1861 Capital Master Fund LP v Wachovia Capital Mkts., LLP

[*1] 1861 Capital Master Fund LP v Wachovia Capital Mkts., LLP 2011 NY Slip Op 51483(U) Decided on August 5, 2011 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on August 5, 2011
Supreme Court, New York County

1861 Capital Master Fund LP, Plaintiff,

against

Wachovia Capital Markets, LLP, Defendant.



650214/2008

 

For Plaintiff:

Dewey Pegno & Kramarsky, LLP

777 Third Avenue

New York, New York 10007

(David S. Pegno, Kara Siegel)

For Defendants:

Rosner Nocera & Ragone. LLP

110 Wall St., 23rd floor

New York, New York 10005

(John Nocera, Luigi Tollis)

Bernard J. Fried, J.

Both parties move for partial summary judgment in this action seeking damages for the breach by defendant Wachovia Capital Markets, LLC, of a provision in the agreements underlying a $500 million committed repurchase credit facility (the repo facility) involving municipal bonds. The repo facility expired on April 30, 2008. The provision at issue requires that the determination of the market value of the municipal securities eligible for tender be determined by a generally recognized source agreed to by defendant and plaintiff 1861 Master Fund LP, a hedge fund. Plaintiff has established as a matter of law that defendant breached this pricing provision by unilaterally insisting that only its own desk pricing could be used to determine market value, and by refusing even to discuss agreeing to other pricing sources. Defendant's insistence that its actions were commercially reasonable, in light of the extreme volatility of the banking crisis of 2008, is insufficient as a matter of law to excuse its breach. [*2]

Plaintiff moves for summary judgment as to liability only. Defendant moves to strike two items of damages in the complaint. The first item is plaintiff's claim for return of $250,000 paid for a prior committed repo facility (the first repo facility) that plaintiff never attempted to utilize prior to its expiration. The second item is plaintiff's "claim for lost opportunity costs and/or lost profits and similar consequential damages in connection with any breach of the Repurchase Agreements" (deft's notice of motion).

Plaintiff's motion is granted to the extent of holding that defendant breached the repo agreement by refusing to agree to any generally recognized pricing source other than its own desk pricing. The effect of this grant of partial summary judgment is to remove the issue of whether defendant breached this provision. Factual issues are presented whether the breach was material, and the amount of damages, if any, to which plaintiff is entitled, beyond the nominal damages owed for any breach of contract.

Defendant's motion is granted to the extent that it seeks to strike that part of plaintiff's demand for damages that seeks the return of the $250,000 fee paid to maintain the committed facility for the one-year period prior to renewal, and is otherwise denied.

The agreement at issue, a May 21, 2007 "Amended and Restated Committed Repo Facility Confirmation," is a renewal and extension of a July 8, 2006, agreement, consisting of two separate agreements, a July 6, 2006 Master Repurchase Agreement (the MRA) and a "Committed Repo Facility Confirmation" (the confirmation), that expired on September 30, 2007. Plaintiff did not tender any bonds for purchase under the first repo facility. The terms of the agreements underlying the first repo facility are applicable to the repo facility, as renewed and extended, unless superceded. Plaintiff had paid defendant $250,000 to have the initial repo facility in place. Plaintiff paid defendant $145,833 to have the renewal repo facility in place. This renewal gave plaintiff the right to access that facility in accordance with its terms, by tendering eligible securities, in amounts up to $500 million, through April 30, 2008.

In early 2008, according to the complaint, after plaintiff had advised defendant that it might use the repo facility, a dispute arose over the source to be used to determine the market value of the securities to be tendered. Section 2 (j) of the MRA, which is applicable to the repo facility, defines "market value" as "the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source [emphasis supplied]" (ex. C to Pegno aff.).

It is undisputed that defendant insisted that it would only agree to using its own desk pricing to determine market value. A March 5, 2008 internal email of defendant states, "I can virtually guarantee ... that we are not flexible on the pricing issue (we will value the bonds — end of story)" (ex. N to Pegno aff.). The complaint alleges that the prices set by defendant's desk pricing source were significantly lower than the prices of generally recognized third-party sources.

Plaintiff alleges that Mr. Steven T. Lang (Lang), who worked for defendant until June 2006, had agreed with Mr. Evan Lamp (Lamp), the managing member of plaintiff, at the time of formation of the first repo facility that the "generally recognized source" referred to would be one of two services, JJ Kenny or IDC, but Lang has submitted an affidavit denying that he ever made such an agreement in 2006, and asserting that he had no authority at that time to make such a binding agreement.

