Opinion
99 Civ. 12175 (AKH).
August 20, 2004
OPINION AND ORDER DENYING RECONSIDERATION, AND ON DAMAGES
In my Opinion and Order dated July 1, 2003 ("Opinion"), I granted summary judgment to defendant Morgan Guaranty Trust Company of New York ("Morgan") dismissing counts one, two, three, five, and six of plaintiffs' Second Amended Complaint. I granted summary judgment to plaintiffs Korea Life Insurance Co., Ltd. ("KLI") and Morning Glory Investment (L) Limited ("Morning Glory") on count four, alleging breach of contract against Morgan. Korea Life Ins. Co. v. Morgan Guar. Trust Co. of N.Y., 269 F. Supp. 2d 424, 447 (S.D.N.Y. 2003). I deferred ruling on damages, pending further submissions from the parties and further proceedings. Id. at 447-48.
Both parties filed motions regarding damages, and Morgan also filed a motion for reconsideration. I held oral argument on February 4, 2004, and the parties filed supplemental briefs on damages subsequent to the argument. I now rule on all outstanding issues, denying Morgan's motion for reconsideration, denying Morgan's defense regarding mitigation, and finding Morgan liable for damages pursuant to its breach of contract in the amounts stated below. I also deny as moot plaintiffs' motion to strike the expert reports of Michael R. Darby and Robert Pickel.
The complex factual background is treated extensively in my prior opinion. See Opinion at 1-16; 269 F. Supp. 2d at 426-35. I assume familiarity with that opinion and restate the facts here only to the extent germane to this discussion.
I. Reconsideration
Morgan moved for reconsideration in response to my invitation. My original decision granted relief to both sides, even though only Morgan had moved for summary judgment. I granted summary judgment to plaintiffs for breach of contract on the ground that the district judge should search the record in deciding a motion for summary judgment and give judgment as appropriate, even though the party who turns out to win may not have made the motion itself. See Opinion at 37; 269 F. Supp. 2d at 446. However, I was concerned that the record was so extensive that I may have overlooked facts, or that a party may not have felt the need to present all relevant facts and arguments. I therefore invited further submissions to correct any overlooked or unpresented facts or arguments, as well as on the issues of damages. See Tr. Feb. 4, 2004, at 2-3.
In moving for reconsideration, Morgan makes two primary arguments. The first is that there is no admissible evidence that written notice was ever provided to Morgan, rather than to Korea Exchange Bank ("KEB"), and that written notice to Morgan was contractually required. The second is that several contemporary documents written by KLI's Bo-Chan Kim in September and October 1997 do not mention KLI's demand to unwind, and Kim's contemporary silence suggests that his October 16, 1997 demand was not really intended. I consider and reject both of Morgan's arguments.
A. Written Notice to Morgan
As I held in my opinion, see Opinion at 9; 269 F. Supp. 2d at 431, the Total Return Swap Agreements between Morning Glory and KEB, and between KEB and Morgan, incorporated the ISDA Master Agreement, requiring all notices to be in writing. Accordingly, it was the October 16, 1997 written unwind request, rather than the prior oral communications, which constituted legally effective demand on Morgan, obligating it to unwind the transactions. Morgan's refusal to act constituted a breach of its contract obligations. Opinion at 37; 269 F. Supp. 2d at 446.
Because I held that "[t]he real parties in interest were KLI and Morgan," Opinion at 35, 269 F. Supp. 2d at 445, I reject any argument by Morgan that the unwind demand was deficient because it was made by KLI rather than by Morning Glory. See id.
Morgan asserts that I should grant reconsideration because it, and not only KEB, should have been given written notice of KLI's instruction to unwind the transactions. According to Morgan, the testimony of KLI's Bo-Chan Kim, who sent the October 16, 1997 demand to unwind and then telephoned KEB and Morgan to confirm its receipt, is hearsay and inadmissible, and that is the only evidence that Morgan was informed of the written notice.
To elaborate on what I described in my earlier opinion, see Opinion at 15, 31; 269 F. Supp. 2d at 434, 443, the record shows that KLI first demanded an unwind as early as June 1997, directing its requests both to Morgan and to KEB as intermediary. KEB and Morgan both declined to act. At a meeting at KLI's office in August 1997, Dr. Chang Hyun Chi, the head of Morgan's Korea team, acknowledged to Kim, a manager in KLI's Fixed Income Department, that Morgan had received, but had not executed, KLI's demand to unwind. Kim reiterated to Chi KLI's demand to unwind, but Morgan still did not comply. Ultimately, on Morgan's specific instructions, KLI sent its written demand to KEB on October 16, 1997, in the form of a telefax from Kim to Joongseok Ahn, a General Manager of KEB. After sending the telefax, Kim called KEB to confirm its receipt of KLI's telefax, in accordance with the regular business practice in Korea, and KEB acknowledged to Kim that it had received KLI's demand notice. A week later, Kim called both KEB and Morgan to inquire why the unwind had not yet been executed. Both KEB and Morgan told Kim that they would not unwind the transaction, each stating that it could not act without the assent of the other, but neither giving the other its assent.
The record that establishes these facts is drawn primarily from testimony by Kim, and confirmed in testimony by other KLI and Morgan employees having personal knowledge, including Chae Wook Noh, the General Manager of KLI's Stock Department who had principally brokered the deal. Taped telephone conversations among Morgan employees confirm that Morgan knew of, and that it intentionally ignored, KLI's attempts to make further contact.
