New York State Court Upholds “Big Boy” Provisions and Dismisses Majority of MBIA’s Claims Against Merrill Lynch Relating to CDS Protection Sold by MBIA Referencing CDOs Issued by Merrill
Hedge Fund Law Report
On April 7, 2010, a New York State trial court dismissed most of the claims brought by MBIA Insurance Corporation (MBIA) and its affiliate against Merrill Lynch & Co. (now owned by Bank of America), over losses the bond insurer incurred guaranteeing credit default swaps (CDSs or swaps) referencing collateralized debt obligations (CDOs) issued by Merrill Lynch. MBIA had brought the lawsuit just under one year ago, claiming that Merrill Lynch’s effort to market the CDOs was part of a deliberate scheme to “offload billions of dollars in deteriorating U.S. subprime mortgages and other collateral that [it] held on its books by packaging them into [ ] CDOs or hedging their exposure through swaps with insurers.” Because MBIA and its affiliate contractually disclaimed reliance on any representations by Merrill Lynch as to the quality of those CDOs, the court dismissed their causes of action for fraud in the inducement, fraud by omission and negligent misrepresentation without regard to the truth of their accusations. However, the court allowed MBIA to proceed with one cause of action, a claim for breach of contract on the theory that Merrill Lynch had promised to deliver securities of “AAA” credit rating quality, but had failed to do so when it delivered securities which had received but did not deserve such a rating. This article summarizes the background of MBIA’s action and the court’s legal opinion.