When this dispute over pricing arose in 2008, Lamp alleges that he spoke with Lang on the [*3]telephone about their alleged understanding in 2006, but Lang states that he has no recollection of the substance of a telephone conversation he had with Lamp. Lang states that the language, "generally recognized source agreed to by the parties," is taken from the standard form supplied by the Bond Market Association. In his affidavit, Lamp refers to his deposition testimony that the provision as to pricing source was not considered critical in 2006, that "it would make sense that it would be nebulous, to be determined" (Lang aff., ¶ 7). Lamp now works for Wells Fargo, which acquired defendant.

Although it was under no contractual duty to accede to defendant's unilateral insistence that only defendant's own desk pricing could be used, plaintiff, while reserving its rights, engaged in negotiations with defendant over a proposed dispute resolution mechanism, but they were unable to agree. According to plaintiff, the major sticking points in the negotiations related to the lack of same-day pricing, and overnight exposure to a margin call. Defendant counters that plaintiff tended to submit securities late in the day, making same-day pricing impractical.

Despite the absence of an agreement over the pricing source, plaintiff attempted on eight different days to access the facility, between March 3, 2008 and April 4, 2008, by tendering portfolios of municipal bonds in amounts varying from approximately $23,000 to $64,000. On each occasion, defendant rejected plaintiff's tender either on the grounds that the tendered bonds did not meet the applicable concentration requirements, or did not contain accurate CUSIP numbers. The concentration terms contained in the confirmation required that the tendered securities not exceed more than 5% by a single issuer, or 20% in a single state.

Plaintiff states that it made these rejected tenders in relatively small amounts to test whether plaintiff could access the facility, in contemplation of accessing a larger amount of the $500 million facility. Plaintiff has not submitted any evidence that these grounds for rejecting the tenders were not based in fact, or that the securities it tendered on these eight occasions did not in fact fail to meet these threshold requirements of eligibility.

The e-mail evidence shows that plaintiff continued in its attempts to access the facility until April 2, 2008, when, according to an e-mail from Lamp to defendant, plaintiff informed defendant that it was cancelling the delivery of securities scheduled for that day because defendant's pricing was "a full 1% lower than the lowest of the prices quoted by [JJ Kenney and IDC] ... and is consistently and materially lower... ." That e-mail informs defendant that it has breached the repo agreement, and that plaintiff is reserving its rights to seek consequential damages (ex. P to Pegno aff.). Negotiations ended on April 3, 2008, with plaintiff again threatening to sue (ex. 18 to Wood aff.).

The complaint contains two causes of action, the first sounding in breach of contract, and the second in breach of the implied covenant of good faith and fair dealing. The breach of contract cause of action seeks the return of the commitment fees that plaintiff paid to have the facility in place for both terms, in the principal amount of $395,833, as well as unspecified "additional costs" it incurred in acquiring replacement funding, for a total amount of $1,900,000. It seeks the same amount, on the alternative theory of breach of the implied covenant of good faith and fair dealing in the second cause of action.

With respect to the first cause of action, while plaintiff has established as a matter of law that defendant breached section 2 (j) of the MRA by unilaterally insisting that it would only agree to using its own desk pricing, plaintiff has not, however, established as a matter of law that this breach [*4]is either material, or constitutes a repudiation of the ultimate duty to purchase eligible securities pursuant to the terms of the repo facility.

Plaintiff has failed to establish as a matter of law that an event of default has occurred under section 11 of the MRA, which contains the contractual damages provision. The only possibly applicable event of default listed is in section 11 (i), which states "[defendant] fails to purchase [securities] upon the Purchase Date" (id.). Because defendant never refused to purchase any eligible securities, other than for failure to satisfy the concentration limits, in order for plaintiff to be entitled to avail itself of the damage remedies listed under section 11, plaintiff would have to prove that defendant's unilateral insistence on using its own desk pricing constituted both an event of default and a repudiation or anticipatory breach of its contractual duty to purchase eligible securities. While the complaint does not plead repudiation, plaintiff's counsel acknowledged at oral argument that it is "an anticipatory breach, because they were insisting upon an unreasonable interpretation ... ." (Tr. at 11).

Anticipatory breach, sometimes called repudiation, requires a showing of an unqualified and clear refusal to perform with respect to the entire contract. While it may be found if a repudiating party is seeking to avoid its obligations by advancing an untenable' interpretation of the contract, or has communicated its intent to perform only upon the satisfaction of extracontractual conditions, we have cautioned that [s]uch a factual determination is heavily dependent upon a determination of whether a breaching party's words or deeds are unequivocal [internal citations and quotation marks omitted]

(O'Connor v Sleasman, 37 AD3d 954, 956 [3d Dept 2007]).