The relevant testimony by Kim, aside from deposition testimony, was at an evidentiary hearing which I conducted on September 4-5, 2002. Kim testified that he sent the fax on the instructions of the Morgan representative whom he spoke with, either Dr. Chang Hyun Chi or General Manager Sung Woo Park. Tr. Sept. 5, 2002, at 174-75. "Before we sent out this particular instruction, we made several calls in order to unwind — in order to request unwinding of a thai baht, but that was not done. . . . Dr. Chi said that we have to send out instruction to KEB . . . What he said was that if we sent this instruction to KEB, KEB will relay this document to J.P. Morgan and then J.P. Morgan will quote the price and if we accept the price, then deal can be settled." Id. at 175-77;see also id. at 169 ("We sent this document because J.P. Morgan asked us to send."). Kim authenticated a translation and the original of the telefax which he had sent, which were received as Plaintiffs' Exhibits 15 and 16, respectively.
Morgan did not object to the admission of the original document, Exhibit 16, on grounds of authenticity, but objected on grounds of late production and on the grounds that a foundation was not laid for its receipt by KEB. Id. at 164-65. I inquired of Kim as to the regular business practice in Korea, and he explained that the legend which in the United States customarily appears at the top of a faxed document to confirm its receipt is not printed in Korea. Instead, the sender customarily telephones the recipient to confirm the document's receipt. Kim testified that he followed the customary practice in this case, speaking to either KEB General Manager Joongseok Ahn or his deputy, Yong Il Keum. Id. at 165-66. Morgan did not raise any objections during the course of my questioning, id., and on the basis of this testimony, I overruled Morgan's objection and admitted the document into evidence. Id. at 167.
Kim testified that he called KEB to confirm its receipt of his telefax, see id. at 166, and that he called Morgan the following week to inquire why the unwind had not occurred. His most detailed explanation followed at the end of his redirect examination, when I questioned him directly:
THE COURT: What happened after you sent Exhibit 16?
THE WITNESS: After we sent out this document, we still did not receive any response from J.P. Morgan. So after one week we called J.P. Morgan once again. I'm not sure whether the person who answered my call was Dr. Chi or Mr. Sung Woo Park.
When I asked why the order was not implemented, why they didn't give us the price quote, J.P. Morgan answered that they did not receive this document from KEB. So after I hung up the phone, I called Mr. Keum at KEB.
When I asked Mr. [Keum] why this instructional document was not released to J.P. Morgan, Mr. Keum answered that he did relay this document to J.P. Morgan but he said that . . . he was under the impression that J.P. Morgan was not interested in implementing the order.
I was very nervous about what happened, so I called J.P. Morgan once again.
THE COURT: Before you do that, you testified that Mr. [Keum] at KEB said that it was his impression that Morgan wasn't interested. Did he say why he had that impression?
MR. HUMMEL [counsel for Morgan]: Your Honor, may I object to the hearsay?
THE COURT: Overruled.
MR. HUMMEL: And I move to strike the hearsay.
THE WITNESS: Mr. Keum said that J.P. Morgan was trying to make excuses, but I didn't really ask why Mr. Keum formulated such an impression about J.P. Morgan because I was really angry and I just wanted to speak to J.P. Morgan once again to find out why. So I called.
THE COURT: See if you can give me a date for this next call to Morgan.
THE WITNESS: I made all these calls one week after we sent out this document and several calls were made on the same day after sending out this document. And when I spoke to J.P. Morgan, they told me something opposite to what KEB told me, had told me earlier, saying that J.P. Morgan said that it is KEB who seemed to be not interested in unwinding the thai baht.
. . .
I was very much angry at the time and . . . I really was under the impression that KEB and J.P. Morgan [were] playing with KLI.Id. at 177-79. The only hearsay objection that Morgan made to any of Kim's testimony was the objection, quoted above, to Kim's testimony regarding the basis for Keum's "impression that J.P. Morgan was not interested in implementing the order." Id. at 178. Morgan now objects to Kim's entire testimony on the grounds that it was hearsay. I note first that Morgan's objection was not timely made, and Morgan in no way indicated that its objection applied to any previous part of Kim's testimony. Morgan did not object during Kim's direct examination, for instance, when he testified that he called KEB to confirm receipt of the telefax.Id. at 165-67. Nor did Morgan object earlier in Kim's redirect examination, when he testified that he informed Morgan that he had sent the unwind demand to KEB. Id. at 173. As applied to these aspects of Kim's testimony, Morgan's objection was not timely made and therefore is waived. See Fed.R.Evid. 103(a)(1) (admission of evidence is not error unless "a timely objection or motion to strike appears of record"); United States v. Frustaci, 96 Cr. 430, 1997 U.S. Dist. Lexis 14111 (S.D.N.Y. Sept. 16, 1997) (objection sustained where not timely made).
Even if Morgan's objection is understood broadly to refer to the entirety of Kim's testimony, and even if it were deemed timely, it could not properly be sustained as applied to other aspects of Kim's testimony beyond his testimony regarding Keum's impression that J.P. Morgan was not interested in implementing the order. Fed.R.Evid. 801(c) defines hearsay as "a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Kim's testimony that he called KEB and Morgan to check that the unwind demand was received and would be acted upon was not hearsay, since Kim made the statements himself, regarding his own previous activities. See Fed.R.Evid. 801(c) (defining hearsay as a statement "other than one made by the declarant while testifying at the . . . hearing"); cf. United States v. Yousef, 327 F.3d 56, 153 (2d Cir. 2003) (defendant's prior written statement is hearsay but his testimony is admissible under Fed.R.Evid. 801(c)). Kim's testimony regarding the course of phone calls following a telefax was also not hearsay, for this testimony was offered not "to prove the truth of the matter asserted," but to establish the regular business practice in Korea. The testimony was not offered in the context of direct questioning, but in the context of investigating the reliability of Plaintiffs' Exhibit 16.
