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April 8, 2013

BY E-FILING AND BY HAND

Hon. Eileen BranstenNew York Supreme Court60 Centre Street, Room 442New York, NY 10007

Re: MBIA Insurance Corporation v. Countrywide Home Loans, Inc., et al., Index No.602825/2008

Dear Justice Bransten:

On behalf of Plaintiff MBIA Insurance Corporation (“MBIA”), we respectfully submit this letter to notify the Court of the First Department’s Decision and Order dated April 2, 2013 (“Decision”) on review of this Court’s January 3, 2012 Order on MBIA’s motion for partial summary judgment (Mot. Seq. 37), MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513 (N.Y. Sup. Ct. N.Y. Cty. 2012) (“Order”). We also respond to Countrywide’s letter dated April 3, 2013 (“Letter”).

The First Department’s Decision clears the path for this Court to grant MBIA’s pending motion for summary judgment (Mot. Seq. 58). First, regarding MBIA’s claim for breach of the Insurance Agreements, the First Department clearly affirmed this Court’s ruling that, “pursuant to Insurance Law §§ 3105 and 3106, plaintiff was not required to establish causation in order to prevail on its fraud and breach of contract claims.” Decision 30-31; see also MBIA, 936 N.Y.S.2d at 527 (“MBIA is not required to establish a direct causal connection between proven warranty breaches by CHL and MBIA’s claims payments made pursuant to the insurance policies at issue.”). The First Department further held that, although rescissory damages are not available in connection with thisclaim, compensatory damages are available—“without resort to rescission”—in the form of

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“recovery of payments made pursuant to an insurance policy,” Decision 31-32, a measure that will allow MBIA to recoup all of its losses. Accordingly, the only remaining hurdle for MBIA on this branch of its motion for summary judgment is to show as a matter of undisputed fact that Countrywide’s pervasive breaches materially increased the risk profile of the insurance. MBIA’s motion papers did so by pointing to undisputed evidence that over 50% of the loans in the pools were materially misrepresented by Countrywide.

Second, regarding MBIA’s claim for breach of the repurchase obligation, the First Department held that MBIA “is entitled to a finding that the loan need not be in default to trigger defendants’ obligation to repurchase it.” Decision 33. The First Department based this holding on both the insurance-law causation rule, see id. (approvingly citing Syncora Guar. Inc. v. EMC Mortg. Corp., 874 F. Supp. 2d 328 (S.D.N.Y. 2012)), and on language in the Transaction Documents, which requires only a showing that the breach “materially and adversely affect[ed] [MBIA’s] interest” in the loan, Decision 33-34.1 The lone remaining hurdle for MBIA on this branch of its motion is to demonstrate the number of loans as to which a Countrywide breach materially increased the risk of non-performance. MBIA’s motion papers did so by pointing to Countrywide’s own internal documents, as well as testimony by Countrywide’s own employees, demonstrating that Countrywide’s breaches materially increased that risk.

While the Decision thus definitively resolves these key legal issues in MBIA’s favor and allows the Court to grant MBIA summary judgment based on the evidentiary showings made in its papers, Countrywide pretends otherwise by repeatedly mischaracterizing the Decision.2 MBIA responds to Countrywide’s assertions below.

1. Countrywide incorrectly asserts that the Decision restricts MBIA to a repurchase remedy.

Countrywide argues that “MBIA’s motion for summary judgment was premised on the assumption that MBIA would be able to recover rescissory damages that would allegedly restore it to the position it occupied before entering the transactions at issue.” Letter 2; see also id. (describing rescissory damages as “MBIA’s basic theory of this case”). Countrywide therefore argues that, “[n]ow that rescissory damages have been ruled to be unavailable, it is plain that MBIA’s sole remedy on its breach-of-contract claim is the loan-by-loan repurchase protocol.” Id. 3. Countrywide is flatly wrong, for numerous reasons.

