Morpheus Capital Advisors LLC, Respondent,v.UBS AG, Defendant, UBS Real Estate Securities, Inc., Appellant.BriefN.Y.May 6, 2014Amy C. Gross Of Counsel APL-2013-00235 To Be Argued By: WILLIAM B. POLLARD, III Time Requested: 30 Minutes New York County Clerk's Index No. 650335/2009 Court of Appeals STATE OF NEW YORK ---------------------~--------------------- MORPHEUS CAPITAL ADVISORS LLC, P laintif.1-Respondent, -against- UBS AG, Defendant, -and- UBS REAL ESTATE SECURITIES, INC., Defendant-Appellant. BRIEF OF PLAINTIFF-RESPONDENT MORPHEUS CAPITAL ADVISORS LLC WILLIAM B. POLLARD, III KORNSTEIN VEISZ WEXLER & POLLARD, LLP 757 Third Avenue New York, New York 10017 (212) 418-8600 Attorneys for Plaintiff-Appellant Morpheus Capital Advisors LLC Date Completed: November 26, 2013 REPRODUCED ON RECYCLED PAPER Corporate Disclosure Statement Pursuant to Rule 500.1(0 Plaintiff-Respondent Morpheus Capital Advisors LLC states that it has no parents, subsidiaries, or affiliates. Dated: New York, New York November 26, 2013 KORNSTEIN VEISZ WEXLER & POLLARD, LLP By: ().· William B. Pollard, III 757 Third Avenue, 18th Floor New York, New York 10017 (212) 418-8600 wpollard@kvwmail.com Attorneys for Plaintiff-Respondent Status of Related Litigation After the trial court’s decision on the motion to dismiss in this action, UBS Real Estate Securities, Inc. and UBS AG brought an action against Morpheus Capital Advisors LLC (the “Fee Action”) based on the fee-shifting provision of the agreement at issue in this litigation. After the Appellate Division rendered its decision in this action, the Fee Action was discontinued without prejudice on stipulation by the parties. -i- Table of Contents Page(s) PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ADDITIONAL QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A. The Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B. UBSRE Sells or Transfers the Student Loan Assets to a Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 C. The Claims Against UBSRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 D. Prior Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 E. The Appellate Division’s Decision . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 I. Morpheus Has a Valid Claim for Breach of Its Exclusivity Rights Because the Agreement Created An Exclusive Right to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. The Agreement’s Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 B. The Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 C. The Parties’ Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 II. Parol Evidence May Be Used to Establish That the Agreement Is An Exclusive Right to Sell Contract . . . . . . . . . . 23 III. Exclusive Agency Does Not Foreclose Morpheus’ Breach of Contract Claims . . . . . . . . . . . . . . . . . . . . . . . 26 A. Exclusive Agency Rights Can Be Altered . . . . . . . . . . . . . . . 27 B. UBSRE Does Not Contest the Appellate Division Holding that Morpheus Has A Contract Claim for Payment of the Success Fee . . . . . . . . . . 31 -ii- C. UBSRE Relies on Supposed and Nonexistent Findings of Fact To Support Its Arguments . . . . . . . . . . . . . . 32 D. Duty to Wait Was An Appropriately Bargained-For Right . . . . . . . . . . . . . . . . . . . . 36 IV. UBSRE’s Other Arguments Are Unavailing . . . . . . . . . . . . . . . . . . 38 A. Appellate Division Did Not Change Commercial Transaction Law . . . . . . . . . . . . . . . . . . . . . . . . 39 B. The Appellate Division’s Decision Will Not Impede Bank Regulation . . . . . . . . . . . . . . . . . . . . . 41 C. The Appellate Division’s Decision Does Not Threaten Comity . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 -iii- Table of Authorities Page(s) Cases 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 296 N.Y.S.2d 338 (1968) . . . . . . . . . . . . . . . . . . . . . . 40, 41 Abiele Contracting, Inc. v. N.Y. City Sch. Constr. Auth., 91 N.Y.2d 1, 666 N.Y.S.2d 970 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Baird v. Erie R.R. Co., 210 N.Y. 225 (1914) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Beal Savings Bank v. Sommer, 8 N.Y.3d 318, 834 N.Y.S.2d 44 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Bierer v. Glaze, Inc., No. CV-05-2459(CPS), 2006 WL 2882569 (E.D.N.Y. Oct. 6, 2006) . 40,41 Board of Educ. of the Hudson City Sch. Dist. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 523 N.Y.S.2d 475 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Brandwein v. Provident Mut. Life Ins. Co. of Philadelphia, 3 N.Y.2d 491, 168 N.Y.S.2d 964 (1957) . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Carnes Communications, Inc. v. Russo, 305 A.D.2d 332, 761 N.Y.S.2d 615 (1st Dep’t 2003) . . . . . . . . . . . . . . . . 30 Clairol Dev., LLC v. Village of Spencerport, 100 A.D.3d 1546, 954 N.Y.S.2d 389 (4th Dep’t 2012) . . . . . . . . . . . . . . . 32 CV Holdings, LLC v. Artisan Advisors, LLC, 9 A.D.3d 654, 780 N.Y.S.2d 425 (3d Dep’t 2004) . . . . . . . . . . . . . . . . 18, 19 -iv- Page(s) Evans v. Famous Music Corp., 1 N.Y.3d 452, 775 N.Y.S.2d 757 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . 25 General Elec. Co.v. Metals Resources Group, Ltd., 293 A.D.2d 417, 741 N.Y.S.2d 218 (1st Dep’t 2002) . . . . . . . . . . . . . 40, 41 Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 750 N.Y.S.2d 565 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . 23 Hammond, Kennedy & Co., Inc. v. Servinational, Inc., 48 A.D.2d 394, 369 N.Y.S.2d 712 (1st Dep’t 1975) . . . . . . . . . . . . . . . . . 30 Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879 (10th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Kass v. Kass, 91 N.Y.2d 554, 673 N.Y.S.2d 350 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . 25 L.N. Jackson & Co. v. Royal Norwegian Gov’t, 177 F.2d 694 (2d Cir. 1949) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Lopez v. Consol. Edison Co. of N.Y., Inc., 40 N.Y.2d 605, 389 N.Y.S.2d 295 (1976) . . . . . . . . . . . . . . . . . . . . . . . . . 25 Mawhinney v. Millbrook Woolen Mills, Inc., 231 N.Y. 290 (1921) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Mercer Capital, Ltd. v. U.S. Dry Cleaning Corp., No. 08 Civ. 05763 (LTS) (JCF), 2009 WL 2163598 (S.D.N.Y. July 21, 2009) . . . . . . . . . . . . . . . . . 17-19, 21 New York Auction Co. v. U.S. Fidelity & Guaranty Co., 260 N.Y. 186 (1932) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 -v- Page(s) NFL Enters. LLC v. Echostar Satellite L.L.C., No. 0600556/2008, 2008 WL 2157888 (Sup. Ct. N.Y. Co. Apr. 30, 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 North German Lloyd v. Guaranty Trust Co. of N.Y., 244 U.S. 12 (1917) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 636 N.Y.S.2d 734 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . 27 Permatex, Inc. v. Loctite Corp., No. 03 Civ.943 LAK GWG, 2003 WL 22683341 (S.D.N.Y. Nov. 14, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Reichmann v. Neumann, 553 F. Supp. 2d 307 (S.D.N.Y. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Riverside South Planning Corp. v. CRP/Extell Riverside, L.P., 60 A.D.3d 61, 869 N.Y.S.2d 511 (1st Dep’t 2008), aff’d, 13 N.Y.3d 398, 892 N.Y.S.2d 303 (2009) . . . . . . . . . . . . . . . . . 24, 25 Schlenger v. 310 Canal St. Corp., 272 A.D. 761, 70 N.Y.S.2d 140 (1st Dep’t 1947) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Shaw v. Bluepers Family Billiards, 94 A.D.3d 858, 941 N.Y.S.2d 691 (2d Dep’t 2012) . . . . . . . . . . . . . . . . . . 32 Shia v. McFarlane, 46 A.D.3d 320, 847 N.Y.S.2d 530 (1st Dep’t 2007) . . . . . . . . . . . . . . . . . 32 Solid Waste Institute, Inc. v. Sanitary Disposal, Inc., 120 A.D.2d 915, 502 N.Y.S.2d 835 (3d Dep’t 1986) . . . . . . . . . . . . . . . . . 30 State v. Home Indemnity Co., 66 N.Y.2d 669, 495 N.Y.S.2d 969 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . 25 -vi- Page(s) Warner v. Kaplan, 71 A.D.3d 1, 892 N.Y.S.2d 311 (1st Dep’t 2009) . . . . . . . . . . . . . . . . 40, 41 Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 763 N.Y.S.2d 525 (2003) . . . . . . . . . . . . . . . . . . . . . . . . 20 Wilson Sullivan Co. v. Int’l Paper Makers Realty Corp., 307 N.Y. 20 (1954) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Wylie v. Marine Nat’l Bank of City of N.Y., 16 Sickels 415 (1875) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Other Authorities 27 Williston on Contracts § 70:20 (4th ed.