Morgan Stanley & Co. v. Peak Ridge Master SPC Ltd.

• Decision Date: 15 March 2013
• Docket Number: No. 10 Civ. 8405(ALC).,10 Civ. 8405(ALC).
• Citation: 930 F.Supp.2d 532
• Parties: MORGAN STANLEY & CO. INCORPORATED, Plaintiff, v. PEAK RIDGE MASTER SPC LTD o/b/o The Peak Ridge Commodities Volatility Master Fund Segregated Portfolio, Defendant.
• Court: U.S. District Court — Southern District of New York

930 F.Supp.2d 532

MORGAN STANLEY & CO. INCORPORATED, Plaintiff,

v.PEAK RIDGE MASTER SPC LTD o/b/o The Peak Ridge Commodities Volatility Master Fund Segregated Portfolio, Defendant.

No. 10 Civ. 8405(ALC).

United States District Court, S.D. New York.

March 15, 2013.

Brian T. Frawley, Kenneth M. Raisler, Adrienne Abercrombie Harris, Sullivan and Cromwell, LLP, New York, NY, for Plaintiff.

Eric R. Levine, Eric P. Heichel, Stephen Lee Weinstein, Eiseman, Levine, Lehrhaupt & Kakoyiannis, P.C., New York, NY, for Defendant.

MEMORANDUM & ORDER

ANDREW L. CARTER, JR., District Judge.

I. Introduction

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 Dismiss is GRANTED in part and DENIED in part,

II. Background

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”).¹ In March of 2010, due to some losses in the account, Morgan Stanley raised the margin requirement to 4:1. In early June of 2010, Morgan Stanley raised the margin requirement to 4.5:1 and again to 6:1 in response to a sharp decline in the NAV of the account. Peak Ridge alleges Morgan Stanley never portrayed these increases as requirements but rather, described them as targets or aspirations. At the close of trading on June 8, the NAV of the account was $11.4 million with a gross market value of the positions in excess of $700 million. On June 9, 2010, Morgan Stanley sent a letter to Peak Ridge, indicating the new margin requirement was 6:1, and Peak Ridge had until the close of business that day to bring the account into compliance. At the close of business on June 9, the account margin was 5.3:1, short of the 6:1 requirement, as confirmed by an email Morgan Stanley received from Peak Ridge.

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.

III. DiscussionA. Standard of Review

Rule 12(b)(6) of the Federal Rules of Civil Procedure allows for dismissal if a party fails “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When deciding a motion to dismiss, the Court must accept as true all well-pled facts alleged in the Complaint and must draw all reasonable inferences in Plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007). Claims should be dismissed when a Plaintiff has not pled enough facts that “plausibly give rise to an entitlement for relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678, 129 S.Ct. 1937. If the non-moving party has “not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

B. Breach of Contract Counterclaim

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.

i. The Customer Agreement does not require a separate margin call

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:

4. Customer's Events of Default; Morgan Stanley's Remedies.

a. Events of Default. As used herein, any of the following is an ‘Event of Default’:

...

(v) the Customer is in default, or an event of default exists, with respect to any material obligation or liability (including the failure to make a payment on demand or to satisfy margin requirements) arising under any contract or agreement between Morgan Stanley ...;

(vi) the failure by Customer to deposit or maintain margins or to pay required premiums in accordance with Section 6(e) hereof, or otherwise to make payments required by Section 3 hereof;

...

b. Remedies. Upon the occurrence of an Event of Default, Morgan Stanley shall have the right, in addition to any other remedy available to Morgan Stanley at law or in equity, (i) buy, sell or otherwise liquidate any or all open Contracts held in or for the Account (including without limitation, through the making or taking of delivery, the use of exchange for physical transactions, exchange for swaps transactions, block trades, any associatedcash transactions as broker or principal, or any other means): ... (iii) sell any or all of the securities or other property of Customer held by Morgan Stanley and to apply the proceeds thereof to any amounts owed by Customer to Morgan Stanley; ... (vi) take such other or further actions Morgan Stanley, in its commercially reasonable discretion, deems necessary or appropriate for its protection, all without demand for margin and without notice or advertisement and to the full extent permitted under Applicable Law ... In exercising its remedies hereunder, Morgan Stanley may in its sole discretion and without prior notice to the Customer ... (C) close out positions in whole or in part, or limit and/or terminate the right of the Customer to trade in the Account, other than for liquidation; (D) sell Contracts to itself or its affiliates or buy Contracts from itself or its affiliates in arms-length transactions ... Any such action may be undertaken in the discretion of Morgan Stanley in a commercially reasonable manner ... A prior demand or margin call of any kind from Morgan Stanley or prior notice from Morgan Stanley shall not be considered a waiver of Morgan Stanley's right to take any action without notice or demand....

...

6. General Agreements. The parties agree that:

...

e. Original and Variation Margin; Premiums; Other Contract Obligations. Customer shall perform all obligations attendant to transactions or positions in the Contracts and shall make, or cause to be made, all applicable original margin, variation margin, intra-day margin and premium payments, in such amount, form and subject to such valuation mechanics, as may be required by Applicable Law or Morgan Stanley. Requests for margin deposits and/or premium payments may, at Morgan Stanley's election, be communicated to Customer orally, telephonically or in writing....

(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...