MBIA v. Countrywide and BofA, Motion to Dismiss Oral Argument Transcript

SUPREME COURT OF THE STATE OF NEW YORK

NEW YORK COUNTY - CIVIL TERM - PART 3

MBIA INSURANCE CORPORATION,

Plaintiff,

-against-

COUNTRYWIDE HOME LOANS, INC.,

COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP.,

COUNTRYWIDE HOME LOANS SERVICING, LP and

BANK OF AMERICA CORP.,

Defendants.

Index # 602825/08

HEARING

60 Centre Street

New York, New York 10007 December 9, 2009

BEFORE:

HONORABLE EILEEN BRANSTEN,

Justice.

APPEARANCES:

QUINN EMANUEL URQUHART OLIVER & HEDGES, LLP 51 Madison Avenue - 22nd Floor

New York, New York 10010

BY: PHILIPPE Z. SELENDY, ESQ.

MANISHA M. SHETH, ESQ.

PETER E. CALAMARI, ESQ.

NICHOLAS JOSEPH, ESQ.

Attorneys for Plaintiff

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3 GUNSTER, YOAKLEY & STEWART, P.A. 225 Water Street - Suite 1750 Jacksonville, Florida 32202-5185

BY: WILLIAM E. ADAMS, JR., ESQ. Attorneys for Defendants

8 GOODWIN PROCTER

The New York Times Building 620 Eighth Avenue New York, New York 10018-1405

BY: DAVID J. APFEL, ESQ. LARKIN M. MORTON, ESa.

MARK HOLLAND, ESQ. Attorneys for Defendants

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21

23

25

ALDORINE WALKER, RPR 26

Official Court Reporter

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2 THE COURT: The first motion, Motion Sequence

3 Number 10, I have to say that you have not reached

4 anywhere near another very large case that I have,

5 where they have gone up to Motion Sequence Number 79.

6 I don't wish that on you. But we are moving in that

7 direction.

8 So, Motion Sequence Number 10, it's Defendant's

9 motion that plaintiff's reassertion of negligent

~o misrepresentation should be dismissed, basically, on

1~ the same grounds as we went through the original --

~2 well, not exactly, but generally the same grounds as we

13 went through in the decision that I rendered under the

14 first complaint.

is MR. APFEL: In July.

~6 THE COURT: So, okay. With that, I'm going

17 to ask Mr. Apfel to talk to me about that motion.

18 MR. APFEL: Your Honor, may I use the podium?

19 THE COURT: Yes. Absolutely.

20 MR. APFEL: Before we begin on the motion to

21 di smi s s , I have two housekeeping matters. If we could

22 skip just for a moment to Motion Sequence Number 11.

23 That's a consented to pro hac vice motion to admit my

24 partner, Sarah Heaton Concannon, to appear before Your

25 Honor. She is not here today. I'm not sure she needs

26 to be for purposes of the argument, but it's a

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2 consented to motion, Your Honor, and I think we should

3 try to do that.

4 THE COURT: The question is, where is it?

s Actually, it's going to be consented to. I just have 6 to find it.

MR. APFEL: Then the other housekeeping 8 matter is --

THE COURT: Without opposition, right? No

io opposition?

11 MR. SELENDY: Correct, Your Honor. 12

THE COURT: It's not here. That's the reason

13 I have not seen it. It is downstairs in Room 130. If

14 it was done by order to show cause, it would be here.

15 So remember, otherwise we have a dual thing happening 16 in terms of motions that I see. I had never seen this.

17 Okay.

18 Assuming that it conforms to my usual way, it will 19 be granted.

20

MR. APFEL: Then the other housekeeping

21 matter is, as Your Honor is aware, the motion to

22 dismiss. All papers on the motion to dismiss have been

23 filed under seal. And that's because they refer to

24 certain documents that one party or another have marked

25 as confidential under the terms of the protective 26 order.

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2 We, at least on the defense side, we would have no

3 objection to unsealing the briefs. We don't think

4 there is anything in the briefs that are of a

s confidential nature. And subject to review of one or

6 two documents, we also wouldn't have any objection to

7 unsealing the exhibits that are attached to various

8 affirmations and affidavits. But we don't know what

9 the plaintiff's position is on that. And the reason I

10 raise it now is I'm unsure as to what I'm permitted to

11 say in open court with respect to material that has

12 been designated confidential. And that's referred to

13 in the briefs, and that I would like to refer to in

14 argument as well.

15 THE COURT: Mr. Selendy?

~6 MR. SELENDY: We have no objection to

17 unsealing the briefs. There are certain MBIA internal

~8 e-mails, however, which, frankly, are outside the scope

19 of the motion to dismiss, but which, nonetheless, were

20 relied upon by Countrywide in its motion. And we may

21 need to see that references to those e-mails be

22 redacted. We don't think they are relevant for the

23 motion. In any case, they are confidential to MBIA.

24 THE COURT: Is there a problem to that?

25 MR. APFEL: We believe they are relevant to

26 the motion. We believe that they are items that are

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2 cognizable by the Court in connection with the motion.

3 I believe you can decide the motion without reliance on

4 those particular exhibits. But I think they would be

5 helpful to Your Honor in giving Your Honor a full

6 understanding of the issues before the Court and

7 enabling Your Honor to make an informed decision on the

8 motion.

9 THE COURT: You know, there is going to be

io some new sealing issues coming up which are going to

11 tighten up the ship a great deal. What both sides

12 believe is absolutely a sealable event is not going to

~3 be found sealable by this Court very much longer. We

14 are in the process of reviewing a new sealing report

15 and which is going to affect my rules. In fact, I'm

16 working on them right now. So, sealing really means

17 something that is of utmost importance to the inner

18 core of the existence of the various corporations.

19 Chitchat between people don't necessarily fall under

20 that. By chitchat, I mean e-mails between people don't

21 necessarily fall within that category. So with that in

22 mind, you have a problem?

23 MR. SELENDY: Your Honor, I think our general

24 view is that everything in this courtroom should not be

25 under seal. There are e-mails of the CEO of the

26 company which were included in their motions, cia iming

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2 that the corporation complaint is not cognizable on the

3 motion to dismiss. That's the only thing that I am

4 referring that we think ought to be redacted. We don't

s think there should have been a motion in the first

6 place.

7 THE COURT: Let's understand something. I

8 want you at the end of this day to go back over this

9 particular series of motions. I mean, the most

10 important motion is Motion Sequence Number 10. 11 was

11 pro hac. Who cares? Well, the person who wants to be

12 here --

13 MR. APFEL: Yes, Ms . Concannon .

14 THE COURT: But 12, 13 and 14 are basically

15 discovery items. And I think they are not as weighty

16 an issue. Although, I know you are contesting it back

17 and forth, you really should get over it and go forward

18 with discovery. But we will get to that later.

19 If, at the end of reviewing the documents

20 concerning 10 you have certain things that you think

21. should remain under seal, then you can set them aside.

22 I will take a look at it, and make a decision. All

23 right.

24 So, let's assume for a second that the motion, as

25 it concerns Motion Sequence Number 10, the briefs and

26 the exhibits, unless I hear cries of dismay, will be

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2 something that we can discuss in open court.

3 MR. APFEL: Okay. As I understand, Mr.

4 Selendy mentioned that there is only one exhibit that

s he has any reservations about, and that's a particular

6 e-mail. And, you know, when and if I mention e-mail in

7 the course of my argument today, I will alert the Court

8 that that's the particular exhibit that we are about to

9 discuss.

io THE COURT: All right.

11 MR. APFEL: As Your Honor know, we are here

12 on a second motion, a second motion to dismiss. And

13 you decided the first motion in an opinion back on July

14 8th of this year.

]_5 So, the question naturally arises, why are we back

~6 on a motion to dismiss? And the plaintiff has raised

17 that question in their papers, accusing us of wasting

18 the Court's time, of wasting resources, of being

19 inefficient. And they have described Your Honor's

20 opinion on the first motion to dismiss as the law of

21 the case, which we should all abide by. I will move 22

On.

23 THE COURT: Have you appealed that opinion?

24 MR. APFEL: We have. And the appeal is

25 pending. Although, we believe that the appeal is and

26 will be mooted. And we intend to file a motion to that

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2 effect in the a First Department.

3 THE COURT: After I make a decision on the

4 second motion to dismiss.

5 MR. APFEL: After you make a decision on the

6 second motion to dismiss.

7 THE COURT: And if it goes your way, you will

8 take out the first one, and then we will have Mr.

9 Selendy's appeal.

io MR . SELENDY: Correct .

1~ MR. APFEL: Your Honor, we believe that the

12 July 8th opinion that Your Honor crafted was the law of

13 the case as of July 8th, but the case has changed since

14 July 8th and has changed because plaintiff has amended

15 its complaint. And the amendment of the complaint

16 means that it has really shift~d ground in various

17 ways. It has changed the nature of the case, and it

18 means that it's really incumbent upon us to move to

19 dismiss once again with respect to various issues.

20 There are three material ways in which the amended

2~ complaint alters the original complaint, in ways that

22 are material. When I say material, material for

23 purposes of our motion to dismiss.

24 First, Your Honor on July 8th dismissed

25 plaintiff's initial negligent misrepresentation claim,

26 and finding that plaintiff had not adequately allege

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2 the requisite special relationship.

3 Plaintiff in their amended complaint has added

4 various allegations, trying to beef up what had been a

s dismissible and dismissed negligent misrepresentation

6 claim. And we don't think that they have gotten over

7 the hurdle. And so, we are here on a motion to dismiss

8 their renewed, their resuscitated negligent

9 misrepresentation. That's number one.

io Number two, they have added, for the first time,

11 Bank of America Corporation as a defendant. We believe

12 that the claim against Bank of America Corporation is

13 entirely fruitless. Bank of America Corporation had

~4 nothing to do with any of the conduct that gives rise

is to this case and shouldn't be part of this case. The

16 only court in the country that has previously

17 considered the exact issue raised by plaintiff with the

18 exact arguments made by plaintiff has dismissed at hand

19 Bank of America from a similar litigation against other

20 Countrywide defendants.

21 THE COURT: What's the case?

22 MR. APFEL: That's the Argent case, Your

23 Honor. And I believe the Argent case is -- let me hand

24 to Your Honor. But it is attached in the up a copy

25 appendix of unreported cases that we have provided to

26 Your Honor with our primary brief at Tab Number i.

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2 THE COURT: Okay.

3 (Document handed to the Court.)

4 MR. APFEL: And the Court is the Central

s District of California, Federal Court in Los Angeles,

6 and I will mention that case in the course of the

7 argument today.

8 Then, the third way in which the plaintiff has

9 significantly or materially changed their case, Your

io Honor, is with respect to the fraud claim. They have

11 added five securitizations that they had previously

12 designated as benchmark securitizations. And now they

13 are claiming that these five additional securitizations

~4 were also part of the underlying fraud.

15 THE COURT: Where do they get the impression

16 that before this amendment we had 15 securitizations

17 and the addition of two? 16 and 17 were the two

18 additional.

19 MR. APFEL: No. Let me clarify that. And

20 that's why we put together this little chart, because

21 we thought it would be helpful to Your Honor.

22 The relationship at issue between MBIA and

23 Countrywide involves 17 securitizations total.

24 Initially, plaintiff sued on 10 of the 17

25 securitizations. And the 10 that the plaintiff sued on

26 were starting here at Number 6 and going all the way

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2 through to 17, with the exception of Number 12 and

3 Number 13. That would be the CWHEQ 2006-S9, and the

4 one that's designated S10. What they have added now

5 are five securitizations. They have added these three,

6 which were previously not part of the case. They have

7 added these two, which were previously not part of the

8 case, except in their language for benchmark purposes,

9 for purposes of comparison to show, you know, how the

io securitizations performed when fraud was not being

11 committed as opposed to how they performed when fraud

12 supposedly was being committed.

13 These early two securitizations prior to 2002 are

14 still not part of the case. And they are pointing to

15 those now as the only two benchmarks. Whereas

16 previously there were seven, now there are two.

17 THE COURT: So what they are saying is that

18 upon further review, they amended their complaint to

19 include securitizations that previously they had not

20 thought were fraudulently induced, and now they are

21 saying there are securitizations that were fraudulently

22 induced?

23 MR. APFEL: That's right. These five

24 additional securitizations that they have added involve

25 approximately 150,000 additional underlying loans, and,

26 you know, billions of additional dollars in unpaid

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2 principal and, therefore, potential exposure for MBIA.

3 Now, the reason that I think that this is material

4 is that what's interesting, Your Honor, is that they

s have added these five. They previously said this had

6 nothing to do with fraud in the inducement. And what's

7 most important is that their theory is that Countrywide

8 changed its practices, beginning at some point in 2004

9 and into 2005. Whereas, they had previously been a

io conservative lender, using very strict underwriting

11 guidelines. Around that time, at least plaintiff's

12 allegation is, Countrywide loosened, broadened its

13 underwriting guidelines. And if you believe plaintiff

14 started, you know, ignoring them almost entirely while

is at the same time holding themselves out to the world as

~6 continuing to be a strict conformist to strict and

17 conservative underwriting practices. If that theory

18 makes any sense, then the fraud, the fraud in the

19 inducement would have been a fraud in the inducement of

20 all the securitizations starting at the time that the

21 fraud began when Countrywide was supposedly making

22 these fraudulent statements to MBIA and to others. And

23 it would mean that, you know, possibly earlier

24 securitizations could be reviewed as benchmarks, but

25 certainly not later ones that are right in the middle

26 of the fraud, you know. And that it appears as if

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2 these later securitizations, these securitizations that

3 occurred in December of 2006, very late in the game,

4 which they previously designated as benchmarks, it

s would appear as if they are experiencing defaults on

6 the underlying loans. MBIA is experiencing losses.

7 They have to pay out money. And as a result, these

8 benchmarks are now fraudulent securitizations. It

9 would appear as if their theory of causation is all

io mixed up, that when they have losses, that causes them

11 to cry fraud as opposed to the fraud actually causing

12 the losses, which is the only way in which their claim

13 can survive a motion to dismiss.

14 The reason I mention this now, Your Honor, is that

is I think that their shift in theory with respect to

16 these benchmarks gives rise to an argument based on

17 what are sometimes referred to as loss causation or

18 synonymously referred to as proximate causation. And

19 we have previously not raised with Your Honor a

20 proximate cause argument for dismissing the fraud

21 claim. And we raise it in our papers this time around

22 in large measure, if not entirely, because of this

23 shift in MBIA's claim from benchmarks to, you know,

24 especially these later benchmarks that come in part of 25 the fraud.

26 So, I intend to talk about the negligent

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2 misrepresentation, the Bank of America Corporation

3 claim, the causation argument, which is brand new. And

4 time permitting, and if Your Honor is still willing to

5 indulge me a few more moments, what I would also like

6 to discuss is a justifiable reliance argument. And the

7 reason I would like to discuss justifiable reliance is

8 that Your Honor previously in denying our first motion

9 to dismiss, we argue that there was, you know, that

io plaintiff, as a matter of law, had not pled justifiable

11 reliance. You found that they had adequately pled

12 justifiable reliance. But you noted in your finding

13 that they amply pled justifiable reliance because it

14 was unclear, in your words. I believe it's on Page 12

is of your initial opinion. It was unclear what exactly

16 MBIA had available to it prior to entering into the

17 securitizations. We believe, and it may well be, and I

18 think that it is our fault for not bringing to your

19 attention the array of material that they did have

20 available to them prior to entering into the

21 securitizations.

22 THE COURT: The justifiable reliance is

23 really based on a re-argument issue that you want to

24 bring in concerning the first motion to dismiss.

25 MR. APFEL: I understand. Let me explain why

26 I would like to raise it once more with Your Honor.

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2 THE COURT: If it is really just based on

3 statements made at Page 12 of the decision, I don't

4 think it's appropriate to do it at this point.

5 MR. APFEL: The reason I would -- that may

6 well be correct, but the reason that I would suggest,

7 you know, indulging me, as I say, to give us the

8 opportunity to argue justifiable reliance is that it's

9 not the same argument that we made previously. It

io brings to Your Honor's attention factual information

11 that is cognizable at this time and that is otherwise

12 undisputed that we believe would lead to a different

13 decision. Plus, and probably more importantly, there

14 has been a decision, another decision made in Central

15 District of California in the case of United Guaranty

16 Mortgage Indemnity Company versus Countrywide Financial

17 Corporation and others that we refer to on papers,

18 which we believe is on all fours with this case.

19 THE COURT: Justifiable reliance?

20 MR. APFEL: On justifiable reliance.

21 THE COURT: Let's skip over that. We are not

22 going to have much time to be able to do that. Unless

23 you made a motion to reargue the decision I made on

24 July 8th, then you would have an opportunity to bring

25 up justifiable reliance. But since you didn't make a

26 motion to reargue, I think that that is taking an extra

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2 bite of the apple. Interesting argument, but it really

3 has no basis.

4 MR. APFEL: I don't want to push it. I'm

5 just suggesting to Your Honor we would like to, if

6 possible, give Your Honor the opportunity to rethink

7 the decision on justifiable reliance on a more complete

8 record than you had the first time around and with the

9 benefit of what we think is a well-reasoned opinion

io by --

11 THE COURT: I'm sure it's well reasoned.

12 MR. APFEL: -- by Judge Pfaelzer in the

13 Central District.

14 THE COURT: California have brilliant

is jurists.

