Southern District Judge Jed Rakoff (See Profile) has become the latest judge to deliver a ruling favorable to bond insurers on a crucial issue in a crush of mortgage repurchase suits against banks that issued toxic mortgage-backed securities.

The ruling came in a case Assured Guaranty Ltd. and its lawyers at Susman Godfrey brought against Flagstar Bank over $1 billion in mortgage-backed securities that Assured insured and that dropped in value in the subprime meltdown.

In a 24-page summary judgment decision issued Sept. 25, Rakoff found that, to force Flagstar to repurchase (or “put-back”) faulty home loans pooled into residential mortgage-backed securities, Assured doesn’t need to show that misrepresentations by the bank directly caused the loans to default. Instead, Assured must only show that the bank’s alleged misrepresentations increased its odds of sustaining losses.

Assured and Flagstar contractually agreed that breaches of representations or warranties concerning the risks of the underlying residential mortgage-backed securities loans would trigger Flagstar’s repurchase obligations, provided that the breaches “materially” or “adversely” impacted the value of the loans.

Flagstar’s lawyers at Arnold & Porter moved for summary judgment in January, arguing that to show it was “adversely impacted” Assured must establish a direct causal link between misrepresentations and its losses.

Assured’s lawyers at Susman took the position that “adverse” just means “opposed to one’s interests,” so to trigger the put-back provisions they only have to show that Assured was harmed by Flagstar’s alleged misrepresentations.

Rakoff issued a one-page order in late February rejecting Flagstar’s motion. His Sept. 25 decision in Assured Guaranty Municipal v. Flagstar Bank, 11 Civ. 2375, said that Assured’s stance on loss causation “fully accords with New York law.”

He based his decision on a long-held principle of New York insurance law holding that an insurer can rescind a policy if it later learns about a material misrepresentation that would have led it to refuse to offer the policy.

Rakoff also noted that Assured’s contract with Flagstar makes no mention of the words like “cause” or “loss.”

“If the sophisticated parties had intended that the plaintiff be required to show direct loss causation, they could have included that in the contract,” he wrote.

Two prior rulings favorable to bond insurers were issued earlier this year. In January Manhattan Supreme Court Justice Eileen Bransten (See Profile)  rejected a closely watched bid by Bank of America Corporation to scuttle a put-back case brought by MBIA Inc., in MBIA Insurance v. Countrywide Home Loans, 602825/2008.

And in June, Southern District Judge Paul Crotty (See Profile)  granted summary judgment to Syncora Guarantee, which sued now-defunct EMC Mortgage Corporation, a Bear Stearns subsidiary, in Syncora Guarantee v. EMC Mortgage, 09 Civ. 3106.

Assured was represented by Susman partner Jacob Buchdahl.

Veronica Rendon, a partner at Arnold & Porter, was counsel to Flagstar.