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

Brief

N.Y.June 6, 2018

To be Argued by: PHILIPPE Z. SELENDY (Time Requested: 30 Minutes) APL-2017-00156 New York County Clerk’s Index No. 651612/10 Court of Appeals of the State of New York AMBAC ASSURANCE CORPORATION and THE SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION, Plaintiffs-Appellants, – against – COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP. and COUNTRYWIDE FINANCIAL CORP., Defendants-Respondents, – and – BANK OF AMERICA CORP., Defendant. BRIEF FOR PLAINTIFFS-APPELLANTS PHILIPPE Z. SELENDY WILLIAM B. ADAMS QUINN EMANUEL URQUHART & SULLIVAN, LLP Attorneys for Plaintiff-Appellant Ambac Assurance Corporation 51 Madison Avenue, 22nd Floor New York,New York 10010 Tel.: (212) 849-7000 Fax: (212) 849-7100 ROBERT P. LOBUE HARRY SANDICK PETER W. TOMLINSON PATTERSON BELKNAP WEBB & TYLER LLP Attorneys for Plaintiffs-Appellants 1133 Avenue of the Americas New York, New York 10036 Tel.: (212) 336-2000 Fax: (212) 336-2222 Dated: September 25, 2017 PRINTED ON RECYCLED PAPER i RULE 500.1(f) DISCLOSURE STATEMENT Plaintiffs-Appellants Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation, through their attorneys, state that the Segregated Account of Ambac Assurance Corporation is a Wisconsin-domiciled insurer and a segregated account of Ambac Assurance Corporation, which is wholly owned by Ambac Financial Group, Inc., a public corporation whose stock trades on the NASDAQ. Plaintiffs-Appellants are aware of no corporation or person owning 10% or more of the stock of Ambac Financial Group, Inc. ii TABLE OF CONTENTS Page RULE 500.1(f) DISCLOSURE STATEMENT.......................................................... i TABLE OF AUTHORITIES ..................................................................................... v PRELIMINARY STATEMENT ............................................................................... 1 QUESTIONS PRESENTED ...................................................................................... 5 JURISDICTIONAL STATEMENT .......................................................................... 5 STATEMENT OF THE CASE .................................................................................. 6 A. Residential Mortgage-Backed Securities .............................................. 6 B. Ambac’s Provision Of Bond Insurance Based On Countrywide’s Representation And Warranties ............................................................ 7 1. Ambac’s Insurance Policies For The Benefit Of Bondholders ................................................................................ 7 2. Countrywide’s Pre-Contractual Representations ........................ 8 3. The Insurance And Indemnity Agreements Between Ambac And Countrywide ........................................................... 9 C. The Material Falsity Of Countrywide’s Representations And Warranties ........................................................................................... 13 D. The Prior Proceedings ......................................................................... 16 1. The Complaint ........................................................................... 16 2. The Motion Court’s Decision ................................................... 17 3. The First Department’s Decision .............................................. 18 ARGUMENT ........................................................................................................... 20 I. AN INSURER MAY RECOVER ALL CLAIMS PAYMENTS MADE ON A FRAUDULENTLY-INDUCED INSURANCE POLICY WITHOUT PROOF THAT IT “JUSTIFIABLY” RELIED ON AN APPLICANT’S REPRESENTATIONS OR PROOF OF LOSS CAUSATION ................................................................................................ 20 A. A Common Law Cause Of Action For Fraudulent Inducement Of An Insurance Policy Does Not Require Proof Of Justifiable Reliance Or Loss Causation ................................................................ 20 iii 1. An Insurer Is Entitled To Rely—Without Investigation— On An Applicant’s Representations And Warranties Relating To The Insured Risks ................................................. 22 2. An Insurer Need Not Prove That Misrepresentations Or Omissions Actually Caused Covered Losses ............................ 27 3. Insurance Law §§ 3105 And 3106 Do Not Require Justifiable Reliance Or Loss Causation For An Insurer’s Inducement Claim ..................................................................... 32 B. The Remedies For Fraudulent Inducement Of An Insurance Policy Include Recovery Of All Claims Payments From An Applicant ............................................................................................. 35 1. The Insurance Law Preserves An Insurer’s Ability To Recover Damages On Its Inducement Claim ............................ 35 2. An Insurer’s Right To Recover All Claims Payments Is Especially Clear Where It Has Issued An Irrevocable Policy For The Benefit Of Third Parties ................................... 37 C. The First Department’s Limitation Of An Insurer’s Fraudulent Inducement Claim Upsets Settled Expectations In This Important Area Of New York Law ...................................................................... 40 II. THE PROVISO OF SECTION 2.01(l) OF THE I&I AGREEMENTS DOES NOT LIMIT AMBAC’S REMEDIES FOR COUNTRYWIDE’S BREACHES OF OTHER SECTIONS OF THOSE AGREEMENTS .............................................................................. 43 A. The Section 2.01(l) Proviso Refers Only To The Representations And Warranties Imported Into Section 2.01(l) ................................... 44 B. The First Department’s Construction Deprives Ambac Of A Crucial Benefit Of Its Bargain ............................................................ 48 C. The Section 2.01(l) Proviso Is Narrower Than The Limitation On Remedies In Nomura ........................................................................... 49 III. AMBAC IS ENTITLED TO REIMBURSEMENT OF ITS ATTORNEYS’ FEES AND EXPENSES INCURRED IN THIS ACTION ........................................................................................................ 50 A. The Plain Language Of Section 3.03(c) Of The I&I Agreements Shows Ambac’s Entitlement To Reimbursement In Litigation Against Countrywide ........................................................................... 51 iv B. The “Indemnification” Provisions In Section 3.04 Of The I&I Agreements Confirm That Section 3.03(c) Applies To This First- Party Action ......................................................................................... 54 C. The Contrast Between The “Notice” Provisions In Sections 3.03(c) And 3.04 Further Confirms That Section 3.03(c) Applies To This First-Party Action .................................................................. 56 CONCLUSION ........................................................................................................ 58 PRINTING SPECIFICATIONS STATEMENT ..................................................... 59 v TABLE OF AUTHORITIES Page(s) Cases Abbott v. United States, 562 U.S. 8 (2010) ......................................................................................... 45, 46 ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (2015) ................................................................................. 26, 27 Admiral Ins. Co. v. Joy Contractors, Inc., 19 N.Y.3d 448 (2012) .......................................................................................... 20 Am. Surety Co. of New York v. Patriotic Assurance Co., 242 N.Y. 54 (1926) .............................................................................................. 23 Assured Guar. Mun. Corp., Flagstar Bank, FSB, 2012 WL 4373327 (S.D.N.Y. Sept. 25, 2012) ..................................................... 30 Cherkes v. Postal Life Ins. Co., 285 A.D. 514 (1st Dep’t 1955) ............................................................................ 24 Colin v. Hamilton Fire Ins. Co. of City of New York, 251 N.Y. 312 (1929) ............................................................................................ 23 Curanovic v. New York Cent. Mut. Fire Ins. Co., 307 A.D.2d 435 (3d Dep’t 2003) ......................................................................... 20 DDJ Mgmt., LLC v. Rhone Grp. L.L.C., 15 N.Y.3d 147 (2010) .......................................................................................... 27 E. Dist. Piece Dye Works v. Travelers’ Ins. Co., 234 N.Y. 441 (1923) ............................................................................................ 33 Ginsburg v. Pacific Mutual Life Insurance Co., 89 F.2d 158 (2d Cir. 1937) ..................................................................... 29, 31, 42 Glickman v. N.Y. Life Insurance Co., 291 N.Y. 45 (1943) ..................................................................... 28, 29, 31, 33, 42 Gottlieb v. Kenneth D. Laub & Co., 82 N.Y.2d 457 (1993) .......................................................................................... 40 Gould v. Cayuga Cnty. Nat’l Bank, 99 N.Y. 333 (1885) .............................................................................................. 35 vi Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169 (1973) .......................................................................................... 48 Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487 (1989) ............................................... 19, 51, 53, 54, 55, 56, 57, 58 Hosp. Ass’n of N.Y. State v. Axelrod, 165 A.D.2d 152 (3d Dep’t 1991) ......................................................................... 45 Ins. Co. of N. Am. v. Kaplun, 274 A.D.2d 293 (2d Dep’t 2000) ......................................................................... 38 Jenkins v. John Hancock Mut. Life Ins. Co., 257 N.Y. 289 (1931) ............................................................................................ 29 Kantor v. Nationwide Life Ins. Co., 16 A.D.2d 701 (2d Dep’t 1962) ........................................................................... 24 Kimmel v. State of New York, 29 N.Y.3d 386 (2017) ................................................................................... 46, 47 Kiss Constr. N.Y., Inc. v. Rutgers Cas. Ins. Co., 61 A.D.3d 412 (1st Dep’t 2009) .......................................................................... 36 Kroski v. Long Island Sav. Bank FSB, 261 A.D.2d 136 (1st Dep’t 1999) ........................................................................ 24 Levine v. Aetna Ins. Co., 139 F.2d 217 (2d Cir. 1943) ................................................................................ 30 Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (2d Cir. 2015) ................................................................................ 29 MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513 (Sup. Ct. N.Y. Cnty. 2012) .................................................... 31 MBIA Insurance Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep’t 2013) ........................................... 3, 17, 22, 31, 35, 36 MBIA Insurance Corp. v. Countrywide, 2013 WL 1845588 (Sup. Ct. N.Y. Cnty. Apr. 29, 2013) .............................. 46, 47 MBIA Ins. Corp. v. J.P. Morgan Sec., LLC, 144 A.D.3d 635 (2d Dep’t 2016) ......................................................................... 27 Mercantile & Gen. Reins. Co., plc v. Colonial Assur. Co., 82 N.Y.2d 248 (1993) .................................................................................... 21, 36 Met. Life Ins. Co. v. Conway, 252 N.Y. 449 (1930) ..................................................................................... 29, 42 vii Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144 (3d Dep’t 1991) ......................................................................... 39 Mut. Benefit Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30 (2d Cir. 1988) .................................................................................. 34 Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015) ............................................................. 19, 49, 50 Quadrant Structured Prods. Co. v. Vertin, 23 N.Y.3d 549 (2014) .......................................................................................... 46 Ralco, Inc. v. Citibank, N.A., 32 A.D.3d 301 (1st Dep’t 2006) .......................................................................... 53 Ralco, Inc. v. Citibank, N.A., No. 604395/2002, 2005 NY Slip Op 30386(U), (Sup. Ct. N.Y. Cnty. June 22, 2005) ................................................... 46 Reliance Ins. Companies v. Daly, 38 A.D.2d 715 (2d Dep’t 1972) ........................................................................... 39 Royal Indem. Co. v. Patel, 2005 WL 2573514 (N.D.N.Y. Oct. 13, 2005) ..................................................... 30 Sager v. Friedman, 270 N.Y. 472 (1936) ............................................................................................ 35 Satz v. Mass. Bonding & Ins. Co., 243 N.Y. 385 (1926) ..................................................................................... 23, 26 Sebring v. Fid.-Phoenix Fire Ins. Co. of New York, 255 N.Y. 382 (1931) ............................................................................................ 