Ambac Assurance Corporation, et al., Appellants,v.Countrywide Home Loans, Inc., et al., Respondents, Bank of America Corp., Defendant.BriefN.Y.June 6, 2018To be Argued by: JOSEPH M. MCLAUGHLIN (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 DEFENDANTS-RESPONDENTS BRIAN D. HAIL GOODWIN PROCTER LLP The New York Times Building 620 Eighth Avenue New York, New York 10018 Tel.: (212) 813-8800 Fax: (212) 355-3333 DAVID J. APFEL GOODWIN PROCTER LLP 100 Northern Avenue Boston, Massachusetts 02210 Tel.: (617) 570-1000 Fax: (617) 523-1231 JOSEPH M. MCLAUGHLIN DAVID J. WOLL SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 Tel.: (212) 455-2000 Fax: (212) 455-2502 Attorneys for Defendants-Respondents Dated: November 9, 2017 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule § 500.1(f) of the Rules of Practice of the Court of Appeals, Defendant-Respondent Countrywide Home Loans, Inc. is a wholly-owned direct subsidiary of Defendant-Respondent Countrywide Financial Corporation (“CFC”), and Defendant-Respondent Countrywide Securities Corp. is a wholly-owned indirect subsidiary of CFC. CFC, in turn, is a wholly owned direct subsidiary of Defendant Bank of America Corporation. Bank of America Corporation has no parent corporation, and no publicly held company owns 10% or more of Bank of America Corporation’s stock. The affiliates of Bank of America Corporation are set forth in an addendum hereto. See infra page 62, et seq. i Table Of Contents Page 1QUESTIONS PRESENTED 2PRELIMINARY STATEMENT COUNTER-STATEMENT OF THE CASE 7 A. Factual Background B. The Complaint C. The IAS Court’s Decision 7 12 12 D. The First Department’s Decision 14 ARGUMENT 17 POINT I. NEW YORK LAW REQUIRES AMBAC TO PROVE ALL ELEMENTS OF ITS COMMON LAW FRAUD CLAIMS... 17 A. The Requirements for a Common Law Claim for Fraudulent Inducement Are Long-Settled B. All Common Law Fraud Claims Require a Showing of Justifiable Reliance 17 18 Insurers Must Prove Justifiable Reliance To Prevail on Fraudulent Inducement Claims.... 1. 18 2. Public Policy Supports a Justifiable Reliance Requirement when a Financial Guaranty Insurer Seeks Money Damages for Fraudulent Inducement 21 3. Ambac’s Failure To Reasonably Investigate the Securitizations Underscores the Importance of the Justifiable Reliance Requirement Common Law Fraud Claims Require a Showing of Causation 24 C. 26 ii D. Ambac’s Invention of an Insurer-Only Rule for Fraudulent Inducement Claims Relies on Inapposite Authorities 28 E. Ambac Is Barred from Seeking the Equivalent of Rescission by Means of All-Claims-Payment Damages 31 F. Sections 3105 and 3106 of New York Insurance Law Do Not Apply to Claims for Money Damages 33 POINT II. THE FIRST DEPARTMENT CORRECTLY HELD THAT AMBAC’S SOLE REMEDY FOR ITS CONTRACT CLAIMS IS THE CONTRACTUAL REPURCHASE PROTOCOL 35 A. Under the Plain Language of the Parties’ Agreements, Ambac’s Remedies “Shall Be Limited To” the Repurchase Protocol B. Ambac Cannot Evade the Agreed-Upon Limitation on Its Remedies by Recharacterizing Its Allegations 1. Ambac’s Interpretation of the Insurance Agreements Would Render the Sole Remedy Provision Meaningless 2. Countrywide’s Interpretation of the Insurance Agreements Would Give Effect to Every Provision of the Contract 36 40 40 46 Ambac’s Remaining Arguments Are Unpersuasive 48C. POINT III. THE FIRST DEPARTMENT CORRECTLY HELD THAT AMBAC CANNOT RECOVER ITS ATTORNEY FEES IN THIS ACTION 49 A. Without an “Unmistakably Clear” Statement in the Contract, Ambac Cannot Recover Its Attorney Fees in Litigation Between the Parties B. Ambac’s Contrary Arguments Are Unpersuasive 50 54 CONCLUSION 60 iii CERTIFICATE OF COMPLIANCE 61 ADDENDUM 62 iv Table Of Authorities Page(s) Cases ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (2015) Admiral Ins. Co. v. Joy Contractors, Inc., 19 N.Y.3d 448 (2012) Alaska v. United States, 545 U.S. 75(2005) Am. Surety Co. ofN.Y. v. Patriotic Assur. Co., 242 N.Y. 54 (1926) Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016) Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, No. 11 Civ. 2375(JSR), 2011 WL 5335566 (S.D.N.Y. Oct. 31,2011) Basis Yield Alpha Fund Master v. Morgan Stanley, 136 A.D.3d 136 (1st Dep’t 2015) Beal Sav. Bank v. Sommer, 8 N.Y.3d 318 (2007) Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259 (1937) Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 N.Y.3d 269 (2011) Channel Master Corp. v. Aluminum Ltd., Sales, Inc., 4 N.Y.2d 403 (1958) passim 29 42 28 27 53 15 43 42 17, 18 18 v Cherkes v. Postal Life Ins. Co., 285 A.D. 514 (1st Dep’t 1955), aff’d, 309 N.Y. 964 (1956) CIFG Assur. N. Am., Inc. v. Goldman, Sachs & Co., 106 A.D.3d 437 (1st Dep’t 2013) City of N.Y. v. Bell Helicopter Textron, Inc., No. 13-cv-6848, 2015 WL 3767241 (E.D.N.Y. June 16, 2015) City of Syracuse v. Hogan, 234 N.Y 457 (1923) Colin v. Hamilton Fire Ins. Co. of City of N.Y., 251 N.Y. 312(1929) Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137 (2017) Cont 7 Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264 (2010) Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307 A.D.2d 435 (3d Dep’t 2003) Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959) DDJMgmt., LLC v. Rhone Grp. LLC, 15 N.Y.3d 147(2010) Durrans v. Harrison & Burrowes Bridge Constructors, Inc., 128 A.D.3d 1136 (3d Dep’t 2015) E. Dist. Piece Dye Works v. Travelers’ Ins. Co., 234 N.Y. 441 (1923) Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553 (2009) 29 21 46 42 30 26 27 29 15 20,21,22, 25 45 30 17, 18 vi Excess Ins. Co. v. Factory Mut. Ins., 3 N.Y.3d 577 (2004) Ginsburg v. Pac. Mut. Life Ins. Co. of Cal., 89 F.2d 158 (2d Cir. 1937) Glickman v. N.Y. Life Ins. Co., 291 N.Y. 45(1943) Gould v. Cayuga Cty. Nat 7 Bank, 99 N.Y. 333 (1885) Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) Hirsch v. du Pont, 553 F.2d 750 (2d Cir. 1977) Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487(1989) In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241 (S.D.N.Y. 2010) In re Brandywine Volkswagen, Ltd., 306 A.2d 24 (Del. Super. Ct), aff’d, 312 A.2d 632 (Del. 1973) 43 29 29 30 36 22 passim 22, 24, 25 29 In re Hyde, 15 N.Y.3d 179 (2010) 50 Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25 (2008) Ins. Co. of N. Am. v. Kaplun, 21A A.D.2d 293 (2d Dep’t 2000) J. DAddario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113 (2012) Kantor v. Nationwide Life Ins. Co., 16 A.D.2d 701 (1962) 36 33 36 29 vii Kinney v. G.W. Lisk Co., 76 N.Y.2d 215 (1990) Kroski v. Long Island Sav. Bank FSB, 261 A.D.2d 136 (1999) Fuelling v. Roderick Lean Mfg. Co., 183 N.Y. 78(1905) Laub v. Faessel, 297 A.D.2d 28 (1st Dep’t 2002) Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531 (2d Cir. 1997) Levine v. Aetna Ins. Co., 139 F.2d217 (2d Cir. 1943) Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) Marin v. Constitution Realty, LLC, 28 N.Y.3d 666 (2017) MBIA Ins. Co. v. GMAC Mortg. LLC, 30 Misc. 3d 856 (Sup. Ct. N.Y. Cnty. 2010) MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep’t 2013) MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 55 Misc. 3d 1204(A), 2017 WL 1201868 (Sup. Ct. N.Y. Cnty. Mar. 31,2017) 58 29 17, 18 15 21 29 53 36 21 13,32 .20, 26, 27,31 Mercantile & Gen. Reinsurance Co., pic v. Colonial Assur. Co., 82 N.Y.2d 248(1993) 29 Metro. Life Ins. Co. v. Noble Lowndes Int 7, Inc., 84 N.Y.2d 430(1994) Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144 (3d Dep’t 1991) 36 33 viii Mount Vernon City Sch. Dist. v. Nova Cas. Co., 19 N.Y.3d 28 (2012) Mut. Benefit Life Ins. Co. v. JMRElecs. Corp., 848 F.2d 30 (2dCir. 1988) Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42 (1956) Nat’l Fire Ins. Co. v. Roofmaster Const., Inc., Civ. No. 04-71142, 2005 WL 1030326 (E.D. Mich. Apr. 28, 2005) Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015) Ralco, Inc. v. Citibank, N.A., 2005 N.Y. Slip Op. 30386(U), 2005 WL 6237375 (Sup. Ct. N.Y. Cnty. June 22, 2005), aff’d, 32 A.D.3d 301 (1st Dep’t 2006) Reliance Ins. Cos. v. Daly, 38 A.D.2d 715 (2d Dep’t 1972) Royal Indem. Co. v. Patel, No. 503-CV-999, 2005 WL 2573514 (N.D.N.Y. Oct. 13,2005) Sager v. Friedman, 270 N.Y. 472(1936) Sebringv. Fid.-Phoenix Fire Ins. Co. of N.Y., 255 N.Y. 382 (1931) Small v. Lorillard Tobacco Co., 94 N.Y.2d 43 (1999) Sommer v. Guardian Life Ins. Co., 281 N.Y. 508 (1939) Stutman v. Chem. Bank, 95 N.Y.2d 24 (2000) 50, 54 29 45 46 16, 48 57 33 29 26, 30 29 20 29 20 ix TAG 380, LLC v. ComMet 380, Inc., 10 N.Y.3d 507 (2008) TBA Glob., LLC v. Fidus Partners, LLC, 132 A.D.3d 195 (1st Dep’t 2015) U.S. Bank N.A. v. DU Mortg. Capital, Inc. (HEAT), 140 A.D.3d 518, 519 (1st Dep’t 2016) United States v. Babbit, 66 U.S. 55 (1861) Vail v. Reynolds, 118N.Y. 297(1890) Vander Veer v. Cont’l Cas. Co., 34 N.Y.2d 50 (1974) William Higgins & Sons, Inc. v. State, 20 N.Y.2d 425 (1967) Wilmington Trust Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 152 A.D.3d421 (1st Dep’t 2017) Statutes 51,52,55 45 55, 56 42 30 29 45 55, 56, 57 N.Y. Ins. L. §3105 passim passimN.Y. Ins. L. §3106 Other Authorities 14 N.Y.Prac., New York Law of Torts § 1:73 21 Am. Jur. Proof of Facts 3d 565 (1993) 5 Carmody-Wait 2d § 29:240 60A N.Y. Jur. 2d Fraud and Deceit § 158 60A N.Y. Jur. 2d Fraud and Deceit §190 18 23 18 18 26 Edwin W. Patterson, Essentials on Insurance Law (1957) 32, 34 x Harry P. Kamen & William J. Toppeta, The Life Insurance Law of New York (1991) N.Y. Pattern Jury Instr. 3:20 N.Y. Pattern Jury Instr. 4:75 Restatement (Second) on Contracts § 203 cmt. e (1981) 31 18 31 45 xi QUESTIONS PRESENTED Whether a financial guaranty insurer asserting a common law fraud claim is1. required to prove the elements of justifiable reliance and loss causation. The First Department correctly held that all insurers— like every other plaintiff— must prove justifiable reliance and loss causation to maintain a common law fraud claim. 2. Whether a financial guaranty insurer that issued unconditional and irrevocable insurance policies can obtain a remedy equivalent to rescission by seeking fraud damages equal to the value of all claims it paid, even those that did not arise from any alleged fraud. The First Department correctly held that an insurer who issues unconditional and irrevocable insurance policies cannot recover the equivalent of rescission by means of rescissory, all-claims-payment damages. 3. Whether Ambac can recover compensatory damages for its contract claims when the plain language of the insurance agreements limits Ambac’s remedy for any defective loan to a contractual repurchase protocol. The First Department correctly determined that the insurance agreements limit Ambac’s remedy for its contract claims to the repurchase protocol. 1 4. Whether Ambac can recover its attorney fees in this action even though the insurance agreements lack any unmistakably clear language demonstrating the parties’ intent to displace the American Rule. The First Department correctly ruled that Ambac cannot recover its attorney fees incurred in litigation against Countrywide because the contracts contained no unmistakably clear contractual language suggesting that the parties intended that result. PRELIMINARY STATEMENT This case concerns a straightforward application of long-settled tort and contract doctrines in the context of residential mortgage-backed securities (RMBS) transactions. Elements of Ambac’s fraud claim. The First Department correctly held that Ambac— like any other plaintiff asserting a common law claim for fraudulent inducement— cannot recover money damages without proving justifiable reliance and loss causation. The court properly rejected Ambac’s argument that insurers are uniquely exempt from satisfying those elements, even when seeking money damages. Ambac suggests that the First Department overlooked “decades of settled precedent” that supposedly recognized an insurer-only rule that relieves insurers of proving the standard elements of a common law claim for money damages. App. 2 Br. at 27. This supposed insurer-only rule is Ambac’s litigation invention. New York court decisions, including the decisions of this Court, consistently have applied the common law elements of fraud in cases brought by insurer-plaintiffs, in the RMBS context and elsewhere. Not a single one of the cases Ambac cites supports its assertion that New York recognizes a special rule applicable when an insurer brings a common law fraud claim for money damages. Without exception, those cases involve an insurer proceeding in equity to rescind a policy or defend against a claim by a policyholder. Ambac does not assert a claim in equity to rescind or avoid paying claims under its policies, nor could it: Ambac admits it issued unconditional and non-rescindable insurance policies. Financial guaranty insurers are sophisticated investment market participants that, in exchange for significant premiums, provide credit enhancement to asset- backed securities transactions through unconditional, irrevocable promises to supplement cash flow in the event of default. Insurers like Ambac also negotiate the terms and conditions of the insurance coverage with other sophisticated commercial parties. There is no reason why insurers, alone among the sophisticated parties to RMBS transactions, should not have to prove the elements of a common law fraud claim for money damages. The case law recognizes no such insurer exception. 