16 MR. APFEL: As does New York, Your Honor.

17 But I think the case speaks for itself.

18 With that, let me turn to negligent

19 misrepresentation .

20 THE COURT: Okay.

21 MR. APFEL: As Your Honor knows, to statea

22 claim for negligent misrepresentation in New York, a

23 party claiming negligent misrepresentation must plead a

24 special relationship, prove a special relationship of

25 trust or confidence between the parties.

26 The plaintiff's original negligent

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a misrepresentation claim was dismissed because Your

3 Honor found that MBIA had, quote, "not allege the

4 violation of any special relationship of trust or

5 confidence." They have renewed this claim, pointing to

6 really two things that they say give rise to the

7 requisite special relationship. And the two things --

8 you can see their allegation summarized in Paragraph 45

9 of the amended complaint. And the two things they

io point to very specifically are (1) what they call a

11 quote, "long-standing relationship," close quote,

~2 between the parties. And (2) what they call a unique

13 and special knowledge that Countrywide had of the

14 lending process of the underwriting process of the

15 securitizations.

16 They use the word and the phrase "special

~7 relationship," you will see that in the amended

~8 complaint multiple times. But just repeating the word

19 "special" a number of times doesn't in and of itself

20 give rise to a special relationship and is not adequate

2~ for pleading purposes.

22 Let's take their two points one by one. First,

23 long-standing relationship. They claim that the

24 long-standing relationship goes back to 2002. In their

25 papers, they allude to other transactions involving

26 these parties that may have been conducted as early as

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2 1995. But their argument with respect to long-standing

3 relationship really focuses on the period of 2002

4 through 2007 and through today, which is the period

5 when the securitizations took place and when MBIA

6 agreed to provide financial guaranty insurance for the

7 Countrywide securitizations.

8 The long-standing relationship they point to, this

9 seven year relationship, consists entirely of

10 arm's-length transactions between these two behemoths

1~ in their respective industries. And there should be no

12 question that these are behemoths in their respective

13 industries. Countrywide at the time was either the

~4 largest residential mortgage lender in the country or

15 very close to it. And MBIA, by its own admission, by

16 its statement in its amended complaint as well as in

17 multiple documents that they gave to investors and the

18 like, described itself as the largest monoline guaranty

19 insurance company in the world. These are gigantic

20 companies, relatively equal in strength, in bargaining 21

power.

22 I would suggest, Your Honor, that as a matter of

23 law, arm's-length transactions between parties with

24 relatively equal bargaining power, no matter how long

25 that relationship may be, cannot give rise to the

26 requisite special relationship for purposes of

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2 negligent misrepresentation. A long relationship is

3 simply not, as a matter of law, a special relationship.

4 The second thing they point to is what they call

s unique and special knowledge that Countrywide had with

6 respect to these securitizations. And they made

7 various allegations, what they claim was the unique and

8 special knowledge that Countrywide had. They call it

9 "special" because they are trying to use the word

io "special" as many times as possible, hoping that

11 somehow will, in and of itself, get them over the bar.

12 Even if Countrywide had certain unique and special

13 knowl edge , which we claim they really did not in this

14 case, it can't outweigh, and it can't create a special

is relationship out of what is a contractual relationship

16 between two sophisticated financial entities such as

17 MBIA and the various Countrywide corporate entities,

18 particularly Countrywide Home Loans.

19 The United Guaranty case, which I mentioned to

20 Your Honor in connection with justifiable reliance,

21 also deals explicitly with negligent misrepresentation.

22 And I bring it to your Honor's attention with respect

23 to negligent misrepresentation as well.

24 A copy is attached to our appendix of unreported

25 cases in connection with our primary memorandum at Tab

26 12. It's also attached in the soon-to-be recorded form

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2 at Tab 4 of our appendix of unreported cases. But with

3 Your Honor's permission, I will hand up a copy for the

4 Court for ease of reference. And the copy I'm handing

s up, just so plaintiff knows, is the Slip Opinion rather

6 than the soon-to-be reported opinion, largely because

7 all of my notes are the Slip Opinion. So, I know the

8 pages in the Slip Opinion.

9 MR. SELENDY: No objection.

io THE COURT: Central District of California is

11 working so hard and creating cases that you rely on so

~2 heavily.

13 MR. APFEL: Working very hard. That is where

14 Countrywide was based, Your Honor. And there are a lot

~5 of cases that are in that district, and a lot of them

16 before one judge. And as you will see, she doesn't --

17 she is not exactly a friend of Countrywide,· And she,

~8 in the context of cases involving unsophisticated

19 investors in the marketplace, she has denied motions to

20 dismiss brought by Countrywide. But in the context on

21 cases brought by sophisticated parties, like MBIA and

22 like United Guaranty, she has, you know, dismissed

23 claims. And in particular, she dismisses negligent

24 misrepresentation claim.

25 Let me explain to you why I think this is on all

26 fours with my case. The plaintiff, United Guaranty, is

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2 a mortgage insurer, not a bond insurer like MBIA. But

3 for purposes of the negligent misrepresentation case

4 for sure, that's a distinction for them, the

5 difference.

6 This was a mortgage insurer that provided mortgage

7 insurance for purposes of this case, as you will see,

8 to large pools, aggregated pools of Countrywide

9 residential home loans involving, just as in this case,

io hundreds of millions of dollars of unpaid principal

11 balances.

~2 So, whereas they were securitizations in this case

13 that pooled together large numbers of loans, in the

~4 United Guaranty case, exactly the same thing. They

is were pooled together. Large numbers of Countrywide

16 loans that were provided with mortgage insurance as

17 opposed to bond insurance.

18 The plaintiff in that case, just like the

19 plaintiff here, allege negligent misrepresentation and

20 fraudulent inducement based upon the exact same theory

2~ as MBIA articulates in this case. They are looking at

22 the exact same statements. They are saying that

23 Countrywide was representing to the world that it was

24 still under the strict underwriting guidelines while,

25 in reality, it supposedly had been in those guidelines.

26 The exact same allegations, underlying allegations.

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2 In United Guaranty's case, unlike here where we

3 are talking about a long-standing relationship of seven

4 years; there, the relationship between those

5 sophisticated parties was 40 years, much longer, the

6 Court dismissed.

7 THE COURT: How long? 40 or four?

8 MR. APFEL: 40. Four, zero. Four decades.

9 The Court dismissed the negligent misrepresentation

io claim. And I would refer Your Honor to Page 32 of the

~1 Slip Opinion, where the judge writes:

12 "These parties were not mismatched in negotiating

13 power. Nor was Countrywide's expertise in the mortgage

14 business plausibly superior to this mortgage insurer's

is expertise in writing mortgage insurance.

16 In sum, it is implausible on its face that two

17 sophisticated business organizations -- even if they

18 have had arm's-length contractual relationship

~9 throughout the years - could create the kind of special

20 relationship that impels California courts to protect

21 against fiduciaries' misdeeds and that impels

22 California. "

23 And as a result, she dismissed the negligent

24 misrepresentation claim. I would suggest, Your Honor,

25 that California law and New York law are identical for

26 purposes of negligent misrepresentation. And just as

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2 it was implausible on its face that the relationship

3 between United Guaranty and Countrywide could give rise

4 to a special relationship to be a special relationship,

s the history here, a much shorter history between these

6 two entities, likewise cannot give rise to a special

7 relationship. Let me tell you why plaintiff argues,

8 how they respond --

9 THE COURT: No. Let plaintiff argue their

io case.

11 MR. APFEL: Okay. But what they say, Your

12 Honor, is that United Guaranty is not controlling

13 precedent. We agree it's not controlling precedent,

14 but it is the same case. And it is --

15 THE COURT: Are there any New York law,

16 Southern District, something applying New York law?

~7 MR. APFEL: Well, the reason that this is the

~8 case that, you know, should inform your Honor's opinion

19 in the case involves our facts. It's the same

20 de fendant s . It's the same exact theory of negligent

2~ misrepresentation. You can't get a case, really,

22 that's any closer, unless it was MBIA also suing on the

23 same theories out in Los Angeles court, which they are

24 doing, but that's a different story on a slightly

25 different theory. We would suggest to Your Honor that

26 the case is -- that the reason the case should --

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2 THE COURT: I will certainly look at it,

3 okay. I have taken this under consideration. Let's

move on.

5 MR. APFEL: Okay.

6 The plaintiff with respect to this case, and I

7 won't linger on this case for no more than another

8 second, but they are going to tell Your Honor --

9 THE COURT: No, sir.

io MR. APFEL: No? I will move on.

11 THE COURT: Move on, please. It's 10:25. We

12 are finishing your argument no later than 11:15. So

13 let's move it on.

14 MR. APFEL: Okay.

15 Your Honor, independent of the United Guaranty

16 case, separate and apart from the United Guaranty case,

17 plaintiff points to an array of cases. The principal

18 case that they are relying on is the Kimmell case,

19 which is a First Department case.

20 We would suggest, Your Honor, that the Kimmell

21 case and all of the other cases that plaintiff relies

22 on do not dictate a different result. All of those

23 cases, all of the cases that they are relying on

24 involve a mismatch of powers, a situation where the

25 plaintiff does not have anywhere near the knowledge or

26 sophistication or wherewithal as the defendant does.

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2 That's not the case. That's not the case here.

Even in Kimmell, which plaintiff relies on, the

4 plaintiff investors were individuals who were without

s knowledge of the economics of a project, and they

6 totally relied on, they were reliant upon the defendant

7 in that case, who was a lawyer, an accountant, the

8 former CFO for multiple years of a multi-national

9 company, PepsiCo, who was the CFO and chairman of the

io board of a company that was sponsoring the project, and

11 which plaintiffs were invested. And there was an

~2 imbalance in the wherewithal and the knowledge and the

13 skills of the two parties that led the court in that

14 case to say that there was a special relationship that

is brought with it a special duty. And, therefore, the

16 negligent misrepresentation case was affirmed. That's

17 simply just not the case here.

~8 The plaintiff will tell you that Countrywide had

19 access to all the information about the underlying

20 loans that they didn't have access to. Your Honor,

21 that simply is not the case. And if you look at the

22 documents that plaintiff itself refers to in its

23 complaint, you will see that plaintiff had access to

24 in forma t i on, sought information, tremendous amounts of

25 information about each one of these securitizations

26 before the securitizations started.

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2 THE COURT: Isn't one of the issues raised in

3 the previous decision the fact that Countrywide

4 allegedly guaranteed to MBIA that the mortgages that

5 they had issued were, quote, "good mortgages," to put

6 it in vernacular term? Good in the sense that they had

7 investigated the people taking out the mortgages, that

8 they were capable of paying them. They were not given,

9 as we now come to learn, in view of the incapability of

io any individual to repay ever the mortgage handed out.

11 That's what MBIA asked for, assurances of Countrywide

it to give them these kinds of assurances, that the

13 mortgages that they were attempting to securitize were,

14 indeed, good mortgages. You know, I'm not getting into

15 the particulars, but I think I would get the idea of

16 it.

17 MR. APFEL: Without getting into the

18 particulars, Your Honor, Countrywide was looking to

19 MBIA to give guarantees to these mortgages.

20 Countrywide had made the mortgages. But in the process

21 of securitizing them, they weren't giving any

22 guarantees to MBIA. They were telling MBIA, you know,

23 we would like to give you the opportunity --

24 THE COURT: We would like you to insure us in

25 case they default.

26 MR. APFEL: We would like you to insure us in

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a case they default. But first, we give them to grading

3 agencies, and the grading agencies, independent grading

4 agencies, Moody's, Fitch, they would grade the

5 securitizations. And typically, the gradings were

6 triple B minus or thereabouts. MBIA would take them,

7 and MBIA would review the information. And by virtue

8 of MBIA's review of the information about the

9 mortgages, they would become triple A securitizations,

io just because of MBIA's involvement in them.

11 MBIA was given loan tapes, which they referred to

12 in their complaint, that had information about all of

~3 the loans that were going to be in each one of

14 securitizations. Independent due diligence firms were

15 hired by Countrywide, and they were given random

16 samples of 200 loans. And they would give reports to

17 MBIA about the quality of those loans before MBIA enter

18 into these securitizations. It is simply wrong, Your

19 Honor, to say that Countrywide was sending MBIA into

20 these securitizations blind. Nor would it make any

21 sense for a sophisticated party like MBIA that is

22 putting billions of dollars at risk to rely on

23 Countrywide's words that these are good, underlying

24 loans. They did their homework. And they touted to

25 the world that they were the best at doing their

26 homework.

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2 Let me refer Your Honor to what is Exhibit L to

3 the affidavit that we gave you in connection with our

4 primary brief, which is Investor Presentation made by

s MBIA, which is undeniable. They don't deny that this

6 is what they said. They describe themselves on Page 1

7 as the largest monoline financial guaranty insurance

8 company in the world. On Page 3, they say that they

9 engage in what they refer to as no loss underwriting,

io which implies, quote, "anticipating no losses under a

~1 worse case scenario." Every transaction must meet

~2 MBIA's stringent credit structuring and legal criteria,

13 and be at least investment grade by Moody's and S6rP.

14 And then they go through, and they explain the detail

15 with which they review things and insist on reviewing

16 thing before they enter into securitizations. To say

17 that they are flying blind is just not what this is

18 about.

19 I would also refer Your Honor to Exhibit N. And

20 Exhibit N is an example of a due diligence package that

21 MBIA itself put together in connection with one of the

22 securitizations. And the reason that this is

23 particularly interesting and goes to your Honor's

24 question is that this was a typical, standard due

25 diligence package that they put together, indicating

26 the level of work that they put into these deals before

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2 they would enter into them at all. And this one in

3 particular, this one in particular, and this is for, I

4 think it is 2007-E, which is very last one, the very

5 last one that they entered into, so, after they had

6 already donel6 others.

7 And I refer Your Honor specifically to Bates page

8 Number MBIA 00126557, which is the fourth to last page

9 of this package, this hefty package that MBIA put

io together before this last securitization. And what

11_ they do here is they summarize the due diligence

12 results that they had received with respect to the

13 prior six securitizations that they had entered into.

14 And in connection with one of those, they have a list

is of what the due diligence companies had come back with

16 be fore, before they entered into the securitizations.

17 And here, they are considering for the seventeenth time

18 entering into a securitization where they are going to

19 be providing guaranty insurance for outstanding

20 principal amount of nearly a billion dollars. It's

2~ Number 17. And yet, four securitizations earlier, they

22 have results from a due diligence company of a random

23 sample of 200 loans that had been reviewed in which 23

24 percent of them, 46 total, were found to have been made

25 as exceptions to Countrywide's guidelines without

26 adequate compensating factors. 23 percent were kicked

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2 out for that reason. And 46 of the 200, because they

3 were not good loans even by the definition applied by

4 this independent due diligence group, and another 26

s percent of the loans, another 52 percent were kicked

6 out for other compliance reasons, not complying with

7 legal issues or with Countrywide's guidelines in one

8 way or another. So, in other words, a total of 98,

9 where 49 percent of the 200 in this deal, four deals

io earlier, were kicked out. We said, "no good." MBIA

11 had that information. And yet, not only did they do

12 the deal four deals earlier, but they did the next one,

13 and the next one, and the next one. This was not a

14 company that didn't have tremendous amount of

15 information. And not only tremendous amount of

16 i n f o rma t i on, but tremendous amount of information about

17 the very problems, the exact problems with these loans

18 that they are now pointing to as evidence of fraud.

~9 They had that information, and they went forward with

20 these anyway, because they had, obviously, a large

21 appetite for risk, maybe a larger appetite than they

22 should have had at that time. But they were not going

23 into this blind.

24 You should also know, Your Honor, that they had

25 the right, if they wanted to, just like United

26 Guaranty, they had the right to look at additional

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2 material. They didn't have to rely just on the 200

3 samples. They could have looked at more. And that's

4 in the insurance agreements. I will refer Your Honor

s to Exhibit K, the initial Garvey affidavit,

6 particularly Section 3.01(1). And I won't take the

7 Court's time to read that right now. But you will see

8 that that gives them the right and ability to get

9 access to anything else they deemed necessary and

io reasonable for them to make an informed decision about

11 whether or not they want to put their money at risk.

~2 Let me turn, Your Honor, to the claim that's been

13 brought against Bank of America Corporation.

14 I don't use the word "frivolous" lightly, Your

is Honor, but this is a frivolous claim. This is a claim

16 that appears to us to belittle, if nothing more than an

17 effort to harass Bank of America and to, you know,

18 pierce a corporate veil on no basis whatsoever. It

19 also appears to be an effort on the part of plaintiff

20 to undo meticulously crafted transactions that were

21 crafted in a way to protect against the very liability

22 that plaintiff is now trying to tag on Bank of America

23 Corporation. I think it's really a little more, Your

24 Honor, than an effort.

25 Plaintiff talks about law of the case. The law of

26 the case is that Your Honor unequivocally back in

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2 October of last year told plaintiff they couldn't have

3 asset discovery with respect to, you know, Countrywide

4 to see whether or not Countrywide would be able to make

5 good on a money judgment down the road. And you told

6 plaintiff at that time --

7 THE COURT: I'm inclined to say, as it

8 concerns successor liability issue, that is, in a

9 sense, a premature amendment, you might say, to the

10 comp laint . But I would say that if you agree that,

~1 indeed, discovery should go forward to provide MBIA

12 with an opportunity to see where it leads to, with the

13 understanding that this would be held in abeyance

~4 without prejudice. If, indeed, it show that there was

is a substantial relationship after discovery went forth.