25 Sommer v. Guardian Life Ins. Co., 281 N.Y. 508 (1939) ............................................................................................ 36 Syncora Guar. Inc. v. EMC Mortg. Corp., 874 F. Supp. 2d 328 (S.D.N.Y. June 19, 2012) ................................................... 30 Syncora Guarantee, Inc. v. EMC Mortg. Corp., 2011 WL 1135007 (S.D.N.Y. Mar. 25, 2011)..................................................... 49 TAG 380, LLC v. ComMet 380, Inc., 10 N.Y.3d 507 (2008) ................................................................................... 51, 52 U.S. Bank, N.A. v. DLJ Mortg. Capital, Inc., 140 A.D.3d 518 (1st Dep’t 2016) ................................................................. 52, 53 UBS Secs. LLC v. RAE Sys. Inc., 101 A.D.3d 510 (1st Dep’t 2012) ........................................................................ 53 viii UBS Secs. LLC v. RAE Sys. Inc., No. 652606/2011, Dkt. No. 25 (Sup. Ct. N.Y. Cnty. Feb. 28, 2012) ..................................................................... 53 United States v. Morrow, 266 U.S. 531 (1925) ............................................................................................ 45 Vail v. Reynolds, 118 N.Y. 297 (1890) ............................................................................................ 35 Vander Veer v. Cont’l Cas. Co., 34 N.Y.2d 50 (1974) ................................................................... 21, 25, 28, 32, 42 Wilmington Trust Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 152 A.D.3d 421 (1st Dep’t 2017) ........................................................................ 52 Statutory Authorities 15 U.S.C. § 77l ........................................................................................................... 7 N.Y. Civ. Prac. L. & R. 5601(c) ................................................................................ 6 N.Y. Civ. Prac. L. & R. 5602(a)(2) ........................................................................... 6 N.Y. Civ. Prac. L. & R. 5602(b)(1) ........................................................................... 5 N.Y. Civ. Prac. L. & R. 5602(b)(2)(iii) ..................................................................... 6 N.Y. Civ. Prac. L. & R. 5713 ................................................................................... 19 N.Y. Ins. Law § 149 (McKinney 1939) ................................................................... 33 N.Y. Ins. Law § 150 (McKinney 1939) ................................................................... 33 N.Y. Ins. Law § 3105 ........................................ 17, 18, 26, 31, 32, 33, 34, 35, 37, 40 N.Y. Ins. Law § 3106 ...................................................................... 18, 31, 32, 33, 40 McKinney’s Cons. Laws of N.Y., Book 1, Statutes § 301(b) ................................. 40 Additional Authorities 6 COUCH ON INSURANCE § 82:20 (June 2017 update) ............................................. 28 45 C.J.S. Insurance § 859 (2016) ............................................................................. 24 Abraham Kaplan & George I. Gross, Commentaries on the Revised Insurance Law of New York (1940) ...................................................................... 32 Amasa J. Parker, Jr., INSURANCE LAW OF NEW YORK, N.Y. Ins. L. § 58 (Banks Law Publishing 1914) .............................................................................. 33 Andrew Amer & Linda H. Martin, The Standard of Materiality for Misrepresentations Under New York Insurance Law, 17 Conn. Ins. L.J. 415 (2011) ............................................................................................................. 33 ix Black’s Law Dictionary (10th ed. 2014) .................................................................. 35 Edwin W. Patterson, Misrepresentations by Insured under the New York Insurance Law, 44 Colum. L. Rev. 241 (1944) .................................................... 34 Edwin W. Patterson, ESSENTIALS ON INSURANCE LAW (1957) ............................... 37 Frederick Pollock, PRINCIPLES OF CONTRACT AT LAW & IN EQUITY (2d ed. 1878) .................................................................................................. 24, 41 John D. Ingram, Misrepresentations In Applications Of Insurance, 14 U. Miami Bus. L. Rev. 103 (2005) .................................................................. 29 L. 1939, Report of the Joint Legislative Committee on Revision of Insurance Laws, No. 101 at 14 (May 7, 1939) ..................................................... 33 N.Y. Pattern Jury Instr.—Civil (Dec. 2016) ............................................................ 21 William Bishop, The Contract-Tort Boundary and the Economics of Insurance, 12 J. Leg. Studies 245 (Jun. ed. 1983) ............................................... 42 1 PRELIMINARY STATEMENT This appeal by permission of the Appellate Division, First Department, follows a decision and order of that court materially limiting causes of action that Plaintiffs-Appellants Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation (collectively, “Ambac”) brought against Defendants- Respondents Countrywide Home Loans, Inc., Countrywide Securities Corporation, and Countrywide Financial Corporation (collectively “Countrywide”) for a massive fraud and breaches of contract perpetrated in connection with seventeen securitization transactions backed by more than 375,000 residential mortgage loans with a face value of more than $25 billion. To maximize the securitizations’ marketability, Countrywide obtained financial guaranty insurance policies from Ambac for the most senior classes of bonds in those deals. Consistent with the strict requirements of the capital markets for financial guaranties of structured and municipal bonds, Ambac agreed to irrevocably insure these bonds for the benefit of the investors who purchased them. Ambac’s decision was based on Countrywide’s extensive pre-contractual representations and contractual representations and warranties (“R&Ws”) concerning its business practices and the individual loans to be included in these securitizations. 2 Countrywide, however, misrepresented its business practices on an immense scale. Countrywide portrayed its practices and standards to Ambac as among the best in the business, when in fact Countrywide’s overarching corporate goal was to make any loan it could quickly offload to third-party purchasers, investors, and insurers without regard to credit quality. For example, contrary to its R&Ws, Countrywide abandoned its own policies and procedures relating to loan underwriting, exceptions practices, and quality control designed to promote strong and consistent credit quality in the millions of loans it originated annually. Countrywide also misrepresented to Ambac that its financial statements were complete and correct in all material respects. Ambac never would have issued its insurance policies had it known the truth. Ambac expects to make more than $2 billion in claims payments to innocent bondholders pursuant to the policies it issued based on Countrywide’s misrepresentations and omissions. By this action, Ambac seeks to recover those payments from Countrywide as compensatory damages for Countrywide’s fraudulent inducement and breaches of contract. The motion court largely sustained Ambac’s claims on summary judgment, but the First Department narrowed them on appeal. In limiting Ambac’s causes of action against Countrywide, the First Department made several fundamental errors of New York law that call out for 3 reversal on de novo review. First, the First Department wrongly held Ambac must establish justifiable reliance and loss causation to prevail on its cause of action for inducement of an insurance contract by misrepresentation or omission. New York common law has long provided otherwise, permitting an insurer to rely on an applicant’s representations in deciding whether to insure a risk, with no additional requirement of justifiable reliance or loss causation. The First Department previously recognized that insurance-specific common-law rule, including in MBIA Insurance Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep’t 2013), which is materially identical to this case and even involved the same defendant, but which the First Department wrongly declined to follow here. And contrary to decades of established law, the decision below also provides that even if an insurer is able to prove it was induced by misrepresentation to issue the policy, the insurer cannot recover claims payments on that policy unless it connects those payments to the subject of the misrepresentation. Second, the First Department wrongly held a contractual “repurchase protocol” is Ambac’s “sole remedy” for Countrywide’s breaches of R&Ws—even those concerning Countrywide’s operations and financial condition that cannot be addressed through the repurchase of individual loans. This holding deviates from established principles of contract construction by supplanting the parties’ bargained- 4 for remedies with the repurchase protocol that appears in a separate contract and by rendering entire paragraphs of the parties’ contracts meaningless. Third, the First Department wrongly affirmed dismissal of Ambac’s cause of action for reimbursement of attorneys’ fees and expenses without discussing the relevant contractual provisions. The decision below creates confusion as to the standard for reimbursement, as it conflicts with this Court’s precedent and with several First Department decisions interpreting materially identical provisions to require reimbursement in similar situations. These errors are of tremendous importance to the insurance industry generally, as they replace insurance applicants’ burden of truthfulness with a burden on insurers to uncover deceit, incentivizing applicants to lie in order to procure insurance and potentially leaving insurers without sufficient remedies for those lies. This shift would hamper insurers’ ability to assess risk and create market inefficiencies, and may lead insurers either to decline to issue insurance or decline to issue insurance under the same terms they do now, with negative and unpredictable consequences for policyholders, investors, and insurers. For these reasons, the First Department’s decision and order should be reversed and the case remanded for trial. 5 QUESTIONS PRESENTED 1. Whether a plaintiff-insurer establishes a cause of action for fraudulent inducement of an insurance policy based on misrepresentations and omissions, and is entitled to recover all claims payments thereunder, by demonstrating the insurer relied on the applicant’s misrepresentations in issuing a policy it would not have issued on the same terms (if at all), without a separate showing of loss causation or that the insurer’s reliance on the representations was “justifiable.” 2. Whether a plaintiff-insurer may pursue all remedies available at law or in equity for breaches of contractual representations and warranties where the applicable insurance agreement states the insurer may do so unless the agreement expressly provides otherwise, and the only limitation on remedies in the agreement is imported from other documents and expressly restricts only the remedies for breach of those other documents. 3. Whether a plaintiff may seek reimbursement of attorneys’ fees and costs incurred in litigation against the plaintiff’s counterparty, where the agreement between the parties provides the plaintiff is entitled to fees and costs incurred in connection with the enforcement of its rights under the agreement. JURISDICTIONAL STATEMENT This Court has jurisdiction over this appeal pursuant to CPLR 5602(b)(1) because the underlying action originated in the Supreme Court, New York County 6 (A62); the decision below is an order of the Appellate Division, First Department, entered on May 16, 2017, that did not finally determine the action and is not an order described in CPLR 5602(a)(2), CPLR 5602(b)(2)(iii), or CPLR 5601(c) (8.A-18.A); and the First Department granted leave to appeal on July 25, 2017 (19.A-20.A). STATEMENT OF THE CASE A. Residential Mortgage-Backed Securities This case concerns seventeen residential mortgage-backed securities (“RMBS”) transactions initiated by Countrywide between 2004 and 2006 (the “Transactions” or “Securitizations”). A4508. Countrywide was then one of the largest mortgage lenders in the United States, and it frequently offloaded mortgages it had originated or purchased through RMBS securitizations. A4708. An RMBS securitization is a trust. A269. To create an RMBS securitization trust, Countrywide typically (including for the Securitizations here): (i) caused a “sponsor” entity to aggregate hundreds or thousands of residential mortgage loans, either by originating them or purchasing them; (ii) caused the sponsor to transfer the loans to a “depositor,” a special-purpose, limited-liability entity; and then (iii) caused the depositor to transfer the loans into a newly-created securitization trust. Id. Countrywide created securitization trusts in order to issue RMBS. An RMBS is a bond that entitles its holder to a monthly distribution of principal and interest 7 payments, derived from and secured by the monthly payment obligations of borrowers on pools of residential mortgage loans held by the issuing trust. A4513. RMBS are subject to the disclosure requirements of the federal securities laws, and were marketed and sold to the investing public by a securities underwriter or underwriting syndicate. A263; 15 U.S.C. § 77l. B. Ambac’s Provision Of Bond Insurance Based On Countrywide’s Representation And Warranties 1. Ambac’s Insurance Policies For The Benefit Of Bondholders To increase the attractiveness of RMBS investments to potential purchasers with varying risk preferences, RMBS securitizations had various credit enhancements. A407. One type of credit enhancement was financial guaranty insurance, under which an insurer promises that, if there is a distribution shortfall for a specified class of bonds, the insurer will make up the difference, thereby guaranteeing insured bondholders’ investments. A4811-12. Here, Countrywide solicited Ambac to provide financial guaranty insurance (the “Policies”) for senior classes of the seventeen Securitizations. A4809. The Policies’ terms are materially identical: Each Policy is made to the trustee of the respective Securitization trust for the benefit of bondholders, contains Ambac’s “unconditional[ ] and irrevocabl[e]” agreement to “pay to the Trustee for the benefit of the Holders” any portion of a missed payment on a covered class of bond, and is “noncancelable for any reason.” A2966. 