3 Ambac’s position that insurers are and should be exempt from proving justifiable reliance is as undesirable as it is unprecedented. It would create serious moral hazard: An insurer could abandon all due diligence and take on greater and greater risks— earning larger and larger premiums— while leaving policyholders on the hook for the very downside risks the insurer intentionally ignored. Ambac’s position would also relieve sophisticated market participants that receive millions of dollars in premiums in exchange for guaranteeing billion-dollar transactions from any responsibility for verifying the representations made to them. The problem is further compounded by Ambac’s argument that insurers are also exempt from proving loss causation. That position, if adopted, would allow Ambac (and other RMBS insurers) to shift the risk of loss on loans that complied with all contractual representations and warranties, yet defaulted due to the real estate collapse in 2007 and 2008 or other causes outside of Countrywide’s control, all of which were risks Ambac irrevocably agreed to assume. Indeed, here, Ambac bargained for and obtained the right to fully evaluate the mortgage loans underlying the securitizations at issue before extending financial guaranty insurance. Under Ambac’s proposed rule, however, financial guaranty insurers could perform absolutely no due diligence, collect high premiums, and then, if the securities perform poorly, collect money damages for 4 misrepresentations which they never actually relied on and which have no connection to their losses. In the IAS Court and First Department, Ambac argued that New York Insurance Law Sections 3105 and 3106, which “informs” its claim, relieve insurers from proving all elements of their claims, an argument the First Department correctly rejected. Ambac now changes course, contending for the first time that the First Department “erred in construing Ambac’s inducement claim as arising under, and being limited by, Insurance Law §§3105 and 3106.” App. Br. at 32. The First Department only “construed” Ambac to mean what it said. In any event, the Insurance Law did not change the common law of fraudulent inducement. Rescissory damages. The First Department was also correct to reject Ambac’s request for damages equal to all claims that it has paid or will pay under the insurance agreements, without regard to loss causation. Such damages would be equivalent to rescissory damages— i.e., damages that place the parties in the same position they were before the contract. Those are exactly the type of damages Ambac may not recover under the unconditional, irrevocable insurance policies it issued. As the First Department cogently explained, “[rjuling otherwise 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 5 which resulted in default due to the housing market collapse or other risks Ambac insured against.” 14.A. Sole remedy. The First Department also properly ruled that the plain language of the parties’ insurance agreements prevents Ambac from seeking money damages for breach of warranty or breach of contract. Those agreements contain a provision providing that Ambac’s sole remedy for breaches of representations and warranties “with respect to any defective Mortgage Loan” is the contractual repurchase protocol. That provision, as the First Department held, covers all of Ambac’s contract-based claims in this lawsuit because all of those claims depend on the allegation that the Securitizations contained defective loans. Though Ambac purports to sue under provisions of the contract other than representations and warranties concerning defective Mortgage Loans, that is pure artifice. Ambac’s only theory of injury is that the Securitizations contained defective loans that defaulted, triggering Ambac’s obligation to pay insurance claims. As the First Department correctly recognized, all of Ambac’s claims of injury depend on Countrywide’s alleged breaches of representations and warranties about the quality, nature, and underwriting of particular loans. These are precisely the injuries for which the plain language of the insurance agreements restricts Ambac’s remedy to the loan repurchase protocol. 6 Attorney fees. Finally, the First Department correctly held that Ambac cannot recover the attorney fees it incurs in connection with litigating this action. The court applied the longstanding New York rule that a contract must express an “unmistakably clear” intent to displace the traditional American Rule before the court will allow for fee-shifting in first-party actions. The contractual provision at issue here does not state specifically that it applies to fees Ambac incurs in litigation against Countrywide. Nor does it contain any other “unmistakably clear” language to that effect. COUNTER-STATEMENT OF THE CASE A. Factual Background Ambac is a financial guaranty insurer and had approximately $20 billion in assets during the relevant time period. E.g., RA959. Ambac had a single line of business: In exchange for premiums, Ambac guaranteed that investors in various financial products would receive all principal and interest due to them even if the securities stopped performing. Because that was Ambac’s single line of business, Ambac was known as a “monoline” insurer. This action concerns 17 securitizations issued by Countrywide and insured by Ambac between 2004 and 2006 (the “Securitizations”). These Securitizations were backed by more than 375,000 individual mortgage loans— specifically, first- and second-lien home equity lines of credit (“HELOCs”), closed-end second-lien 7 mortgage loans (“CES”), and first-lien subprime loans. See A27. Countrywide either originated or acquired each of these individual 375,000 loans, and then sold pools of them to securitization trusts (collectively, the “Trusts”). See, e.g., A1732. The Trusts then issued and sold RMBS to investors, who were owed the principal and interest on the mortgage loans, to be paid from the cash flows generated by borrower payments. A1715. In exchange for multimillion-dollar insurance premiums, Ambac issued insurance policies to the Trusts covering $20.15 billion in exposure under the Securitizations. E.g., A66; A3013. The specific risks which Ambac agreed to insure against included the risk that a downturn in housing prices, increased unemployment, or other macroeconomic events might cause the borrowers of the loans underlying the Securitizations to miss mortgage payments. To the extent the missed payments resulted in shortfalls in payments to investors, they would trigger Ambac’s duty to make the investors whole. By design, these insurance policies were expressly unconditional and irrevocable, a feature which increased the value of the Securitizations to investors and, consequently, the insurance premiums Ambac received. In this case, Ambac’s guarantees reduced the risk inherent in the insured securities enough to raise the Securitizations’ ratings from (for most of the Securitizations) BBB or Baa2— -just two notches above “junk bonds” — to AAA. 8 See RA505-06; RA342 at 255:12-16; RA130 at 137:21-23; RA745-46; RA659- 60; RA117 at 85:17-24; RA318-19 at 160:10-163:20; RA727-30. For each Securitization, a series of interrelated contracts (the “Transaction Documents”) defines Ambac’s and Countrywide’s rights and obligations. E.g., A1029; A1710; A2573; A2806. The only contract to which both Ambac and Countrywide are parties is the Insurance and Indemnification Agreement (“Insurance Agreement”). E.g., A2842ÿ15. Section 2.01(/) of each Insurance Agreement incorporates the more than 60 representations and warranties (“R&Ws”) which Countrywide made about the mortgage loans in each Securitization in other Transaction Documents to which Ambac is not a party. These R&Ws covered compliance of the mortgage loans with loan underwriting guidelines and issues pertaining to a range of loan characteristics. E.g., A2582-93. Section 2.01(7) also contains a sole remedy provision, which provides that if any mortgage loan fails to comply with an R&W in a way that “materially and adversely affects” Ambac’s interest in the loan, Ambac’s remedy is limited to a contractual repurchase protocol through which Countrywide must cure, substitute, or repurchase any materially defective loan. E.g., A2818. Before entering into these agreements, Ambac had access to a wealth of information that it could analyze to determine whether the RMBS transactions were too risky to insure. The public offering documents for the Securitizations, for 9 example, disclosed numerous risk factors associated with the underlying loans, including high loan-to-value ratios, low borrower FICO scores, high percentages of loans originated with little or no verification of borrower income or assets, and a “significant number” of loans originated as exceptions to Countrywide’s underwriting guidelines. See, e.g., A1718-24; A1729; A2148; A2435. Ambac admits it also had “unfettered” access to the Securitizations’ loan origination files and to third-party due diligence reports commissioned by Countrywide. A4591. But Ambac never reviewed a single loan file, and never requested that any loan identified by Countrywide prior to closing as non- compliant with guidelines. A4388-96. Indeed, for a majority of the Securitizations, Ambac closed without first obtaining any third-party due diligence results from Countrywide. A765; A4396. Ambac performed no due diligence on the loans underlying the Securitizations, even though Ambac’s written Loan File Due Diligence Procedures required it to “choose a random sample of between 125 and 200 loans to be reviewed by an outside due diligence firm” in order to “[pjrovide confirmation that the lender is originating its loans in accordance with its underwriting guidelines.” RA10. Ambac’s procedures also required it to review and check the due diligence results and ensure that: (i) “[a]ny loan not reviewed [had] a very good explanation or proof of payoff,” (ii) “no loan field [had] more than a 5% difference between the 10 tape and the file reviewed,” and (iii) no “more than 5% of the loans sampled [had] credit issues.” RA11. If more than 5% of the loan sample did have credit issues, Ambac was required to “resize[] the credit enhancement to reflect the lower credit quality pool, or, depending on the degree of variance, re-consider the transaction.” Id. Ambac could “NOT remove the few loans in question and assume the problem is fixed because it does not address the fact that more problems can be lingering in the overall pool.” Id. Ambac was also required to randomly select “between 20 and 30 loans” from the sample “for reappraisal review.” Id. Ambac ignored all of these requirements when issuing the insurance policies for each of the Securitizations. In one transaction, fewer than 24 hours passed between Ambac’s receipt from Countrywide of a loan tape describing the underlying collateral and Ambac’s decision to insure the $1.3 billion securitization. A4377-79. Ambac received millions of dollars in premiums per Securitization. See RA655-56 (showing total per annum premiums on the Securitizations exceeded $33 million); RA748 (Ambac earns “approximately $1.2-$1.5 million per year per every $1 billion insured RMBS par outstanding.”). Indeed, Ambac employees were incentivized to insure risky RMBS business that generated high insurance premiums, because it directly increased their compensation. A4556. 