16 MR. APFEL: With all respect, Your Honor, we

17 don't believe that the discovery should go forward.

18 THE COURT: I know you don't, but I'm just

19 saying that I think it should. And with that, if you

20 agree to it and allow discovery to go forward, I would,

21 indeed, agree with you that the successor liability

22 issue should be held in abeyance pending further

23 discovery.

24 MR. APFEL: If Your Honor will permit me, let

25 me explain why I think there should be no need for

26 discovery in this case and why the successor liability

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2 claim should be dismissed.

3 THE COURT: I don't know if I can dismiss it.

4 The issue here is, they make a claim, and the claim is,

5 indeed, possibly something that should not be in the

6 final complaint. But by making the claim, it allows

7 them, because you wish me to dismiss it, but it allows

8 them to go forward with discovery. I'm not sure that

9 it's appropriate that we should have a claim, but I am

io sure that there should be some discovery to allow MBIA

1~ to see whether or not Bank of America is, indeed,

12 stepping into the shoes of Countrywide so, therefore,

13 should have successor liability claim. I really don't

14 know.

15 MR. APFEL: Your Honor, but a party doesn't

16 just get to, you know, say oh, Bank of America

17 Corporation has successor liability. We think they

~8 have successor liability, so let's fish around and try

19 to prove it. When there is a full, public record of

20 disclosures made to the SEC by Bank of America

21 Corporation in connection with all the transactions

22 involving Countrywide, that really cannot be disputed

23 as to the structure of those transactions that, you

24 know, make it clear as day that Bank of America

25 Corporation became Countrywide's parent but did not

26 succeed to the liabilities at issue in this case. All

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2 the discovery in the world is not going to change it.

3 THE COURT: But you see, the plaintiff does

4 allege a rather important fact. It actually supports

5 its claim that it's a de facto merger. (1) the

6 continuity of ownership, in that it acquired

7 Countrywide back-pay shareholders with back stock. (2)

8 that Countrywide ceased its operation in that back, has

9 retired Countrywide's brand name, and that Countrywide

io intends to operate its mortgage business through the

11 Bank of America, Home Loans Division. (3)

~2 consolidation of the business operation; and (4) back

~3 as impliedly assumed Countrywide's liabilities. So, I

14 mean, that's their claim. As I stated, there is really

15 not any kind of discovery to support one way or the

~6 other.

17 And so, of course, then plaintiff comes in with

~8 Motion Sequence Number 12, which is basically a motion

19 to ask for the issuance of a commission of three-party

20 companies hired by Countrywide to conduct due

21 diligence. Which one is it?

MR. SELENDY: We are seeking to compel

23 discovery from Bank of America, Your Honor.

24 THE COURT: You are, yes. That's what I

25 thought. You are. I didn't quite say it, but my

26 understanding of 12, this is an attempt on their part

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2 to seek the kind of discovery necessary to support

3 their theory, and based on facts that, indeed, Bank of

4 America becomes successor liability. So, what I'm

s saying to you is that possibly what should be done,

6 because I think it is premature, is that we go forward

7 with the discovery, which under our system we believe

8 should be full and broad and excessive and expansive,

9 go forward with the discovery. And should in the end

io there be sufficient information that would support a

11 successor liability, I would permit them to make

12 another motion to amend or we could go forward. The

13 other way around is, we could go forward with the

14 successor liability, go forward with the discovery.

is And, of course, there would be a summary judgment

16 motion at the end of discovery, allowing you to come in

17 and say they should not have had their motion to amend

18 to begin with. So, it's one of two ways of doing it.

19 MR. APFEL: One suggestion, Your Honor, would

20 be, which I think is in keeping with Your Honor's

21 directive here or suggestion here, is they

22 acknowledge -- there is no hint here, there is no

23 allegation that Bank of America has a primary

24 liability. There is no suggestion that Bank of America

25 was involved in any of the alleged, you know,

26 underlying wrongdoing. It's a pure vicarious liability

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2 claim, successor liability. So, they are really trying

3 to do exactly the same thing that they were trying to

4 do last year. They are trying to make sure that at the

s end of the day, if they ever get there, if they ever

6 get a money judgment, that there is going to be a pot

7 of money available for them to pick from. I mean,

8 that's what they are looking for. So, it seem to make

9 sense, because I think that there is no legal basis for

io the successor liability claim against Bank of America.

11 Because, for instance, the de facto merger doctrine

12 only applies in a situation where there has not been an

13 actual merger. But here, there was an actual merger,

14 just not the merger that they are touting. The merger

is that took place was what's called this -- it has a

16 snazzy name - Forward Triangular Merger. But Bank of

~7 America purchased all the stock of Countrywide

18 Financial, which then merged into a separate entity, a

19 separate Bank of America subsidiary that had been

20 created for purposes of this transaction then called

21 Red Oak Merger Company. And then once it merged into

22 Red Oak -- Red Oak has been renamed Countrywide

23 Financial. But there was an actual merger there. So

24 the de facto merger doctrine doesn't apply at all.

25 And the one court that I would just suggest Your

26 Honor may read the opinion on, which is cited at Page 9

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2 of our reply is: In Re: McKesson HBOC, Inc.

3 Securities Litigation. They spoke to this exact same

4 situation. And the court there --

5 THE COURT: Which court is it out of?

6 MR. APFEL: I believe it's Federal Court.

7 It's the Northern District in California, but we are

8 still in California. But, again, it deals with the

9 same type of transaction and the de facto merger

io doctrine. And there, the Court says that the lead

11 plaintiff argues that McKesson HBOC is the de facto

12 successor. That's the argument being made here to HBOC

~3 and, thus, it may be held liable for HBOC securities

14 fraud.

is However, a Reverse Triangular Merger, here we have

16 a Forward Triangular Merger, but the same thing

17 performed here, merger for target with a specially

18 formed subsidiary of the acquirer, which then becomes

19 the sole shareholder of the newly merged subsidiary.

20 It does not affect the de facto merger, unless the

21 transaction has been structured to disadvantage

22 creditors or shareholders. Lead plaintiff pleads no

23 facts that would so suggest. These types of

24 transactions only give rise to successor liability

25 where there are fraudulent transactions. And they have

26 not alleged that there was any fraud involved in the

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2 transaction involving Bank of America's acquisition of

3 various Countrywide entities.

4 Let me suggest this, Your Honor, the only way that

s the discovery becomes relevant is if there is a finding

6 of liability against Countrywide. Why don't we hold in

7 abeyance not just the successor liability claim, but

8 hold in abeyance discovery with respect to Bank of

9 America Corporation on the issue of successor liability

~o until such time as liability is established? That way,

11 our client is not, you know --

12 THE COURT: How can liability be established

13 if you don't actually conduct some discovery to find

14 out whether liability might be there?

is MR. APFEL: Because the liability -- if there

16 is going to be liability, it's the liability of the

17 Countrywide entities. Bank of America is only going to

18 be liable as a successor, and only if there is a

19 finding that there is underlying liability.

20 THE COURT: You are putting it over for a

21 numb e r , a number of years at the rate this is going.

22 It is true, this is an '08 case, which is practically

23 juvenile. But, nevertheless, I think we should address

24 it. I will submit that issue. I will submit it.

25 MR. APFEL: Your Honor, the only reason I'm

26 suggesting that, is that it's very intrusive into Bank

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2 of America's business. Bank of America has already

3 done a lot of work to try to structure these

4 transactions to avoid exactly what they are talking

5 about.

6 THE COURT: Absolutely. I could well imagine

7 they have. If I were Bank of America, I would have the

8 lawyers work double time to make sure I structure my

9 taking over Countrywide so that Bank of America has no

10 liability whatsoever and can't be reached and etc.,

11 etc. But just because, in fact, maybe because such hard

12 work was put into a file between Bank of America and

13 Countrywide does not necessarily mean that there isn't

14 necessity of breaking that file to make sure, indeed,

15 the proper parties are before the Court. I don't know.

16 I really don't. But that is the argument, the argument

17 that we have done our best to make sure the flag went

~8 up. It's not a very, very good argument.

19 MR. APFEL: Your Honor, it's not just a

20 question of doing your best, it's a question of the

21 filings that are on file with the SEC that make clear

22 what the nature of the transactions are, none of which

23 have changed.

24 THE COURT: You know, the SEC has not always

25 been right.

26 MR. APFEL: Not always right.

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2 THE COURT: Just the fact that the SEC

3 reviewed and agreed does not necessarily mean that i~t

4 is where we should be headed. I will submit it.

s That's it. I will submit it, and I will take a look at

6 it.

7 The next is fraud.

8 MR. APFEL: Your Honor, when you are

9 considering the issue, I would remind Your Honor to

~o read carefully and pay attention to the Argent

~1 decision.

12 THE COURT: You know, you don't have to

~3 remind any once again that my entire case should depend

14 on a Central District California Court judge. I

15 believe that, indeed, if you come to the commercial

~6 division in New York State, you have equal kind of

17 judge and equal ability for this judge to reason, and

~8 equal, good Appellate Division to reverse if I'm wrong,

19 and a Court of Appeals that has equal amount of

20 standing than California. So, you constantly put in

21 the Argent case from the Central District of

22 California. Guess what? Where is a case from New

23 York? Why isn't there a case from New York? Maybe

24 because the Central District of California is wrong.

25 And maybe I'm going to be making other kinds of law.

26 So, please, please, there must be a New York case that

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2 we can rely on. At least, give me some guidance.

3 Let's go on to 4.

4 MR. APFEL: Okay.

s THE COURT: And by the way, as I stated

6 before, of course, I'm going to read it, all right. I

7 don't have to remind me to read it. mean, you

8 MR. APFEL: Your Honor, I'm not suggesting

9 that in any way, shape or form. And I apologize if you

~o take it that way.

11 THE COURT: It's all right. It's only been

12 the tenth time asking me to read it. That's enough.

13 Let's go.

14 MR. APFEL: I apologize. The only reason I

is mention it is because it is the exact same facts.

16 THE COURT: Yes, I understand.

17 MR. APFEL: Okay.

18 THE COURT: But, you know, just because they

19 are the exact same facts doesn't mean that two judges

20 agree.

21 MR. APFEL: Okay. Let me talk about

causation issue, Your Honor, which is a new issue

23 brought to Your Honor's attention, brought in

24 connection with plaintiff's enhanced fraud claim.

25 Again, if their theory is right, if their theory

26 is right that there was a systematic fraud that

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a Countrywide engaged in, beginning at some point in

3 2004, then one would think that all of the

4 securitizations after that suffered from the fraud, and

s that their losses in connection with all of them were

6 caused by the fraud. And that would include those two

7 securitizations, S9 and S10, which are lines 12 and 13,

8 which they previously said we just benchmark that they

9 contest. They contest the fraud.

lo We would suggest to Your Honor that what's going

11 on here is that as time passes, and they are suffering

12 additional losses, their losses are causing them to cry

13 fraud. And it's not the fraud that cauged the losses

14 in the first place. And it's really, rather, the

15 economy that has caused the losses. I would suggest to

16 Your Honor that it is not a mere coincidence that

~7 between their initial filing of their first complaint

~8 in September of 2008 and their filing of their amended

19 complaint in August of 2009, you know, the country

20 suffered the worst economic downturn since the Great

21 Depression. It's that, Your Honor, that I would

22 suggest caused the losses, is a proximate cause of

23 their losses and not the fraud that they allege.

24 You know, if Your Honor will indulge me for a

25 second, you probably are too young even to know who

26 Everett Dirksen is. But if you recall, Everett Dirksen

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2 was a congressman who once was --

3 THE COURT: From Illinois, wasn't he?

4 MR. APFEL: I don't know whether he was a

5 lawyer or not, but he was a congressman, who once said

6 in connection with the federal budget: "You cut a

7 billion here, you cut a billion there, pretty soon you

8 are talking about real money."

9 And the reason I mention him in this context is,

io we have argued that the economy rather than any sort of

~1 fraudulent scheme is the proximate cause of plaintiff's

12 losses. But in order to make it real, I think instead

13 of arguing billions of dollars, we have to cut a

14 billion here, cut a billion there, get it down to the

15 loan level to give Your Honor an appreciation for what

16 we mean when we say it's the economic downturn as

17 opposed to any sort of scheme or fraud that caused

~8 plaintiff's losses.

19 So, let me give you examples at the loan level of

20 how we believe where the causal link is between these

21 loans and any loss that may have been suffered by

22 plaintiff.

23 You've heard referenced a number of times by the

24 parties to things called CLTV or DTI, CLTV ratio. CLTV

25 ratio is the combined loan to value ratio. And the

26 higher that is, in other words, the greater the loan is

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in connection with the value of the loan, the gre~ter

3 the likelihood is of a potential default. So because

4 you don't want to --

s THE COURT: When you are dealing with second

6 mortgages and third mortgages.

7 MR. APFEL: Especially when you are dealing,

8 as in this case, only with second liens.

9 Likewise, the debt to income ratio, the higher

io that debt to income ration, the more debt a person has

11 on a monthly basis in comparison to their income, the

12 greater likelihood that they are going to default. So,

~3 these are sort of signs that you look for and that MBIA

14 looked for in evaluating these packages of loans before

is deciding to secure against them. They want to have

16 ratios that are as low as possible.

17 Now, MBIA's allegation, their theory at the loan

18 level as opposed to this macro level, at the loan

19 level, their theory is that Countrywide defrauded them

20 because CLTV's were artificially low. They were

21 providing MBIA with false CLTV. They have not

22 identified any that's specifically false, but their

23 theory is that the CLTV's were false because, for

24 instance, appraisals on the property had been inflated

25 by Countrywide's appraisers, driving up the size of the

26 value of the property, driving up the denominator and,

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2 therefore, driving down the CLTV and it making it

3 appear as if it's a less risky loan than it might in

4 reality be. I'm just saying that that's the fraud.

s Likewise, with debt to income, at the loan level, they

6 are saying that the DTI's that are presented by

7 Countrywide are false. Because in some instances,

8 Countrywide had programs where they would give loans to

9 people just based on stated income. And they say --

10 THE COURT: Never verifying the income.

11 MR. APFEL: Without the necessity of

12 verification. They are saying that they should have

13 known in many instances, from looking at the files,

14 that the stated income was too high. And they either

is knew or should have known that and, therefore, they

16 were defrauding MBIA by suggesting low DTI's based on

17 artificially high incomes, whereas the incomes were

18 really low.

19 Let's assume, for purposes of this examination,

20 that they are right. They are right that the

21 underwriting that was done in connection with various

22 loans was shun. And let's assume they are right, even

23 that Countrywide either knew or should have known that

24 a particular CLTV or particular DTI was artificially

25 lower than it should have been. And if they had known

26 the truth about how high it really was and how risky it

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2 really was, they never would have agreed to securitize

3 the securitizations involving loans of that type.

4 Assuming that's right, you know, let's say we have

5 this particular loan, we have two loans, one with the

6 artificially low CLTV and one with the artificially low

7 DTI. And in their words, they are fraudulent loans.

8 But a month goes by, and some of these are made, loans

9 are made in 2001, 2002, 2003, 2004. They go into these

io securitizations. And a month goes by, two months go

11 by, three months go by. The borrower makes payments.

12 A year goes by, two years go by, three years go by, the

13 borrower continues to make payments, and then the

14 borrower becomes delinquent. And you look into the

~5 file and what you see is, you call up and say, why have

16 you been making these payments all this time and now

17 all of a sudden you are defaulting? And you would find

18 that the economy has taken such a downturn in the

19 particular area where the borrower has either borrows

20 fund from maybe Southern Florida or Southern

21 California, and property values have deteriorated, and

22 it's no longer worth it for them to be making their

23 payments because their property values, whatever it is.

24 Even if it was artificially appraised, you know, higher

25 than it should have been the first time, now the value

26 has really plummeted, and they don't want to be making

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2 these whopping monthly payments for something at the

3 end of the day that is not going to be worth very much.

4 Or you find, with respect to the other loan where they

5 are saying that the debt to income ratio was

6 artificially low, that this borrower, this borrower has

7 lost his job and, therefore, can't make payments, even

8 though he has made payments over time. So the cause in

9 these two cases, is it the fraud that they are

io alleging, or is it very specific, very real economic

11 events that bear on the lives of these individual

12 borrowers? I would suggest that the But For Cause of

~3 the loss that MBIA may suffer is that the loan was made

14 in the first place. They will say it should never be

15 made in the first place. For purposes of this example,

~6 we agree it shouldn't have been made in the first

17 place. So, there is a But For Cause. But the

18 requirement under New York law and everywhere else

19 where there is a common-law fraud claim is that they

20 have to establish proximate cause, a real nexus between

21 their losses and the supposed wrong. And here, in

22 these two examples that I have given, which are

23 grounded in the fraud that they allege, and accepting

24 their allegations as true, the cause, the proximate

25 cause of what leads them to end up having to make

26 payments on these defaulted loans is not the artificial

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2 and false lowering of the CLVT or DTI in the first

3 place. But what it really is, is these very specific,

4 very real economic events that intrude on the lives of

5 the particular individuals.