8 Irrevocable policies are the cornerstone of the guaranteed-securities market. Unless policies are irrevocable, ratings agencies cannot base their ratings on an insurer’s AAA-credit rating. A4811. And because investors depend on ratings in making their investment decisions, without irrevocable policies, the bond insurance industry would be undermined, and the RMBS market would be radically different. 2. Countrywide’s Pre-Contractual Representations Countrywide made numerous pre-contractual representations to induce Ambac to issue the irrevocable Policies. For example, Countrywide provided Ambac with draft Prospectus Supplements relating to the deals to be insured that purported to describe Countrywide’s loan origination procedures. See A2853, A3131. Countrywide also made representations at meetings with Ambac employees, where Countrywide touted its “conservative approach to origination volume and quality of corporate controls.” A3138. The information Countrywide provided Ambac at these meetings was in turn provided to Ambac’s credit committee for the purpose of evaluating the Transactions. A3137-38. Countrywide also gave Ambac mortgage loan “tapes” (large spreadsheets) for each Transaction, which purported to reflect true and accurate information about proposed loan pools, including key metrics for assessing borrowers’ ability to repay their loans and sufficiency of the properties as collateral. A3141. Ambac used these loan tapes to model the transactions and to conduct other qualitative analysis. Id. 9 As Countrywide knew, Ambac depended on the extensive information Countrywide supplied to assess the risks of insuring the Securitizations. Id. 3. The Insurance And Indemnity Agreements Between Ambac And Countrywide Ambac issued the Policies for the benefit of third-party bondholders only after receiving assurances from Countrywide that the Securitizations and the mortgage loans held by the securitization trusts were as-represented. Prior to the issuance of each Policy, Countrywide and Ambac entered into an Insurance and Indemnity Agreement (the “I&I Agreements”).1 Under the I&I Agreements, and as conditions precedent for Ambac’s issuance of the Policies (A2807), Countrywide made additional R&Ws regarding the nature of the transactions, the loans underlying the transactions, and other matters pertinent to the risks insured. Certain of these R&Ws were contained only within the I&I Agreements (the “I&I R&Ws”). In twelve of the thirteen lettered paragraphs of Section 2.01 of the I&I Agreements, Countrywide made extensive representations solely to Ambac, including, among other things, that the RMBS offering “complie[d] … in all material 1 The Appendix contains the Transaction documents for four deals representing one of each deal type: 2004-K (HELOC), 2005-L (First-Lien HELOC), 2006-11 (First- Lien) and 2006-S4 (Closed-End Second-Lien). The language in those documents is exemplary of the language in the remaining Transaction documents. The remaining thirteen Transaction documents are included in the full summary judgment record, which was part of the record on appeal to the First Department. See Motion Seq. Nos. 27 & 29, Index No. 651612/2010, Docket Item Nos. 1489-1529. 10 respects with … securities law” (A2817, A3157-58 (§ 2.01(k))); the Securitizations’ Prospectus Supplements did “not contain any untrue statement of material fact and [did] not omit to state a material fact necessary to make the statements therein … not misleading” (A2817, A3157-58 (§ 2.01(k))); “the other material information relating to … the operations of Countrywide … or the financial condition of Countrywide … furnished to [Ambac]” did not “contain[] any statement of a material fact which was untrue or misleading in any material respect when made” (A2817, A3157-58 (§ 2.01(j))); and Countrywide did not know of any circumstances that could reasonably be expected to cause a Material Adverse Change (as defined in the I&I Agreements) in its business or financial condition (A2817, A3157-58 (§ 2.01(j))). With paragraph (l) of Section 2.01, however, the parties incorporated by reference the R&Ws Countrywide made in other documents for each Securitization (the “Loan R&Ws”): Each of the representations and warranties of Countrywide … contained in the applicable Operative Documents and the Underwriting Agreement is true and correct in all material respects and … Countrywide … hereby makes each such representation and warranty to, and for the benefit of, [Ambac] as if the same were set forth in full herein; 11 A2858.2 The Loan R&Ws included, among others, Countrywide’s promise it had complied with its own guidelines in originating the underlying loans. A1048. These guidelines contained detailed specifications regarding, for example, the ratio of the loan amount to the value of the mortgaged property, the ratio of the borrower’s debt to his income, and the borrower’s credit score. A510. Countrywide’s origination guidelines also mandated specific procedures, such as verification of the borrower’s income and employment. Id. The I&I Agreements make clear that Ambac issued the Policies subject to the express condition precedent that the R&Ws were accurate and complete. A2825-86 (§ 3.01) (Ambac “agrees to issue the Policy on the Closing Date subject to satisfaction of the conditions precedent set forth below,” including that “[t]he representations and warranties of Countrywide … set forth or incorporated by reference in this [I&I] Agreement shall be true and correct on and as of the Closing Date as if made on the Closing Date”). 2 “[A]pplicable Operative Documents” for each Securitization are all documents that Countrywide and its affiliates executed to effect each Transaction, including: (i) for each HELOC transaction, a Mortgage Loan Purchase Agreement (“MLPA”), Sale and Servicing Agreement (“SSA”), and Trust Indenture; and (ii) for each closed-end second lien and first lien transaction, a Pooling and Servicing Agreement (“PSA”). A113; A7186-188. The term “Operative Documents” also includes the I&I Agreements (A2813), but Section 2.01(l) does not incorporate the I&I R&Ws, which are already “set forth in full” in the I&I Agreements (A2818). 12 Ambac bargained for broad and complementary remedies in the event Countrywide breached either the I&I R&Ws or the Loan R&Ws. Section 5.02 of the I&I Agreements permits Ambac to “take whatever action at law or in equity as may appear necessary or desirable.” A2877. It further states: 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 [I&I] Agreement, [the Indenture or the PSA] or existing at law or in equity. Id. None of the twelve paragraphs containing I&I R&Ws includes any express limitation on remedies for breach of those R&Ws. But Section 2.01(l), which imports the Loan R&Ws, contains the following proviso: provided, however, that the remedy for any breach of a representation and warranty of Countrywide in [Section 3.02 of the MLPA and in Section 2.04 of the SSA, or Section 2.03 of the PSA, as applicable] 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 [Section 3.02 of the MLPA or Section 2.03 of the PSA, as applicable] shall be limited to the remedies specified in the [SSA or PSA, as applicable]. A2858. The “remedies specified” are a “repurchase protocol” that provides a loan- specific remedy under which Countrywide agreed that, upon discovery or notice of a breached Loan R&W, among other conditions, it would cure the breach, substitute 13 another mortgage loan, or repurchase the loan at a contractually-specified price. A3032-34. The I&I Agreements also include in Section 3.03(c) a provision permitting Ambac to seek reimbursement for any attorneys’ fees incurred in litigation with Countrywide: Countrywide agrees to pay to [Ambac] any and all charges, fees, costs and expenses that [Ambac] may reasonably pay or incur, including reasonable attorneys’ and accountants’ fees and expenses, in connection with (i) 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 (including any insolvency proceeding in respect of any Transaction participant or any affiliate thereof) relating to any of the Operative Documents, any party to any of the Operative Documents (in its capacity as such a party) or the Transaction …. Provided that three Business Days written notice of the intended payment or incurrence shall have been given to Countrywide by [Ambac], such reimbursement shall be due on the dates on which such charges, fees, costs or expenses are paid or incurred by [Ambac]. A2868 (emphases added). C. The Material Falsity Of Countrywide’s Representations And Warranties Countrywide’s R&Ws turned out to be materially false on every level: The loans included in the Securitizations were much riskier than Countrywide represented. Countrywide falsely described not only a substantial majority of the loans, but also the overarching standards and practices of the company that 14 originated them. Countrywide was a very different entity than the “gold standard” mortgage company that it had portrayed itself as to Ambac. The genesis of Countrywide’s misrepresentations was its aggressive growth strategy, in pursuit of which its parent and successor, Bank of America, now admits Countrywide “began to offer products that featured more permissive lending criteria.” A3227. Even as Countrywide increased the number of loan products, however, Countrywide’s senior management ignored warnings of deterioration in underwriting quality and widespread fraud, and allowed production units to originate loans that did not comply with stated policies and guidelines. A3222-30. Countrywide’s management even implemented a “make-any-loan-we-can-sell” strategy, instead of a culture of responsible lending. A389-400. Countrywide thus built an inventory of tens of thousands of shoddy, out-of-guideline loans to borrowers who were not credit-worthy. When it came time for Countrywide to securitize the loans and to obtain financial guaranty insurance for the Securitizations, Countrywide—knowing the truth would have indicated an extremely high risk of non-payment on the loans—chose instead to misrepresent the loans’ attributes and its loan origination practices. The Nobel Prize-winning economist Dr. Joseph Stiglitz, one of Ambac’s experts, has explained that Countrywide’s reckless mortgage origination and securitization behavior was a substantial factor in causing the “mortgage meltdown” 15 and 2008 financial crisis. A296. Countrywide and Bank of America subsequently admitted to reckless origination practices and massive fraud as part of a $16.65 billion settlement with various states, federal agencies, and the United States. A5455. As a result of Countrywide’s misrepresentations and omissions, the pool of loans backing the bonds Ambac insured had a significantly higher risk of loss and default than Ambac had been led to believe. For example, an Ambac expert has described in great detail how Countrywide’s mortgage lending practices were “not reasonably calculated to originate loans that conformed to Countrywide’s representations and warranties to Ambac, and in many respects were tailored to maximize loan volume at the expense of loan quality.” A5530. These failings extended beyond violations of Countrywide’s underwriting guidelines and amounted to a wholesale abandonment of internal controls in areas ranging from fraud detection to quality control to appraiser independence. The consequences of these practices were devastating: Ambac’s re-underwriting expert has concluded approximately 78% of the loans in the Securitizations materially breached Countrywide’s R&Ws. A5841. The head of Ambac’s RMBS business unit affirmed that “[h]ad Ambac known about the pervasive violations of Countrywide’s loan origination guidelines and other representations and warranties in the loans underlying the Countrywide 16 Transactions, Ambac would not have agreed to insure the Countrywide Transactions.” A4810. Due to Countrywide’s misrepresentations and omissions, Ambac expects to make more than $2 billion in insurance claims payments pursuant to the Policies. See A4715. D. The Prior Proceedings 1. The Complaint In 2010, Ambac filed suit against Countrywide in Supreme Court, New York County, seeking to hold Countrywide responsible for its wrongdoing in connection with the Securitizations. Ambac asserted three causes of action relevant here. First, Ambac asserted a cause of action for fraudulent inducement of an insurance policy based on misrepresentation and omission, alleging it would not have insured the Securitizations had Countrywide not misrepresented its operations and the quality of the underlying loans. A163-64. Second, Ambac asserted a cause of action for breach of contract, alleging Countrywide materially breached the I&I Agreements through its misrepresentations about its loan-origination business and lending practices and by refusing to satisfy its obligation to repurchase, cure, or substitute breaching loans. A165-66. 