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

New York Court of Appeals

June 27, 2018

Ambac Assurance Corporation, et al., Appellants,
v.
Countrywide Home Loans, Inc., et al., Respondents, Bank of America Corp., Defendant.

          Philippe Z. Selendy, for appellants.

          Joseph M. McLaughlin, for respondents.

          Securities Industry and Financial Markets Association; Mark J. Browne; Association of Financial Guaranty Insurers; New York Insurance Association, Inc., amici curiae.

          OPINION

          GARCIA, J.

         Plaintiff Ambac Assurance Corporation, a monoline financial guaranty insurer, agreed to insure payments of principal and interest owed to the holders of residential mortgage-backed securities sponsored by defendant Countrywide [1]. Following a market downturn, many of the loans backing those securities went into default, causing substantial losses. Ambac filed suit against Countrywide, alleging, among other things, that Countrywide fraudulently induced Ambac to enter into the insurance agreements and that Countrywide breached a number of contractual representations and warranties. Both parties brought motions for partial summary judgment. As relevant here, Ambac argued that, with respect to its fraudulent inducement claim, it did not need to prove justifiable reliance or loss causation, and that the proper measure of damages would be recovery of all claims paid out under the policies. Ambac also asserted that the repurchase protocol provided for as a sole damages remedy in the contract between the parties should not govern certain of its contractual claims. Lastly, Ambac sought attorneys' fees from Countrywide. We agree with the Appellate Division that these arguments lack merit and therefore affirm.

         The residential mortgage-backed securities ("RMBS") market was a booming industry in the mid-2000s. These "intricately structured financial instruments [are] backed by hundreds or thousands of individual [] mortgages, each obtained by individual borrowers for individual houses" (Federal Housing Finance Agency v. Nomura Holding America, Inc., 104 F.Supp.3d 441, 458 [SD NY 2015], affd 873 F.3d 85');">873 F.3d 85 [2d Cir 2017]). The investor in this type of security is entitled to "a stream of income from pools of residential mortgage loans held by a trust" (id.). Between 2004 and 2006, Ambac insured 17 RMBS securitizations issued by Countrywide. These securitizations were backed by more than 300, 000 individual mortgage loans, which Countrywide had originated or acquired and then sold into securitization trusts. In exchange for substantial premiums, Ambac issued unconditional, irrevocable insurance policies, agreeing to insure certain payments to the investors. Securities with a guaranty of payment from a monoline insurer typically receive the credit rating of that insurer. In this case, the guaranty by Ambac, itself rated AAA, significantly enhanced the credit ratings of the RMBS securitizations.

         For each securitization, Ambac executed an Insurance and Indemnity Agreement ("Insurance Agreement") - the only contract between the parties here - setting out Ambac's insurance obligations. Section 2.01 (l) of the Insurance Agreement incorporates more than 60 representations and warranties from the agreements executed by Countrywide to effect each of the securitization transactions [2]. These representations and warranties address a range of issues, including each mortgage loan's compliance with underwriting guidelines, the accuracy of the information in the Mortgage Loan Schedule, appraisal and foreclosure issues, and compliance with federal regulations.

         Section 2.01 (l) also provides that the remedy for breach of any of these imported representations and warranties and the remedy "with respect to any defective Mortgage Loan or any Mortgage Loan as to which there has been a breach of representation or warranty" under the Securitization Documents "shall be limited to the remedies specified" in the applicable Securitization Documents. In turn, the limited remedy provided in the Securitization Documents requires Countrywide to either repurchase, cure, or substitute nonconforming loans. Other subdivisions of Section 2.01 contain additional representations and warranties, including that there are no material untrue statements in the Insurance Agreement, Securitization Documents, or other material written or electronic information provided to Ambac relating to the mortgage loans or Countrywide's operations or financial condition (Section 2.01 (j)), and that the transactions' offering documents did not contain any material misrepresentation or omission and otherwise complied with applicable securities laws (Section 2.01 (k)).

         Section 3.03 (c) of the Insurance Agreements provides that Countrywide agrees to reimburse Ambac for "charges, fees, costs, and expenses... including reasonable attorneys'... fees and expenses, in connection with... the enforcement, defense or preservation of any rights in respect of any of the Operative Documents, including defending, monitoring, or participating in any litigation or proceeding relating to any of the Operative Documents." Section 5.02 (b) of the Insurance Agreements provides that, "unless otherwise expressly provided, no remedy herein conferred or reserved is intended to be exclusive of any other available remedy, but each remedy shall be cumulative and shall be in addition to other remedies given under this Insurance Agreement... or existing at law or in equity."