I provided Morgan with ample opportunity to supplement the record with its own evidence, through testimony or otherwise, that it and KEB had not received notice of KLI's October 16, 1997 telefax. Both on and off the record, at conferences, during the evidentiary hearings on Morgan's summary judgment motion, and during this motion for reconsideration, I pressed the parties to submit any other relevant evidence which would provide a more complete record. See, e.g., Tr. Sept. 4, 2002, at 3, 107-08, 117-18; Tr. Sept. 5, 2002, at 183; Tr. July 17, 2003, at 13-14; Tr. Feb. 4, 2004, at 2-3. Morgan did not produce any evidence contradicting Kim's testimony; instead, Morgan rests on its denials. Morgan "must do more than simply show that there is some metaphysical doubt as to the material facts" in order to raise a triable issue of fact. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Morgan's simple denial is even less persuasive in the context of a motion for reconsideration. See Kotlicky v. United States Fidelity Guar. Co., 817 F.2d 6, 9 (2d Cir. 1987) (heightened standards for motion to reconsider); Nemaizer v. Baker, 793 F.2d 58, 61-62 (2d Cir. 1986) (same).
Aside from disputing the evidence showing that KEB and Morgan were made aware of KLI's October 16, 1997 unwind demand, Morgan also contends that the unwind demand was legally defective because the requirement of written notice included a requirement that the written notice be sent, not to KEB, but to Morgan directly. As I held before, Morgan "knew, by reason of both KLI's written and oral notices, that KLI wanted its baht position unwound, and that it was Morgan's decision not to comply with the demand Clearly, Morgan had actual knowledge, and therefore is deemed to have notice that KLI made demand pursuant to the unwind provision." Opinion at 32; 269 F. Supp. 2d at 443 (citingLeasing Serv. Corp. v. Diamond Timber, Inc., 559 F. Supp. 972, 978 (S.D.N.Y. 1983)). Morgan thus had actual knowledge of the written notice. "A person is deemed to have notice when he has actual knowledge or when `from all the facts and circumstances known to him at the time in question he has reason to know that it exists.'" Pavia v. 1120 Ave. of the Americas Assocs., 901 F. Supp. 620, 625 (S.D.N.Y. 1995) (quoting Diamond Timber, 559 F. Supp. at 978).
More significantly, it was Morgan which had "instructed KLI to send any request to unwind to KEB." Opinion at 15; 269 F. Supp. 2d at 431. Indeed, Morgan maintained that position — that any notice was to be sent to KEB — right up through its motion for summary judgment. See Memorandum in Support of Defendant's Motion for Summary Judgment at 35-36 (April 12, 2002) ("Morning Glory did have an express contractual right under the Morning Glory-KEB Swap to `terminate' that contract upon two days written notice to KEB." (emphasis original; citing clause establishing privity between Morning Glory and KEB)); Tr. June 20, 2002, at 62-63 ("The contracts provide that there should be a demand, that it should be to KEB . . ."); Tr. Sept. 5, 2002, at 171 ("The unwind request should have been to KEB . . ."). After consistently maintaining the position that KLI and Morning Glory were required to give written notice to KEB, Morgan is now estopped from arguing that the written notice should have been to Morgan instead. See, e.g., Club Haven Investment Co. v. Capital Co. of America, 160 F. Supp. 2d 590 (S.D.N.Y. 2001) (equitable estoppel doctrine binds a party to its word in breach of contract case).
Morgan held out KEB as its agent for receiving notice. It rejected KLI's initial attempts to communicate directly to Morgan its desire to unwind, instructing KLI that an unwind demand would be considered effective only if it was sent, in writing, to KEB. It maintained that position throughout this lawsuit. Morgan's actions now are governed by the rule that a party which gives instructions as to the recipient to whom notice must be provided may not later contend that notice given to that recipient was ineffective. "[K]knowledge acquired by an agent acting within the scope of his agency is imputed to his principal and the latter is bound by such knowledge although the information is never actually communicated to it." Center v. Hampton Affiliates, Inc., 488 N.E.2d 828, 829 (N.Y. 1985) (citing Farr v. Newman, 199 N.E.2d 369, 371 (N.Y. 1964); see also Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) (followingCenter).
Nor does KEB's agency fall within the "adverse interests" exception to this doctrine. Wight, 291 F.3d at 87. That exception can be invoked only when the agent has "totally abandoned his principal's interests and [is] acting entirely for his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal." Center, 488 N.E.2d at 830. KEB's role in this set of transactions was purely as an intermediary. It had no interests adverse to Morgan's, and, by telling KLI that it could not effect the unwind — that is, by taking the same position towards KLI that Morgan took — it was in no way acting adversely to Morgan's interests, let alone "totally abandon[ing]" them. Id. The adverse interests exception is "narrow," Wight, 219 F.3d at 87, and it does not apply here. The written notice which KLI provided to KEB on October 16, 1997 was sufficient and legally effective to compel instructed action from Morgan.
B. Contemporary Extrinsic Evidence
Morgan argues that internal KLI memoranda, one of September 30, 1997 and another of October 30, 1997, derogate from KLI's written demand to unwind the Morning Glory transactions. Morgan contends that since Bo-Chan Kim, who signed the October 16 demand notice on behalf of KLI, did not mention anything about an unwind request in the two internal memoranda, an issue of fact arises as to what really was KLI's intent. Morgan notes that it and KLI had been discussing a restructuring of their deal, as reflected in Morgan's letter of October 3, 1997, and that KLI may have preferred a restructuring to an unwind.
