Countrywide Appellant Respondents Reply Brief

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Countrywide Appellant Respondents Reply Brief Powered By Docstoc
					                                                    To Be Argued By:
                                                       Mark Holland




           New York Supreme Court
               APPELLATE DIVISION      — FIRST DEPARTMENT


                      MBIA INSURANCE CORPORATION,
                                                 Plaintiff-Respondent-Appellant,
                                   against

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

                       and BANK   OF   AMERICA CORP.
                                                                     Defendant.


               REPLY BRIEF FOR
      DEFENDANTS-APPELLANTS-RESPONDENTS
         COUNTRYWIDE HOME LOANS, INC.,
         COUNTRYWIDE SECURITIES CORP.,
       COUNTRYWIDE FINANCIAL CORP., AND
     COUNTRYWIDE HOME LOANS SERVICING, L.P.

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, Florida 32202              New York, New York 10018
904-354-1980                             212-813-8800
                                         agray@goodwinprocter.com


Attorneys for Defendants-Appellants-Respondents Countrywide Home Loans, Inc.,
           Countrywide Securities Corp., Countrywide Financial Corp.,
                  and Countrywide Home Loans Servicing, L.P.


                New York County Clerk’s Index No. 602825/08
                                         TABLE OF CONTENTS

                                                                                                                 PAGE

PRELIMINARY STATEMENT ...............................................................................1

COUNTER-STATEMENT OF QUESTIONS PRESENTED ON MBIA’S CROSS
    APPEAL ..........................................................................................................2

ARGUMENT .............................................................................................................2

I.       MBIA’S FRAUD CLAIM SHOULD HAVE BEEN DISMISSED FOR
         FAILURE TO ALLEGE LOSS CAUSATION ..............................................2

         A.       MBIA Did Not Suffer Losses From the Purchase of a Business ..........3

         B.       Post-Closing Events Undermine MBIA’s Loss Causation
                  Allegations.............................................................................................5

II.      THE AMENDED COMPLAINT FAILS TO PLEAD FRAUD WITH
         PARTICULARITY..........................................................................................9

III.     MBIA’s FRAUD CLAIM DUPLICATES ITS CONTRACT CLAIM ........12

IV.      MBIA HAS NOT ADEQUATELY PLEADED FRAUD AS TO
         COUNTRYWIDE SECURITIES AND COUNTRYWIDE FINANCIAL ..16

V.       THE DISMISSAL OF THE NEGLIGENT MISREPRESENTATION
         CLAIM SHOULD BE AFFIRMED.............................................................18

VI.      MBIA’S IMPLIED COVENANT CLAIM SHOULD BE DISMISSED IN
         FULL AS DUPLICATIVE OF MBIA’S CLAIMS FOR BREACH OF
         CONTRACT..................................................................................................24

CONCLUSION........................................................................................................28




                                                            i
                                     TABLE OF AUTHORITIES


CASES                                                                                                   PAGE(S)

Abrahami v. UPC Constr. Co.,
  176 A.D.2d 180 (1st Dep’t 1991) ......................................................................16

Batas v. Prudential Ins. Co. of Am.,
   281 A.D.2d 260 (1st Dep’t 2001) .......................................................................23

Brine v 65th Street Townhouse LLC,
   20 Misc. 3d 1138(A) (table), 2008 WL 3915784
   (Sup. Ct. N.Y. County Aug. 20, 2008) ..............................................................13

Callas v. Eisenberg,
  192 A.D.2d 344, 350 (1st Dep’t 1993) ..............................................................11

Coppola v. Applied Elec. Corp.,
  288 A.D.2d 41 (1st Dep’t 2001) .........................................................................12

Dalton v. Educ. Testing Serv.,
  87 N.Y.2d 384 (1995) ........................................................................................26

Derdiarian v. Felix Contracting Corp.,
  51 N.Y.2d 208 (1980) ..........................................................................................8

E. River Steamship Corp. v. Transamerica Delaval, Inc.,
   476 U.S. 858 (1986)............................................................................................13

Emigrant Bank v. UBS Real Estate Sec., Inc.,
  49 A.D.3d 382 (1st Dep’t 2008) .........................................................................21

ESBE Holdings Inc. v. Vanquish Acquisition Partners, LLC,
  50 A.D.3d 397 (1st Dep’t 2008) ........................................................................16

Eurycleia Partners, LP v. Seward & Kissel, LLP,
  12 N.Y.3d 553 (2009) ........................................................................................10

Financial Guaranty Ins. Co. v. Countrywide Home Loans, Inc.,
   No. 650736/09 (Sup. Ct. N.Y. County June 15, 2010) ................................24, 27
                                                         ii
First Bank of the Americas v. Motor Car Funding, Inc.,
   257 A.D.2d 287 (1st Dep’t 1999) .................................................................13, 14

Footbridge Ltd. Trust v. Countrywide Home Loans, Inc.,
  No. 09 Civ. 4050, 2010 WL 3790810 (S.D.N.Y. Sept. 28, 2010)................10, 15

Gupta Realty Corp. v. Gross,
  251 A.D.2d 544 (2d Dep’t 1998)........................................................................12

Hotaling v. A.B. Leach & Co.,
  247 N.Y. 84 (1928) ...............................................................................................4

Hudson River Club v. Consol. Edison Co.,
  275 A.D.2d 218 (1st Dep’t 2000) .................................................................19, 24

In re Enron Corp.,
    No. 04 Civ. 1367, 2005 WL 356985 (S.D.N.Y. Feb. 15, 2005).........................16

In re JP Morgan Chase Sec. Litg.,
    2007 WL 950132 (S.D.N.Y. Mar. 29, 2007) ...............................................15, 20

Inter-Atl Fund, L.P. v. Alvaro,
   No. 061611/2006, 2007 WL 2236595 (Sup. Ct., N.Y. County Apr. 5,
   2007) ..................................................................................................................13

Lakeville Pace Mech., Inc. v. Elmar Realty Corp.,
   276 A.D.2d 673, 676 (2d Dep’t 2000) ...............................................................11

Laub v. Faessel,
  297 A.D. 2d. 28 (1st Dep’t 2002) .....................................................................5, 8

Lonestar Fund V (US) L.P. v. Barclays Bank PLC,
  594 F.3d 383 (5th Cir. 2010) ........................................................................ 15-16

Luminent Mortgage Capital, Inc. v. Merrill Lynch & Co.,
  652 F. Supp. 2d 576 (E.D. Pa. 2009)....................................................................8

Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc.,
  41 A.D.3d 269 (1st Dep’t 2007) ........................................................................26

MBIA Ins. Corp. v. Countrywide Home Loans, Inc.,
  No. 602825/08 (Sup. Ct. N.Y. County Apr. 27, 2010).......................................20


                                                             iii
MBIA Ins. Corp. v. Credit Suisse Secs. (USA) LLC,
  No. 603751/09 (Sup. Ct. N.Y. County July 30, 2010) ......................................13

MBIA Ins. Corp. v. Residential Funding Co.,
  26 Misc. 3d 1204(A) (table), 2009 WL 5178337
  (Sup. Ct. N.Y. County Dec. 22, 2009)..........................................................24, 28