1 Although the First Department limited its holding to the “Revolving Home Equity Loan Asset Backed Notes, Series 2006-E” securitization because the Transaction Documents for the other fourteen securitizations were not in the record on appeal, those documents are in the record on the pending motion for summary judgment and are essentially identical to the documents the First Department considered. See Pl.’s Mem. Of L. In Supp. Of Its Mot. For Summ. J. On Breach Of The Insurance Agreements, Sept. 19, 2012 (Mot. Seq. 58), at 8-9. Accordingly, this Court should extend the First Department’s ruling to the other fourteen securitizations.2 Tellingly, Countrywide recognizes that the Decision favors MBIA when Countrywide states that it “currently intend[s] to seek leave from the First Department to certify the [Decision] to the Court of Appeals for its review ….” Letter 2.

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First, MBIA has never tied its ability to recover claims payments to the availability of a rescissory-damages remedy. The focus of the branch of MBIA’s motion concerning the claim for breach of the Insurance Agreements (as informed by Ins. Law. § 3106) was to show, as undisputed fact, that “56% of the loans breached Countrywide’s representations and warranties, thus demonstrating a material breach of the entire Insurance Agreements.” Pl.’s Reply Mem. Of L. In Further Supp. Of Its Mot. For Summ. J. On Breach Of The Insurance Agreements, Nov. 9, 2012(Mot. Seq. 58), at 5. While MBIA did discuss rescissory damages as one form of relief that (at least before the First Department’s Decision) could be awarded on MBIA’s claim, see, e.g., id. at 17-19, MBIA nowhere restricted the claim to that remedy. In fact, MBIA argued both to the First Department and this Court that a non-rescissory, compensatory-damages remedy should be granted if MBIA proves its claim for breach of the entire Insurance Agreements with the benefit of the insurance-law causation rule of Ins. L. § 3106.3 As this Court explained, under that rule, “MBIA must prove for its breach of warranty claim that Countrywide’s alleged misrepresentations materially increased MBIA’s risk of loss” on day one of the policies. MBIA, 936 N.Y.S.2d at 522 (citing Ins. L. § 3106(b)) (emphasis added).

Second, the First Department plainly understood this context, for it explicitly held, in a keysentence that Countrywide ignores, that MBIA may seek “recovery of payments made pursuant to an insurance policy without resort to rescission.” Decision 32 (emphasis added). Moreover, the First Department clearly so held in connection with MBIA’s claim for breach of the Insurance Agreements as opposed to MBIA’s claim for breach of the repurchase obligation. Compare id. at 31-32 (discussing claim for breach of the Insurance Agreements) (“Although the Insurance Law provides for ‘avoid[ing]’ an insurance policy (or rescission), it also mentions ‘defeating recovery thereunder,’ which, logically means something other than rescission. Neither defendants, nor the federal cases on which they rely, explain why ‘defeating recovery thereunder’ cannot refer to the recovery of payments made pursuant to an insurance policy without resort to rescission.”) (internal citations omitted), with id. at 33-34 (discussing claim for breach of the repurchase obligation).4

3 See, e.g., Br. For Pl.-Resp./Cross-Appellant, Dec. 7, 2012 (1st Dep’t), at 27 (“MBIA’s theory [is] that it suffered harm on day one of the policies by assuming a risk (to pay claims under the policies) that was materially different from and greater than was represented by Countrywide. ... This is further corroborated by the fact that MBIA seeks rescissory damages …”) (emphasis added); Pl.’s Mem. Of L. In Opp’n To Countrywide’s Mot. For Summ. J., Oct. 19, 2012 (Mot. Seq. 57), at 19n.20 (“an insurer who demonstrates that the applicant made material misrepresentations may obtain rescission or equivalent relief”) (emphasis added).

Countrywide misrepresents (Letter 2 n.2) Plaintiff’s Memorandum Of Law In Support Of Its Motion For Summary Judgement On Breach Of The Insurance Agreements, Sept. 19, 2012 (Mot. Seq. 58), at 45 n.79, as an indication by MBIA that it is predicating its entire summary-judgment argument on a rescissory-damages theory. In fact, the footnote did nothing more than “reserve[MBIA’s] right to present evidence in further support of its damages calculations based on the Court’s rulings.” Id. The footnote did not abandon the compensatory-damages remedy later endorsed by the First Department—namely, “the recovery of payments made pursuant to an insurance policy without resort to rescission.” Decision 32.4 The First Department hardly broke new ground in endorsing a compensatory-damages remedy of “recovery of payments made” without any requirement of a causal link between the defendant’s (footnote continued)

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Were Countrywide correct that the First Department intended to restrict MBIA to its repurchase remedy, there would have been no reason for the First Department to cite Ins. Law § 3106 or to discuss the remedy of “recovery of payments made pursuant to an insurance policy,” a broader remedy than the repurchase remedy.