KLI's internal memoranda do not change the legal effect of the October 16 written demand Clause 12 of the ISDA Master Agreement, specifically incorporated into the KLI/Morgan/KEB agreements, required that notice be given in writing, and where written notice is required, anything that derogates from that written notice must be in writing as well. See N.Y. Gen. Oblig. Law § 15-301 (contractual requirement of written notice is enforceable and cannot be waived except in writing); see, e.g., Jaffe v. Paramount Communications, 644 N.Y.S.2d 43, 47 (N.Y.App.Div., 1st Dep't 1996) (where contract required written notice, presence or absence of a writing is dispositive; extrinsic evidence is immaterial under N.Y. Gen. Oblig. Law § 15-301); Bank of N.Y. v. Kranis, 592 N.Y.S.2d 67 (N.Y.App. Div., 1st Dep't 1993) (same: contract "with a no-oral-modification clause is not amenable to oral termination. Parol evidence cannot be used to vary or contradict the express terms of the writing, and no triable issues of fact are created. . . ."). Morgan cannot produce a writing that constitutes a revocation or modification of KLI's written demand
Morgan's motion for reconsideration raises no triable issue of fact. KLI's October 16, 1997 written demand was neither modified nor revoked. I affirm my finding that KLI's written demand on October 16, 1997 was effective, and that Morgan's failure to comply with it constituted a breach of Morgan's contractual duty. Accordingly, I deny Morgan's motion for reconsideration.
II. Mitigation
I calculated in my opinion that Morgan was responsible for paying $26,456,946 in damages. I explained that this calculation was preliminary and did not constitute a ruling, and I invited the parties to submit supplemental briefings on the question of damages. Opinion at 38; 269 F. Supp 2d at 446. Morgan argues that plaintiffs failed to mitigate damages and that, under the mitigation doctrine, the maximum KLI can recover is $6.35 million. Morgan argues that KLI could have mitigated its damage by making offsetting three-month forward contracts, purchasing and selling short baht forward positions and long dollar forward positions, in appropriate amounts. Alternatively, Morgan argues, KLI could have purchased put options on the baht. Morgan presents an expert to show that either of these types of transactions would have protected KLI against subsequent depreciation of the baht against the dollar.
The doctrine of mitigation generally applies to a breach of contract action. "New York's courts adhere to the universally accepted principle that a harmed plaintiff must mitigate damages." Air Et Chaleur, S.A. v. Janeway, 757 F.2d 489, 494 (2d Cir. 1985). "[T]he party seeking damages is under the duty to make a `reasonable effort' to avoid consequences of the act complained of. It is, indeed, a rule of broad acceptance that `No recovery may be had for losses which the person injured might have prevented by reasonable efforts and expenditures.'" Wilmot v. State, 297 N.E.2d 90, 92 (N.Y. 1973) (internal citations omitted).
However, a plaintiff is not required to take economically unreasonable steps, or to engage in particular transactions identified by the breaching defendant. In Carlisle Ventures, Inc. v. Banco Espanol de Credito, S.A., 176 F.3d 601 (2d Cir. 1999), Carlisle bought shares of common stock in the defendant bank, known as Banesto. Soon afterwards, Spanish regulators uncovered financial instabilities in Banesto, leading to the devaluation of its shares. Carlisle sued, and Banesto was found liable for breach of contract. On appeal, Banesto argued that its damages should be reduced because Carlisle failed to participate in a below-market sale of shares, which would have offset the losses it incurred through its previous transaction. The Court of Appeals rejected this argument, holding that in evaluating a mitigation argument,
it is appropriate for courts to focus "not on the failure of the plaintiff to pursue the . . . alternative courses of action suggested by [the] defendant but upon the reasonableness of the action which [the] plaintiff did in fact take. The fact that in retrospect a reasonable alternative course of action is shown to have been feasible is not proof of the fact that the course actually pursued by the plaintiff was unreasonable."Id. at 609 (citing Zanker Dev. Co. v. Cogito Sys. Inc., 264 Cal. Rptr. 76, 79 (1989) (brackets and ellipses in original). The Court of Appeals thus held that "a breach victim is rarely required to accept a new offer in order to mitigate damages." Id. (citing caselaw and Dan B. Dobbs, Law of Remedies, at 135 (2d ed. 1993));see also III E. Allan Farnsworth, Farnsworth on Contracts § 12.12, at 232 (3d ed. 2004) ("What steps the injured party is expected to take depends on the circumstances. . . . The injured party is not . . . expected . . . to take steps that involve undue burden, risk, or humiliation.").