11 B. The Complaint In 2007 and 2008, the United States suffered the worst financial crisis since the Great Depression. Housing prices plunged, unemployment mounted, and the credit markets collapsed across the globe. As a result, widespread borrower defaults occurred on the mortgage loans underlying the Securitizations and other RMBS. A4478-79. As incoming mortgage payments decreased, the Trusts began to fall short of the cash necessary to pay the RMBS investors. When shortfalls occurred, Ambac became obligated to pay claims to investors. In response, Ambac sued Countrywide and virtually every other major RMBS sponsor and originator with which it did business between 2004 and 2007. In each of its complaints, Ambac advanced the same central claim: It was deceived about the riskiness of approximately 80% or more of the loans underlying the securitizations it insured. See A4480-81 (collecting Ambac’s complaints). In this case, Ambac has claimed that Countrywide breached its R&Ws with respect to the loan collateral and fraudulently induced Ambac to insure the Securitizations. A163. C. The IAS Court’s Decision After discovery, both Ambac and Countrywide filed cross-motions for summary judgment. On October 22, 2015, the IAS Court granted and denied each motion in part. 12 Ambac first argued that “there is no justifiable reliance requirement for a fraud claim under [Insurance Law] Section 3105” and that it need not prove loss causation under Sections 3105 and 3106 of the Insurance Law. A202; A204-08 (internal quotation marks omitted). While Ambac’s Complaint and Amended Complaint each asserted causes of action for common law fraud, Ambac argued that Sections 3105 and 3106 of the Insurance Law should nonetheless apply. A202; A204-05. The IAS Court agreed with Ambac. It held that “in the insurance context,” Section 3105 of the New York Insurance Law relieves Ambac of the requirement that it justifiably relied on Countrywide’s representations to prove its common law claim for fraudulent inducement. A30. The IAS Court also held that Ambac need not prove loss causation in order to establish liability. A48-49 (citing MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412 (1st Dep’t 2013) (“MBIA IF)). The IAS Court, however, rejected Ambac’s attempt to use Section 3105 and 3106 to recover all of its claims payments, irrespective of whether the payments were caused by alleged misrepresentations. A45-47. The IAS Court recognized that Ambac’s theory of “compensatory damages” is “effectively equivalent to rescissory damages” — a remedy Ambac gave up when it issued irrevocable and unconditional insurance policies. Id. The IAS Court reasoned that rescissory 13 damages would improperly “put Ambac in the same position as if it had never agreed to insure the securitizations.” A46. Second, the IAS Court ruled that the sole remedy provision which is incorporated into the Insurance Agreements only applies to claims styled as breaches of Section 2.01(/) of the Agreements. A33. “[T]o the extent that Ambac can prove breaches of other sections of the Insurance Agreements,” the IAS Court thus concluded, “it is not limited to the sole remedy of repurchase.” Id. Third, the IAS Court held that Ambac cannot recover its attorney fees incurred in this action because Section 3.03(c) in the parties’ agreements did not contain the exacting language necessary to make “unmistakably clear” that the parties intended to waive the benefit of the American Rule. A49-50 (quoting Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 492 (1989)). D. The First Department’s Decision On May 16, 2017, following oral argument, the First Department issued a unanimous decision, ruling in Countrywide’s favor with respect to the four issues presented on this appeal. First, the First Department held that “[t]he elements of a fraud cause of action are long-settled,” and therefore rejected Ambac’s argument below that the Insurance Law informs its common law fraud claim and abrogated the justifiable reliance and causation elements of an insurer’s common law claims. 8.A. Further, 14 the First Department observed that justifiable reliance is “essential” (quoting Basis Yield Alpha Fund Master v. Morgan Stanley, 136 A.D.3d 136, 140 (1st Dep’t 2015)) and a “fundamental precept” to any fraud claim (quoting Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322 (1959)). 9.A. The First Department noted that in ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y. 3d 1043 (2015), this Court “recently reaffirmed, in a fraud action brought by a financial guaranty insurer like Ambac here, the necessity of proving justifiable reliance.” 9.A. With respect to loss causation, the First Department held that it has “repeatedly reaffirmed” that ‘“[ljoss causation is the fundamental core of the common-law concept of proximate cause’ and ‘[a]n essential element’ of a fraud claim.” 10.A (quoting Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dep’t 2002)). Second, the First Department affirmed the IAS Court’s holding that Ambac is not entitled to all claims payment damages because “[although Ambac describes the relief it seeks as compensatory damages, it is no different from rescissory damages to which Ambac is not entitled.” 13.A. As the First Department explained: Ruling otherwise would inequitably allow Ambac to recoup the money it paid out for loans that complied with all warranties, and for which there misrepresentations, but which resulted in default due to the housing market collapse or other risks Ambac insured against. By issuing the irrevocable insurance policies, Ambac accepted the risk that an economic downturn could cause the loans to default and trigger its obligation to pay. were no 15 14.A (emphasis added). Third, the First Department ruled that Ambac’s sole remedy under the Insurance Agreements for its claims is the repurchase protocol. 14.A-15.A. The Court examined the “plain language” of the parties’ contracts, and explained that “Section 2.01(/) of the agreements broadly provides that ‘the remedy with respect to any defective Mortgage Loan . . . shall be limited to [the repurchase protocol].”’ 14.A (emphasis in original). Since the “heart of Ambac’s lawsuit is that it was injured due to a large number of defective loans,” the First Department rejected Ambac’s attempt to “avoid the consequences of the sole remedy provision” by claiming that it was also fraudulently induced by Countrywide’s R&Ws about its operations and financial condition. 15.A. The First Department also concluded that Ambac’s reliance on Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), was “unavailing” because the contractual provision at issue there was “narrower than the one here.” 15.A. Fourth, the First Department affirmed the IAS Court’s ruling that Section 3.03(c) of the parties’ Insurance Agreements does not evince the “unmistakably clear” intent to allow Ambac to seek reimbursement of attorney fees in this action. 16.A (citing Hooper, 74 N.Y.2d at 492). 16 ARGUMENT POINT I. NEW YORK LAW REQUIRES AMBAC TO PROVE ALL ELEMENTS OF ITS COMMON LAW FRAUD CLAIMS A. The Requirements for a Common Law Claim for Fraudulent Inducement Are Long-Settled “[T]he essential constituents” of a “common-law action for fraud and deceit . . . have been understood from the time such actions were maintained.” Kuelling v. Roderick Lean Mfg. Co., 183 N.Y. 78, 85 (1905). Those elements are “a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. deC.V., 17 N.Y.3d 269, 276 (2011). This Court has repeatedly reaffirmed those elements. See, e.g.,ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 (2015); Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009); Knelling, 183 N.Y. at 85. Ambac’s operative complaint includes specific allegations that it “reasonably relied on Countrywide’s statements and omissions when it entered into the [Insurance] Agreements and issued its Policies” and that, “[a]s a result of Countrywide’s false and misleading statements and omissions, [it has] suffered, and will continue to suffer, damages including claims payments under the Policies.” A164; see also A108-11. Yet Ambac now contends that these core 17 elements of justifiable reliance and loss causation, which it pled, do not apply here because this case alleges fraudulent inducement of an insurance policy. Contrary to Ambac’s suggestion, New York law has never carved out a special rule for fraud claims brought by insurers. The First Department correctly rejected Ambac’s argument, and this Court should affirm. B. All Common Law Fraud Claims Require a Showing of Justifiable Reliance 1. Insurers Must Prove Justifiable Reliance To Prevail on Fraudulent Inducement Claims Ambac does not dispute that a plaintiff normally must prove justifiable reliance to prevail on a claim of fraudulent inducement. Indeed, every leading New York law treatise addressing the elements of causes of action recognizes that justifiable reliance is an element of a claim seeking money damages for common law fraud. See, e.g., 60A N.Y. Jur. 2d Fraud and Deceit § 158; 5 Carmody-Wait 2d § 29:240; 14 N.Y.Prac., New York Law of Torts § 1:73; N.Y. Pattern Jury Instr. 3:20. Decades of precedent confirm the point. See, e.g., Centro Empresarial, 17 N.Y.3d at 276; Eurycleia Partners, 12 N.Y.3d at 559; Kuelling, 183 N.Y. at 85; Channel Master Corp. v. Aluminum Ltd., Sales, Inc., 4 N.Y.2d 403 (1958). None of those authorities recognizes an insurer-only exception to the general rule. In fact, this Court’s recent decision in ACA Financial, makes clear that there is no such exception. In ACA Financial, a monoline financial guaranty insurer 18 (like Ambac) sued the sponsor of a financial transaction which the monoline had insured. 25 N.Y.3d at 1044. The question presented was whether the monoline had adequately pleaded justifiable reliance. The Court divided over the question whether the monoline plaintiff had stated a claim. But the majority and the dissent agreed that a monoline financial guaranty insurer asserting a common law fraudulent inducement claim must plead and prove “facts to support the claim that it justifiably relied on the alleged misrepresentations” by the party that took out the insurance policy. Id. “It is well established,” the majority explained, “that if . . . the [plaintiff] has the means available to [it] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, [the plaintiff] must make use of those means . . . .” Id. The dissent similarly stated: Savvy commercial and financial players and inventive lawyers abound in New York. Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable is designed to make sure that the courts “rejectf] the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” and “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” 19 ACA Financial, 25 N.Y.3d at 1051 (Read, J., dissenting) (quoting DDJMgmt., LLCv. Rhone Grp. LLC, 15 N.Y.3d 147, 154 (2010)). Ambac contends that ACA Financial does not apply here because “[t]he plaintiff never argued for the applicability of the common law insurance rules” and “did not frame its claims as based on misrepresentations made on behalf of an insurance applicant.” App. Br. at 26. But courts have roundly rejected similar attempts to dismiss ACA Financial, and with good reason. As Justice Komreich of the Commercial Division recently explained: It is hard to believe . . . that the Court of Appeals would have made such a fundamental error about the applicable law or that such an obvious dispositive issue would have been overlooked by the able counsel in that case. As in ACA, [a monoline insurer] must prove the common law elements of fraud, including loss causation. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 55 Misc. 3d 1204(A), 2017 WL 1201868, at *19 (Sup. Ct. N.Y. Cnty. Mar. 31, 2017). The implausibility of Ambac’s premise— that in ACA Financial this Court “overlooked” decades of its precedent on the core elements of a fraud claim— is reinforced by the significant number of decisions issued both before and after ACA Financial that have applied the ordinary common law elements in fraud cases 1 This Court also has emphasized the justifiable reliance requirement of common law fraud when distinguishing common law fraud claims from statutory claims that evidence clear legislative intent to depart from the common law reliance requirement. See Stutman v. Chem. Bank, 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 55-57 (1999). 