Third, although Countrywide vigorously argued to the First Department, in opposition to MBIA’s defense of this Court’s ruling that rescissory damages are available, that MBIA should be restricted to the repurchase remedy as its sole remedy,5 the First Department did not accept Countrywide’s argument. Instead, the First Department based its holding that rescissory damages are “not warranted” only on the grounds that (1) “Plaintiff voluntarily gave up the right to seek rescission—under any circumstances; and in fact, plaintiff does not actually seek rescission,” Decision 32; and (2) rescission is not “impracticable,” id. To make matters even more clear, the First Department affirmatively rejected Countrywide’s sole-remedy argument by stating, at the conclusion of the Decision, that “[w]e have considered the parties’ remaining arguments and find them unavailing.” Id. 34.

Fourth, Countrywide cannot escape the Decision’s clear rejection of Countrywide’s sole-remedy argument by pointing (Letter 2-3) to case law not cited by the Decision. Countrywide begins by citing a decision in Assured Guaranty Municipal Corp. v. Flagstar Bank, F.S.B., No. 11-cv-2375 (S.D.N.Y.). By way of background, there are numerous decisions in that Assured case, only one of which the First Department cited. Specifically, the First Department cited the summary-judgment decision, 2012 WL 4373327 (S.D.N.Y. 25, 2012).6 Contrary to Countrywide’s suggestion (Letter 2),

misrepresentations and those payments. For example, Hotaling v. Leach & Co., 247 N.Y. 84 (1928), held that, even outside the insurance-law context, a plaintiff may establish causation by showing that the defendant’s misrepresentation caused the plaintiff to enter into a transaction, without the further need to show any causal link between the misrepresentation and losses realized after the transaction was entered. Specifically, the Court of Appeals held that the plaintiff could recover all of its losses on a bond it was fraudulently induced to purchase, including those that flowed from a post-purchase event in the market. The Court of Appeals reasoned that the defendant’s “fraud continued to operate [after the sale] and to induce the continued holding of the bond,” and thus “[t]he loss sustained is directly traceable to the original misrepresentation of the character of the investment the plaintiff was induced to make.” Id. at 93. In other words, while the post-purchase market event “may have been a subsidiary cause[,] it was not an independent cause.” Id. Similarly here, MBIA’s losses under the policies were “directly traceable” to Countrywide’s misrepresentations because, once MBIA had been induced to issue irrevocable policies by those misrepresentations, it was irrevocably committed to pay any and all claims arising under them, whatever the “subsidiary cause” of the claimed losses. 5 See Br. For Defs.-Appellants-Resps., Nov. 7, 2012 (1st Dep’t), at 51 (“MBIA’s ‘sole remedy’ for breaches of Countrywide’s representations and warranties is to require Countrywide to repurchase breaching loans”).6 Specifically, the First Department cited the Assured summary-judgment decision in support of its holding, in MBIA’s favor, (1) that the insurance-law causation rule applies to MBIA’s claim for breach of the Insurance Agreements, and (2) on MBIA’s repurchase claim, that MBIA is “entitled to (footnote continued)

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the First Department did not cite the post-trial decision in Assured, 2013 WL 440114 (S.D.N.Y. Feb. 5, 2013), or the motion-to-dismiss decision referenced therein, see id. at *37 (referring to Am. Mem., ECF No. 56 (Oct. 27, 2011), also available at 2011 WL 5335566 (S.D.N.Y. Oct. 31, 2011)).