A plaintiff is also not required to take steps in mitigation that should have been taken by the breaching defendant. InTravelers Indemnity Co. v. Maho Machine Tool Corp., 952 F.2d 26 (2d Cir. 1991), defendant Maho, a German company, sold a machine to a purchaser in Singapore. It arrived damaged, and was rejected. Maho offered the purchaser a choice: incur the expense of approximately $10,000 to fly Maho's engineer from Germany to Singapore to inspect the machine, or fly the machine to Germany for repairs. The purchaser declined to return the machine to Germany, and its insurer, Travelers, as subrogee, sold the machine for salvage, and sued Maho for breach of contract. Maho relied on the defense of mitigation, arguing that the purchaser could have reduced its damages by spending $10,000 to fly Maho's engineer from Germany to Singapore. The Court of Appeals rejected the argument, ruling, in part, that "even if it were thought reasonable for Travelers to have incurred the $10,000 expense for Maho's engineer to inspect the machine in Singapore, it was at least as reasonable for Maho to incur the same expense." Id. at 31. "[T]he victim of a breach of contract need not make expenditures to mitigate damages where the breaching party had the same opportunity to prevent damages." Id. Saboundjian v. Bank Audi (USA), 556 N.Y.S.2d 258 (N.Y.App. Div., 1st Dep't 1990), which Morgan cites as contrary authority, involves very different facts. Plaintiff in Saboundjian was an experienced and active foreign currency trader, who maintained "a number of different foreign currency positions open with the bank at various times." 556 N.Y.S.2d at 260. Plaintiff had ordered the bank to sell his deutsche marks when they reached a certain price per dollar, and the bank failed to do so. When the bank informed him, the morning after the deutsche marks hit the sell price, that the sale had not been executed as requested, the bank also informed him that they could execute it at that time at a price "only somewhat less." Id. Plaintiff declined, stating, "Don't worry, I am bullish." Id. Plaintiff then waited another month until he finally asked the bank to close out his position. Id. The First Department held that since plaintiff had "fail[ed] to cover within a reasonable time," his damages should be reduced by the amount of loss that he could have avoided had he mitigated through an offsetting transaction. Id. at 261. Plaintiff could not, the First Department held, "refuse to cover a transaction previously requested and thereby speculate on the market entirely at the risk of the broker." Id. at 261 (quoting Brown v. Pressner Trading Corp., 475 N.Y.S.2d 405 (N.Y.App.Div., 1st Dep't 1984).
Similarly, in Brown v. Pressner Trading Corp., 475 N.Y.S.2d 405 (N.Y.App.Div., 1st Dep't 1984), upon whichSaboundjian relies, plaintiff requested a transaction which was impossible to execute because the relevant market had been frozen, did not follow up on its request, and later "refuse[d] to cover" for the transaction. Id. at 407.
KLI did no such thing. The unwind provision, clause 2(e) of the Morning Glory/KEB Total Return Swap Agreement, was inserted specifically to protect KLI against an open-ended currency devaluation. KLI had far less experience with international currency markets than did Morgan, and the parties specifically provided by the unwind demand provision to place on Morgan the obligation to mitigate the effects of devaluation. The parties to a contract may rearrange such rights and obligations as part of their negotiations. See, e.g., Charles J. Goetz Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 Va. L.Rev. 967, 971-72 (1983) (mitigation doctrine, like most contract rules, is "permissive, applying only if the parties do not otherwise agree," and can and should be contractually modified when appropriate); cf. Duncan v. TheraTx, Inc., 775 A.2d 1019, 1021 (Del. 2001) (damage rules should reflect what the parties bargained for or would have bargained for (quoting Goetz Scott)). The Total Return Swap Agreement thus assigned to Morgan the duty to mitigate damages, and Morgan had the obligation, upon written demand by KLI pursuant to clause 2(e), to mitigate loss by unwinding the baht portion of the deal. As in Maho Machine, KLI should not bear the responsibility and the expense of undertaking this unwind by entering into an offsetting transaction when Morgan had an equal opportunity, greater market experience, and the contractual obligation to do so.
Furthermore, the mitigation transactions suggested by Morgan would not have been financially reasonable for KLI. According to Morgan, the cost of a put option on the baht would have been $6.35 million. As I observed in my opinion, KLI's income was approximately $7 million for the year ending March 31, 1996. Opinion at 11; 269 F. Supp. 2d at 432. Given the financially precarious situation that KLI found itself in after the baht began to fall — including both its mounting debt to Morgan and the potential credit ramifications of operating in a deficit — the high deployment of capital required to exercise a put option would have raised the transaction costs of a $6.35 million offset beyond KLI's means, not to speak of the magnitude of transactional risk that KLI would have had to incur in trying to effect a perfect hedge with a volatile currency and an unstable (at the time) Thai government. Thus, just like the plaintiff inCarlisle, KLI was not required to enter into the specific transaction identified by the defendant; while a party has an obligation to take "reasonable" steps to mitigate damages, it does not have an obligation to go beyond those. Carlisle, 176 F.3d at 609; Wilmot, 297 N.E.2d at 92.
Accordingly, I hold that the doctrine of mitigation of damages did not require KLI or Morning Glory to enter into the put and call transactions suggested by Morgan. KLI had the contract right under clause 2(e) to require Morgan to unwind, and thus to stop the running of loss. III. Calculation of Damages
In my opinion, I performed a preliminary calculation of the damages caused by Morgan's breach. "Using published exchange values of the baht to the dollar as of October 20, 1997, two business days after KLI's demand, I calculate[d] that an unwind of the baht forward contract executed on that date would have yielded $39,847,800." Opinion at 38; 269 F. Supp 2d at 446. I then compared that value with the yield obtained when Morgan performed its unwind, on January 7, 1998. The actual unwind yielded $66,304,746. Subtracting one from the other, I posited the difference, or $26,456,946, as the amount of damage caused by Morgan's breach. Since KLI is suing to be repaid the much larger amount that it had paid Morgan, I held that that difference, $26,456,946, is the amount which Morgan should be obligated to credit, or repay, to plaintiffs. Id.
I observed, however, that "liquidation values of forward currency contracts for deteriorating currencies are not so easily derived," requiring expert proofs more appropriately than arithmetical calculations from published currency tables. Opinion at 38; 269 F. Supp 2d at 447. I held that the correct amounts of damages still had to be ascertained, and I called for submissions and held a hearing. Id. The parties, in their additional briefing, now dispute a number of elements of damages. I address each of these points in turn.
