The bond insurer MBIA Inc., which nearly went broke insuring mortgage-backed securities underwritten by Countrywide Financial Corporation, scored a big win on Tuesday in its effort to wrest back $1.4 billion from the lender.

New York’s Appellate Division, First Department ruled that in order to make Countrywide buy back home mortgages packaged into securities, MBIA only needs to show that it was misled about the riskiness of the loans. Countrywide’s parent company, Bank of America Corporation, had insisted that it only needs to repurchase home loans that defaulted.

"[T]he loan need not be in default to trigger defendants’ obligation to repurchase it," the appellate court ruled. "[T]o the extent plaintiff can prove that a loan which continues to perform materially and adversely affected its interest, it is entitled to have defendants repurchase the loan."

MBIA insured billions of dollars worth of MBS underwritten by Countrywide in the years before the financial crisis. In so-called "purchase and sale agreements," Countrywide made representations and warranties about the underwriting standards it used for the underlying home loans. In the event that it breached those reps and warranties, Countrywide promised to buy back the mortgages at their original face value.

After the subprime crisis hit, MBIA paid out $1.4 billion in claims on Countrywide MBS losses. MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan sued Countrywide in New York state court, alleging that the lender was required under the repurchase clause to replace underperforming home loans with cash. As The American Lawyer explained a March 2012 feature, bond insurers have brought dozens of similar "put-back cases" against big banks like JPMorgan Chase & Co. and Credit Suisse SA. Other investors have brought similar claims against Countrywide based on repurchase clauses in their own contracts with the lender.

The New York Supreme Court Justice overseeing the MBIA case, Eileen Bransten, sided mostly with the insurer on summary judgment. Crucially, on the issue of loss causation, she ruled that the insurer doesn’t need to establish that misrepresentations by Countrywide directly caused the home loans to default. MBIA only has to show that Countrywide’s alleged breaches caused it to incur an increased risk of loss, she ruled.

Bransten’s ruling wasn’t all good news for MBIA, however. The insurer had moved for summary judgment on the nagging question of when Countrywide’s repurchase obligations kick in. According to MBIA, to get Countrywide to buy back a mortgage, it only needed to show that Countrywide had materially breached a rep or warranty. Countrywide countered that it was only required to repurchase home loans that defaulted. As we reported, Bransten refused to grant summary judgement to MBIA, but indicated that she might revisit the question later. Bank of America had said in a November 2011 regulatory filing that an adverse ruling on the warranty breach issue could "significantly impact" its estimated $16.3 billion liability on repurchase claims.

BofA may want to set aside some more dough, because the First Department has now unceremoniously reversed Bransten on the warranty breach issue. "[H]ad these very sophisticated parties desired to have an event of default or non-performance trigger the repurchase agreement, they certainly could have included such language in the contracts," the court ruled. "They did not do so, and this Court will not do so now under the guise of interpreting the writing."

The ruling wasn’t a total loss for BofA and its appellate lawyer, Barry Ostrager of Simpson Thacher & Bartlett, however. The First Department also reversed a ruling by Bransten that MBIA can seek rescissory damages from Countrywide, which would have given the insurer a quick route to recovering 100 percent of its losses. MBIA’s lawyers at Quinn Emanuel, led by Philippe Selendy, can still seek traditional compensatory damages at trial.

"Plaintiff voluntarily gave up the right to seek recission," the court wrote. "Plaintiff should not be permitted to utilize this very rarely used equitable tool to reclaim a right it voluntarily contracted away."