ANDREW L. CARTER, JR., District Judge.
On November 8, 2010, Plaintiff Morgan Stanley & Co. Incorporated ("Morgan Stanley") filed a Complaint against Defendant Peak Ridge Master SPC LTD ("Peak Ridge"). Plaintiff alleges Defendant, an energy hedge fund, breached the contract governing a natural gas futures trading account ("the account") held with Morgan Stanley, causing Plaintiff to terminate the account and seek recovery for the losses incurred. Defendant counterclaimed, arguing Plaintiff breached the contract by wrongfully terminating the account, and Plaintiff's affiliate was unjustly enriched by the sale of the account.
On July 3, 2012, Morgan Stanley and its affiliate, Morgan Stanley Capital Group, Inc. ("MSCG"), filed a Motion to Dismiss Defendant's amended counterclaims. Peak Ridge filed its opposition on August 02, 2012, and Morgan Stanley filed a reply on August 16, 2012. For the reasons discussed below, Morgan Stanley's Motion to
Peak Ridge held an account with Morgan Stanley between October of 2009 and June of 2010, trading natural gas options and futures. Morgan Stanley served as the Futures Commission Merchant ("FCM") and clearing member for the account, guaranteeing Peak Ridge's trades to the New York Mercantile Exchange ("the exchange") and assuming full responsibility for any losses. The Commodity Futures Customer Agreement ("Customer Agreement") entered into by Morgan Stanley and Peak Ridge on September 4, 2009 established their rights and obligations subject to New York law. Due to the assumption of risk by Morgan Stanley in its capacity as the FCM, the Customer Agreement imposed certain limitations on Peak Ridge's trading. One such limitation was a margin requirement, which obligated Peak Ridge to make minimum deposits into the account to assure its performance. The Customer Agreement permitted Morgan Stanley to compel greater margins than those required by the exchange to protect against intra-day market losses and future fluctuations in the value of the contracts held by the account.
The initial margin requirement Morgan Stanley imposed on Peak Ridge was a 2:1 net asset value ("NAV").
Morgan Stanley sent written notice of default to Peak Ridge on June 10. After the close of trading that same day, the account was in compliance with the 6:1 margin requirement, and the NAV of the account was just over $15 million. On June 11, Morgan Stanley sent Peak Ridge written notice terminating its access to the account. Morgan Stanley then entered into a series of transactions, trading in the account until June 23, 2010 when it sold the remaining positions, hedges, and cash balance to MSCG. In its counterclaims, Peak Ridge alleges: (1) Morgan Stanley breached the Customer Agreement through its seizure and liquidation of the account; and (2) MSCG has been unjustly enriched by the sale of the account.
Morgan Stanley makes the current motion before the Court pursuant to Rule 12(b)(6), seeking dismissal of Peak Ridge's counterclaims.
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows for dismissal if a
Peak Ridge's first counterclaim alleges Morgan Stanley breached the Customer Agreement by erroneously declaring the account in default, failing to make a margin call or request for a monetary margin deposit, seizing the account when it was in compliance with the margin requirement, and failing to exercise its liquidation remedies in a commercially reasonable manner. Specifically, Peak Ridge argues a margin call is required before an event of default can be declared under the Customer Agreement, and Morgan Stanley never made a margin call. Even though the account had fallen below the 6:1 margin requirement on June 9, Peak Ridge remedied the deficiency by the close of trading on June 10. Therefore, since the account was in compliance with the margin requirement when the actual seizure occurred on June 11, Morgan Stanley lost its right to pursue certain remedies. Morgan Stanley also could have traded more judiciously to avoid destroying the value of the account, and its conduct during liquidation was grossly negligent.
The Customer Agreement sets forth Morgan Stanley's ability to impose margin requirements and the remedies available upon an event of default. The relevant parts state:
(Frawley Decl., Ex. 1-1, Dkt. No. 31-1.)
According to Peak Ridge, Section 6(e) of the Customer Agreement does not allow Morgan Stanley to declare an event of default for failure to meet a margin requirement unless it makes a margin call for a specific dollar amount that would bring the account into compliance first. Peak Ridge's assertion, however, is contrary to the plain text of the Customer Agreement. Section 6(e) clearly states Peak Ridge is required to make margin payments in any amount or form Morgan Stanley dictates. Further, Morgan Stanley can communicate these margin requirements orally, telephonically, or in writing. Once Morgan Stanley has conveyed what the margin requirement is, there is no additional obligation to make a margin call if the account falls out of compliance. Section 4(b), which allows Morgan Stanley to exercise its remedies if the margin requirement is not met "without demand for margin" and "in its sole discretion and without prior notice to the Customer", confirms a margin call is not required before Morgan Stanley can declare an event of default. See Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1095 (2d Cir.1993) (concluding where the parties dispute the meaning of a provision, the task of the court "is to determine whether such clauses are ambiguous when `read in the context of the entire agreement'" (quoting W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990))).
