New York Court of Appeals Requires Ambac to Follow Repurchase Protocol and Prove Elements of Fraud Claim


On June 27, 2018, the New York Court of Appeals ruled that Ambac Assurance Corporation (“Ambac“) could not recover the full $2.2 billion in damages it sought in the form of claim payouts on $25 billion worth of securitized mortgages from Countrywide Home Loans, Inc. (“Countrywide“). Ambac, a monoline financial guaranty insurer, had agreed to insure payments of principal and interest owed to holders of 17 RMBS securitizations that had been sponsored by Countrywide. Ambac sued Countrywide, alleging claims for fraudulent inducement and breach of contractual representations and warranties. At summary judgment, Ambac contended that it was not required to prove justifiable reliance or loss causation for the fraudulent inducement claim, and that the contract’s repurchase protocol—specified to be the sole remedy for breaches of representations and warranties—did not govern its contractual claims.

The First Department rejected each of Ambac’s arguments and the Court of Appeals affirmed. As to the elements of the fraudulent inducement claim, the Court reaffirmed the long standing rule that a fraud plaintiff must prove justifiable reliance and causation. It rejected Ambac’s argument that New York Insurance Law § 3105 eliminated those elements for insurers because that section does not provide a cause of action for damages, does not “inform” common law elements of fraudulent inducement, and applies only to claims for policy rescission, which Ambac contracted away.

As to Ambac’s remedies, the Court held that Ambac could not avoid the sole remedy provision because the “factual allegations underpinning Ambac’s transaction-level breaches are the same as those for the loan-level breaches.” “Ambac’s complaint fails to include breach of contract allegations beyond those that fall under the sole remedy provision of Section 2.01(l), and accordingly Ambac is limited to the repurchase protocol as the potential remedy for those claims.” The Court also held that Ambac could not recover damages in the amount of all claims paid under the policies, regardless of the number of loan-level breaches, because that would impermissibly allow Ambac to recover rescissory damages, which are not available under monoline insurance policies.

Finally, the Court held that Ambac could not recover attorneys’ fees because the parties’ agreement did not show an “unmistakably clear” intent to shift fees in litigation between the parties.

As it did before the First Department, Orrick, Herrington & Sutcliffe filed an amicus brief on behalf of the Securities Industry and Financial Markets Association (“SIFMA“) before the Court of Appeals, advocating for several legal propositions that the Court of Appeals adopted in its decision. Opinion.