reply memorandum of law support of plaintiff's motion to compel disclosure - mbia vs country...
DESCRIPTION
MBIA's Reply memorandum in support of its motion to compel Countrywide and Bank of America to produce loan files, documents produced to the Attorney Generals, and documents relevant to successor liability. Visit http://subprimeshakeout.blogspot.com/2010/06/bofa-and-countrywide-appeal-order.html for analysis.TRANSCRIPT
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
MBIA INSURANCE CORPORATION,
Plaintiff,
-against-
COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS SERVICING, LP, and BANK OF AMERICA CORP.
Defendants.
Index No.: 08/602825
IAS Part: 3 (Bransten, J.)
REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF PLAINTIFF'S MOTION TO COMPEL DISCLOSURE
QUINN EMANUEL URQUHART & SULLIVAN, LLP
Peter E. Calamari Philippe Z. Selendy Jonathan B. Oblak Manisha M. Sheth Eve S. Moskowitz Brad E. Cohen
51 Madison Avenue, 22nd Floor New York, New York 10010 Tel: 212-849-7000 Facsimile: 212-849-7100
Attorneys for Plaintiff MBIA Insurance Corporation
June 8, 2010
FILED: NEW YORK COUNTY CLERK 06/08/2010 INDEX NO. 602825/2008
NYSCEF DOC. NO. 209 RECEIVED NYSCEF: 06/08/2010
TABLE OF CONTENTS
Page
PRELIMINARYSTATEMENT .....................................................................................................2
ARGUMENT...................................................................................................................................4
I. DEFENDANTS SHOULD BE COMPELLED TO PRODUCE COMPLETE LOANORIGINATION FILES ...........................................................................................4
A. Defendants Should Be Compelled To Produce Complete Loan Files .....................5
B. MBIA Has Been Prejudiced By Defendants' Failure To Produce Complete LoanFiles .................................................................................................................6
C. MBIA's Request For Assurances That Defendants' Productions Of Loan Files Are Complete Does Not Implicate A Disputed Issue Of Fact ........................6
D. Defendants Should Be Compelled To Produce Indexed Loan Files Or Loan Files Capable Of Being Indexed .....................................................................7
E. Defendants Should Be Sanctioned For Their Dilatory Conduct ..............................8
II. DEFENDANTS SHOULD BE COMPELLED TO PRODUCE DOCUMENTS PREVIOUSLY PRODUCED TO THE STATE ATTORNEYS GENERAL .....................9
III. BAC SHOULD BE COMPELLED TO PRODUCE DOCUMENTS RELEVANT TO DETERMINING BAC'S SUCCESSOR LIABILITY ................................................11
A. The Requested Documents Are Relevant To Determining BAC's SuccessorLiability .................................................................................................12
B. BAC's Reliance On The Court's Prior Rulings Is Unavailing ..............................14
CONCLUSION..............................................................................................................................15
1
TABLE OF AUTHORITIES
Page
Cases
Aqua Prods., Inc. v. Aquaquality Pool & Spa, Inc., No. CV 05-2538 (DRH) (ARL), 2006 WL 2884913 (E.D.N.Y. Oct. 10, 2006) .......................14
Caballero v. Montefiore Med. Ctr., 167 A.D.2d 219 (1st Dep't 1990) ..............................................................................................7
DeMille v. DeMille, 5 Misc.3d 355 (N.Y. Sup. Ct. Nassau Co. 2004) .....................................................................15
Fendi Adele v. Filene's Basement, Inc., No. 06 Civ. 244, 2009 WL 855955 (S.D.N.Y. Mar. 24, 2009) .................................................9
Firmes v. Chase Manhattan Auto. Fin. Corp., 50 A.D.3d 18 (2d Dep't 2008) ...................................................................................................4
Fitzgerald v. Fahnestock & Co., Inc., 286 A.D.2d 573 (1st Dep't 2001) ................................................................................12, 13, 14
Graham v. Ortiz, No. 07-CV-1690 (JG) (LB), 2009 WL 4016055 (E.D.N.Y. Nov 18, 2009) ............................14
Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F. Supp. 834 (S.D.N.Y. 1977) ..........................................................................................13
New Mexico State Investment Council v. Countrywide Fin. Corp., Cause No. D-0101-CV-2008-02289 (N.M. First Judicial Dist. Ct.) ........................................11
Pagliaro v. City of N.Y., 112042/2003, 2008 WL 586234 (N.Y. Sup. Ct. N.Y. Co. Feb. 25, 2008) ................................4
Pourquoi M.P.S. Inc. v. Worldstar Int'l, Ltd., 4883/ 2009 WL 3982237 (N.Y. Sup. Ct. Queens Co. Oct. 16, 2009) .......................................7
Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239 (1983) ..............................................................................................................13
Stiefel v. Messer, No. 03-004, 20 Misc.3d 1135 (A) (N.Y. Sup. Ct. Ulster Co. Jun. 30, 2008) ..........................15
