In a June 1, 2011 decision by Justice Kornreich, the court granted in part and denied in part, the defendants’ motion to dismiss the complaint which arose out of an insurance policy MBIA issued to guarantee payments to a trust that consisted of residential second mortgages and mortgage-backed securities. Plaintiff MBIA alleged that it issued the insurance policy as a result of the defendants’ fraudulent misrepresentations and breaches of contractual representations and warranties. The court dismissed the fraudulent inducement claim on the grounds that it was duplicative of MBIA’s breach of contract claim and struck the demand for punitive damages. It found that MBIA’s allegations, that the loans at issue did not conform with underwriting guidelines and the defendants’ Prospectus did not adequately disclose information about the loans, were not facts collateral to the contract, and any damages sustained as a result could be recovered under the breach of contract claim. The court further concluded that MBIA’s allegation that the defendants’ representation that they complied with the strict underwriting standards was insufficient to state the fraudulent inducement claim because MBIA, a sophisticated business entity, failed to conduct its own due diligence, was aware that the Prospectus painted a negative picture of the trust’s value and, therefore, assumed the risk when it elected to proceed with the transaction under those known facts.

The court denied the motion to dismiss the breach of contract claim, rejecting the defendants’ argument that the claim lacked specificity, because CPLR § 3013 required MBIA only to provide notice of the transactions, which it properly did. However, the court struck MBIA’s claim for lost profits because such damages are recoverable under a breach of contract claim only where the particular damages are contemplated by the parties at the time of the agreement, and the court found that the insurance agreement evidenced the parties’ intent to limit damages to the amounts due under the agreement and amounts necessary to enforce MBIA’s rights thereunder.

MBIA Ins. Corp. v Credit Suisse Sec. (USA) LLC, Sup Ct NY County, June 1, 2011. Kornreich, J, Index No. 603751/09