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2956002BRIACG 00007.WPD PRELIMINARY STATEMENT This appeal presents a question of contract interpretation involving an agreement between Plaintiff-Respondent Morpheus Capital Advisors LLC (“Morpheus”) and Defendant-Appellant UBS Real Estate Securities, Inc. (“UBSRE”) for the provision of investment banking services. It comes to this Court based on an order of the Appellate Division, First Department, that reinstated Morpheus’ Complaint after it had been dismissed by the Supreme Court, New York County, on a pre-answer motion. The contract gave Morpheus the exclusive right to sell, or arrange another transaction that transferred the first risk of loss, involving a half billion dollars of toxic assets owned by UBSRE with a limited exception involving two named companies. Less than a month after UBSRE and Morpheus executed their contract, UBSRE’s parent, UBS AG, sold the toxic assets at issue in a transaction that UBS AG solicited, and its regulator, the Swiss National Bank (“SNB”), arranged, with a third party fund (the “Stabilization Fund”) that SNB created. By selling those assets in a bailout that did not come within the contractual exception, UBSRE breached the exclusivity provision of the contract in two separate ways. First, UBSRE breached Morpheus’ exclusive right to sell the toxic assets. Second, it breached Morpheus’ exclusive rights during a four and a half month period 2 to solicit counterparties for a sale or other transaction involving those toxic assets, even if, as the Appellate Division incorrectly held, the contract created only an exclusive agency. Either breach obligated UBSRE to pay Morpheus damages equal to a contractually defined “Success Fee” of nearly $3 million. UBSRE, wrongly, argues that Morpheus has no viable contract claims because the contract only created an exclusive agency and this allowed UBSRE to sell or otherwise dispose of the toxic assets on its own without liability to Morpheus. This argument contradicts the express terms of the contract that permitted UBSRE only to engage in a self-directed transaction with two named counterparties and then only for certain types of transactions. Its deal with the Stabilization Fund did not come within that exception. Further, the contract allowed USBRE to market the toxic assets only jointly, with Morpheus “taking the lead.” The Appellate Division also held that the payment provision of the contract required UBSRE to pay the Success Fee for any sale or transaction involving the toxic assets, subject, of course, to the limited carve out, even if Morpheus did not introduce the counterparty to USBRE. Thus, the Court concluded that Morpheus adequately pled that the transaction with the Stabilization Fund triggered a provision in the contract that required UBSRE to pay Morpheus the Success Fee. UBSRE 1 This unchallenged holding of the Appellate Division should be affirmed, regardless of any other argument UBSRE makes before this Court. See infra at 31-32. 3 ignored in its appeal brief that its refusal to pay what it owes was found by the Appellate Division to be a separate claim for breach of the parties’ contract.1 For these reasons, and others discussed below, Morpheus’ Complaint asserts viable contract claims against UBSRE, and its Complaint should not be dismissed. Rather, the decision of the Appellate Division should be modified to recognize Morpheus’ claim for breach of its exclusive right to sell, and otherwise affirmed, and the case returned to the Supreme Court for discovery and trial. ADDITIONAL QUESTIONS PRESENTED 1. Did the Appellate Division err in holding that the agreement between the parties did not create an exclusive right to sell? 2. Did the Appellate Division correctly hold that Morpheus properly asserted a contract claim based upon UBSRE’s breach of Morpheus’ exclusive rights to solicit counterparties for a transaction during the term of the contract? 2 “A” is the Appendix filed by UBSRE with this Court. “RA” is the Respondent’s Appendix Morpheus filed with this Court. 4 STATEMENT OF FACTS A. The Agreement On September 19, 2008, in the midst of the 2008 global financial crisis and less than a week after Lehman Brothers collapsed, UBSRE retained Morpheus, pursuant to a written agreement (the “Agreement”), to act as UBSRE’s “financial advisor and investment banker” in the proposed sale of, or other transfer of the risk of first loss for, more than $500 million in “toxic” student loan assets that UBSRE owned (the “Student Loan Assets”). (A60-662). The Agreement provided that Morpheus, among other things, would (A60-61, ¶ 1): • Identify, introduce and assess appropriate investors • Coordinate all efforts with [UBSRE’s] client relationship team, including its sales and trading teams as directed by [UBSRE] • Assist in the development of any necessary financial analysis • Assist in the development of alternative transaction structures • Conduct analysis of the appropriate valuation ranges 5 • Assist in the creation of marketing and due diligence materials, including joint marketing efforts with [UBSRE] with [Morpheus] taking the lead. All marketing and due diligence materials are subject to [UBSRE’s] prior review and approval in all cases. • Coordinate communications with and information requests from potential investors • Assist in the analysis, structuring and negotiation of the terms of any Transaction, including documentation review • Provide general corporate finance and investment banking advice • Provide advice on restructuring issues associated with the business and operations of [companies holding the student loan assets] . . . . . [UBSRE] agrees that [Morpheus] shall have the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement. Notwithstanding the foregoing, [Morpheus] acknowledges that if a credit default swap, any financing, derivative or Class B Note transaction is consummated by [UBSRE], and/or its affiliates, with Morgan Stanley & Co. or NBF International Holdings, Inc., or any of their affiliates, relating to the Student Loan Assets then [Morpheus] shall not be entitled to any Success Fee under this Agreement. However, if [UBSRE] enters into a Transaction to sell the Student Loan Assets to Morgan Stanley & Co. and/or NBF International Holdings, Inc., or any of their affiliates, and [Morpheus] performed substantially all the services set forth in Section 1, then the terms, conditions and fees set forth in this Agreement shall apply to such Transaction. 3 UBSRE claims, without record support, there is no dispute regarding its compliance with its obligation to pay Morpheus’ monthly fee. If this action is returned to the trial court, Morpheus intends to offer evidence that UBSRE breached its obligation to do this, as well. 6 UBSRE further agreed to pay Morpheus a retainer payment, plus a monthly fee3 and a “Success Fee” defined as follows (A61, ¶ 2): [Morpheus] shall receive a Success Fee payable upon the closing of the Transaction, taking into account the following: Transaction Amount As % Value of Student Loan Assets [Morpheus] Success Fee (Percentage) 0 to 85.0% 37.5 bps 85.1% to 90.0% 43.75 bps 90.1% to 95.0% 50 bps > 95.1% 62.5 bps For the purposes of this Agreement, the “Transaction Amount” is 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. The [Morpheus] Success Fee will be determined by multiplying the appropriate [Morpheus] Success Fee (in bps) above by the Transaction Amount. The Agreement also provided (A62, ¶ 5): 5. Termination of Engagement - Exclusivity. [Morpheus]’s engagement will commence on the date hereof and will continue until December 31, 2008, unless extended by mutual written 4 UBSRE repeatedly refers to the parties’ investment banking relationship as akin to that of a real estate broker and a seller, but, as the terms set forth above demonstrate, it is not. 7 consent or earlier terminated as provided below. Either [UBSRE] or [Morpheus] may terminate this Agreement at any time, with or without cause, by giving written notice to the other party; provided, however, that no such termination will affect the matters set out under the captions “Fees and Expenses”, “Use of Information”, “Certain Acknowledgments”, “Indemnification” and “Miscellaneous”. It is expressly agreed that following the expiration or termination of this Agreement, [Morpheus] will continue to be entitled to receive fees as described above that have accrued prior to such expiration or termination but are unpaid. It is also expressly agreed that if [UBSRE] completes any Transaction with a party or parties (“Investor”) (1) introduced to [UBSRE] by [Morpheus], (2) introduced to [UBSRE] by another party other than [Morpheus], but [Morpheus] performed substantially all of the services set forth herein in Section 1 prior to the termination of this Agreement, then [Morpheus] shall be entitled to its full fees as described above, until March 31, 2009.4 Thus, the Agreement gave Morpheus the “exclusive right to solicit counterparties” for any potential transaction involving the Student Loan Assets during the term of the Agreement. (A60, ¶ 1). The very next sentence after that grant of exclusivity contains a limited carve out in which UBSRE would not be obligated to pay the Success Fee for certain transactions involving Morgan Stanley & Co. or NBF International Holdings, Inc., but would be required to pay that fee if it or its affiliates “enters into a Transaction to sell the Student Loan Assets” to either of those 8 entities, and Morpheus has substantially performed the services under the Agreement. (A61, ¶ 1). B. UBSRE Sells or Transfers the Student Loan Assets to a Third Party On or about October 16, 2008, UBS AG sold or otherwise transferred the Student Loan Assets as part of a bailout it sought and the SNB arranged to “a third party fund” (the Stabilization Fund) that SNB created. (A53, ¶ 18). In announcing this transaction, UBS AG said that the sale and transfers of these assets would “take place over the coming months, during fourth quarter 2008 or first quarter 2009, but will be priced at valuations as of 30 September 2008.” (A53-54, ¶ 18). The press release further stated that the assets transferred into the Fund would include “US student loan auction rate certificates and other securities backed by student loans” and that “[a]t completion of the transaction, UBS’s net exposure in these risk categories will be reduced to zero.” (A53, ¶ 18). This was repeated in UBS AG’s third quarter financial disclosure statements. (A54, ¶ 19). Thus, UBSRE transferred to the Stabilization Fund the risk of first loss regarding the toxic Student Loan Assets as of September 30, 2008, and capped any further losses from those assets as of that date. (A53-54, ¶ 18). 