In re Tamer, 877 N.Y.S.2d 874 (N.Y. Sur. Ct. Westchester Co. 2009) ..........................................................4
ii
Plaintiff MBIA Insurance Corporation ("MBIA" or "Plaintiff') respectfully submits this
reply memorandum of law in further support of its motion to compel Defendants Countrywide
Home Loans, Inc. ("CHL"), Countrywide Securities Corporation ("CSC"), Countrywide
Financial Corporation ("CFC"), Countrywide Home Loans Servicing, LP ("CHLS")
(collectively, "Countrywide"), and Bank of America Corporation ("BAC") (collectively, the
"Defendants") to produce the following disclosure:
(1) (i) complete loan origination files for those loans in the Countrywide Securitizations that were ever 30-days delinquent ("30-Days Delinquent Loans"), or in the alternative, a witness at the June 16, 2010 hearing to explain why Defendants are unable to do so;' (ii) confirmation that the loan files previously produced for the 180-days delinquent, charged-off, and foreclosed loans ("Severely Delinquent Loans") are complete, and to the extent that any such loan files are not complete, to produce immediately complete loan origination files for any such loans; and (iii) the necessary metadata, including loan identification number and index title 2 for each of the 30-Days Delinquent Loans and Severely Delinquent Loans in the Countrywide Securitizations;
(2) documents that Defendants previously produced to various state attorneys general in connection with the October 6, 2008 settlement of their investigations of Countrywide's lending practices (the "Settlement-Related Documents"); and
(3) documents relating to BAC's successor liability, including (i) its acquisition of Countrywide's assets; (ii) its assumption of Countrywide's liabilities; and (iii) its
' In an effort to gain a better understanding of Defendants' ability to produce complete loan origination files, on May 17, 2010, MBIA served deposition notices on Defendants regarding their "process of creating, storing, maintaining, and transferring loan origination files in the ordinary course of [] business." Reply Affirmation of Manisha M. Sheth in Further Support of Plaintiffs Motion to Compel Disclosure dated June 8, 2010 ("Sheth Reply Aff."), Exs. 1, 2. Defendants refused to appear for the depositions which were noticed for June 7, 2010 at 9:30 a.m. In fact, it was not until Friday, June 4, 2010, at 4:19 p.m., that Defendants first informed MBIA that they would not produce a witness for the deposition. Id., Ex. 3.
The Affidavits of Michael Chase and Allen Kalust in Support of Defendants' Opposition to Plaintiffs Motion to Compel Disclosure ("Chase Aff." and "Kalust Aff.", respectively), refer to this metadata as "document type." Chase Aff. ¶¶ 10, 12; Kalust Aff. ¶¶ 8-9.
3 The following.15 securitizations are at issue in the Amended Complaint: (i) CWABS 2004-I; (ii) CWABS 2004-P; (iii) CWHEQ 2005-A; (iv) CWHEQ 2005-E; (v) CWHEQ 2005-I; (vi) CWHEQ 2005-M; (vii) CWHEQ 2006-E; (viii) CWHEQ 2006-G; (ix) CWHEQ 2006-S8; (x) CWHEQ 2006-S9; (xi) CWHEQ 2006-S 10; (xii) CWHEQ 2007-E; (xiii) CWHEQ 2007-S 1; (xiv) CWHEQ 2007-S2; and (xv) CWHEQ 2007-S3 (collectively, the "Countrywide Securitizations" or "Securitizations").
valuation of Countrywide's assets and liabilities, including any due diligence in connection with its acquisition of Countrywide.4
PRELIMINARY STATEMENT
Not only have Defendants exhibited their disregard for this Court's prior orders, their
discovery "strategy" in this action has been shameful. s Their modus operandi from the start has
been (i) to object initially to MBIA's requests, (ii) to delay informing MBIA whether they will
produce the requested documents, (iii) to eventually inform MBIA that they will not produce the
requested documents, (iv) to cause MBIA to file or seek permission to file a motion to compel
with the Court, and (v) to agree to produce responsive documents after a court order or a motion
to compel has been filed. The most recent example of Defendants' discovery strategy is
Defendants' about-face in connection with certain documents relating to BAC's successor
liability. Accordingly, MBIA respectfully requests the imposition of sanctions, including
awarding MBIA its expenses in bringing yet another motion to compel.
Defendants continue to withhold documents that this Court has ordered them to produce.
The first category of documents sought in MBIA's motion — loan origination files for loans that
were ever 30-days delinquent — are covered by this Court's January 14, 2010 Decision and Order
("January 2010 Decision") and the February 19, 2010 Stipulated Order Regarding Pretrial
Schedule ("Scheduling Order"), where this Court held that such files were relevant and ordered
' Despite refusing to produce documents pertaining to these categories for months, Defendants, for the first time in their opposition papers, now agree to produce documents responsive to BAC Request Nos. 32, 34, 35, and 36. Defs. Mem. at 8. Accordingly, the requests remaining at issue in this motion are Request Nos. 22, 33, 37-39, and 41.