MBIA Ins. Corp. v. Royal Bank of Can.,
  No. 12238/09, 2010 N.Y.Misc. LEXIS 3958
  (Sup. Ct. Westchester County Aug. 19, 2010) .......................................20, 24, 28

Mercer Capital Ltd. v. U.S. Dry Cleaning Corp.,
  No. 08 Civ. 05763, 2009 WL 2163598 (S.D.N.Y. July 21, 2009) .....................22

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

Pramco III v. Partners Trust Bank,
   15 Misc.3d 1142(A)(table), 2007 WL 157449 (Sup. Ct. NY County May
   31, 2007) .............................................................................................................14

Robeco-Sage Capital, L.P. v. Citigroup Alternative Invs. LLC,
  No. 601030/08, 2009 N.Y. Misc. LEXIS 4338 (Sup. Ct. N.Y. County
  July 28, 2009)......................................................................................................22

Rubin v. Nine W. Group,
  No. 0763/99, 1999 N.Y. Misc. LEXIS 655 (Sup. Ct. Westchester Co.
  Aug. 24, 1999) ....................................................................................................27

Sargiss v. Margarelli,
   12 N.Y.3d 527 (2009) ........................................................................................18

Sims v. First Consumers Nat’l Bank,
   303 A.D.2d 288, 290 (1st Dep’t 2003) ..............................................................26

Skillgames, LLC v. Brody,
   1 A.D.3d 247, 252 (1st Dep’t 2003) ..................................................................26

Smith v. Ameriquest Mortgage Co.,
  60 A.D.3d 1037 (2d Dep’t 2009)........................................................................22

Starr Foundation v. American International Group,
   901 N.Y.S. 2d 246 (1st Dep’t 2010).................................................................4, 6
                                                            iv
Sutherland v. Glennon,
   256 A.D.2d 984 (3d Dep’t 1998) .......................................................................11

Svasta & Co. v. Interactive Planet Software Motion, Inc.,
   No. 0602425/2005, 2008 WL 253485 (Sup. Ct. N.Y. County June 12,
   2008) ..................................................................................................................13

Syncora Guarantee Inc. v. Countrywide Home Loans, Inc. et al.,
   No. 650042/09 (Sup. Ct. N.Y. County Mar. 13, 2010) ......................... 24, 27-28

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier,
   No. 05 Civ. 1989, 2005 WL 2148919 (S.D.N.Y. 2005).......................................5

United Guar. Mortgage Indem. Co. v. Countrywide Fin. Corp.,
  660 F. Supp. 2d 1163 (C.D. Cal. Oct. 5, 2009) ..................................................21

Yucyco, Ltd. v. Republic of Slovenia,
   984 F. Supp. 209 (S.D.N.Y. 1997) .....................................................................27

Zito v. Leasecomm Corp.,
   No. 02 Civ 8074, 2004 WL 2211650 (S.D.N.Y. Sept. 30, 2004) ......................18



STATUTES
CPLR 3016(b) ..............................................................................................10, 12, 13



SECONDARY SOURCES
Prosser & Keaton, Torts, §41 at p. 263 (5th ed.) .......................................................6




                                                             v
                             PRELIMINARY STATEMENT
       MBIA’s Brief1 does not provide any basis to permit it to inflate its breach of

contract claims into claims for fraud, negligent misrepresentation or breach of the

implied covenant of good faith.              Initially, MBIA’s Brief confirms that the

Complaint does not adequately plead loss causation. MBIA does not identify any

facts in the Amended Complaint demonstrating that its losses were caused by

Countrywide’s purported misrepresentations, rather than the collapse in the

housing market that began in 2007. MBIA’s attempt to argue that loss causation

should be measured as of the date of the contract falls flat. MBIA did not purchase

an asset which could be valued as of the date of the contract, but instead received

payments from Countrywide to assume a contingent liability. Thus, MBIA’s fraud

claim should have been dismissed for failure to plead loss causation.

       MBIA’s remaining arguments are also meritless. First, MBIA’s Brief fails

to excuse the lack of specificity in the Amended Complaint as to the fraud claim.

Second, MBIA’s allegations supporting its fraud claims improperly rehash the

fundamentals of its contract action, as demonstrated in the Countrywide

Defendants Opening Brief.           Third, its negligent misrepresentation claim fails

because the parties lacked the “special relationship of trust or confidence” required

for such a claim. Finally, MBIA’s claim for breach of the implied covenant of
1
 The Plaintiff-Respondent-Appellant’s Brief shall be referred to as “MBIA’s Brief” or “Opp.”
Unless otherwise indicated, all documents referenced herein shall be referred to as defined the in
Defendants-Appellants-Respondents Brief (the “Opening Brief” or “Br.”)
good faith and fair dealing duplicates MBIA’s breach of contract claims and

should have been dismissed in its entirety.

                 COUNTER-STATEMENT OF QUESTIONS
                 PRESENTED ON MBIA’S CROSS APPEAL
      1.     When a plaintiff brings a claim for breach of an implied covenant of

good faith and fair dealing expressly grounded on the same contractual provisions

and conduct as its breach of contract claim, should the breach of implied covenant

claim be dismissed as duplicative of the breach of contract claim? The IAS Court

answered in the affirmative.

      2.     Can a plaintiff claiming negligent misrepresentation satisfy the

“special relationship” requirement simply by alleging that two commercially

sophisticated parties who entered into arms-length transactions had a long-standing

relationship and the defendant had greater knowledge about its own business than

the plaintiff? The IAS Court answered in the negative.


                                   ARGUMENT

I.    MBIA’S FRAUD CLAIM SHOULD HAVE BEEN DISMISSED FOR
      FAILURE TO ALLEGE LOSS CAUSATION
      MBIA acknowledges that New York law requires a plaintiff alleging fraud

to plead facts demonstrating that the alleged misrepresentation caused plaintiff’s

loss. (Opp. 23.) Rather than explain how in its pleading it has met this




                                        -2-
requirement, MBIA argues at length for an exemption. MBIA’s arguments ignore

well-settled New York law.

       A.    MBIA Did Not Suffer Losses From the Purchase of a Business
      MBIA first contends that its loss occurred at the moment it agreed to insure

the Securitizations, presumably establishing loss causation simply by alleging that

it entered into the transactions at issue. (Id. at 26.) Under MBIA’s theory, events

subsequent to its agreement to insure the Securitizations “are irrelevant.” (Id.)

The only case MBIA cites to support this proposition, Merrill Lynch & Co. v.

Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007), is totally inapposite.

      Merrill Lynch focused on the different measures of damages available for

fraud. In Merrill Lynch the buyer of a business, Allegheny, alleged that the Seller,

Merrill Lynch, misrepresented the financial condition of the business at the time of

sale, causing Allegheny to pay an inflated purchase price. Id. at 183. The Merrill

Lynch court recognized that the measure of damages in such circumstances

represents “the difference between the purchase price of the asset and its true

value, plus interest, generally measured as of the date of sale.” Id. Fundamental to

the Merrill Lynch court’s reasoning was the payment of funds at the time of the

transaction closing. Allegheny suffered an out-of-pocket loss immediately that

would not be changed by subsequent events.




