On November 29, a five-judge panel of New York’s Appellate Division affirmed the dismissal of CIFG Assurance North America, Inc.’s (“CIFG”) claims against Bear Stearns & Co. (now known as J.P. Morgan Securities LLC (“J.P. Morgan”)) based on alleged material misrepresentations in connection with an insurance contract.  However, the panel found that CIFG’s claims should not have been dismissed with prejudice because CIFG should have been given an opportunity to replead.

The complaint alleged that Bear Stearns & Co. (“Bear Stearns”) made material misrepresentations that induced CIFG to provide financial guaranty insurance in connection with two collateralized debt obligations (“CDOs”).  According to CIFG, Bear Stearns created the CDOs to rid itself of toxic, high-risk residential mortgage-backed securities (“RMBS”) that it was carrying on its books.  CIFG alleged that Bear Stearns needed a third party to insure the CDOs’ senior tranches to make them marketable to investors.  Bear Stearns approached CIFG to provide financial guaranty insurance on certain senior notes issued by the CDOs and made material misrepresentations to induce CIFG to do so.  Specifically, Bear Stearns allegedly represented to CIFG that the CDOs’ assets would be selected by independent and reputable collateral managers when, in reality, Bear Stearns allegedly paid off the managers to allow itself to choose the collateral and load the CDOs with the toxic RMBS from its own books.  CIFG also claimed that Bear Stearns held a number of short positions against the CDOs’ portfolios and profited substantially therefrom.  Due to the large volume of toxic RMBS in the portfolios, both CDOs collapsed within a year of closing, which forced CIFG to pay over $100 million to discharge its liabilities under the insurance.  CIFG alleges that it would have never issued the insurance had it known that the collateral managers would be taking direction from Bear Stearns.

In affirming the dismissal, the Appellate Division found that the “complaint contains insufficient information about the insurance policies CIFG was allegedly fraudulently induced to issue, and the circumstances under which those policies were issued.”  Furthermore, the Appellate Division found that the complaint failed to include any detail as to how Bear Stearns “solicited” the insurance from CIFG and was void of any information about the underlying CDO transaction.  Lastly, the panel noted that “the complaint merely states that CIFG paid over $100 million to discharge its liabilities under the insurance, but does not identify to whom those payments were made, or the events that triggered the payments.”  Based on all of these deficiencies, the panel held that CIFG’s misrepresentation claim did “not clearly inform defendant as to the complained-of incidents, and it was properly dismissed.”  Nonetheless, the Appellate Division held that CIFG should be given an opportunity to replead and rejected J.P. Morgan’s argument to dismiss the claim as time-barred.

The case is captioned CIFG Assurance North America Inc. v. J.P. Morgan Securities LLC, index number 654074/2012, in the New York Supreme Court, Appellate Division, First Department.

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