20 brought by monolines. See Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 44 Misc. 3d 1206(A), 2014 WL 3288335, at *2 (Sup. Ct. N.Y. Cnty. July 3, 2014); CIFG Assur. N. Am., Inc. v. Goldman, Sachs & Co., 106 A.D.3d437, 437-38 (1st Dep’t 2013); MBIA Ins. Co. v. GMAC Mortg. LLC, 30 Misc. 3d 856, 861 (Sup. Ct. N.Y. Cnty. 2010). 2. Public Policy Supports a Justifiable Reliance Requirement when a Financial Guaranty Insurer Seeks Money Damages for Fraudulent Inducement The justifiable reliance requirement serves to identify whether the plaintiff “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” DDJMgmt., 15 N.Y.3d at 154 (citation omitted). Accordingly, longstanding New York law recognizes the particular importance of justifiable reliance in cases where a sophisticated plaintiff contends it was defrauded. “It is well established that where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541 (2d Cir. 1997) (citation and internal quotation marks omitted). Sophisticated parties must “investigate the information available to them with the care and prudence expected from people blessed with full access to information.” 21 Hirsch v. du Pont, 553 F.2d 750, 763 (2d Cir. 1977). “This rule has been frequently applied in recent years where the plaintiff is a sophisticated business person or entity that claims to have been taken in.” DDJ Mgmt., 15 N.Y.3d at 154. “In some cases, the rule serves to rid the courts of cases in which the claim of reliance is likely to be hypocritical.” Id. There is little question that Ambac qualifies as a sophisticated entity. Its entire “business model” was “based on establishing underwriting guidelines and procedures that enable the company to guarantee” complex financial instruments “that were ‘of investment grade quality with a remote risk of loss.’” In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241, 248 (S.D.N.Y. 2010) (quoting Ambac’s Form 10-K filings). Ambac’s credit enhancement role in the Securitizations afforded it a negotiated right to “unfettered” access to all of the underlying loan origination files, and Ambac’s own complaint describes efforts that it says it took to vet the Securitizations at issue. A110. While the parties disagree whether a trier of fact could determine that Ambac’s conduct constitutes justifiable reliance on any alleged misrepresentations by Countrywide, Ambac cannot deny that it had the contractual right and means to perform significant due diligence on the Securitizations. For these reasons, Ambac’s attempt to analogize itself to insurers who sell life, health, fire, and other policies— policies which, unlike the financial guaranty 22 offered by Ambac, may be rescinded in equity— is unavailing. Such an insurer may be entitled to equitable relief, including rescission, and “relieve[d] . . . from its obligation to make payments to the insured” if it “was given incorrect or incomplete information by a prospective insured, and relied on the information providing coverage.” 21 Am. Jur. Proof of Facts 3d 565 (1993). Unlike Ambac, high-volume insurers retain rescission rights because they often cannot conduct due diligence on the policies they issue: Because of the large number of policies that an insurer is typically asked to sell, insurers are usually not able to undertake an independent investigation of a prospective insured before issuing a policy. When an independent investigation is not possible, the insurer must rely on the truthfulness of the information set forth in the application in determining whether the insurance should be provided. ... If an event later occurs that triggers coverage under the policy, and the insurer ends up paying under the policy, . . . the insurer is, in effect, paying for something against which it had not been able to protect itself adequately, whether through higher premiums, secondary insurance, or otherwise. Id. But an insurer’s right to rescission is not the same as a right to obtain money damages for fraud. Indeed, no case recognizes the right of any insurer— including life, health, and fire insurers, let alone monoline insurers— to recover money damages for fraud without first proving justifiable reliance. Rather, the case law dictates that insurers, like every other plaintiff, must prove justifiable reliance to prevail on a fraudulent inducement claim for money damages. 23 3. Ambac’s Failure To Reasonably Investigate the Securitizations Underscores the Importance of the Justifiable Reliance Requirement Ambac’s assertion that it is unfair to insurers to require them to prove justifiable reliance rings hollow. Ambac marketed its unconditional financial guaranty product to the RMBS industry by touting its depth of knowledge and sophistication in the mortgage markets. Ambac told investors in its SEC filings that its underwriting guidelines were “developed . . . with the intent that Ambac Assurance guarantees only those obligations which, in the opinion of [its] underwriting officers, are of investment grade quality with a remote risk of loss.” In re Ambac. Fin. Grp., Inc. Sec., Litig., 693 F. Supp. 2d at 277 (quoting Ambac Form 10-K for the year ending December 31, 2005, filed with the SEC on March 13, 2006, at p. 10). Absolving Ambac of the requirement to prove that its reliance on the representations made to it was reasonable would upset the settled expectations of other market participants, like RMBS investors and rating agencies, who relied on the credit enhancement Ambac provided and who were led to believe that Ambac was conducting sophisticated diligence. Ambac also ignores that its insurer-only rule would make it harder for an ordinary RMBS investor to prove fraud relative to Ambac and other insurers. Such asymmetry is particularly untenable where, as here, Ambac’s participation in the Securitizations made them more attractive to investors who would not have 24 invested in significantly lower-rated securities that were unenhanced by Ambac’s insurance. Ambac’s doomsday description of the burdens it will bear if required to prove justifiable reliance is illusory. The law already holds that “[w]here a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” DDJMgmt., 15 N.Y.3d at 154. Ambac is not that plaintiff. And even if it were, the issue should be tried. In light of a voluminous record showing that it abdicated its responsibilities to adhere to the “remote risk” model of underwriting it touted to investors, Ambac would rather not have to convince a fact-finder that its reliance was justifiable. In re Ambac. Fin. Grp., Inc. Sec., Litig., 693 F. Supp. 2d at 248. This record includes the undisputed evidence that Ambac, in violation of its own policies, failed to perform any loan-file due diligence, failed to request due diligence that Countrywide had performed, and failed to review the due diligence results it did receive from Countrywide. Ambac now complains about alleged discrepancies between the pre-closing loan tapes (which it did receive) and loan files (to which it had access but chose to ignore), when a review of those loan files at the time they were received would have revealed those purported discrepancies. See pp. 10, supra. “When insuring a deal worth hundreds of millions or billions of dollars, 25 that it would have merely cost tens of thousands of dollars to reunderwrite a small sample of loans should be enough proof that [the monoline insurer plaintiffs] reliance was not reasonable.” MBIA v. Credit Suisse, 2017 WL 1201868, at *14. This Court should affirm the First Department’s application of settled and straightforward law requiring Ambac to justify its reliance on representations made in billion-dollar RMBS transactions on which it was paid millions of dollars in premiums. C. Common Law Fraud Claims Require a Showing of Causation Black letter New York law holds that “[t]he injured party is entitled to recover in a tort action for deceit only such damages as result directly, necessarily, and proximately from the fraud.” 60A N.Y. Jur. 2d Fraud and Deceit §190. Earlier this year, this Court reiterated that “[a] false representation does not, without more, give rise to a right of action, either at law or in equity, in favor of the person to whom it is addressed.” Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137, 142 (2017). Rather, “reliance on the false representation must result in injury”; “[i]f the fraud causes no loss, then the plaintiff has suffered no damages.” Id. (quoting Sager v. Friedman, 270 N.Y. 472, 479-81 (1936)). Courts in New York apply an “out of pocket rule” to assess the proper recovery in a fraud case: Plaintiffs are entitled only to “the actual loss sustained as a direct result of 26 fraud that induces an investment.” Cont 7 Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264, 271 (2010). The sophistication and business purpose of financial guaranty insurers underscore the wisdom of requiring proof of loss causation: “Limiting [a monoline insurer’s] recovery to losses incurred due to non-conforming loans comports with the traditional out-of-pocket rule . . . and with [the insurer’s] agreement to insure the risk of loss on conforming loans.” MBIA v. Credit Suisse, 2017 WL 1201868, at *20. Indeed, as this Court noted on a prior appeal in this case, Ambac only initiated litigation “[w]hen the mortgage-backed securities that Ambac insured failed during the recent financial crisis.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 620 (2016). Eliminating a loss causation requirement here would pave the way for Ambac to recover damages for claims payments that arose due to market-wide forces beyond any party’s control. Such a result would fundamentally alter the essence of the bargain that the parties made. “By issuing the irrevocable insurance policies, Ambac accepted the risk that an economic downturn could cause the loans to default and trigger its obligation to pay.” 14.A. Ambac was well aware that it was insuring against an economic downturn. In its 2006 Form 10-K, Ambac stated that “[c]hanges in general economic conditions can impact our business,” and “[Recessions . . . could adversely affect 27 the performance of our insured portfolio.” Ambac Form 10-K for the year ending December 31, 2006, filed with the SEC on March 1, 2007, at p. 29. Now, faced with having to make good on its policies covering the precise risks that it insured against, Ambac seeks to shift the full amount of those risks to the parties who paid for Ambac’s insurance coverage. This Court should hold Ambac to its bargain. D. Ambac’s Invention of an Insurer-Only Rule for Fraudulent Inducement Claims Relies on Inapposite Authorities Ambac’s assertion that “New York law has never required an insurer also prove justifiable reliance or loss causation” (App. Br. at 21) is incorrect. It rests solely on cases sounding in equity in which an insurer sought to rescind or to defeat recovery under a policy. Those cases have no application to common law fraud claims for money damages— especially where, as here, the policies at issue are irrevocable. As long ago as 1926, this Court in American Surety Co. of New York v. Patriotic Assurance Co. emphasized the distinction between an insurer’s rights in equity and a claim for damages. 242 N.Y. 54, 64 (1926). The Court cautioned against “confusing] the general rules applicable to a plaintiff seeking to recover damages at law for fraudulent misrepresentation and those applicable to a defendant who sets up the defense, to an action to hold him liable on a contract that such contract was procured by material misrepresentations.” Id. Rescission is also “equitable in nature,” Mercantile & Gen. Reinsurance Co., pic v. Colonial Assur. 28 Co., 82 N.Y.2d 248, 251 (1993), and is “available even if the material misrepresentation was innocently or unintentionally made,” Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 436 (3d Dep’t 2003) (citation and internal quotation marks omitted). A money damages claim for fraud, by contrast, requires intent, as well as justifiable reliance and loss causation. See In re Brandywine Volkswagen, Ltd., 306 A.2d 24, 28 (Del. Super. Ct.) (“[A] court of law and a court of equity test false statements according to different rules in determining whether a wrong has been committed entitling a person to relief.”), aff’d, 312 A.2d 632 (Del. 1973). Ambac’s case citations uniformly concern actions in equity. In Admiral Insurance Co. v. Joy Contractors, Inc., for example, the Court addressed “alleged misrepresentations” to an insurer in an underwriting submission in the context of causes of action seeking only equitable and declaratory relief. 