide Home Loans, Inc.,
225 Water Street Suite 1750                  Countrywide Securities Corp.,
Jacksonville, Florida 32202                  Countrywide Financial Corp., and
(904) 354-1980                               Countrywide Home Loans Servicing, L.P.

                                             O’MELVENY & MYERS LLP

                                                  By: /s/Jonathan Rosenberg______
                                                  Jonathan Rosenberg
                                                  Bradley J. Butwin
                                                  William J. Sushon
                                                  Asher L. Rivner

                                             7 Times Square
                                             New York, New York 10036
                                             Telephone: (212) 326-2000
                                             Facsimile: (212) 326-2061

                                             Attorneys for Defendant
                                             Bank of America Corporation

				
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