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Bank of America and Countrywide Home Loans are appealing a Manhattan judge's ruling to allow a $2 billion lawsuit filed by an underwriter for residential mortgage-backed securities that eventually tanked during the 2008 financial crisis to move forward to trial.

In addition to preserving the fraud claim by Ambac Assurance Corp., a financial guaranty insurer that underwrote 17 securities backed by more than 375,000 individual mortgage loans, Manhattan Supreme Court Justice Eileen Bransten also denied a motion by Bank of America, which acquired Countrywide in 2008, to be tried separately.

Bransten's ruling, one of her final acts as a Commercial Division judge prior to her Dec. 31 retirement, sets the stage for a jury trial in the case. That trial is now on the docket for late February.

“We are pleased with the decision of the New York Supreme Court and look forward to proceeding to trial,” said Ganfer Shore Leeds & Zauderer name partner Mark Zauderer, who is part of the team representing Ambac.

Joseph McLaughlin of Simpson Thacher & Bartlett, who represents Countrywide, did not respond to a request for comment.     

The long-running legal spat between Ambac and Countrywide began in 2010, when Ambac filed suit alleging that, between 2004 and 2006, Countrywide induced Ambac to insure the faulty securities by way of fraudulent representations and that the home-loan provider breached a number of contractual representations, such as that Countrywide was supposed to repurchase breaching loans

According to a recent ruling in the case by the New York Court of Appeals, in 2007, the housing market was beginning to slide, mortgage defaults were increasing, and Ambac was paying out more claims than anticipated.

The insurer claims that it reviewed originating files of defaulting loans and allegedly found that 7,900 of 8,800 loans reviewed contained material breaches of the insurance agreements brokered between Ambac and Countrywide.

Countrywide has enjoyed some victories in the case so far: in 2015, Bransten ruled that, under New York insurance statutes, Ambac did not have to prove that it relied solely on Countrywide's allegedly fraudulent statements to recover its $2 billion in insurance payments. 

But the Appellate Division, First Department reversed Bransten's decision, ruling that Ambac should be held to a higher standard on the fraud claim; specifically that it must prove the elements of common-law fraud. The Manhattan-based appeals court also found that Ambac was not entitled to attorney fees 

In June, the Court of Appeals affirmed the First Department and also found that Ambac is limited to the repurchase protocol contained in its insurance contracts with Countrywide as the remedy for breach of contract claims. 

Back at the trial level, Bransten said Ambac will be allowed to use a statistical sample of 7,200 to prove liability or damages for breach of contract.

Read more:

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