' Defendants' reliance on the volume of the discovery that they have produced or intend to produce in this action is a red herring. The number of documents produced to date is not a proper basis for denying MBIA the benefit of other non-privileged documents that are relevant to its allegations and causes of action. Defendants' attempt to compare the volume of discovery produced by Defendants with the volume of discovery produced by MBIA is nonsensical. Indeed, given the nature of the claims alleged against the five Defendants, each of whom had a unique role in the securitization process, one would expect that MBIA's production of documents would be dwarfed by the size of the Defendants' collective productions.
F)
Defendants to use best efforts to substantially complete their production of such loan files by
April 30, 2010. The second group of documents — the Settlement-Related Documents — are
encompassed by the January 2010 Decision granting MBIA's motion to compel documents
responsive to Request No. 63, which sought all documents relating to BAC's October 6, 2008
settlement. Finally, the third category of documents sought by MBIA was addressed at the
December 9, 2009 hearing and the Order dated April 27, 2010, where the Court recognized
generally that MBIA's discovery requests to BAC were relevant to MBIA's allegations of
successor liability.
Despite this Court's prior orders, Defendants continue to deprive MBIA of relevant
documents. First, despite agreeing to produce loan origination files by the deadlines set forth in
the Scheduling Order, Defendants have failed to confirm that any of the loan files produced are
complete. And even though Defendants previously represented to this Court that a loan file
typically consists of 150 to 200 pages, of the 50,988 loan files produced in discovery, over 9,600
are less than 85 pages. Sheth Reply Aff. ¶ 8. Second, Defendants incredibly argue that the
Settlement-Related Documents do not "relate" to BAC's October 6, 2008 settlement with the
state attorneys general. There can be no question that documents that Defendants previously
produced to various state attorneys general in connection with their investigations of
Countrywide's failure to adhere to its underwriting guidelines and to knowingly make loans to
borrowers whom it knew would not be able to repay those loans, relate to the settlement of those
investigations. Finally, Defendants continue to withhold documents relating to: (i) BAC's
valuation of Countrywide's assets and liabilities during the pre-merger due diligence process; (ii)
communications regarding Countrywide's transfer of assets to BAC and BAC's assumption of
liabilities; and (iii) the impact of such transfers and the acquisition on MBIA, including
Defendants' ability to perform its contractual obligations. Unable to contest the relevance of
these documents to the determination of whether there was a de facto merger between BAC and
Countrywide, Defendants resort to an entirely misplaced reading of this Court's January 2010
Decision to justify withholding such documents. For the reasons set forth below, MBIA's
motion to compel, including its request for sanctions, should be granted in its entirety.
ARGUMENT
I. DEFENDANTS SHOULD BE COMPELLED TO PRODUCE COMPLETE LOAN ORIGINATION FILES
MBIA seeks Defendants' compliance with this Court's January 2010 Decision granting
MBIA's motion to compel the production of loan files for the 30-Days Delinquent Loans and the
Scheduling Order. There can be no question that Defendants have an obligation to produce in
discovery the complete loan origination file as it exists in the ordinary course of their business.6
In re Tamer, 877 N.Y.S.2d 874, 876 (N.Y. Sur. Ct. Westchester Co. 2009) (noting that New
York rule requiring production of "complete and accurate" copies of documents either as they
are kept in the ordinary course of business or organized to correspond to request categories).
Moreover, once Defendants know or have reason to know that a document produced in discovery
is not complete, they have an obligation to supplement their production. See, e.g., Firmes v.
Chase Manhattan Auto. Fin. Corp., 50 A.D.3d 18, 35-37 (2d Dep't 2008) (holding that under
CPLR 3101, parties are under a mandate to supplement their production as soon as they become
aware that documents are not in complete form); Pagliaro v. City of N. Y., 112042/2003, 2008
WL 586234, at *5 (N.Y. Sup. Ct. N.Y. Co. Feb. 25, 2008) ("Parties are required to amend or
supplement responses given to a disclosure request `promptly' when the party has obtained
6 Defendants' claim that MBIA has demanded over 391,000 loan files is simply untrue. Defs. Mem. at 16. MBIA proposed a sampling-based approach where Defendants would produce 15,000 loan files in discovery. Prior
4
information that the response was incomplete or incorrect, or no longer correct"). Here, as early
as July 2009, MBIA informed Defendants that thousands of loan files produced in discovery
appeared to be incomplete. Defendants are obligated either to promptly supplement their
productions or confirm that the files produced are complete.7
A. Defendants Should Be Compelled To Produce Complete Loan Files
Contrary to Defendants' representations that they have "completed" their production of
loan origination files for the 30-Days Delinquent Loans, thousands of loan files produced by
Defendants are incomplete. 8 Defendants previously represented that a loan origination file
typically consists of between 150-200 pages. Sheth Aff., Ex. 21. Defendants now claim that 85
pages is a "reasonable cut-off point" for flagging incomplete loan files. Defs. Mem. at 20 n. 16.
