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First Department Declines to Dismiss Fraudulent Inducement Claim as Duplicative of Contract Claim Based on Expert Analysis

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  • Posted on: Sep 18 2019

The elements of a common law fraud claim in New York are well known to readers of this Blog: “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). To prevail on a claim of fraud, the plaintiff must plead and prove each element. But as plaintiffs often find that is not so easy.

In addition, where the plaintiff alleges a breach of contract, he/she must demonstrate that the fraud claim is not duplicative of the contract claim. One way to do so is to show that the fraud damages are not recoverable under a contract measure of damages. As with the elements of a fraud claim, demonstrating the absence of an overlap in the measure of damages often proves to be a difficult endeavor.

On September 17, 2019, the Appellate Division, First Department, had the opportunity to address the duplication of damages doctrine, holding that plaintiff demonstrated it had sustained more than contract damages sufficient to sustain its fraudulent inducement claim against defendants. Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2019 N.Y. Slip Op. 06570 (1st Dept. Sept. 17, 2019) (here).


Ambac has a long history. Approximately nine years ago, Ambac Assurance Corporation (“Ambac”), a financial-guaranty insurer, filed a complaint in New York Supreme Court against Countrywide Home Loans, Inc. and certain affiliates and Bank of America Corp. (collectively, “Countrywide”). Ambac alleged that Countrywide fraudulently induced it to insure payments on residential mortgage-backed securities from 2004 through 2006. Ambac claimed that Bank of America, which acquired Countrywide in 2008, was liable for Countrywide’s conduct as its successor-in-interest.

Between 2004 and 2006, Ambac provided financial guaranty insurance to Countrywide with respect to 17 residential mortgage-backed securitizations issued to investors. The 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 (an important fact to the Court), agreeing to insure certain payments to investors if the underlying mortgage holders failed to make payments.

Pursuant to the insurance agreements with Ambac (“Insurance Agreements”), and to effect each of the securitization transactions, Countrywide provided over 60 representations and warranties covering a range of issues, including each underlying loan’s compliance with underwriting guidelines, compliance with federal regulations, appraisal issues, and the accuracy of the information in the loan schedules. In other sections of the Insurance Agreements, Countrywide represented and warranted that there were no material untrue statements in the securitization documents or in the information provided to Ambac regarding the loans and Countrywide’s operations and financial condition. The Insurance Agreements provided that the sole remedy for a breach of the representations and warranties, as well as any defective mortgage loan, was to require Countrywide to either repurchase, cure, or substitute non-conforming loans.

By 2007, with the housing market in decline, mortgage default and delinquency rates increased. As a result, Ambac had to pay out far more claims than anticipated. 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 representations and warranties in the Insurance Agreements. Pursuant to the Insurance Agreements, Ambac initiated the repurchase protocol by submitting notices of breach to Countrywide – that is, Ambac requested that Countrywide repurchase or cure the defaulting mortgages or substitute new ones.

In 2010, Ambac filed suit against Countrywide, asserting claims for: (i) breach of the Insurance Agreements, the representations and warranties in the Insurance Agreements, and the repurchase protocol; (ii) fraudulent inducement; and (iii) indemnification and reimbursement of attorney fees and expenses. Ambac also included a claim of successor and vicarious liability against Bank of America.

Both parties moved for partial summary judgment. The motion court held, relying on Insurance Law § 3105, that Ambac did not need to demonstrate justifiable reliance and loss causation to succeed on its fraudulent inducement claim. Section 3105 provides, in relevant part, that “[n]o misrepresentation shall avoid any contract of insurance or defeat any recovery thereunder unless such misrepresentation was material” and “no misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.” With respect to Ambac’s claims alleging breaches of the representations and warranties, the court found that the sole remedy provision did not apply “beyond Section 2.01 (l),” of one of the agreements, 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.

The Appellate Division, First Department, modified the motion court’s decision. Ambac Assurance Corp. v Countrywide Home Loans, 151 A.D.3d 83 (1st Dept. 2017) (here).  The First Department 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 First Department rejected the motion 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 First Department affirmed the motion 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 First Department affirmed the motion court’s holding that Ambac was not entitled to attorneys’ fees.

The New York Court of Appeals affirmed. Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018) (here).

The Court of Appeals held that “Insurance Law § 3105 play[ed] no role” in the case, reasoning that “Section 3105 does not provide an affirmative, freestanding, fraud-based cause of action through which an insurer may seek to recover money damages” and does not “‘inform’ a court’s assessment of the longstanding common law elements of fraudulent inducement.” 31 N.Y.3d at 580. The Court noted that “[b]y its terms, section 3105 is only relevant when an insurer seeks rescission of an insurance contract or is defending against claims for payment under an insurance contract, relief that Ambac cannot, and does not, seek.” Id.

The Court further noted that Section 3105 was enacted to benefit policyholders by requiring insurers who were seeking to nullify their contracts to prove material misstatements; the statute did not relax the elements required to show fraud in an “insurer-only” exception. Id. As a consequence, the Court held that Section 3105 “does not remove required elements for a showing of common law fraudulent inducement.…” Id.

The Court next turned to two elements of a fraudulent inducement claim relevant to the appeal: justifiable reliance and loss causation.

First, the Court underscored the importance of proving justifiable reliance, noting that the element is critical to pleading (and proving) a fraudulent inducement claim: “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.” Id. at 579 (citation and internal quotations omitted).