19 N.Y.3d 448, 458 (2012). Rescission— not money damages— was also requested in Curanovic, 307 A.D.2d at 436. This error pervades Ambac’s brief.2 2 See Royal Indent. Co. v. Patel, No. 503-CV-999, 2005 WL 2573514, at *1 (N.D.N.Y. Oct. 13, 2005) (declaratory judgment action); Kroski v. Long Island Sav. Bank FSB, 261 A.D.2d 136 (1999) (same); Mut. Benefit Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30, 31 (2d Cir. 1988) (rescission); Vander Veer v. Cont’l Cas. Co., 34 N.Y.2d 50, 52 (1974) (defense to claim for coverage); Kantorv. Nationwide Life Ins. Co., 16 A.D.2d 701, 701 (2d Dep’t 1962) (same); Cherkes v. Postal Life Ins. Co., 285 A.D. 514, 515 (1st Dep’t 1955), aff’d, 309 N.Y. 964 (1956) (same); Glickman v. N.Y. Life Ins. Co., 291 N.Y. 45, 52 (1943) (same); Levine v. Aetna Ins. Co., 139 F.2d 217, 217-18 (2d Cir. 1943) (same); Sommer v. Guardian Life Ins. Co., 281 N.Y. 508, 512-13 (1939) (same); Ginsburgv. Pac. Mut. Life Ins. Co. of Cal,89 F.2d 158, 158 (2d Cir. 1937) (rescission); Sebringv. Fid.-Phoenix Fire Ins. Co. of N.Y., 255 N.Y. 382, 385 (1931) 29 New York cases that address rescission or avoidance of payment under a policy are inapposite not only because Ambac is seeking damages, but also because Ambac issued irrevocable policies in the form of a financial guaranty.3 In Sager v. Friedman, 270 N.Y. at 479-81; Vail v. Reynolds, 118 N.Y. 297, 302-03 (1890); and Gould v. Cayuga County National Bank, 99 N.Y. 333, 337 (1885)— each cited by Ambac— this Court identified three potential remedies for fraudulent inducement: (1) rescission of the contract followed by an action at law to recover consideration; (2) an action in equity to rescind the contract; and (3) an action at law to recover the damages sustained. Because Ambac admits that its insurance policies are irrevocable, (see A66; Ambac Form 10-K for the year ending December 31, 2006, filed with the SEC on March 1, 2007 at p. 2), the first and second of these options are foreclosed to it. And none of these cases holds that an action at law to recover damages does not require proof of reliance or loss causation. To the contrary, Sager stated that “[t]o give rise, under any circumstances, to a cause of action, either in law or in equity, reliance on the false representation must result in injury.” 270 N.Y. at 479. (same); E. Dist. Piece Dye Works v. Travelers’ Ins. Co., 234 N.Y. 441, 449-50 (1923) (defense to claim for coverage). 3 In other contexts, insurance policies commonly provide that a misrepresentation of material fact in the insurance application voids the policy. See, e.g., Colin v. Hamilton Fire Ins. Co. of City of N.Y., 251 N.Y. 312, 313-314 (1929). Ambac’s insurance policies are by their terms irrevocable. 30 Finally, that the New York Pattern Jury Instructions, upon which Ambac relies (App. Br. at 21), references misrepresentation as one of many “Insurance Defenses” in equity has no bearing on the elements of an affirmative damages claim in law, which alone is at issue here. See N.Y. Pattern Jury Instr. 4:75. In any event, Ambac is wrong that establishing a defense to payment under an insurance policy requires no proof of reliance or causation. See, e.g., Harry P. Kamen & William J. Toppeta, The Life Insurance Law of New York 252-53 (1991) (describing “defense of material misrepresentation,” as requiring proof that “the insurer reasonably relied on [materially false and material representations in the insurance application] to its detriment”). E. Ambac Is Barred from Seeking the Equivalent of Rescission by Means of All-Claims-Payment Damages By seeking recovery of all claims payments it has made or will make under the policies, Ambac elevates form over substance, and seeks rescission by a different name. “[R]ecovery of losses incurred on conforming loans is simply a species of rescissory damages.” MBIA v. Credit Suisse, 2017 WL 1201868, at *20. “That is because the only situation in which [an insurer] could avoid losses on conforming loans is one where it never insured the Transaction.” Id.; see also 13.A-14.A. Ambac has no support for its attempt to recover the equivalent of rescission on an irrevocable guaranty. As the First Department held in MBIA, Ambac 31 “voluntarily gave up the right to seek rescission— under any circumstances', and in fact, [Ambac] does not actually seek rescission.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412, 413 (1st Dep’t 2013) (emphasis in original). Accordingly, Ambac “should not be permitted to utilize this very rarely used equitable tool ... to reclaim a right it voluntarily contracted away or to obtain relief it never actually requested.” Id. (citation omitted). Rescission is “legally unavailable” to Ambac, and damages that provide the exact same relief as rescission would negate Ambac’s unconditional and irrevocable payment obligation. Id. Ambac’s citation of a 1957 treatise on Insurance Law says nothing about the propriety of recovering any and all claims payments, essentially unwinding the insurance policy, as a remedy for fraud. See Edwin W. Patterson, Essentials on Insurance Law 380 (1957). The treatise notes that “[i]n insurance litigation the right to recover damages is seldom involved.” Id. Indeed, Patterson’s book focuses on revocable, high-volume life and fire insurance— not the irrevocable financial guaranty insurance at issue here. See id. at 379-84. Ambac also relies on cases arising in the automobile insurance context, which are equally distinguishable. See App. Br. at 34-35. As Ambac notes, New York has a “statutory scheme [that] prevents rescission ab initio” in light of the “public interest in automobile insurance policies which exceeds that of the parties 32 to the insurance contract.” Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144, 149 (3d Dep’t 1991); see also Ins. Co. ofN. Am. v. Kaplun, 274 A.D.2d 293, 298- 99 (2d Dep’t 2000). While these cases acknowledge that a claim for damages remains available, they nonetheless make clear that any suit for damages must be “based on” — i.e., caused by— “the alleged fraud.” Reliance Ins. Cos. v. Daly, 38 A.D.2d 715, 716 (2d Dep’t 1972). Nothing in these automobile insurance cases even hints, let alone holds, that an automobile insurer is relieved of proving all of the elements of a common law fraud claim, including justifiable reliance, causation, and damages. F. Sections 3105 and 3106 of New York Insurance Law Do Not Apply to Claims for Money Damages Ambac faults the First Department for erroneously “construing” its fraudulent inducement claim as arising under Insurance Law Section 3105 or 3106 and for getting it “precisely backwards” by “holding an insurer must prove loss causation and justifiable reliance” because those sections were not “intended to alter the essential elements of a fraud claim.” App. Br. at 32-34. What is “precisely backwards,” however, is Ambac’s shifting litigation position. While Ambac has not pleaded a claim under Sections 3105 or 3106, it argued vociferously in the IAS Court and in the First Department that these statutes were of critical importance because they “informed” its claim and thus relieved it of the burden to prove justifiable reliance and loss causation. See pp. 13-14, supra. The 33 First Department correctly held that “[t]here is no merit to Ambac’s contention that Insurance Law § 3105 dispenses with the common-law requirement of proving justifiable reliance and loss causation.” 10.A (emphasis added). Without acknowledging its now-discarded assertions before the two courts below, Ambac now tries to flip the script and argue that the First Department interpreted the Insurance Law to “preclude or otherwise limit the relief that Ambac may obtain on its common-law inducement claim.” App. Br. at 32. That is incorrect. The First Department correctly found that Ambac conflated distinct legal concepts by arguing that an insurer need only show that a misrepresentation was material— and nothing more: “Cases applying Insurance Law § 3105 arise in the context of either a declaratory judgment action by an insurer seeking rescission of an insurance policy or an insurer asserting a defense to an insured’s claim for payment under the policy.” 12.A (collecting authorities). “Here, Ambac seeks neither to rescind the policies, which are unconditional and irrevocable, nor to defeat a claim by an insured for payment.” Id. For this reason, Sections 3105 and 3106— like the common law they sought to codify— are beside the point. See App. Br. at 32-33 (noting Section 3105 and 3106 of the Insurance Law “were intended principally to restate and codify the common law” but also “clarif[y] the meaning of ‘materiality’ of a misrepresentation”); see also Patterson, supra, at 387 n.8 34 (noting that predecessor statute to Sections 3105 and 3106 “says nothing about fraud or scienter” and thus “did not change prior New York case law”). POINT II. THE FIRST DEPARTMENT CORRECTLY HELD THAT AMBAC’S SOLE REMEDY FOR ITS CONTRACT CLAIMS IS THE CONTRACTUAL REPURCHASE PROTOCOL The First Department examined the “plain language” of Section 2.01(7) of the Insurance Agreements, observing that it “broadly provides” that Ambac’s remedy for claims “with respect to” defective mortgage loans or loans that breached the warranties in Section 3.02 of the Purchase Agreement “shall be limited to the remedies specified in the Sale and Servicing Agreement.” A2818; 14.A. The “sole remedy” specified in the Sale and Servicing Agreement is repurchase of the defective loans, pursuant to a contractual repurchase protocol. A1052-53. The First Department explained that the “plain language of this provision indicates that the repurchase protocol applies to a breach of any representation or warranty relating to defective loans, and not just those specifically incorporated into section 2.01(7)*” 14.A-15.A. Ignoring that express limitation, Ambac seeks broad compensatory damages for injuries allegedly caused by the inclusion of non-compliant loans in the Securitizations. The First Department rejected Ambac’s compensatory-damages claim based on the plain language of Section 2.01(7)* It correctly ruled that, because the “heart of Ambac’s lawsuit is that it was injured due to a large number 35 of defective loans,” Ambac “cannot avoid the consequences of the sole remedy provision” by claiming that it was also fraudulently induced by Countrywide with respect to its operations and financial condition. 15.A. This Court should affirm. A. Under the Plain Language of the Parties’ Agreements, Ambac’s Remedies “Shall Be Limited To” the Repurchase Protocol New York law allows parties to limit their remedies for breach of contract. See J. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113, 118 (2012). In determining the scope of a limitation on remedies, courts apply ordinary rules of contract interpretation. See id. at 118-19; Metro. Life Ins. Co. v. Noble Lowndes Inf l, Inc., 84 N.Y.2d 430, 436-38 (1994). “[T]he fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.” Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25, 29 (2008) (citation and internal quotation marks omitted). “The best evidence of that intent is the parties’ writing,” Marin v. Constitution Realty, LLC, 28 N.Y.3d 666, 673 (2017), and a “complete, clear and unambiguous” provision limiting the parties’ remedies should “be enforced according to the plain meaning of its terms,” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002). A party that “later regret[s]” agreeing to such a provision must “lie on the bed [it] made.” Metro Life, 84 N.Y.2d at 436. With slight variation across agreements, Section 2.01(/) of the Insurance Agreements provides in relevant part: 36 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 . . . makes each . . . representation and warranty [in the applicable Operative Documents] to, and for the benefit of, [Ambac] as if the same were set forth in full herein; provided, however, that the remedy for any breach of a representation and warranty of Countrywide in Section 3.02 of the Purchase Agreement and in Section 2.04 of the Sale and Servicing Agreement 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 Purchase Agreement shall be limited to the remedies specified in the Sale and Servicing Agreement. A2818 (emphasis added). Section 2.01(/) has two clauses. The first incorporates the R&Ws from the “Operative Documents” “as if the same were set forth in full” in the Insurance Agreements. A2818. The “Operative Documents” are all of the various contracts involved in the RMBS transactions. See A2813 (Insurance Agreement § 1.01); App. Br. at 11 n.2. Two of the Operative Documents include R&Ws about individual mortgage loans: the Purchase Agreement (in Section 3.02) and the Sale and Servicing Agreement (in Section 2.04). Those R&Ws cover a range of topics, from property appraisals, to borrowers’ debt-to-income ratios and incomes, to compliance with predatory-lending laws, even to a representation that “each Mortgage Loan was originated in accordance with . . . underwriting guidelines.” A2584; A2586; A2589; A2592 (Purchase Agreement § 3.02(iv), (xiv), (xxxvi), (li), 37 (lx)). Ambac’s operative complaint alleges multiple breaches of these so-called “Loan-Level Representations and Warranties.” A121-24 (|146) (citing Section 3.02 of the MLPA and Section 2.04 of the SSA). The second clause in Section 2.01(/) limits the remedies for particular contract claims to “the remedies specified in the Sale and Servicing Agreement,” which refers to the repurchase protocol contained in that agreement. The Sale and Servicing Agreement, in fact, provides that the repurchase protocol is the“sole remedy for breaches of R&Ws concerning the mortgage loans. A1053 (SSA § 2.04(b)). Under the second clause of Section 2.01(J) of the Insurance Agreement, the claims limited to that repurchase remedy are (1) claims “for any breach” of the representations or warranties in Section 3.02 of the Purchase Agreement or Section 2.04 of the Sale and Servicing Agreement, and (2) claims “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 Purchase Agreement.” A2818. As the First Department recognized, all of Ambac’s claims here are claims “with respect to any defective Mortgage Loan” for purposes of Section 2.01(/). 14.A. The First Department explained that the “heart” of this lawsuit— indeed, Ambac’s only theory of injury— is that the Securitizations contained defective 38 loans that defaulted, triggering Ambac’s obligation to pay insurance claims. See A67; A129-30 11-12, 158-59); 15.A. Consider, for example, one of Ambac’s central themes: its allegation that loans in the Securitizations fell outside of Countrywide’s origination guidelines because they were originated through an exceptions process. See A76; All;A82- 83; A86; A88; A89-90; A106 (ffl[39, 41, 51, 53, 61, 64, 67, 105, 106). This is an allegation “with respect to [] defective Mortgage Loan[s],” A2818, and “with respect to” loans that allegedly breach the R&Ws in Section 3.02, see A2589 (Purchase Agreement § 3.02(xxxvi)) (representing that “each Mortgage Loan was originated in accordance with [its] underwriting guidelines”). The same is true of Ambac’s other allegations. Compare A82-83; A88; A96; A101; A106-07 flflf 64, 79, 90, 106, 107) (alleging statements in the Prospectus Supplement regarding the loan collateral’s property appraisals, borrowers’ debt-to-income ratios and income, and compliance with predatory-lending laws were false), with A2584; A2586; A2592; A2593 (Purchase Agreement § 3.02(iv), (xiv), (li), (lx)) (warranties on same topics). Even Ambac’s allegations about Countrywide’s “broader business practices and financial condition,” App. Br. at 48, are assertions “with respect to” defective loans. Those allegations too put forth a theory of injury centered on “defective Mortgage Loan[s]”: The Securitizations contained defective loans that defaulted, 39 forcing Ambac to pay claims to bondholders. Ambac admits as much: The Complaint alleges that Countrywide breached the “broader, transaction-level” R&Ws because of the “prevalence” of breaches of so-called “loan-level” R&Ws in Ambac’s reunderwriting samples. ABO(|159). Ambac does not distinguish between “loan-level” and “transaction-level” breaches that pertain to “the accuracy of information [Countrywide] provided to Ambac.” Id. fl[ 160). As the First Department correctly recognized, any harm that Ambac suffered from any alleged misstatements by Countrywide necessarily rests on loss caused by defective loans. 14.A-15.A. There is, in short, no serious question that all of Ambac’s contract claims are claims “with respect to” allegedly defective or breaching loans. Under Section 2.01(7), Ambac’s sole remedy is the repurchase protocol. B. Ambac Cannot Evade the Agreed-Upon Limitation on Its Remedies by Recharacterizing Its Allegations Ambac’s arguments in support of its claim for compensatory damages contradict the plain meaning and purpose of the contract to which it agreed. Ambac bargained for a'“sole remedy” with respect to defective mortgage loans, and the First Department properly held Ambac to its bargain. 1. Ambac’s Interpretation of the Insurance Agreements Would Render the Sole Remedy Provision Meaningless 40 Ambac’s primary argument to avoid the deal it struck is that the limitation of remedies in Section 2.01(7) does not apply because Ambac has also asserted claims under Sections 2.01(j) and (k) of the Insurance Agreements. App. Br. at 44-48. Ambac calls these provisions “Transaction-Level Representations and Warranties.” A118-21 (fflf 140-45). In Section 2.01(j), Countrywide represented that neither the various transaction documents nor any “other material information” related to the underlying loans, Countrywide’s operations, or Countrywide’s financial condition contained any materially misleading statements and that Countrywide did not know of “any circumstances that could reasonably be expected to cause” “a material adverse change in the ability of [Countrywide] to perform its obligations under any of the Operative Documents, including any material adverse change in the business, financial condition, results of operations or properties” of Countrywide. A2817; see also A2812 (defining “Material Adverse Change”).4 In Section 2.0l(k), Countrywide represented that the offerings complied with applicable securities law and that the “Offering Document” — the Prospectus and Prospectus Supplement— did not contain any materially false statements. A2817. 4 Ambac apparently has abandoned its claim, which it asserted below, that Countrywide also violated Section 2.01(g) of the Insurance Agreements, which concerns the accuracy of Countrywide’s financial statements. See App. Br. at 9-10, 44, 47, 48 (mentioning only Sections 2.0l(j) and (k)). In any event, the remedies for subsection (g) too would be limited to the repurchase protocol because, again, Ambac’s theory of injury rests entirely on “defective Mortgage Loan[s].” See A130 (f 161); pp. 38-40, supra. 41 Ambac urges that the limitation on remedies is a “proviso” that applies only to the language preceding it in subsection (/). Ambac thus reasons that the limitation does not apply to its claims under (j) and (k). That argument is convenient, but incorrect. Regardless of how Ambac chooses to label its claims, all of its breach of contract claims are with respect to “any defective Mortgage Loan” and are governed by subsection (/). Ambac cannot avoid the limitation on remedies— a limitation that obviously was designed for claims exactly like Ambac’s— by cloaking its claims as based upon subsections (j) and (k).5 When assessing the validity of a claim, this Court “look[s] for the reality.” Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 264 (1937); see W Elec. Co. v. Brenner, 41 N.Y.2d 291, 293 (1977). “[T]he essence of the action and not its mere name,” in other words, is dispositive. Brick, 276 N.Y. at 264. “The form of the action, however it may be disguised[,] . . . will not be permitted to mislead the court or divert its attention from the main issue to be determined.” City of Syracuse v. Hogan, 234 N.Y. 457, 461 (1923). Ambac alleges that Countrywide breached its contractual obligations by placing defective loans into the RMBS Trusts. See, e.g., A76; A77; A82-83; A86; 5 Nor is Ambac correct that a “proviso” can only limit the clause preceding it. See App. Br. at 47-48. A proviso has independent force and applies beyond the preceding clause if its language and surrounding context dictates that result. See Alaska v. United States, 545 U.S. 75, 104—09 (2005); United States v. Babbit, 66 U.S. 55, 61 (1861). 42 A88; A89-90; A106 (ff 39, 41, 51, 53, 61, 64, 67, 105, 106). The loans were allegedly defective because, as discussed above, they supposedly breached Countrywide’s R&Ws in the Operative Documents. And Ambac’s theory of how Countrywide’s alleged breaches resulted in harm is that the Securitizations contained defective loans that did not perform as expected, which in turn triggered Ambac’s obligations to pay claims to bondholders. See, e.g.,A61; A127-30 (ff 11-12, 154-58). Ambac’s contract claims unmistakably are claims “with respect to . . . defective Mortgage Loan[s] or . . . Mortgage Loan[s] as to which there has been a breach of representation or warranty under Section 3.02.” A2818. They are, therefore, subject to the limitation on remedies in Section 2.01(/), regardless of how Ambac now chooses to style them. Ambac’s argument that it can invoke subsections (j) and (k) of the Insurance Agreements to avoid the limitation on remedies in subsection (/) violates the cardinal rule that contract provisions should be construed to avoid “render[ing] any portion meaningless.” Beal Sav. Bankv. Sommer, 8 N.Y.3d 318, 324 (2007); Excess Ins. Co. v. Factory Mut. Ins., 3 N.Y.3d 577, 582 (2004). To be sure, subsections (j) and (k) provide additional protection to Ambac on subjects not covered by the loan-level R&Ws in other Operative Documents incorporated in subsection (/). But here, all of Ambac’s allegations under subsections (j) and (k) relate to subjects covered by subsection (/). If Ambac could overcome the sole 43 remedy provision by suing under subsections (j) and (k), that limitation would have no effect. For example, consider the specific warranty in the Purchase Agreement that “the information in the Mortgage Loan Schedule,” which lists all of the loans’ relevant characteristics, “is correct in all material respects.” A2584 (Purchase Agreement § 3.02(iv)). Under Ambac’s interpretation of the parties’ bargain, Ambac could avoid the sole remedy applicable to this specific warranty about the Mortgage Loan Schedule by claiming that material inaccuracies in the loan schedule instead constitute “information relating to the Mortgage Loans” under Section 2.01(j) of the Insurance Agreement, which is not subject to the sole remedy. A2817. If that were correct, two contract provisions would be rendered superfluous: (i) the specific warranty in the Purchase Agreement concerning the “Mortgage Loan Schedule” and (ii) the express limitation in Section 2.01(/) on remedies concerning “any defective Mortgage Loan.” Ambac’s argument would render many other specific warranties incorporated in Section 2.01(/) superfluous, too. Compare, e.g.,A1729-30; A1762; A1780; A1786; A1821; A1822 (statements in Prospectus or Prospectus Supplement regarding manufactured housing, lease duration, single-family occupancy, delinquency rates, loan-to-value ratio, home appraisals, and hazard insurance), with A2585; A2586; A2587; A2588-89; A2590; 44 A2591; A2592 (Purchase Agreement § 3.02(xii), (xvi), (xviii), (xxx), (xxxviii), (xliv), (li)). Ambac’s interpretation also improperly elevates the general provisions of subsections (j) and (k) of Section 2.01 over the specific limitation of subsection (/). Yet the law is clear that “if there [is] an inconsistency between a specific provision and a general provision of a contract,” “the specific provision controls.” Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956). That rule prevents broad, catch¬ all provisions from rendering more specific provisions superfluous. See TBA Glob., LLC v. Fidus Partners, LLC, 132 A.D.3d 195, 204 (1st Dep’t 2015); Durrans v. Harrison & Burrowes Bridge Constructors, Inc., 128 A.D.3d 1136, 1138 (3d Dep’t 2015); see also William Higgins & Sons, Inc. v. State, 20 N.Y.2d 425, 428 (1967). Plus, “the specific or exact term is more likely to express the meaning of the parties with respect to the situation than the general language,” as “[attention and understanding are likely to be in better focus when language is specific or exact.” Restatement (Second) on Contracts § 203 cmt. e (1981). Ambac’s construction flouts those principles. While subsection (j) warrants the “Accuracy of Information” provided by Countrywide with respect to “the Mortgage Loans, the operations of Countrywide, . . .