Based on MBIA's review, of the 26,208 loan origination files that Defendants have produced in
discovery for the 30-Days Delinquent Loans, over 9,200 of those files are less than 85 pages.
Sheth Reply Aff. ¶ 8. Thus, 35 percent of the loan files for the 30-Days Delinquent Loans are
incomplete by Defendants' own admission. Moreover, Defendants themselves acknowledge that
"[s]hort of looking at each individual loan origination file prior to production (an impossible task
for the hundreds of thousands of loans at issue), there is no surefire means to determine whether
a loan file is or is not incomplete." Defs Mem. at 20. (emphasis added). Despite these
significant admitted shortcomings, Defendants have the audacity to represent to this Court that
they have completed their production of loan origination files for the 30-Days Delinquent Loans.
to the issuance of the January 2010 Decision Defendants rejected this proposal, and instead volunteered to produce all loans files for the Mortgage Loans in the Countrywide Securitizations.
' Defendants' proposal to supplement only those loan files containing less than 85 pages is inconsistent with their discovery obligations. Affirmation of Manisha M. Sheth dated May 19, 2010 ("Sheth Aff.")., Ex. 22. Defendants must also confirm the converse — namely, that loan files containing 85 or more pages are complete.
8 The Kalust Affidavit submitted by Defendants concedes that "complete copies of certain loan origination files may not have been produced to MBIA." Kalust Aff. ¶ 25.
Accordingly, MBIA respectfully requests that for the 30-Days Delinquent and Severely
Delinquent Loans, Defendants be compelled to (i) complete their production of loan origination
files for such loans by producing all documents from the loan origination files; or (ii) represent
that their production of loan origination files for such loans is complete.
B. MBIA Has Been Prejudiced By Defendants' Failure To Produce Complete Loan Files
Defendants' assertions that MBIA has not been prejudiced by Defendants' conduct are
disingenuous. In fact, as a result of Defendants' dilatory conduct, MBIA has been prejudiced in
several ways. First, relying on Defendants' agreement to produce the loan files for the 30-Days
Delinquent Loans by April 30, 2010, MBIA lined up significant resources to begin reviewing
that loan file production. Because Defendants have failed to supplement their production with
complete loan files or confirm that any of the produced loan files are complete, MBIA is unable
to commence its review. Second, because Defendants had previously represented that the loan
files produced were complete, MBIA commenced its review of such files. Now, as Defendants
continue to produce additional scattered documents for loans previously produced in discovery,
MBIA will be required to expend additional time and expenses re-reviewing loan files previously
reviewed. Finally, because of the disorganized manner in which many of the loan files were
produced, MBIA has incurred additional expenses in organizing and indexing the loan files for
review. Sheth Reply Aff. ¶ 9.
C. MBIA's Request For Assurances That Defendants' Productions Of Loan Files Are Complete Does Not Implicate A Disputed Issue Of Fact
In attempting to avoid their basic discovery obligations, Defendants incorrectly claim that
MBIA is seeking "(under the guise of a discovery demand) to have this Court prematurely decide
a disputed issue of fact." Defs. Mem. at 22. Contrary to Defendants' argument, MBIA is not
demanding assurances "as to what documents should, or should not, be included within the loan
0
file." Rather, MBIA simply seeks confirmation that it has received in discovery all documents
that are part of any given loan origination file. Without such assurances, MBIA's experts will be
forced to spend countless hours re-reviewing and re-analyzing previously reviewed loan files
when they receive supplemental productions of previously produced loan origination files at
considerable cost to MBIA. Moreover, each loan file becomes a moving target in that
Defendants will be able to continuously supplement their production to avoid breaches of the
representations and warranties in the Transaction Documents.
Accordingly, MBIA requests that this Court preclude Defendants from introducing
additional documents from the loan origination files after any new deadline set by this Court for
the completion of Defendants' production of such loan origination files. See, e.g., Caballero v.
Montefiore Med. Ctr., 167 A.D.2d 219, 219-20 (1st Dep't 1990) (upholding decision to preclude
use of any part of the record that had gone undisclosed to plaintiffs); Pourquoi M.P.S. Inc. v.
Worldstar Int'l, Ltd., 4883/05, 2009 WL 3982237 (N.Y. Sup. Ct. Queens Co. Oct. 16, 2009)
(granting plaintiff's motion to preclude defendants from offering evidence or testimony on topics
covered in certain document requests because defendants' failure to adhere to discovery
stipulation rose to level of "willful and contumacious acts" required for preclusion).