Where, as here, a contract is clear and unambiguous, the parties are bound by the language contained in the document,
The June 9, 2010 letter set the new margin requirement at 6:1 and gave Peak Ridge until the close of business that day to bring the account into compliance. At the close of trading on June 9, the account did not meet the margin requirement, forming the basis for Morgan Stanley's declaration of default. Peak Ridge argues Morgan Stanley breached the Customer Agreement by declaring the account in default without adequate notice. It asserts standard industry practice for compliance with new margin requirements is one day.
Due to the volatile nature of the commodities market, FCMs can be responsible to the exchange for risky positions taken by their customers. This assumption of responsibility, in turn, necessitates the ability of FCMs to maintain control over the accounts they guarantee. See Pompano-Windy City Partners, Ltd. v. Bear Stearns & Co., Inc., 794 F.Supp. 1265, 1275-76 (S.D.N.Y.1992) (citing Sherman v. Sokoloff, 570 F.Supp. 1266, 1270 n. 14 (S.D.N.Y.1983)) ("The purpose of margin call rules is to protect brokers from the risks associated with insufficiently secured accounts, and to prevent customers from carrying vast exposure in their accounts without adequate capital to cover their positions."); Geldermann & Co., Inc. v. Lane Processing, Inc., 527 F.2d 571, 577 (8th Cir.1975) ("Investors ... who have failed to deposit sufficient maintenance margins may have insufficient financial resources to withstand substantial losses on the market and, if so, continued trading on that account is a financial risk for the commission merchant, and ultimately for the commodities exchange....").
Morgan Stanley, in its business discretion, determined Peak Ridge's account had assumed overly risky positions, necessitating an increase in the margin requirement and giving Peak Ridge a limited amount of time to bring the account into compliance. Courts have held that as little as one hour is sufficient notice under similar circumstances. See Capital Options Invs., Inc. v. Goldberg Bros. Commodities, Inc., 958 F.2d 186, 190 (7th Cir.1992) ("One-hour notice to post additional margin ... is reasonable where a contract specifically provides for margin calls on options at any time and without notice."); Prudential-Bache Sec., Inc. v. Stricklin, 890 F.2d 704, 706-07 (4th Cir.1989) (rejecting a claim that 24-hour notice, which the broker normally gave to customers, was necessary before broker could liquidate an under-margined
Additionally, Peak Ridge is unable to point to any provision of the Customer Agreement that entitles it to at least one day's notice and an opportunity to cure. See Fesseha v. TD Waterhouse Investor Servs., Inc., 193 Misc.2d 253, 747 N.Y.S.2d 676, 679 (N.Y.Sup.Ct.2002) (finding where the customer agreement does not state a party has a right to notice and an opportunity to cure an undermargined account, the court will not assume these requirements are implied in the contract), aff'd, 305 A.D.2d 268, 761 N.Y.S.2d 22 (1st Dep't 2003). To the contrary. Section 4(b) gives Morgan Stanley unfettered discretion to require margin requirements are met without demand and without prior notice to the account holder. Such broad authority, which was specified in the contract and is necessary to stabilize an unpredictable market, has not been compromised by the courts. See Cauble v. Mabon Nugent & Co., 594 F.Supp. 985, 990 (S.D.N.Y.1984) (holding margin call notice requirements can be waived through agreements giving brokers broad authority to liquidate an account if it becomes undermargined.); Omnivest Inc. v. Elders Futures, Inc., 157 A.D.2d 528, 530-31, 550 N.Y.S.2d 6 (App. Div. 1st Dep't 1990) (finding less than a full day adequate to demand compliance with a margin requirement based on the FCM's broad discretion in the customer agreement).
Peak Ridge's next argument contends it was able to bring the account into compliance with the 6:1 margin requirement by the close of business on June 10, so Morgan Stanley was estopped from seizing the account. Specifically, since Morgan Stanley delayed the exercise of its remedies, even for a day, it lost the right to seize the account since Peak Ridge cured the default in the intervening period. This argument, for which Peak Ridge offers no legal support, is another assertion that directly contradicts the Customer Agreement. Section 10(h) states, "Neither party's failure to exercise, delay in exercising, or partial exercise of any contractual right ... on any occasion or series of occasions is or implies a waiver of any contractual right ... and does not preclude any future exercise, delayed exercise or partial exercise of any contractual rights hereunder." (Frawley Decl., Ex. 1, Dkt. No. 31-1); see also Modern Settings, 936 F.2d at 645 ("[T]he mere fact that Securities did not always exercise its contractual right to liquidate margin accounts without notice did not amount to a waiver of that right.").
