Morpheus Capital Advisors LLC v. UBS AG

• Decision Date: 12 March 2013
• Citation: 2013 N.Y. Slip Op. 01518,105 A.D.3d 145,962 N.Y.S.2d 82
• Parties: MORPHEUS CAPITAL ADVISORS LLC, Plaintiff–Appellant, v. UBS AG, et al., Defendants–Respondents.
• Court: New York Supreme Court — Appellate Division

105 A.D.3d 145

962 N.Y.S.2d 82

2013 N.Y. Slip Op. 01518

MORPHEUS CAPITAL ADVISORS LLC, Plaintiff–Appellant,

v.UBS AG, et al., Defendants–Respondents.

Supreme Court, Appellate Division, First Department, New York.

March 12, 2013.

Kornstein Veisz Wexler & Pollard, LLP, New York (William B. Pollard, III and Amy C. Gross of counsel), for appellant.

White & Case LLP, New York (Kenneth A. Caruso and Peter E. Wilhelm of counsel), and Chadbourne & Parke, LLP, New York (Jeffrey I. Wasserman of counsel), for respondents.

PETER TOM, J.P., RICHARD T. ANDRIAS, KARLA MOSKOWITZ, NELSON S. ROMÁN, JJ.

ROMÁN, J.

In 2008, during the financial crisis that left many financial services companies holding billions of dollars in “toxic assets” (undervalued and underperforming assets), plaintiff and defendant UBS Real Estate Securities, Inc. (UBSRE) entered into an agreement whereby plaintiff was to act as UBSRE's “financial advisor and investment banker in the proposed sale of certain of [UBSRE's] student loan warehouse loan facilities (the ‘Transaction’).” The agreement gave plaintiff the “exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement.” Moreover, according to the agreement, upon the closing of “the Transaction,” plaintiff would be paid a success fee for its services, which would be calculated as a percentage of the “Transaction Amount,”

“defined as the agreed value of the Student Loan Assets which are transferred or sold to a third party, or in respect to which the risk of first loss is assumed by a third party, in one or a series of transactions ” (emphasis added).

Alleging that defendants breached the agreement, plaintiff sued, claiming, inter alia:

“On October 16, 2008, during Morpheus' exclusivity period, Defendant UBS AG reached an agreement with the Swiss National Bank (‘SNB’) and a third party fund (the ‘Stabilization Fund’) whereby the student loan assets [held by UBSRE] would be sold to the Stabilization Fund. This deal ... relieve[d] UBS AG and UBSRE of the risk of any further loss with respect to those assets ... [and that] [b]y entering into that agreement ... UBSRE ... breached the Agreement with Morpheus” (emphasis added).

Defendants moved for pre-answer dismissal of the complaint pursuant to CPLR 3211(a)(1) and (a)(7). Holding that defendants had established both a frustration of purpose defense and that the complaint failed to state a cause of action against UBS AG, the motion court granted defendants' motion in its entirety. Plaintiff appealed, and upon a review of the record, we conclude that the motion was erroneously granted to the extent it sought dismissal of the claims asserted against UBSRE.

The motion court erred in dismissing the complaint pursuant to CPLR 3211(a)(1) (defense founded on documentary evidence) on the ground that the purpose of the parties' agreement was frustrated by SNB's creation of the Stabilization Fund (Fund) into which UBSRE could deposit its allegedly toxic assets and free itself of the risk involved in maintaining such debt on its books, and that UBSRE was thus relieved of any duty to pay the success fee.

“The doctrine [of frustration of purpose] applies when a change in circumstances makes one party's performance virtually worthless to the other, [thereby] frustrating his purpose in making the contract” ( PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391 [2011] [internal quotation marks omitted] ). However, the defense is not available when the event preventing performance was foreseeable ( Warner v. Kaplan, 71 A.D.3d 1, 6, 892 N.Y.S.2d 311 [2009],lv. denied14 N.Y.3d 706, 2010 WL 1235676 [2010] ), or where the party asserting the defense “through the conduct of its principals, was responsible for the events which transpired” ( VJK Prods., Inc. v. Friedman/Meyer Prods., Inc., 565 F.Supp. 916, 921 [S.D.N.Y.1983] ).

A motion to dismiss premised on documentary evidence “may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law” ( see Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002] ). Here, while defendants aver that the creation of the Fund frustrated the purpose of the agreement, they nevertheless fail to establish that defense with documentary evidence. The very documents defendants submit in support of their motion establish that the creation of the Fund was in fact foreseeable and contemplated by the parties in the agreement. Specifically, the agreement contains a provision compensating plaintiff in the event of a transaction where the risk of loss was, as alleged here, assumed by a third party. Accordingly, in premising plaintiff's compensation on the sale, transfer or, as here, assumption of UBSRE's student loan assets by another, the Fund's creation and UBSRE's transfer of its assets thereto was foreseeable.

