In MBIA Insurance Corp. v. Countrywide Home Loans, Inc. (87 AD3d 287, 928 N.Y.S.2d 229 [1st Dept 2011] [2011 MBIA decision]), the Appellate Division expressly applied the concept of loss causation in the RMBS monoline insurer context.
The Court held that in order to prevail on a fraud claim, the plaintiff must demonstrate that the "defendant's misrepresentations were the direct and proximate cause of the claimed losses," and that a fraudulent misrepresentation is the legal cause of loss only if "the loss might reasonably be expected to result from the reliance." (Id., at 295.)
The Court then concluded that allegations substantially similar to those made in the instant action as to compliance with underwriting standards and the quality of the loans were "sufficient to show loss causation since it was foreseeable that MBIA would suffer losses as a result of relying on Countrywide's alleged misrepresentations about the mortgage loans." (Id., at 295-296.)
The Court also reasoned that "it cannot be said, on this pre-answer motion to dismiss, that MBIA's losses were caused, as a matter of law, by the 2007 housing and credit crisis." (Id., at 296.) In holding that the insurer had sufficiently pleaded a fraud claim independent of its breach of warranty claim, the Court cited the following allegations: The defendants provided the insurer with loan documentation, including loan tapes, that contained false and misleading representations as to the characteristics of the loans, including LTV and DTI ratios; the prospectuses contained false representations about the defendants' compliance with underwriting guidelines and the independence of third-party appraisers; the defendants provided the insurer with false and misleading shadow ratings; the defendants made regular presentations to the insurer falsely representing their risk-management systems and loan origination practices; and the defendants made all of these representations "with knowledge of their falsity and to induce" the insurer to provide the financial guaranty insurance for the transactions. (87 AD3d at 294.)
The Court reasoned:
"A fraud claim will be upheld when a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, even though the same circumstances also give rise to the plaintiffs breach of contract claim. 'Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract . . . and therefore involves a separate breach of duty'.
Because MBIA alleges misrepresentations of present facts, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives. . . . It is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim. . . . It simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract." (Id.)