First Department Holds that Insurance Law 3105 Doesn’t Immunize Insurer from Proving Justifiable Reliance and Loss Causation to Succeed on Fraud Claim

Under New York Insurance Law § 3105, insurers have an out. If you materially misrepresent something when buying insurance, the insurer can get out of the contract. That’s valuable to insurers as it transfers the risk of loss when the insurer was induced to issue a policy based upon false information.

In Ambac Assur. Corp. v Countrywide Home Loans, Inc., however, an insurer sought to take the operation of section 3105 beyond voiding a falsely procured policy. Ambac, a financial guaranty insurer, brought an action against Countrywide to hold it liable for falsely inducing Ambac to irrevocably guarantee 17 residential mortgage-backed securitizations. On summary judgment, Ambac argued that Insurance Law § 3105 dispensed with the common-law requirement of proving justifiable reliance and loss causation to succeed on its fraudulent inducement claim.

The First Department rejected Ambac’s argument that section 3105 should be extended to reduce its burden on an affirmative damages claim for common-law fraud. The Court held:

This is only the latest in a recent line of fraud cases that the First Department has decided involving the failure of residential mortgage backed securities. Although each of these cases seem rightly decided to me, a credit to the First Department’s panels in handling these complex issues, I wouldn’t be surprised to see the Court of Appeals take one or more of these cases to provide certainty in this emerging area of the law. 

The First Department’s order can be found here.

Third Department, This Time, Upholds Expulsion of Student for Sexual Assault

In Matter of Weber v State Univ. of N.Y., Coll. At Cortland, the Third Department confirmed a SUNY determination to expel a student for sexually assaulting another student, finding that the victim never consented to sex. 

This case is pretty clear cut and would not be that remarkable if it wasn’t for the Third Department’s recent decision in Matter of Haug v State Univ. of N.Y. at Potsdam, which I discussed here.

In the matter of only a few weeks, the Third Department has reached two contradictory decisions on SUNY disciplinary determinations for sexual assault.  Although the facts in Haug were not as clear as in Weber, in neither case did the victim affirmatively consent to sex as required under the SUNY sexual assault policy. Yet, in Haug, the Third Department overturned an expulsion determination because, it held, the victim’s act of taking off her shirt was somehow implicit consent to sex.  In Weber, in contrast, it was the perpetrator of the assault who took off the victim’s clothes.  

I truly hope that this is not the line that the Third Department is drawing on consent.  When SUNY’s policy says affirmative consent is required, it is affirmative consent that the courts should look for.  Requiring anything less for consent is rewriting SUNY’s sexual assault policy and not according SUNY’s disciplinary determinations the deference that they are due.  That is not the courts’ role.

The Third Department’s order can be found here.

First Department Holds Obligation to Repurchase Residential Mortgage Backed Securities Terminates After 6 Years

In Bank of N.Y. Mellon v WMC Mtge., LLC, Bank of NY Mellon was left holding thousands of defective residential mortgage backed securities after the real estate market collapse in 2008.  The Bank of NY, which became the administrator of the loans in a securitized trust in June 2006, sued WMC Mortgage and JPMorgan Chase to force them to repurchase the bogus loans under a Mortgage Loan Sale and Interim Servicing Agreement (MLSA) and Pooling and Servicing Agreement (PSA).  Both agreements provided that upon a material breach of the representations and warranties, including that the loans were not defective, the Bank of NY had to give notice of the breach and WMC then had between 60 to 90 days to buy back the loans.  If WMC failed to do so, JPMC, which had guaranteed the sale of the loans, was on the hook.  “The MLSA further provided that a cause of action for repurchase did not accrue until after the purchaser made a demand for repurchase” (Opn, at 2).  

The Bank of NY gave notice of the material breach three weeks short of the six year anniversary of the 2006 sale, and demanded that WMC and JPMC take back the defective loans, but WMC and JPMC failed to repurchase the loans.  So, the Bank of NY commenced this put back action to force WMC and JPMC to do so.  Supreme Court dismissed the Bank of NY’s suit because it was not brought within 6 years after the misrepresentations were made in connection with the 2006 sale. 