5 There are disputes between the parties regarding when the closing at issue took place and how that affects Morpheus’ rights, if at all, regarding its second cause of action. However, those disputes are not before this Court. 6 The timing of UBS AG’s transaction with the Stabilization Fund suggests that UBS AG was actively engaged in arranging it at the same time UBSRE was entering its contract with Morpheus. Thus, it appears that, when UBSRE was agreeing to exclusivity terms with Morpheus, its parent was negotiating a bailout that would breach Morpheus’ agreed-to rights. This raises questions of good faith and fair dealing. 9 While the parties dispute when the transaction with the Stabilization Fund involving the Student Loan Assets closed, UBSRE admits that a sale took place in October 2008.5 Brief for Defendant-Appellant UBS Real Estate Securities, Inc., dated October 11, 2013 (“UBSRE Br.”) at 1. Thus, UBSRE concedes that, as of October 16, 2008, it, through its parent’s actions, had deprived Morpheus of its contractual exclusivity rights concerning the Student Loan Assets.6 In a November 4, 2008 press release, UBS AG said: “With this transaction [with the Stabilization Fund], UBS AG caps future potential losses from these assets, reduces its risk-weighted assets, materially de-risks and reduces its balance sheet and is no longer exposed to the funding risk of these assets.” (A54, ¶ 20). The agreement with the Stabilization Fund and SNB permitted UBS AG to transfer or sell up to $60 billion of toxic assets on its balance sheet; however, UBS AG sold or transferred to the Stabilization Fund less than $40 billion of such assets. UBSRE Br. at 11. The transaction value of the Student Loan Assets transferred to the Stabilization Fund was $500 million or more. (A55, ¶ 24). 7 Morpheus seeks damages for UBSRE’s breach of the exclusivity terms of the Agreement, and not a lost “commission.” Where, as here, a promisor breaches an exclusivity agreement, the promisee may collect damages in the amount the promisee would have earned but for the promisor’s breach. Wilson Sullivan Co. v. Int’l Paper Makers Realty Corp., 307 N.Y. 20, 26-27 (1954) (“plaintiff’s action is not to collect earned commissions; rather, it is for damages resulting from defendant’s breach of contract, which damages are measured by the commissions plaintiff would have earned but for the breach”) (emphasis in original). 10 C. The Claims Against UBSRE UBSRE breached the Agreement in three ways that are at issue before this Court. First, the transaction with the Stabilization Fund breached Morpheus’ exclusive right to sell. Second, the bailout sale breached Morpheus’ right to solicit counterparties during the remaining term of the Agreement. Third, UBSRE was required contractually to pay the Success Fee, but refused to do so, without justification. Based on the value of the Student Loan Assets at the time of the bailout transaction, UBSRE owes Morpheus at least $2,887,500. (A55, ¶¶ 26-28; A61, ¶ 2). Morpheus then sued UBSRE and UBS AG to recover damages for the breach of its exclusivity rights and payment of the fee due and owing.7 (A49). The claims against UBS AG were dismissed without prejudice by the Supreme Court, and are not at issue in this appeal. Morpheus’ first cause of action alleges that, by entering into an agreement to sell or otherwise transfer the Student Loan Assets to the Stabilization Fund, UBSRE breached Morpheus’ exclusivity rights, and, therefore, UBSRE was obligated to pay 11 Morpheus the Success Fee. (A56-57, ¶¶ 31-32). The second cause of action alleges that the sale of the Student Loan Assets to the Stabilization Fund obligates UBSRE to pay Morpheus the Success Fee under the terms of the Agreement. (A57, ¶¶ 35-36). The third cause of action alleges that UBSRE breached its duty of good faith and fair dealing by manipulating the closing date for the sale or transfer of the last tranche of toxic assets sold to the Fund in an attempt to create a defense to its contractual obligation to pay Morpheus a Success Fee. It further alleges that any closing on April 3, 2009 “as of March 31, 2009" satisfied any precondition that a transfer had to be completed prior to April 1, 2009 to the extent that this was a precondition for Morpheus to be paid under the terms of the Agreement. (A57-58, ¶¶ 39-41). The fourth cause of action sought attorneys’ fees as the prevailing party pursuant to the terms of the Agreement. (A58, ¶¶ 43-44). The third and fourth causes of action are not at issue on this appeal. D. Prior Proceedings Morpheus filed this lawsuit in June 2009 against UBSRE and UBS AG for claims based upon the Agreement. (A49-59). On August 19, 2009, UBSRE and UBS AG moved to dismiss the Complaint pursuant to CPLR 3211(a)(1) and (7). (RA4). In a Decision and Order dated January 3, 2011, the motion court granted the motion on the grounds that frustration of purpose had rendered the Agreement void, excusing 12 performance under it. (A37-43). It further held that Morpheus had not sufficiently alleged any claims against UBS AG, a ruling previously announced after oral argument. (A40, A42). While it acknowledged Morpheus’ contentions that there were factual disputes that needed to be resolved, the motion court dismissed them, finding that the UBS AG bailout was based on the “unprecedented” and “unforeseeable” events of September- October 2008 that roiled the global financial system. (A42). The motion court did not reach the other arguments UBSRE made in support of the motion to dismiss. The motion court’s Decision and Order was reduced to a final judgment dated March 18, 2011. (A44-45). Morpheus appealed both the January 3, 2011 Decision and Order and the March 18, 2011 Judgment. E. The Appellate Division’s Decision By a Decision and Order dated March 12, 2013, the Appellate Division, First Department, reversed the motion court’s dismissal of the Complaint as to UBSRE with one justice dissenting. It also affirmed the dismissal as to UBS AG, but held that it was without prejudice. (A3-35). With respect to UBSRE’s frustration of purpose argument, the Appellate Division held that defense unavailable as a matter of law. It found that a transaction 13 with the Stabilization Fund was both foreseeable and addressed by the parties in the Agreement concerning transactions with third parties. It also found that UBSRE’s parent had sought the bailout. Thus, UBSRE could not assert a frustration defense. (A6-7). It further held that UBSRE’s documents did not conclusively establish that Morpheus’ performance under the Agreement had been rendered worthless to UBSRE. (A7). The Appellate Division also rejected UBSRE’s argument that it could sell the Student Loan Assets to the Stabilization Fund without paying Morpheus. It first held, without explanation, that the Agreement granted Morpheus only an exclusive agency. However, the Court further held that this did not defeat Morpheus’ claim for breach of contract. (A9-10). It explained: 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. . . . 