[and] the financial condition of Countrywide,” and subsection (k) warrants the Securitizations’ “Compliance With Securities Laws,” Section 2.01(/) alone addresses the “ remedy with respect to 45 any defective Mortgage Loan . . . .” A2817-18 (emphasis added). See also City of N.Y. v. Bell Helicopter Textron, Inc., No. 13-cv-6848, 2015 WL 3767241, at *10- 11 (E.D.N.Y. June 16, 2015) (where contract prohibited the buyer of a helicopter from recovering money damages from the seller but provided that the purchaser’s right to inspect the helicopter “shall in no way be deemed a waiver ... of any right later to . . . recover damages,” the “brief, general language of the right to inspect without waiver clause” did not “override the clear and precise limitations on remedies set forth in the warranties”); Nat’l Fire Ins. Co. v. Roofmaster Const., Inc., Civ. No. 04-71142, 2005 WL 1030326, at *1, *6 (E.D. Mich. Apr. 28, 2005) (general warranty on workmanship in a roofing contract did not “circumvent” more specific contractual provision stating that the roofing company “w[ould] not be held responsible for water damage to the interior of the premise”). 2. Countrywide’s Interpretation of the Insurance Agreements Would Give Effect to Every Provision of the Contract Ambac argues that Countrywide’s reading of the contract “deprives Ambac of a crucial benefit of its bargain” by leaving Ambac without recourse for any false statements Countrywide made about its “broader business practices and financial condition.” App. Br. at 48. That is a red herring. Ambac is not alleging any injury caused by any misrepresentations that is not also an injury it traces to “defective Mortgage Loan[s].” Ambac could seek compensatory relief under Section 2.01(j) to the extent it could identify a false statement by Countrywide that is not about 46 “defective Mortgage Loan[s]” and is thus not subject to Section 2.01(7). It alleges no such false statement here. Similarly, under Section 2.0l(k), Ambac could bring a claim for a misrepresentation in the Offering Documents that concerns something other than specific loan characteristics that are covered by more specific R&Ws in other transaction documents. Indeed, the Offering Documents contain a number of representations that have nothing to do with the quality of mortgage loans, including descriptions of the RMBS certificates (A2372), overcollateralization provisions, including how excess cash flow will be distributed to certificate holders (A2389), an explanation of an adjustment to the master servicing fee in the event of a prepayment interest shortfall (A2369), and descriptions of how LIBOR will be calculated (A2393). Such claims would not concern allegedly defective loans; they would, instead, allege misstatements in the Offering Documents, as Section 2.0l(k) contemplates. The First Department’s interpretation thus honors the language of the contract without rendering any part superfluous. Holding Ambac to the sole remedy here— where it exclusively and repeatedly alleges that Countrywide misrepresented loan quality and characteristics— also makes practical sense: Claims about defective loans (unlike claims about, for instance, Countrywide’s broader operations) can be fully remedied by curing, repurchasing or substituting those loans. 47 C. Ambac’s Remaining Arguments Are Unpersuasive Ambac raises two additional arguments, but each is unavailing. Ambac’s second argument is that “Section 5.02 of the [Insurance] [Agreements underscores that Ambac’s remedy ... is not limited to the repurchase protocol.” App. Br. at 47-48. Section 5.02 provides in relevant part: 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 Insurance Agreement, the Indenture or existing at law or in equity. A2837 (emphasis added). Ambac’s argument is misguided because Section 2.01(/) “expressly providefs]” that Ambac’s remedies for its claims based on defective loans are limited to the repurchase protocol. A2818. Section 5.02’s provision for “cumulative” remedies thus does not apply. Ambac’s third argument (App. Br. at 49-50) is that the First Department erred in distinguishing the contract in Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc. as a “narrower” limitation on remedies than the one in Section 2.01(/). 133 A.D.3d 96 (1st Dep’t 2015), appeal certified, No. APL-2016-24 (reargument ordered May 9, 2017). Ambac’s argument is beside the point; the contract terms in Nomura are different than the contract terms here. See id. at 101, 108; 15.A. The First Department was correct that the language of the Nomura contract was “narrower,” lacking critical features 48 that are present here: Nomura's, limitation-of-remedies provision did not contain Section 2.01(/)’s expansive “with respect to any defective Mortgage Loan” language, and Nomura's, cumulative-remedies provision did not contain Section 5.02’s “[u]nless otherwise expressly provided” language. See id. at 101. POINT III. THE FIRST DEPARTMENT CORRECTLY HELD THAT AMBAC CANNOT RECOVER ITS ATTORNEY FEES IN THIS ACTION Section 3.03(c) of the Insurance Agreements provides that Countrywide will reimburse Ambac for any reasonable attorney fees it incurs “in connection with . . . the enforcement, defense or preservation of any rights in respect of any of the Operative Documents.” A2828. The First Department properly determined that Section 3.03(c) “does not evince an ‘unmistakably clear’ intent to permit Ambac to seek reimbursement for attorney fees incurred in its litigation against Countrywide.” 16.A. The provision does not state specifically that it applies to fees Ambac incurs in litigation between the parties, as opposed to litigation with third parties. Because this Court has squarely held that first-party fee shifting requires clear and unmistakable contractual language, which is not present here, the First Department correctly determined that Ambac may not recover its attorney fees in this action. 16.A. 49 A. Without an “Unmistakably Clear” Statement in the Contract, Ambac Cannot Recover Its Attorney Fees in Litigation Between the Parties New York follows the traditional “American Rule” regarding attorney fees: “[A]ll parties to a controversy— the victors and the vanquished— [must] pay their own.” In re Hyde, 15 N.Y.3d 179, 185 (2010). Parties may choose to depart from the American Rule by contract. Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491-92 (1989). The mere existence of a contractual reimbursement provision, however, does not displace the American Rule in a first-party action. Id. Only when the contract contains “ unmistakably clear” language abrogating the American Rule will the Court “infer a party’s intention to waive the benefit of the rule.” Mount Vernon City Sch. Dist. v. Nova Cas. Co., 19 N.Y.3d 28, 39 (2012) (quoting Hooper, 74 N.Y.2d at 492)). Section 3.03(c) provides in relevant part: Countrywide [Home Loans, Inc.] agrees to pay [Ambac Assurance Corp.] 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 ... the enforcement, defense or preservation of any rights in respect of any of the Operative Documents .... Provided that [Ambac provides] three Business Days written notice of the intended payment or incurrence . . . , such reimbursement shall be due on the dates on which [Ambac pays or incurs] such charges .... 50 A2828; see also A2811-12 (Insurance Agreement § 1.01) (defining “Countrywide” and “Insurer”). As the First Department recognized, nothing about that language demonstrates an “unmistakably clear” intent to displace the American Rule in first-party actions. To begin with, Section 3.03 does not contain the kind of “exclusive[] or unequivocal]” language the law requires. Hooper, 74 N.Y.2d at 492. Rather, the provision is easily susceptible to the interpretation— commonplace in contracts like this— that Countrywide must reimburse Ambac for the costs of litigating claims against third parties, not against Countrywide itself. This Court’s decisions in Hooper and TAG 380, LLC v. ComMet 380, Inc., 10 N.Y.3d 507 (2008), illustrate the point. In Hooper, a computer vendor agreed to “indemnify and hold harmless” the buyer “from any and all . . . reasonable counsel fees” incurred in connection with any breach of warranty, service to be performed, equipment sold, or infringement of intellectual property. 74 N.Y.2d at 492. Because all of those subjects were “susceptible to third-party claims” and did not “exclusively or unequivocally refer[] to claims between” the contractual parties, this Court held that the provision did not “support an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract.” Id. 51 This Court in TAG found the necessary unmistakably clear language in a contract between a commercial landlord and tenant, which provided that the landlord could recover any attorney fees it incurred in “enforcing any right against Tenant.” 10 N.Y.3d at 516 (emphasis added). Because the parties’ agreement expressly referred to litigation between the landlord and the tenant, it unmistakably intended to displace the American Rule in first-party actions. See id. at 515-16. Within that framework, the question here is not close. Far from “exclusively or unequivocally refer[ring] to claims between” Ambac and Countrywide, Hooper, 74 N.Y.2d at 492, Section 3.03(c) applies by its terms to any rights that Ambac may have under any of the “Operative Documents.” See A2813 (Insurance Agreement § 1.01); p. 37, supra. That includes rights against a number of third parties other than “Countrywide,” which the Insurance Agreements define as Countrywide Home Loans, Inc. See A2811 (Insurance Agreement § 1.01); A2836- 37 (Insurance Agreement § 5.02(a)(ii), (iii), (v)). Take, for example, the Indenture. The Indenture is a contract between the RMBS trust and the trustee responsible for administering the trust. See A2644- 765. Countrywide Home Loans is not a party to the Indenture. A2649. Even so, the Indenture entitles Ambac to certain payments from the indenture trustee whenever the trustee receives funds from the underlying homeowners. A2694-95 (Indenture § 8.03(a)(i), (vi), (ix), (xii)). Ambac also has the right to direct the 52 indenture trustee to take legal action under certain circumstances. A2675-76 (Indenture § 5.05(a)). If Ambac “reasonably . . . incur[s]” attorney fees to “enforceÿ” those rights, A2828, Section 3.03(c) of the Insurance Agreement would require Countrywide Home Loans to reimburse those costs. See Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 181-82 (2011) (discussing ability of third-party beneficiary to enforce contract). Thus, like the provision in Hooper, Section 3.03 deals with subjects “susceptible to third-party claims.” 74 N.Y.2d at 492. It does not “exclusively or unequivocally refer to claims between” the contracting parties. Id. The parties’ intent to limit reimbursement to third-party actions is further evidenced by the provision in Section 3.03(c) requiring Ambac to provide Countrywide with “three Business Days written notice of the intended payment or incurrence.” A2828. As this Court ruled in Hooper, notice provisions have no “logical application to a suit between the parties” and thus create obligations that “unmistakably relate to third-party claims.” 