CREDIT SUISSE FIRST BOSTON v. UTRECHT AMERICA FINANCE CO (2010)

Defendants Utrecht-America Finance Co. (“UAFC”) and Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A., Rabobank Nederland (“Rabobank”) (collectively “Defendants”) move for partial summary judgment establishing the measure of damages for which it may be liable. Plaintiff Credit Suisse First Boston (“CSFB” or “Plaintiff”) opposes.

BACKGROUND

CSFB is a global investment bank. Complaint, ¶ 4.

UAFC is a Delaware corporation and subsidiary of Rabobank. Rabobank is a global bank headquartered in the Netherlands. Id., ¶¶ 5, 6.

UAFC had a $45 million interest in a $485 million syndicated bank loan to an entity called Choctaw Investors, B.V. (“Choctaw”). Choctaw had been a financing vehicle for the Enron Corporation prior to Choctaw's dissolution in March of 2003. Affirmation of H. Rowan Gaither IV in support of Plaintiff's Opposition to Defendants' Motion for Partial Summary Judgment, Ex. 2 (February 2, 2010 Decision and Order, Bransten, J.), pp. 2-3; Complaint, ¶ 19.

On October 28, CSFB alleges that it and UAFC orally agreed that CSFB would purchase $15 million of Choctaw's distressed debt for 62.5% of the debt's face value. The parties' agreement was memorialized in a written confirmation dated November 5, 2003. Complaint, ¶¶ 9, 11.

Prior to CSFB and UAFC effectuating their agreement, in early January, 2004, the market value of Choctaw debt began to rise. On January 13, 2004, Choctaw debt was trading at 75% of its face value. That day, UAFC orally informed CSFB that UAFC was terminating the Choctaw deal. UAFC sent CSFB written confirmation of the termination on January 14, 2004. Id., ¶¶ 26-28.

The market value of Choctaw debt continued to rise after January 14, 2004. On February 27, 2004, CSFB allegedly purchased a comparable amount of Choctaw debt from a third party for an allegedly higher price than it had contracted to pay for Choctaw debt from UAFC. Id., ¶¶ 32, 35.

In this motion, Defendants seek partial summary judgment limiting CSFB's damages to the difference between the contract price which CSFB agreed to pay UAFC for Choctaw Debt and the market value of that debt on January 14, 2004.

ANALYSIS

I. Summary Judgment

“The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Failure to make such a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers.” Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986). Upon making such a showing, the burden of proof shifts to the party opposing the motion. Id. In order to defeat the motion, the opposing party “must produce evidentiary proof in admissible form sufficient to require a trial of material questions of fact on which he rests his claim” or an acceptable reason for his failure to do so. Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980).

II. Defendants Are Not Entitled to Partial Summary Judgment

Defendants seek partial summary judgment limiting CSFB's damages to the difference between the contract price which CSFB agreed to pay UAFC for Choctaw Debt and the market value of that debt on January 14, 2004.

Plaintiff argues in opposition that it is premature to determine the measure of damages prior to trial. Plaintiff argues that New York courts routinely apply different measures of damages and that in order to properly determine the measure of damages requires a full factual record. Plaintiff's Memorandum of Law in Opposition to Defendants' Motion for Partial Summary Judgment (“Plaintiff's Opp. Memo”), pp. 13-18.

Defendants argue that New York law assesses damages at the time and place of the breach. Defendants' Memorandum of Law in Support of Motion for Partial Summary Judgment Dismissing the Complaint to the Extent Plaintiff Seeks the Recovery of Damages That Are Not Available as a Matter of Law (“Defendants' Memo”), pp. 6-15.; Defendants' Reply Memorandum of Law in Support of Motion for Partial Summary Judgment Dismissing the Complaint to the Extent Plaintiff Seeks the Recovery of Damages That Are Not Available as a Matter of Law (“Defendants' Reply Memo”), pp. 1-5. Defendants further argue that Plaintiffs have not shown that other measures of damages are available in the instant case. Defendants' Reply Memo, pp. 6-11.

Generally, “the proper measure of damages for breach of contract is determined by the loss sustained or gain prevented at the time and place of the breach.” Simon v. Electrospace Corp., 28 N.Y.2d 136, 146 (1971). This general rule does not concern itself with fluctuations in value that occur subsequent to the breach. Kaminsky v. Herrick, Feinstein LLP, 59 AD3d 1, 11-12 (1st Dep't 2008); Castle Coal & Oil Co., Inc. v. Frank's Fuel, Inc., 69 A.D.2d 795, 795 (1st Dep't 1979); Orange & Rockland Utilities, Inc. v. New England Petroleum Corp., 60 A.D.2d 233 (1st Dep't 1977). Under this rule, where the breach in question involves the failure to deliver an asset, damages are determined by the difference between the contract price for the asset and the fair market value of the asset at the time of breach. Cole v. Macklowe, 64 AD3d 480, 480 (1st Dep't 2009); Kaminsky, 59 AD3d at 11; Aroneck v. Atkin, 90 A.D.2d 966, 966 (4th Dep't 1982).

