Misrepresentation of Present Facts Is Collateral to the Contract in New York
In MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 AD3d 287, 293, 928 N.Y.S.2d 229 [1st Dept 2011], the plaintiff MBIA provided guarantee insurance on mortgages that were securitized by the defendant Countrywide.
"Securitization involves packaging numerous mortgage loans into a trust, issuing debt securities in the trust and selling those notes, known as residential mortgage-backed securities, to investors. The securities are backed by the mortgages, and the borrowers' payments of principal and interest on their mortgage loans are used to pay the investors who purchased the securities" (MBIA at 290).
Pursuant to written agreements, the subject transaction between the parties provided that "MBIA guaranteed the payments of interest and principal to investors... therefore, any shortfalls in trust payments to the investors would be covered by MBIA" (id. at 291).
In 2009, MBIA commenced the action alleging that Countrywide "made material misrepresentations and breached warranties concerning the origination and quality of the mortgage loans underlying the securitizations," and that the misrepresentations of present facts, specifically the quality of the mortgages, were made with the intent to induce MBIA to provide the guarantee insurance (MBIA at 291-4).
MBIA argued that had it known of the true quality of the mortgages, it would not have issued the insurance coverage.
As a result, "MBIA had paid $1.4 billion on its guarantees and faces future claims in excess of hundreds of millions of dollars more" (id. at 291).
The court held that the allegations that Countrywide's misrepresentations of present facts were made with the intent to induce MBIA into the subject transactions were sufficient to sustain an cause of action for fraud independent of MBIA's cause of action for breach of contract.
The court stated that "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" (MBIA at 295). "Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract...therefore involves a separate breach of duty" (MBIA at 293.)