Countrywide does not assert that its other authorities (Letter 2-3) were mentioned in the Decision. In any event, Countrywide’s authorities are beside the point because, as just explained, the First Department definitively rejected Countrywide’s sole-remedy argument. Even if the issue were still open for this Court’s resolution, MBIA’s summary-judgment papers explain that Countrywide’s argument is meritless because Countrywide waived the argument, the argument is refuted by the plain language of the Transaction Documents, and the argument misperceives the intended purpose of the repurchase remedy. See Pl.’s Mem. Of L. In Opp’n To Countrywide’s Mot. For Summ. J.,Oct. 19, 2012 (Mot. Seq. 57), at 29-35; Pl.’s Reply Mem. Of L. In Further Supp. Of Its Mot. For Summ. J. On Breach Of The Insurance Agreements, Nov. 9, 2012 (Mot. Seq. 58), at 17-19; Syncora Guar. Inc. v. EMC Mortg. Corp., 09-cv-3106, 2011 WL 1135007, at *6 n.4 (S.D.N.Y. Mar. 25, 2011) (The repurchase remedy “is a narrow remedy (‘onesies and twosies’) that is appropriate for individualized breaches…. That is not what is alleged here. Here, Syncora alleges massive misleading and disruption of any meaningful change by distorting the truth.”).

Moreover, Countrywide’s cases are inapposite or incorrect: (1) the Assured motion-to-dismiss decision relied upon a provision, applicable to the entire contract, that the Insurer was “subject to the limitations as to remedies as set forth in the Transaction Documents,” Sheth Aff., Oct. 19, 2012, Ex. 107, § 2.03(h)—here, by contrast, the sole-remedy provision applies only to a single paragraph (§ 2.01(l)) of the Insurance Agreements; (2) Assured Guar. Municipal Corp. v. DLJ Mortg. Cap., Inc., No. 652837/11, 2012 WL 5192752 (N.Y. Sup. Ct. N.Y. Cty. Oct. 11, 2012) (Kornreich, J.), incorrectly concluded that “the Insurers are third-party beneficiaries of the PSAs with all the rights of the Certificateholders,” id. at *8, when in fact the PSAs provided that Assured was a “third-party beneficiary of the [PSA] to the same extent as if it were a party hereto,” id. at *4(emphasis added), which the Certificateholders were not; (3) MBIA Ins. Corp. v. Residential Funding Co., No. 603552/08, 2009 WL 5178337 (N.Y. Sup. Ct. N.Y. Cty. Dec. 22, 2009) (Fried, J.), is irrelevant because the court did not construe a sole-remedy clause; and (4) U.S. Bank Nat’l Ass’n v. WMC Mortg. Corp., 843 F. Supp. 2d 996 (D. Minn. 2012), is likewise distinguishable, because the claims were brought by a trustee who did not benefit from provisions like those contained in the Insurance Agreements here.7

a finding that the loan need not be in default to trigger defendants’ obligation to repurchase it.” Decision 32, 33. 7 Countrywide quotes the First Department’s Decision out of context in arguing that, “if ‘these very sophisticated parties desired’ a particular contractual term, they could have bargained for it; if they wanted a damages remedy in the form of reimbursement of all claims paid or any other pool-wide remedy, ‘they certainly could have included such language in the contracts.’” Letter 3 (quoting Decision 33). In fact, the quoted phrases from the First Department’s Decision concerned rejection of Countrywide’s argument that the repurchase remedy is available only as to loans that have defaulted. In rejecting the argument, the First Department reasoned, inter alia, that, had the parties intended such a default prerequisite, they easily could have so stated. Decision 33. Countrywide has (footnote continued)

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2. Countrywide incorrectly asserts that MBIA must prove a causal connection between warranty breaches and MBIA’s claim payments for purposes of MBIA’s claim for breach of the Insurance Agreements.

After correctly noting that “[t]he Decision left in place this Court’s causation ruling in its entirety,” Letter 3, Countrywide attempts to narrow that causation ruling to the question of liability, arguing that an entirely different causation standard applies to damages. Countrywide again is incorrect, as evident from the plain text of the First Department’s Decision.

As discussed above, this Court’s Order held that, for purposes of MBIA’s “claim for breach of the Insurance Agreement,” that MBIA “must establish … that CHL’s breach of warranties … increased the risk profile of the issued insurance policies and MBIA is not required to establish a direct causal connection between proven warranty breaches by CHL and MBIA’s claims payments made pursuant to the insurance policies at issue.” 936 N.Y.S.2d at 527; see also Decision 30-31(characterizing this Court’s Order as holding that, “pursuant to Insurance Law §§ 3105 and 3106, plaintiff was not required to establish causation in order to prevail on its fraud and breach of contract claims”). The First Department proceeded to affirm that holding, rejecting Countrywide’s “[c]ontrary … arguments.” Decision 31. Most importantly, the First Department did so in the same breath as it endorsed non-rescissory, compensatory damages in the amount of “recovery of payments made pursuant to an insurance policy without resort to rescission.” Id. 32. Given this plain language, there is simply no room for Countrywide to argue for a distinction between the causation required for liability and the causation required for damages.

