AMBAC Assurance Corp. v. Countrywide Home Loans, Inc.

• Decision Date: 16 May 2017
• Citation: 56 N.Y.S.3d 21,151 A.D.3d 83
• Parties: AMBAC ASSURANCE CORPORATION, et al., Plaintiffs–Appellants–Respondents, v. COUNTRYWIDE HOME LOANS, INC., et al., Defendants–Respondents–Appellants, Bank of America Corp., Defendant. The Association of Financial Guaranty Insurers and the Securities Industry and Financial Markets Association, Amici Curiae.
• Court: New York Supreme Court — Appellate Division

151 A.D.3d 83
56 N.Y.S.3d 21

AMBAC ASSURANCE CORPORATION, et al., Plaintiffs–Appellants–Respondents,
v.
COUNTRYWIDE HOME LOANS, INC., et al., Defendants–Respondents–Appellants,

Bank of America Corp., Defendant.

The Association of Financial Guaranty Insurers and the Securities Industry and Financial Markets Association, Amici Curiae.

Supreme Court, Appellate Division, First Department, New York.

May 16, 2017.

56 N.Y.S.3d 24

Patterson Belknap Webb & Tyler LLP, New York (Peter W. Tomlinson, Harry Sandick and Robert P. LoBue of counsel), for appellants-respondents.

Simpson Thacher & Bartlett LLP, New York (Joseph M. McLaughlin, Shannon K. McGovern and David J. Woll of counsel), and Goodwin Procter LLP, New York (Brian D. Hail of counsel), for respondents-appellants.

Orrick, Herrington & Sutcliffe LLP, New York (Richard A. Jacobsen of counsel), for the Securities Industry and Financial Markets Association, amicus curiae.

Axinn Veltorp & Harkrider LLP, New York (Donald W. Hawthorne of counsel), for the Association of Financial Guaranty Insurers, amicus curiae.

ROSALYN H. RICHTER, J.P., SALLIE MANZANET–DANIELS, JUDITH J. GISCHE, TROY K. WEBBER, MARCY L. KAHN, JJ.

RICHTER, J.P.

In this action, Ambac, a financial guaranty insurer, seeks to hold Countrywide liable in connection with 17 residential mortgage-backed securitizations sponsored by Countrywide¹ . Upon Countrywide's application, Ambac issued unconditional and irrevocable insurance policies for the transactions, guaranteeing the payments of principal and interest to the securitizations' investors. In its complaint, Ambac alleges, inter alia, that (i) Countrywide breached various contractual representations and warranties relating to the loans and its business practices; and (ii) Countrywide fraudulently induced Ambac to issue the insurance policies by making false statements about Countrywide's operations and the loans. Both Ambac and Countrywide sought summary judgment on a number of issues. The motion court granted in part and denied in part each of the parties' motions. Both parties now appeal.

We agree with Countrywide that Ambac is required to prove all of the elements of its fraudulent inducement claim, including justifiable reliance and loss causation. The elements of a fraud cause of action are long-settled. To establish fraud, a plaintiff must show "a misrepresentation or a material omission of fact which was false and known to be false by [the] defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" (Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817, 827, 37 N.Y.S.3d 750, 59 N.E.3d 485 [2016] [internal quotation marks omitted] [alteration in original]; see

56 N.Y.S.3d 25

Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147, 910 N.E.2d 976 [2009] ).

The element of justifiable reliance is "essential" to any fraud claim (Basis Yield Alpha Fund Master v. Morgan Stanley, 136 A.D.3d 136, 140, 23 N.Y.S.3d 50 [1st Dept.2015] ; see Danann Realty Corp. v.

Harris, 5 N.Y.2d 317, 322, 184 N.Y.S.2d 599, 157 N.E.2d 597 [1959] [it is a "fundamental precept" that reliance must be justifiable in order to state a cause of action for fraud] ). The Court of Appeals recently reaffirmed, in a fraud action brought by a financial guaranty insurer like Ambac here, the necessity of proving justifiable reliance (see ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044, 10 N.Y.S.3d 486, 32 N.E.3d 921 [2015] ["To plead a claim for fraud in the inducement ..., [a] plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations"] ).

A plaintiff asserting a fraud claim must also "demonstrate that a defendant's misrepresentations were the direct and proximate cause of the claimed losses" (Vandashield Ltd. v. Isaacson, 146 A.D.3d 552, 553, 46 N.Y.S.3d 18 [1st Dept.2017] [internal quotation marks omitted] ). "To establish causation, [a] plaintiff must show both that [the] defendant's misrepresentation induced [the] plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which [the] plaintiff complains (loss causation)" (Laub v. Faessel, 297 A.D.2d 28, 31, 745 N.Y.S.2d 534 [1st Dept.2002] ). "Loss causation is the fundamental core of the common-law concept of proximate cause" and "[a]n essential element" of a fraud claim (id. ). This Court has repeatedly reaffirmed this principle (see e.g. Basis PAC–Rim Opportunity Fund (Master) v. TCW Asset Mgt. Co., 149 A.D.3d 146, 48 N.Y.S.3d 654 [1st Dept.2017] ; Gregor v. Rossi, 120 A.D.3d 447, 448, 992 N.Y.S.2d 17 [1st Dept.2014] ; Nam Tai Elec., Inc. v. UBS PaineWebber Inc., 46 A.D.3d 486, 488, 850 N.Y.S.2d 11 [1st Dept.2007] ; Water St. Leasehold LLC v. Deloitte & Touche LLP, 19 A.D.3d 183, 185, 796 N.Y.S.2d 598 [1st Dept.2005], lv. denied 6 N.Y.3d 706, 812 N.Y.S.2d 35, 845 N.E.2d 467 [2006] ).

There is no merit to Ambac's contention that Insurance Law § 3105 dispenses with the common-law requirement of proving justifiable reliance and loss causation. Nor can that statute be used affirmatively as a basis to recover monetary damages. Insurance Law § 3105 provides that a material misrepresentation "shall avoid [a] contract of insurance" and "defeat recovery thereunder" (Insurance Law § 3105[b][1] ). This Court recently observed that "Insurance Law § 3105 does not, by its terms, create a cause of action, but merely codifies common law [insurance] principles" (CIFG Assur. N. Am., Inc. v. J.P. Morgan Sec. LLC, 146 A.D.3d 60, 68, 44 N.Y.S.3d 2 [1st Dept.2016] ;² see Kaplan & Gross, Commentaries on the Revised

Insurance Law of New York § 149 at 338 [1940 ] [predecessor statute to section 3105"restates generally, ... in codified form, common law principles long established in the field of insurance"] ).

At the outset, we note that, in its complaint, Ambac does not even reference Insurance Law § 3105, and pleads only common-law fraudulent inducement. Nevertheless, Ambac contends that its

56 N.Y.S.3d 26

fraud claim is "informed" by that statute. By its express terms, Insurance Law § 3105 has no applicability here. It merely permits an insurer, in the event of a material misrepresentation, to either "avoid [a] contract of insurance" (i.e., pursue the remedy of rescission) or "defeat recovery" under the insurance contract (i.e., defeat an insured's claim for payment) (Insurance Law § 3105[b][1] ; see 128 Hester LLC v. New York Mar. & Gen. Ins. Co., 126 A.D.3d 447, 447, 5 N.Y.S.3d 69 [1st Dept.2015] ["a material misrepresentation made at the time an insurance policy is being procured may lead to a policy being rescinded and/or avoided"] ).

Cases applying Insurance Law §...