D. Defendants Should Be Compelled To Produce Indexed Loan Files Or Loan Files Capable Of Being Indexed
Contrary to Defendants' cries of harassment, MBIA is not "mandating" that Defendants
produce loan files as indexed PDFs.9 Defs. Mem. at 18. Rather, given the disorganized and
jumbled fashion in which most of the loan files were produced, MBIA simply requests that
Defendants produce all existing metadata or similar information that would enable MBIA to
' MBIA's correspondence to Defendants on this subject demonstrates that MBIA consistently requested that a loan file be produced as a single, organized, cohesive, indexed loan file, and only suggested indexed PDFs as
7
aggregate and index the loan files. 10 To be clear, MBIA is not demanding that Defendants create
metadata where none exists. Instead, MBIA is merely seeking that Defendants produce all
metadata that currently exists, and for any loans where such metadata does not exist, that
Defendants produce identifying information, such as "loan number" and "document type" — data
that Defendants concede exists — that will allow MBIA to aggregate the images into a single,
organized, cohesive, indexed loan file.
E. Defendants Should Be Sanctioned For Their Dilatory Conduct
Defendants' pattern of ignoring the concerns raised by MBIA and providing it with false
assurances that the loan files were complete for nearly a year warrants sanctions. First, for
nearly eight months, Defendants ignored MBIA's repeated concerns that the loan files produced
by Defendants were incomplete." Sheth Aff. ¶¶ 49-54, 60-62. Then for over two months,
Defendants assured MBIA that it "should rely on the loan origination files produced during the
course of discovery" because Defendants "believe [their] productions of loan files to be both
complete and accurate." Id. ¶¶ 62-68. It was not until the afternoon of the April 30, 2010
deadline for the production of loan files for the 30-Days Delinquent Loans that Defendants
finally admitted that some of the loan files produced were incomplete. Most recently,
Defendants have failed to respond to MBIA's repeated requests to confirm that any of the loan
files produced in discovery, including those loan files that exceed 200 pages, are in fact
a possible format for production when MBIA learned that Defendants produced thousands of loan files to RMG as indexed PDFs over the course of seven months. See Sheth Aff. ¶¶ 47-60.
10 Defendants have the ability to produce loan files in this fashion. Chase Aff. ¶¶ 6-12.
1 1 Defendants' assertion that they "immediately. . . investigated and took steps to rectify any issue" concerning their production of incomplete loan files is blatantly false. Compare Defs. Mem. at 20 with Sheth Aff. ¶¶ 49-68. Despite the fact that between February 12 and May 28, 2010, MBIA sent Defendants no fewer than 9 letters expressing concerns about the completeness of the loan files produced in discovery, Sheth Aff., Exs. 33, 34, 36, 37, 38, 43; Sheth Reply Aff., Exs. 4, 5, 6, Defendants appear to have failed to raise this issue with the individual responsible for the production of such files. Chase Aff. ¶ 34 ( " [R]ecently has it come to his attention that certain
8
complete. Sheth Reply Aff., Exs. 4, 5, 6, 8; Sheth Aff., Ex. 43. Worse yet, Defendants have the
gumption to represent in their pleadings that they have "completed" their production of loan
origination files, when over 9,600 of the loans produced in discovery are less than 85 pages.
Sheth Reply Aff. ¶ 8. Given the egregious nature of Defendants' conduct on this issue, MBIA
respectfully submits that sanctions are appropriate. Fendi Adele v. Filene's Basement, Inc., No.
06 Civ. 244, 2009 WL 855955, at *8 (S.D.N.Y. Mar. 24, 2009) (holding that sanctions are
appropriate where a repeatedly incomplete production added delay to the discovery process).
II. DEFENDANTS SHOULD BE COMPELLED TO PRODUCE DOCUMENTS PREVIOUSLY PRODUCED TO THE STATE ATTORNEYS GENERAL
Defendants attempt to mislead this Court by conflating two different document requests
issued by MBIA. 12 To be clear, MBIA's Request No. 63, which is the request that is the subject
of the instant motion, seeks all documents relating to BAC's October 6, 2008 settlement with the
state attorneys general in connection with BAC's purchase of CFC. In its January 2010
Decision, this Court granted Plaintiff's motion to compel "documents relating to Bank of
America's ... settlement with various state attorney generals," and held that "request [No. 63] is
relevant and Countrywide's assertions to the contrary are unavailing." Sheth Aff., Ex. 4 at 16,
25. In explaining the relevance of such documents, the Court specifically noted that "[i]f
communications between Countrywide and state attorneys general contemplated violations that,
if enforced, could reasonably cause a Material Adverse Change, then they would relate to
MBIA's claim of breach of the representations in the Insurance Agreements." Id. at 16. The
loan origination files produced to MBIA may not have contained images of all documents from the associated loan origination file." (emphasis added)).
