First Department Holds that Jury Waiver Provision in Contract Does Not Bar Jury Trial Demand When Agreement Alleged to Be Procured Through Fraud

• Posted on: Jan 16 2020

On January 16, 2020, the Appellate Division, First Department recalled and vacated its September 17, 2019 decision in Ambac Assur. Corp. v Countrywide Home Loans Inc., 175 A.D.3d 1156 (1st Dept. 2019), for the primary purpose of deciding whether the motion court properly denied Countrywide’s motion to strike Ambac’s jury demand on its fraudulent inducement cause of action. In its decision replacing the recalled and vacated decision (2020 N.Y. Slip Op. 00367 (here)), the First Department affirmed the denial.

In doing so, the Court left intact (with some minor edits) the ruling with regard to Ambac’s fraudulent inducement claim and whether it was duplicative of its contract claim. This Blog examined the Court’s September 2019 decision in the article, titled “First Department Declines to Dismiss Fraudulent Inducement Claim as Duplicative of Contract Claim Based On Expert Analysis.”

The Court’s revised decision was issued in response to Defendants’ motion to reargue and, in the alternative, leave to appeal to the Court of Appeals the issue whether, among others, “the Court should clarify that it did not decide whether Countrywide’s motion to strike Ambac’s jury demand should be granted, where that issue was not addressed in the Court’s opinion ….” In the September 17, 2019 Decision and Order, the Court affirmed, without discussion, the motion court’s order denying Countrywide’s motion to strike Ambac’s jury demand on the fraudulent inducement claim.

[Ed. Note: On the issue this Blog examined – whether the damages sought by the fraudulent inducement claim were duplicative of the contract claim, thereby necessitating dismissal of the fraudulent inducement claim – the Court held that the motion court “correctly denied the Countrywide defendants’ motion” to dismiss the claim. This Court reasoned that “the Countrywide defendants [did] not establish[ ], as a matter of law, that the damages sought in connection with the fraud claim [were] the same as those sought in connection with the contract claims.” The Court noted that “at oral argument before the Court of Appeals,” Countrywide’s attorney recognized that “there was a different measure of damages for the fraud and contract claims” and that the “Court of Appeals itself” recognized that the measures of damages for the fraudulent inducement claim and the contract claims were separate and distinct. The Court further noted that Ambac’s damages expert, who was not challenged by the Countrywide defendants, “explain[ed] that the damages for the fraud and contract claims [were] ‘qualitatively and quantitatively distinct.’” In this regard, the expert explained 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, in light of the “expert affidavit already submitted,” and the motion to supplement that affidavit filed by Ambac, the Court held that “it [was] premature to dismiss the fraud claim as duplicative.”]

Since this Blog did not address the jury waiver issue in our examination of the case (here), a little context is provided below.

Before the motion court, Countrywide contended that the agreements at issue each contained a jury waiver provision and, therefore, Ambac’s jury demand for its fraudulent inducement claim should be stricken.

Countrywide argued that under established law contractual jury waivers are broad enough to cover fraud claims, including claims for fraudulent inducement, associated with the contract that contains the jury waiver. As noted by the motion court, this argument was rejected by the First Department in Ambac Assur. Corp. v. DLJ Mtge. Capital, Inc., 102 A.D.3d 487 (1 st Dept 2013), which it noted was “strikingly similar to the instant action.” In DLJ Mtge., the First Department held that the jury waiver provision in a contract Ambac entered into in connection with its insurance of an RMBS transaction did not deprive Ambac of its right to a jury trial on its fraudulent inducement claim related to the same RMBS transaction. The motion court observed that Ambac brought virtually identical claims against DLJ as it did against Countrywide and that the same arguments in support of the motion to strike Ambac’s jury demand were made in both cases.

In DLJ, Ambac alleged that it was fraudulently induced by defendants to enter into an insurance agreement and provide financial guaranty insurance on certain RMBS transactions, and, in the alternative, that the defendants had breached representations and warranties in the parties’ insurance agreement. Ambac requested a jury trial on its fraudulent inducement claim, but not on its breach of contract claims. The defendants moved to strike Ambac’s jury demand, and the trial court granted that motion. Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc., 33 Misc. 3d 1208(A) *14-15 (Sup. Ct., N.Y. County 2011). On appeal, the First Department reversed, holding that “the complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim. Thus, the provision of the agreement that waives the right to trial by jury does not apply.” Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc., 102 A.D.3d at 487-88.

Under New York law, a jury waiver clause does not apply where the party alleging fraudulent inducement challenges the validity of the contract. See, e.g., Zahar CDO 2003-1 Ltd v. Xinhua Sports & Entertainment Ltd., 158 A.D.3d 594, 594 (1st Dept 2018) (“a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission, may, under certain circumstances, still challenge the validity of the underlying agreement in a way that renders the contractual jury waiver provision in that agreement inapplicable to the fraudulent inducement cause of action”); China Dev. Indus. Bank v. Morgan Stanley & Co. Inc., 86 A.D.3d 435, 436-43 7 (1st Dept. 2011) (holding that a challenge to the validity of the contract as a whole also invalidates the jury waiver clause in the contract). The motion court found that “as in DLJ, Ambac’s claim for fraudulent inducement challenges the validity of the parties’ I&I Agreements.” Therefore, the motion court concluded, “Ambac is entitled to a jury trial on its fraudulent inducement claim because that claim challenges the validity of the I&I Agreements that contain the jury waiver provision that Countrywide invokes.”

In its revised decision and order, the First Department affirmed. Like the motion court, the First Department found that Ambac “repeatedly allege[d] that the insurance agreements [it entered] were obtained through various types of fraudulent conduct.” Slip Op. at *2. Thus, explained the Court, “because it is clear that Ambac’s primary claim is fraudulent inducement, the agreements’ provisions waiving the right to a jury trial do not apply.” Id. (citing MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC, 102 A.D.3d 488, 488 (1st Dept. 2013); and Ambac Assur. Corp. v DLJ Mtge. Capital, 102 A.D.3d at 487-488).

Takeaway Under New York law, where a plaintiff challenges the validity of an agreement because of fraud, a provision waiving the right to a jury trial arising out of that agreement does not apply. See, e.g., China Dev. Indus. Bank v. Morgan Stanley & Co. Inc., 86 A.D.3d 435, 436-437 (1st Dept. 2011); Wells Fargo Bank, N.A. v. Stargate Films, Inc., 18 A.D.3d 264 (1st Dept. 2005). Where fraudulent inducement is the plaintiff’s primary claim, “[i]t is of no consequence that the complaint does not contain the word ‘rescission’ or expressly state that it challenges the validity of the … agreement.” Ambac Assur. Corp. v. DLJ Mtge. Capital, 102 A.D.3d at 488). Since Ambac’s primary claim was fraudulent inducement, the Ambac Court found that the jury waiver clause was no bar to a jury trial.