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 asserted by the dissent, the agreement only granted plaintiff an exclusive agency rather than an exclusive right to sell. . . . Paradoxically, the dissent notes that plaintiff never introduced UBSRE to any counterparties and then argues - 14 in complete disregard of the portion of the agreement requiring that UBSRE afford plaintiff the right to solicit a counterparty - that in transferring its student loan assets to the Fund, defendants did not breach the agreement. According to plaintiff’s complaint, it is UBSRE’s alleged failure to afford plaintiff the opportunity to solicit a counterparty for the instant transaction, as required by the agreement, that forms one basis for plaintiff’s breach of contract claim. Thus, plaintiff has pleaded a cause of action for breach of contract. (A10-12). The Appellate Division further held that the payment provision of the Agreement required UBSRE to pay Morpheus, regardless of whether it introduced the counterparty, holding: To the extent that the agreement unambiguously and without limitation contemplates compensation to plaintiff when “the risk of first loss is assumed by a third party, in one or a series of transactions,” and does not limit compensation to plaintiff only if it introduced such third party to UBSRE, we also find merit to plaintiff's contention that the agreement mandated compensation for any transaction involving UBSRE's toxic assets during the term of the agreement. (A13). Addressing an issue raised by one Justice in dissent that this payment obligation was conditioned upon Morpheus introducing the counterparty who engaged in the transaction involving the Student Loan Assets, the Court said that to the extent the dissent’s view 15 is at odds with the provision requiring compensation solely when “the risk of first loss is assumed by a third party, in one or a series of transactions,” [that] merely creates an ambiguity, warranting denial of defendants’ pre-answer motion to dismiss. (A14; citations omitted). UBSRE moved before the Appellate Division for leave to appeal to this Court, and the Appellate Division granted that motion on August 13, 2013. (A2). ARGUMENT I. Morpheus Has a Valid Claim for Breach of Its Exclusivity Rights Because the Agreement Created An Exclusive Right to Sell The Appellate Division wrongly held without analysis, and UBSRE wrongly advocates, that the Agreement created an exclusive agency between UBSRE and Morpheus, rather than an exclusive right to sell. The plain language of the Agreement, settled law, and the drafting history make clear that the parties created an exclusive right to sell involving the Student Loan Assets under which Morpheus is entitled to receive the Success Fee as damages for any breach of its rights, subject to one limited exception, inapplicable here. A. The Agreement’s Terms UBSRE says nothing in its brief about the relevant terms of the Agreement, or why those terms allegedly render it an exclusive agency. Instead, UBSRE just 8 UBSRE’s silence on this issue makes is impossible for Morpheus to respond to whatever arguments UBSRE makes in its Reply Brief regarding exclusive agency. 16 repeatedly and wrongly calls the Agreement that. Similarly, UBSRE makes no effort to explain why, as it contends, the Appellate Division was correct in its holding only an exclusive agency was created.8 The obvious reason for UBSRE’s silence is that it has nothing constructive to say to defend its position. The text of the Agreement itself is all that is necessary to find that Morpheus had an exclusive right to sell the Student Loan Assets. As is customary in the investment banking industry (RA11, ¶ 3), the parties agreed that Morpheus was not required to introduce the counterparty to UBSRE in order to be paid the Success Fee, and the Agreement reflects this. It provides that Morpheus “shall receive a Success Fee payable upon the closing of” any transaction involving the sale, transfer, or transfer of risk of first loss of the Student Loan Assets. (A61, ¶ 2). Further, Section 1 of the Agreement gave Morpheus the “exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement.” (A60, ¶ 1). The next sentence states that “Notwithstanding the foregoing,” UBSRE is not required to pay a Success Fee if UBSRE and/or its affiliates consummates a transaction involving a credit default swap or any financing, derivative or Class B Note transaction with Morgan Stanley or NBF International. However, UBSRE 17 would have to pay Morpheus if it and/or its affiliates “enters into a Transaction to sell” the Student Loan Assets to one of those two companies. (A61, ¶ 1). This limited carve out of UBSRE’s obligation to pay Morpheus for a transaction that it and/or its affiliates initiated is unnecessary if they could dispose of the Student Loan Assets without liability to Morpheus in a self-directed transaction. Section 1 also permitted UBSRE to jointly market the assets with Morpheus “taking the lead.” (A60, ¶ 1). This provision, like the Morgan Stanley/NBF International carve out, also is not necessary if UBSRE had, as it claims, an unfettered right to sell the Student Loan Assets without obligation to Morpheus. B. The Applicable Law In assessing the nature of Morpheus’ exclusivity rights, the Court is required to discern the intent of the parties from the wording of the Agreement, and not simply look for “magic words” that create an exclusive right to sell. This is particularly so for investment banking contracts. The Appellate Division did not do this, and UBSRE wrongly seeks to take advantage. But the law is clear. In Mercer Capital, Ltd. v. U.S. Dry Cleaning Corp., No. 08 Civ. 05763 (LTS) (JCF), 2009 WL 2163598 (S.D.N.Y. July 21, 2009), for example, the defendant argued that the plaintiff did not have an exclusive right to sell defendant’s securities because the contract used the term “exclusive placement agent” as opposed to the 18 term “exclusive right to sell.” Id., at *8. The court rejected this argument, stating: “Although under New York law the term ‘exclusive placement agent’ is used in real estate transactions to signal that the broker is not entitled to compensation for sales made by the owner of real estate, it is not clear that the terminology is uniformly used in the same manner in the securities arena.” Id. (citations omitted). The court further found ambiguity in the contractual language and a genuine issue of material fact as to plaintiff’s right to recover based on sales defendant made. Id., at *9. While the contract language in Mercer Capital does not precisely replicate that in the Agreement, its language does indicate that the parties intended an exclusive right on Morpheus’ part to sell, and that Morpheus be compensated if UBSRE breached that right. At the very least, as in Mercer Capital, the language in the Agreement should be viewed in the context of one for investment advisory services, not a real estate brokerage agent, and constructed on a full factual record. Similarly, in CV Holdings, LLC v. Artisan Advisors, LLC, 9 A.D.3d 654, 780 N.Y.S.2d 425 (3d Dep’t 2004), the issue was whether the defendant investment banking firm was contractually entitled to payment upon the plaintiff’s sale on its own of a part of plaintiff’s company. The agreement at issue provided that the plaintiff engaged defendant “‘on an exclusive basis, to provide advisory and investment banking services with respect to the exploration of strategic alternatives 19 that may lead to a possible transaction.’” 9 A.D.3d at 655, 780 N.Y.S.2d at 426 (quoting agreement). The Third Department reversed the trial court, holding that, while the language in the agreement was not as clear as in other cases where contracts had been construed as giving parties exclusive rights to sell, the agreement was nonetheless ambiguous, which, in turn, permitted it to consider extrinsic evidence. Id. The court then held that, because the extrinsic evidence pointed in different directions, “the matter is not amenable to summary disposition.” 9 A.D.3d at 657, 780 N.Y.S.2d at 428. The courts in Mercer Capital and CV Holdings recognized that there are no specific words which must be used to grant an exclusive right to sell. Rather, the entire contract must be scrutinized, and its terms construed in the context of the relevant trade or industry and with the aid of parol evidence to address ambiguities. This, as Mercer Capital pointed out, limits the usefulness of cases that arise out of real estate disputes -- that is, almost all the cases UBSRE cites here and cited below. Where, as here, the intent of the parties to give Morpheus an exclusive right to sell is clear from the contract, Morpheus’ claim for breach of exclusivity should survive a motion to dismiss. If that intent cannot be ascertained from the contract, Morpheus’ claim also survives such a motion, and parol evidence becomes relevant to the construction of the Agreement. 