17 Third, Ambac asserted a cause of action for reimbursement of attorneys’ fees and expenses it incurred enforcing its rights under the Securitizations pursuant to Section 3.03(c) of the I&I Agreements. A167-68. 2. The Motion Court’s Decision The parties each moved for summary judgment on several issues, and, in 2015, the motion court granted in part and denied in part each party’s motion. A26. First, relying on Insurance Law § 3105 and the First Department’s decision in MBIA, 105 A.D.3d 412, the motion court ruled Ambac was not required to prove justifiable reliance or loss causation to establish Countrywide’s liability on the cause of action for inducement by misrepresentation and omission. A30-33. But the motion court concluded Ambac could not recover all claims paid under its policy as compensatory damages, which it viewed as equivalent to an impermissible rescissory remedy; instead, in the motion court’s view, Ambac was required to apportion its losses between breaching and non-breaching loans. A45-47. Second, the motion court ruled Ambac was not restricted to the repurchase protocol as its sole remedy for breaches of the I&I R&Ws. A33. The court ruled that the sole remedy proviso in Section 2.01(l) of I&I Agreements applies only to breaches of the Loan R&Ws incorporated by reference in that subsection and does not extend to the I&I R&Ws elsewhere in Section 2.01 that concern Countrywide’s 18 overall business operations, its financial condition, and the integrity of the Securitizations as a whole. A33-34. Third, the motion court dismissed Ambac’s cause of action for reimbursement of attorneys’ fees and costs on the ground that Section 3.03(c) of the I&I Agreements is not “unmistakably clear” in showing the parties’ intent to permit recovery of attorneys’ fees in actions among contracting parties. A49-50. 3. The First Department’s Decision On Ambac’s appeal and Countrywide’s cross-appeal, the First Department affirmed in part and reversed in part. Three holdings are relevant here. First, expressly declining to follow its prior decision in MBIA (12.A), the First Department held Ambac’s cause of action for fraudulent inducement based on misrepresentation and omission requires proof of the same elements as a common- law fraud claim, including justifiable reliance and loss causation (8.A-14.A). The court relied principally on non-insurance cases to identify the elements for an insurer’s inducement claim, and concluded that Insurance Law §§ 3105 and 3106 do not dispense with what it thought were the general common-law requirements to prove justifiable reliance and loss causation. 9.A-14.A. The First Department accordingly held Ambac is not entitled to recover claims payments under the Policies absent a showing that its reliance on Countrywide’s misrepresentations was justifiable and that payments “arise from a breach or misrepresentation.” 13.A. 19 Second, the First Department held the repurchase protocol is Ambac’s sole remedy for breaches of I&I R&Ws. The court stated the “sole remedy” proviso in Section 2.01(l) of the I&I Agreements unambiguously applies to “a breach of any representation or warranty relating to defective loans, and not just those specifically incorporated into section 2.01(l),” and thus limits Ambac’s remedy to the repurchase protocol even as to Countrywide’s misrepresentations about its operations and financial condition. 15.A (emphasis added). The First Department rejected Ambac’s reliance on Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), lv. granted, 2016 N.Y. Slip Op. 60115(U) (1st Dep’t Jan. 5, 2016), which had held a “sole remedy” clause inapplicable to claims arising from similar transaction-level warranties, stating the “sole remedy clause in that case was narrower than the one here.” 15.A. Third, the First Department upheld the dismissal of Ambac’s cause of action for reimbursement of attorneys’ fees and costs, concluding without further discussion that “Section 3.03(c) does not evince an ‘unmistakably clear’ intent to permit Ambac to seek reimbursement for attorneys’ fees incurred in its litigation against Countrywide.” 16.A (quoting Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 492 (1989)). The court did not analyze the contractual language or seek to reconcile its conclusion with prior decisions of this Court and the First Department interpreting substantially similar provisions. 20 Upon Ambac’s motion, the First Department granted leave to appeal, certifying the following question pursuant to CPLR 5713: “Was the order of this Court, which modified, on the law, to the extent indicated therein, and otherwise affirmed the order of Supreme Court, properly made?” 20.A. This appeal followed. ARGUMENT I. AN INSURER MAY RECOVER ALL CLAIMS PAYMENTS MADE ON A FRAUDULENTLY-INDUCED INSURANCE POLICY WITHOUT PROOF THAT IT “JUSTIFIABLY” RELIED ON AN APPLICANT’S REPRESENTATIONS OR PROOF OF LOSS CAUSATION A. A Common Law Cause Of Action For Fraudulent Inducement Of An Insurance Policy Does Not Require Proof Of Justifiable Reliance Or Loss Causation The First Department erred as a matter of law in holding, for Ambac to prevail on its common law claim for fraudulent inducement of an insurance policy based on misrepresentation or omission, Ambac must establish that (i) its reliance on Countrywide’s extensive extra-contractual representations in issuing the policies was justifiable and (ii) overpayments under those policies were proximately caused by the falsity of Countrywide’s statements. Under New York law, “an insurer may avoid an insurance contract if the insured made a false statement of fact as an inducement to making the contract and the misrepresentation was material.” Curanovic v. New York Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 436 (3d Dep’t 2003); see, e.g., Admiral Ins. Co. v. Joy Contractors, Inc., 19 N.Y.3d 448, 460 (2012) (insurer stated claim where insured’s misrepresentations “deprive[d] the 21 insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage”); Mercantile & Gen. Reins. Co., plc v. Colonial Assur. Co., 82 N.Y.2d 248, 251-53 (1993) (recognizing insurer’s claim that “material misrepresentations … induced it to enter into the [reinsurance] contracts”); Vander Veer v. Cont’l Cas. Co., 34 N.Y.2d 50, 53 (1974) (similar). New York law has never required an insurer also prove justifiable reliance or loss causation in an action concerning an applicant’s fraudulent inducement of an insurance policy. And for good reason: Such a rule would incentivize dishonesty in applicants, who are naturally better informed than insurers, distort markets, and raise the cost of insurance for honest applicants. The distinct character of an insurer’s action for inducing an insurance policy by misrepresentation or omission is so familiar, it appears in the New York (Civil) Pattern Jury Instructions, which contain separate charges for “garden-variety” fraud and for fraud in inducing an insurance policy through a false representation or warranty. Compare N.Y. Pattern Jury Instr.—Civil (Dec. 2016 update) § 3:20 (Fraud and Deceit) with id. § 4:75 (Insurance Defenses – Misrepresentation) and id. § 4:76 (Insurance Defenses – Breach of Warranty). Thus, in a prior decision it declined to follow here, the First Department itself recognized New York courts are “not required to ignore the insured/insurer nature of the relationship between the parties” 22 when determining acceptable proof for a fraudulent inducement claim. MBIA, 105 A.D.3d at 412. In departing from these settled authorities which rightly treat an insurer’s claim for inducing an insurance policy by misrepresentation or omission as distinct from a standard common law claim for fraud, the First Department principally relied on cases outside the insurance context. 9.A-10.A. The First Department’s failure to consider relevant authorities from the insurance context led it to err. Contrary to the decision, to establish fraudulent inducement of an insurance policy based on misrepresentation or omission: (i) there is no requirement that an insurer’s reliance be “justifiable,” because an insurer is entitled to rely, without the need for investigation, on an applicant’s representations and warranties in procuring the policy; and (ii) there is no additional requirement of loss causation, because an applicant’s material misrepresentations cause harm by inducing the insurer to issue a policy it otherwise would not have issued. 1. An Insurer Is Entitled To Rely—Without Investigation—On An Applicant’s Representations And Warranties Relating To The Insured Risks The First Department’s holding (9.A) that Ambac is required to prove its reliance on statements Countrywide made in procuring the insurance policies was “justifiable” is contrary to decades of settled precedent. This Court explained over ninety years ago that, at common law, an insurer is entitled to rely on an applicant’s 23 statements in procuring insurance, without any further duty of inquiry: “[I]t has never been held by any authority of substantial weight that a person making a material misrepresentation in an application for insurance will be relieved from the consequences thereof if he can show that the other party by the exercise of sufficient diligence and pains might have discovered the inaccuracy of the representation.” Am. Surety Co. of New York v. Patriotic Assurance Co., 242 N.Y. 54, 64-66 (1926). This rule applies with even greater force where an applicant procures a policy through written representations and warranties, as Countrywide did here. See A2808 (Ambac “agree[d] to issue the Polic[ies] … subject to … conditions precedent” expressly including “[t]he representations and warranties … set forth or incorporated by reference in the [I&I Agreements] … be[ing] true and correct”). As this Court has long held, “[i]f … warranties are written into the policy[, an insurer] … has the right, in spite of any knowledge or information it may have, to rely thereon.” Satz v. Mass. Bonding & Ins. Co., 243 N.Y. 385, 392 (1926). Until the decision below, New York courts had unflaggingly followed this rule to hold an insurer has no obligation to investigate an applicant’s statements made to procure insurance. See, e.g., Colin v. Hamilton Fire Ins. Co. of City of New York, 251 N.Y. 312, 314-15 (1929) (holding, in insurance misrepresentation case, “[t]he fact that by the exercise of diligence it might have discovered the falsity of the representation does not relieve the person making it from the consequences of 24 his act”); Kroski v. Long Island Sav. Bank FSB, 261 A.D.2d 136, 137 (1st Dep’t 1999) (“a failure to make further inquiry ... is not the equivalent of knowledge, nor does it cancel out or counteract the insured’s fraud”) (internal quotation marks and citation omitted); Kantor v. Nationwide Life Ins. Co., 16 A.D.2d 701, 701 (2d Dep’t 1962) (insurer “may not be charged with knowledge of the insured’s physical condition not disclosed in the application for insurance, even though such knowledge may have been acquired by its examining doctor in his capacity as the insured’s personal physician”); Cherkes v. Postal Life Ins. Co., 285 A.D. 514, 516 (1st Dep’t 1955) (insured “may not shift the burden of truthfulness which was upon the insured into a burden of distrust and additional inquiry on the part of [the insurer]”), aff’d, 309 N.Y. 964 (1956).3 These rules make good sense in the insurance context given the information asymmetry between an applicant, who has superior knowledge about the characteristics of the entity or transaction to be insured, and an insurer, who has limited access to such information or ability to investigate every aspect of an applicant’s representations. See Frederick Pollock, Principles of Contract at Law & in Equity 463 (2d ed. 1878) (noting common law of misrepresentation gives special treatment to insurance contracts because “the subject-matter of the contract 3 See also 45 C.J.S. Insurance § 859 (2016) (stating insurer “has the right to rely upon representations made by an applicant for a policy” and “is under no duty to make further inquiry or investigation”). 25 is especially within the knowledge of one party, and the other has to rely, in the first instance at all events, on the correctness of the statements made by him”); see also Sebring v. Fid.