12 Compare MBIA Request No. 63 (seeking "all documents relating to [BAC]'s settlement of October 6, 2008 with [the state attorneys general] in connection with [BAC]'s purchase of Countrywide Financial Corporation") with MBIA Request No. 54 (seeking "all documents relating to any discussions or communications with any regulator, law enforcement agent, or state attorney general relating to (a) the Trusts, (b) the Securitizations,
6
Court's ruling unequivocally granted MBIA's motion to compel disclosure of documents
responsive to Request No. 63, and contained no limiting language. 13 Id. at 16, 25.
In an effort to avoid the plain language of this Court's January 2010 Decision,
Defendants discuss at length a totally separate request, Request No. 54, in their opposition
papers, even though that request is not at issue in MBIA's motion. Defs. Mem. at 3-6. Indeed,
the language that Defendants quote in their opposition papers relates to this Court's ruling on
MBIA's prior motion to compel documents responsive to Request No. 54, and in no way impacts
this Court's ruling on Request No. 63 regarding the Settlement-Related Documents. Defs. Mem.
at 5 (quoting January 2010 Decision at 14-15).
The Settlement-Related documents are a subset of the documents already ordered to be
produced by this Court. They are relevant to MBIA's allegation that Countrywide breached its
representation and warranty that the Mortgage Loans in the Securitizations complied with
federal, state, and local law. Indeed, the settlement agreements produced by Defendants confirm
that the underlying investigations by the state attorneys general involved allegations that
Countrywide failed to adhere to its underwriting guidelines and knowingly made loans to
borrowers whom it knew would not be able to repay their loans. See Pl. Mem. at 12-13.14
or (c) the Mortgage Loans, including but not limited to, the policies or procedures applicable to each and any proposed or enacted changes thereto" (emphasis added)).
13 Defendants' reliance on statements made by this Court's Law Secretary after the issuance of the January 2010 Decision is inappropriate. While the Law Secretary took a narrow view of the January 2010 Decision, he nonetheless granted MBIA permission to file a motion to compel the Settlement-Related Documents based on the plain language of the January 2010 Decision.
14 Defendants' argument that such settlement agreements are limited to first lien products is unavailing. Defendants' aggressive campaign to drive market share without regard to its compliance with its publicly-stated underwriting guidelines was implemented with regard to the origination of both first liens and second liens. Moreover, the fact that the relief in the settlement agreements is limited to modifications of first liens does not mean that the underlying investigations did not also encompass second liens. In any event, Defendants have recognized the relevance and applicability of their practices to the loans referenced in the settlement agreements by their agreement to include the search terms "ARM" and "Alt-A" in their electronic search terms used to collect responsive documents. Sheth Reply Aff., Exs. 12, 13.
10
Accordingly, this Court should compel Defendants to produce the Settlement-Related
documents. 15 Moreover, this Court should impose sanctions because Defendants have failed to
comply with this Court's January 2010 Decision granting MBIA's prior motion to compel
documents responsive to Request No. 63, thereby forcing MBIA to expend additional resources
drafting yet another motion to compel documents previously ordered to be produced.
III. BAC SHOULD BE COMPELLED TO PRODUCE DOCUMENTS RELEVANT TO DETERMINING BAG'S SUCCESSOR LIABILITY
Although BAC has now agreed to produce documents in response to Request Nos. 32,
34, 35, and 36 following the filing of this motion to compel, it remains steadfast in its refusal to
produce documents responsive to Request Nos. 22, 33, 37-39, and 41, which seek documents
concerning: (i) BAC's valuation of Countrywide's assets and liabilities during the pre-merger
due diligence process; (ii) communications regarding Countrywide's transfer of assets to BAC
and BAC's assumption of Countrywide's liabilities; and (iii) the impact of such transfers and the
acquisition on MBIA, including Defendants' ability to perform its contractual obligations. 16 In
its April 27, 2010 Decision, this Court held that MBIA has sufficiently alleged "a de facto
merger in which Bank of America intended to absorb and continue the operation of
Countrywide." Sheth Aff., Ex. 19 at 15.
Since the Court's decision, BAC continues to settle investigations arising out of
Countrywide's misconduct prior to its acquisition by BAC. On May 7, 2010, BAC agreed to pay
15 Defendants' argument that documents produced in the case captioned, New Mexico State Investment Council v. Countrywide Fin. Corp., Cause No. D-0101-CV-2008-02289 (N.M. First Judicial Dist. Ct.), are not relevant to this action is incredible as that case involves five of the same securitizations at issue in this action. Sheth Reply Aff., Ex. 9 (alleging violations as to the following securitizations, CWHEQ 2005-I, CWHEQ 2006-E, CWHEQ 2006-S9, CWHEQ 2007-E, and CWHEQ 2007-S3).
16 Defendants' contention that MBIA's motion is "unnecessary" and "woefully premature" is baseless. Prior to filing their opposition papers, Defendants had repeatedly advised MBIA that they did not intend to produce any documents in response to Request Nos. 22, 32-39, and 41. MBIA was not required to wait until BAC completed its production of documents to challenge Defendants' withholding of relevant and responsive documents.
