Mbia Ins. Corp. v. Countrywide Home Loans, Inc.

40 Misc.3d 643

965 N.Y.S.2d 284

2013 N.Y. Slip Op. 23140

MBIA INSURANCE CORPORATION, Plaintiff,

v.COUNTRYWIDE HOME LOANS, INC., Countrywide Securities Corp., Countrywide Financial Corp., Countrywide Home Loans Servicing, LP and Bank of America Corp., Defendants.

Supreme Court, New York County, New York.

April 29, 2013.

Peter E. Calamari, Phillipe Z. Selendy, Jonathan B. Oblak, and Manisha M. Sheth of Quinn Emanuel Urquhart & Sullivan, LLP, for MBIA Insurance Corporation.

Walter Dellinger, Jonathan Rosenberg, Daniel L. Cantor, and B. Andrew Bednark of O'Melveny & Myers LLP, for Bank of America Corp.

EILEEN BRANSTEN, J.

Motion sequence numbers sixty and sixty-one are consolidated for disposition. This matter comes before the Court on the summary judgment motions submitted by MBIA Insurance Corporation (“MBIA”) and Bank of America Corp. (“BAC”). Each motion seeks summary judgment under CPLR 3212(e) on MBIA's successor liability claim under the theories of de facto merger and assumption of liabilities. Each theory will be addressed in turn.

For the reasons that follow, MBIA and BAC's motions are denied.

I. Background

The facts of this matter have been discussed extensively in previous decisions of this court. Thus, only details necessary to the instant motions are referenced herein.

MBIA brought this action on September 30, 2008 against the Countrywide Defendants.¹ MBIA alleges that Countrywide fraudulently induced MBIA to insure fifteen residential mortgage-backed securitizations (“Securitizations”) and that Countrywide breached the representations and warranties in the transaction documents related to the Securitizations. On August 24, 2009, MBIA filed an amended complaint (the “Amended Complaint”). The Amended Complaint added, among other things, a cause of action alleging successor liability against BAC. This successor liability claim for Countrywide's alleged liabilitiesis premised on a series of transactions entered into by BAC and the Countrywide Defendants in 2008.

A. Transactions Between BAC and the Countrywide Defendants

On January 11, 2008, BAC agreed to acquire Countrywide Financial Corporation (“CFC”) through a forward triangular merger, whereby CFC merged into BAC's wholly-owned subsidiary, Red Oak Merger Corporation (the “Red Oak Merger”). (BAC Statement of Undisputed Material Facts Under Rule 19–a (“BAC 19–a Statement”) ¶ 24.) ² Before the merger closed, CFC was a holding company whose subsidiaries were primarily engaged in mortgage origination and servicing, banking, capital markets, and insurance businesses. (MBIA Rule 19–a Statement of Undisputed Material Facts (“MBIA 19–a Statement”) ¶ 6.) At that time, CFC's direct and indirect subsidiaries included Countrywide Home Loans (“CHL”), Countrywide Home Loans Servicing (“CHLS”), and Countrywide Capital Markets, Inc., which in turn owned Countrywide Securities Corporation (“CSC”). (MBIA 19–a Statement ¶ 7.)

When the Red Oak Merger closed on July 1, 2008, Red Oak Merger Corporation was renamed Countrywide Financial Corporation. (BAC 19–a Statement ¶ 30.) As consideration for the Red Oak Merger, CFC's shareholders received BAC stock. (BAC 19–a Statement ¶ 27.)

Immediately following the July 1, 2008 Red Oak Merger—between July 1 and 3, 2008—certain CFC subsidiaries, CHL and CSC, sold assets to BAC subsidiaries (the “July 2008 Transactions”). (MBIA 19–a Statement ¶¶ 70–71, 78, 87–89.) These asset sales to BAC subsidiaries were done “[t]o support Bank of America Corporation's (BAC') strategic model for the residential mortgage business and to provide efficiency in [BAC's] funding and liquidity plans.” (BAC Responses to MBIA Rule 19–a Statement of Undisputed Material Facts (“BAC Resp. to MBIA 19–a Statement”) ¶ 41).³

The July 2008 Transactions were followed by additional asset sales on November 7, 2008 (the “November 2008 Transactions”). The November 2008 Transactions included the sale to BAC of “substantially all of CFC and CHL's remaining assets.” (MBIA 19–a Statement ¶ 105.) These transactions were effectuated through a Stock Purchase Agreement, by which BAC purchased from CFC its 100% equity ownership of Effinity Financial Corp. (BAC 19–a Statement ¶ 120), and an Asset Purchase Agreement, through which BAC purchased substantially all of CHL's remaining assets. (BAC 19–a Statement ¶ 132.)