Countrywide’s argument finds no support in the Assured post-trial decision, which the First Department’s Decision did not cite, and which in any event endorses MBIA’s position. Specifically, in discussing the “proximat[e] cause” element of the insurer’s claim, the Assured court framed the inquiry as whether the defendant’s misrepresentations “caused Assured to improperly bear the burden of paying claims on the transactions.” 2013 WL 440114, at *39 (emphasis added). The court then held that Assured “should be reimbursed in full for all claims paid on the underlying transactions,” id. (emphasis added), without mentioning any causal link between the misrepresentations and specific claims paid.

Absent any basis to insist on a requirement (which both this Court and the First Department rejected) that MBIA “establish a direct causal connection between proven warranty breaches by CHL and MBIA’s claims payments,” MBIA, 936 N.Y.S.2d at 527, Countrywide’s attempt to apply that requirement—invoking “expert evidence demonstrating that even if the alleged breaches of representations and warranties claimed by MBIA in fact increased the risk of loss on the loans …, MBIA would not have sustained any losses if not for macroeconomic factors beyond Countrywide’s control,” Letter 4—is meritless.

no basis to wrench this quotation out of context and apply it to the distinct issue whether, on MBIA’s claim for breach of the Insurance Agreements, MBIA may obtain, as compensatory damages, “recovery of payments made pursuant to an insurance policy without resort to rescission.” Id. at 32.

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3. Countrywide incorrectly asserts that MBIA must prove a causal connection between warranty breaches and non-performance of specific loans for purposes of MBIA’s claim for breach of Countrywide’s repurchase obligation.

Countrywide is equally off-base in attempting to impose a post-day-one causation requirement in connection with MBIA’s separate claim for breach of the repurchase obligation. Countrywide asserts, without quoting the Decision, that “the First Department took care not to endorse the notion that an increase in risk of loss alone would constitute a material and adverse effect.” Letter 4 (citing but not quoting Decision 33).

In fact, the First Department made clear that a material increase in risk of loss on day one as to a loan, caused by a Countrywide breach, is all that is required to trigger the repurchase obligation. Specifically, the First Department approvingly cited Syncora and the Assured summary-judgment decision, both of which clearly held that an increase in risk of loss on day one is sufficient. SeeDecision 33 (citing Syncora, 874 F. Supp. 2d 328; Assured, 2012 WL 4373327). Syncora held that, “[c]onsistent with the rationale underlying the insurance law principles discussed above, Syncora may establish a material breach of the I&I by proving that EMC’s alleged breaches increased Syncora’s risk of loss on the Policy, irrespective of whether the breaches caused any of the HELOC loans to default,” 874 F. Supp. 2d at 339 (emphasis added). The Assured summary-judgment decision similarly held that a “‘breach of warranty … [that] materially increases the risk of loss’” is actionable. 2012 WL 4373327, at *5 (quoting Ins. L. § 3106(b)). Countrywide ignores both the First Department’s citation of these authorities and their specific holdings. Countrywide’s interpretation of the First Department’s Decision, in this instance and in the others discussed above, should thus be rejected out of hand.

We thank Your Honor for considering this letter. We respectfully suggest that, since both parties have now submitted letter briefs regarding the Decision, the further briefing requested by Countrywide is unnecessary and would simply delay this Court’s determination of the pending motions for summary judgment.8

Respectfully submitted,

/s/ Philippe Z. Selendy

Philippe Z. Selendy

cc: Counsel for Defendants (via e-filing)

8 Of course, if this Court would find further briefing helpful, MBIA stands ready to provide it. Any such briefing would, however, relate only to the primary-liability issues, and would have no impact on MBIA’s motion for summary judgment as to Bank of America Corp.’s successor liability. Accordingly, such briefing would not warrant delaying a decision on the latter motion.