The Appellate Division, First Department affirmed that portion of the Supreme Court order that dismissed the repurchase claims against WMC.  The Court held that the repurchase claims accrued when the sale was completed in June 2006 and the 6-year statute of limitations ended WMC’s obligation to repurchase the defective loans under the agreements because the Bank of NY was no longer entitled to any remedy for the misrepresentations.  The parties could not “decide to change the accrual of an otherwise accrued claim or extend the running of a limitations period,” the Court held, by trying to agree to a different accrual date for a repurchase cause of action under the MLSA (Opn, at 3). Nor could the parties choose to “adopt a discovery rule to delay the running of a limitations period for an existing breach of contract” (id.). Thus, the Bank of NY’s failure to file the repurchase claims against WMC within 6 years after the 2006 closing rendered those claims time-barred.

The First Department, however, declined to dismiss the backstop repurchase claims against JPMC. Although the underlying remedy against WMC was time-barred, the Court held that the Bank of NY could still try to make JPMC to repurchase the loans because JPMC’s guaranty obligation did not accrue until after WMC failed to buy back the loans within 90 days after the Bank of NY’s notice of the material breach.

Thus, the Court held, the mere fact that the Bank of NY’s remedy against WMC was time-barred did not similarly extinguish its claims against JPMC.

The First Department’s order can be found here.

First Department Affirms Trial Court Decision to Set Aside Personal Injury Verdict for Egregious Conduct of Defendant’s Counsel

In Smith v Rudolph, the First Department affirms a trial court decision to set aside a personal injury verdict in the plaintiff’s favor because defense counsel’s conduct was so egregious that it deprived the plaintiff of fair trial.  The Court held:

Here are some examples of what defense counsel did to justify the new trial in the interest of justice:

Although it is certainly strange for the plaintiff to have moved to set aside the verdict after winning, the jury’s failure to award any future damages and apportion the defendant only 70% of the fault likely prompted the motion.

The First Department held that given the outrageous conduct of defense counsel, which affected the entire trial, it was not an abuse of the trial court’s discretion to set aside the verdict in the interest of justice.  The concurrence, however, was quick to point out that this was the rarest of cases, and it is a very high burden to show that the conduct of counsel so prejudiced the trial as to warrant vacatur of a verdict.

Interestingly, the First Department seems to have reached this question in an exercise of its interest of justice jurisdiction because the plaintiff never preserved it by moving for a mistrial while defense counsel’s conduct was occurring.  This will pose a significant reviewability problem should the defendant ever want to take the issue to the Court of Appeals.

The First Department’s order can be found here.

First Department Declines to Require Sex Offender Registration Where Underlying Crime Had No Sexual Motivation or Conduct

In People v Diaz, the First Department holds that Correction Law § 168-a(2)(d)(ii), which required the defendant to register as a sex offender in New York for the out-of-state murder of a minor, violated the defendant’s substantive due process rights as applied.  Particularly, under that section, an individual is required to register as a sex offender in New York if he or she is convicted of a crime outside of the state that requires sex offender registration in that state. Because Virginia required registration for the murder of a minor, even without any sexual component to the crime, New Uork’s statute did too.

Noting that had the crime occurred in New York, the defendant would not have been required to register as a sex offender, the First Department held that registration in this defendant’s case violated his due process rights under the US and NY Constitutions because the defendant’s crime against a minor didn’t involve sexual motivation or conduct. New York’s Sex Offender Registration Act is intended to protect the public against sex offenders, and thus requiring registration for a crime that had no sexual component was not reasonably related to the statute’s purpose, the Court held.
The First Department’s order can be found here.

ZBA Tie Vote is Not a Default Denial When Exercising Original  Jurisdiction, Holds Third Department

In Matter of Alper Restaurant Inc. v Town of Copake Zoning Board of Appeals, the Third Department holds that a Town ZBA’s tie vote does not result in a default denial when it is exercising original jurisdiction to consider a special use permit. The default denial provisions only apply when a ZBA is exercising appellate jurisdiction.

