Ambac Assur. Corp. v. Countrywide Home Loans, Inc., Index No 653979/14, 12/19/2016 (Friedman, J.)

Fraud; Fraud Inducement; Justifiable Reliance; Damages

By: Taylor E. Anderson | Staff Writer

Plaintiff insured eight residential mortgage-backed securities (“RMBS”) transactions (“the Transactions”). Defendant and its subsidiaries supplied all or most of the loans for the transactions and was the underwriter for one of the transactions. Plaintiff alleged that Defendant fraudulently induced Plaintiff to issue the policies by misrepresenting Defendant’s mortgage origination and quality control practices, its compliance with underwriting guidelines, and the quality and characteristics of the loans backing the Transactions. Additionally, Plaintiff alleged Defendant participated in risky behavior that maximized loan approval rates but did not consider homeowner ability to repay the loans and that the various misrepresentations caused Plaintiff to suffer in the wake of the market downturn in 2008. Defendant moved to dismiss the complaint on the ground that Plaintiff failed to plead the required element of justifiable reliance.

Defendant argued that (1) Plaintiff’s failure to do its due diligence barred its claim, and (2) alternatively, Defendant moved to dismiss Plaintiff’s claim of damages because they were equivalent to rescissory damages, which are unavailable to Plaintiff under First Department precedent. In  opposition, Plaintiff argued (1) New York Insurance Law § 3105 does not require proof of justifiable reliance, and (2) Plaintiff sufficiently plead justifiable reliance based on elaborate due diligence.

The Court found (1) that the issue under New York Insurance Law §3105 did not need to be decided because loss causation was adequately plead and not contested in this matter, and (2) the due diligence conducted by Plaintiff met both the higher standard applied to sophisticated parties and the ordinary standard required to plead justifiable reliance, without expressly stating which standard applied in the action. The Court focused their analysis on the due diligence claim, finding that Plaintiff sought information it was entitled to and analyzed the data extensively using their own and third party systems. However, in order to conduct this analysis Plaintiff relied on the information provided by Defendant in various documents and face-to-face meetings. The question of what constitutes reasonable reliance is generally not a question to be resolved as a matter of law and this case was not an exception. The Court found that it was for the trier of fact to determine if the Plaintiff availed itself to the means available to it given its size and sophistication through a complex analysis of several factors.

The Court therefore denied Defendant’s motion to dismiss on a finding that Plaintiff sufficiently plead justifiable reliance in order to sustain a fraud action. The Court determined that Plaintiff had a maintainable claim at the pleading stage but denied their ability to request damages of all past and future payments on the policies.

Ambac Assur. Corp. v. Countrywide Home Loans, Inc., Index No 653979/14, 12/19/2016 (Friedman, J.)

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