The assertion that Morgan Stanley was estopped from seizing the account is baseless for other reasons as well. The account did not meet the 6:1 margin requirement on June 9; this alone was sufficient for Morgan Stanley to declare an event of default under the Customer Agreement. Subsequent activity in the account does
Section 4(b) authorizes Morgan Stanley to take any action it deems necessary to protect itself, including liquidating an account and selling it to an affiliate, so long as Morgan Stanley acts in a commercially reasonable manner. Peak Ridge argues Morgan Stanley did not exercise its remedies in a commercially reasonable manner by: (1) denying Peak Ridge access to the account and failing to keep Peak Ridge informed of the account's status; (2) destroying the value of the account in a self-serving manner; and (3) dropping barriers that would shield information about the account from MSCG.
The first argument, asserting Peak Ridge was denied access to the account and was not kept informed of the liquidation, is easily rejected. There is no provision in the Customer Agreement that gives Peak Ridge these rights.
The most compelling argument to support the breach of contract counterclaim
According to Peak Ridge, Mr. Stier's continuous trading on his book while in a position to trade for Morgan Stanley created a conflict of interest, whereby Mr. Stier traded in the Peak Ridge account to benefit his book and other traders at MSCG. (Id. ¶ 126.) He shared details of his trading on behalf of Morgan Stanley with colleagues and supervisors at MSCG, including Sara Menker, Brian Sestak, and Lev Kazarian. (Id. ¶¶ 124-25.) Moreover, Mr. Stier allegedly engaged in self-dealing on June 15, 2010 and June 21, 2010 by executing trades in the account by private transaction where the opposite party was his own or another MSCG account. (Id. ¶ 127.) Mr. Stier determined the quantity and price for these trades, which was more favorable to MSCG than the traded price on the exchange that day. (Id.)
Once undesirable positions in the account were liquidated, Peak Ridge contends Morgan Stanley only considered MSCG as a buyer for the remaining positions without seeking any alternative bids or making any effort to arrange a sale to a third-party. (Id. ¶ 140.) There were no negotiations on price with MSCG, and the sale was not documented in writing. (Id. ¶¶ 141, 143.) Morgan Stanley also agreed to pay MSCG a liquidity premium of $14 million for the sale of the account, (Id. ¶ 150.) After the sale, the account's positions were transferred to Mr. Stier's trading book. (Id. ¶ 152.) By the end of 2010, Mr. Stier's book showed profits of approximately $30 million. (Id. ¶ 53.)
The Customer Agreement requires Morgan Stanley to act in a commercially reasonable manner when liquidating a customer's account, and it also requires that any sales to its affiliates, including MSCG, be done in an arms-length transaction. Courts have found that commercial reasonableness, which is a term commonly used in conjunction with the Uniform Commercial Code, is often a fact-intensive inquiry. See Leigh Co. v. Bank of N.Y., 617 F.Supp. 147, 153 (S.D.N.Y.1985) ("It is true that the determination of commercial reasonableness is usually a factual determination best made by the trier of fact[.]"); Bank of China v. Chan, 937 F.2d 780 (2d Cir.1991) (finding an issue of fact precluded summary judgment on commercial reasonableness); Holland Am. Cruises, N.V. v. Carver Fed. Sav. & Loan Ass'n, 60 A.D.2d 545, 400 N.Y.S.2d 64, 65 (1st Dep't 1977) (holding whether the Defendant acted in accordance with "reasonable commercial standards applicable to the business" presented an issue of fact).
Taking its factual assertions as true and drawing all inferences in its favor, Peak Ridge has pled sufficient facts to state a counterclaim for breach of contract with respect to Morgan Stanley's liquidation of the account by Mr. Stier. Peak Ridge benefits from the rational inference that Mr. Stier assumed a conflict of interest by managing the liquidation of the account for
The same factual allegations also support the argument that the sale to MSCG was not done in an arms-length transaction. Like the inquiry into commercial reasonableness, determining whether an arms-length transaction occurred requires an examination of the facts and circumstances surrounding the deal. See Application of Putnam Theatrical Corp., 16 A.D.2d 413, 416, 228 N.Y.S.2d 93 (4th Dep't 1962) (suggesting courts view transactions in light of the facts and circumstances surrounding them to determine whether they were at arms-length). Mr. Stier was responsible for trading in the account during Morgan Stanley's dump of certain positions to drive down the account's value. The account was then sold to MSCG, whereby Mr. Stier acquired the remaining positions. Mr. Stier benefited from control over the account prior to the sale, which another buyer with no relationship to Morgan Stanley would not have received. The allegations that Morgan Stanley paid a substantial liquidity premium without seeking third-party buyers for the residual positions strengthen this claim.