6 THE COURT: But, I mean, what they are saying

7 is that, and I'm not disagreeing with you that there

8 was an economic downturn that probably aggravated the

9 situation, but what they are saying is the fact that

io Countrywide did increase the appraisal, therefore, make

11 the bottom line lower, or that Countrywide did the

12 other way around, they are saying that that alone is

13 where the fraud occurred, because it was an inducement

14 to MBIA to enter into the securitizations.

15 MR. APFEL: For purposes of this example, we

16 disagree with that, as you know. But for purposes of

17 this example, I'm accepting all that as true. We say,

18 still they don't get over the rail because they need to

19 prove proximate causation of the ultimate loss that

20 they suffer. And what they have proven with these

21 ex amples, what they have proven is But For Cause but

22 not proximate cause. And it's not as if on equitable

23 grounds, Your Honor, it's not as if they were left

24 holding the bag. Because they are protected. They are

as fully protected under the contract by the put-back

26 rights or the re-purchase obligation that Countrywide

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2 has under the contract with respect to any

3 representation of warranty that's been breached. And

4 they can point to in these examples that I have given

s to those representations and warranties and say, okay,

6 you know --

7 THE COURT: It's all the more reason to put

8 back in it.

9 MR. APFEL: All the more reason for them to

io go under the contract and negotiate with Countrywide to

11 take back these loans if they can prove that there were

12 these problems from the get go. But what it doesn't

13 do, Your Honor, is it doesn't give rise to and it

14 doesn't prove a fraud, because what is missing, what's

~s missing is that proximate cause link between what

16 happens to the loans and the losses that they suffer.

17 Your Honor, I would just like to refer for one

18 moment to the principal case which MBIA relies on to

19 rebut our case, because I think it helps us and doesn't

20 help them. And unfortunately, I hate to say it, but in

21 this case, it's not me who is raising a California

22 case, it's MBIA that has. They point to a case called

23 In Re: Countrywide Securities Litigation, cited by the

24 same judge in Central District of California, who

25 decided United Guaranty, and who decided Argent. But

26 they point to that case as an example of a judge

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2 rejecting the exact same loss causation and proximate

3 cause argument that I'm attempting to articulate to

4 Your Honor right now.

5 And in that case, that was a securities case

6 brought by a class of investors in Countrywide who

7 brought the case against Countrywide and multiple

8 individuals. There was a motion to dismiss based on

9 the exact same grounds that I'm raising right now. And

io the court there rejected the motion as to most of the

~1 de fendant s . And the court rejected the motion because

12 it found that false statements were made. Then

13 truthful disclosures were later made, as alleged. This

14 is what they are finding for purposes of a motion to

15 dismiss. And after the truthful disclosures were made,

16 there was an immediate -- in each case when a truthful

17 disclosure was made, there was a decline in stock

~8 price.

~9 And so, the opinion denying the motion on

20 proximate cause grounds, the motion to dismiss based on

21 proximate cause was that there wasn't sufficiently

22 tight nexus between -- there wasn't a sufficiently

23 tight nexus between the statements and the losses to

24 the investors at that time who lost once the stock

25 price went down. The Court found there was no nexus.

26 There was no nexus. So you could assume, you know, for

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2 purposes of the motion to dismiss, it was so tight, the

3 temporal nexus was so tight between the truthful

4 disclosures and the decline in the stock price that it

5 would appear as if the cause is the falsity of the

6 earlier statements.

7 THE COURT: Okay.

8 MR. APFEL: Now, what's important about that

9 case is that, that's with respect to investors in the

io market. But the court also dismissed the claim against

11 one of the defendants on proximate cause ground. And

~2 that was the defendant Stan Kurland. And I would ask

~3 the Court to look specifically at 588 F.Supp.2d at

14 1201, which discusses that part of the case. And

15 the re , the court said, quote: "It is too far a stretch

16 to state a claim that Kurland's 2005, 2006 statements

17 could have possibly caused losses almost a year later."

18 Close quote. Whereas, with respect to the statements

19 of others, there was a tight nexus. The Court said,

20 okay, that's sufficient, sufficient proof of proximate

21 cause for purposes of withstanding motions to dismiss.

But where there is a gap of almost a year, that's not

23 tight enough. Maybe there is But For Cause, but there

24 is not a proximate cause. Here, I would suggest, Your

25 Honor, that there is a gap of years between the fraud

26 that's being alleged and the losses. And that's

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2 stretching it too far for proximate cause purposes.

3 Plaintiff still have their contractual agreement.

4 · THE COURT: Okay. Thank you, Mr. Apfel. I

5 assume that we have, basically, come to the conclusion

6 of your argument?

7 MR. APFEL: Unless you are willing to indulge

8 me with respect to the justifiable reliance claim.

9 THE COURT: No.

io MR. APFEL: I think that you do not. I

11 understand.

12 THE COURT: Thank you very much. We turn to

13 Mr. Selendy.

14 MR. SELENDY: Thank you, Your Honor. I will

15 just set up the board that we have. If I may, I would

16 appreciate your offer to use the podium.

17 THE COURT: Yes. Absolutely.

~8 MR. SELENDY: I will brief this in a moment.

19 It's based on allegations in the first amended

20 complaint.

21 First, let me just start briefly on the subject of

22 changes. What's changed since we were here last?

23 First, if it wasn't clear enough before, it's by now

24 widely accepted that Countrywide and its misconduct

25 were a major cause of the housing crisis and the

26 recession.

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2 As the New York Times reported a few months after

3 our last argument, more than any other major lending

4 institution, Countrywide had become synonymous with the

s excesses that led to the housing bubble. And that

6 misconduct included predatory lending to millions of

7 borrowers, aiding and abetting borrowers fraud and

8 appraiser fraud, and knowingly disregarding

9 underwriting and loan origination criteria in order to

io drive up market shares to MBIA. The misrepresentations

~1 fall into three different categories:

12 Misrepresentations about underwriting and origination

13 practices as to which the Countrywide entities not only

14 had superior knowledge but unique knowledge how they

is were doing what they said they were doing.

16 Misrepresentations about pool-wide characteristics of

17 each of these RMBS securitizations. There are now 15

18 of them, and misrepresentations about the attributes at

19 the loan level of the hundreds of thousands of loans

20 that were put into those securitizations, including

21 expressed warranties that the information they provided

22 about the loans was truthful and accurate.

23 As of today, MBIA's losses on these transactions

24 are up from 459 million to 1 .4 billion. And MBIA's

25 put-back requests on individual loans are up from 2,292

26 loans as of the original complaint to 4,689 loans.

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2 Those are all loans as to which there are material

3 deviations from underwriting guidelines.

4 Further, with respect to other cases, the SEC's

5 claims against Countrywide's former CEO Mozilo and COO

6 Sambol have been sustained over their motions to

7 dismiss, and Bank of America for its part has now

8 effectively integrated Countrywide's platform,

9 operations and assets into its own businesses as a

io .combined company. These factual changes all confirm

II the propriety of the Court's original ruling and of the

12 amendments to the complaint.

13 As for the law, all of the controlling First

14 Department authority relied upon by this Court remains

15 good and controlling law. And, indeed, since our last

16 hearing, New York courts have repeatedly held that it

17 is fraud for an arranging bank to knowingly procure and

18 market on the basis of inflated credit ratings, as

19 Countrywide did here with the false and inflated shadow

20 ratings it knowingly procured for each RMBS

21 transaction. Those cases are the Abu Dhabi Commercial

22 Bank case, the Morgan Stanley, the Southern District,

23 HSH, the UBS, the second opinion of Justice Lowe, and

24 M&T Bank versus Gemstone.

25 Countrywide has no argument under New York law,

26 and they rely repeatedly on the, frankly, anomalous

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2 decisions of the single California court, applying

3 California law or Federal Securities Law to different

4 cases, decisions that would be clear error under

s controlling First Department authority here.

6 So in short, Your Honor, the case against

7 Countrywide has only gotten better. How has the

8 complaint changed? We have not launched this case new.

9 What we did was act. MBIA acted within its rights to

~o correct and perfect its pleading, in light of the

11 guidance of Your Honor's prior opinion. MBIA clarified

12 the allegations of transaction structure and of

13 negligent misrepresentation. MBIA asserted new claims

14 against Bank of America, successor claims based on de

is facto merger. And MBIA asserted claims on five

16 additional securitizations based on an ongoing forensic

17 analysis of fraud as of the inception of each of these

18 RMBS deals.

19 On the initial Sambol previous deals, we found 700

20 loans with material deviations from guidelines. The

21 fact that as of the original complaint such a forensic

22 analysis had not been conducted doesn't mean that those

23 transactions were all right at the time we first filed

24 the claim. The exercise was laborious, and it's

25 expensive, even on a sampling basis. And MBIA does not

26 file fraud claims lightly without doing that kind of

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2 analysis.

3 What the securitizations show, five additional

4 ones, is the difficulty of finding a fraud-free

s baseline for Countrywide's conduct. That establishes

6 systemic fraud, not the absence of fraud, as

7 Countrywide's counsel had oddly argued here.

8 So, let me go to the two key issues of successor

9 liability and negligent misrepresentation. I will just

io say with respect to the factual issues that have been

11 raised and the speculation that has gone very far

12 afield from the complaint actually contradicting the

13 allegations without support in the pleadings. This

~4 isn't the summary judgment motion. It's not a trial.

is We don't have to present proof, as was suggested by

16 Countrywide's counsel. And we are not submitting or

17 referring to affirmations of fact on issues such as

18 causation or reasonable reliance. Those are premature

19 today.

20 So, let me turn to the liability of Bank of

21 America. Here, we do agree with Your Honor's statement

22 that a decision on the merits could be postponed

23 pending discovery, including under 3211(d), which ought

24 to go forward as of today. If we have to go to the

25 merits, the framework for analysis is whether de facto

26 merger occurred between Countrywide and the parent,

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2 Bank of America. And the triangular merger into the

3 newly created Red Oak Shell subsidiary doesn't end the

4 inquiry. It's a starting point. Nor does Bank of

s America say so that it wanted to avoid liability end

6 the inquiry. It raises a question. And Countrywide's

7 California case In Re: McKessonl which was referred to

8 today, actually makes that plain. ~ It reversed

9 triangular merger or forward triangular merger. It

io does not effect a de facto merger, unless the

11 transaction has been structured to disadvantage

12 creditors or shareholders. The doctrine is plainly

13 applicable to this situation, in other words. And one

14 needs to determine under that California case whether

is the shareholders have been disadvantaged. Contrary to

16 what was said today, even McKesson doesn't require

17 fraud for a de facto merger finding. Better authority

18 for the same proposition is the controlling First

~9 Department case of Fitzgerald v Fahnestock. That's 286

20 A.D.2d 573, which states: "The de facto merger

21 doctrine creates an exception to the general principal

22 that an acquiring corporation does not become

23 responsible thereby for the preexisting liabilities of

24 the acquired corporation. This doctrine is applied

25 when the acquiring corporation has not purchased

26 another corporation merely for the purpose of holding

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2 it as a subsidiary but, rather, has effectively merged

3 with the acquired corporation."

4 So the question is, has Bank of America

s effectively merged with Countrywide Financial? Has it

6 been alleged adequately in the pleadings, assuming the

7 facts as stated to be true?

8 Now, Countrywide has argued, and we put this on

9 the board, at Page 8 of its reply. The bottom line is

io that the Bank of America Corporation is Countrywide

11 Financial sole shareholder and nothing more. That's

12 literally what they say in their papers. That lawyer's

13 assertion isn't true. And it's directly contradicted

14 by the complaint as well as by the public statements of

15 Bank of America.

16 So what are the facts here? As we have set forth

~7 on the board, the initial statement made by Bank of

18 America was that they bought Countrywide and all of its

19 assets and liabilities. They went on to say, and this

20 is quoted, and these are the references to the first

21 amended complaint: "Bank of America combined the

22 mortgage home equity and insurance businesses of the

23 parent Bank of America and Countrywide, appointing one

24 person to head the combined businesses."

25 Then in July 2008, Bank of America stated

26 publicly: "We begin to combine the two companies and

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2 are prepared to introduce our new name and way of

3 operating, including realizing substantial savings from

4 the integration of the businesses and the relocation of

s Bank of America Home Loans to Calabasas, California."

6 The site formally of Countrywide Financial. And they

7 said that "Bank of America is expected to benefit by

8 leveraging its broad product set to deepen

9 relationships with existing Countrywide customers." In

io other words, the parent was going to take advantage of

11 the Countrywide' goodwill and the Countrywide's client

12 lists. Then in October of 2008, that's Point 4, Bank

13 of America agreed to a settlement of up to 8.4 billion

14 to restructure Countrywide's Home Loans resolving

15 predatory lending lawsuits by the Attorneys General,

~6 and assuming liabilities so that business could

~7 continue, a factor that's expressly noted under

18 Fitzgerald v Fahnestock.

19 And then November 10, 2008, after the merger into

20 the Shell Company, the Red Oak subsidiary, the 8K filed

21 by Bank of America reported in connection with the

22 integration of Countrywide Financial with Bank of

23 America's other businesses and operations. Countrywide

24 Financial and its subsidiary, Countrywide Home Loans

25 transferred substantially all their assets and

26 operations to Bank of America. In consideration for

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2 the transfer, Bank of America assumed additional

3 liabilities. That transfer means that creditors, such

4 as MBIA, don't have the assets. They now have been

5 moved into other Bank of America businesses and the

6 operations have been consolidated.

7 Thereafter, as reflected in Point 6, Countrywide

8 Financial stopped filing its own financial statements.

9 And then in April of this year, Bank of America

io completely retired the Countrywide brand and name and

11 website, effectively shifting any residual goodwill

~2 that may have been associated with Countrywide's

~3 platform and its operations to Bank of America's Home

14 Loans.

15 In May, they went on to report, while the move is

16 reflected in article -- while the move to shutter the

17 name is essentially complete, the operational effort to

18 integrate across two completely different lending

19 servicing systems is now underway. In other words,

ao they are consolidating within Bank of America, not

21 staying within the subsidiary.

22 And finally, on September 30th, the former CEO,

23 Ken Lewis of Bank of America said these integrations

24 are on track and we are turning the value over. What

25 they have done, in effect, is a two-step merger.

26 First, a merger in the Shell subsidiary, then they

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2 stripped out the assets, integrated the operations,

3 retired the name, put the financials on the parent

4 company and made assets unavailable to creditors.

5 That's exactly what the de facto merger doctrine is

6 designed to prevent.

7 So, if Bank of America were truly a sole

8 shareholder and nothing more, as defendants argued in

9 their briefs and again today, then all these public

io statements about integrated operations would be simply

11 false. But assuming the truth of those public

12 statements and admissions and our allegations, which

13 are based upon this, as the Court must on a motion to

14 dismiss, then Bank of America has, in fact, effected a

~5 de facto merger. And they can hardly repudiate, as

~6 they have tried in their briefs, the statements made to

~7 shareholders and to the SEC. These are facts

18 publically disclosed, and we can imagine what's in the

19 files they are fighting so hard not to produce.

20 Under Fitzgerald v Fahnestock, the First

21 Department founded de facto merger where post

22 acquisition the subsidiary had ceased to file its own

23 financial statements which were instead reported under

24 those of the parent. The trading and other departments

25 were integrated into the parent. And the subsidiary

26 ceased to operate under its own broker/dealer number.

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2 That whole holding squarely applies to the facts here,

3 where Countrywide Financial have now reported on the

4 Bank of America. Substantially, all of Countrywide's

s assets have been transferred to Bank of America's

6 businesses. The operations and the integrated brand

7 name has been retired. Bank of America has leveraged

8 its access to Countrywide's goodwill and customer

9 lists. And Countrywide can't operate now, except

io through Bank of America. In fact, Bank of America

11 today appears to be handling the re-purchase requests

12 coming from MBIA, and refusing those requests.

13 As the First Department held, such allegations, if

~4 subsequently proven, would demonstrate the defendant

is rendered, here Countrywide, incapable of doing business

16 except through defendant; i.e., that defendant had

17 rendered Countrywide a mere shell, and that a de facto

18 merger had been accomplished.

19 Now, I would just point out, it doesn't matter

20 that Bank of America took several months to strip out

ai Countrywide assets and integrate the operations. The

22 Second Circuit held this much in the Arnold Graphics

23 case, cited in our brief, where it upheld the final

24 judgment of the de facto merger on the evidence based

25 on conduct occurring over a year after the acquisition

26 of a new subsidiary. The Arnold Graphics court also

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2 went on to say that statements by a corporate officer

3 trying to recast prior statements made publically to

4 the SEC and shareholders would not even be considered.

s That's on the evidence.

6 There is no basis also to deny the claim, pending

7 adjudication of an ultimate liability, as was

8 suggested. There is now a claim asserted against Bank

9 of America, not just Countrywide. Since Bank of

io America merged the operations, Countrywide has,

11 essentially, ceased to purchase re-purchase loans.

~2 Bank of America appears to be handling the servicing.

13 And there is an immediate and present harm to MBIA of

14 approximately $1.5 billion. We believe the nonpayment

~s is driven, at least in part, by the fact that

16 Countrywide has transferred substantially all of its

17 assets to the other Bank of America operations. And

18 indeed, Your Honor, it wouldn't surprise me if

19 Countrywide counsels' fees were paid or guaranteed by

20 Bank of America.

21 Now, their response to this, not for the first

22 time, is to ignore controlling First Department

23 precedent and ask Your Honor to follow the California

24 decision of Judge Pfaelzer. But in that Argent case,

25 there were no allegations of de facto merger. There

26 were no allegations at all, in fact, except the

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2 bare-bones conclusory assertion of successor liability.