The Third Department’s order can be found here

Third Department Surprisingly Vacates Expulsion of SUNY Student for Sexual Assault

In a surprising reversal in Matter of Haug v State Univ. of N.Y. at Potsdam, the Third Department annulled SUNY’s determination to expel a student who sexually assaulted another student as unsupported by substantial evidence in the record.  The SUNY Student Code required affirmative consent to sex, which it was undisputed that the student never received, but the Court nevertheless said that the complainant’s hearsay account of the incident was insufficient to meet the substantial evidence standard. Instead, the Court held, the complainant’s act of removing her shirt when the student offered sex was enough to show consent in this situation. The Court, therefore, vacated the student’s expulsion. 

In a cogent dissent, the dissenting Justices take the majority to task for finding consent here, and for substituting the Court’s own judgment of the facts for the SUNY disciplinary board that heard the testimony at the disciplinary proceeding.  The dissent emphasizes that the complainant’s story that she “froze” upon the student’s advances was consistent when she told it both to the SUNY investigator and to an administrator.  It did not have any of the hallmarks of unreliability that have lead to the general rule that hearsay evidence, on its own, isn’t enough to constitute substantial evidence.  Moreover, the only reason why the complainant’s account was technically hearsay, the dissent pointed out, was because she didn’t want to participate in disciplinary proceedings.  Her decision doesn’t undermine the credibility of her account of the assault.  Thus, the dissent would have confirmed the SUNY expulsion determination.

The dissent has the far better analysis in my opinion. I’m pretty surprised the majority went as far as it did to vacate SUNY expulsion, given the deference that is traditionally owed to administrative disciplinary determinations. What’s more is that the policy implications of the majority’s holding overruling a lack of express consent finding could be significant.  SUNY has an express consent to sex policy on its campuses statewide, and that majority largely ignored that to find that implied consent was enough.  Although the Court of Appeals is not an error correction court, generally, I wouldn’t be surprised to see the dissent in the Third Department grant leave to appeal to review the case.

The Third Department’s order can be found here.


According to Victor Paladino, an excellent appellate advocate in the State Attorney General’s office, SUNY has taken an appeal as of right to the Court of Appeals from the Third Department’s order based upon the two Justice dissent. The issue on appeal will be whether hearsay testimony of the kind involved here can constitute substantial evidence to support the SUNY expulsion determination. As this case could significant alter the types of proof upon which disciplinary determinations can be based, it will have a significant effect on colleges and universities throughout the State.  This case bears watching, to be sure.

First Department Questions Propriety of Rule Limiting Liability for Domestic Animals to Viscious Propensities

In Scavetta v Wechsler, the First Department affirms the dismissal of negligence claims against the owner of a dog that, when leashed to a bicycle rack, dragged the rack into the street injuring the plaintiff. Although the Court noted that it was constrained to dismiss the case by the Court of Appeals’ vicious propensities rule in Bard v Jahnke (6 NY3d 592 [2006]), it went to great lengths to question the continuing vitality of the rule and its unintended consequences.

In criticizing the rule, the First Department says the strict liability rule based upon vicious propensities wrongly immunizes negligent animal owners, and effectively invites the Court of Appeals to revisit rule.  I would not be surprised to see the First Department grant leave to the Court of Appeals in this case to bring the issue before the Court for reconsideration.

The First Department’s order can be found here.

In Case of First Impression, First Department Holds RMBS Trustee Has Standing to Enforce Putback Rights

In Natixis Real Estate Capital Trust 2007-HE2 v Natixis Real Estate Holdings, LLC, the First Department holds, in a case of first impression in NY, that the Securities Administrator of a residential mortgage backed securities (RMBS) trust has standing to bring an action to enforce putback rights, in addition to the standing normally granted to the RMBS’s Trustee.

The First Department’s decision can be found here.

In Basis PAC-Rim Opportunity Fund (Master) v TCW Asset Mgt. Co., the First Department holds loss causation lacking in a residential mortgage backed securities fraud case where the investment tanked at  the same time as the housing market. The Court clarified that it is not impossible to show fraud in the event of a market collapse, but the issue of loss causation must specifically be addressed on summary judgment.

The First Department’s order can be found here.

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