The remaining arguments regarding the breach of contract counterclaim are without merit and as such, will not be addressed. Peak Ridge's first counterclaim for breach of contract survives dismissal only with respect to the allegations that Morgan Stanley did not act in a commercially reasonable manner during the liquidation of the account by Mr. Stier and that the sale of the account to MSCG was not an arms-length transaction. The allegations that Morgan Stanley could have traded more judiciously or differently after seizing the account are not part of the surviving claim and are DISMISSED for the reasons set forth above.
It has been clearly established in New York that damages should be measured by loss sustained or gain prevented at the time of breach in contract cases alleging a wrongful seizure of securities. Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 262 (2d Cir.2002) ("New York courts are clear that breach of contract damages are to be measured from the date of the breach."); Simon v. Electrospace Corp., 28 N.Y.2d 136, 145, 320 N.Y.S.2d 225, 269 N.E.2d 21 (1971); Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 197 (2d Cir.2003) (rejecting the conversion measure of damages, which is the securities' value at the time of the conversion or their highest intermediate value between notice of the conversion and the time when reentry into the market would be both warranted and desired, in breach of contract cases). "New York courts `have rejected awards based on what the actual economic conditions and performance' were in light of hindsight.'" Lucente, 310
Morgan Stanley also points out that the Customer Agreement contains a liability limitation provision. Section 5 states,
(Frawley Decl., Ex. 1-1, Dkt. No. 31-1.) These provisions are valid and enforceable under New York law. Net2Globe Int'l, Inc. v. Time Warner Telecom of N.Y., 273 F.Supp.2d 436, 449-50 (S.D.N.Y.2003) ("The New York Court of Appeals has declared that `[a] limitation on liability provision in a contract represents the parties' Agreement on the allocation of risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor.'" (quoting Metro. Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 618 N.Y.S.2d 882, 643 N.E.2d 504, 507 (1994))); DynCorp v. GTE Corp., 215 F.Supp.2d 308, 318 (S.D.N.Y.2002). Nevertheless, a liability limitation will be set aside when the conduct as issue involves gross negligence or willful misconduct. Kalisch-Jarcho, Inc. v. City of N.Y., 58 N.Y.2d 377, 384, 461 N.Y.S.2d 746, 448 N.E.2d 413 (1983); Gross v. Sweet, 49 N.Y.2d 102, 106, 424 N.Y.S.2d 365, 400 N.E.2d 306 (1979).
Peak Ridge argues Morgan Stanley's conduct after seizing the account amounts to gross negligence or willful misconduct, which cannot be insulated by the Customer Agreement. In Net2Globe, the court described the type of conduct that would lead to nullifying a liability limitation provision:
273 F.Supp.2d at 454; see also Deutsche Lufthansa AG v. Boeing Co., No. 06 Civ. 7667(LBS), 2007 WL 403301, at *3 (S.D.N.Y. Feb. 2, 2007) ("When the setting is, as here, a contract between two sophisticated parties the conduct must evince a reckless disregard for the rights of others, or be of a kind that smacks of intentional
Here too, Peak Ridge's allegations are insufficient to plead gross negligence or willful misconduct. As the Court noted above, the allegations demonstrate Morgan Stanley may have engaged in conduct surrounding the liquidation and sale of the account that was self-serving and aimed at maximizing its profits. This conduct could be deemed commercially unreasonable, but commercial reasonableness requires significantly less culpability than "a compelling demonstration of egregious intentional misbehavior." Considering Mr. Stier may have engaged in self-dealing with respect to liquidating some of the positions, MSCG traders may have had access to information about the account which should have been protected, and MSCG may have bought the remaining positions on suspiciously favorable terms, there are no facts that amount to malice, recklessness, or callous indifference on the part of Morgan Stanley. As such, the unambiguous liability limitation in the Customer Agreement permits Peak Ridge to recover only actual damages. Any allegations seeking recovery for consequential, incidental, punitive, or special damages, including lost profits, are DISMISSED.