3 Judge Pfaelzer went out an reviewed the public

4 statements to the SEC and reached her opinion on a

s bare-bones pleading. That's not our case. And the

6 allegations of the first amended complaint should not

7 be disregarded on the motion to dismiss, particularly

8 where they track the exact admissions of Bank of

9 America itself.

io We would submit, if there is any doubt at all

~1 about the merits of the claim, at the very least, under

12 3211(d), the Court should allow discovery for MBIA to

13 determine whether Bank of America's acts are consistent

14 wit its public statements to the SEC and shareholders,

~5 or, instead, consistent with the representations made

16 by Countrywide in its papers to this Court.

17 So, let me turn then to the negligence claim.

18 That claim does not run between an insurer and its

~9 insurers. It's made plain in the first amended

20 complaint by the clarified allegations regarding the

21 transactions structure. MBIA is insuring the

22 obligations of the RMBS trusts to the note holders.

23 But the negligent misrepresentation claims are asserted

24 only against Countrywide in its various capacities,

25 RMBS secure advisor, loan originator, and architect of

26 the fraud. None of the Countrywide entities are

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2 insured. And we would submit the Batas case,

3 therefore, doesn't control this issue.

4 Moreover, the third party reviews of loans that

5 Countrywide's counsel discussed today, which were paid

6 for by Countrywide, did not do a forensic analysis of

7 borrower's fraud or originator fraud. Indeed, they

8 said so on their face. That wasn't what they were

9 doing. I want to say that the negligent

~o misrepresentation claim isn't based solely on the

11 relationship of trust and confidence under Kimmell,

12 which is a Court of Appeals holding, not First

~3 Department .

14 There are two other independent sources of the

is duty to speak with care, and both apply here. I would

16 like to discuss those. I will rest on our brief for

17 the Kimmell discussion. Those duties apply even as to

18 sophisticated parties in arm's-length transactions.

19 First, Countrywide's unique or superior knowledge

20 of the material facts represented gives rise to duty to

21 speak with care as to certain of the material

22 representations under the First Department rule of

23 Swersky v Dreyer and Traub, which is 643 NY2d at 37.

24 We cited it in our original opposition brief.

25 And second, Countrywide's communication of half

26 truths or misleading statements themselves create a

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2 duty of correct disclosure, under the First Department

3 rule of Williams v Sidley, Austin, Brown and Wood,

4 which is 832 NY2d at 11.

5 THE COURT: Could you give me the official

6 cites?

7 MR. SELENDY: Yes. We will pull them up.

8 As to the first source of duty, under Swersky v

9 Dreyer and Traub, it's incontrovertible that

~o Countrywide had unique knowledge of its own practices

11 in the origination of loans and whether its

~2 underwriting teams complied with the stated guidelines.

13 They also had superior knowledge of all of the

14 following: Whether the data reflected in those loan

is tapes conform to the actual application files and

~6 appraisals in Countrywide's possession; whether there

17 were compensating factors to justify any exceptions to

18 the stated guidelines; whether, as Countrywide

~9 represented, the appraisals for the loans were

20 conducted by third-party appraisers that were

21 independent of Countrywide; whether the characteristics

22 of each RMBS pool, as structured by Countrywide

23 Securities based on loans originated by Countrywide

2s Home Loans according to parameters set out by

25 Countrywide Financial, corresponded to the

26 representations of those characteristics.

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2 And finally, also on that issue, as to which there

3 was superior knowledge, whether Countrywide obtained

4 the shadow ratings from grading agencies on the basis

5 of incomplete or false information, such that the

6 shadow ratings were themselves false and inflated.

7 There was no practical ability for MBIA to try to

8 replicate Countrywide's knowledge, either as to its

9 knowledge of its own practices or its knowledge of the

io credit quality of the hundreds of thousands of loans in

11 the securitizations. That was the basis, in fact, of

12 Countrywide's marketing, expertise, its knowledge and

]_3 its expressed representations and warranties, which, as

14 the Second Circuit held in Merrill Lynch, the

~5 allegation applying New York law were intended

16 precisely so that there didn't have to be due diligence

17 on those subjects. That's the purpose of the rep and

18 warranty when you have that.

19 And Countrywide is simply wrong in saying that it

20 was a pre-closing contractual right to review this

21 stuff. To the contrary, the right to access the loan

22 origination files issued only after the closing of each

23 deal. And it's made plain in the insurance agreement

24 Section 2.02. The rights arise during the term of the

25 agreement. It' under 4.101. It's specified to take

26 effect on the date of issuance. The date of issuance

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2 means the date the policy is issued. In other words,

3 MBIA could not demand files for any transaction before

4 closing. That's the key distinction from one of the

5 bases of Judge Pfaelzer's decision in the UGMI case

6 that'was referred to several time today, where that

7 Court held, rightly or wrongly, that UGMI could obtain

8 that information pre-closing.

9 They have tried to reargue the point in their

io brief by pointing to Section 3.01 of the insurance

11 ag re ement . That provision only talks about documents

12 reasonably necessary to effect the closing. In other

13 words, opinion letters, approvals and other transaction

14 do c ume n t s , not due diligence files. This is the first

is I have heard of this argument in the history of the

16 relationship between the parties.

17 The fact that Countrywide has moved at the time

18 from having one of the best reputations as a loan

19 originator when it made those expressed representations

20 in the warranties to one of the worst today doesn't

21 make MBIA's reliance at the time unreasonable.

22 And as the Second Circuit said in the case of Suez

23 Equity v Toronto, 250 F-Surrogate 103, where defendants

24 initiated contacts with plaintiffs induced them to

25 forbear frbm performing their own due diligence and

26 repeatedly vouched for the veracity of the allegedly

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2 deceptive information. That state a claim for

3 negligent misrepresentation. So that's the security

4 knowledge.

5 The second ground, even if Countrywides were not

6 obligated to speak on the basis of its peculiar

7 knowledge of the facts, and it was, it became obligated

8 once it volunteered false and misleading factual

9 assertions as to each of its underwriting and

io origination practices. The general characteristics of

11 those RMBS pools, including the percentages of loans

12 and borrowers within given risk categories, specific

13 shadow rating that Countrywide wrongfully procured for

14 each RMBS, and, finally, the attributes of the

15 individual loans within each RMBS, having volunteered

16 to give that false information, it had a duty to make

17 corrective disclosure. It had to come forward and

18 point out how, in fact, Countrywide originated the

19 loans and assessed loan applications; what, in fact,

20 the true risk parameters were of each RMBS pool,

21 including the true percentages of loans, borrowers

22 within given risk categories; what the true credit

23 quality of each RMBS was in order to correct the false

24 inflated shadow ratings. And finally, the truth about

25 the loans, as reflected in the application files, by

26 contrast to the representations in the loan tapes.

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2 In other words, Your Honor, Countrywide didn't

3 simply present MBIA with a set of loan origination

4 files and say how about it? Decide if you would like

5 to issue insurance. To the contrary, they have

6 affirmatively elected to make a whole series of false

7 and misleading half truths and other misrepresentations

8 to market the deals. And having elected to make those

9 misrepresentations, they had a duty to make corrective

io disclosures. At the very least, Your Honor, whether

11 they made misleading, partial disclosures is ordinarily

12 a question of fact inappropriate for resolution on

13 motion to dismiss here, as the First Department held in

14 Sterling National Bank v Israel Discount Bank, 305 AD2d

is 184.

~6 Now, let me turn to the fraud issue. I will be

17 brief on this, because I think there is nothing new for

18 the Court to consider.

19 With respect, very briefly, on duplication, the

20 contract is replete with specific allegations of

21 pre-closing statements that are separate from

collateral to the contracts under the rule of First

23 Bank, as Your Honor previously held. Those

24 misrepresentations that I mentioned are of, at least,

25 three different types as to the underwriting practices

26 as to the overall RMBS characteristics and as to the

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2 individual loan level attributes. And they were made

3 before contract in each of the loan tapes in the

4 representations of the origination guidelines and the

5 prospectuses for each RMBS, in the shadow ratings and

6 in other statements. They have cited in their paper

7 and rely very heavily on the unpublished Federal

8 District Court case of Enron, which they previously

9 advanced to Your Honor. That court, we submit,

io misconstrues First Bank. The issue of duplication

1~ can't be decided on the basis of whether there is a

12 contract remedy as Enron appears to hold because,

13 invariably, there is going to be a contract remedy for

14 breaches of representations and warranties, as there

15 was in the First Bank case. If Enron was right, First

16 Bank would be two cases. But if this Court were even

17 inclined to look to Federal cases and the Second

~8 Circuit for this issue rather than First Bank itself,

~9 the controlling authority isn't the unpublished Federal

20 District case, but, rather, the Second Circuit case of

21 Merrill Lynch v Allegheny. And there, the Second

22 Circuit squarely held following First Bank, if a

23 contract is fraudulently induced by representations

24 that are later incorporated in the contract, there is

25 no duplication of claims. Specifically, the Court said

26 that the alleged misrepresentations would represent,

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2 proven a breach of the contractual warranties does not

3 alter the result. The plaintiff may elect to sue in

4 fraud on the basis of misrepresentations of these

5 expressed warranties.

6 The Second Circuit also held in that case that if

7 a bank provides warranties, as Countrywide did here,

8 the warranties imposed on the party making the

9 representations a duty to provide accurate and adequate

10 factual assertions. And they entitle the counter-party

~1 to rely upon them without further investigation or a

12 slew of them. That's at Pages 181 to 182 of the

13 opinion.

14 The Court stated Merrill Lynch's warranties, in

is effect, represent contractual stipulations, that the

16 facts covered by them be treated as information

17 exclusively within Merrill Lynch's knowledge.

18 Now, today and in the papers, Countrywide's

19 counsel has charged that we have changed our theory as

20 to Countrywide's disclosures. That's not correct.

21 MBIA has consistently asserted that the basic problem

22 is Countrywide's failure to adhere to the guidelines as

23 represented, whether those guidelines concern stated

24 dec, low doc loans, Alt-A loans or otherwise. The key

25 thing, that they must conform to what they represent

26 about those loans, particularly if they are going into

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2 loans and borrower types that are riskier than prime

3 loans.

4 So the issue here isn't one of failure to

5 understand what the representations were and,

6 therefore, it's not a Nomura type, one of the cases

7 they rely upon, a Nomura-type situation of regret over

8 disclosed, soft underwriting practices. Contrary,

9 Countrywide made specific representations as to how its

10 strict underwriting criteria would mitigate the risk

11 for the categories of loans and borrowers to be

12 included in these deals. MBIA was willing to insure

13 the risks, as represented. What it had no obligation

14 to do was insure RMBS transactions built on loans that

is Countrywide knew didn't conform to Countrywide's own

~6 representations made to induce the transactions.

17 Very briefly on fraud by omission. They have not

18 made any argument to rebut the fact that its

19 nondisclosures based on superior knowledge and half

20 truths supported a fraud by omission. I would simply

21 like to direct Your Honor to a holding reached in a

22 case brought by defendant Bank of America itself

23 against Bear Sterns, a Southern District holding.

24 On September 30, 2009, Judge Crotty in the case of

25 Bank of America, N.A versus Bear Sterns Asset

26 Management, Inc. ruled for Bank of America - and we

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2 have a case to hand up on that - ruled for Bank of

3 America in its capacity as plaintiff and deny

4 defendant's motion to dismiss the common-law fraud

s claim, holding that there, even as between

6 sophisticated parties on both sides in an arm's-length

7 transaction, defendants duty to disclose arose from

8 their superior knowledge of the funds, precarious

9 financial conditions. That's in the transcript

io starting at Page 50, Your Honor, Pages 50 to 52. It

11 was an opinion read into the record. So, they upheld

~2 superior knowledge as between sophisticated parties.

13 The courts further held that disclaimers of a

14 fiduciary or advisory relationship in the transaction

is were in effective to disclaim a duty to disclose, an

16 issue that we don't even have here, because there are

17 no disclaimers; we have these reps and warranties. And

18 the Court further held the fraud claim didn't duplicate

19 breach of contract.

20 Briefly on the remedy, whether the remedy,

21 put-back remedy is exclusive, as was argued in their

22 papers, they mischaracterized the nature of that

23 remedy. It's a remedy that was intended for errors.

24 It's not an allocation of the risk of fraud, saying

25 Countrywide commit whatever fraud you like, and if and

26 when we find it, we can put loans back to you. That

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2 wasn't the intent. Indeed, it's a ludicrous Idea. It

3 was meant to address situations where there are errors

4 in the underwriting, nonconformity in the underwriting

5 guidelines, so that the loans could be put-back and

6 Countrywide can correct its mistakes or the isolated

7 misconduct of individual brokers and appraisers. It

8 certainly wasn't intended to address systemic fraud.

9 And I would point you, again, to the insurance

io agreement, Section 5.03, which expressly states the

11 contract remedy is cumulative, not exclusive. Put-back

~2 remedy is only addressing one of the three categories,

13 the representations I have described; namely,

14 misrepresentations as to the attributes of the

~5 individual loans.

~6 Now, what do you to make of Judge Pfaelzer's

~7 holding in the UGMI case? There, Your Honor, it was

18 different contract terms as to put-back remedy. The

Es opinion was based on Judge Pfaelzer's view that UGMI,

20 as a mortgage insurer, had loan-by-loan expertise.

21 That's not our case. That's not MBIA's business. As

22 was pointed out by Countrywide's counsel today, MBIA

23 and'Countrywide are, in fact, behemoths in different

24 industries, different industries with different

as expertise.

26 Indeed, there was no pre-contractual right of

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2 access, as I have mentioned before. That was an

3 expressed element of Judge Pfaelzer's holding. There

4 was practical ability to replicate Countrywide's

5 knowledge of the loans that follows from the absence of

6 the pre-contractual right of access. And moreover,

7 that holding conflicts with the allegations in MBIA's

8 first amended complaint as to industry customs and

9 practice. It also ignores representations at the pool

~o level and representations of origination practices,

11 basically conflating them all to loan level

12 representations, which the court said could all be

13 addressed, including fraud by the contract remedy.

~4 To the extent she said that it is duplicative, the

~5 fraud claim is duplicative of contract, that holding

16 contradicts First Bank. It may be acceptable for

17 California courts by California law; it's contrary to

18 New York law. And it can't be applied here for

19 contracts governing by New York law.

20 Now, on causation, Countrywide has made what we

21 regard as the astonishing argument that there is no

22 adequate allegation of causation to support fraud based

23 on its egregious misconduct in the loan origination.

24 In effect, they are telling Your Honor that the

25 origination practices and criteria are immaterial to

26 the performance of the loan. And their counsel today

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a tried to make that out through hypothetical examples of

3 fact, which wouldn't be proper even at trial, much less

4 on a motion to dismiss.

s When they marketed the RMBS, those origination

6 practices and criteria were held out as critical

7 aspects of the transaction. Indeed, the underwriting

8 guidelines were marketed as identifying those

9 characteristics of borrowers and loans that were the

io most relevant to credit worthiness that mattered the

11 most, precisely in conditions of market stress where

12 borrowers may find it difficult to repay their debt.

13 That's when it matters most, that the borrower have the

14 income that he or she said she has, and that the loans

15 reflect a value of the property, which is at least

16 equal to what is stated.

17 Countrywide can't rewrite that history of how it

18 sold these deals, rewrite it out of existence now that

~9 it is trying to avoid liability for fraud.

20 And briefly, Your Honor, on the question of

21 specificity, as this Court previously held, the

22 complaint clearly satisfies Rule 3016(b). There is no

23 question that Countrywide is fairly on notice of the

24 claims of misrepresentation, which is the purpose of

25 the Rule. And to take just one example among many, the

26 amended complaint incorporates at Paragraph 77 and 81

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2 MBIA's 4,689 put-back requests to Countrywide. Each

3 put-back request specifically details the

4 representations made on a loan-by-loan basis. There

5 was a question why we didn't put that into the

6 complaint. There were four separate put-back requests,

7 Your Honor. This is one of those request,

8 approximately 1,600 different loans. Every single --

9 and we have a copy for the Court, if Your Honor would

io like to accept this. Every single request details

11 specifically why the loan does not conform to the

12 representations made by Countrywide in the loan case

13 and the documentation. There are errors, for example,

14 in debt to income. There are errors in loan to value.

15 There are instances where Countrywide stated it's a

16 full document loan. Whereas, in fact, once MBIA was

17 able to get access to the underlying files turns out to

18 be a limited documentation or a no doc stated income

19 loan. They know exactly what's there. And this detail

20 is far beyond the standards of 3016(b), which, by the

21 way, the Court of Appeals' decision is clear and

22 confirms that's not a change in law, as was suggested

23 in their papers.

