At this hearing, MBIA will be seeking summary judgment that BAC breached its insurance agreements with MBIA, authorizing MBIA to obtain recissionary damages equal to all of the losses sustained by MBIA on its insured BAC mbs pools, plus interest at the statutory annual rate of 9%. This amounts to approximately $5 billion in damages.
The debt consent solicitation/debt tender offer contest has many possible outcomes, but MBIA does possess a "checkmate" move at the end of the game. The notes (2034 notes) that are the subject of the consent solicitation/tender offer contest are prepayable by MBIA at any time. MBIA will need to make a private placement of at least $330 million of replacement notes (with registration rights) that have a cross-default provision to its liking in order to prepay the 2034 notes, and the prepayment will be costly to MBIA, but the point remains: MBIA has a pathway to achieve what it wants, the elimination of all holding company debt that cross-defaults to its securitization insurance subsidiary debt.
So, now back to the litigation front. It has not been easy to track the parties' arguments, both because of redactions within the briefing and seals of entire motion papers and exhibits, as well as the flurry of counsel activity as the motions for unsealing filings (argued today), primary liability (to be argued December 5, 2012) and successor liability (to be argued December 12, 2012) have approached.
It makes sense, however, to focus on two motions for summary judgment in particular that are game-changers, possibly game-enders: BAC's breach of insurance agreements (this post), and the BAC parent company liability for subsidiary Countrywide's liabilities (future post).
In MBIA's reply brief in further support for summary judgment on breach of insurance agreements, filed November 14, 2012 (MBIA Reply Brief), MBIA points out that Justice Bransten has already ruled by way of summary judgment on January 3, 2012 (January 3 SJ) that MBIA is entitled to judgment on breach of insurance agreements if it can show that BAC breached representations and warranties (R/W) made to MBIA, and those R/W breaches materially increased the risk of loss to MBIA by insuring the loans.
If MBIA can show this, it is entitled to judgment. Under the January 3 SJ, evidence relating to the performance of the loans post-closing, or whether losses in respect of the loans were caused by the R/W breaches, is irrelevant to this analysis. Also, justifiable reliance by MBIA is not required to be proved. MBIA's Reply Brief states "New York Insurance Law § 3106 requires only that MBIA establish that Countrywide's breaches of representations and warranties were material to the risk insured, not that MBIA justifiably relied on those representations. Indeed, the entire purpose of the representations and warranties was to allow MBIA to rely on them as 'insurance policies' against any possibility that facts regarding the loans were not as Countrywide represented."
So, the question for summary judgment purposes is whether there is a genuine question of fact as to whether (i) BAC breached the R/Ws in the insurance agreements, and (ii) those breaches materially increased MBIA's risk of loss. If there is a genuine question of fact, the parties will go to trial. If there is no genuine question of fact, MBIA should be granted summary judgment on the issue of whether BAC breached the insurance agreements, and under the January 3 SJ, MBIA would be entitled to recissionary damages (the amount of which would need to be determined by further briefing).
The MBIA Reply Brief sets out the question as to whether there is a genuine question of fact as follows: "A fundamental principle of summary judgment procedure is that the non-moving party may not rest on conclusory assertions in its opposition brief or affirmations. Such assertions of a factual dispute are properly recognized as "feigned," not genuine disputes, and thus do not preclude summary judgment. [citation omitted]. To demonstrate a genuine dispute, the non-moving party must point to concrete evidence from which a reasonable fact-finder could find in its favor. Countrywide has failed to do so here."
To make its argument, MBIA relies on the Butler Report, which is MBIA's expert analysis of a sampling of 6,000 loans from among the over 389,000 loans comprising the insured pools. According to the MBIA Reply Brief, "MBIA moved for summary judgment on [the breach of insurance agreement] claim because (1) MBIA's expert found indisputable breaches of certain of Countrywide's representations and warranties in a random sample of loans from the Securitizations which could be extrapolated to the rest of the pool; and (2) Countrywide's experts could not and did not meaningfully respond to the vast majority of those breaches. Once these breaches alone are extrapolated from the random sample to the total population of loans, they indicate that some 56% of the loans breached one or more representations and warranties, a figure sufficiently high to constitute a material breach of the entire Insurance Agreements as a matter of law and to entitle MBIA to rescissory damages under this Court's January 3, 2012 Order."
So, while the Butler Report indicated that more than 56% of the loans suffered from one or more defects, MBIA argues in the MBIA Reply Brief that there can be no dispute that 56% of the mortgage loans contained R/W breaches, and the brief goes on at length to argue that BAC does not, indeed can not, show that this is not an objective fact.
For example, BAC contested in its motion papers that the "no default" R/W was not breached because the term default refers to payment default, and the loans were still current when they were deposited into the pools. The MBIA Reply Brief counters by showing that the term default is defined in the transaction documents to include any misrepresentation by the borrower ("Default," in turn, is defined in the "Mortgage Note," an agreement signed by the borrower and lender (often Countrywide), to include, inter alia, "any misrepresentation" by the borrower "whether in [the] application, in this Agreement, or in the Mortgage.") In this way, MBIA argues that it is an objective fact that 626 of the 6,000 sampled loans in the Butler Report breached the "no default" R/W, and that BAC cannot presents facts to indicate otherwise.
BAC seeks to dispute the materiality of the R/W breaches by introducing a study by Dr. Hubbard (Dean of the Columbia School of Business and reputed economics adviser to Gov. Romney) that shows no strong link between R/W breaches and loan performance. In the MBIA Reply Brief, this argument by BAC gets the back of the hand, as MBIA asserts loan performance post-closing is irrelevant to the question as to whether MBIA's risks were increased materially at closing.
I will not go into further detail of MBIA's presentation that there is no genuine factual dispute as to the other portion of the 56% of the loans that it claims objectively constitute R/W breaches, other than to say that there is impressive detail and argumentation. Will it be enough to persuade Justice Bransten that no trial is needed since no questions of fact remain? I think it will be a close call...but I also think reasonable people would believe that it should be too close a call for BAC to take.
NB: this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice. Investing is a tough game, and everyone must do and own their own work, because you will certainly own your investments.
Disclosure: long MBI. Follow me on twitter.