A. Calculating the Unwind Date and Price
I held in my opinion that the effective date of KLI's unwind demand was October 16, 1997, and that the unwind should be calculated, in accordance with clause 2(e) of the Morning Glory/KEB Total Return Swap Agreement, as of two business days following that demand, or October 20, 1997. See Opinion at 38; F. Supp. 2d at 446.
Plaintiffs now contend that the proper valuation date should be October 16, 1997, rather than two business days later. According to plaintiffs, a distinction exists between the "valuation date" and the "termination date." Because the entire process of unwinding the transaction — from agreeing on a price to arranging for settlement of the transaction — could not be entirely completed in one day, according to plaintiffs, the unwind was to be priced as of the day of demand, and effected two days later. Thus, plaintiffs argue, the "valuation date" was the date of demand, October 16, and the baht should be priced as of that date, rather than as of the "termination date," October 20.
Morgan contends that under the plain language of clause 2(e), the date of unwind should have been October 20, and that should therefore be considered the date of valuation.
Clause 2(e) of the Morning Glory/KEB Total Return Swap Agreement reads as follows:
The Counterparty [Morning Glory] has the right as of any Business Day on a full two-way payments basis to terminate the Transaction at the prevailing market value, as determined by the Calculation Agent [Morgan] in a reasonable and fair commercial manner, on at least two (2) Business Days prior notice.
Under this provision, Morning Glory had a right to terminate the transaction "at the prevailing market value," a right which arose "as of any Business Day" which followed "two (2) Business Days prior notice." The prevailing market value was thus to be determined as of the day when the right to terminate arose, that is, two business days following the date notice was given. Effective notice was given first on October 16, 1997; accordingly, plaintiffs' right to terminate arose not on that date, but rather two business days later, October 20, and section 2(e) directed the unwind to occur "at the prevailing market value" as of that day. The plain text and logic of the clause suggests that there is no difference between the "valuation date" and the "termination date"; the baht is to be priced as of the date of termination, October 20, 1997.
The next issue is to fix the exact amount of actual damages caused by Morgan's failure to perform the unwind as of October 20, 1997. Since KLI paid Morgan an amount based on Morgan's unwind occurring on January 7, 1998, the amount KLI would have owed Morgan had the unwind been effected on October 20, 1997 must be subtracted by the amount KLI actually paid based on the January 7, 1998 unwind. The parties are in agreement that KLI paid Morgan $66,304,746 with respect to Morgan's January 7, 1998 unwind. See Opinion at 38; 269 F. Supp 2d at 446. They also agree that the formula by which to determine what KLI would have owed Morgan had the unwind occurred as of October 20, 1997 was the formula provided by the Morning Glory/KEB Total Return Swap Agreement, see Opinion at 6 n. 5; 269 F. Supp. 2d at 429 n. 5:
Baht Payment Amount = Notional Amount × 5 × (ThbSpot — ThbMat)/ThbMat; "Notional Amount" = $25,000,000; "ThbSpot" = 25.624; "ThbMat" = the value of the baht at maturity.
As I held above, ThbMat should be determined as of October 20, 1997, the date the unwind should have occurred. The parties dispute the value of ThbMat on that date.
In calculating the value of the baht on October 20, 1997, the parties agree that a three-month forward rate is appropriate, and I accept the methodology adopted by William Arnold, in his Supplemental Declaration dated November 12, 2003, for determining this rate. The result is a rate of 38.71 baht per dollar. Using this rate and the formula cited earlier,
Baht Payment Amount = $25,000,000 × 5 × (25.624 — 38.71)/38.71 = -42,256,522.75, or a $42,256,522.75 payment from Morning Glory (or KLI as guarantor and as the real party in interest) to KEB. See Opinion at 6 n. 5; 269 F. Supp. 2d at 429 n. 5. Assuming that the unwind should have occurred at the 38.71 baht/dollar exchange rate, the amount of overpayment, adjusted by Morgan's breach of contract, was $66,304,746 — $42,256,522.75 = $24,048,223.25.
Accordingly, Morgan must pay to plaintiffs $24,048,223.25 in damages, with interest at nine percent from October 20, 1997.See N.Y.C.P.L.R. § 5001(a) ("Interest shall be recovered upon a sum awarded because of a breach of performance of a contract . . ."); id. § 5004 ("Interest shall be at the rate of nine per centum per annum, except where otherwise provided by statute.");Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 90 (2d Cir. 1998) (simple interest at statutory rate of nine percent in breach of contract actions); Adams v. Lindblad Travel, Inc., 730 F.2d 89, 93 (2d Cir. 1984) (prejudgment interest recoverable as of right in an action at law for breach of contract).
B. Financing Costs
Plaintiffs also claim incidental damages of $14,448,075 to repay them for the financing costs they incurred when they paid Morgan $90,492,246 following the termination of the Total Return Swap Agreements. Plaintiffs argue that the financing costs they incurred were the consequence of Morgan's breach of contract. KLI lacked sufficient funds to pay Morgan's demand, made January 27, 1998 for full payment of $90,492,246, and entered into a Loan Facility Agreement with Morgan to finance such payment. KLI argues that if Morgan had unwound its baht position on October 20, 1997, as it was contractually required to do, much of this financing would have been unnecessary. Accordingly, KLI argues that the financing costs it thus could have avoided should be recoverable. Morgan argues that financing costs constitute consequential damages and are not recoverable under New York law because they were not within the contemplation of the parties at the time they signed the contract.
