Friday, May 31, 2013

Ambac Is Using MBIA's Roadmap in Its Over $1 Billion Representation and Warranty Case Against Bank of America

To those speculators who missed out on an opportunity to profit from MBIA's $2.7 billion settlement with Bank of America (BAC) (you didn't catch that week of May 6th 60% price appreciation in MBIA common stock?), life is presenting you with a do-over, in the form of Ambac's fraud and breach of representation and warranty (R/W) action against BAC.

Moreover, this is a do-over with benefits.  Ambac has the benefit of MBIA's legal roadmap to proceed with its R/W action against BAC in front of Justice Bransten, courtesy of Justice Bransten's own summary judgment opinions in MBIA's now-settled action against BAC.

In MBIA Wins on the Law But Must Go To Trial. Has the Settlement Bid/Ask Spread Just Narrowed? I noted that Justice Bransten's successor liability summary judgment opinion was noteworthy for two reasons.  First, Justice Bransten decided two crucial questions of New York law in MBIA's favor:  (i) New York rather than Delaware law of de facto merger applies to the question of BAC's successor liability, and (ii) there is no requirement to show inadequacy of consideration in de facto merger transactions under New York law.  Ambac is now the beneficiary of these MBIA successor liability opinions by Justice Bransten, given that it is certain that she will apply this same reasoning to the Ambac v BAC case before her.

Second, while Justice Bransten's opinion denied  summary judgment on BAC successor liability, she provided MBIA a roadmap for trial, identifying the (rather thin amount of) fact evidence she felt was still missing at the summary judgment stage of the proceeding, thereby offering MBIA guidance on what additional facts it needed to prove at trial.  With MBIA's case against BAC settled, however, MBIA's trial roadmap was not simply filed away in MBIA's glove compartment. 

Ambac has come out with a second amended complaint in its R/W case against BAC that illustrates the usefulness of Justice Bransten's roadmap when used by another monoline insurer with another in excess of one billion dollar case against BAC (Ambac had paid claims of "over $1 billion" as of June 30, 2011).  In effect, Ambac has reached into MBIA's glove compartment and taken out MBIA's trial roadmap for Ambac's own use in its R/W case against BAC.

At pages 19-45 of Justice Bransten's Summary Judgment Opinon, Justice Bransten reviews the factual allegations made by MBIA to support the de facto merger claim that BAC had succeeded to Countrywide's liabilities because Countrywide's entire mortgage business had been transferred to BAC.  While MBIA's fact allegations of BAC's acquisition of Countrywide's mortgage platform were strong, Justice Bransten concluded that at the summary judgment stage of the case, certain fact questions remained, including in particular whether BAC itself controlled the transfer of Countrywide's mortgage platform to BANA, BAC's North American banking subsidiary, and whether BAC in fact dictated what decisions were made ostensibly by Countrywide.

At the time of the decision, I thought Justice Bransten was being something of a hardass regarding this factual showing, as it was abundantly clear to me that BAC controlled BANA as well as Countrywide, based on the deposition testimony presented by MBIA.  But to Justice Bransten's credit, if she did not think MBIA made the necessary factual showing of BAC's control over BANA and Countrywide sufficient to rule on such control at the summary judgment stage, shame on MBIA and more power to Justice Bransten.  By the way, being called a hardass can be viewed as a term of endearment by a trial judge.

So as Alison Frankel points out in a new post,  Ambac's has amended its complaint recently a second time to assert various claims that BAC has controlled Countrywide since its acquisition, and that Countrywide is simply the alter ego of BAC.

While Ms. Frankel tells you "the what", she doesn't tell you "the why", in connection with this alter ego argument by Ambac.  "The why" is simply that Ambac is focusing on that final yard that, in Justice Bransten's view, MBIA still needed to go in its successor liability argument to prove that BAC exercised control over Countrywide.  This final yard in the trial roadmap is required to show that BAC orchestrated the transfer of Countrywide's mortgage platform to BANA, and that this transfer was tantamount to a transfer to BAC itself.

For the benefit of my lawyer readers, since Justice Bransten interpreted the "cessation of business" prong of the four-part de facto merger analysis as requiring strong evidence that Countrywide didn't operate as a separate entity post-mortgage platform transfer, and she seemed to make a distinction between a transfer of Countrywide's mortgage platform to BANA, as opposed to the ultimate parent BAC, Ambac is essentially folding in an alter ego claim both to stand on its own but, more importantly, to buttress the de facto merger claim.

So, in the case of Ambac's R/W suit against BAC, BAC has certainly seen this movie before...Ambac is "MBIA: The Sequel"...except that Ambac has the financial flexibility that MBIA did not have to rewrite the ending, substituting a judgment after trial in the place of settlement before trial.

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; AMBC.  Follow me on twitter.

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