                                        -3-
      This case does not involve a sale of a business. MBIA did not buy anything.

At the “closing” of each Securitization, MBIA issued an insurance policy, for

which it received a handsome premium. MBIA’s valuation of the “represented risk

profile” of the Securitizations did not lead to a loss at the time of closing. (Opp.

26.) MBIA paid nothing at closing and paying any future claims depended on

subsequent events.    MBIA’s attempt to analogize itself to the purchaser of a

business thus fails. Cf. Starr Foundation v. American International Group, 901

N.Y.S. 2d 246 (1st Dep’t 2010) (affirming dismissal of fraud complaint where the

plaintiff did not suffer any “out-of-pocket” loss).

      More relevant here is Hotaling v. A.B. Leach & Co., 247 N.Y. 84 (1928), on

which the Merrill Lynch court relied. (Opp. 27.) In Hotaling, the New York Court

of Appeals explained the rule that applies here: “[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 plaintiff’s loss caused by subsequent events not connected with such fraud.”

247 N.Y. at 87 (emphasis added).          MBIA’s own cited authority establishes

“subsequent events” must be taken into account in determining whether MBIA has

adequately pled loss causation.




                                         -4-
      B.     Post-Closing Events Undermine MBIA’s Loss Causation
             Allegations
      MBIA only can identify two paragraphs in its 206-paragraph Amended

Complaint that purport to address loss causation. Those paragraphs allege that (i)

Countrywide failed to comply with applicable underwriting guidelines and (ii) an

unexpectedly high number of loans defaulted, requiring MBIA to pay insurance

claims.    (See Br. 20.)    MBIA fails to provide any explanation as to how

Countrywide’s purported failure to comply with guidelines caused the borrowers to

default. Many borrowers may have defaulted because they lost their jobs, or the

value of their homes plummeted – not because a document was missing from their

loan files or because their FICO scores were incorrect. This failure to plead any

causal link between the two events renders MBIA’s fraud claims defective.

“‘[T]here must be some reasonable connection between the act or omission of the

defendant and the damage which the plaintiff has suffered.’” Laub v. Faessel, 297

A.D. 2d. 28, 31 (1st Dep’t 2002) (internal quotation omitted).

      MBIA argues that allegations of misrepresentations and damages alone

suffice to plead loss causation in the instant context. (Opp. 27-28.) MBIA cites a

single case to support its position and again misreads its own authority.      In

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, 2005 WL

2148919 (S.D.N.Y. 2005), the plaintiff purchased asset-backed securities even

thought the underlying loans were experiencing increased delinquencies.       The


                                        -5-
defendants misrepresented in the securities’ prospectus that the increase in

delinquencies arose from “collection problems” and a “slowdown in the U.S.

economy,” even though the loans were actually riskier than described. 2005 WL

2148919 at *3. When the pace of delinquencies and defaults continued over a

sustained period, the rating agencies downgraded the securities, causing them to

lose value.      The court held that the detailed allegations that the seller

misrepresented the true cause of the increased delinquency and default rates

sufficed to establish loss causation. Id. at 12.2

        Here, MBIA does not allege that the loans in the Securitizations were

experiencing high rates of delinquencies and defaults at the time MBIA issued the

insurance. Nor does MBIA accuse Countrywide of misrepresenting the cause of

the delinquencies and defaults in the loans. The allegations the Bombardier court

found critical to adequately pleading loss causation in that case thus are missing

here.

        MBIA argues that the underwriting guidelines were intended to ensure that

borrowers could repay their loans “in good economic times or bad,” and that, at a

minimum, its losses are greater than they would have been if more loans had

complied with the guidelines. (Op. 29.) This Court recently rejected that logic in

Starr Foundation, 901 N.Y.S.2d at 249-50. There, in 2007 the defendant, AIG,

2
   Notably, Bombardier involved a federal securities fraud claim, even thought MBIA earlier
criticizes Countrywide for relying on federal securities law precedents. (See Opp. 24-25.)


                                           -6-
allegedly fraudulently induced the plaintiff to continue to hold AIG stock by

misrepresenting the degree of risk in AIG’s credit default swap (CDS) portfolio.

When the credit crisis caused the value of the CDS portfolio, and hence AIG’s

share price, to plummet, the plaintiff sought to recover for the decreased value of

its shares. This Court affirmed the dismissal of the complaint because the value of

the CDS portfolio was impaired regardless of any misrepresentations AIG may

have made.    The Court explained: “[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 AIG’s stock price.” Id. at 249-50. Nor did the argument

that the misrepresentations exacerbated the losses suffice. “To the extent the

[plaintiff] argues that the ultimate drop in AIG’s share price was greater than it

otherwise would have been because general market conditions had worsened by

the time the alleged misrepresentations were corrected, the loss was not related to

the subject of the alleged misrepresentations and therefore was not proximately

caused by them.” Id. at 251

      MBIA improperly attempts to shift its pleading burden to Countrywide to

show that the current credit crisis was a “superseding cause” of MBIA’s losses.

(Opp. 29.) The burden is not on Countrywide to plead facts showing the credit

crisis was an intervening cause of MBIA’s losses; the burden is on MBIA to allege



                                       -7-
facts connecting Countrywide’s purported underwriting failures to the loans’

increased delinquencies and defaults. See Laub v. Faessl, 297 A.D.2d 28, 31 (1st

Dep’t 2002). The existence of the credit crisis (of which this Court, like so many

other courts, may take judicial notice), as well MBIA’s allegations that the

delinquencies and defaults increased for all 15 Securitizations simultaneously,

makes MBIA’s burden far more difficult – it does not shift the burden to

Countrywide.3

       MBIA’s attempts to distinguish Countrywide’s authorities are unavailing.

Luminent Mortgage Capital, Inc. v. Merrill Lynch & Co., 652 F. Supp. 2d 576

(E.D. Pa. 2009), did not turn on the fact that “just 5 out of 80 loans” allegedly

deviated from the stated guidelines. (Opp. 31.) In fact, the plaintiffs alleged that

56 of 80 sampled did not comply with their stated terms. Id. at 582. As here, the

plaintiffs alleged that “the characteristics of the loan portfolio as a whole ‘did not

comport with the information provided in the deal tape and the term sheet’ and as a

result, . . . over time the loan portfolio demonstrate[d] an unusually high rate of

early payment defaults, as well as unusually high rates of delinquencies.” Id. at

583. The Luminent court held those allegations inadequate to plead loss causation,


3
    MBIA inexplicably cites Derdiarian v. Felix Contracting Corp., 51 N.Y 2d 208 (1980) as
    support for the proposition that the credit crisis “cannot be deemed a superseding course as a
    matter of law.” Derdiarian was a personal injury case involving a claim for negligence, not
    fraud. The Court of Appeals explained that “the question of legal cause may be decided as a
    matter of law” in cases involving “independent intervening acts which operate upon but do
    not flow from the original negligence.” Id. at 315.


