A New York state appeals court Tuesday dismissed a lawsuit in which bond insurer MBIA Inc. accused Merrill Lynch & Co. of fraudulently misleading it into providing insurance on $5.7 billion of risky debt.
The ruling is a setback for MBIA, whose 2009 restructuring is also being challenged in the New York courts. It came in one of many cases accusing banks of misleading investors about the safety of complex debt packaged into securities that plunged in value after the credit crisis struck in 2007.
An MBIA spokesman said the company will ask the Court of Appeals, New York’s highest court, to review the case.
MBIA had been the largest U.S. bond insurer before piling up large losses from insuring mortgages and other debt that proved to be toxic. Merrill’s exposure to similar debt led to its January 2009 takeover by Bank of America Corp.
In Tuesday’s ruling, the New York State Appellate Division in Manhattan dismissed the last of six claims brought by Armonk, New York-based MBIA and co-plaintiff LaCrosse Financial Products LLC over transactions dating from 2006 and 2007.
According to court papers, MBIA had provided insurance on credit default swaps that LaCrosse sold Merrill in connection with $5.7 billion of collateralized debt obligations.
The complaint said that while MBIA does not have a direct ownership stake in New York-based LaCrosse, it is consolidated in MBIA’s financial statements on the basis that MBIA guarantees LaCrosse’s obligations under credit default swaps.
The plaintiffs accused Merrill of fraudulently overstating the quality of the underlying securities, including that they were ‘triple-A” rated, as part of a scheme to ‘offload billions of dollars” of subprime mortgages and other risky debt.
Merrill countered that the plaintiffs suffered from a “classic case of buyer’s remorse” and should not recover.
A lower court judge last April dismissed the plaintiffs’ case apart from a breach of contract claim.
But in Tuesday’s ruling, a five-justice appeals court panel unanimously dismissed that claim as well.
The panel said the plaintiffs’ ‘level of sophistication,” together with ‘specific disclaimers in the contracts” did not excuse their having failed to uncover the risks sooner.
It also said Merrill fulfilled its obligation to provide “triple-A”-rated securities, even if some of them may have been downgraded later.
Kevin Brown, the MBIA spokesman, said the case remains “important as part of the industry-wide effort to address the improper behavior of certain market participants.”
Bank of America spokesman Bill Halldin said the Charlotte, North Carolina-based bank is pleased with the ruling, which is “consistent with our view that MBIA never had a valid claim.”
MBIA’s 2009 restructuring overseen by New York’s insurance superintendent at the time, Eric Dinallo, split its municipal bond business from its structured finance operations.
A group of banks challenged the split, saying it left the company’s insurance unit undercapitalized and unable to pay out on their claims. New York’s highest court, the Court of Appeals, will consider some of the banks’ arguments this year.
The case is MBIA Insurance Corp. et al v. Merrill Lynch et al, New York State Appellate Division, 1st Department, No. 4163.
(Reporting by Jonathan Stempel; Editing by Phil Berlowitz, Maureen Bavdek and Bernard Orr)
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