KLI relies on several New York cases which hold that financing costs may be awarded in certain circumstances, alongside prejudgment interest. See Bulk Oil (U.S.A.), Inc. v. Sun Oil Trading Co., 697 F.2d 481 (2d Cir. 1983); Intermeat, Inc. v. American Poultry Inc., 575 F.2d 1017 (2d Cir. 1978); Niagara Mohawk Power Corp. v. Stone Webster Engineering Corp., 88 Civ. 819, 1992 U.S. Dist. Lexis 7721 (N.D.N.Y. May 23, 1992). These cases hold that "[a] party to a contract may recover financing costs as incidental damages, apart from prejudgment interest allowable under New York State law." Niagara Mohawk, 1992 U.S. Dist. Lexis 7721, at *106.
However, as Niagara Mohawk itself acknowledges, id. at *107, Bulk Oil and Intermeat are both inapposite because those cases were decided under Article 2 of New York's Uniform Commercial Code. See N.Y.U.C.C. § 2-710 ("Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach."). The financing costs in those cases were deemed "commercially reasonable"; they had been incurred previously and were owed to third parties. Bulk Oil, 697 F.2d at 482; Intermeat, 575 F.2d at 1024-25.
By contrast, the instant case is not a U.C.C. case, and the rights afforded under § 2-710 are not present. Further, KLI incurred the financing costs after Morgan's breach had already occurred. KLI, already having cause for complaint against Morgan, made a conscious decision not only to continue paying Morgan the sums owed to it, but to return to Morgan for financing. The financing charges were thus caused not by Morgan's breach, but by KLI's business decision. KLI cannot now complain that it should not have paid those charges.
More significantly, the breach of contract damages which I award here must be distinguished from the damages which plaintiffs originally sought when they brought suit. Plaintiffs sought a rescission of their contracts under grounds including fraud, negligent misrepresentation, illegality, and commercial frustration. Plaintiffs sought the return of all sums they paid to Morgan, $90,492,246 in total. This sum included the financing costs that KLI now seeks. See Opinion at 15-16; 269 F. Supp. 2d at 434-35. I granted summary judgment to Morgan dismissing those causes of action, holding that the parties were in pari delicto. Opinion at 29-30; 269 F. Supp. 2d at 442. I allowed plaintiffs to recover not the entirety of their expenditures, but only the amount of the overpayments which were the direct consequence of Morgan's breach of contract. Opinion at 38; 269 F. Supp. 2d at 446. I denied in my opinion, and I deny again now, plaintiffs' attempt to recover more of their losses than they are entitled to by virtue of Morgan's breach of contract.
Finally, I observe, as does Morgan, that under New York law, "[in] order to impose on the defaulting party a further liability than for damages [which] naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting." Kenford Co. v. County of Erie, et al., 537 N.E.2d 176, 178 (N.Y. 1989) (Kenford II) (citations omitted) (brackets in original). There is no evidence that the parties contemplated when they entered into the Total Return Swap Agreements that they would need a financing agreement to settle their accounts, or, if they had considered this unlikely eventuality, that they would have agreed upon the result plaintiffs now seek. See Kenford Co. v. County of Erie, et al., 493 N.E.2d 234, 236 (N.Y. 1986) (Kenford I) (in the absence of a governing contractual provision, "the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject"). Plaintiffs' claim for financing costs is denied.
C. Collateral Held by Morgan
Plaintiffs allege that Morgan currently holds an account containing a credit balance remaining from U.S. Treasury securities pledged by KLI to secure KLI's payment obligations under the Loan Facility Agreement. As explained by plaintiffs, collateral was sold from this account to make payments as they came due under that Agreement. After KLI paid the entire debt claimed by Morgan on January 31, 2000, a cash balance of $574,132.55 remained in the account controlled by Morgan. KLI seeks return of that balance, as well as prejudgment interest.
Morgan concedes that it is currently holding cash collateral belonging to KLI, and that such a sum should be included in a final award of damages. Morgan argues, however, that it should not be required to pay prejudgment interest on this money, given that plaintiffs have never before asserted a claim regarding that collateral or even referenced it in the course of this lawsuit.
The record shows that plaintiffs properly demanded return of their collateral on February 28, 2000, exactly one month after they made payment to Morgan of $90,492,246 and shortly after they filed this lawsuit. Morgan was thus on notice that failure to repay the collateral would result in an interest obligation.Cf. Doyle v. Levy, 162 N.Y.S.2d 714 (N.Y.App.Div., 1st Dep't 1957), aff'd 152 N.E.2d 541 (N.Y. 1958). Morgan's objection that the complaint did not specifically mention the collateral is without merit, because this aspect of the claim is fairly subsumed within the balance of KLI's claims. Accordingly, Morgan is liable to plaintiffs in the amount of the excess collateral, $574,132.55, plus prejudgment interest at the statutory rate of nine percent, running from February 28, 2000. Morgan may keep whatever interest actually accrued in the ordinary course, and accordingly, no further accounting is required.
D. Currency Exchange Loss
The final element of KLI's requested damages is currency exchange loss in the amount of $1,346,360.25. Plaintiffs are Korean entities and claim that they will ultimately need to convert any damages into Korean won. The overpayments they made to Morgan were in U.S. dollars, however, as will be the judgment that they recover. Plaintiffs argue that the dollar/won exchange rate is less favorable to them today than it was at the time it made its overpayments — that is, KLI used more won to pay Morgan in dollars in 1998 through 2000 than it would recover now if it were awarded the same dollar sum. Plaintiffs therefore argue that in order to make them whole, the award of damages should include compensation for losses in the exchange rate. Plaintiffs calculate that the sum of currency exchange losses, assuming a comparison between the exchange rates in place during each payment and the exchange rate in place on October 9, 2003, shortly before plaintiffs submitted their motion, equals $1,346,360.25.