20 The Appellate Division did not construct the terms of the Agreement before holding that it was only an exclusive agency. In fact, it offered no reason for its conclusion, other than to say that it agreed with the dissent that the Agreement was an exclusive agency. (A9). Thus, it is unclear what, if any, of the dissent’s reasoning that the majority found persuasive. The dissent, however, relied on a multitude of its own supposed factual findings, see infra at 32-33, n. 13, ignored key terms in the Agreement and misapplied the law in resolving what it believed the Agreement was and was not. To start, it is settled law that a contract must be read as a whole, with all provisions being given meaning. See, e.g., Beal Savings Bank v. Sommer, 8 N.Y.3d 318, 324-25, 834 N.Y.S.2d 44, 47-48 (2007); Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358, 763 N.Y.S.2d 525, 528 (2003). The dissent says nothing about the contractual provision that relieves UBSRE of the obligation to pay Morpheus only if it or its affiliates completed a certain type of deal with Morgan Stanley or NBF International. This failure is not inconsequential. Rather, the carve out completely undercuts the conclusion that the Agreement is an exclusive agency. The same can be said for the bar on UBSRE marketing its own assets except jointly with Morpheus “taking the lead.” If the Agreement was an exclusive agency, the carve out and the 9 The provision in Sections 1 and 5 of the Agreement that Morpheus is entitled to a Success Fee only if it “performed substantially” does not, as UBSRE argued below, undercut Morpheus’ exclusivity rights. It simply requires Morpheus to perform other duties to have a right to the benefits of the Agreement when this pre-condition applies. The dissent faulting Morpheus for not pleading this performance fails to give heed to CPLR 3015(a), which specifically does not require pleading of performance or occurrence of a condition precedent. 21 marketing restrictions would be unnecessary because UBSRE would already have the right to sell to anyone without limitation or liability to Morpheus. C. The Parties’ Intent In addition, the cases that the dissent and UBSRE cite almost exclusively arise out of real estate brokerage disputes. However, the meaning of terms used in real estate brokerage agreements do not necessarily transfer to contracts in other fields. See, e.g., Mercer Capital, 2009 WL 2163598, at *8. This is particularly so here, as the norm for contracts for the provision of investment banking services requires the banker to be paid a fee when a deal is made.9 (RA11, ¶ 3). This norm is borne out by the drafting history of the Agreement, and, in particular, the carve out provision. In an early draft of the Agreement, Morpheus proposed, in terms typical of those in investment banking contracts, that it would be paid a Success Fee upon the closing of any transaction disposing of the Student Loan Assets, and that payment of the Success Fee was not conditioned upon any introduction of counterparties by Morpheus or anyone else to UBSRE. (RA11-12, ¶ 5; RA15-16). UBSRE countered with a proposal that it or its affiliates could dispose of the Student Loan Assets to one 22 of 20 companies and individuals without paying Morpheus. (RA12, ¶ 6; RA22; RA31). Morpheus rejected this change, explaining that it did not want to be in a position of obtaining an acceptable price for the Student Loan Assets only to have one of the 20 buyers on UBSRE’s proposed list beat that price by some insignificant amount and, thus, cut off Morpheus’ right to a Success Fee. (RA12-13, ¶ 7; RA37- 38). After further negotiations, Morpheus and UBSRE agreed to a very limited carve out of Morpheus’ exclusivity rights involving only certain specific types of transactions with Morgan Stanley or NBF International. (A61, ¶ 1; RA13, ¶ 8; Compare RA22 and RA31 with A61). The drafting history demonstrates that the parties understood, as UBSRE knows to a moral certainty, that Morpheus had the exclusive right to sell the Student Loan Assets, except as limited by the Morgan Stanley/NBF International carve out. Therefore, giving effect to all provisions of the Agreement, it is an exclusive right to sell agreement and not an exclusive agency contract. The Appellate Division’s holding that it is an exclusive agency agreement was an error and should be reversed. 10 Even if the Court were to agree with UBSRE’s interpretation of the Agreement regarding its obligation to pay Morpheus, that aspect of the Complaint should not be dismissed. Rather, Morpheus should be given an opportunity to move in the trial court to reform the Agreement to conform to the parties’ intent. Record evidence shows that the parties intended that Morpheus would be paid for any transaction involving the Student Loan Assets except for the limited carve out involving Morgan Stanley and NBF International. Supra at 16-17 and (RA12-13, ¶¶ 6-8). Reformation would be available because “the instrument [would then] fail[] to express the real agreement between the parties,” and would be appropriate to “establish and perpetuate the true, existing contract by making the instrument express the real intent of the parties.” 27 Williston on Contracts § 70:20 (4th ed.). See also Brandwein v. Provident Mut. Life Ins. Co. of Philadelphia, 3 N.Y.2d 491, 496, 168 N.Y.S.2d 964, 967 (1957) (“a mutual mistake of the parties or . . . a mistake on plaintiff’s part and a fraud by defendant . . . are the classic grounds for reformation of an instrument in equity”); New York Auction Co. v. U.S. Fidelity & Guaranty Co., 260 N.Y. 186, 191 (continued...) 23 II. Parol Evidence May Be Used to Establish That the Agreement Is An Exclusive Right to Sell Contract “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 569 (2002) (citations omitted). In this case, the drafting history of the Agreement may be used to help inform the Court’s construction of the provisions that demonstrate the parties’ intent that Morpheus would be paid a Success Fee if UBSRE or an affiliate engaged in any transaction involving the Student Loan Assets without Morpheus that did not come within the sole exception to Morpheus’ exclusivity. That evidence also may be used if the Court finds that the Agreement is ambiguous or to rebut arguments that UBSRE makes in bad faith.10 10 (...continued) (1932) (“the mistake is that the writing does not express the agreement [the parties] intended. The courts have repeatedly met such cases by affording relief.”); Baird v. Erie R.R. Co., 210 N.Y. 225, 232 (1914) (“equity will reform a written instrument in which the words used differ in legal effect from the contract actually made”). 24 In Schlenger v. 310 Canal St. Corp., 272 A.D. 761, 761, 70 N.Y.S.2d 140, 140 (1st Dep’t 1947), the court allowed the use of extrinsic evidence to explain the meaning of contractual language. Similarly, a “court will resort to extrinsic or ‘parol’ evidence . . . where the circumstances surrounding the agreement invest the language of the contract with special meaning.” Permatex, Inc. v. Loctite Corp., No. 03 Civ.943 LAK GWG, 2003 WL 22683341, at *6 (S.D.N.Y. Nov. 14, 2003) (internal quotation marks and citation omitted). Here, the Court may properly use the drafting history to inform its views regarding the role that the carve out and other provisions in the Agreement play in determining the intent of the parties regarding Morpheus’ exclusivity rights. The Court also may use the drafting history to determine the parties’ intent if it finds the relevant language ambiguous. “The existence of ambiguity is determined by examining the entire contract and considering the relation of the parties and the circumstances under which it was executed, with the wording to be considered in light of the obligation as a whole and the intention of the parties as manifested thereby.” Riverside South Planning Corp. v. CRP/Extell Riverside, L.P., 60 A.D.3d 11 See also Evans v. Famous Music Corp., 1 N.Y.3d 452, 458-59, 775 N.Y.S.2d 757, 761 (2004) (turning to extrinsic evidence where agreement is ambiguous on its face); State v. Home Indemnity Co., 66 N.Y.2d 669, 671, 495 N.Y.S.2d 969, 971 (1985) (“If, however, the language in the insurance contract is ambiguous and susceptible of two reasonable interpretations, the parties may submit extrinsic evidence as an aid in construction, and the resolution of the ambiguity is for the trier of fact”) (citations omitted); Lopez v. Consol. Edison Co. of N.Y., Inc., 40 N.Y.2d 605, 609, 389 N.Y.S.2d 295, 298 (1976) (parol evidence permissible to resolve ambiguity and to establish custom and practice). 