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When we reported last April on New York state supreme court judge Bernard Fried’s dismissal of MBIA’s fraud claims against Merrill Lynch in a case involving collateralized debt obligations, we noted that all wasn’t lost for MBIA, which had asserted that it was on the hook for hundreds of millions of dollars in losses because it insured Merrill securities backed by deficient collateral. Judge Fried spared MBIA’s breach of contract claim, which alleged that the CDOs MBIA insured were not qualified for the AAA ratings they received. We called the survival of MBIA’s contract claim “a ray of hope for the embattled company.” That ray is now extinguished. On Tuesday a unanimous panel of the New York state appellate division, first department knocked out the breach of contract case in a three-page page ruling. And as it was in the lower court, the plain language of the CDO contracts was MBIA’s downfall. “The breach of contract cause of action fails to state a cause of action for breach of the promise to provide subordination protection since there is no such promise in the relevant agreements,” the appellate court found. “Nor does it state a cause of action for breach of the promise to provide AAA-rated securities since it is undisputed that defendants in fact provided securities with AAA ratings. Nowhere in the plain language of the documents does there appear a promise of credit quality.” The appeals court also upheld the dismissal of MBIA’s other claims against Merrill, finding that MBIA was a sophisticated investor bound by the disclaimers in the contracts it executed. Scott Musoff of Skadden, Arps, Slate, Meagher & Flom argued at the appeals court for Merrill. He declined to comment. A BofA spokesperson told us via e-mail that the bank is “pleased with the court’s decision….The unanimous ruling is consistent with our view that MBIA never had a valid claim and we are pleased that the court has dismissed the action.” Philippe Selendy of Quinn Emanuel Urquhart & Sullivan made MBIA’s appellate argument, in the first of the insurer’s many New York state MBS cases to reach the appeals court. Selendy didn’t return our call. MBIA sent us this e-mail statement on the appeals court’s decision: “We respectfully but strongly disagree with today’s ruling from the appellate division and will request an appeal to New York’s highest appellate court,” the statement says. “This case, which concerns our effort to recover from Merrill’s well-publicized misconduct in creating and selling complex derivative products, is important as part of the industry-wide effort to address the improper behavior of certain market participants.” MBIA is at the vanguard of investor efforts to pressure issuers and underwriters of mortgage-backed securities, as you can see from this website detailing its MBS suits. Most of MBIA’s cases have fared better than the Merrill suit; in particular, the insurer won an important December 2010 ruling that permits it to use statistical sampling of underlying mortgages to prove fraud against Countrywide.

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