                                              -8-
not because of the number of loans that allegedly did not comply with guidelines,

but because:

               [w]e are satisfied that the one-and-a-half year time period
               between the alleged misrepresentation and the injury,
               combined with the market downturn in the mortgage
               industry that developed in early-to mid-2007, is sufficient
               to undermine the inference of a nexus between
               Defendants’ misrepresentations and the performance of
               the Junior Certificates.

Id. at 593.

      The same – or longer – time period between Countrywide’s alleged

misrepresentations and MBIA’s injury, combined with the intervening 2007 credit

crisis and the concurrent spiking default rates in all 15 Securitizations, similarly

should satisfy this Court that MBIA fails to plead a nexus between Countrywide’s

alleged misrepresentation and MBIA’s losses.


II.   THE AMENDED COMPLAINT FAILS TO PLEAD FRAUD WITH
      PARTICULARITY
      MBIA does not point to any facts in the Amended Complaint that show how

Countrywide’s statements, whether public or made directly to MBIA, concerning

its loan origination practices were false or misleading. Instead, MBIA argues that

it should be excused from supplying the detail required by CPLR 3016(b) because

in some cases “it may be impossible to state in detail the circumstances

constituting a fraud.” (Opp. 33-34). That it is not the case here.



                                          -9-
      MBIA admittedly received numerous Prospectus Supplements and loan

tapes that provided extensive information concerning the underlying loans’

underwriting and quality before insuring the Securitizations.      (S.R. 181, Am.

Compl. ¶¶ 36-38.) MBIA admits it has requested and received sufficient loan data

to evaluate the underwriting quality of the loans in the Securitizations. (Opp. 13.)

Despite this information, MBIA has not provided any facts to support its

conclusory assertion that 91% of the defaulted loans it examined deviate from

Countrywide’s underwriting guidelines. Nor can MBIA identify any other factual

allegation anywhere in the Amended Complaint that supports its claim that any of

the alleged statements Countrywide made were false or misleading.

      Less than one month ago, the United States District Court for the Southern

District of New York dismissed a nearly identical state law fraud claim for failure

to plead with particularity. In Footbridge Ltd. Trust v. Countrywide Home Loans,

Inc., No. 09 Civ. 4050, 2010 WL 3790810, at *10-12, 25 (S.D.N.Y. Sept. 28,

2010), the plaintiffs alleged that Countrywide “made misrepresentations in the

offering documents and in communications with plaintiffs regarding its

underwriting guidelines.” As here, the Complaint did not provide any detail about

how these alleged statements were rendered false by Countrywide’s alleged

conduct. Id. at *10. For example, the plaintiff alleged that “Countrywide deviated

from the loan-origination practices that it represented in the offering documents,



                                       - 10 -
effectively abandoning rather than loosening its loan-origination standards.” Id. at

12.    The Footbridge Court found that these allegations lacked sufficient

particularity because the plaintiff failed to allege “which ‘practices’ Countrywide

represented it would use or which practices were ‘effectively abandoned’” and

failed to “describe the extent to which such practices were ‘effectively

abandoned.’” Id. at *12. The Amended Complaint here suffers from the same

defects, and same reasoning applies.4

       MBIA contends it should not be required to plead in detail because MBIA

made repurchase requests for some loans, which supposedly provide Countrywide

with adequate notice of MBIA’s fraud claims. (Opp. 34.) MBIA’s repurchase

requests are not part of the record. Moreover, MBIA excludes any explanation as

to how the repurchase requests, which vaguely identified alleged defects in certain

loans, provide notice of the nature of Countrywide’s alleged fraud. MBIA itself

concedes that the parties knew that some of the Mortgage Loans would not comply

with Countrywide’s underwriting guidelines or other contractual representations

4
  MBIA attempts to distinguish Footbridge by arguing that the pleading standard in federal court
under Rule 9(b) of the Federal Rules of Civil Procedure is higher than the pleading standard
under CPLR 3016(b). (Opp. 35.) CPLR 3016(b) is derived from Rule 9(b), and New York
courts may look to decisions under Rule 9(b) in determining whether the requirements of CPLR
3016(b) have been met. Cf. Sutherland v. Glennon, 256 A.D.2d 984, 985 (3d Dep’t 1998)
(looking to federal law interpreting CPLR provision modeled after the federal rule).
Moreover even if 3016(b) sets forth a lower pleading standard than Rule 9(b), the Amended
Complaint does not meet it for the reasons discussed above and in Countrywide’s Opening Brief
(at 25-30). See Callas v. Eisenberg, 192 A.D.2d 344, 350 (1st Dep’t 1993); Lakeville Pace
Mech., Inc. v. Elmar Realty Corp., 276 A.D.2d 673, 676 (2d Dep’t 2000) (fraud claim dismissed
because the complaint “did not articulate what representations were made by the Bank and how
the alleged representations were fraudulent”).


                                             - 11 -
and warranties. (Opp. 17, n.5.) MBIA’s invocation of the repurchase remedy thus

cannot suffice to put Defendants on notice as to the nature of fraud that MBIA is

claiming.

       The Amended Complaint fails to plead fraud with the specificity required

under CPLR 3016(b), and should be dismissed for this reason as well.


III.   MBIA’S FRAUD CLAIM DUPLICATES ITS CONTRACT CLAIM
       MBIA does not dispute the parties’ transaction documents incorporated

Countrywide’s alleged pre-contractual misrepresentations.           MBIA argues,

however, that when a contract repeats pre-contractual misrepresentations, a

plaintiff may bring claims for both fraud and breach of contract. (Opp. 36.) New

York courts have held to the contrary.             Where alleged pre-contractual

misrepresentations are subsequently incorporated into a contract, they are neither

collateral nor extraneous to the contract. See, e.g., Gupta Realty Corp. v. Gross,

251 A.D.2d 544, 545 (2d Dep’t 1998) (“[T]he alleged misrepresentations were not

collateral or extraneous to the contract since they were expressly incorporated into

the mortgage modification agreement.”); see also Coppola v. Applied Elec. Corp.,

288 A.D.2d 41, 42 (1st Dep’t 2001) (distinguishing cases where fraud claim was

not duplicative of contract claim on the grounds that the “undisclosed fraudulent

intent . . . related to an additional oral assurance not embodied in the terms of the

agreement that was allegedly breached”) (emphasis added). The reason for this


                                        - 12 -
rule is simple: if fraud claims could be asserted based on pre-contractual

statements incorporated into the contract, then “contract law would drown in a sea

of tort.” E. River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858,

866 (1986).