Stated in other terms, KLI is asking to be compensated for the difference between what the award would be in dollars, as of the date of judgment, and what the award would have been in won, had it been granted on the date of loss. In practical effect, KLI is seeking a judgment that would change its damages from an award calculated in dollars, as of the date of judgment, to an award calculated in won, as of the date of loss. This request contradicts two basic principles of judgments: that damages are rendered in dollars, and that any conversion of currencies in an award of damages is calculated as of the date of judgment.
"Almost forty-five years ago, in Shaw, Savill, Albion Co. v. The Fredericksburg, the Court of Appeals for the Second Circuit stated that `it is well settled that a money judgment by an American court must be in American currency.'" Mitsui Co. v. Oceantrawl Corp., 906 F. Supp. 202, 203 (S.D.N.Y. 1995) (quotingShaw, 189 F.2d 952, 954 (2d Cir. 1951)). KLI, by seeking a judgment in the won equivalent of dollars as of an earlier set of dates, is circumventing the rule of Shaw, Savill by seeking practical compensation in won, rather than in dollars.
The proper course is to calculate the loss in dollars, and to do so as of the date of judgment. For instance, in Sae Sadelmi S.p.A. v. Papua New Guinea Elec. Comm'n, 94 Civ. 2959, 1994 U.S. Dist. Lexis 16978 (S.D.N.Y. Nov. 29, 1994), then-District Judge Sotomayor confirmed an arbitration award which was in part expressed in foreign currencies. She held that "[a]n American court . . . can only enter a money judgment in U.S. dollars. Therefore, I will enter judgment directing the parties to convert the foreign currencies into U.S. dollars as of the date judgment is entered by the Clerk of the Court." Id. at *4 (citation omitted).
Even if a judgment in won were appropriate, the date of conversion to dollars would be that of judgment, rather than that of injury. "[I]n a diversity action such as this one, the date on which to convert a foreign currency judgment into United States dollars is governed by New York law." Dynamic Cassette Int'l v. Mike Lopez Assocs., 923 F. Supp. 8, 11 (E.D.N.Y. 1996). Under New York law, a judgment may be rendered in a foreign currency where the cause of action was based upon an obligation expressed in that currency. N.Y. Jud. Law § 27(b); see Dynamic Casette, 923 F. Supp at 12. In such a case, however, the "judgment or decree shall be converted into currency of the United States at the rate of exchange prevailing on the date of entry of the judgment or decree." N.Y. Jud. Law § 27(b); see Dynamic Casette, 923 F. Supp. at 12 ("Section 27(b) now explicitly provides that a judgment entered in a foreign currency be converted into United States dollars at the exchange rate prevailing on the date of judgment.").
Accordingly, judgment should be expressed in dollars, without regard to the currency markets for dollars and won. Section 27(b) of the Judiciary Law does not apply, since the dealings of the parties were done, not in a foreign currency, but in dollars. Cf. In re Oil Spill by The Amoco Cadiz, 954 F.2d 1279, 1328 (7th Cir. 1992) (when commercial activity took place in a foreign currency, court should enter judgment in such currency, for "the parties themselves selected for their dealings, the currency in which the loss is felt"); see also Sea-Roy Corp. v. Parts R Parts, Inc., 1999 U.S. App. Lexis 3383, at *12-*13 (4th Cir. 1999) (quoting Amoco Cadiz). Here, as stated, the required payment was to be made in dollars, and KLI's loss was therefore expressed in dollars. A judgment converted into Korean won as of the date of loss, which KLI is in substance requesting, would be inappropriate.
N.Y. Jud. Law § 27(b) reads in full:
In any case in which the cause of action is based upon an obligation denominated in a currency other than currency of the United States, a court shall render or enter a judgment or decree in the foreign currency of the underlying obligation. Such judgment or decree shall be converted into currency of the United States at the rate of exchange prevailing on the date of entry of the judgment or decree.Mitsui Co. v. Oceantrawl Corp., 906 F. Supp. 202, 203 (S.D.N.Y. 1995), reached the opposite result from Sea Sadelmi, in light of N.Y. Jud. Law § 27(b). However, to apply Mitsui in this case would be an overextension of the rule, given that the underlying dealings, and the loss to KLI, were expressed in dollars.
IV. Plaintiffs' Motion to Strike
By letter dated June 4, 2004, plaintiffs inquired about the status of their motion to strike the expert reports of Michael R. Darby and Robert Pickel, filed on November 18, 2002. The reports were filed as part of Morgan's Offer of Proof in response to my invitation, concerning the possible international financing and investment effects were I to find that the transaction between the parties was ultra vires and illegal under Korean law. Morgan's experts expressed their opinions that the potential effects were significant and could undermine financial markets and possibly cause capital flight.
My ruling on the merits of the case made the experts' opinions moot and academic. See Opinion at 26-27, 34-35; 269 F. Supp. 2d at 440-41, 444-45. Plaintiffs' motion to strike no longer has any practical import. It is denied as moot.
V. Conclusion
For the reasons stated, I deny Morgan's motion for reconsideration and its argument relating to mitigation of damages. I deny plaintiffs' argument that KLI's damages should include financing costs and currency exchange losses. I deny as moot KLI's motion to strike the expert reports of Michael R. Darby and Robert Pickel. I find Morgan liable to plaintiffs in the following amounts:
1. Loss of $24,048,223.25 for Morgan's breach of contract, with interest of nine percent from October 20, 1997.
2. Cash collateral of $574,132.55, with interest of nine percent from February 28, 2000.
The Clerk shall enter judgment accordingly and mark this case as closed.
SO ORDERED.