-Phoenix Fire Ins. Co. of New York, 255 N.Y. 382, 387 (1931) (“If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked.”). These rules are, moreover, economically efficient: With minimal expenditure, an applicant can disclose its superior knowledge to the insurer, which with minimal expenditure can then create an accurate risk profile. Placing the burden of verifying applicants’ representations on the insurer, moreover, would incentivize applicants to be untruthful because they would have nothing to lose. If the insurer happens to learn of an applicant’s misrepresentation, then it may be denied coverage—but this would merely place it in the same position as if it had been truthful. If the insurer does not learn of the misrepresentation, then the applicant has succeeded in obtaining insurance and insulating itself from the risk of its misrepresentation. Insurers are free to define the risks they deem important in issuing insurance by conditioning issuance and pricing of a policy on receiving certain representations and warranties. See Vander Veer, 34 N.Y.2d at 52 (“As an insurer, the defendant is free to select its risks and it makes inquiry of matters which it deems material to the 26 risk.”). The common law of fraudulent inducement of an insurance policy thus has sought to protect insurers’ contractual “freedom of choice in determining whether to accept or reject the risk.” Id. at 53. For this reason, this Court’s precedents have presumed an insurer’s reliance on contractual representations and warranties, even when the insurer had actual, pre-contract knowledge of the facts warranted against (which Ambac did not have here). See, e.g., Satz, 243 N.Y. at 392-93. The First Department’s radical departure from the insurance-specific rule for inducement claims is unsupported by the sole insurance case it cited, ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (2015). See A9.A. There, the defendant sought dismissal because the plaintiff-insurer purportedly “failed to sufficiently plead the ‘justifiable reliance’ element of its fraud in the inducement and fraudulent concealment claims,” ACA, 25 N.Y.3d at 1044, and this Court reviewed the First Department’s dismissal of the claims on that basis, id. at 1044-45. The plaintiff never argued for the applicability of the common-law insurance rules, perhaps because the plaintiff did not frame its claims as based on misrepresentations made on behalf of an insurance applicant. Cf. id. at 1045 (misrepresentation made in email by non-party to insurance contract).4 Accordingly, 4 The special treatment for applicants’ representations is reflected today in Insurance Law § 3105 (defining “representation” as “a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured”) (emphasis added), and continues to set the boundary between 27 ACA does not address, much less impliedly overrule, the decades of settled precedent holding an insurer may rely on an applicant’s representations without inquiry. Nor did this Court in ACA abrogate the general rule, applicable both inside and outside the insurance context, that a party is generally entitled to rely on contractual representations and warranties without inquiry. See, e.g., DDJ Mgmt., LLC v. Rhone Grp. L.L.C., 15 N.Y.3d 147, 154 (2010) (“[W]here a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.”) (collecting authorities). Here, Countrywide’s pre-contractual representations were so important to Ambac’s decision to issue the Policies that Ambac required Countywide to provide contractual R&Ws that they were true. A2817, A3157-58. Thus, even if Ambac were not entitled to the special rules for an insurance inducement claim (and it is), the imposition of a duty to investigate Countrywide’s representations would remain erroneous. 2. An Insurer Need Not Prove That Misrepresentations Or Omissions Actually Caused Covered Losses The First Department’s holding (9.A-10.A) that an insurer must prove loss causation to establish a claim for fraudulent inducement of an insurance policy by common fraud claims and insurance inducement claims, see MBIA Ins. Corp. v. J.P. Morgan Sec., LLC, 144 A.D.3d 635, 639 (2d Dep’t 2016) (considering whether statement was made by or on behalf of “applicant,” so as to give rise to insurer inducement claim). 28 misrepresentation or omission also is contrary to the well-settled rule of insurance law, both in New York and nationwide, that when an applicant’s misrepresentations induce an insurer to issue an insurance policy, “it is immaterial that there is no causal or other relationship between the actual loss which is sustained under the policy and the falsity of the representation.” 6 COUCH ON INSURANCE § 82:20 (June 2017 update) (collecting cases). This is because a material misrepresentation in an insurance application “deprive[s] the [insurer] of freedom of choice in determining whether to accept or reject the risk.” Vander Veer, 34 N.Y.2d at 53. This harm occurs on the day the policy is issued; whether the misrepresented facts actually cause any claims payments pursuant to the policy is of no moment. This Court thus has long held the causation inquiry for an insurer’s common law inducement claim is simply whether the misrepresentation or omission materially increased the insurer’s risk when the policy issued, without any further requirement of proof of a causal connection between the subject matter of the misrepresentation and the loss. For example, in Glickman v. N.Y. Life Insurance Co., 291 N.Y. 45 (1943), an insured misrepresented in his life insurance application that he had not received medical treatment after being examined by the insurer’s physician (when in fact he had received treatment for an intestinal ulcer), and the insured later died from “coronary sclerosis, a disease unrelated to the intestinal ulcer.” Id. at 49, 50. This Court held the insurer had no obligations under the policy 29 even though the insured’s death was unrelated to the misrepresentation, explaining “[t]he fact that the applicant died from another cause does not disprove the increase of risk” to the insurer on day one of the policy. Id. at 52; see Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 185 (2d Cir. 2015) (providing “law of insurance” as “common example” of “area[] of the law” where “the requirement of loss causation is eliminated either by contract or by statute”); Met. Life Ins. Co. v. Conway, 252 N.Y. 449, 452-53 (1930) (Cardozo, J.) (“In the event of violation, the policy, at the election of the insurer, is avoided altogether, and this though the death is unrelated to the breach.”). Similarly, in Ginsburg v. Pacific Mutual Life Insurance Co., 89 F.2d 158 (2d Cir. 1937), an applicant for disability insurance misrepresented he had never had bronchitis and later was diagnosed with multiple sclerosis. Id. at 159. The Second Circuit, citing decisions of this Court, held under New York common law the insurer could not be bound by the policy because “it makes no difference that [the misrepresented illness] was an illness unrelated to the disease upon which the present claim for indemnity is based.” Id. The court explained “such a causal connection is not necessary” under New York law because, otherwise, “the insured could freely misrepresent information specifically requested and still recover on the policy if the causal connection could not be traced.” Id. (citing Jenkins v. John Hancock Mut. Life Ins. Co., 257 N.Y. 289 (1931)); see John D. Ingram, Misrepresentations In 30 Applications Of Insurance, 14 U. Miami Bus. L. Rev. 103, 111 (2005) (“If the cause of loss is connected to the misrepresented fact, the insured has lost nothing, because he wouldn’t have had coverage anyway. If the cause of loss is not connected, he has coverage he otherwise couldn’t have obtained. Thus, he had nothing to lose by misrepresenting.”). This principle is fully applicable to all types of insurance contracts, including liability insurance, see, e.g., Levine v. Aetna Ins. Co., 139 F.2d 217, 217-18 (2d Cir. 1943); property and casualty insurance, see, e.g., Royal Indem. Co. v. Patel, 2005 WL 2573514, *4 (N.D.N.Y. Oct. 13, 2005); and, as here, financial guaranty insurance, see, e.g., Assured Guar. Mun. Corp., Flagstar Bank, FSB, 2012 WL 4373327, *602-03 (S.D.N.Y. Sept. 25, 2012) (ruling financial-guaranty insurer need not show “direct loss causation” because under New York law, insurer “must only show that the breaches materially increased its risk of loss …. [T]he causation that must be shown here is that the alleged breaches caused plaintiff to incur an increased risk of loss.”); Syncora Guar. Inc. v. EMC Mortg. Corp., 874 F. Supp. 2d 328, 336- 37 (S.D.N.Y. June 19, 2012) (similar). For its part, the First Department did not rely on a single case from the insurance context in creating a loss-causation requirement for an insurer’s inducement claim. See 9.A-10.A. Indeed, the only insurance case the First Department cited in so holding was its prior decision in MBIA, which held loss 31 causation was not an element of an insurer’s inducement claim. 105 A.D.3d at 412. But the court expressly “decline[d] to follow” MBIA without explanation or analysis. 12.A.5 The First Department further erred in limiting Ambac’s relief to claims payments arising from the subject of Countrywide’s misrepresentations. 14.A-15.A. Because Ambac’s injury is the issuance of insurance policies it would not have issued on the same terms had it known the truth about Countrywide’s representations (see supra, at 28), Ambac is entitled to recover all claims payments that were made pursuant to the fraudulently procured policies. In common-law insurance cases such as Glickman and Ginsberg, for example, the insurer was permitted to avoid all claims payments resulting from the policy induced by misrepresentations, with no attempt to apportion claims payments “related” and “unrelated” to those misrepresentations. Glickman, 291 N.Y. at 50-51; Ginsburg, 89 F.2d at 160. Rather, as those decisions recognize, the direct cause of all payments made under a policy induced by material misrepresentation is the material misrepresentation; the apportionment requirement 5 In MBIA, the First Department affirmed the motion court’s ruling that for “purposes of determining materiality [for inducement of an insurance policy by misrepresentation], there need not be a causal connection between the misrepresented condition and the loss suffered.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513, 521-22 (Sup. Ct. N.Y. Cnty. 2012). Citing Insurance Law §§ 3105 and 3106 (discussed infra, Part I.A.3), the First Department explained that “the motion court was not required to ignore the insured/insurer nature of the relationship between the parties to the contract.” MBIA, 105 A.D.3d at 412. 32 that the First Department imposed here deprives the insurer of its freedom to choose which risks it will insure and at which rates. Vander Veer, 34 N.Y.2d at 53. 3. Insurance Law §§ 3105 And 3106 Do Not Require Justifiable Reliance Or Loss Causation For An Insurer’s Inducement Claim The First Department further erred in construing Ambac’s inducement claim as arising under, and being limited by, Insurance Law §§ 3105 and 3106, which concern an applicant’s representations and warranties, respectively, in procuring insurance. Those provisions do not create a cause of action and Ambac does not, contrary to the First Department’s mistaken view, “seek[] to assert Insurance Law § 3105 as an affirmative claim.” 12.A. Ambac brought a common law claim for fraudulent inducement of an insurance policy. A163-64. Nor is the First Department correct that Insurance Law §§ 3105 and 3106 preclude or otherwise limit the relief that Ambac may obtain on its common- law inducement claim. Those provisions were intended principally to re-state and codify the common law. See Abraham Kaplan & George I. Gross, COMMENTARIES ON THE REVISED INSURANCE LAW OF NEW YORK 338 (1940) (predecessor statute to § 3105 was intended to restate “common law principles long established in the field of insurance.”).6 They modify the common law only to the extent they overrule prior 6 Insurance Law §§ 3105 and 3106 re-enact without material alteration prior Insurance Law §§ 149 and 150, which codified the materiality standard governing 33 decisions of this Court holding a false warranty need not be material in order to avoid or defeat recovery under an insurance policy. See, e.g., Glickman, 291 N.Y. at 51 (“Apparently in [predecessor] section 150 the Legislature was seeing to it that a policy of insurance will not be avoided by proof of an immaterial breach of warranty.”) (quotation and citation omitted). Legislative history confirms this limited intent to “clarif[y] the meaning of ‘materiality’ of a misrepresentation” for purposes of insurers’ inducement claims and provide “both the litigants and the court with a surer guide to the outcome of litigation on this difficult subject[.]” L. 1939, Report of the Joint Legislative Committee on Revision of Insurance Laws, No. 101 at 14 (May 7, 1939). insurers’ misrepresentation claims, while adding a materiality requirement to insurers’ common law false warranty claims. Andrew Amer & Linda H. Martin, The Standard of Materiality for Misrepresentations Under New York Insurance Law, 17 Conn. Ins. L.J. 415, 426, 428-29 (2011); N.Y. Ins. L. §§ 149-50 (McKinney 1939). The superseded sections 149 and 150 were derived from former Insurance Law § 58, which provided—as to life insurance only—that an applicant’s statements in a policy will be construed as representations and not warranties. See Amasa J. Parker, Jr., INSURANCE LAW OF NEW YORK, N.Y. Ins. L. § 58 (Banks Law Publishing 1922); see also E. Dist. Piece Dye Works v. Travelers’ Ins. Co., 234 N.Y. 441, 449- 50 (1923) (noting Legislature enacted section 58 because “[p]rior to 1906 a breach of warranty contained in an application for insurance constituted a defense to a claim upon the policy, although the warranty related to an immaterial matter,” whereas “[a] misrepresentation contained in the application … only became a defense if it related to a material matter”) (emphasis added). 