24 With respect to the involvement of Countrywide's

25 Securities and Countrywide Financial, briefly,

26 Countrywide Securities arranged and underwrote each

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2 securitization. It was responsible for each false

3 prospectus and supplemental prospectus. The prospectus

4 falsely described the home loans underwriting practices

5 representing that the underwriting standards were, in

6 fact, applied to assess the borrowers' credit standing

7 and repayment ability or the value and adequacy of the

8 related collateral. That's in the 2006-G prospectus,

9 at Page 27.

io The supplemental prospectus went on to

11 misrepresent a host of statements, including that the

12 appraisers has determined on the basis of the

~3 originator approved independent third-party fee based

14 appraisal. That's supplemental prospectus for 2006-G

15 at Page 34. That's false. That's made by

~6 Countrywide's Securities. No selection will be made in

17 a manner that would adversely affect the interest of

18 the note holders or the note insurer. General

19 representation at Page 37. That's egregiously false

20 based upon the thousands of noncompliances from

21 guidelines we have already identified.

22 Finally, the underwriting process is intended to

23 assess the applicant's credit standing and payment

24 ability. Again, that's supplemental prospectus, Page

25 33. Countrywide Securities is also the entity that

26 knowingly procured the false shadow ratings, that

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2 marketed and sold the notes, that put the calculations

3 of borrowers and loans in each prospectus as to the

4 overall RMBS pools, built on data that Countrywide knew

5 to be false.

6 As to Countrywide Financial, as we said before,

7 it's the holding company that acts and operates through

8 Securities and Countrywide Home Loans. It's the

9 architect of the frauds. The former top executives,

io Mozilo and Sambol, have been sued for their

11 misrepresentations as to their practices which they

12 engineered. And in the SEC complaint, which is

13 incorporated by reference if our first amended

14 complaints at Paragraphs 108 to 110, it's made plain

~5 that Paragraph 110 of our complaint, both Mozilo and

16 Sambol were aware as early as June 2006 that a

17 significant percentage of borrowers who were taking out

18 stated income loans were engaged in mortgage fraud.

19 That on June 2, 2006, Sambol received an e-mail

20 reporting on the results of a quality-controlled audit

21 that shows 50 percent of stated income loans showeda

22 variance of income from the borrowers' IRS filings.

23 Then, if you look at the SEC complaint, which you

24 are entitled to do, since it's incorporated by

25 reference, Paragraph 49, the former CEO Mozilo admits

26 that he personally observed a serious lack of

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2 compliance within our origination system as it relates

3 to documentation and generally deteriorating in the

4 quality of the loans originated versus pricing.

5 I will move on. Your Honor, just one other final

6 point. You have heard a significant number of cases

7 referenced that are Federal Securities cases. They are

8 briefed. Instead of talking about common law fraud

9 cases under New York law, talks about Federal

io Securities cases. I will just point out that with

~1 respect to one Federal Securities case that we

~2 reference as support for our New York law, they make

13 the following statement at Page 18 of their reply

14 brief:

15 "The fraud on the market doctrine has no

16 applicability to plaintiff's common-law fraud claim."

17 They are basically saying, don't look at those Federal

18 Securities cases, and we ask you to. And frankly, Your

19 Honor, you don't need to. This is a common-law fraud

20 cia im . It's governed by New York law, and that's what

21 you should assess.

22 On the implied covenant claim, I will take two

23 minutes on this. It's pled as an alternative contract.

24 The court had previously upheld the claim to the extent

25 it was based on corrective measures necessary to undo

26 the effect of Countrywide's wrongdoing. But the claim

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2 logically extends beyond corrective measures to those

3 steps taken in the origination and inclusion of the

4 loan that undermine the benefit of the bargain. We

s would submit the issue of whether that part of the

6 claim should go forward should be deferred until after

7 the presentation of the evidence based on Countrywide

8 and Bank of Americas's refusal to honor virtually any,

9 other than a minimal amount of the 4,689 put-back

io requests submitted over the past year. Defendants must

1~ be planning to come tell this Court that the contract

12 requirements have to be interpreted very narrowly and

13 allowing for extraordinary discretion. We think that's

14 wrong. We think we can show that these put-backs

is constitute straight breaches of contract. But if there

16 are questions about the margins for certain problem

17 loans, then it is appropriate to examine whether the

18 inclusion of those loans in these trusts are

19 constituted, at the least, a violation of the implied

20 covenant of good faith and fair dealings. The whole

21 benefit of the bargain was for Countrywide to use its

22 loan origination and underwriting expertise to deliver

23 quality loans as it represented. And if they made

24 unreasonable exceptions to guidelines or failed to

25 exercise meaningful oversight over the origination

26 practices by brokers, or allowed the use of programs

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2 that they knew facilitated borrower fraud, those

3 practices, at the least, if they are not contract,

4 straight contract breaches, they violate the implied

5 covenant of good faith and fair dealing. They are

6 complicated facts and issues and further reason why

7 such claims ordinarily should not be resolved on a

8 motion to dismiss.

9 Unless Your Honor have questions, I will rest on

10 that. We have my colleague, Manisha Sheth, who will

~1 address our discovery motions.

12 THE COURT: We will get to them in a second.

13 Very, very brief, like two minutes in rebuttal, two

14 minutes only.

is MR. APFEL: There is a lot to respond to,

16 Your Honor.

17 THE COURT: Two minutes.

18 MR. APFEL: Two minutes. Just a couple of

19 quick points.

20 One, although I referenced and relied on Federal

21 California cases, that was for the reason --

22 THE COURT: District Court cases.

23 MR. APFEL: District Court cases. That was

24 for the reason that they are the most recent cases.

25 THE COURT: Yes, I understand. The most

26 re cent , absolutely on point.

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2 MR. APFEL: But our brief, Your Honor,

3 without going through the details in two minutes, is

4 replete on every point with controlling First

s Department Court of Appeals authority from New York

6 that deals with each one of the those points.

7 THE COURT: Good.

8 MR. APFEL: So that I would ask Your Honor to

9 look at the brief with respect to --

io THE COURT: I will look at the brief. Don't

11 worry about that.

12 MR. APFEL: -- with controlling New York

~3 authority.

14 Secondly, with respect to Bank of America,

is plaintiff picks out statements and various incidents

16 that have occurred over time to suggest that the

~7 structure that was put in place when Bank of America

~8 acquired Countrywide is not what it purports to be.

19 Plaintiff has not allege that there was an attempt

20 here to defraud creditors in that transaction, nor was

21 there such an intent. These various statements, you

22 know, for instance, in various events or things that

23 plaintiff points to, for instance, the financials of

24 the Countrywide entities being included in the

25 financials of Bank of America, that does not indicate

26 that Bank of America Corporation has assumed any

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2 liabilities of the specific Countrywide entities. That

3 is an accounting requirement, that when a holding

4 company issues its public financials that it include

s within those public financials the financials of each

6 of its subsidiaries, including the various Countrywide

7 subsidiaries. These parties that have been named by

8 plaintiff in this case, Countrywide Home Loans in

9 particular, are the correct parties, the correct

io parties in interest. These are not parties that are in

11 bankruptcy. To the extent that their assets have been

12 sold to Bank of America Corporation or activities on

13 Countrywide being consolidated with Bank of America

14 Corporation and for business purposes, the name has

is been retired. Those sales were for real good

~6 consideration. And those entities have money and are

17 not in bankruptcy. They have not declared bankruptcy.

18 And they will see at the end of day whether they get a

~9 judgment. And if they do get a judgment, whether or

20 not those entities can satisfy that judgment.

21 It is, I suggest to Your Honor, wrong to bring

22 Bank of America at this stage of the game into the mix.

23 If you are inclined, as you have indicated you are, to

24 give discovery, rather than it being broad and sweeping

25 discovery, we would suggest to Your Honor that it be on

26 the successor liability issue, because we are quite

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2 confident that there is to basis here for any successor

3 liability as a matter of law.

4 To the extent that you are in anyway disturbed by

s these allegations that they have made, that they

6 suggest any sort of inconsistency with the very real

7 legal structure of the transactions on which Bank of

8 America acquired Countrywide, we would suggest either

9 holding discovery in abeyance until the end, as I

io suggested earlier. Or if you are inclined to go

11 forward with discovery now, make it very targeted

12 discovery, very limited in scope so that they can get

13 the information they need one way or another to

14 establish successor liability. And I will guarantee to

15 Your Honor we would be back here in very short order

16 with a summary judgment motion on the issue of

17 successor liability because we are confident that there

18 is no successor liability.

19 THE COURT: That's now submitted, okay.

20 MR. APFEL: Your Honor, just two more things.

21 THE COURT: I really don't have anymore time.

22 We are going to have to close it up. I have two more

23 cases.

24 MR. APFEL: Let me just make one final

25 obse rvation, Your Honor. We will rest on papers with

26 respect to the substance of many of these arguments

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2 that Mr. Selendy made that I don't have time to respond

3 to right now. I would want to bring Your Honor's

4 attention --

5 THE COURT: Just for the record, you had 1

6 hour and a half, even an hour and 40 minutes of

7 argument, that you had plenty of time to establish

8 anything you wanted. And the opposition only took

9 approximately a half hour. So, much less time.

io MR. APFEL: Although he did reargue all the

11 elements of the fraud claim, which I did not touch on.

~2 The only thing I would say, Your Honor, he made one

13 astonishing statement, and that was that MBIA was

14 willing to insure, as represented. That's not what

is MBIA told its investors. What MBIA --

16 THE COURT: Never mind what MBIA told its

17 investors. It's more the relationship between MBIA and

~8 Counts ywide, and what Countrywide told MBIA to get them

~9 to insure. That has to be the basis of the fraud, not

20 on what MBIA puffs off and does puffery to get the

21 world to say what a great company MBIA is. That's not

22 the issue.

23 MR. APFEL: It's also not true that they were

24 willing to insure, as represented. They didn't just

25 insure, as represented.

26 THE COURT: That's what we are here to

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2 discover.

3 MR. APFEL: They insured. And what is clear,

4 based on their own allegations, is that they insured a

s series of 17 securitizations.

6 THE COURT: I understand.

7 MR. APFEL: We would suggest, Your Honor,

8 that they had access to all files with respect to 200

9 files in each case. They had access to anything more

io than they wanted in each case. But more importantly,

1~ as they go forward, and they acknowledge this

12 th ems elves, they have full rights each and every time

13 to look at all the loans underlying each one of these

14 securitizations.

15 THE COURT: After the contract was made. Am

16 I right on that or not? After the contract was

~7 comp leted, then they had the right. Then at that

18 point, they had the right. It is true that the

19 securitizations started in 2006 and went onward. Yes,

20 I understand that point of view. I know you want to

21 get the board out that's over there. But I understand

22 that. But nevertheless, my understanding, looking at

23 the underlying contract, is that Countrywide said no to

24 the information prior to the deal being completed.

25 After the deal is completed, then they had the right.

26 MR. APFEL: Your Honor, with all respect,

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2 that is incorrect.

3 THE COURT: Show me where exactly I'm wrong.

4 MR. APFEL: You are incorrect because MBIA

s had access before each deal to loan tapes with

6 information about each one of the loans. They had due

7 diligence reports with due diligence firm --

8 THE COURT: Exactly the problem. On the loan

9 tapes, did you have loan tapes before the deal?

~o MR. SELENDY: Your Honor, that's precisely

11 the point. The loan tapes contain false and misleading

12 data. Our point is that we had no contractual right of

13 access to the origination files which would have

14 allowed us to determine the falsity of that data until

15 after the closing. And that's very clear under this

16 insurance agreement.

17 THE COURT: Just on that origination file,

18 did they have the right to the origination file prior

19 to the deal?

20 MR. APFEL: Yes. And I would suggest if Your

21 Honor would look at Section 3.01 of the insurance

22 agre ement . That is Exhibit K.

23 THE COURT: I will look at it.

24 MR. APFEL: 3.01(1) which is broad and gives

25 them access right. And then after that, by their own

26 a c knowl edgment , by their own acknowledgment, after deal

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2 one, they have full access to everything. So before

3 they insured deal 2, 3, 4, all the way to 17, they have

4 full access.

s THE COURT: Wait a second. Is that true?

6 MR. SELENDY: Your Honor, first of all, with

7 respect to 3.01(1), as I pointed out in my argument,

8 that's only approval and opinion letters. It is not

9 access to the loan origination files. And in the

io history of party relationship, the first time we heard

~1 that interpretation was in connection with their motion

12 to dismiss. It's only a legal opinion letter or other

~3 documents reasonably necessary to effect the deal.

14 Section 2.02 that control the loan origination files.

15 And as I pointed out, that comes into effect only after

16 the policy has issued.

~7 Furthe rmo re , it is not the case that there is some

~8 kind of universal right of access after each deal

19 closes. It is specific. You can make request for

20 individual loans and other data at a reasonable

21 request. We have made requests after those deals had

22 been done. That was one of the reasons why we were

23 able to do a forensic analysis, which we didn't have to

24 do before. There was no reason to do it before, given

25 the expressed reps and warranties. But the forensic

26 analysis which we did before taking the significant

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2 step of filing fraud, which MBIA does not do lightly

3 and did not do lightly here.

4 THE COURT: I'm going to have to interrupt,

s but let me just say this: The Court every time it

6 takes on a motion like this spends an inordinate amount

7 of time reading all the cases, reading all the briefs,

8 as you have asked me to do, but you know you could

9 assume I do. If you look at my prior decisions, you

io certainly can't say it was a fly-by-night, little

11 decision, right?

12 MR. APFEL: I agree.

13 THE COURT: You may appeal my decision. You

14 may not agree with it, but you cannot say that it

15 wasn't done with a great deal of time and effort on the

16 Court's part.

17 MR. APFEL: Yes.

18 THE COURT: And the only reason that I point

19 that out, because it was sort of like an implication

20 that, gee, Judge, please read this decision at least

21 this time. There were 22 pages on the last one. I

22 assure you, Mr. Apfel, I do read your cases that you

23 point to. I will read even the cases from the District

24 Court of California, Southern District, never mind it's

25 not a Central Circuit Court in California, but I will

26 read them with care. And whether I agree with it or

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2 not is not the point. The point is that I come to the

3 best conclusion as I can.

4 Now, we have left Motion Sequence Number 12 -- I'm

5 sorry. 11, 13 and 14. However, let me just say this

7 (Whereupon, a discussion was held off the

8 record.)

9 THE COURT: Let's take a five minute break.

io MS. SHETH: Your Honor, before we recess,

11 would you like a copy of the put-back letter?

12 THE COURT: No.

13 MS. SHETH: We also have a copy of what's on

~4 the board.

is THE COURT: Yes, I will take that. The Court

16 will take note that this is on -- what was this again?

17 MR. SELENDY: This is the put-back request

18 for individual loans. This is one of several put-back

19 requests made. Overall, there were 4,689 individual

20 loans.

21 THE COURT: How many loans?

22 MR. SELENDY: This is approximately, I guess

23 1,500, i, 600 loans.

24 THE COURT: 1,600 loans. And the Court will

25 note that it is approximately 3 feet tall. We agree on

26 that? Two feet tall.

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2 MR. APFEL: It's a lot of material. It

3 represents the sort of analysis that they were capable

4 of doing on day one, Your Honor.

5 THE COURT: But the Court is not interested

6 in accepting those documents. All right, let's take a

7 five minute break.

8 (Recess taken.)

9 THE COURT: I am ready. Ready for the next

io batch, and you would be glad to know -- I shouldn't

~1 tell you this - the other case that I had to deal with,

12 I'm doing on submission only. But that doesn't mean we

13 are going to be here until 1:00, no. We have got to go

14 quickly.

~s So now, we are dealing with Motion Sequence Number

16 12. We will start with that. Plaintiff seeks an order

17 directing the issuance of commissions to the three

18 third-party companies hired by Countrywide to conduct

19 due diligence on the securitizations, and it's being

20 opposed. And I am going to ask Ms. Sheth to, indeed,

21 tell me about this motion. And, Mr. Apfel, you will be

22 responding?

23 MR. APFEL: I will, Your Honor.

24 THE COURT: Okay. Keep it concise.

25 MS. SHETH: Your Honor, Manisha Sheth on

26 behalf of MBIA Insurance Corporation.

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Let me begin before we get into the details of the

3 specific discovery motions with telling Your Honor

4 where we are in the case with regard to discovery.

s Despite your Honor's ruling that all aspect

6 of discovery should proceed in this case, during the

7 last 15 months, the defendants have not even been able

8 to agree on the very basic aspects of discovery.

9 First, proposed document custodian, defendants

io have not been able to agree to a list of document

11 custodians whose files should be searched. In fact,

12 they proposed a mere 50 custodians across all of the

13 five defendants, not even all five defendants. I'm

14 sorry. All four defendants, because they refused to

15 produce any custodian for Bank of America Corporation.

16 Se cond, defendants have refused and have not been

17 able to agree to even a list of search terms that we

18 can use to collect and search for responsive documents.

~9 In fact, without informing the plaintiff's counsel or

20 MBIA, defendants have applied a very narrow search

21 filter to their instant production to documents,

22 limiting it only to documents that have the terms:

23 "Second Liens, Closed and Second, HELOC, Piggyback,

24 80/20 loans. And by applying this filter, defendants

25 have reduced significantly the number of responsive

26 documents that are produced to MBIA.

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2 For example, the e-mails that are referenced by

3 the SEC in its complaint and have been incorporated

4 into the amended complaint, we have not yet even seen

s those e-mails, which are clearly relevant to the issues

6 in this case.

7 And moreover, despite your Honor's directive that

8 there not be a single day's delay in this case in

9 discovery, the defendants took a summer hiatus from

~o discovery. And in fact, from the period of July 2009

11 to the end of September of 2009, defendants produceda

~2 mere 200 pages in discovery.