However, Plaintiff is correct that New York courts apply different measures of damages in different situations.

Lost profits may be awarded where such lost profits are a natural consequence of the breach, where that measure of damages was contemplated by the parties when the contract was formed and where the lost profits asserted are capable of reasonably accurate measurement. Ashland Mgt. v. Janien, 82 N.Y.2d 395, 404 (1993); Awards.com, LLC v. Kinko's, Inc., 42 AD3d 178 (1st Dep't 2007).

UCC Article 2 provides cover damages as a remedy in certain situations involving the sale of goods. NY UCC § 2-712 (“After a breach ․ the buyer may cover' by making in good faith and without unreasonable delay any reasonable purchase of ․ goods in substitution for those due from the seller. The buyer may recover from the seller ․ the difference between the cost of cover and the contract price[.]”). Although Article 2 specifically excludes “investment securities” from the definition of “goods”, “ “the courts, relying on the Official Comment to section 2-105, have held that a buyer's remedies for breach of contract as set forth in Article 2 will apply to security transactions by analogy.” G.A. Thomson & Co., Inc. v. Wendell J. Miller Mortg. Co., Inc., 457 F.Supp. 996, 999 (SD N.Y.1978) (applying New York law). In G.A. Thomson & Co., Inc., the court awarded the plaintiff cover damages-the difference between the contract price to purchase underlying securities and the price paid by the plaintiff to purchase the same securities from another source-when the defendant failed to deliver and the plaintiff was obligated to resell the contracted-for securities. G.A. Thomson & Co., Inc., 457 F.Supp. at 997; see also Brown v. Pressner Trading Corp., 101 A.D.2d 761, 762 (1st Dep't 1984) (finding that “[w]hen a broker wrongfully fails to purchase or sell a security as directed, the customer's damages are limited to the cost of covering or replacing the security. If the customer fails to cover within a reasonable time, damages are limited to the potential cost to cover, measured from the time he learns of the broker's failure and for a reasonable time thereafter”); Saboundjian v. Bank Audi (USA), 157 A.D.2d 278, 284 (1st Dep't 1990) (“ “liability is limited to the difference between the price at which the plaintiff could have executed the trade at issue, were it not for the failure to carry it out, and the price at which he could have executed the transaction within a reasonable time after he learned that it had not been effected earlier”).

The appropriate measure of damages thus depends on the facts of the case. To that end, we agree with Plaintiff that in order to determine the proper measure of damages, the court will require a complete factual record. Indeed, “there is no rule of thumb to be applied to any given set of facts. We must look to the nature of the contract and the circumstances surrounding its breach.” Dillon v. Magner, 29 A.D.2d 759, 760 (2d Dep't 1968) (quoting New York Water Service Corp. v. City of New York, 4 A.D.2d 209, 213 (1st Dep't 1957).

Importantly, New York law aims to make the non-breaching party in as good a position as it would have been but were it not for the breach. Xand Corp. v. Reliable System Alternatives Corp., 63 AD3d 724, 725 (2d Dep't 2009). It is unclear if that goal would be accomplished under the rule that damages are assessed as of the time and place of the breach if Plaintiffs are correct in their assertion that the market for Choctaw debt was highly illiquid.

It is further unclear on the record before the court that the court should not treat Choctaw debt as a security or as a good within the meaning of the UCC, or extend the remedies of UCC Article 2 to the instant case by analogy. The record is insufficient to establish whether the Choctaw debt fits the broad and commonly-employed definition of an investment contract and, thereby, a security as articulated by the Supreme Court in S.E.C. v. W.J. Howey Co., as an investment scheme that “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” 328 U.S. 293, 301 (1946); see also S.E.C. v. Edwards, 540 U.S. 389, 393 (2004). Similarly, the incomplete factual record does not disclose whether or not the court should treat the Choctaw debt as a good in the same manner as New York courts have treated foreign currency as a good Saboundjian, 157 A.D.2d at 284-285.

The parties offer differing, if not incomplete, accounts of the structure and liquidity of the market for Choctaw debt, CSFB's involvement in that market, and the nature the investment itself. Making the Plaintiff whole will require the court to have a fuller understanding of Choctaw distressed debt and also trading of distressed debt, generally-a subject about which, owing to the relative newness of distressed debt trading, there is a surprising dearth of relevant case law.

Furthermore, if the court finds that cover damages are the appropriate measure of damages here, the court must then determine whether Plaintiffs' delay in purchasing replacement debt from another source was “reasonable” in light of the circumstances. The factual record before the court is insufficient to do so.

Defendants have not made a prima facie showing of entitlement to judgment as a matter of law and, therefore, partial summary judgment on the issue of damages is denied.

Accordingly, it is

ORDERED that Defendants' Motion for Partial Summary Judgment is DENIED.

This constitutes the decision and order of the court.

EILEEN BRANSTEN, J.