        MBIA relies on a snippet from this Court’s decision in First Bank of the

Americas v. Motor Car Funding, Inc., 257 A.D.2d 287 (1st Dep’t 1999), to support

its position. (Opp. 36-38.) In First Bank, this Court stated that “a fraud claim can

be based on a breach of contractual warranties notwithstanding the existence of a

breach of contract claim.” Id. at 292. There, however, the plaintiff pointed to

specific representations the defendant made outside the contracts that allegedly led

the plaintiff to believe that the warranties in the contract had been satisfied. Id. at

289.5

        In contrast, the contracts here contain all of Countrywide’s alleged pre-

contractual representations. MBIA effectively concedes this point, arguing that

Countrywide made misrepresentations in “documents and communications leading


5
   Since First Bank, some IAS courts have held that simply alleging a pre-contractual statement
is sufficient to permit both fraud and contract claims. See, e.g., MBIA Ins. Corp. v. Credit Suisse
Secs. (USA) LLC, No. 603751/09, at 14 (Sup. Ct. N.Y. County July 30, 2010) (Opp. Ex. A).
Other courts have permitted fraud claims to survive only when the statements differed from the
representations and warranties in the agreements. See, e.g., Brine v 65th Street Townhouse LLC,
20 Misc. 3d 1138(A) (table), 2008 WL 3915784, at *4 (Sup. Ct. N.Y. County Aug. 20, 2008)
Svasta & Co. v. Interactive Planet Software Motion, Inc., No. 0602425/2005, 2008 WL 253485,
at *4 (Sup. Ct. N.Y. County June 12, 2008); Inter-Atl Fund, L.P. v. Alvaro, No. 061611/2006,
2007 WL 2236595, at *4-5 (Sup. Ct., N.Y. County Apr. 5, 2007). Countrywide submits that the
latter decision more accurately apply First Bank.


                                              - 13 -
up to the parties’ contract and in the contracts themselves.” (Opp. 37 (emphasis

added).) Unlike the plaintiff in First Bank, MBIA fails to identify any extra-

contractual misrepresentations that can support its fraud claim.

       Further, under MBIA’s theory, any statement of fact made during

contractual negotiations and incorporated into the final agreement could spawn

fraudulent inducement claims. This approach has been recognized as contrary to

New York law. As the Pramco court noted:

     Taking plaintiff’s argument[] to its logical extreme, a plaintiff may
     make out a distinct fraudulent inducement claim in any case in which
     a defendant presents it with a form contract containing promises or
     warranties the defendant knows to be false, on the mere theory that
     presenting the form contract with its representations is an extraneous
     act which induced plaintiff to sign the contract. That is not our law . .
     . .”
Pramco III v. Partners Trust Bank, 15 Misc. 3d 1142(A) (table), 2007 WL

1574479, at *3 (Sup. Ct. NY County May 31, 2007).6

       Moreover, even if MBIA could identify any alleged “collateral”

misstatements, such statements could not have induced MBIA to enter into the

agreements at issue.7 At the time of contracting, MBIA bargained for and obtained


6
  MBIA attempts to distinguish Pramco ignore the fact that the representations at issue were
made as part of an initial bid that was later incorporated into the final contract between the
parities. See id. at *1
7
  MBIA points to various unspecified pre-contractual statements to the public and to MBIA
describing Countrywide’s underwriting standards, statements in Prospectuses and Prospectus
Supplements, and loan tapes containing certain data points concerning the loans as being
collateral statements. As discussed above and in Countrywide’s Opening Brief none of the
allegations satisfy the requirements of CPLR 3016(b). Further, the only statements arguably not
subsumed by representations in the Transaction Documents are general statements to the market


                                             - 14 -
an express right to “put back” loans to Countrywide that did not comply with

Countrywide’s underwriting guidelines. (See S.R. 183, Am. Compl. ¶ 43; R. 1529,

2007-E Purchase Agreement at § 3.02(c).) Indeed, the parties agreed that the put-

back remedy would constitute Plaintiff’s “sole and exclusive” remedy for breach of

any of the representations and warranties. (R. 1529, 2007-E Purchase Agreement

at § 3.02(c).)          The existence of this put-back remedy is an express

acknowledgement by MBIA that such loans would, in fact, exist. MBIA cannot

now claim that it was deceived about the existence of non-conforming loans and

induced to enter the transactions when it specifically contemplated and addressed

those loans in its contracts with Countrywide. See Footbridge, 2010 WL 3790810,

at   *16;      Lonestar      Fund      V     (US)       L.P.   v.    Barclays       Bank      PLC,

594 F.3d 383, 390 (5th Cir. 2010); In re Enron Corp., No. 04 Civ. 1367, 2005 WL

356985, at *8 (S.D.N.Y. Feb. 15, 2005).

       MBIA’s fraud claim therefore should be dismissed as duplicative of its

breach of contract claim.

concerning Countrywide’s intent to expand its market share and maintain strict underwriting
practices. (See, e.g., S.R. 175-78, Am. Compl. ¶¶ 20-27.) These statements, however, cannot
sustain a fraudulent inducement claim. See Footbridge, 2010 WL 3790810, at *24 (“Statements
about corporate culture and integrity are typically considered to be inactionable puffery.”) (citing
In re JP Morgan Chase Sec. Litg., 2007 WL 950132, at *4 (S.D.N.Y. Mar. 29, 2007); Jacobs v.
Lewis, 261 A.D.2d 127,127-28 (1st Dep’t 1999) (defendant’s misrepresentations regarding
expertise and professionalism of contractors ultimately hired by plaintiff “amounted to no more
than opinions and puffery or ultimately unfulfilled promises, and in either case were not
actionable as fraud”).

.


                                               - 15 -
IV.   MBIA HAS NOT ADEQUATELY PLEADED FRAUD AS TO
      COUNTRYWIDE SECURITIES AND COUNTRYWIDE FINANCIAL

      MBIA’s attempts to salvage its fraud claim against Countrywide Financial

or Countrywide Securities fail. MBIA concedes that a plaintiff must “allege[]

specific details of each individual’s [wrongful] conduct” when pleading a fraud

claim. (Opp. 43.) MBIA nonetheless attempts to skirt this obligation by pointing

to (1) “the wide-ranging nature of the alleged fraudulent” conduct by other

Countrywide defendants, and (2) “the relationship between and among the

Countrywide entities.” (Id. at 43-44.) Countrywide Financial and Countrywide

Securities affiliation with other defendants MBIA has accused of fraud is not

enough. To so hold would eviscerate the pleading requirement that each defendant

be apprised of the basis of Plaintiff’s claim against it. See ESBE Holdings Inc. v.

Vanquish Acquisition Partners, LLC, 50 A.D.3d 397, 398 (1st Dep’t 2008)

(upholding dismissal of fraud claims for lack of particularity where the complaint

lumped multiple defendants together and attributed all of the alleged conduct them

collectively, as such allegations made it “impossible to determine . . . which

defendants made misstatements”); Abrahami v. UPC Constr. Co., 176 A.D.2d 180,

180 (1st Dep’t 1991) (affirming dismissal where “there were no factual allegations

alleging that [certain] defendants had made any fraudulent representations to

plaintiff or allegations of fact from which it could be inferred that they had agreed

or entered into an understanding . . . to cooperate in any fraudulent scheme”).