The unjust enrichment counterclaim is based on the same facts as the arguments previously discussed — namely, the circumstances surrounding the sale of the account to MSCG. Peak Ridge brings this claim against MSCG, who was not a party to the Customer Agreement, contending MSCG unjustly benefited from the purchase of its account by receiving and profiting from the remaining positions after Mr. Stier dumped the undesirable ones. On the other hand, Morgan Stanley and MSCG argue the Customer Agreement forecloses Peak Ridge's ability to recover under a theory of unjust enrichment.
New York state courts, federal courts in our district, and the Second Circuit have held the existence of a valid and enforceable contract precludes an unjust enrichment claim relating to the subject matter of the contract. See e.g. Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388, 521 N.Y.S.2d 653, 516 N.E.2d 190 (1987) ("The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter."); Golub Assocs. Inc. v. Lincolnshire Mgmt., Inc., 1 A.D.3d 237, 767 N.Y.S.2d 571, 572 (1st Dep't 2003) ("Nor is a claim predicated on unjust enrichment cognizable where the parties' rights and obligations are governed by a valid and enforceable contract."); Krause v. Forex Exch. Mkt., Inc., 12 Misc.3d 1192(A), No. 05-601854, 2006 WL 2271274, at *4 (N.Y.Sup.Ct. Mar. 1, 2006) ("[T]here is no basis for the quasi-contractual claim of unjust enrichment, inasmuch as there was a valid contract in existence."); Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F.Supp.2d 275, 311 (S.D.N.Y.1998) (finding no unjust enrichment claim can lie where the sale and liquidation of securities
Peak Ridge relies on two decisions to argue an exception to Clark-Fitzpatrick should apply to our case. In Hughes v. BCI Int'l Holdings, 452 F.Supp.2d 290 (S.D.N.Y.2006), despite the existence of a valid contract, the court held Plaintiffs could maintain an unjust enrichment claim against Defendants, a third-party to the contract who wrongfully obtained Plaintiffs' assets. The assets were intended for the company in which Plaintiffs were investing, and Defendants' actions deprived Plaintiffs of the value of their investment. Id. at 304. The court reasoned that the existing contract did not dictate Plaintiffs' rights vis-à-vis Defendants, who diverted Plaintiffs' assets from the company, so the contract should not preclude Plaintiffs from proceeding in equity against Defendants, Id. "[P]laintiffs' binding agreement... should not preclude plaintiffs from proceeding in equity.... To hold otherwise would subvert the `logic of [this] equitable doctrine ... which is designed to prevent unjust enrichment where the absence of an enforceable contract otherwise prevents recovery from [the culpable] parties.'" Id. (quoting Seiden Assocs., Inc. v. ANC Holdings, Inc., 754 F.Supp. 37, 41 (S.D.N.Y.1991)).
The second case, Howe v. Bank of N. Y. Mellon, 783 F.Supp.2d 466 (S.D.N.Y.2011), follows the same analysis as Hughes. In Howe, the court allowed Plaintiff-bondholder's unjust enrichment claim to stand against a co-issuer of trust preferred securities. Plaintiff alleged the sale of the securities was in violation of the indenture contract, to which the co-issuer was a nonsignatory. Id. at 485-86. Defendant, a party to the contract, "breached the Indenture when it sold the TruPS [trust preferred securities], and Plaintiff can cognize a claim that Bimini [the non-signatory coissuer] caused, aided and abetted ... breach of the Indenture." Id. at 486, Since the indenture did not set forth Plaintiff's rights with respect to the co-issuer, Plaintiffs were permitted to proceed in equity against the co-issuer. Id.
The Court finds the existence of the Customer Agreement bars Peak Ridge's unjust enrichment claim under the facts of this case. While the Customer Agreement does not set forth Peak Ridge's rights vis-à-vis MSCG, it directly covers the same subject matter Peak Ridge alleges as the basis for its unjust enrichment claim — the sale of the account by Morgan Stanley to MSCG was not done in a commercially reasonable manner through an arms-length transaction. Therefore, Peak Ridge has a remedy at law through a breach of contract claim, which necessarily extinguishes recovery for the same underlying conduct through a quasi-contract claim. See In re Chateaugay Corp., 10 F.3d 944, 958 (2d Cir.1993) ("[T]he successful assertion of its [Appellant's] contractual right ... is fatal to any quasi contractual claim,"). Although MSCG may have benefited from the sale of the account,
Accordingly, Peak Ridge's second counterclaim against MSCG for unjust enrichment is DISMISSED in its entirety.
For the reasons explained above, Counterclaim Defendants' Motion to Dismiss the amended counterclaims is