         By 2007, with the housing market in decline, mortgage default and delinquency rates increased (see Federal Housing Finance Agency, 873 F.3d at 106-107). As a result, Ambac had to pay out far more claims than anticipated. At this point, the complaint alleges, Ambac began to review the origination files of defaulting loans and found that approximately 7, 900 out of 8, 800 that were reviewed contained material breaches of the Insurance Agreements' representations and warranties. Ambac then initiated the repurchase protocol by submitting notices of breach to Countrywide.

         In September 2010, Ambac commenced the instant action, alleging that Countrywide "fraudulently induced Ambac to provide credit enhancement to improve the marketability of the notes and certificates issued in connection with each of the RMBS securitizations." In addition, Ambac alleged material breach of each Insurance Agreement; breach of the representations and warranties between the parties; breach of the repurchase protocol; and indemnification and reimbursement of attorneys' fees and expenses. Ambac also included a claim of successor and vicarious liability against Bank of America.

         Both parties moved for partial summary judgment. As relevant to this appeal, Supreme Court determined, relying on Insurance Law § 3105, that Ambac did not need to demonstrate justifiable reliance and loss causation in order to succeed on its fraudulent inducement claim. With respect to Ambac's claims alleging breaches of the various contractual representations and warranties, the court found that the sole remedy provision did not apply "beyond Section 2.01 (l)," so "to the extent that Ambac can prove breaches of other sections of the I[nsurance] Agreements, it is not limited to the sole remedy of repurchase." However, the court determined that, "to the extent that Ambac is entitled to receive an award of damages unrelated to the repurchase protocol," Ambac was not entitled to recover all payments made to investors pursuant to the Insurance Agreements as compensatory damages because that would be "effectively equivalent to rescissory damages," and that any damages calculation "must be calculated in reference to claims payments made due to loans breaching" representations and warranties. Finally, the court found that Ambac was not entitled to recover attorneys' fees.

         On appeal, the Appellate Division modified Supreme Court's opinion in part and affirmed (Ambac Assurance Corp. v Countrywide Home Loans, 151 A.D.3d 83');">151 A.D.3d 83 [1st Dept 2017]). The Appellate Division held that justifiable reliance and loss causation are required elements of a fraudulent inducement claim, and that Insurance Law § 3105 is not applicable to a common law fraud claim for money damages. The Appellate Division rejected Supreme Court's holding that the repurchase protocol was not the sole remedy for Ambac's claims for breach of representations and warranties, holding instead that "Ambac cannot avoid the consequences of the sole remedy provision by relying on what it terms transaction-level' representations, because the heart of Ambac's lawsuit is that it was injured due to a large number of defective loans." The Appellate Division affirmed Supreme Court's method of damages calculation for any claims not subject to the repurchase protocol, holding that Ambac was not entitled to compensatory damages "amounting to all claims payments it made or will make under the policies, regardless of whether they arise from a breach or misrepresentation." Finally, the Appellate Division affirmed Supreme Court's holding that Ambac was not entitled to attorneys' fees. The Appellate Division granted Ambac leave to appeal.

         The required elements of a common law fraud claim are "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 [2016] [internal citations and quotation marks omitted]). Justifiable reliance is a "fundamental precept" of a fraud cause of action (Danaan Realty Corp. v Harris, 5 N.Y.2d 317, 322 [1959]), as is "resulting injury" (Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 276 [2011]). This Court has previously held, in the context of a monoline insurer suing for fraudulent inducement of a financial guaranty on a transaction involving asset-backed securities, that "to plead a claim for fraud in the inducement or fraudulent concealment, plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations" (ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 [2015]; see also id. at 1051 [Read, J dissenting on other grounds] [describing the justifiable reliance requirement as "our venerable rule"]). In apparent recognition of the fact that justifiable reliance and loss causation are required elements of its fraudulent inducement claim, Ambac's operative complaint pled these well-established elements, alleging that Ambac "reasonably relied on Countrywide's statements and omissions when it ...


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