                                        - 16 -
       MBIA argues that it has adequately stated a fraud claim against CFC

because the Amended Complaint asserts that: (1) Countrywide Financial “was the

parent company of” other defendants, and (2) “top executives at Countrywide

Financial devised a plan to increase market share at the expense of sound

underwriting practices, [] while assuring MBIA . . . that Countrywide continued to

adhere to its strict and prudent origination standards.” (Opp. 42.) The fact that

CFC is the parent company of Countrywide Home and Countrywide Securities—

the entities that did do business with MBIA—does not render CFC liable for their

alleged conduct. (Countrywide Br. 37-38). Moreover, although the Amended

Complaint asserts that CFC executives “devised a plan to increase Countrywide’s

market share,” (S.R. 176-77, Am. Compl. ¶ 23), there is nothing fraudulent about

such conduct. The Amended Complaint does not identify any false statement

made by any CFC executive to any representative of MBIA about the quality of the

Mortgage Loans underlying the Securitizations. MBIA thus has failed to plead its

fraud claim against Countrywide Financial with any degree of particularity.8

8
   The two cases cited by MBIA to support its argument are inapposite. (See Opp. 42-43.) Zito
v. Leasecomm Corp., No. 02 Civ 8074, 2004 WL 2211650 (S.D.N.Y. Sept. 30, 2004), concerned
the requirements for pleading mail fraud as a predicate act for a RICO violation, not for alleging
common law fraud against multiple defendants. See id. at *12 (holding that, where mail fraud is
alleged as a predicate act for a RICO claim—and is not a claim in itself—the pleading
requirements of Fed. R. Civ. P. 9(b) are more “relaxed”) (citations omitted). In Sargiss v.
Margarelli, 12 N.Y.3d 527 (2009) the court relied on affidavits submitted by the plaintiff to cure
the pleading defects in the complaint. Id. at 531 (“Although plaintiff’s ‘allegations of fraud were
not directly lodged against’ Julius Sargiss and Panrad in the complaint in the same detail as they
were against the decedent, [based on the supplemental evidence presented in affidavits], ‘the
indirect circumstantial inference’ of Julius’s fraudulent conduct and his ‘direct naming . . . with
regard to the same conduct alleged, under the circumstances,’ is sufficient.”).


                                              - 17 -
       MBIA’s fraud claim against CSC is likewise inadequate. MBIA rehashes its

allegations that (1) Countrywide Securities, as the underwriter for the

securitizations, has its name listed on the prospectuses for the Securitizations, (2)

Countrywide Securities performed statistical calculations concerning the Mortgage

Loans that were included in the prospectuses, and (3) Countrywide Securities

“cause[ed]” the prospectuses “to be made available” to MBIA.             (Opp. 43.)

However, the Amended Complaint does not allege that Countrywide Securities

drafted the allegedly misleading prospectuses, that any of Countrywide Securities

calculations in the prospectuses were inaccurate, or that Countrywide Securities

knew that any other statements contained in the prospectuses were false or

misleading. (See Countrywide Br. 38-39.) Absent such allegations, MBIA’s fraud

claim against Countrywide Securities also should be dismissed for lack of

particularity.

V.     THE DISMISSAL OF THE NEGLIGENT MISREPRESENTATION
       CLAIM SHOULD BE AFFIRMED
       In its cross appeal, MBIA argues that the IAS Court erred in dismissing

MBIA’s claim for negligent misrepresentation. (Opp. 50-57.) The IAS Court’s

decision on this issue was mandated by New York precedent and is unquestionably

correct.

       MBIA does not dispute that “[a] claim for negligent misrepresentation can

only stand where there is a special relationship of trust or confidence” between the


                                        - 18 -
parties sufficient to give rise to a duty of care. Hudson River Club v. Consol.

Edison Co., 275 A.D.2d 218, 220 (1st Dep’t 2000). Nor does MBIA dispute that,

in the context of an arm’s-length commercial transaction, such a duty only arises

“where ‘the parties . . . enjoy a relationship of trust and reliance closer . . . than that

of the ordinary buyer and seller.’” (Opp. 51).9 Stated differently, “[a] simple arm’s

length business relationship is not enough.” United Safety of Am., Inc. v. Consol.

Edison Co., 213 A.D.2d 283, 285-86 (1st Dep’t 1995).

       In an attempt to show a “special relationship” between MBIA and

Countrywide, MBIA points to allegations in the Amended Complaint that (1)

Countrywide knew more about underlying loans and its own underwriting

practices than MBIA, (2) “MBIA relied on Countrywide’s long-established

reputation for sound origination, underwriting, and servicing practices, and its prior

track record . . . ,” (3) MBIA relied on Countrywide’s established reputation for

“conservative underwriting” practices and strong past performance, and (4) the

parties had engaged in other commercial transactions that “pre-dated the

Securitizations at issue in MBIA’s Amended Complaint.” (Opp. 52-54.) These

allegations even if true, do not give rise to a relationship of trust or confidence


9
    See also Sheridan v. Trs. of Columbia Univ., 296 A.D.2d 314, 316 (1st Dep’t 2002)
(dismissing negligent misrepresentation claim because, “at the time of the alleged
misrepresentation, the parties were clearly acting at arm’s length”); United Safety of Am., Inc. v.
Consol. Edison Co., 213 A.D.2d 283, 285-86 (1st Dep’t 1995) (“A claim for negligent
misrepresentation can only stand in the presence of a special relationship of trust or confidence . .
. . A simple arm’s length business relationship is not enough.”).


                                               - 19 -
between MBIA and Countrywide that is in any way different—or greater—than

that of parties to an arm’s-length contract.

      First, as the IAS Court properly recognized, the fact that a defendant may

have greater “knowledge of ‘the particulars’ of its own business” than a plaintiff

does not give rise to a “special relationship” between the parties. Memorandum

Decision and Order at 8, MBIA Insurance Corp. v. Countrywide Home Loans, Inc.,

No. 602825/08 (Apr. 27, 2010). Accord JP Morgan Chase Bank v. Winnick, 350

F. Supp. 2d 393, 402 (S.D.N.Y. 2004). Nor does it matter that MBIA may have

relied on Countrywide’s reputation and past performance—or that Countrywide

may have known that MBIA was doing so—in deciding to insure the

Securitizations. See MBIA Ins. Corp. v. Royal Bank of Can., No. 12238/09, 2010

N.Y. Misc. LEXIS 3958, at *10, *41 (Sup. Ct. Westchester County Aug. 19,

2010)) (dismissing negligent misrepresentation claim against another issuer where

MBIA alleged reliance on “the past performance of securities of comparable

quality”).   If one party’s consideration of the other’s reputation and past

performance per se sufficed to give rise to a special relationship between

contracting parties, then such a relationship would exist in virtually every case, and

the exception would swallow the rule.

      MBIA’s insuring of two earlier Countrywide securitizations before insuring

the 15 Securitizations at issue also is of no moment. (See S.R. 179, 224, Am.



                                         - 20 -
Compl. ¶¶ 29, 156). As explained by one court, “it is implausible on its face that

two sophisticated business organizations—even if they have had arm’s-length

contractual relationships throughout the years—could create the kind of special

relationship” required to allege a negligent misrepresentation claim. United Guar.

