Ambac Assurance Corporation, et al., Plaintiffs-Appellants-Respondents,
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.
appeals from the orders of the Supreme Court, New York County
(Eileen Bransten, J.), entered on or about October 27, 2015,
which granted in part and denied in part plaintiffs' and
the Countrywide defendants' respective motions for
Patterson Belknap Webb & Tyler LLP, New York (Peter W.
Tomlinson, Harry Sandick and Robert P. LoBue of counsel), for
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.
Veltorp & Harkrider LLP, New York (Donald W. Hawthorne of
counsel), for the Association of Financial Guaranty Insurers,
Rosalyn H. Richter, J.P., Sallie Manzanet-Daniels, Judith J.
Gische, Troy K. Webber, Marcy L. Kahn, JJ.
action, Ambac, a financial guaranty insurer, seeks to hold
Countrywide liable in connection with 17 residential
mortgage-backed securitizations sponsored by Countrywide
. 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.
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  [internal quotation
marks omitted] [alteration in original]; see Eurycleia
Partners, LP v Seward & Kissel, LLP, 12 N.Y.3d 553,
element of justifiable reliance is "essential" to
any fraud claim (Basis Yield Alpha Fund Master v Morgan
Stanley, 136 A.D.3d 136, 140 [1st Dept 2015]; see
Danann Realty Corp. v Harris, 5 N.Y.2d 317, 322 
[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  ["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
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 [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 [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., - A.D.3d -, 2017 NY Slip Op 01644 [1st Dept 2017];
Gregor v Rossi, 120 A.D.3d 447, 448 [1st Dept 2014];
Nam Tai Elec., Inc. v UBS PaineWebber Inc., 46
A.D.3d 486, 488 [1st Dept 2007]; Water St. Leasehold LLC
v Deloitte & Touche LLP, 19 A.D.3d 183, 185 [1st
Dept 2005], lv denied 6 N.Y.3d 706');">6 N.Y.3d 706 ).
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]). 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 [1st
Dept 2016];  see Kaplan & Gross,
Commentaries on the Revised Insurance Law of New York §
149 at 338  [predecessor statute to section 3105
"restates generally, ... in codified form, common law
principles long established in the field of
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 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]; see 128 Hester
LLC v New York Mar. & Gen. Ins. Co., 126 A.D.3d 447,
447 [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"]).
applying Insurance Law § 3105 arise in the context of
either a declaratory judgment action by an insurer seeking
rescission of an insurance policy or an insurer asserting a
defense to an insured's claim for payment under the
policy (see e.g. Arch Specialty Ins. Co. v Kam Cheung
Constr., Inc., 104 A.D.3d 599');">104 A.D.3d 599 [1st Dept 2013];
Rampersant v Nationwide Mut. Fire Ins. Co., 71
A.D.3d 972 [2d Dept 2010]; Kiss Constr. NY, Inc. v
Rutgers Cas. Ins. Co., 61 A.D.3d 412');">61 A.D.3d 412 [1st Dept 2009];
Vebeliunas v American Nat. Fire Ins. Co., 156 A.D.2d
555 [2d Dept 1989]). Here, Ambac seeks neither to rescind the
policies, which are unconditional and irrevocable, nor to
defeat a claim by an insured ...