25 61, 66-67, 869 N.Y.S.2d 511, 516 (1st Dep’t 2008) (internal quotation marks and citation omitted), aff’d, 13 N.Y.3d 398, 892 N.Y.S.2d 303 (2009). Accord Kass v. Kass, 91 N.Y.2d 554, 566,673 N.Y.S.2d 350, 356 (1998). Courts will find that contract terms are ambiguous if “the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” Riverside South Planning Corp., 60 A.D.3d at 66, 869 N.Y.S.2d at 516 (internal quotation marks and citation omitted).11 The Appellate Division did not address the carve out or limited marketing rights provisions. UBSRE contended below that the carve out language is meaningless, and said nothing about the express bar on UBSRE marketing the Student Loan Assets without Morpheus taking the lead. Morpheus’ interpretation of the Agreement as representing an intent to establish an exclusive right to sell clearly is reasonable. Assuming that UBSRE could, for the first time, set forth an equally plausible meaning supporting its claims regarding intent, then the contract is ambiguous, and the drafting history may be considered by the trial court. That 26 evidence, of course, would expose the hollowness of UBSRE’s argument that the parties intended to create only an exclusive agency. This strongly suggests why UBSRE failed to address this issue. Finally, the drafting history can be used to expose an argument made in bad faith. See, e.g., Reichmann v. Neumann, 553 F. Supp. 2d 307, 326 (S.D.N.Y. 2008). The email exchanges and the draft agreements in the record (RA15-38) establish, without any doubt, that UBSRE agreed to pay Morpheus a Success Fee, even if the transaction with the Stabilization Fund was a bailout sought by UBS AG and arranged by SNB. The drafting history can be used to expose the argument UBSRE makes in bad faith to the contrary. Moreover, had UBSRE wanted to exclude a transaction, such as the bailout, from the Agreement, it had every opportunity to do so when the parties were negotiating for Morpheus’ services. Its failure to do so undercuts both UBSRE’s argument and the dissent’s point that Morpheus’ exclusivity rights would not apply to the bailout UBS AG sought and obtained. III. Exclusive Agency Does Not Foreclose Morpheus’ Breach of Contract Claims Assuming arguendo that the Appellate Division correctly concluded that the Agreement created an exclusive agency, it properly determined that Morpheus had asserted valid claims for a breach of (a) its exclusivity rights and (b) UBSRE’s failure 27 to pay the Success Fee as required by the Agreement. UBSRE attacks the correctness of the latter holdings, but its arguments fail because they disregard the principle that parties are free to agree to contract terms as they wish, and the terms in the Agreement completely negate UBSRE’s arguments. Thus, the Appellate Division properly held, even if the Agreement does create an exclusive agency, that Morpheus has stated claims for breach of contract. (A4, A11). A. Exclusive Agency Rights Can Be Altered Parties have a right under New York law to define the parameters of their contractual relationship. “Freedom of contract prevails in an arm’s length transaction between sophisticated parties such as these, and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.” Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 695, 636 N.Y.S.2d 734, 740 (1995). See also Abiele Contracting, Inc. v. N.Y. City Sch. Constr. Auth., 91 N.Y.2d 1, 9, 666 N.Y.S.2d 970, 973 (1997) (“Unless statutory language or public policy dictates otherwise, the terms of a written agreement define the rights and obligations of the parties to the agreement.”) (citation omitted); Board of Educ. of the Hudson City Sch. Dist. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 29, 523 N.Y.S.2d 475, 479 (1987) (“Parties to a contract have the power to specifically delineate the scope of their liability at the time the 28 contract is formed.”). Thus, any argument that the Agreement could not expand Morpheus’ legal rights beyond those traditionally conferred by an exclusive agency fails as a matter of law. The Appellate Division correctly held that, once UBSRE agreed to sell the Student Loan Assets to the Stabilization Fund in contravention of its agreement “that [Morpheus] shall have the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement,” (A60, ¶ 1), Morpheus had a valid claim for breach of contract. (A9-11). This holding is nothing more than the proper construction of the terms of the Agreement. UBSRE nevertheless tries to cast the Appellate Division’s holding as incorrect because it is somehow incompatible with an exclusive agency. However, the binary either/or result that UBSRE urges, as it later admits, is incompatible with the bedrock principle that parties are free to contract as they wish. Further, UBSRE’s argument that it is entitled to compete with Morpheus in the sale of the Student Loan Assets is undermined by the fact that it (a) limited that competition to certain deals with Morgan Stanley or NBF International and (b) agreed that UBSRE would only jointly market those assets with Morpheus taking the lead in any such marketing efforts. (A60-61, ¶ 1). 12 See UBSRE Br. at 15-16. 29 After extensive argument about why the Agreement for Morpheus to provide UBSRE with investment banking services must be treated as nothing more than an exclusive agency contract, UBSRE finally concedes that “[t]he parties to a contract, of course, may choose to give each other greater or lesser rights than the parties would have as a matter of law.” UBSRE Br. at 24. It then goes on to argue, weakly, that, because the Agreement gives Morpheus an exclusive right to solicit counterparties, this language cannot create anything more than an exclusive agency. UBSRE offers no explanation, however, as to why that would be. Its argument also is made in isolation from the other terms of the Agreement, see supra at 15-17, that support the Appellate Division’s conclusion that Morpheus had more than just the rights solely afforded by an exclusive agency. Further and tellingly, the string of cases UBSRE cites as establishing the law of exclusive agency did not grapple with exclusive agency agreements that also included additional terms affecting the rights of the parties.12 Rather, they presented the question of whether the agreement at issue was an exclusive agency or an exclusive right to sell. Not surprisingly, all but three of the cases UBSRE cites deal with real estate brokerage arrangements. They do not establish any rule that would prevent a modification of traditional rights of an exclusive right to sell or an exclusive 30 agency. None of those cases, therefore, have any meaningful role in the resolution of this appeal. The three cases that do not involve real estate brokerage contracts shed no further light on how this Court should address the construction of the terms in the investment banking contract here that modify the sort of straightjacket exclusive agency terms that UBSRE contends should confine Morpheus’ rights. Carnes Communications, Inc. v. Russo, 305 A.D.2d 332, 332, 761 N.Y.S.2d 615, 616 (1st Dep’t 2003), only addressed whether an agreement for advertising services was an exclusive agency or an exclusive right to sell, and not whether the parties could vary the terms of the rights created by those agreements. Solid Waste Institute, Inc. v. Sanitary Disposal, Inc., 120 A.D.2d 915, 916-17, 502 N.Y.S.2d 835, 836 (3d Dep’t 1986), addressed a brokerage agreement for the sale of a business. It found that there was no clear expression of intent defining the parameters of a supposed exclusive right to sell, and that plaintiff had failed to submit any parol evidence in support of such a right. Finally, Hammond, Kennedy & Co., Inc. v. Servinational, Inc., 48 A.D.2d 394, 397, 369 N.Y.S.2d 712, 714-15 (1st Dep’t 1975), another action dealing with a dispute over a commission for the sale of a business, found an exclusive right to sell, but left for trial the scope of the exclusivity regarding a sale after the contract was terminated. 31 Accordingly, to the extent that the Agreement only provides an exclusive agency, its terms also created an exclusive right for Morpheus to solicit counterparties during the term of the Agreement that the Appellate Division correctly held UBSRE could not foreclose by disposing of the Student Loan Assets in the deal with the Stabilization Fund that denied Morpheus the opportunity to exercise its rights. B. UBSRE Does Not Contest the Appellate Division Holding that Morpheus Has A Contract Claim for Payment of the Success Fee The Appellate Division held “that the agreement mandated compensation for any transaction involving UBSRE’s toxic assets during the term of the agreement” unless that payment provision was ambiguous. (A13). In either circumstance, it said, UBSRE’s pre-answer motion to dismiss should be denied. (A13-14). A finding of ambiguity would allow Morpheus to bring the drafting history before the Court. That, of course, would expose as fallacious UBSRE’s argument that Morpheus is entitled to nothing. UBSRE said nothing about this holding in its opening brief. It, apparently, rests its appeal regarding this breach claim on the contention that the parties cannot vary in their contract the common law limitations of an exclusive agency. Regardless of what may be UBSRE’s argument, if it has one, it cannot in its reply brief raise any argument not previously advanced to support any contention that the Appellate 13 Among those purported findings by the dissent are: • UBSRE’s transfer of the Student Loan Assets was not the result of efforts by any broker (A21, A30); • there was no market for the Student Loan Assets (A20, A24, A34); • “there is simply no possibility that [Morpheus] could locate a prospective counterparty willing to acquire the assets on the terms offered by the SNB” (A33); • SNB did not introduce UBS AG to the Stabilization Fund (A24-25); • UBS AG, not UBSRE, was responsible for the transfer of UBSRE’s Student Loan Assets to the Stabilization Fund (A25); (continued...) 