Furthermore, the documents submitted by defendants in support of their motion also fail to establish that the creation of the fund was, in and of it itself, the event which frustrated the purpose of the agreement. Specifically, these documents fail to conclusively establish that the creation of the Fund, rather than defendants' decision to avail themselves of it, rendered plaintiff's performance under the agreement—finding a purchaser for the very assets that UBSRE transferred into the Fund—“virtually worthless” to UBSRE ( VJK Prods., Inc., at 920–921). Therefore, defendants fail to establish their frustration of purpose defense as a matter of law.

The dissent asserts that the agreement itself, which defendants submitted in support of their motion to dismiss, establishes defendants' right to dismissal. Specifically, the dissent notes that the portion of the agreement entitled “Scope of Engagement” requires plaintiff to “[i]dentify, introduce and assess appropriate investors.” Similarly, the dissent notes that the portion of the agreement that contemplates payment to plaintiff when the “Student Loan Assets ... are transferred or sold to a third party, or ... [when] the risk of first loss is assumed by a third party, in one or a series of transactions,” precludes compensation to plaintiff because UBSRE transferred its assets to the Fund created by SNB, a party that plaintiff did not and could not introduce to UBSRE. The crux of the dissent's argument, therefore, is that the agreement grants plaintiff an exclusive agency rather than an exclusive right to sell. Thus, the dissent concludes, defendants did not breach the agreement, because plaintiff did not broker UBSRE's transfer of its toxic assets into the Fund, and under the circumstances, plaintiff has no cause of action for breach of contract. While we agree that plaintiff was granted only an exclusive agency, we disagree that plaintiff fails to state a cause of action for breach of contract or that defendants established a defense based on documentary evidence.

The dissent correctly notes that generally under an exclusive agency agreement no liability to pay commissions arises absent the participation of the party to whom the exclusive agency is granted ( U.S. No. 1 Laffey Real Estate v. Hanna, 215 A.D.2d 552, 553, 627 N.Y.S.2d 54 [2d Dept. 1995], lv. denied87 N.Y.2d 804, 639 N.Y.S.2d 782, 662 N.E.2d 1072 [1995] ). We further agree with the dissent to the extent it notes that here the agreement only confers an exclusive agency to plaintiff insofar as it does not expressly prohibit UBSRE from finding a buyer for its toxic assets and thereafter engaging in a self-brokered sales transaction ( see Carnes Communications, Inc. v. Dello Russo, 305 A.D.2d 332, 332, 761 N.Y.S.2d 615 [1st Dept. 2003] ). However, the dissent erroneously contends that since plaintiff only had an exclusive agency and did not introduce UBSRE to the Fund, the agreement precludes a breach of contract claim.

A review of the agreement establishes that while plaintiff was only granted an exclusive agency, the agreement nevertheless gave plaintiff “the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement.” Read broadly, the allegations in the complaint, which on a motion to dismiss pursuant to CPLR 3211(a)(7) we deem as true ( see Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 414, 729 N.Y.S.2d 425, 754 N.E.2d 184 [2001];Cron v. Hargro Fabrics, 91 N.Y.2d 362, 366, 670 N.Y.S.2d 973, 694 N.E.2d 56 [1998] ), state a cause of action for breach of contract.

Specifically, the complaint alleges “[t]he Agreement provided Morpheus with the ‘exclusive right to solicit counterparties' for any potential transaction,” and premises the breach of contract claim on, inter alia, UBSRE's failure to give plaintiff the right to solicit counterparties before transferring its assets to the Fund ( Harris v. Seward Park Housing Corp., 79 A.D.3d 425, 426, 913 N.Y.S.2d 161 [1st Dept. 2010] [the essential elements of a cause of action for breach of contract are the existence of a contract, the plaintiff's performance under the contract, the defendant's breach of that contract, and resulting damages] ). Contract provisions should be given their plain and ordinary meaning ( Rosalie Estates. v. Colonia Ins. Co., 227 A.D.2d 335, 336, 643 N.Y.S.2d 59 [1st Dept. 1996] ), and when clear, a contract ought to “be enforced according to its terms” ( Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 [2004] [internal quotation marks omitted] ). Accordingly, since the agreement required UBSRE to give plaintiff the opportunity to solicit a counterparty prior to transferring its assets into the Fund, and since plaintiff pleads a breach of that very term, the complaint states a cause of action for breach of contract. This is true, even if, as...