34 The First Department, moreover, has it precisely backwards in holding an insurer must prove loss causation and justifiable reliance because there is purportedly no “statement of legislative intent or legislative history indicating that Insurance Law § 3105 was intended to alter the essential elements of a fraud claim.” 13.A. The elements of an insurer’s inducement claim come from the common law itself, which does not require proof of loss causation or justifiable reliance (see supra Parts I.A.1-I.A.2), so the lack of any statement of legislative intent to alter the common law means the statutory Insurance Law does not impose those requirements. Thus, as courts and the drafter of Insurance Law § 3105 have recognized, the statute merely codifies a requirement on the insurer to show that, absent the misrepresentation, it “would have made a different contract … or the same contract with a higher premium.” Edwin W. Patterson, Misrepresentations by Insured under the New York Insurance Law, 44 Colum. L. Rev. 241, 253 (1944); see Mut. Benefit Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30, 32-33 (2d Cir. 1988) (same). There is no additional requirement in the Insurance Law that the insurer prove its reliance on the applicant’s representation was “justified” or the representation caused any particular losses. Rather than support the First Department’s decision, these provisions contradict it. 35 B. The Remedies For Fraudulent Inducement Of An Insurance Policy Include Recovery Of All Claims Payments From An Applicant 1. The Insurance Law Preserves An Insurer’s Ability To Recover Damages On Its Inducement Claim The First Department is likewise incorrect in holding an insurer may not recover compensatory damages from an applicant that procures an insurance policy by misrepresentation or omission, and instead is limited, in the event of fraudulent inducement, to pursuing a “declaratory judgment action … seeking rescission” or to “asserting a defense to an insured’s claim for payment under the policy.” 12.A; see 13.A (stating Ambac is “not entitled” to seek “rescissory damages” or “compensatory damages” because Ambac “issue[d] … irrevocable insurance policies”). This holding disregards that, at common law, a party induced to enter a contract by misrepresentation has the option of rescinding the contract as void ab initio out of court and then suing at law for damages; seeking equitable rescission and an accounting by judicial decree; or suing on the contract for damages. See, e.g., Sager v. Friedman, 270 N.Y. 472, 479-81 (1936); Vail v. Reynolds, 118 N.Y. 297, 302-03 (1890); Gould v. Cayuga Cnty. Nat’l Bank, 99 N.Y. 333, 337 (1885). Section 3105 reflects this common-law remedial framework. As the First Department correctly recognized in MBIA, 105 A.D.3d at 412, the first clause of the statute—which permits an insurer “to avoid any contract of insurance”—refers, by its plain terms, to the remedy of rescission (or “avoidance”). See RESCISSION, 36 Black’s Law Dictionary (10th ed. 2014) (noting “rescission” is “also termed avoidance” (emphasis added)); see also, e.g., Sommer v. Guardian Life Ins. Co., 281 N.Y. 508, 512-13 (1939) (referring to insurer’s affirmative defense of “avoidance” in insured’s suit for payment and holding insurer could “avoid its policy” based on material misrepresentation); Kiss Constr. N.Y., Inc. v. Rutgers Cas. Ins. Co., 61 A.D.3d 412, 414-15 (1st Dep’t 2009) (where insured sought payment, insurer was entitled to judgment on its counterclaim to “rescind” the policy as “void ab initio”). That equitable remedy, contrary to the First Department’s suggestion below (12.A), may be exercised as a claim, counterclaim, or defense. See, e.g., Mercantile & Gen. Reins. Co., plc. v. Colonial Assurance Co., 82 N.Y.2d 248, 252 (1993) (recognizing rescission counterclaim). Recognizing this, the First Department held in MBIA that the second clause of the Insurance Law—which permits an insurer to “defeat[] recovery thereunder”— “logically” must refer to something besides rescission or avoidance, or else it is superfluous, and there is no reason it cannot refer to an affirmative claim for damages based upon fraudulent inducement of insurance. 105 A.D.3d at 412. That interpretation was exactly right and follows directly from the just-noted principle that one who has been induced by misrepresentation to enter a contract has the option of seeking equitable rescission or legal damages for fraud. 37 The Insurance Law thus recognizes that an insurer has a remedy for material misrepresentation in the inducement of insurance at equity and at law. In addition, the statute’s drafter has expressly stated an insurer’s remedies for material misrepresentation includes an affirmative suit for damages—particularly where, as here, the applicant-wrongdoer is not the beneficiary under the policy. In describing the “legal consequences of a misrepresentation,” he observed: The person induced to act in reliance thereon may sue to recover damages from the person who (fraudulently) made the misrepresentation, or he may rescind a contract that he was induced to make with the person who made the misrepresentation. The first legal remedy is available against anyone who deceitfully made a misrepresentation. The second is available only against the person who made the contract. Thus, if a life-insurance company is induced to issue a policy to A because of a fraudulent misrepresentation of Dr. B, of whom it made inquiry as to A’s health, it can recover judgment against Dr. B for damages …. Edwin W. Patterson, ESSENTIALS ON INSURANCE LAW 380 (1957). Thus, the person responsible for the language in Section 3105—that a misrepresentation enables an insurer to “avoid a contract of insurance or defeat recovery thereunder”—explained inducement claims like Ambac’s may be brought for damages. 2. An Insurer’s Right To Recover All Claims Payments Is Especially Clear Where It Has Issued An Irrevocable Policy For The Benefit Of Third Parties The First Department also erred to the extent it held Ambac cannot seek compensatory damages from Countrywide because it issued irrevocable policies. 38 See 12.A. That is exactly backwards: It is precisely because Ambac issued irrevocable policies—based on Countrywide’s representations (see, e.g., A2825- 26)—that Ambac may seek damages from Countrywide. Without recourse to a common law action in damages (or an appropriate equitable equivalent, such as recoupment), Ambac would be left with its irrevocable, ongoing payment obligation to third parties and no remedy for Countrywide’s material misrepresentations—all while Countrywide has reaped enormous benefits from sales to RMBS certificate- holders that were possible only because of Ambac’s insurance. Because the policies are irrevocable and cannot be rescinded, it is particularly clear that there is an unbroken chain of causation between Countrywide’s misrepresentations and all claims Ambac pays under the policies: Once Countrywide’s misrepresentations induced Ambac to issue the policies, Ambac became irrevocably obligated to pay all claims under the policies, and thus all claims payments follow necessarily from those misrepresentations. New York courts have recognized this principle in the context of automobile insurance, holding, where an automobile insurer is statutorily barred from seeking rescission of a third-party insurance policy based on an insured-applicant’s misrepresentations, the insurer can nevertheless recover the claims payments it makes to the third party from the insured-applicant. See, e.g., Ins. Co. of N. Am. v. Kaplun, 274 A.D.2d 293, 298 (2d Dep’t 2000) (“An insurance carrier that is precluded from rescinding a policy 39 retroactively due to fraud is not without means of redress. For example, if the insurer is required to pay benefits under the policy to a third party, it may bring an action against its insured to recover such losses.”); Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144, 149 (3d Dep’t 1991) (“[A] suit by an insurer against its insured to recover damages the insurer was obligated to pay to an insured third party as a result of the insured having fraudulently obtained the insurance is cognizable.”); Reliance Ins. Companies v. Daly, 38 A.D.2d 715, 716 (2d Dep’t 1972) (holding laws precluding rescission of automobile insurance policy did not “preclude[ ] a suit for damages after the insurer’s responsibilities to a third party have been satisfied.”). While in those cases, a statute, not a contract, rendered the policies irrevocable, that distinction is immaterial, for in both circumstances the prohibition on rescission is intended to protect the policies’ innocent beneficiaries. Moreover, requiring issuers of irrevocable financial guaranty policies to show loss causation over and above transaction causation, contrary to the insurance-law rules discussed above, would lead to especially perverse results, for the incentives of an unprincipled applicant to lie during the insurance-application process are even stronger when an irrevocable policy is the prize. There is no basis in New York law to force an insurer that issues an irrevocable policy, instead of a revocable one, to bear a risk it never would have taken if the applicant had told it the truth. In either case, the applicant is equally responsible for the misrepresentations; the only 40 difference is there are innocent beneficiaries for the irrevocable policy that preclude rescission and commit an insurer to pay all claims under the policy notwithstanding the applicant’s misrepresentations. Insurance Law §§ 3105 and 3106 do not require a contrary result. The First Department identified decisions citing Insurance Law § 3105 in which an insurer had sought total rescission or else erected a defense to coverage (12.A), but none of those cases involved irrevocable payment guaranties to innocent beneficiaries. Nothing in § 3105 or § 3106 purports to abrogate these common law principles, let alone clearly so. See, e.g., Gottlieb v. Kenneth D. Laub & Co., 82 N.Y.2d 457, 465 (1993) (“The common law is never abrogated by implication, but on the contrary it must be held no further changed than the clear import of the language used in a statute absolutely requires.”) (quoting McKinney’s Cons. Laws of N.Y., Book 1, Statutes § 301(b)), cited in 13.A. C. The First Department’s Limitation Of An Insurer’s Fraudulent Inducement Claim Upsets Settled Expectations In This Important Area Of New York Law The First Department’s decision also rests on unsound policy. The court believed allowing Ambac to recover the full amount of its claims payments would “inequitably allow Ambac to recoup the money it paid out for loans that complied with all warranties, and for which there were no misrepresentations, but which resulted in default due to the housing market collapse or other risks Ambac insured 41 against.” 