An insurance company that has charged an erstwhile Wall Street investment bank with lying on an application for insurance can file a new legal pleading after the first one was dismissed, a New York appeals court has ruled in a decision that highlights fallout from the financial crisis eight years on.
In 2006, Bear Stearns & Co. approached CIFG Assurance North America about purchasing insurance in connection with two collateralized debt obligations (CDOs), which held bundles of mortgages that varied in their risk.
Bear Stearns, which was acquired in 2008 by JPMorgan after the former failed amid a run on the bank by customers, allegedly assured CIFG that the mortgages that went into the securities would be selected by managers acting independently of Bear Stearns and in the interest of long-term investors. While that assurance led CIFG to insure the securities, the company says, Bear Stearns itself allegedly chose the collateral, which according to the insurer, consisted of risky mortgage-backed securities from the bank’s own books, and then bet on the portfolios to fail. (For more on that type of thing, see “The Big Short.”)
A trial judge dismissed the lawsuit with prejudice (meaning permanently) because CIFG’s court papers contained insufficient information about the insurance policies and the circumstances under which they were issued. The court found fault with a failure by CIFG to describe the terms of the policies, the dates they were issued, the period of time they covered, the parties to the contracts, the beneficiaries, or any information about so-called credit default swaps that would guarantee the CDOs. (In the context of the transaction, CIFG insured the credit default swaps, which, in turn, guaranteed notes issued by the CDOs.)
But while the trial judge properly dismissed the lawsuit, she erred in not allowing CIFG to re-file it, the state’s Appellate Division ruled on Nov. 29. “A request for leave to amend a complaint should be ‘freely given, and denied only if there is prejudice or surprise resulting directly from the delay, or if the proposed amendment is palpably improper or insufficient as a matter of law,’” Judge Judge Rosalyn Richter wrote on behalf of a five-judge panel. [citations omitted] Further, “[a] party opposing leave to amend must overcome a heavy presumption of validity in favor of [permitting amendment.]”
According to the panel, CIFG, which in July merged into Assured Guaranty, asserted that it paid more than $100 million pursuant to the policies but did not identify to whom the payments were made, or the events that triggered them.
Still, CIFG alleged on appeal that Bear Stearns created the CDOs to transfer high risk assets from its own books to other investors and knew that the market would require that the senior notes issued by the CDOs be insured. CIFG also alleges that Bear Stearns misrepresented repeatedly that the CDOs’ portfolios would be selected by managers independent from Bear Stearns. The specificity of those allegations entitle CIFG to file its lawsuit anew, the panel said.