13 Now, despite your Honor's ruling that all aspects

~4 of the case should go forward, there should be no

15 distinction between fraud discovery and contract

16 discovery, the vast majority, 8 million of the 9

~7 million pages that defendants have produced have

18 consisted of loan origination files and underwriting

19 guidelines.

20 Now, what is significant are all the documents,

21 the key documents that defendants have not yet

22 produced. One, internal e-mails from their witnesses,

23 such as Mozilo and Sambol. These are clearly relevant,

24 as referenced by the SEC in its amended complaint. In

25 fact, throughout the 15 months since the case has been

26 pending, the defendants have only produced 32,000

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2 e-mails.

3 Now, the documents that we are also missing, have

4 not received yet are loan servicing files, despite the

5 fact that MBIA has expressly alleged a breach of the

6 servicing contract in this case. We have not received

7 any documents relating to the structured loan debts.

8 As Your Honor will recall, that's the debts that were

9 set up in Piano, Texas and Calabasas that were set up

io to approve exception loans, loans that did not comply

11 with underwriting guidelines. We have not receive any

12 training material, employee handbooks, anything that

13 would tell the defendants' employees how they are to go

~4 about originating loans, underwriting loans, servicing

15 loans and how they are supposed to be making exceptions

16 to those underwriting guidelines.

17 We have not received any analysis of the

18 underlying loans. We have not seen any internal

19 audits, any compliance reviews that were done by

20 Countrywide to make sure that it was following the

21 guidelines. We have not seen any communications of

22 mortgage brokers, appraisers, due diligence firms. We

23 have not seen any internal deliberations or

24 communications regarding how Countrywide has decided

25 whether or not to accept MBIA's repurchase request, the

26 put-back request. We have not seen any compensation

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2 policies, any incentive programs, despite the fact that

3 the complaint alleges that Countrywide incentivise its

4 employees to increase the number of loan origination,

5 increase riskier loans by paying them more money for

6 those loans. And yet, we have not seen those documents

7 that show the policies.

8 We have not seen even documents that show how

9 Countrywide selected the loans that went into these

10 securitizations. So, there are vast areas of

11 documents, key areas of documents that have not even

12 been provided. And the 8 out of 9 million documents

~3 that had been provided, 80 had been loan origination

14 files and underwriting guidelines.

~5 Now, against this backdrop, there are four pending

16 motions before Your Honor. Your Honor had pointed out

17 Motion Sequence Number 12, which is the third-party due

18 diligence subpoena. Now, this is a very

19 straightforward issue. The issuance of commissions

20 authorizing subpoenas to out-of-state witnesses is a

21 matter of course. This is a routine matter that is

22 generally not subject to motion practice. The

23 subpoenas in this case are directed to Clayton, MDMC

24 and Fidelity, which is formerly known as Watterson

25 Prime. These are the companies, the third-party due

26 diligence firms that were retained by Countrywide

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2 Securities to review samples of loans. And the results

3 of those parties' reviews provided to MBIA in

4 connection with its decision to insure these loans.

5 There is no dispute that the documents of these parties

6 are relevant. Defendants concede the relevance.

7 The narrow issue for this Court to decide is

8 whether or not documents relating to all 17

9 securitizations should be produced, or documents

io relating to the 15 that MBIA has currently suffered

11 damages on. And I would like to tell Your Honor why

12 those prior two deals are relevant.

13 As Your Honor knows, in the amended complaint, we

~4 have alleged that Countrywide began its market

15 campaign, aggressive campaign to drive market share at

16 the expense of complying with underwriting guidelines

~7 in 2004. The first two deals are from 2006. Now, the

18 reason that documents relating to those deals are

19 relevant is because it may establish whether or not

20 there was, as Mr. Selendy had pointed out, a fraud-free

21 baseline of comparison. Defendants have put this issue

22 into the case by repeatedly alleging causation, that

~3 the harm here was caused by the market and not by their

24 fraud .

25 The earlier documents relating to these two deals

26 from the due diligence companies will show a variety of

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2 things. They may show (1) whether there was a change

3 in how the due diligence firm was retrained by

4 Countrywide. They may show how the due diligence firm

5 was compensated by Countrywide and whether there was a

6 change between the 2002 time period and the 2004 time

7 period. They may show, was there a change in who

8 selected the sample, how was the sample of loan

9 selected, what was the methodology used to review these

~o loans.

~1 THE COURT: I'm not going to cut you short.

12 But on 12, is there an opposition apart from the 15 to

13 17 securitizations?

14 MR. APFEL: Other than that, no, Your Honor.

15 THE COURT: All right. Then it's granted in

16 full, including 17. So, I am going add the reason why.

17 And I will give you a reason why, because I do think

18 that since there is a thought, according to MBIA, I'm

19 not saying they are right or wrong, according to MBIA,

20 the, quote, "fraud" commenced in 2004, and these other

21 two securitizations were done before, as Ms. Sheth was

22 telling me very eloquently, there may be substantial

23 differences in the mechanisms of doing the

24 securitizations before the date versus after the date.

25 And as such, the Court is going to permit that, to

26 allow a review of what's considered to be the base

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2 versus what is now considered to be, according to MBIA,

3 the fraudulentness. As to that, the Court will permit

4 it.

s MR. APFEL: Your Honor, the only thing I

6 would suggest is that, you know, there is a long, drawn

7 issue here and the nature of the request made by MBIA.

8 THE COURT: Let me tell you, discovery,

9 according to what Ms. Sheth just told me, is,

io unfortunately, not doing very well. I'm going to make

11 an announcement about that. Yes, I understand it is

12 lots and lots and lots of paper. If you do it by

13 xeroxing, it's going to be the exfoliation of these

14 trees, the attrition, whatever, the poor trees are

15 going to die throughout the entire state of Alaska just

16 to be able to do this kind of discovery. However,

17 thank goodness for scanning and disks and all sort of

18 wonderful ways of doing things, which would not cause

19 the lives of trees, which I do suggest we go through

20 that process rather than anything else.

21 MR. APFEL: Your Honor, may I respond just on

the issue of whether discovery is proceeding?

23 THE COURT: No. We will get to that in a

24 minute. I got 12 out of the way. It is granted,

25 including 17 out of the 17.

26 Now Motion Number 13, plaintiff seeks document

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2 discovery from back, arguing that defendants are

3 attempting to stay discovery. We have been over the

4 back issue a number of times. The Court is going to

5 order that the back discovery goes forward. If~

6 indeed, at the end of the day I do not rule in favor of

7 the successor liability, I would still allow discovery

8 concerning back. Because, indeed, the issue -- forget

9 whether or not I have a claim as to the successor

io liability, I am still going to permit discovery to go

11 forward to see whether or not what exactly was the

12 relationship or what happened with Countrywide when it

13 either, quote, "Merged" or didn't merge with back. So

14 I'm going to permit that.

15 MR. APFEL: Your Honor, with respect to that,

~6 I hear your loud and clear on that, but this discovery,

17 which, as plaintiff explained, is quite broad and

18 sweeping --

19 THE COURT: I understand.

20 MR. APFEL: -- relates to what could only be

21 construed as an ancillary party, an ancillary matter.

22 THE COURT: That's your issue. Let's get

23 into what is discovery in the State of New York. Maybe

24 it's not that way in California. Maybe it's not that

25 way in other places, but, obviously, California is the

26 baseline here. But in the State of New York, we

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2 believe in exceptionally broad discovery, way beyond

3 what may be admissible at a trial of this action. Way

4 beyond. It is full and complete disclosure on both

s sides, not one side but both sides. And it is that

6 notion, that concept that the CPLR has articulated very

7 clearly. And it is one that I believe in. I also

8 think it's one that facilitates the understanding of

9 the case, even a complex case like this. And it leads

io ultimately to, it is my hope one day, a resolution of

~1 this matter. However, if it doesn't resolve, then

12 everybody has as much information as necessary to be

13 able to formulate the parameters of the trial. And as

14 I said, not everything that is discoverable is

15 certainly something that I would permit as evidence in

16 a court of law, but it is still discovery.

17 And as to the issue that's articulated in Motion

18 Sequence Number 13, the Court is going to permit that.

19 Because even as I said, even if I find against MBIA in

20 terms of successor liability, because you did make good

21 a point. And I really don't know where I'm going to go

22 on it. Even if I do find that, I would still permit

23 the discovery, because I do think that it is an area

24 that MBIA, the plaintiff, is entitled to find out

25 about. That would by my ruling in any case.

26 MR. APFEL: Your Honor, it's just that what

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2 they are finding out is whether or not Bank of America

3 Corporation Bank is a successor with respect to

4 particular liabilities. It would just seems at this

5 instance that discovery, because it is with respect to

6 a vicarious liability claim, could be narrow and

7 targeted so that we can resolve whether or not that

8 entity should ever be a party to this lawsuit.

9 THE COURT: There will always be available to

io you remedy that would limit discovery. If you feel

1~ that you need to seek an order of protection, then I

12 expect a proper motion before me on the order of

13 protection. If you find that it's attorney work

14 product or whatever, then let me just say, because I

is will say it now, and I am sure this is part and parcel

16 something that may very well be an issue in terms of

17 the back relationship with Countrywide.

18 If there is a claim of attorney/client privilege

19 or attorney work product here, and that is the reason

20 why we are not going to be producing documents, then

21 let me just say, I want the log to follow the CPLR. I

22 don't want log saying, you know, Judge, attorney/client

23 privilege. No, no, that doesn't do it for me. In

24 fact, I went over this in another major case. Yes, it

25 takes a great deal of time to do an attorney/client

26 privilege log. So, it should include with a Bates

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2 number, the document, the date that it was produced,

3 from whom and to whom, what the document was about and

4 what was the basis for the claim, all right. Not just

s attorney/client privilege, but, rather, the

6 communications that involve this kind of information.

7 That would be attorney/client privilege. Now, do I

8 think that's the end of the argument? No. Then it

9 goes to the proper person to be reviewed. But at least

10 let's get the log properly done. Apart from those kind

11 of things, Motion Sequence Number 13, Ms. Sheth, is

12 granted. Okay.

13 MS. SHETH: Thank you, Your Honor.

14 THE COURT: Explain to me Motion Sequence

15 Number 14. That I'm a little confused about.

16 MS. SHETH: Motion sequence

~7 MR. APFEL: That's our motion, Your Honor.

18 THE COURT: 14? Plaintiff seeks the issuance

19 of judicial subpoenas. Is that yours?

20 MR. APFEL: Defendants' motion.

21 THE COURT: Is it your motion, Ms. Sheth?

22 MS. SHETH: No, that's defendants' motion,

23 but I can respond with our points on that. I think

24 it's a very straightforward issue.

25 THE COURT: Let him at least make his points

26 first. He is capable of making his own points.

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2 MR. APFEL: Your Honor, with respect to our

3 motion, we are seeking to have our commission issue to

4 obtain documents from Mitsui, which is a reinsurer that

5 provided reinsurance to MBIA, we believe, with respect

6 to at least one or two of the transactions at issue.

7 And we are also seeking an order from the Court that

8 would permit us to take discovery or to issue a

9 subpoena to the New York Department of Insurance.

io THE COURT: Why?

~1 MR. APFEL: That's the regulator that

12 regulates MBIA. There has been, you know,

13 correspondence, we believe, between the lender and MBIA

14 in some instances with respect to the securitizations

15 that are in issue in this case with respect to

16 Countrywide.

~7 With respect to MBIA's practices, how it assesses

18 risk. All the practices of MBIA that we would want as

~9 part of what went into or didn't go into the due

20 diligence that they performed wittl respect to the

21 securitizations at issue. There are communications

22 there -- I mean, there is a restructuring that was done

23 of MBIA. We want to have a better understanding of how

24 that restructuring came about and why the company was

25 split into two entities, in effect, where one entity

26 would provide guaranty insurance to municipal bonds,

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2 while the other entity would continue to provide

3 guaranty insurance to in structured finance. We

4 believe that that decision was, in part, made because

s of a recognition on the part of the regulator of

6 deficiencies with respect to the practices of MBIA in

7 the past.

8 THE COURT: Let me just say this, let me hear

9 from Ms. Sheth first.

10 MR. APFEL: I mean, the only other thing I

11 would add, Your Honor, it seems as if you have said

~2 several times today that discovery in New York is broad

13 and sweeping. We believe that this is really a classic

14 instance of what is good for the goose is good for the

15 gander. Ms. Sheth, she will speak for herself, but

16 this doesn't go to the fraud claim, but it goes exactly

17 to our defense. We have to be enabled to defend this

18 case.

19 THE COURT: I understand, Mr. Apfel. You

20 would be surprised this is not my first day in court,

21 maybe my second. It seems to me to be forever. I

understand, Mr. Apfel.

23 The issue I have, more so than the discovery of

24 the New York State Department of Insurance, is the

25 reinsurance issue. And I have another case that is

26 massively big that have issue of reinsurance directly

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2 in it. And, in fact, I am in the process of writing a

3 decision on the issue of reinsurance. So I am a little

4 bit familiar. I'm not saying totally, but I am

5 somewhat familiar with some of the case law concerning

6 reinsurance.

7 So, Ms. Sheth, do you have anything to say to me

8 on reinsurance?

9 MS. SHETH: Yes, your Honor. I want to be

io clear and to say MBIA understands the broad scope of

11 discovery. We have been engaging in discovery. And we

12 are willing to agree to an appropriately tailored

subpoena to Mitsui Reinsurance Company. That said, the

14 proposed subpoena that defendants have put forth is not

15 a narrowly tailored subpoena. MBIA would be willing to

16 agree to a subpoena that calls for documents about the

17 17 deals in this case. Defendants proposed subpoena

~8 calls for documents about Mitsui due diligence

19 practices, Mitsui staffing. It calls for documents

20 about MBIA's entire business. It talks about a request

21 document about securitizations of first lien mortgages.

22 It talks about communications about MBIA's entire

23 underwriting practices. It's not limited to the deals

24 in this case. If defendants will agree to a narrowly

25 tailored subpoena about these 17 deals, we will agree

26 to the issuance of such information.

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2 THE COURT: I am going to take it under

3 submission, because I'm not in the least bit secured in

4 my own mind exactly how I feel about reinsurance. It

5 is a very particular area of the law. It requires

6 further review of the case law. And I am not

7 comfortable with reinsurance per se. Because,

8 basically, and, again, maybe I'm speaking too soon, is

9 my understanding that the Courts, the Appellate Court

io and the Court of Appeals have been very negative about

11 the litigants attempting to find out information on

12 reinsurers. Because one of the basic policies involved

13 is that those, the issue of reinsurer goes directly to

14 how much money is available to finance or to support

is large or complex settlements in complex cases. And I'm

16 a little weary about it. However, if there is an

17 agreement between the two parties, and, indeed,

18 Countrywide agrees to it, then that's something I won't

19 interfere with, because it would be an agreement

20 settlement between the two parties. But apart from

21 that, I will take it under advisement. I don't quite

22 know where I would come out on that.

23 MR. APFEL: Let me say two things on the

24 reinsurance, Your Honor. One is that MBIA has brought

25 very sweeping claims generally but also with respect to

26 damages.

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2 THE COURT: You have to speak up.

3 MR. APFEL: There have been very, very broad

4 claims with respect to damages, saying that all of the

s evils that have befallen MBIA over the last several

6 years have resulted from Countrywide's conduct. One,

7 we believe we are entitled to find out the steps that

8 MBIA took to mitigate damages in the form of obtaining

9 reinsurance.

io THE COURT: I am not so sure you are

11 entitled. You can either make an agreement. You can

12 either agree to a limited subpoena, or you cannot agree

13 to a limited subpoena, then I will make a decision.

14 And either you win or you don't win, but it will be

15 based a great deal on case law concerning reinsurance.

16 MR. APFEL: Understood. The other thing I

17 would add, Your Honor, with respect to the broad nature

18 of this subpoena and the extent to which it goes beyond

19 the Countrywide deals, to the extent that MBIA is

20 interested in doing a comparison on certain Countrywide

21 deals and securitizations to the supposedly fraudulent

ones -

23 THE COURT: No. That is entirely different,

24 Mr. Apfel. The reason why it is entirely different is

25 that, yes, MBIA is entitled to discovery of

26 Countrywide's practices as it concerns securitizations.

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2 But you are asking the Court to agree to it. On the

3 other hand is the issue of reinsurer, and that is a

4 whole different financial issue between insurance

s companies, and I am not so sure you are entitled to

6 that.

7 MR. APFEL: But all I am suggesting is

8 that --

9 THE COURT: Yes. But what's good for the

io goose is good for the gander too.

~1 MR. APFEL: But also, even with respect to

12 the reinsurer, there are communications with the

13 reinsurer about t~hese other deals that will give us a

14 sense, different practices.

15 THE COURT: If you want to, I will submit it,

16 and it will be submitted. And I will then think about

17 it. And I don't tell you how I'm going to come out on

18 it, okay. So 14 is submitted on the issue of

19 reinsurance.

20 Now issues of judicial subpoena to the New York

21 State Department of Insurance --

22 MS. SHETH: Your Honor, may I be heard on

23 that issue?

24 THE COURT: Yes. Go ahead.

25 MS. SHETH: Now, let me begin by saying that

26 the standard is to issue a subpoena to a government

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2 agency such as the New York State Insurance Department

3 is higher than issuing a subpoena to a third party.