While Plaintiff has established as a matter of law that defendant unequivocally advanced an untenable interpretation of the pricing source term of the contract, it has not established that this breach constitutes a material breach as a matter of law, or that defendant refused to perform the entire contract.

Under New York law, a material breach is "one which would justify the other party to suspend his own performance, or a breach which is so substantial as to defeat the purpose of the entire transaction [emphasis in original]" (see In re Balco Equities Ltd., Inc., 323 BR 85, 95 (Bankruptcy Ct, SDNY 2005) ; In re Bradlees Stores, Inc., 2001 WL 1112308, 7 2001 US DIST LEXIS 14755 [SDNY, 2001]. "It is only where the evidence concerning the materiality is clear and substantially uncontradicted that the question is a matter of law for the court to decide [internal quotation marks and citation omitted]" (Syracuse Orthopedic Specialists, P.C. v Hootnick, 42 AD3d 890, 892 [4th Dept 2007]; see also Joseph M.. Perillo, Calamari & Perillo on Contracts § 11.18(a), at 432 (5th ed. 2003) ("Materiality of breach is ordinarily a question of fact.").

The purpose of the transaction was for plaintiff to have a standby or back-up line of credit to finance its investment activities in the event of just such a banking liquidity crisis as transpired in 2008. The complaint alleges that defendant's pricing is materially and consistently lower than other sources. In connection with its April 2, 2008 final proposed tender, plaintiff alleged that defendant's pricing was 1% lower. It cannot be said as a matter of law, based on the evidence [*5]presented, that a one-percent differential in pricing defeated the purpose of the transaction. Indeed, plaintiff only raised the pricing issue after being unable to tender eligible securities on numerous occasions. The disputed issues of same-day pricing and margin terms are not specifically related to agreeing to a pricing source.

The effect of plaintiff's motion for partial summary judgment as to liability is only to remove from the case the issue of defendant's breach of its duty to agree to a pricing source. It fails to the extent that it seeks to posit ultimately liability on the basis of this breach not only because it has not established the materiality of the breach as a matter of law but also because plaintiff's submissions do not establish that plaintiff was ready, willing and able to tender eligible securities (see Ross Bicycles, Inc. v Citibank, N.A., 200 AD2d 379, 380 [1st Dept 1994]; Emposimato v. CIFC Acquisition Corp. 2011 WL 833801, 13 [Sup Ct, NY County 2011]).

Emposimato holds that a plaintiff moving for summary judgment, seeking damages for repudiation, must make a prima facie showing in its moving papers that, but for the other party's anticipatory breach, it was ready, willing and able, including financially able, to perform its obligations under the contract.

In its motion for partial summary judgment, defendant argues correctly that plaintiff is not entitled to return of the $250,000 that plaintiff paid to have the initial repo facility in place. Plaintiff has not demonstrated that defendant breached any duty in connection with that facility. Nor has plaintiff demonstrated that these two agreements should be considered one agreement.

Defendant also argues that plaintiff's claim for consequential damages is barred under the damages provision contained in the confirmation, which requires a showing that an event of default has occurred and that defendant is the defaulting party. That damages clause, Section 11 (g) of the MRA, provides, as pertinent: [t]he defaulting party shall be liable to the non-defaulting party for (i) the amount of all reasonable legal or other expenses incurred by the non-defaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction [emphasis supplied]

(ex. C to Pegno Aff.).

There is no merit to defendant's argument that the foregoing language contains any express limitation of liability. Such a contractual limitation on damages must be expressed "clearly, explicitly and unambiguously [citation omitted]" (Madison Hudson Associates LLC v Neumann, 44 AD3d 473, 481 [1st Dept 2007]). While the grant of partial summary judgment to plaintiff on liability only for the established breach by defendant of its duty to agree to a generally recognized pricing source removes any factual issue whether defendant breached section 2 (j) of the MRA, an array of factual issues remain. Therefore, plaintiff's argument that the matter should be set down for an inquest is unavailing.

Accordingly, it is

ORDERED that the motion for partial summary judgment (Sequence No. 003) as to liability [*6]only of plaintiff 1861 Capital Master Fund LP, is granted, to the extent of holding that defendant Wachovia Capital Markets, LLC, breached section 2 (j) of the Master Repurchase Agreement, and otherwise denied; and it is further

ORDERED that the motion for partial summary judgment (Sequence No. 004) of defendant Wachovia Capital Markets, LLC, is granted to the extent of striking plaintiff's demand for damages measured by the $250,000 paid by the plaintiff for the initial repo facility, and otherwise denied.

DATED:

ENTER:

__________________________________

J. S. C.