11
$624 million to six New York retirement funds arising out of allegations that Countrywide made
materially false statements and omissions about its policies and procedures for underwriting
loans. Sheth Reply Aff., Ex. 11. As recently as June 7, 2010, BAC agreed to pay $108 million
to settle an investigation by the Federal Trade Commission that Countrywide improperly
serviced mortgage loans to maximize its servicing fees, made false statements to borrowers about
the amounts they owed, and failed to disclose all fees and charges to the borrowers. 17 Id., Ex. 10.
BAC's recent settlements are further evidence of its assumption of Countrywide's liabilities
arising out of its improper underwriting and servicing of mortgage loans. Accordingly, MBIA is
entitled to disclosure of documents relevant to its claim of successor liability as to BAC.
A. The Requested Documents Are Relevant To Determining BAC's Successor Liability
Request No. 37 pertains to communications regarding Countrywide's transfer of assets to
BAC and BAC's assumption of Countrywide's liabilities. 18 Documents responsive to this
request, like the documents responsive to Requests Nos. 32, 34, 35, and 36 — which Defendants
have now agreed to produce — are relevant to establishing the hallmarks of a de facto merger.19
Request Nos. 22, 33, and 41 pertain to BAC's valuation of Countrywide's assets and
liabilities during the pre-merger due diligence process. 20 Documents relating to BAC's valuation
" Such investigations support MBIA's allegations that Countrywide breached its servicing obligations, Am. Compl. ¶¶ 85-88, and that Countrywide breached its representation that each Mortgage Loan complied with applicable local, state, and federal laws. Id. ¶ 58.
18 Request No. 37 seeks "all documents relating to any communications between Bank of America and any other person regarding any transfer of assets from Countrywide to Bank of America or vice versa, and any assumption of debt securities and/or related guarantees of Countrywide by Bank of America." Sheth Aff., Ex. 11.
19 The "hallmarks" of a de facto merger are: (i) continuity of ownership; (ii) cessation of ordinary business and dissolution of the acquired corporation as soon as possible; (iii) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and (iv) continuity of management, personnel, physical location, assets and general business operation. Fitzgerald v. Fahnestock & Co., Inc., 286 A.D.2d 573, 574 (1st Dep't 2001).
20 Request No. 22 seeks "all documents relating to any due diligence by Bank of America in connection with its purchase of a $2 billion stake in Countrywide in August 2007." Request No. 33 seeks "all documents
12
of Countrywide's liabilities are relevant to whether BAC assumed such liabilities when it
acquired Countrywide at a significant discount. Similarly, documents relating to BAC's
valuation of Countrywide's assets are relevant to whether BAC paid fair consideration when it
acquired Countrywide and thus, whether the transaction was entered into fraudulently to escape
Countrywide's liabilities. Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239, 245 (1983)
(recognizing that a corporation may be held liable for the torts of its predecessor if the
transaction is entered into fraudulently to escape such obligations).21
Request Nos. 38 and 39 pertain to the impact of such transfers and the acquisition of
Countrywide on MBIA, including Defendants' ability to perform its contractual obligations.22
Documents responsive to these requests are also relevant to MBIA's allegations of successor
liability. 23 Fitzgerald, 286 A.D.2d at 574 (The "assumption by the successor of the liabilities
ordinarily necessary for the uninterrupted continuation of the business of the acquired
corporation" is a key factor in determining whether a transaction constitutes a de facto merger.).
relating to any due diligence Bank of America performed in connection with its acquisition of Countrywide in July 2008...." Request No. 41 seeks "all documents relating to any valuation of any pending and/or potential claims against Countrywide by Bank of America or any third party in connection with Bank of America's acquisition of Countrywide in July 2008." Sheth Aff., Ex. 11.
21 Additionally, such documents are likely to reveal Countrywide's representations to BAC about the value of Countrywide's assets, including its residual interest in the underlying Mortgage Loans, the Securitizations, and the Securities, and its liabilities, including its expected losses in connection with the Mortgage Loans, Securitizations, and Securities. Such documents are relevant to MBIA's fraud allegations that Countrywide misrepresented the credit quality of such assets to MBIA and investors.
22 Request No. 38 seeks "all documents relating to the effect or impact on MBIA of any transfer of assets from Countrywide to Bank of America and any assumption of debt securities and/or related guarantees of Countrywide by Bank of America...." Request No. 39 seeks "all documents relating to the effect or impact of any transfer of assets from Countrywide to Bank of America or vice versa and any assumption of debt securities and/or related guarantees of Countrywide by Bank of America, on the ability of Countrywide to perform its duties and obligations as set forth in the Purchase Agreement, the Sale and Servicing Agreement, the Insurance Agreement, the Trust Indenture, or the Prospectus and Supplemental Prospectus for each of the Securitizations." Sheth Aff., Ex. 11.