MBIA maintains that the July 2008 and November 2008 Transactions were part of a plan developed by BAC before the closing of the Red Oak Merger. MBIA contends that following the announcement of the proposed Red Oak Merger on January 11, 2008, BAC planned to integrate and transition Countrywide's businesses into BAC's business through a series of transactions by which BAC would acquire control over, and then transfer, all of Countrywide's productive assets, operations and employees to itself. (MBIA 19–a Statement ¶ 38.) MBIA refers to this as the “Integration Plan” and points to Bank of America documents that pre-date the closing of the Red Oak Merger and discuss BAC's plan to “[m]erge CFC into Red Oak and then assets out of Red Oak and into BofA” to “provide[ ] a filter for assets and liabilities.” (Affirmation of Jonathan B. Oblak in Support of MBIA's Motion for Summary Judgment (“Oblak Affirm.”) Ex. 18 at BACMBIA–X0000018074.)

BAC disputes that the July 2008 and November 2008 transactions were part of any “Integration Plan” and urges the Court to look at these two asset sales as distinct from the de jure Red Oak Merger. BAC disputes that the use of “BAC” in the documents highlighted by MBIA shows “any effort to combine BAC and Countrywide's business operations.” (BAC Response to MBIA 19–a Statement ¶ 47.) Instead, BAC points to deposition testimony stating that BAC was used “generically” to refer to the Bank of America group of companies. ( Id.)

II. Analysis

Although “[i]t is the general rule that a corporation which acquires the assets of another is not liable for the torts of its predecessor,” Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239, 244–45, 464 N.Y.S.2d 437, 451 N.E.2d 195 (1983), a corporation may be held liable for the torts of its predecessor if (1) there was a consolidation or merger of seller and purchaser, (2) it expressly or impliedly assumed the predecessor's tort liability, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations. Id. at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195.

MBIA grounds its successor liability claim in the first and second of these exceptions: (1) that there was a de facto merger between BAC and the Countrywide Defendants and (2) that BAC impliedly assumed the Countrywide Defendants' liabilities.⁴ BAC and MBIA each seek summary judgment on MBIA's successor liability claim.

A. Summary Judgment Standard

A party moving for summary judgment is required to make a prima facie showing that it is entitled to judgment as a matter of law by providing sufficient evidence to eliminate any material issues of fact from the case. Winegrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851, 853, 487 N.Y.S.2d 316, 476 N.E.2d 642 (1985). Failure to make such a showing mandates denial of the motion, notwithstanding the sufficiency of the opposition. Id. If there is a prima facie showing, the party opposing must then demonstrate the existence of a factual issue requiring a trial of the action. Zuckerman v. City of New York, 49 N.Y.2d 557, 562, 427 N.Y.S.2d 595, 404 N.E.2d 718 (1980).

“It is axiomatic that summary judgment is a drastic remedy which should not be granted where there is any doubt as to the existence of a triable issue of fact or where such issue is even arguable.” Tronlone v. Lac d'Amiante Du Quebec, Ltee, 297 A.D.2d 528, 528–29, 747 N.Y.S.2d 79 (1st Dep't 2002). The summary process “classically and necessarily requires that the issues be first exposed and delineated” since “[i]ssue-finding, rather than issue-determination, is the key.” Id.

B. De Facto Merger

MBIA asserts that the Red Oak Merger, coupled with the July and November 2008 Transactions, amounted to a de facto merger of BAC and the Countrywide Defendants, and that accordingly, BAC is liable for the breach of contract and fraud claims asserted by MBIA against Countrywide. BAC maintains that this claim fails as a matter of law because there was no de facto merger, rendering successor liability inapplicable. For the reasons that follow, neither BAC nor MBIA is entitled to summary judgment on the de facto merger claim under New York law.

1. Choice of Law

The threshold issue for the de facto merger analysis is choice of law. While BAC asserts that Delaware law governs, MBIA contends that New York law is applicable. After consideration of the relevant factors, MBIA's de facto merger claim is properly governed by New York law.

i. New York Choice of Law—Determination of Whether an Actual Conflict Exists

Since New York is the forum state, New York choice of law rules are applicable. Padula v. Lilarn Properties Corp., 84 N.Y.2d 519, 521, 620 N.Y.S.2d 310, 644 N.E.2d 1001 (1994). “The first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved.” In re Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219, 223, 597 N.Y.S.2d 904, 613 N.E.2d 936 (1993). Laws are in conflict “[w]here the applicable law from each jurisdiction provides different substantive rules.” Int'l Bus. Mach. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 143 (2d Cir.2004); see also Elson v. Defren, 283 A.D.2d 109, 115, 726 N.Y.S.2d 407 (1st Dep't 2001) (finding no “meaningful conflict” between New York and Idaho laws with respect to vicarious liability). The differences must be “relevant” to the issue before the Court. Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 331 (2d Cir.2005) (applying New York choice of law rules) (quoting Tronlone v. Lac d'Amiante Du Quebec, Ltee, 297 A.D.2d...