MBIA Ins. Corp. v. JP Morgan Sec. LLC, Index No. 64676/2012, 6/6/2016 (Scheinkman, J.)

Fraudulent Concealment; Motion for Summary Judgment; Justifiable Reliance; Mortgage Securitization Transaction; Due Diligence Report; Superior Knowledge; Duty to Disclose.

By: Nora Boujida | Staff Member

Plaintiff insurer, MBIA Insurance Corporation, and Defendant underwriter, J.P. Morgan Securities LLC (f/k/a Bear, Stearns & Co., Inc.), were involved in a mortgage securitization transaction. To issue the insurance policy, Plaintiff required that Defendant provide a due diligence report from a third-party firm, Mortgage Data Management Corporation (“MDMC”), illustrating Defendant’s current financial status. Shortly after beginning its work, MDMC informed Defendant that it discovered significant issues in its review. Specifically, Defendant altered spreadsheets to remove failing credit and compliance grades. MDMC sent spreadsheets demonstrating negative and unsatisfactory results to Defendant. Efforts made by Defendant to address the problems proved unsuccessful. Defendant, however, did not send Plaintiff the original spreadsheet, but instead an altered version. The parties then closed the transaction. Defendant’s loans ultimately failed. As a result, Plaintiff paid out millions to investors to cover their losses.

Plaintiff first brought an action against Defendant for actual fraud, alleging it relied upon the intentional misrepresentations made by Defendant. The Court granted summary judgment to Defendant because there was no evidence to support the claim. The Court, however, stated there was evidence suggesting Defendant had a duty to disclose, giving rise to a claim of fraudulent concealment. The Court allowed Plaintiff to interpose an amended complaint containing a cause of action for fraudulent concealment, alleging that Defendant had a duty to disclose the true results of the due diligence report on four bases: (1) the contractual relationship between Plaintiff and Defendant; (2) Defendant’s agreement to share MDMC’s due diligence results with Plaintiff; (3) Defendant’s duty to disclose attributable to Defendant’s superior knowledge; (4) Plaintiff’s reliance on Defendant’s alleged omissions of material facts. In opposition, Defendant moved for summary judgment presenting three arguments: (1) the lack of evidence that Plaintiff relied on Defendant’s “supposed silence” in deciding to insure the transaction; (2) any such reliance would not unreasonable because Plaintiff was a sophisticated business entity and should have conducted its own investigation into the details of the transaction; (3) Defendant did not owe Plaintiff any affirmative duty to disclose the results of the due diligence review.

The Court denied Defendant’s motion for summary judgment because there were triable issues of fact as to whether Defendant owed Plaintiff a duty to disclose and whether Plaintiff actually relied on Defendant’s failure to disclose. First, the Court held there were genuine issues of fact as to whether Defendant owed a duty to disclose the MDMC report. In a claim for active fraudulent concealment, an affirmative duty to disclose material information may arise from the need to complete or clarify one part’s partial or ambiguous statements or from a fiduciary or confidential relationship between the parties. Here, the Court found genuine issues of fact as to the actions of Defendant in altering the final report, and why Defendant had not forwarded the MDMC report to Plaintiff. Thus, the Court found no basis for concluding that Defendant has shown it was not subject to a duty to disclose as a matter of law. Second, the Court held there are genuine issues of fact as to whether Plaintiff actually relied on Defendant’s failure to disclose the MDMC report. To prove reliance, the fraud and injury must be connected in actions founded on fraud. It must appear in an appreciable sense that the damage flowed from the fraud as the proximate, and not the remote, cause. Here, the Court opined that Defendant did not provide any evidence that Plaintiff did not rely on the failure to produce the reports prior to closing. The Court also found clear questions of fact as to whether Defendant’s conduct included act of active concealment and whether Defendant’s actions thwarted Plaintiff’s own efforts, if any, to fulfill its own responsibilities to protect itself.

MBIA Ins. Corp. v. JP Morgan Sec. LLC, Index No. 64676/2012, 6/6/2016 (Scheinkman, J.).