14.A. This view is incorrect because it assumes Ambac insures the losses from individual loans that default. RMBS financial guaranty insurance is insurance for RMBS securities, not loans. Ambac insured against the risk of distribution shortfalls on specific RMBS securities, which were backed by pools of mortgage loans; Ambac did not insure specific loans, and did not select or approve the inclusion of particular loans in any pool. To evaluate the risk of a distribution shortfall, Ambac had to evaluate the risk the borrowers of the loans in those pools, as a group, would not make sufficient payments to cover the distributions. To evaluate the aggregate credit risk of these borrowers, Ambac relied on information about them and the mortgaged properties that Countrywide warranted to be true, in both its pre-contractual representations and contractual R&Ws. Ambac would not have issued its insurance had it known Countrywide had so profoundly misrepresented the credit risk of the pools. It is fully equitable, and sound policy, to allow Ambac to recover the amounts of the insurance payments it has made and will continue to make based on policies it was fraudulently induced to issue by Countrywide’s lies about the credit risk of the loan pools. Applicants have an informational advantage over insurers, because they are best aware of the risks to be insured against. See generally Pollock, Principles at 446. When an applicant misrepresents key facts to the insurer, it “deprive[s] the [insurer] of freedom of choice in determining whether to accept or 42 reject the risk.” Vander, 34 N.Y.2d at 53. Such conduct leads to adverse selection— an applicant using its informational advantage to obtain insurance on more favorable terms than the facts warrant—and to moral hazard—an applicant taking inadequate precautions because of that insurance. See generally William Bishop, The Contract- Tort Boundary and the Economics of Insurance, 12 J. Leg. Studies 245-47 (Jun. ed. 1983). The most efficient and reasonable solution for this problem is also the simplest one: Applicants must be required to fully and truthfully disclose the information they know or can access concerning the risk they are seeking to insure against. This poses minimal cost to the applicant, but saves the insurer the significant expense that would be required to discover facts the applicant already knows. To incentivize applicants to be honest in disclosing the risks to be insured against, the law must remove from them the benefit of insurance if they misrepresent those risks. For example, as discussed, a life insurer need not honor a policy if the applicant withheld information about a medical condition that increases his risk of death, even if the insured dies from a cause unrelated to that condition, because he misrepresented the risk. E.g. Glickman., 291 N.Y. at 49-50; Met. Life, 252 N.Y. at 452-53; Ginsburg, 89 F.2d at 159. Here, where Countrywide was the applicant but not the beneficiary, and the policies were irrevocable because the financial markets for those products could not function otherwise, Ambac could not simply withhold 43 payment to the bondholders. Rather, to remove the benefit of the insurance policy from Countrywide while maintaining that benefit for the innocent bondholders, Countrywide must pay Ambac the amount of its insurance payments to those bondholders. The alternative is untenable. If financial guaranty insurers cannot be assured of recovering their full insurance payments in the face of massive applicant fraud involving irrevocable policies required by capital markets, they are likely to decline to issue such insurance at all, thereby adversely affecting the market for asset-backed securitizations and potentially insured municipal securities as well. Even if policies continued to issue, the existing pricing model would be fundamentally disturbed, because it does not account for insurers having to bear the burden of ferreting out applicants’ misrepresentations and the risk of liability without recourse if they are unable to do so. There is no need to go down this path. Rather, by returning to settled law, the Court can restore a regime in which applicants for insurance are incentivized to be honest and will bear the full financial consequences if they are not. II. THE PROVISO OF SECTION 2.01(l) OF THE I&I AGREEMENTS DOES NOT LIMIT AMBAC’S REMEDIES FOR COUNTRYWIDE’S BREACHES OF OTHER SECTIONS OF THOSE AGREEMENTS The First Department also erred in holding the repurchase protocol referenced in Section 2.01(l) of the I&I Agreements “applies to a breach of any representation 44 or warranty relating to defective loans, and not just those specifically incorporated into section 2.01(l).” 14.A-15.A. Though purporting to interpret the contracts’ “plain language,” the First Department ignored key language in Sections 2.01(l) and 5.02 and failed to give effect to the I&I Agreements’ overarching purpose. This Court should reinstate the motion court’s ruling that honors the parties’ bargain by permitting Ambac to obtain all remedies available at law or in equity for Countrywide’s rampant breaches of the I&I R&Ws in Sections 2.01(j) and (k), even where the Loan R&Ws incorporated by Section 2.01(l) have also been violated. A. The Section 2.01(l) Proviso Refers Only To The Representations And Warranties Imported Into Section 2.01(l) Contrary to the First Department’s decision, the proviso of Section 2.01(l) by its plain language limits remedies only for breaches of the Loan R&Ws imported into Section 2.01(l). Section 2.01(l) begins: Each of the representations and warranties of Countrywide … contained in the applicable Operative Documents [including as relevant the MLPAs, SSAs, and PSAs] and the Underwriting Agreement is true and correct in all material respects and … Countrywide … hereby makes each such representation and warranty to, and for the benefit of, [Ambac] as if the same were set forth in full herein; A2818. It continues with the proviso relevant here: provided, however, that the remedy for any breach of a representation and warranty of Countrywide in [Section 3.02 of the MLPA and in Section 2.04 of the SSA, or Section 2.03 of the PSA, as applicable] and the remedy with respect to any defective Mortgage Loan or any 45 Mortgage Loan as to which there has been a breach of representation or warranty under [Section 3.02 of the MLPA or Section 2.03 of the PSA, as applicable] shall be limited to the remedies specified in the [SSA or PSA, as applicable]. Id. Ignoring the introductory words “provided, however, that” and the remedial limitation’s position within Section 2.01(l) alone, the First Department construed that limitation to apply, broadly, across all of the I&I R&Ws—and to all of Ambac’s claims. In the First Department’s view, the statement in Section 2.01(l) that “the remedy with respect to any defective Mortgage Loan … shall be limited to [the repurchase protocol]” meant “that the repurchase protocol applies to a breach of any representation or warranty relating to defective loans.” 14.A-15.A. But to apply the phrase “with respect to any defective Mortgage Loan” to all claims whose allegations relate in any way, directly or indirectly, to defective loans stretches the text well beyond any permissible reading. This is particularly so given that the relevant language is in a proviso to Section 2.01(l). “[A] proviso limits the clause or terms immediately preceding it.” Hosp. Ass’n of N.Y. State v. Axelrod, 165 A.D.2d 152, 155 (3d Dep’t 1991); see Abbott v. United States, 562 U.S. 8, 25-26 (2010) (“The ‘grammatical and logical scope’ of a proviso … ‘is confined to the subject-matter of the principal clause’ to which it is attached.”) (quoting United States v. Morrow, 266 U.S. 531, 46 534-35 (1925)). Thus, “the inclusion of … provisos” “as to certain matters” “is generally considered to deny the existence of others not mentioned.” Kimmel v. State of New York, 29 N.Y.3d 386, 394 (2017); cf. Quadrant Structured Prods. Co. v. Vertin, 23 N.Y.3d 549, 560 (2014) (“if parties to a contract omit terms … the inescapable conclusion is that the parties intended the omission”). Accordingly, in MBIA Insurance Corp. v. Countrywide, 2013 WL 1845588 (Sup. Ct. N.Y. Cnty. Apr. 29, 2013), the Supreme Court, interpreting very similar agreements, ruled the proviso to Section 2.01(l) did not apply to other paragraphs of Section 2.01 because the parties did not “include[] such a limitation in all of the paragraphs in Section 2.01.” Id. at *9. Likewise, here, because the words “any defective Mortgage Loan” appear within a proviso attached to the first clause of Section 2.01(l), their “grammatical and logical scope” is presumptively confined to the Loan R&Ws imported into the I&I Agreements by that first clause. See Abbott, 562 U.S. at 25-26. That presumption is further validated because the proviso’s language mirrors the language in the underlying deal documents that are sources of the Loan R&Ws incorporated into Section 2.01(l): The SSAs (for HELOC deals) and the PSAs (for CES and first- lien subprime deals) use the construction “defective mortgage loan” to refer to a loan that is subject to the repurchase protocol because it breached specific Loan R&Ws or because of documentation defects. See A3156 (discussing SSA §§ 2.02, 2.04; 47 PSA § 2.02). The Section 2.01(l) proviso, limiting the remedy for such “defective Mortgage Loans” (or other breaches of Loan R&Ws) to the repurchase protocol, simply clarifies that to the extent Ambac is granted rights imported from the underlying deal documents, Ambac’s remedies are those specified in those deal documents. The structure of the I&I Agreements further confirms the parties intended to apply the repurchase protocol only to breaches of the Loan R&Ws incorporated by the first clause of Section 2.01(l). The proviso’s presence in Section 2.01(l) alone, among a series of over a dozen lettered paragraphs, indicates the parties intended not to limit remedies under other paragraphs. See, e.g., Kimmel, 29 N.Y.3d at 394. Ambac and Countrywide “are both very sophisticated parties” that “certainly could have included such a limitation in all of the paragraphs in Section 2.01.” MBIA, 2013 WL 1845588, at *12. Section 5.02 of the I&I Agreements underscores that Ambac’s remedy for breaches of the I&I R&Ws is not limited to the repurchase protocol. That provision provides each remedy under the I&I Agreements is “cumulative” and “in addition to other remedies … existing at law or in equity” “[u]nless otherwise expressly provided.” A2837. Since the proviso of Section 2.01(l) does not modify Section 2.01(j) or (k), a fortiori it cannot form an “express[]” exception for those paragraphs to Section 5.02’s default rule that Ambac’s remedies are cumulative and broad. Even 48 if any ambiguity existed as to whether the proviso constituted an “express” exception to the default rule for those paragraphs, that question is for the factfinder. See, e.g., Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 172 (1973). To the extent the First Department reasoned recovery could not lie both under the Loan R&Ws incorporated by Section 2.01(l) and under the I&I R&Ws in Section 2.01(j) or (k), its construction also conflicts with the cumulative-remedies guarantee in Section 5.02. It cannot be that a breach of both Loan R&Ws and I&I R&Ws would lead to Ambac having fewer remedies than if there had been a breach of the I&I R&Ws only. B. The First Department’s Construction Deprives Ambac Of A Crucial Benefit Of Its Bargain By ruling the limitation on remedies in Section 2.01(l) applies to the I&I R&Ws in other paragraphs of Section 2.01, the First Department failed to give effect to the agreements’ general purpose. Ambac’s ability to pursue broad remedies for Countrywide’s breaches of the I&I R&Ws, in addition to availing itself of the repurchase protocol for breaches of the Loan R&Ws, is crucial to limiting Ambac’s massive risk under its irrevocable policies. To protect itself, Ambac bargained for two sets of R&Ws that have distinct and complementary functions. The I&I R&Ws ensure that Ambac could rely on Countrywide’s representations about its broader business practices and financial condition in deciding whether to do business with Countrywide. See supra, at 8-9. 49 The sensible remedy for a breach of such warranties, which go to the heart of Ambac’s decision to issue its policies and which expose Ambac to risks that are multiples of the risk for which it bargained, is full recovery of Ambac’s claims payments under those policies. By contrast, “[t]he repurchase protocol is a low-powered sanction for bad mortgages that slip through the cracks. It is a narrow remedy (‘onesies and twosies’) that is appropriate for individualized breaches.” Syncora Guarantee, Inc. v. EMC Mortg. Corp., 2011 WL 1135007, *6 n.4 (S.D.N.Y. Mar. 25, 2011). The repurchase protocol is a standard feature of RMBS securitizations that operates as an efficient remedy to address what the parties expect to be the limited instances of non- compliant loans. There is no indication the parties intended this protocol to be Ambac’s sole remedy for breaches of any and all R&Ws. C. The Section 2.01(l) Proviso Is Narrower Than The Limitation On Remedies In Nomura In holding the Section 2.01(l) proviso applies to the I&I R&Ws, the First Department sought to distinguish its prior decision in Nomura, 133 A.D.3d 96, on the basis that a similar provision there was “narrower” than Section 2.01(l). 15.A. That is not correct. In Nomura, the First Department held a provision making cure or repurchase the “sole remedies” “respecting [1] a missing document or [2] a breach of the [loan- level] representations and warranties contained in Section 8” did not apply to 50 transaction-level warranties in Section 7 of that agreement. 133 A.D.3d at 107-08. But, just as in Nomura, the Section 2.01(l) proviso covers loans with documentation defects or that breach Loan R&Ws. See supra, at 11. Moreover, the case for restricting the limitation on remedies in Section 2.01(l) is even more compelling than it was for the relevant provision in Nomura. First, the provision here is in a proviso and thus is presumed to apply only to the clause to which it is attached. See supra, Part II.A. In contrast, the provision in Nomura appeared in a stand-alone sentence in a separate section of the agreement, without any proviso language. See 133 A.D.3d at 107. Second, unlike in Nomura, here the I&I R&Ws for each Securitization appear in the separate I&I Agreements—the principal agreements relating to the issuance of Ambac’s insurance policy and the only transaction agreements to which Ambac and Countrywide are both parties. In the I&I Agreements, Ambac bargained for and obtained a litany of additional R&Ws providing broad protection commensurate with the risks Ambac was taking on by issuing an irrevocable insurance policy. In Nomura, where the plaintiff was the Trustee, there was no stand-alone agreement containing additional R&Ws. See 133 A.D.3d 99-101. III. AMBAC IS ENTITLED TO REIMBURSEMENT OF ITS ATTORNEYS’ FEES AND EXPENSES INCURRED IN THIS ACTION The First Department additionally erred in holding the I&I Agreements do not require Countrywide to reimburse Ambac for its attorneys’ fees and expenses 51 incurred in this action. In so holding, the First Department quoted this Court’s decision in Hooper, stating without analysis that the I&I Agreements do not “evince an ‘unmistakably clear’ intent to permit Ambac to seek reimbursement for attorneys’ fees incurred in its litigation against Countrywide.” 