23 See also Schumacher, 59 N.Y.2d at 245 ("A corporation may be held liable for the torts of its predecessor if. . . it expressly or impliedly assumed the predecessor's tort liability"); Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F. Supp. 834, 839 (S.D.N.Y. 1977) (a corporation impliedly assumes liability for its predecessors obligations when its "conduct or representations ... indicate an intention on the part of the buyer to pay the debts of the seller.").
13
These requests are relevant to whether the asset transfers or the acquisition as a whole was
structured in a way to frustrate creditors. See Sheth Aff., Ex. 3 at 40:7-15 ("If I were BAC, I
would have the lawyers work double time to make sure I structure my taking over Countrywide
so that BAC has no liability whatsoever and can't be reached and etc. But just because, in fact,
maybe because such hard work was put into a file between BAC and Countrywide does not
necessarily mean that there isn't necessity of breaking that file to make sure, indeed, the proper
parties are before the Court.").
BAC's offer to produce documents in response to certain requests but not others is not
appropriate. See Defs. Mem. at 13. BAC is obligated to produce documents relevant to all of
the Fitzgerald factors, not just the ones that it cherry-picks. See Graham v. Ortiz, No. 07-CV-
1690 (JG) (LB), 2009 WL 4016055, at *1 (E.D.N.Y. Nov 18, 2009) (explaining that under New
York law, a party must "respond[] to ... discovery requests.. . [he or she] does not get to pick
and choose what he will comply with and when he will do so."); Aqua Prods., Inc. v.
Aquaquality Pool & Spa, Inc., No. CV 05-2538 (DRH) (ARL), 2006 WL 2884913, at *1
(E.D.N.Y. Oct. 10, 2006) ("Counsel cannot pick and choose those documents that they believe
satisfies the request; rather, they must provide the plaintiff with all non-privileged responsive
documents in their client's possession."). Accordingly, this Court should compel BAC to
produce documents in response to Requests Nos. 22, 33, 37-39, and 41.
B. BAC's Reliance On The Court's Prior Rulings Is Unavailing
Defendants inaccurately refer to the chronology of events in this action to argue that this
Court's earlier decisions regarding discovery MBIA sought from Countrywide should somehow
foreclose the issue of whether such documents are relevant to its allegations of successor liability
against BAC. However, neither of the Court's prior decisions relating to discovery sought from
Countrywide related to the successor liability claim against BAC.
14
A court's decision must be interpreted in light of the grounds and facts before it at the
time of decision. See, e.g., Stiefel v. Messer, No. 03-004, 20 Misc.3d 1135(A), at *3 (N.Y. Sup.
Ct. Ulster Co. Jun. 30, 2008) (rejecting party's interpretation of a prior decision and order as
involving issues that were not in front of the court at the time of decision, and, as such, could not
have been considered or determined by the court); DeMille v. DeMille, 5 Misc.3d 355, 359-60
(N.Y. Sup. Ct. Nassau Co. 2004) (same). Contrary to Defendants' arguments, this Court's
January 2010 Decision pertained to MBIA's motion to compel dated April 9, 2009 which was
filed prior to the Amended Complaint naming BAC as a defendant and prior to the issuance of
MBIA's discovery requests to BAC. As such, that ruling in no way addressed whether MBIA's
discovery requests to BAC were relevant to the allegations of successor liability in the Amended
Complaint.
Finally, Defendants' agreement to produce documents in response to Request Nos. 32,
34, 35, and 36 for the first time in their opposition papers despite multiple prior requests by
MBIA prior to filing its motion is further evidence of Defendants' strategy of forcing MBIA to
bring a motion to compel prior to agreeing to produce relevant and responsive documents,
warranting the imposition of sanctions.
CONCLUSION
For the reasons set forth above, this Court should grant Plaintiff's motion to compel,
including its request for sanctions.
15
Dated: New York, New York June 8, 2010
Respectfully submitted,
QUINN EMANUEL URQUHART & SULLIVAN, LLP
By: ^f^ Peter 1. Calamari Philippe Z. Selendy Jonathan B. Oblak Manisha M. Sheth Eve S. Moskowitz Brad E. Cohen
51 Madison Avenue, 22nd Floor New York, New York 10010 Tel: 212-849-7000 Facsimile: 212-849-7100
Attorneys for Plaintiff MBIA Insurance Corporation
16
Index No. 08/602825
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
MBIA INSURANCE CORPORATION,
Plaintiff,
-against-
COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP., COUNTRYWIDE FINANCIAL CORP COUNTRYWIDE HOME LOANS SERVICING, LP and BANK OF AMERICA CORP..
Defendants.
REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF PLAINTIFF'S MOTION TO COMPEL
DISCLOSURE
QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 (212) 849-7000
Counsel for Plaintiff MBIA Insurance Corporation