32 Division erred in its holding that Morpheus has a contract claim for payment of the Success Fee. To the extent that UBSRE attempts to make a substantive argument attacking the Appellate Division’s holding for the first time on reply, the Court, sua sponte, should strike it from the appeal record. See Clairol Dev., LLC v. Village of Spencerport, 100 A.D.3d 1546, 1547, 954 N.Y.S.2d 389, 391 (4th Dep’t 2012); Shaw v. Bluepers Family Billiards, 94 A.D.3d 858, 860, 941 N.Y.S.2d 691, 693 (2d Dep’t 2012); Shia v. McFarlane, 46 A.D.3d 320, 321, 847 N.Y.S.2d 530, 531 (1st Dep’t 2007). C. UBSRE Relies on Supposed and Nonexistent Findings of Fact To Support Its Arguments UBSRE relies upon a number of factual “findings” that the dissent below purports to make from the motion to dismiss record that as a matter of procedure cannot be made, and, in any event, are wholly unsupported by the motion record.13 13 (...continued) • the Stabilization Fund could not be “introduced” to UBSRE (A25); and • SNB was the “effective purchaser” of UBSRE’s Student Loan Assets (A31). 14 UBSRE mischaracterizes the majority’s decision when it says it rejected the argument that SNB acted as a broker. This is based on another improper attempt at fact finding by the dissent. The majority appropriately did not address this issue beyond referencing the dissent’s assumption in considering and rejecting its arguments. (A9). 33 Using the dissent’s factual “findings,” for example, that no market could or did exist for the Student Loan Assets in the fall of 2008, that UBSRE’s transfer of the Student Loan Assets to the Stabilization Fund was not the result of efforts by any broker [“another party” is the proper contractual term] (A62, ¶ 5), and that SNB intervened purely for regulatory purposes, UBSRE urges this Court to dismiss Morpheus’ Complaint. This, of course, is not proper, and those supposed findings should be ignored, particularly when used by UBSRE to advocate its position. Nor is the dissent’s commentary, adopted by UBSRE, that Morpheus is seeking to “insinuate itself into the financial rescue of UBS AG . . . to seek payment of a success fee the broker could not possibly hoped to have earned,” (A34) accurate or appropriate. Morpheus was, as explained above, not a “broker,” but a banker retained by UBSRE to provide investment banking services, whose contract called for the very payment in dispute.14 UBSRE did not, as it claims in its brief (UBSRE Br. at 13-14), “locate[]” a buyer for the Student Loan Assets. As the dissent itself recognized, both SNB and 15 This case is not the place for this Court to make broad pronouncements about the rights of real estate brokers under an exclusive agency contract, as UBSRE invites. See UBSRE Br. at 28. 34 UBS AG arranged the transaction with the Stabilization Fund, and acted as intermediaries between UBSRE and the Stabilization Fund. (A31). What effect this has on Morpheus’ right to the Success Fee is an issue that this Court need not address. Rather, it should be resolved in the trial court after discovery has been taken. UBSRE argues repeatedly that it did not use another broker to arrange the transfer of its Student Loan Assets to the Stabilization Fund, but the Agreement, again, does not frame Morpheus’ rights solely in terms of whether UBSRE arranged a transaction through another intermediary, be it a broker or someone else. Rather, the Agreement, as is relevant here to one contract theory, grants Morpheus the right to a Success Fee if a third party introduces UBSRE to a potential buyer and a transaction with that buyer takes place. (A62, ¶ 5). There are factual issues to be resolved regarding who brought UBSRE together with the Stabilization Fund, when, how and to what effect, none of which are before this Court. UBSRE’s entire premise that Morpheus was a mere “broker” with rights and duties akin to those of a real estate broker is wrong, and wholly without record support.15 As Morpheus’ president explained in his affidavit before the trial court, “[t]he Agreement is not a brokerage or finder’s contract. Rather, it is a financial advisory and investment banking services agreement under which Morpheus provided 35 a broad range of services to” UBSRE. (RA11, ¶ 2). Moreover, the terms of the Agreement itself make clear that Morpheus was not merely presenting a static asset to an existing market. Rather, Morpheus’ range of tasks, beyond seeking a counterparty for a transaction, included, among other things, creating a market involving qualified buyers for the Student Loan Assets. As Morpheus explained at the outset of the assignment, it would be “creat[ing] the most effective and competitive market for the” Student Loan Assets that it could. (A60; RA12-13; ¶ 7; RA37-38). Morpheus also was called upon to provide assistance with developing financial analysis, assistance with creating marketing and due diligence materials, and assistance with “the development of alternative transaction structures.” (A60). The duty to assist in developing alternative transaction structures is particularly telling. In a brokerage agreement to sell real estate or a business, the asset already exists in the form in which it will be sold, and it is the duty of a broker to find a buyer. Here, however, in an investment banking contract, the banker is not merely trying to sell a prepackaged cluster of assets. Rather, as the Agreement contemplates, the banker is the driving force in creating the very structure of a deal to sell or transfer the risk of first loss. 16 The dissent raised the specter that the exclusive right to solicit counterparties given Morpheus by the Agreement is “akin to an augmented right of first refusal.” (A32). But, as the majority found, “whether the agreement grants plaintiff such a right [of first refusal], is an issue we need not reach because it is raised solely by the dissent.” (A12). 36 D. Duty to Wait Was An Appropriately Bargained-For Right UBSRE’s failed attempt to cast Morpheus as a “broker” aside, the “duty to wait” that the Appellate Division found the Agreement granted to Morpheus was an appropriately bargained-for right, not a destruction of settled case law or a source of potential confusion for businesses.16 UBSRE’s argument that the Appellate Division’s decision will impose some sort of ill-defined waiting period on sellers is a fiction. The Agreement gave Morpheus “the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of [the] Agreement.” (A60). There is nothing unspecified about that. It requires UBSRE to afford Morpheus the opportunity to solicit counterparties for the very period of time for which the parties bargained and agreed. Wylie v. Marine Nat’l Bank of City of N.Y., 16 Sickels 415 (1875), provides UBSRE with no support. Aside from being yet another real estate brokerage case, Wylie’s facts differ significantly from those at issue here. First, as UBSRE admits, Wylie did not involve an exclusive agency arrangement; at best, it involved a non- exclusive agency. UBSRE Br. at 20 n. 5. In that case, a seller made a deal at a higher 17 See UBSRE Br. at 20-23. 37 price with a buyer whom the broker introduced during the term of the brokerage contract. The decision holding that no commission was due the broker turned on the non-exclusive nature of the contract, and has nothing to do with the instant facts that, at minimum, proceed from an exclusive agency. UBSRE’s theory that an exclusive agency agreement is meant to create a “competition” between the seller and broker flies in the face of the parties’ express intent to the contrary, supra at 21-22, and seeks a broad ruling on the nature of brokerage agreements in general, which is not an issue before this Court. As is customary in the investment banking industry, Morpheus bargained for and received a period of time in which to find a counterparty for a transfer of UBSRE’s assets. (RA11, ¶ 3). Morpheus specifically declined to enter an agreement that would leave it open to the very competition that UBSRE now claims it was entitled to pursue to Morpheus’ detriment. (RA12-13, ¶7; RA37-38). While UBSRE cites a swath of cases, from New York State and elsewhere, in support of its “competition” theory, none of those cases involved the type of carve out contained in the Agreement involving Morgan Stanley or NBF International, or the type of provision that limits UBSRE to joint marketing with Morpheus “taking the lead.”17 38 In any event, UBSRE concedes that this supposed competition only functions appropriately in the absence of bad faith. See UBSRE Br. at 21. Thus, Morpheus would have the right in the trial court to plead that UBSRE acted in bad faith involving its supposed right to compete against Morpheus after entering a contract that barred, with a narrow exception, such competition. IV. UBSRE’s Other Arguments Are Unavailing The Appellate Division’s decision does not create the commercial and legal chaos that UBSRE claims it will create. It merely upholds the rights of private parties to contract as they see fit. UBSRE also offers no factual record to support its claim that, in transferring Student Loan Assets to the Stabilization Fund, it was complying with any regulatory directive by SNB or how such a directive, if given, would excuse an existing contractual obligation in the United States between two corporate citizens of this country, UBSRE and Morpheus. Rather, the motion record supports Morpheus’ contention that, to help repair its self-damaged balance sheet, UBS AG sought a bailout from SNB and, to advance this, UBSRE voluntarily and unnecessarily transferred the Student Loan Assets to the Stabilization Fund in breach 18 On April 15, 2009, UBS’s Chairman, Peter Kurer, told the bank’s shareholders that, during 2008, UBS was mired in financial problems caused by its own “grave errors in the areas of strategy, risk control, internal cooperation and reporting,” for which he sincerely apologized to his shareholders. (RA41). To address those problems, he said that UBS “had to ask the Swiss National Bank and the Swiss government for help in stabilizing the bank.” (RA39). 