The 1st Department did none of that. Consequently, counsel for MBIA and BAC have engaged in a series of letter writing to Justice Bransten seeking to elucidate the decision's delphic, even talmudic, meaning. See BAC's first letter, MBIA's first letter, BAC's second letter, and MBIA's second letter .
What's this all about?
The upshot is whether MBIA must seek to recover its damages only through loan repurchase by BAC, as MBIA's "sole remedy", or whether MBIA is able to seek compensatory damages for representation and warranty (R&W) breaches made by BAC in the insurance agreement without going though the repurchase protocol.
Why does this matter?
It may not. If MBIA is left to pursue the repurchase protocol as a sole remedy, MBIA can clearly point out that BAC has breached its obligations to repurchase loans, and its 90 day cure period has long lapsed. Judge Rakoff followed this line of reasoning in Assured Guaranty v Flagstar and awarded Assured Guaranty a damage award for substantially all of its losses. See Rakoff's discussion about Assured Guaranty's recovery of damages at pps. 94-100 of Rakoff Opinion.
This recovery theory is a two step process, as Judge Rakoff made Assured Guaranty show, based upon the circumstances involved with the securitizations that it insured, that if Flagstar had made all of its loan repurchases as it was obligated to do, and deposited the repurchase proceeds in the trust, noteholders would have gotten their payments as scheduled and Assured Guaranty would not have had to make any insurance claims payments.
If MBIA is not limited to pursuing this repurchase avenue of recovery as a sole remedy, MBIA can simply recover damages for R&W breach of insurance agreement directly, without this second step analysis. As an additional matter, MBIA had been seeking rescissory damages for breach of insurance agreement, which is an even more direct theory of recovery, but the 1st Deparment held that rescissory damages were unavailable.
So what did the 1st Department say with respect to this sole remedy limitation in its decision holding rescissory damages unavailable?
BAC counsel in its letters states that the 1st Department did not address sole remedy, that the sole remedy limitation is still intact, and it even appends a subsequent decision by Justice Ramos holding that Assured Guranty in another case is limited to its sole remedy. (BAC also goes on to argue that MBIA must prove an additional form of causation at the damages stage, where BAC will seek to reintroduce its argument that everything but its breaches, most prominently the financial crisis, caused MBIA's damges, an argument BAC can no longer assert at the liability phase of the case since the 1st Department held that no such causation showing for liability is required. This is the same argument advanced by Flagstar that Judge Rakoff rejected with respect to Assured Guaranty's recovery of damages against Flagstar).
On the other hand, MBIA counsel states that in denying rescissory damages, the 1st Department rejected the sole remedy limitation, albeit without saying so explicitly.
Who is right?
To answer this, you have to read the decision carefully and try to interpret the basis of the 1st Department's decision. In my view, the only fair reading of the 1st Department decision reveals that it rejected rescissory damages as a special theory of recovery under an insurance agreement because recovery was otherwise available to MBIA under the insurance law (Sections 3105 and 3106). The 1st Department said that where an insurer can defeat recovery of payments under the insurance law, the extraordinary equitable remedy of rescission is not warranted.
Now, if the 1st Department had said that it was because MBIA could recover payments by pursuing loan repurchases (whether or not as a sole remedy) as provided by the contracts, then BAC would be able to argue that it defeated MBIA's claim for rescissory damages because MBIA's remedies were purely contractual (and BAC would argue that the contracts provide for repurchase as a sole remedy). But the 1st Department did not say that it was the availability of a contractual remedy that made rescission unavailable. It specifically stated that it was the availability of an adequate remedy under the insurance law that made rescission unavailable.
A second reason advanced by MBIA is the statement made by the 1st Department at the end of the decision: "We have considered the parties' remaining arguments and find them unavailing." What were BAC's arguments?
BAC's appellate brief sets forth its loan repurchase as a sole remedy argument at the end (or "remaining" portion) of its brief. See argument beginning at p. 51. Isn't this what the 1st Department is referring to when it says that BAC's remaining arguments are "unavailing"? How can it be otherwise?
Now, if the 1st Department had simply said that it was not necessary to address BAC's remaining arguments, because a remedy other than rescission was available under the insurance law, then it would be clear that the 1st Department had not passed on the merits of BAC's sole remedy argument.
But when the 1st Department specifically states that BAC's remaining arguments are "unavailing", it seems to me that you would be hard-pressed to claim that your argument with respect to sole remedy had not been considered and rejected by the 1st Department.
Although that is clearly not enough to stop BAC.
NB: this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice. Investing is a tough game, and everyone must do and own their own work, because you will certainly own your investments.
Disclosure: long MBI. Follow me on twitter.