Second, the Court declined to eliminate the loss causation element of a fraudulent inducement claim. The Court noted that loss causation is a “well-established requirement of a common law fraudulent inducement claim for damages.” Id. Noting that the Court “recently affirmed this requirement,” the Court reiterated that a false representation must result in an injury to give rise to a cause of action for fraud: “if the fraud causes no loss, then the plaintiff has suffered no damages.” Id. at 581. Accordingly, the Court held that “Ambac’s request for compensatory damages in the form of all claims payments made to investors must be rejected.” Id.  In other words, Ambac could not recover damages based on losses suffered on all defaulting loans without establishing that the losses resulted from a breach. To hold otherwise, explained the Court, would give Ambac the equivalent of rescissory damages, which it was unable to seek on its unconditional, irrevocable policies.

In holding that loss causation remained a required element of a fraudulent inducement claim, the Court specifically distinguished between the damages recoverable for fraud and breach of contract:

The Appellate Division correctly determined that justifiable reliance and loss causation are required elements of a fraudulent inducement claim; that Ambac may only recover damages on its fraudulent inducement claim that flow from nonconforming loans; that the remedy for Ambac’s contract claims is limited to the repurchase protocol provided for in the contract’s sole remedy provision, and that Ambac is not entitled to attorneys’ fees.

Id. at 584-585.

Thus, the Court expressly differentiated the remedies available for the two claims, referring to its fraud ruling as “the method of damages calculation for any claims not subject to the repurchase protocol.” Id. at 581.

Following, inter alia, expert proceedings, Defendants moved for, among other things, summary judgment dismissing Plaintiff’s fraudulent inducement claim as being duplicative of the contract claim due to an overlap in the measure of damages for the contract and fraud claims. The motion court denied the motion, recognizing that Ambac sought fraud damages distinct from those arising out of the contract claims. (Here.) As the motion court observed: “When appearing before the Court of Appeals, Countrywide decided to distinguish Ambac’s fraudulent inducement cause of action from its contract cause of action. Countrywide’s goal was to have the Court of Appeals declare that Ambac can only use the repurchase protocol to measure the damages in the contract cases. Countrywide prevailed.”

On appeal, the First Department affirmed.

The First Department’s Decision

The Court held that the Countrywide defendants did not establish, as a matter of law, “that the damages sought in connection with the fraud claim are the same as those sought in connection with the contract claims.” Slip Op. at **1-2. The Court noted that Ambac had “submitted an affidavit from its expert,” explaining that “the damages for the fraud and contract claims [were] ‘qualitatively and quantitatively distinct.’” Id. at *2.

The expert explains that whereas the contract damages are calculated based on the terms of the contractual repurchase protocol, the fraud damages are determined based on the portion of Ambac’s claims payments that flow from nonconforming loans. Thus, according to the expert, the calculation of the fraud damages does not rely in any way on the contractual repurchase price that governs the contract damages calculation.


The Court further noted that, according to the expert, “the fraud damages differ[ed] from the contract damages because they include[d] additional expenses incurred by Ambac that are not recoverable in contract.” Id. Notably, Ambac’s expert report went “unchallenged by the Countrywide defendants.” Id.

Finally, the Court noted that Ambac’s expert intended to submit a supplemental report in which he would include revised damages calculations. Ambac filed a motion to permit such a report, which the Court presumed would contain “a more detailed explanation of the differences between the contract and fraud damages.” Id. In light of that motion, and the “expert affidavit already submitted,” the Court held that “it [was] premature to dismiss the fraud claim as duplicative.” Id. “Thus,” concluded the Court, “denial of the motion to dismiss the fraud claim, without prejudice to renewal after the conclusion of the proceedings below related to the expert affidavit is appropriate.” Id.

The Court rejected Defendants’ contention that MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108 (1st Dept. 2018) and Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital I Inc., 164 A.D.3d 1126 (1st Dept. 2018), commanded a different result: “[N]either MBIA nor Financial Guar. stands for the sweeping proposition that, in all residential mortgage-backed security cases, a fraudulent inducement claim brought by a monoline insurer is, as a matter of law, duplicative of contract claims based on the same nonconforming loans.” Slip Op. at *2.

MBIA Ins. Corp. v Credit Suisse Sec. [USA] LLC (165 AD3d 108 [1st Dept 2018]) and Financial Guar. Ins. Co. v Morgan Stanley ABS Capital I Inc. (164 AD3d 1126 [1st Dept 2018]) do not require a different result. In MBIA, the court concluded that fraud damages in the form of all claims payments made were not recoverable, and that “repurchase damages” were duplicative of contract damages (165 AD3d at 113-114). Here, Ambac does not seek to recover all claims payments made, nor does it seek repurchase damages under its fraud claim. Instead, it only seeks fraud damages based on claims payments flowing from nonconforming loans, the precise measure sanctioned by the Court of Appeals (see Ambac, 31 NY3d at 581 [Ambac’s fraud damages should be measured by reference to claims payments based on nonconforming loans]). In Financial Guar., the court merely found, on the specific facts alleged, that the fraud damages duplicated the contract damages (164 AD3d 1126). There was no indication that the plaintiff in that case submitted an expert affidavit explaining any differences between the measures of damages sought by the fraud and contract claims.



As readers of this Blog know, most of the cases we discuss involving the duplication of claims doctrine occur at the motion to dismiss stage of the proceeding. Ambac goes beyond that stage into summary judgment proceedings. In that stage of the proceedings, the issue of damages often comes into sharper focus. This is especially so, as in Ambac, with expert disclosure and reports.

Perhaps, then, a lesson to be gleaned from Ambac is the desirability of retaining a damages consultant at the pleading stage of the action. This can be important since plaintiffs often have a difficult time articulating the difference between contract damages and fraud damages. Of course, not every case warrants such a retention. But, where appropriate, a damages consultant can help a plaintiff withstand a challenge to a fraud claim on the grounds that the alleged fraud damages are not separate and distinct from the alleged contract damages.

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