Mortgage Indem. Co. v. Countrywide Fin. Corp., 660 F. Supp. 2d 1163, 1187

(C.D. Cal. Oct. 5, 2009) (“UGMI”) (finding no “special relationship” between the

United Guaranty insurance company and Countrywide despite the “long

(approximately 40-year) business relationship” between the parties); see also

Emigrant Bank v. UBS Real Estate Sec., Inc., 49 A.D.3d 382, 385 (1st Dep’t 2008)

(special relationship “must have existed prior to the transaction giving rise to the

alleged wrong, and not as a result of it”).

      Although MBIA argues that “[n]umerous courts have upheld negligent

misrepresentation causes of actions on allegations similar to those alleged in

MBIA’s Amended Complaint” (Opp. 55), the three cases MBIA cites are

inapposite. The first two involved claims brought by individual plaintiffs and/or

small business owners against large corporations that actively solicited the

plaintiff’s business through false statements or promises. See Smith v. Ameriquest

Mortgage Co., 60 A.D.3d 1037, 1040 (2d Dep’t 2009) (upholding negligent

misrepresentation claim where defendant mortgage company’s agent “personally

solicited the plaintiff to refinance her mortgage with Ameriquest, and came to her



                                         - 21 -
home twice to provide her with information about the transaction in an effort to

convince her that the transaction was in her best interests”); Mercer Capital Ltd. v.

U.S. Dry Cleaning Corp., No. 08 Civ. 05763, 2009 WL 2163598, at *5 (S.D.N.Y.

July 21, 2009) (upholding claim where placement agent falsely represented to dry

cleaning business owner that it “could easily sell up to $100,000,000 of Dry

Cleaning’s securities, had effective market connections and strong working

relationships with syndicates of other brokerage firms, and had already secured

certain commitments for Dry Cleaning’s securities sales”).

      In MBIA’s third case, Robeco-Sage Capital, L.P. v. Citigroup Alternative

Invs. LLC, No. 601030/08, 2009 N.Y. Misc. LEXIS 4338, at *17-19 (Sup. Ct.

N.Y. County July 28, 2009), the court declined to dismiss a negligent

misrepresentation claim based on allegedly false statements by a hedge fund’s

advisors about the fund’s financial condition in order to induce the investors not to

sell their shares. The court found that the investment advisors owed a fiduciary

duty to investors in the fund to provide truthful information about the fund’s

investments. As with the other two cases on which MBIA relies, Robeco-Sage

does not involve an arm’s-length commercial transaction between two

sophisticated corporate entities, like the transactions at issue in this litigation.

      MBIA also fails to distinguish this Court’s decision in Batas v. Prudential

Ins. Co. of America, 281 A.D.2d 260, 264, 724 N.Y.S.2d 3 (1st Dep’t 2001), which



                                          - 22 -
is dispositive and on which the IAS Court relied. In Batas, this Court noted that, in

the context of a claim for breach of fiduciary duty, “defendants’ superior

knowledge of their product, and a posting of promotional material on their web

page in which they tout themselves as a ‘trusted name’ in health insurance,” cannot

create the type of special relationship necessary to give rise to a duty of care.

Batas, 281 A.D.2d at 264. The Court held that no special relationship arose even

though the “consumers [we]re forced to place their trust in the accuracy and

truthfulness of the insurer’s representations as to the extent and scope of the

coverage provided, relying on the good faith of the insurer.” Id. at 269 (Wallach,

J. and Saxe, J., dissenting in part); see id. at 260 (Maj. Op.) (“The facts are fairly

set forth by the dissent.”). MBIA attempts to distinguish Batas on the ground that

it addressed a fiduciary duty claim, rather than a claim for negligent

misrepresentation. This is a distinction without difference: in both instances, a tort

claim will only arise if the nature of the relationship between two contracting

parties was such that one contracting party owed a duty of care to the other. See

Hudson River Club, 275 A.D.2d at 220. Here, as in Batas, Countrywide owed no

such duty to MBIA.

      Finally, numerous other IAS Courts universally have dismissed negligent

misrepresentations claims against Countrywide and other RMBS issuers for lack of

a “special relationship” between the parties. See Financial Guaranty Ins. Co. v.



                                        - 23 -
Countrywide Home Loans, Inc., Index No. 650736/09 (Sup. Ct. N.Y. County),

Memorandum and Order dated June 15, 2010, at 11; Syncora Guarantee Inc. v.

Countrywide Home Loans, Inc. et al., Index No. 650042/09 (Sup. Ct. N.Y.

County), Memorandum and Order dated March 31, 2010, at 15; MBIA Ins. Co. v.

Residential Funding Co., 26 Misc. 3d 1204(A) (table), 2009 WL 5178337, at *5

(Sup. Ct. N.Y. County Dec. 22, 2009); MBIA Ins. Corp. v. Royal Bank of Canada,

No. 12238/09, 2010 N.Y. Misc. LEXIS 3958, at *41 (Sup. Ct. Westchester County

Aug. 19, 2010).     This Court should do likewise and affirm the IAS Court’s

dismissal of MBIA’s negligent misrepresentation claim.

VI.   MBIA’S IMPLIED COVENANT CLAIM SHOULD BE DISMISSED
      IN FULL AS DUPLICATIVE OF MBIA’S CLAIMS FOR BREACH
      OF CONTRACT.
      MBIA argues that this Court should reinstate the portion of the implied

covenant claim dismissed by the IAS Court.            MBIA concedes that where

“plaintiffs’ implied covenant claims [are] based on the same allegations as their

contract claims,” the implied covenant claims must be dismissed. (Opp. 47.)

Nevertheless, MBIA insists that it should be permitted to proceed on its implied

covenant claim, and that the scope of this claim should even be expanded to

include unspecified “additional instances where Countrywide maintained some

discretion and abused that discretion to deprive MBIA of the fruits of the contract.”

(Opp. 49.) MBIA’s argument is a non-starter.




                                        - 24 -
       MBIA acknowledges that an implied covenant claim may only stand when

the complained – of conduct is “not expressly forbidden by any contractual

provision.” (Opp. 45) (quoting Skillgames, LLC v. Brody, 1 A.D.3d 247, 252 (1st

Dep’t 2003) (internal quotation marks omitted).                  The Amended Complaint

unquestionably alleges that the Transaction Documents precluded Countrywide

from engaging in all of the complained-of conduct. (S.R. 226-31, Am. Compl. ¶¶

163-79.) By MBIA’s own admission, therefore, the Amended Complaint fails to

state an implied covenant claim.

       The cases MBIA cites are inapposite. None permit an implied covenant

claim to stand alongside a breach of contract claim where the two claims are based

on the same conduct, as is the case here. 10 Tellingly, as MBIA concedes, the “duty

to take corrective action,” is identified in the Amended Complaint as a “duty”

imposed on Defendants by the express language of the Transaction Documents.

(Opp. 48; see Br. 42-44.)


