We have been following the MBIA lawsuit against Bank of America (see here and here). In the latest development, Justice Eileen Bransten of New York State Supreme Court ruled on Monday that MBIA’s lawsuit may proceed. The lawsuit involves allegations regarding mortgage-backed securities that accompanied Bank of America’s 2008 acquisition of Countrywide Financial Corp (“Countrywide”). MBIA alleges Bank of America, as Countrywide’s successor, fraudulently induced MBIA to insure fifteen residential mortgage-backed securities.
In the ruling, Justice Bransten denied Bank of America’s argument that it could not be held liable for claims against Countrywide because it had paid fair value for Countrywide’s assets. The court stated the following:
Here, the issue is whether two of those successor liability exceptions – de facto merger and assumption of liability – are viable in light of the evidentiary record. Whether payment of fair value in the ordinary course would result in ‘fairness’ to creditors is collateral to the matter at bar . . . The principle underlying the de facto merger doctrine is that a purchaser cannot escape the assumption of liabilities ordinarly attendant with a merger by labeling the transaction something else. Whether fair value is paid for the assets acquired has no bearing on whether a New York court will look at a transaction or series of transactions and deem them ‘in substance a consolidation or merger of seller and purchaser.’ Thus, BAC’s argument that its payment of ‘fair value’ defeats MBIA’s successor liability claim fails.
Although the opinion allowed MBIA’s suit to proceed, Justice Bransten also found that MBIA was not entitled to summary judgment on its successor liability theory. Some commentators have speculated whether this ruling will have an affect on a proposed $8.5 billion settlement between Bank of America and investors in another case (we’ve also reported on it here). For more information, see MBIA Can Continue Its Fraud Case Against Bank of America and Judge in MBIA v. Countrywide Gives Boost to Monolines, MBS Investors.
Various news outlets reported on May 6, 2013 that MBIA and Bank of America had settled the lawsuit for $1.6 billion in cash. For more information, visit MBIA, Bank of America Reach Legal Settlement: Sources, MBIA Surges After Report Insurer Settled with Bank of America, and Bank of America and MBIA Said to Agree to $1.7 Billion Settlement.