74 N.Y.2d at 492-93; see also Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, No. 11 Civ. 2375(JSR), 2011 WL 5335566, at *5 (S.D.N.Y. Oct. 31, 2011). Indeed, it is impossible to apply Section 3.03(c) to first-party litigation without creating bizarre results that the parties could not have intended. Section 3.03(c), for instance, requires Countrywide to pay “any and all” legal fees that 53 Ambac “reasonably pay[s] or incur[s] ... in connection with ... the enforcement” of its “rights,” whether or not Ambac is the prevailing party. A2828. If applied to litigation between Ambac and Countrywide, Section 3.03(c) would require Countrywide to pay Ambac’s “reasonable” legal fees even if Ambac lost. Id. Equally implausibly, Ambac’s interpretation would require Countrywide to fund a lawsuit against itself on an ongoing basis in real time during litigation. Section 3.03(c) requires Countrywide to pay Ambac’s attorney fees as soon as -with interest accruing on any of Ambac’s legal fees thatthose fees become du< Countrywide leaves unpaid— as long as Ambac gives three days’ notice. See id. (Insurance Agreement § 3.03(d)). It is doubtful the parties intended to create such a bizarre arrangement— much less “unmistakably clear” that they did so. Nova, 19 N.Y.3d at 39 (emphasis omitted). B. Ambac’s Contrary Arguments Are Unpersuasive Ambac first argues that Section 3.03(c) must apply to litigation between Countrywide and Ambac because the provision uses the term “enforcement.” App. Br. at 52-54. As Ambac sees it, “[t]his language cannot be limited to . . . third- party actions because Ambac can ‘enforce’ its rights . . . only against another party to the contracts— namely Countrywide.” App. Br. at 52. That reasoning depends on the false assumption that Countrywide is the only party to the various “Operative Documents” other than Ambac. But as discussed 54 above, Ambac has rights under the various contracts against entities other than “Countrywide” — i.e., Countrywide Home Loans. Those entities include the owner trustee, the indenture trustee, the depositor, and the issuer. See pp. 52-53, supra. Section 3.03(c) would apply to Ambac’s efforts to “enforce” its rights against any of those third-party entities. Ambac nevertheless suggests that this Court and the First Department have held that “enforcement” necessarily refers to first-party actions. App. Br. at 52-53 & n.8. Ambac’s cited cases do not support that proposition. Ambac principally relies on TAG, but this Court did not hold that the word “enforcement” automatically connotes a waiver of the American Rule. Instead, the Court’s holding hinged on the contract provision’s express statement that the tenant would pay the landlord’s legal fees in litigation “ against Tenant.” 10 N.Y.3d at 516. There is no such express statement in the Insurance Agreements. Similarly, in each of the First Department cases Ambac cites, the court relied on contract language that, even if it provided for reimbursement of attorney fees in first-party actions, is absent from Section 3.03(c). See Wilmington Trust Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 152 A.D.3d 421, 422 (1st Dep’t 2017); U.S. Bank N.A. v. DLJ Mortg. Capital, Inc. (HEAT), 140 A.D.3d 518, 519 (1st Dep’t 2016). Those cases addressed fee-shifting provisions in RMBS contracts that applied only to costs incurred by the Trustee in seeking remedies for 55 a breach of those contracts. See Wilmington Trust, 152 A.D.3d at 422 (interpreting provision providing defendants “shall indemnify Purchaser and hold it harmless against any . . . legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of [MSCC’s] representations and warranties contained in Sections 5(a) and 5(b) hereof ’ (emphasis added)); HEAT, 140 A.D.3d at 519 (interpreting Section 2.03(d) of PSA, requiring reimbursement of “expenses reasonably incurred by . . . the Trustee in respect of enforcing the remedies for” a breach of Section 2.03(b) of PSA); see Wilmington Trust, No. 652686/2013, Dkt. No. 13, at 29-30 (Sup. Ct. N.Y. Cnty. Feb. 28, 2014) (hereinafter, Wilmington Trust Contract); HEAT, No. 651174/2013, Dkt. No. 53, at 64 (Sup. Ct. N.Y. Cnty. Sept. 13, 2013) (hereinafter, HEAT Contract). Because in each case the contract language required the sponsor to reimburse the Trustee for actions taken to recover for breach of that same contract, the court interpreted the reimbursement provisions to apply to actions against the sponsor. See Wilmington Trust, 152 A.D.3d at 422; HEAT, 140 A.D.3d at 519. Section 3.03(c), by contrast, unequivocally covers rights that Ambac has against third parties and contains no other clear statement indicating that the parties intended to shift fees in first-party actions. See pp. 52-53, supra. And, unlike the reimbursement provisions in the cases Ambac cites, Section 3.03(c) is not part of 56 the repurchase protocol and is therefore not within the scope of Ambac’s sole remedy in this action. See pp. 35-40, supra; Wilmington Trust Contract at 29-30; HEAT Contract at 64-66. Moreover, Section 3.03(c) conditions reimbursement of fees on the provision of “notice of intended payment or incurrence” — a telltale sign that the parties did not intend to shift fees in first-party actions. See A2828; Wilmington Trust Contract at 29-30; HEAT Contract at 60; UBS Secs. LLC v. RAE Sys. Inc., No. 652606/2011, Dkt. No. 13-1, at 11-13 & Dkt. No. 13-2, at 2-3 (Sup. Ct. N.Y. Cnty. Nov. 16, 2011); Ralco, Inc. v. Citibank, N.A., 2005 N.Y. Slip Op. 30386(U), 2005 WL 6237375, at *16-17 (Sup. Ct. N.Y. Cnty. June 22, 2005), aff’d, 32 A.D.3d 301 (1st Dep’t 2006). Ambac next cites the indemnification provisions in Section 3.04 of the Insurance Agreements to support its fee-shifting position. App. Br. at 54-58. Those provisions require Countrywide “to indemnify and save harmless” Ambac from “claims, losses, liabilities (including penalties), actions, suits, judgments, demands, damages, costs or expenses,” including “reasonable” attorney fees, “arising out of or relating to” certain acts or omissions by Countrywide. A2829-30 (Insurance Agreement § 3.04(a) & (b)). Ambac argues that the indemnification provisions in Section 3.04 cover the same types of claims that the reimbursement provision, Section 3.03(c), covers. Accordingly, Ambac reasons, interpreting both 57 Sections 3.03(c) and 3.04 to apply only to third-party actions would render one or the other superfluous. Ambac’s argument proceeds from a false premise because Sections 3.03(c) and 3.04 do not cover the same types of claims. Section 3.03(c) entitles Ambac to reimbursement for certain costs that it incurs in connection with the “ enforcement” of contractual “rights.” A2828 (emphasis added). Section 3.04(a) and (b) entitles Ambac to indemnification “from and against” certain “claims, losses, liabilities,” and so on. A2829-30 (emphasis added). Section 3.03(c) concerns Ambac’s rights, in other words, and Section 3.04 concerns Ambac’s liabilities— principally if not exclusively claims brought against Ambac. Interpreting both of those provisions to apply only to third-party actions does not place them in conflict; it allows them to work in parallel. The rights-versus-liabilities distinction also answers Ambac’s argument that Countrywide’s right to assume the defense of an action that falls within the indemnification provision of Section 3.04, but not the reimbursement provision of Section 3.03(c), somehow means that the two sections cannot both be limited to third-party actions. See App. Br. at 56-58. When Ambac is subject to a lawsuit covered by Section 3.04(a) or (b), Countrywide must indemnify not only Ambac’s legal fees but also the amount of any judgment. See A2829-30; Kinney v. G.W. Lisk Co., 76 N.Y.2d 215, 218 (1990). Because Ambac will not be required to pay a 58 judgment, it has little incentive to defend the action vigorously. Countrywide thus has a strong incentive to control the defense, and Ambac benefits if it does not have to pay to defend itself. A2830-31 (Insurance Agreement § 3.04(c)). Section 3.03(c), on the other hand, only requires Countrywide to reimburse Ambac’s costs associated with the enforcement of Ambac’s own contractual rights. In that scenario, Ambac alone can prosecute the action and control how it is litigated, and there is no “defense” for Countrywide to assume. Sections 3.03(c) and 3.04, in short, work in harmony and are not redundant. For these reasons, Section 3.03(c) of the Insurance Agreements does not permit Ambac to recover its attorney fees in this action. The judgment of the First Department should be affirmed. 59 CONCLUSION For the foregoing reasons, the Decision and Order of the Appellate Division, First Department, entered on May 16, 2017, should be affirmed. Dated: New York, New York November 9, 2017 SIMPSON THACHER & BARTLETT LLP EB. Joseph M. McLaughlin David J.Woll 425 Lexington Avenue New York, New York 10017 Telephone: (212) 455-2000 GOODWIN PROCTER LLP Brian D. Hail The New York Times Building 620 Eighth Avenue New York, New York 10018 Telephone: (212) 813-8800 David J. Apfel 100 Northern Avenue Boston, Massachusetts 02210 Telephone: (617) 570-1000 Attorneys for Defendants-Respondents Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp. 60 CERTIFICATE OF COMPLIANCE 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: 12 Line spacing: Double 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 13,403. Dated: New York, New York November 9, 2017 Joseph M. McLaughlin SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 Telephone: (212) 455-2000 Attorney for Defendants-Respondents Countrywide Home Loans, Inc., Countrywide Securities Corp., and Countrywide Financial Corp. 61 ADDENDUM Bank of America Corporation’s direct and indirect subsidiaries as of December 31, 2016, as reflected in Exhibit 21 of Bank of America Corporation’s Form 10-K, filed on February 23, 2017, with the Securities and Exchange Commissions, are as follows: BA Continuum Costa Rica, Limitada BA Continuum India Private Limited BA Continuum Singapore International Holdings Private Limited BA Credit Card Funding, LLC BA Electronic Data Processing (Guangzhou) Ltd. BAC Canada Finance Company BAC North America Holding Company BANA Canada Funding Company Ltd. BANA Holding Corporation Banc of America FSC Holdings, Inc. Banc of America Leasing & Capital, LLC Banc of America Merchant Services, LLC Banc of America Preferred Funding Corporation Banc of America Public Capital Corp 62 Banc of America Securities Asia Limited Banc of America Securitization Holding Corporation Bank of America California, National Association Bank of America Malaysia Berhad Bank of America Merrill Lynch Banco Multiplo S.A. Bank of America Merrill Lynch International Limited Bank of America Mexico, S.A., Institucion de Banca Multiple Bank of America Singapore Limited Bank of America, National Association BankAmerica International Financial Corporation Blue Ridge Investments, L.L.C. BofA Canada Bank BofA Finance LLC Boston Overseas Financial Corporation Cherry Park LLC CM Investment Solutions Limited Countrywide Financial Corporation Countrywide Home Loans, Inc. DSP Merrill Lynch Limited FIA Holdings S.a.r.l. 63 Financial Data Services, Inc. First Franklin Financial Corporation Managed Account Advisors LLC MBNA Limited Merrill Lynch (Asia Pacific) Limited Merrill Lynch (Australia) Futures Limited Merrill Lynch (Singapore) Pte. Ltd. Merrill Lynch Argentina S.A. Merrill Lynch B.V. Merrill Lynch Bank and Trust Company (Cayman) Limited Merrill Lynch Canada Inc. Merrill Lynch Capital Markets AG Merrill Lynch Capital Markets Espana, S.A., S.V. Merrill Lynch Capital Services, Inc. Merrill Lynch Commodities (Europe) Limited Merrill Lynch Commodities Canada, ULC Merrill Lynch Commodities, Inc. Merrill Lynch Corredores de Bolsa SpA Merrill Lynch Credit Reinsurance Limited Merrill Lynch Derivative Products AG 64 Merrill Lynch Equities (Australia) Limited Merrill Lynch Equity S.a.r.l. Merrill Lynch Far East Limited Merrill Lynch Financial Markets, Inc. Merrill Lynch Global Services Pte. Ltd. Merrill Lynch International Merrill Lynch International & Co. C.V. Merrill Lynch International Bank Designated Activity Company Merrill Lynch International Incorporated Merrill Lynch Israel Ltd. Merrill Lynch Japan Finance GK Merrill Lynch Japan Securities Co., Ltd. Merrill Lynch Life Agency Inc. (Washington) Merrill Lynch Luxembourg Finance S.A. Merrill Lynch Malaysian Advisory Sdn. Bhd. Merrill Lynch Markets (Australia) Pty. Limited Merrill Lynch Markets Singapore Pte. Ltd. Merrill Lynch Menkul Degerler A.S. Merrill Lynch Mexico, S.A. de C.V., Casa de Bolsa Merrill Lynch Mortgage Lending, Inc. 65 Merrill Lynch Professional Clearing Corp. Merrill Lynch Reinsurance Solutions LTD Merrill Lynch S.A. Corretora de Titulos e Valores Mobiliarios Merrill Lynch Securities (Taiwan) Ltd. Merrill Lynch Securities (Thailand) Limited Merrill Lynch South Africa (Proprietary) Limited Merrill Lynch UK Holdings Limited Merrill Lynch Yatirim Bank A.S. Merrill Lynch, Kingdom of Saudi Arabia Company Merrill Lynch, Pierce, Fenner & Smith, Incorporated ML Equity Solutions Jersey Limited ML UK Capital Holdings Limited Mortgages 1 Limited Mortgages pic NB Holdings Corporation One Bryant Park LLC OOO Merrill Lynch Securities Plano Partners PT Merrill Lynch Indonesia ReconTrust Company, National Association 66 Regent Street II, Inc. Specialized Lending, LLC Spring Valley Management LLC U.S. Trust Company of Delaware Wave Lending Limited White Springs LLC 67