10
    Of the precedential cases that MBIA cites, one concedes that, notwithstanding MBIA’s
contrary assertions (Opp. 48), “breach of implied obligations can . . . be dismissed at the
pleadings stage.” Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 303 (1st
Dep’t 2003) (noting “the lack of merit to plaintiffs’ argument that a claim for breach of implied
obligations can never be dismissed at the pleadings stage”). Another expressly states that
“contract and implied duty claims may be redundant.” Sims v. First Consumers Nat’l Bank, 303
A.D.2d 288, 290 (1st Dep’t 2003) (reversing dismissal of implied covenant claim where “[t]he
issues in the instant case are still undeveloped . . . ”). In two of the cases, implied covenant
claims were brought where breach of contract claims were not asserted. See Dalton v. Educ.
Testing Serv., 87 N.Y.2d 384 (1995); Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc., 41
A.D.3d 269, 270 (1st Dep’t 2007). Lastly, in Skillgames, this Court affirmed the dismissal of an
implied covenant claim. Skillgames, LLC, 1 A.D.3d 247 at 252 (holding that “[a] claim for
breach of the implied covenant of good faith and fair dealing cannot substitute for an
unsustainable breach of contract claim”).


                                             - 25 -
      The other concrete examples of purportedly “discretionary” conduct MBIA

cites—Countrywide’s purported “discretion to select which mortgage loans would

be included in the Securitizations” and its purported “discretion . . . ‘to allocate

sufficient resources to service and administer the Mortgage Loans,’” (Opp. 49-50

(quoting S.R. 195, Am. Compl. ¶ 85)) – are not alleged in the Amended Complaint

to have been “discretionary.” To the contrary, the Amended Complaint asserts that

the Transaction Documents obligated Countrywide to select Mortgage Loans for

the Securitizations in strict compliance with its underwriting guidelines and that its

failure to do so breached the express provisions of these documents. (S.R. 194-95,

Am. Compl. ¶ 84.) Likewise, the Amended Complaint alleges that the Transaction

Documents obligated Countrywide to service the Mortgage Loans in accordance

with customary and usual standards of practice, and that it breached the express

provisions of these agreements by failing to do so. (S.R. 195, Am. Compl. ¶ 85.)

MBIA cannot now recharacterize alleged “obligations” as “discretionary” for

purposes of this appeal.

      MBIA chose to plead an implied covenant claim that was expressly

grounded in the same contractual provisions and conduct as its breach of contract

claim. MBIA must now live with that decision. See, e.g., Yucyco, Ltd. v. Republic

of Slovenia, 984 F. Supp. 209, 216 (S.D.N.Y. 1997) (“[Plaintiff] did not allege

such a theory in its amended complaint, and it is well-settled that a claim for relief



                                        - 26 -
may not be amended by the briefs in opposition to a motion to dismiss.”) (internal

quotation marks omitted); see also Rubin v. Nine W. Group, No. 0763/99, 1999

N.Y. Misc. LEXIS 655 (Sup. Ct. Westchester Co. Aug. 24, 1999) (same).

      Indeed, as MBIA concedes, courts that have considered implied covenant

claims in analogous cases filed by MBIA and other monoline insurers against

Countrywide and other issuers of residential mortgage-backed securities have,

without exception, dismissed those claims as duplicative of breach of contract

claims. (Opp. 47.) See Financial Guaranty Ins. Co. v. Countrywide Home Loans,

Inc., Index No. 650736/09 (Sup. Ct. N.Y. County), Memorandum and Order dated

June 15, 2010, at 11-12 (Br. Ex. B); Syncora Guarantee Inc. v. Countrywide Home

Loans, Inc. et al., Index No. 650042/09 (Sup. Ct. N.Y. County), Memorandum and

Order dated March 31, 2010, at 15 (Br. Ex. C); MBIA Ins. Co. v. Residential

Funding Co., 26 Misc. 3d 1204(A) (table), 2009 WL 5178337, at *6-7 (Sup. Ct.

N.Y. County Dec. 22, 2009);      MBIA Ins. Corp. v. Royal Bank of Can., No.

12238/09, 2010 N.Y. Misc. LEXIS 3958, at *15 (Sup. Ct. Westchester County

Aug. 19, 2010). MBIA attempts to distinguish those cases by arguing that the

implied covenant claims were dismissed because the “courts construed the

plaintiff’s implied-covenant claims as based on the same allegations as their

contract claims.” (Opp. 47) The same is true here. MBIA cannot evade the actual

allegations in its Amended Complaint.



                                        - 27 -
                                 CONCLUSION

      For the foregoing reasons and for the reasons stated in Countrywide's

Opening Brief, this Court should reverse the lAS Court's rulings to the extent they

deny the Countrywide Defendants' motion to dismiss MBIA' s claims for

fraudulent inducement and for breach of the implied covenant of good faith and

fair dealing, and affirm the lAS Court's dismissal of MBIA's negligent

misrepresentation claim.

Dated: October 15,2010


                               Respectfully submitted,

                               GOODWIN PROCTER LLP


                               BY:~~A
                               Mark~iiand       >


                               Christopher J. Garvey
                               Abigail K. Hemani
                               Ashley H. Gray
                               The New York Times Building
                               620 Eighth Avenue
                               New York, NY 10018
                               (212) 813-8800

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




                                       - 28 -
                            Attorneys for Defendants-Appellants
                            Countrywide Home Loans, Inc., Countrywide
                            Securities Corp., Countrywide Financial Corp.
                            and Countrywide Home Loans Servicing, L.P.

Of Counsel:

Thomas M. Hefferon                 Robert J. McGahan
GOODWIN PROCTER LLP                GOODWIN PROCTER LLP
901 New York Avenue, N.W.          601 S. Figueroa Street, 41st floor
Washington, D.C. 20001             Los Angeles, CA 90017
(202) 346-4000                     (213) 426-2500

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




                                  - 29 -
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                       Pursuant to 22 NYCRR § 600.10(d)(iv)



         I hereby certify pursuant to 22 NYCRR § 600.1 O( d)(iv) that the foregoing

brief was prepared on computer using Microsoft Word 2003.




Type:          A proportionally spaced typeface was used, as follows:


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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, AND PROOF OF
SERVICE, IS 6936.

Dated:     New York, New York
           October 15,2010



                                             BY:[~~",,---=
                                             Ashley H.   ay, Esq.
                                             The New York Times Building
                                             620 Eighth Avenue
                                             New York, NY 10018
                                             (212) 813-8800




                                         - 30 -
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STATE OF NEW YORK                      )
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That on 10/15/2010 deponent caused to be served 2 copy(s) of the within

                                                  Reply Brief

upon the attorneys at the address below, and by the following method:

By Hand and Email

Quinn Emanuel Urquhart
& Sullivan LLP
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Attorneys for Plaintiff-Respondent
-Appellant MBIA Insurance
Corporation
Email:
evemoskowitz@quinnemanuel.com




      Sworn to me this                           Case Name: MBIA Insurance Corporation v. Countrywide
  Friday, October 15, 2010                                  Home Loans, Inc.
         ALLISON R. WADE                      Docket/Case No (602825/08)
    Notary Public, State of New York
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