16.A (quoting Hooper, 74 N.Y.2d at 492). But the I&I Agreements’ plain language shows the parties’ unmistakable intent that Ambac be reimbursed for attorneys’ fees and litigation expenses incurred in enforcing its contractual rights against Countrywide. A. The Plain Language Of Section 3.03(c) Of The I&I Agreements Shows Ambac’s Entitlement To Reimbursement In Litigation Against Countrywide While the default rule in American litigation is attorneys’ fees are borne by the party that incurs them, this Court recognized in Hooper that parties may (and commonly do) structure their dealings differently. 74 N.Y.2d at 492. New York courts must enforce a promise to reimburse attorneys’ fees where it “can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances.” Id. at 491-92. This is not an onerous burden: The party seeking reimbursement need only demonstrate that “such award is authorized by agreement between the parties.” TAG 380, LLC v. ComMet 380, Inc., 10 N.Y.3d 507, 515 (2008); see Hooper, 74 N.Y.2d at 493 (following “settled rules” to determine “intent of the parties” as to fee shifting). 52 Section 3.03(c) of the I&I Agreements states in relevant part that Ambac is entitled to reimbursement for “reasonable attorneys’ … fees and expenses” incurred “in connection with … the enforcement … of any rights in respect of the Operative Documents, including … participating in any litigation … relating to … any party to any of the Operative Documents.” A2828.7 This language cannot be limited to expenses that Ambac incurs in third-party actions because Ambac can “enforce” its rights under the contracts only against another party to the contracts—namely Countrywide. In this way, Section 3.03(c) is similar to the reimbursement provision in TAG 380, which entitled the plaintiff to fees incurred while “enforcing any right against” the counterparty. See 10 N.Y.3d at 515-16. This Court held such “enforcement” language unmistakably applies to first-party actions. See id. And prior to its decision below, the First Department had likewise repeatedly held similar “enforcement” language reflects an unmistakable intent to shift costs and fees in a first-party action like this one. See, e.g., U.S. Bank, N.A. v. DLJ Mortg. Capital, Inc., 140 A.D.3d 518, 519 (1st Dep’t 2016) (plaintiff in RMBS litigation entitled to attorneys’ fees in first-party litigation where contract provided reimbursement of “out-of-pocket expenses reasonably incurred … in respect of enforcing the remedies for” representation-and-warranty breaches) (emphasis added); Wilmington Trust Co. 7 “Operative Documents” is defined to include the I&I Agreements. E.g., A2813. 53 v. Morgan Stanley Mortg. Capital Holdings LLC, 152 A.D.3d 421 (1st Dep’t 2017) (applying U.S. Bank and Hooper to reverse dismissal of indemnification claim).8 The reimbursement provision in Hooper, in contrast, did not include references to either (i) reimbursement for attorneys’ fees and expenditures incurred in the “enforcement” of “rights” under the contract itself or (ii) “litigation relating to any party” to the contract. See 74 N.Y.2d at 490 n.1. Rather, there the plaintiff sued for breach of a contract to purchase computer equipment and installation services and sought attorneys’ fees pursuant to a contractual provision entitled “Indemnity.” Id. at 490 n.1. That provision obligated the defendant to indemnify and hold harmless [plaintiff] … from any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees’ arising out of breach of warranty claims, the performance of any service to be performed, the installation, operation and maintenance of the computer system, infringement of patents, copyrights or trademarks and the like. 8 See also UBS Secs. LLC v. RAE Sys. Inc., 101 A.D.3d 510, 510 (1st Dep’t 2012) (holding indemnification provision covering “all losses, claims, damages, liabilities and expenses incurred by [plaintiff] in connection with the enforcement of its rights” under the contract applied in a “direct party action”) (emphasis added); Ralco, Inc. v. Citibank, N.A., 32 A.D.3d 301, 301 (1st Dep’t 2006) (holding reimbursement provision covering “all of [defendant’s] costs and expenses, including reasonable counsel fees … in connection with … the enforcement of [defendant’s] rights” applied in first-party action) (emphasis added). (The relevant contract language at issue in UBS and in Ralco is set forth in the motion court decisions. See UBS Secs. LLC v. RAE Sys. Inc., No. 652606/2011, Dkt. No. 25 at 33 (Sup. Ct. N.Y. Cnty. Feb. 28, 2012); Ralco, Inc. v. Citibank, N.A., No. 604395/2002, 2005 NY Slip Op 30386(U), *7 (Sup. Ct. N.Y. Cnty. June 22, 2005).) 54 Id. at 492 (modifications in original). This Court rejected the fees claim, holding the indemnity provision was “typical of those which contemplate reimbursement when the indemnitee is required to pay damages on a third-party claim.” Id. This Court explained all of the listed circumstances “are susceptible to third-party claims for failures in the installation or operation of the system” and “[n]one are exclusively or unequivocally referable to claims between the parties themselves or support an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract.” Id. The language of Section 3.03(c) is entirely different, as it expressly refers to an action—enforcement of a contract—that can be taken only against a party to the contract. This language, together with surrounding provisions that confirm its effect (see infra, Part III.C), evinces the parties’ unmistakable intent that Ambac be reimbursed for attorneys’ fees and expenses incurred in litigation against Countrywide to enforce the I&I Agreements. B. The “Indemnification” Provisions In Section 3.04 Of The I&I Agreements Confirm That Section 3.03(c) Applies To This First- Party Action The proper construction of Section 3.03(c) is clearer still in light of Section 3.04 of the I&I Agreements, which actually does resemble the Hooper provision in every relevant regard: 55 Section 3.04. Indemnification. (a) In addition to any and all of [Ambac’s] rights of reimbursement, indemnification, subrogation and to any other rights of [Ambac] pursuant hereto or under law or in equity, Countrywide, the Issuer and the Depositor agree to pay, and to protect, indemnify and save harmless, [Ambac] … from and against any and all claims, losses, liabilities (including penalties), actions, suits, judgments, demands, damages, costs or expenses (including reasonable fees and expenses of attorneys, consultants and auditors and reasonable costs of investigations) of any nature arising out of or relating to the breach by Countrywide, the Issuer or the Depositor of any of the representations or warranties contained in Section 2.01 or arising out of or relating to the transactions contemplated by the Operative Documents by reason of: … A2829-30. The coverage of the indemnity in Section 3.04(a) is set forth immediately after the above-quoted paragraph and includes, inter alia, “any omission or action … in connection with the offering, issuance or delivery of the Securities;” “misfeasance or malfeasance … or gross negligence or theft” by directors, officers, and employees; violations of law; and breaches of representations and warranties. A2829. In Section 3.04(b), in turn, Ambac similarly indemnified “Countrywide, the Issuer, and the Depositor” regarding “any untrue statement or alleged untrue statement of a material fact contained in the Insurer Information;” any failure by Ambac to make a payment under the insurance policy; or any breach of Ambac’s representations and warranties. A2830. The “Indemnification” provisions of Section 3.04 thus function virtually identically to the provisions this Court analyzed in Hooper: They require the 56 indemnitor to “save harmless” the indemnitee and contemplate “subjects [that] are susceptible to third-party claims for failures” in the securitization process, such as by investors in the RMBS. See 74 N.Y.2d at 492. By contrast, the “reimbursement” clause of Section 3.03(c) has none of these hallmarks of what this Court in Hooper called a “typical” indemnification clause for third-party claims. Id. As discussed above, Section 3.03(c) expressly concerns a different category of litigation expenses: those incurred in the “enforcement” of “rights” under the contract itself. The First Department’s holding robs Section 3.03(c)—structured and worded entirely differently from Section 3.04, and clearly intended to provide something more—of any force and effect, contrary to the very interpretative principles this Court applied in Hooper. See 74 N.Y.2d at 493 (stating its interpretation “affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect”). C. The Contrast Between The “Notice” Provisions In Sections 3.03(c) And 3.04 Further Confirms That Section 3.03(c) Applies To This First-Party Action The “notice” provisions in Sections 3.03(c) and 3.04 also differ in important respects that show Ambac’s entitlement to recover its fees and costs in this action. In Hooper, this Court relied in part on language in the indemnity clause requiring the plaintiff to “promptly notify” the defendant of any indemnifiable “claim or litigation” and allowing the defendant to “assume the defense of any such claim or 57 litigation with counsel satisfactory to [plaintiff].” 74 N.Y.2d at 492 (brackets in original). This Court stated such language “ha[d] no logical application to a suit between the parties.” Id. at 493. Here, the notice language in Section 3.03(c)—but not in Section 3.04—clearly has meaning in suits between the parties to the contract. Section 3.03(c) states in relevant part: “Provided that three Business Days written notice of the intended payment or incurrence shall have been given to Countrywide by [Ambac], such reimbursement shall be due on the dates on which such charges, fees, costs or expenses are paid or incurred by [Ambac].” A2828 (emphasis added). Thus, Section 3.03(c)’s notice provision applies not to a “claim or litigation” as in Hooper—which this Court found would be superfluous in a first-party action—but to the “payment or incurrence” of a reimbursable expense. Notice by Ambac is not a condition precedent to reimbursement pursuant to Section 3.03(c); only if Ambac desired to be reimbursed at the time of payment would it need to provide the contemplated notice of the expected payment. Such notice is not superfluous, because although Countrywide would eventually learn of a first-party claim, it would not know the dates on which Ambac has paid or will pay expenses in pursuing the claim. Also importantly, Section 3.03(c) does not invite or require Countrywide’s “assumption of the defense,” which (as Hooper recognizes) would be nonsensical in the first- party “enforcement” actions contemplated by Section 3.03(c). Section 3.04 again stands in sharp contrast, as there the parties have expressly provided, much like in Hooper, that the indemnitee shall notify the indemnitor of any covered “action or proceeding” so that indemnitor may “assume the defense thereof.” A2830. The parties’ omission of a similar clause in Section 3.03(c) further confirms what is unmistakably clear from the other language of the I&I Agreements: Section 3.03(c)’s reimbursement provisions apply to first-party litigation and Section 3.04’s indemnification provisions apply to third-party claims. CONCLUSION The certified question should be answered in the negative, and the First Department’s decision should be reversed to the extent appealed. Respectfully submitted,DATED: September 25, 2017 Philippe Z. Selendy William B. Adams QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 (212) 849-7000 philippeselendy@quinnemanuel.com williamadams@quinnemanuel.com Robert P. LoBue Harry Sandick Peter W. Tomlinson PATTERSON BELKNAP WEBB & TYLER LLP 1133 Avenue of the Americas New York, New York 10036 (212)336-2000 rplobue@pbwt.com hsandick@pbwt.com pwtomlinson@pbwt.com Attorneys for Plaintijfs-AppellantsAttorneys for Plaintiff-Appellant Ambac Assurance Corporation 58 PRINTING SPECIFICATIONS STATEMENT I hereby certify pursuant to 22 NYCRR § 500.13(c) that the foregoing brief was prepared on a computer using Microsoft Word. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Footnote Point Size: 14 DoubleLine spacing: The total number of words in the brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, proof of service, certificate of compliance, or any authorized addendum containing statutes, rules and regulations is 13,578. September 25, 2017Dated: foU*- O-