4 That is governed by CPLR Section 2307. There is not a

5 lot of case law on this section. However, we have

6 uncovered one case, and that case states that the

7 movant must demonstrate special circumstances by

8 showing that the information sought is material and

9 necessary, and that it cannot be obtained from other

io sources. We are talking about a government agency and

11 the burden of responding to a subpoena on a government

~2 agency.

13 And let me say that this subpoena that defendants

14 have proposed is overly broad. But more importantly,

15 they have not met their standards. The New York State

16 Insurance Department was not a participant in these

17 deals. It was not involved in these deals, unlike the

18 third-party due diligence in the first place. The New

19 York State Insurance Department had no involvement in

20 these deals.

21 Moreover, defendants proposed subpoenas are not,

22 again, limited to the 17 deals in this case, the 17

23 securitizations, but rather seek broad discovery into

24 areas of MBIA's business that are not remotely relevant

25 to this case. Mr. Apfel mentioned one of them, the

26 trans formation. That transformation was not done by

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2 MBIA Insurance Corporation, the plaintiff in this case,

3 but by MBIA parent, MBIA. There is no reason for

4 discovery into that transaction with regard to the

5 element and causes of action in this case.

6 Moreover, defendants seek any regulatory filing

7 that was made by MBIA to the New York State Insurance

8 Department. This is completely broad, overexpansion

9 and, frankly, is harassing MBIA for documents that it

10 is legally obligated to produce to its regulator as a

11 matter of law. And now defendants are trying to seek

12 those documents from the regulator that have no bearing

13 on the causes of action and the defenses alleged in

14 this case.

15 In addition to those two extremely broad

16 categories, the defendants also seek documents about

17 MBIA's overall business, beyond the 17 deals in the

18 case expanded to securitizations of residential

19 mortgage back securities, beyond just second liens. We

20 are talking about first liens now. CDO's, MBIA's

21 municipal bond business, MBIA's financial strength

22 rating. MBIA's entire business practices. And there

23 is no analysis, just a blanket assertion in their

24 papers that defendants believe that these documents are

25 relevant.

26 Now, the second prong of the discovery standard

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2 under 2307 is that these documents cannot be obtained

3 from another source. Defendants have not yet exhausted

4 their efforts to obtain discovery from MBIA. They had

s asked MBIA for documents that were provided to the New

6 York State Insurance Department. MBIA have gone back

7 to defendants during the meeting process and said, give

8 us a narrower request tailored to these deals, rather

9 than provide a narrow request or move to compel before

10 this Court. The defendants have attempted to

11 circumvent the discovery process and jump ahead,

~2 leapfrog to get the same discovery from the New York

13 State Insurance Department. That is not appropriate

14 under 2307.

15 Moreover, if you look at Mr. Apfel's affirmation

16 in support of his motion, it makes clear that

~7 defendants are speculating as to the very existence of

18 these documents. In the case entitled: People v

19 Coleman, 349 NY2d at 298, the Court denied a motion

20 under 2307 and stated that it is denied where it is

21 clear that a party is simply foraging for evidence.

22 In this case, if we look at the affirmation of Mr.

23 Apfel, and we look at Paragraph 13, it says: "To the

24 extent that MBIA had communications about

25 securitizations performance."

20 Paragraph 17: "If the documents regarding the

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2 restructuring or credit downgrade show that such

3 actions were taken in response to MBIA's losses."

4 Paragraph 18: "If such documents show that MBIA

s fail to follow its underwriting guidelines."

6 There is no basis for the contention that these

7 documents even exist, let alone how they are relevant

8 and material to their cause of action in this case.

9 Now, defendants are comparing apples and oranges

io by saying that this discovery is comparable. For the

11 reasons I have already stated, this is a government

12 entity, not a private party. This is an entity that is

13 not involved in the securitizations, but an entity that

14 MBIA is legally obligated to report to.

is The scope of discovery that MBIA is seeking with

16 regard to third-party due diligence is narrowly

17 tailored to the deals in this case, where the discovery

18 proposed subpoena to the New York State Insurance

~9 Department is extremely expansive. And it's extremely

20 telling that MBIA has not even asked this kind of

21 discovery from Countrywide. Countrywide admits it's a

22 heavily regulated entity, just like MBIA. But MBIA has

23 not asked for all of Countrywide's regulatory filings.

24 It wouldn't be relevant to this case.

25 And defendants have made that same argument on the

26 pending motion to compel, where MBIA have limited its

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2 discovery request to just communications to regulator

3 involving the deals in this case and its

4 representations of its underwriting practices.

s Countrywide is subject to numerous investigations

6 by the FBI, the SEC, State Attorney General's office,

7 all arising out of the same misconduct,

8 misrepresentation of its adherence to the understated

9 underwriting guidelines. And they have refused to even

10 provide that to MBIA, but yet they have come in here

11 and seek the Court's permission to issue a subpoena

12 seeking all of MBIA's regulatory filings, but MBIA have

13 not been accused of any wrongdoing in this case.

14 Therefore, we would ask that the subpoena to the New

is York State Insurance Department be denied.

16 THE COURT: Yes, Mr. Apfel, briefly because

17 we are getting to the end of the session.

18 MR. APFEL: Your Honor, one thing that Ms.

19 Sheth said just now is categorically false. There is

20 no other way of saying it.

21 THE COURT: I can't hear you.

22 MR. APFEL: MBIA has asked for all of

23 Countrywide's regulatory filings. It is the subject --

24 THE COURT: Wait a second. Is that true?

25 Ms. Sheth just told me it's not. Is that true?

26 MS. SHETH: We have asked Countrywide for its

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2 regulatory communications regarding misrepresentations 3 about its underwriting guidelines. It had been under

4 investigation by the State AG's office, the SEC. They

s have produced documents to the SEC, and we have asked 6 for those documents, and they have not provided us with

7 any.

8 MR. APFEL: This is a subject of current

9 motion practices. We are trying to get the specific

io request, but they have requested, without exception,

11 all documents relating to any discussions or

12 communications .

13 THE COURT: You are reading from what?

14 MR. APFEL: I am reading from Plaintiff's

15 first request for production of documents to the

16 Countrywide defendants.

17 THE COURT: What date is that?

18 MR. APFEL: The date of that was November 4,

19 2008.

20 THE COURT: Has that been amended or changed

21 in anyway in the second request or the third request?

MS. SHETH: Your Honor, we had a meet and

23 confer about various requests since the motion was

24 filed, and I believe even before this motion was filed.

25 It is a request, but the parties have been meeting and

z~ conferring. And we have narrowed the request to

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2 misrepresentations about the underwriting guidelines

3 and documents that have been produced to government

4 agencies.

5 THE COURT: So, it's not an untruth.

6 MR. APFEL: It is.

7 THE COURT: But a meet and confer between two

8 good attorneys are supposed to arrive at a proper

9 conclusion. And not everything needs to be done by the

io Court, not everything.

11 MR. APFEL: We understand, Your Honor.

12 THE COURT: If you had, indeed, if you did

13 not for the last 15 months take a holiday from July to

14 the end of September, producing 200 pages. If the

is entire amount of discovery, 8 million pages out of 9

16 million pages that have been produced, it had to do

17 with loan originations only. If, indeed, no e-mails

18 have been turned over, of course, it is the rule that

19 it should be turned over. If, indeed, there has been

20 no structure, nothing done on any one of the major

ai issues in front of us, if that is true, sir, then let

22 us focus in on the discovery.

23 Motion Sequence Number 14 is denied, not with

24 prejudice, without prejudice. Do the discovery between

25 the parties. If, indeed, at the end of that time you

26 have a necessity to go to the Department of Insurance

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2 instead of going to MBIA to ask for those documents

3 from MBIA, then I may entertain it. But right now,

4 considering that the Government of the State of New

s York is reducing the personnel in every and each entity

6 there is, because there is a current budget crunch, I

7 am not going to end the Department of Insurance ability

8 to regulate because Countrywide is asking for this

9 broad amount of discovery.

io I am suggesting to you, Countrywide, Mr. Apfel,

11 that you, indeed, sit down and actually conduct

12 discovery. You have to understand something. I think

13 I'm a patient person, but I am not a patient person

14 when I hear that, indeed, proper discovery request have

15 been made and nothing has happened in return, except,

16 to put it as nothing would be a little bit of a great

17 assault. 9 million pages have been put together, but

18 it's not sufficient.

~9 My suggestion to you, Mr. Apfel, is that the

20 documents that you are looking for from the Department

21 of Insurance, whether or not they have it or not, if

22 they are relevant, please ask them for those documents.

23 If there is a view from MBIA that it is too broad, they

24 will make a motion to protect themselves. If you, on

25 the other hand, Mr. Apfel, on behalf of Countrywide,

26 believe that the request being made by MBIA is too

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2 broad, there is also an order of protection for you.

3 Everybody has remedies. But one remedy that is not

4 appropriate is not doing anything. All right. I mean,

5 look, I'm not going to judge whether you have or have

6 not. There is an allegation you haven't. You have an

7 allegation probably that they haven't. Sit down. Do a

8 meet and confer. And if you can't come to an

9 agreement, you can do a motion by order to show cause

io before this Court on exactly the documents that you

~1 believe you are entitled to and exactly which documents

12 that MBIA thinks they are entitled to, and why I

13 shouldn't just order it done. But before I do that,

14 because even though I don't want to have to do

~s unnecessary work, and I have plenty of work to do just

16 on this morning's arguments, plenty of work to do. I

17 don't want to get involved with discovery,

18 particularly. I will if I have to, but let me tell you

19 s ome thing . I get very unhappy if it is the kind of

20 kind of discovery that an ordinary judge, on an

21 ordinary day would say should be discovered.

22 As to the Department of Insurance, I am not about

23 to ask them to stop everything. Countrywide is here,

24 and they are asking for all the documents that they

25 could have gotten from MBIA. After you have done that

26 exercise, and after you tell me the document on X, Y

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2 and Z have not been produced by MBIA or a Jackson

3 affidavit by MBIA, saying I can't find those documents,

4 they are nonexistent, and the only place in the whole

s wide world that would have them is, indeed, the

6 Department of Insurance, I may grant your subpoena.

7 But at this time, it is not being granted.

8 MR. APFEL: Your Honor, one thing. You seem

9 to have believed everything that Ms. Sheth says. Just

10 because she says it, doesn't make it true.

11 THE COURT: No, I don't believe it. I am

12 saying that going to the Department of Insurance is

13 premature. That's all I'm saying.

14 MR. APFEL: We have made these requests, Your

is Honor, repeatedly over many months. MB IA, they

16 categorically refuse to give us any of these documents.

17 THE COURT: That seems to be like tit for

18 tat. It seems to me, and I also put into the record

19 that, indeed, one of my court attorneys, Mr. Leung,

20 Jeff Leung, L-E-U-N-G, has spent a considerable amount

21 of time talking to everyone at my expense because he

22 can't work on anything else when he is talking to MBIA

23 and Countrywide, where he has made proposals and

24 suggestions about how to get around the discovery

25 disputes, which, apparently, was completely rejected or

26 ignored.

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2 Let me tell you something else. And that is, when

3 one of my persons speak at length with the counsel for

4 both sides, and spends a good deal of time on this, and

5 then his suggestion is completely ignored, kicked to

6 the Department of Insurance, do this and do that, you

7 know what? Again, I don't appreciate the waste of

8 time. I just don't. So, I would suggest to you that,

9 indeed, sit down once again on your demands. Make a

io list of things. If it is agreed to, do the work. If

11 it is not agreed to, come back on a motion to compel on

~2 both sides. And if it is not agreed to, but there is a

13 sense that it's overburdensome and I need an order of

14 protection, do motions. But don't just come in with

15 subpoenas for the Department of Insurance, because I am

16 not going to burden Govenor Patterson's overly-burdened

17 people up there with things that should be, indeed,

18 produce by MBIA. And if they cannot be produced, or

19 they don't have those documents, remember what a

20 Jackson affidavit is? That is when I have searched

21 diligently, up and down and into every crevice I can

22 find - this goes for you too, Mr. Apfel - every

23 crevice, every little file cabinet I can find, I have

24 opened everything up, and, by golly, after all these

25 search, hours of searching, I have not been able to

26 find document X, Y and Z, and, the re fo re , I am inviting

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2 you this affidavit saying, after due diligence, I just

3 cannot find this document, then that's called a Jackson

4 affidavit. Affidavit, mind you, not affirmation.

5 Affidavit. Then, of course, later on, when that

6 wonderful document which was searched for, a great deal

7 of time was spent, we will not be able to produce it

8 again at trial. That's a Jackson affidavit. If,

9 indeed, you can find it from another source, and you

io think that the Department of Insurance is, indeed, the

11 keeper of such records, possibly I will give you the

12 subpoena at that point. All right. I have a lunch

13 meeting, so this session is concluded.

~4 MS. SHETH: I apologize for troubling you.

15 Your Honor, we had asked for a preliminary conference

~6 to set a schedule in this case, and we had submitted a

17 proposed scheduling order. Your Honor, we understand

~8 you are very busy, but can we at least get a trial date

~9 in this action, a note of issue date? We believe that

20 would expedite the discovery process.

21 THE COURT: I agree with you there. Do you

22 have a proposed scheduling order?

23 MS. SHETH: We do.

24 THE COURT: Where is that?

25 MS. SHETH: I can hand it up, Your Honor.

26 THE COURT: Have you looked it over, Mr.

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2 Apfel?

3 MS. SHETH: The issue is there is a big

4 disagreement on the proposed schedule.

5 MR. APFEL: Not surprising.

6 MS. SHETH: Your Honor, the plaintiff

7 believes that document discovery should be completed in

8 March of 2011. All discovery in March of -- I'm sorry.

9 THE COURT: 2011?

io MS. SHETH: The trial will be March of 2011.

1~ THE COURT: That sounds better.

12 MS. SHETH: And defendants have made a

~3 proposal that the trial would be in June of 2012. And

14 we are very troubled by that.

is THE COURT: You know what? I will split the

16 baby. I will make it June of 2011. In the meantime,

17 you can adjust your dates. Let's get going.

18 Do you have another problem apart from not wanting

19 to go to trial in 2011?

20 MR. APFEL: Your Honor, I just don't want you

21 to leave with the impression that things haven't been

22 done. Countrywide have been working hard.

23 THE COURT: It's not going well enough. The

24 reason why I know it's not going well enough is that

25 Mr. Leung has been spending too much time, and it's

26 reported to me the hours worth of work, and nothing

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2 gets going to the next stage. It is not going well.

3 Get discovery, documentary discovery done.

4 When are you proposing that should be finished?

5 MR. APFEL: Your Honor, we are proposing that

6 that not be finished until 2011, because --

7 THE COURT: No, no, not documentary

8 discovery, no.

9 MR. APFEL: Your Honor, least an additional

~o six months for document discovery.

11 THE COURT: I tell you what, I'm going to

~2 keep the dates as they are. And you can then come in

13 and tell me exactly what problems you have. No, sir.

14 No. This is a 2008 case. It can't go on forever. All

~s right. It just cannot. Don't just shrug your

16 shoulders. No, it cannot go on forever. It is going

17 to get done a little quicker than you think it is going

18 to get done. It is going to get done sooner rather

19 than later. I am a very, very understanding person,

20 but it's not going to be one of those cases that is

21 108. And when my successor comes in, because I have

22 retired of old age, and they can't keep me on any

23 longer, he says, oh, '08 case, gee, it should have been

24 done by now, should have been done by now. No. You

25 know what? It is going to get down in my venue, my

26 time before I retire, which, you would be glad to know,

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2 is a number of years away before I retire. I have to

3 look at this.

4 MR. APFEL: Your Honor, the reason that it's

5 unrealistic to talk about this document discovery being

6 done within the next three or even six months is that

7 in discussions with MBIA, they have identified two

8 date, 400 custodians whose documents they want us to

9 search for.

io THE COURT: Good. Get going on it. The way

11 to get going on it, if you said to me, they have

12 identified 400, and I have managed to get done 200 of

~3 them, and it takes me this amount of time, I would be a

14 lot more sympathetic. Instead of oh, gee, it's going

~5 to take me so much time, better do it in 2016. No.

16 The answer is, sir, is that you get going on these

~7 things. There will be compliance conferences. You can

18 tell me all the good reasons you have not been able to

19 complete this by this time, and then, possibly, I might

20 give you an extension. The idea of having time limits

21 is that you get going on it with a sense of urgency.

22 And urgency is a great thing to have because it gets

23 work done. And that's why we all have deadlines.

24 That's why deadlines are good. I'm not sure about

25 this, but I'm not going to deal with it now anyway.

26 Have a lovely holiday if I don't see you before.

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2 MS. SHETH: Thank you, Your Honor.

3 MR. SELENDY: Thank you, Your Honor.

4 MR. APFEL: Thank you Your Honor.

s THE COURT: Happy holiday to everyone.

6 * * * *

7 It is hereby certified that the foregoing is a true and accurate transcript of the proceedings.

10 ALDORINE WALKER, RPR Official Court Reporter

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MBIA v. Countrywide and BofA, Motion to Dismiss Oral Argument Transcript

Documents

Transcript of MBIA v. Countrywide and BofA, Motion to Dismiss Oral Argument Transcript