39 of Morpheus’ rights.18 For much the same reason, UBSRE’s international comity argument, barely made before either lower court and rightfully ignored by both, fails. A. Appellate Division Did Not Change Commercial Transaction Law The Appellate Division’s decision does not change anything about how the law treats exclusive agency rights where the contract forming those rights does not contain language that modifies the traditional legal bounds of that relationship. In any event, even a modification of such rights as the Appellate Division found in this action does not have the apocalyptic effects that UBSRE claims. UBSRE and Morpheus made a contract. The Appellate Division interpreted the language of the contract. Commercial life in New York goes on. The Appellate Division did not, despite UBSRE’s bald arguments otherwise, impose a “new” “duty to wait” on sellers that are parties to an exclusive agency contract that has no terms requiring such a duty. Nor does the “duty to wait,” as put forth by UBSRE, convert an exclusive agency into an exclusive right to sell. The right that the Appellate Division found was the bargained for and expressed right to have a specified period of time to earn 40 the Success Fee based upon the substantial work required of Morpheus under the Agreement. Having agreed to give Morpheus that opportunity, UBSRE could not unilaterally take it away just because a better deal came along. See 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281, 296 N.Y.S.2d 338, 344 (1968) (“where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused”); General Elec. Co.v. Metals Resources Group, Ltd., 293 A.D.2d 417, 418, 741 N.Y.S.2d 218, 220 (1st Dep’t 2002) (finding no impossibility of performance where circumstances rendered defendant’s performance “financially disadvantageous”); Bierer v. Glaze, Inc., No. CV-05-2459(CPS), 2006 WL 2882569, at *7 (E.D.N.Y. Oct. 6, 2006) (“Under New York law, changes in market conditions or economic hardship do not excuse performance.”); cf. Warner v. Kaplan, 71 A.D.3d 1, 5, 892 N.Y.S.2d 311, 314 (1st Dep’t 2009) (“where performance is possible, albeit unprofitable, the legal excuse of impossibility is not available”). The Appellate Division did no more than construe the language in the Agreement, determine the parties’ intent, and hold that Morpheus properly had pled a claim for breach of its exclusivity rights. Ignoring the parties’ agreed-upon language here in favor of imposing the terms of a garden variety exclusive agency, 41 as UBSRE urges, would work the real disruption to commercial contracts in this State. B. The Appellate Division’s Decision Will Not Impede Bank Regulation UBSRE’s argument that holding it to its agreement with Morpheus will impede bank regulation ignores the facts and distorts the law. The Appellate Division rejected UBSRE’s argument that it breached its agreement with Morpheus because SNB required it to do so. The majority pointed out that UBSRE voluntarily sold the Student Loan Assets to the Stabilization Fund. (A8). The record also establishes that UBSRE’s parent, UBS AG, requested the bailout at issue to address its own self-inflicted financial problems. (RA39; RA41). There is no record support for the argument that UBSRE advances that the transfer of the Student Loan Assets to the Stabilization Fund was not a business decision, but rather an act of cooperation, compelled or voluntary, with its regulator. Moreover, requiring UBSRE to honor a contract made to address the problems for which its parent sought governmental assistance is not impeding bank regulation. It is preventing UBSRE from breaching its contractual obligations just because they became financially disadvantageous. The law does not permit this. See cases cited supra at 40. UBSRE does not cite, because it cannot, any authority for the novel 19 See Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 886-87 (10th Cir. 1985) (party’s alleged breach that arose from compliance with state environmental regulation was excused by express provision of the contract); Mawhinney v. Millbrook Woolen Mills, Inc., 231 N.Y. 290, 292-95, 300 (1921) (“the government gave [defendant] orders which had to be filled at once” during time of war); NFL Enters. LLC v. Echostar Satellite L.L.C., No. 0600556/2008, 2008 WL 2157888, at *4-5 (Sup. Ct. N.Y. Co. Apr. 30, 2008) (supposed breach occurred in face of letters from Members of Congress that may have threatened further antitrust investigation); North German Lloyd v. Guaranty Trust Co. of N.Y., 244 U.S. 12, 21-24 (1917) (shipowner turned back to port in anticipation of danger of being captured and was later ordered to return to port, anyway); L.N. Jackson & Co. v. Royal Norwegian Gov’t, 177 F.2d 694, 695-96 (2d Cir. 1949) (cargo ship cooperating with war effort). 42 proposition that bank regulators can direct action that impairs the contractual rights of private parties with impunity, let alone allow a regulated entity to do so. The cases UBSRE cites for the rather obvious proposition that banks should cooperate with their regulators have no bearing on this dispute. Rather, they all involve external events or regulations to which a litigant responded as sought or required by the government. They did not involve a litigant who caused the very problem requiring government intervention, invited the government to intervene and then sought to disclaim contractual obligations based upon that intervention.19 Finally, UBSRE ignores a glaring hole in its regulatory argument -- there is no indication that the Student Loan Assets needed to be included in any bailout. While the initial announcement of the bailout said that “up to $60 billion in assets” would be transferred to a third party Stabilization Fund, ultimately less than $40 billion was transferred. (A53-55, ¶¶ 18, 21-22; UBSRE Br. at 11). Thus, even if UBSRE’s “excuse argument” had any legal support, a factual issue would have to be resolved 43 in the trial court regarding whether the transaction involving the Student Loan Assets was necessarily a part of the bailout. Plainly, there is no record evidence that the SNB required, or even suggested, that the transferred assets include the Student Loan Assets. C. The Appellate Division’s Decision Does Not Threaten Comity UBSRE’s argument that comity supports reversal also has no record support beyond a hearsay press release in which the SNB says that, in assisting UBS, it acted pursuant to its statutory mandate. In the absence of a factual record that supports a claim of comity, UBSRE’s argument should be disregarded. In addition, UBSRE’s argument that Morpheus prevailing in this action would allow it “to profit from the Swiss government bailout of Swiss banks in Switzerland” (UBSRE Br. at 35) is absurd. Comity does not absolve UBSRE, a private corporation, from liability for its breach of a contract involving a commercial transaction with another private party. Moreover, in the State of New York, UBSRE, a Delaware company (A51, ¶ 9), breached a contract with Morpheus, also a Delaware company (A51, ¶ 7). UBSRE now should make Morpheus whole, and doing that does not implicate issues of comity between the United States and Switzerland. CONCLUSION For the reasons stated, this Court should hold that the Agreement granted Morpheus an exclusive right to sell, not just an exclusive agency, modify the Appellate Division's decision accordingly, and otherwise affirm the Appellate Division's decision. This action then should be remanded to the motion court for further proceedings, including discovery and trial. Dated: Of Counsel: New York, New York November 26, 2013 KORNSTEINVEISZ WEXLER& POLLARD, LLP By:Q~Z.~~ William B. Pollard, III 757 Third Avenue, 18th Floor New York, New York 10017 . (212) 418-8600 wpollard@kvwmail.com Attorneys for Plaintiff-Respondent AmyC. Gross 44