Morpheus Capital Advisors LLC, Respondent,v.UBS AG, Defendant, UBS Real Estate Securities, Inc., Appellant.

Brief

N.Y.May 6, 2014

APL-2013-00235 New York County Clerk’s Index No. 650335/09 Court of Appeals STATE OF NEW YORK MORPHEUS CAPITAL ADVISORS LLC, Plaintiff-Respondent, against UBS AG, Defendant, and UBS REAL ESTATE SECURITIES, INC., Defendant-Appellant. >> >> BRIEF FOR DEFENDANT-APPELLANT UBS REAL ESTATE SECURITIES, INC. Kenneth A. Caruso Patrick M. Wilson WHITE & CASE LLP 1155 Avenue of the Americas New York, New York 10036 (T) 212-819-8200 (F) 212-354-8113 and Jeffrey I. Wasserman HERRICK, FEINSTEIN LLP 2 Park Avenue New York, New York 10016 (T) 212-592-1400 (F) 212-592-1500 Attorneys for Defendant-Appellant Date Completed: October 11, 2013 To Be Argued By: Kenneth A. Caruso Time Requested: 30 Minutes NEWYORK 8993010 v2 CORPORATE DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(f) 1. Defendant-Appellant, UBS Real Estate Securities, Inc. (“UBSRE”), is a wholly owned subsidiary of UBS Americas Inc., which is a wholly owned subsidiary of UBS AG. 2. The following are subsidiaries of UBSRE: a. Battenkill Insurance Company, LLC b. Corporate Aircraft Funding Company, LLC c. SRF Whaler Inc. d. Strategic Residential Solutions LLC e. UBS Real Estate Investments Inc., which has the following subsidiaries: i. CRE Edge LLC ii. Master Triple Net Holdings LLC, which has the following subsidiaries: 1. CRE Ivy Brook LLC 2. CRE Greece Triple Net Holdings LLC 3. CRE Rockwell Asheville LLC 4. CRE Rockwell Champaign LLC 5. CRE Rockwell Columbus LLC 6. CRE Rockwell Greenville LLC 7. CRE Rockwell Kings Mountain LLC 8. CRE Rockwell Rogersville LLC NEWYORK 8993010 v2 ii 9. CRE SoundView JV LLC 10. Durham Triple Net Holdings LLC 11. Southern Pines Triple Net Holdings LLC NEWYORK 8993010 v2 iii STATUS OF RELATED LITIGATION The Appellate Division remanded this action to Supreme Court, New York County. On remand, UBSRE served its Answer and Counterclaim, to which Morpheus served a Reply. The parties have exchanged discovery requests, and written responses and objections. In 2009, UBSRE produced documents in connection with the motion to dismiss. There has been no further document production. NEWYORK 8993010 v2 iv TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... 1 QUESTIONS PRESENTED ...................................................................................... 6 STATEMENT SHOWING JURISDICTION AND PRESERVATION ................... 7 STATEMENT OF FACTS ........................................................................................ 8 A. UBSRE And Morpheus Enter Into The Agreement .............................. 8 B. The Worldwide Financial Crisis In 2008 .............................................. 9 C. The Swiss National Bank Takes Action .............................................. 10 D. UBS Transfers Assets To The Stabilization Fund .............................. 11 E. Morpheus Commences This Action .................................................... 11 F. The Proceedings Below ....................................................................... 12 1. The Proceedings In Supreme Court .......................................... 12 2. The Proceedings In The Appellate Division ............................. 13 ARGUMENT ........................................................................................................... 14 MORPHEUS HAS NO CAUSE OF ACTION FOR A SUCCESS FEE ................ 14 A. Exclusive Brokerage Contracts -- The Applicable Law ..................... 14 B. Under The Applicable Law, Morpheus Is Not Entitled To A Success Fee And The Complaint Should Be Dismissed ..................... 17 C. The Appellate Division Erred When It Sustained The Complaint ............................................................................................ 17 1. The Appellate Division Imposed A Duty To Wait Before Selling ....................................................................................... 18 2. The Imposition Of A Duty To Wait Was Erroneous ................ 19 3. A Duty To Wait Would Complicate And Unsettle The Law, Thereby Affecting A Multiplicity of Commercial Transactions .............................................................................. 25 a. A Duty To Wait Would Complicate And Unsettle The Law .......................................................................... 25 b. A Duty To Wait Will Affect A Multiplicity Of Commercial Transactions ............................................... 28 c. The Court Should Reject These Changes And Complications ................................................................. 29 NEWYORK 8993010 v2 v 4. A Duty To Wait Threatens To Impede Bank Regulation ......... 30 5. Considerations Of International Comity Support Reversal ...... 34 CONCLUSION ........................................................................................................ 36 NEWYORK 8993010 v2 vi TABLE OF AUTHORITIES CASES Ackman v. Toren, Inc., 6 A.D.2d 427 (1st Dep’t 1958) ...................................... 15, 17 Ackman v. Toren, Inc., 6 N.Y.2d 720 (1959) ............................................................ 17 Audrey Balog Realty Corp. v. E. Coast Real Estate Dev., Inc. 202 A.D.2d 529 (2d Dep’t 1994) .......................................................................... 15 Ballard v. Tingue Mills, Inc., 128 F. Supp. 683 (D. Conn. 1954) ............................. 20 Barnet v. Cannizzaro, 3 A.D.2d 745 (2d Dep’t 1957) ............................................... 15 Carnes Commc’ns, Inc. v. Russo, 305 A.D.2d 332 (1st Dep’t 2003) ................. 15, 29 Conway v. Matthews, 37 Ala. App. 513, 70 So. 2d 827 (1954) .......................... 20, 23 Destiny USA Holdings, LLC v. Citigroup Global Mkts. Realty Corp., 24 Misc. 3d 1222(A), 2009 WL 2163483 (Sup. Ct. Onondaga Cnty. July 17, 2009).......................................................................................................... 9 Dubuc, Lucke & Co. v. DiFlora, 1999 Ohio App. LEXIS 3736 (Aug. 4, 1999) ...... 20 Ettinghoff v. Horowitz, 115 A.D. 571 (2d Dep’t 1906) ............................................ 22 Far Realty Assocs. Inc. v. RKO Del. Corp., 34 A.D.3d 261 (1st Dep’t 2006) .............................................................................................. 15, 16 Foltz v. Begnoche, 222 Kan. 383, 565 P.2d 592 (1977) ............................................ 23 Gaillard Realty Co. v. Rogers Wire Works, Inc., 215 A.D. 326 (1st Dep’t 1926) .................................................................................................... 15 Hammond, Kennedy & Co. v. Servinational, Inc., 48 A.D.2d 394 (1st Dep’t 1975) ........................................................................................ 15, 16, 29 Harvard Assocs., Ltd. v. Hayt, Hayt & Landau, 264 A.D.2d 814 (2d Dep’t 1999) ..................................................................................................... 15 Hecht v. Meller, 23 N.Y.2d 301 (1968) ..................................................................... 21 NEWYORK 8993010 v2 vii IFA Inc. v. Ellco Leasing Corp., 1993 U.S. Dist. LEXIS 4376 (N.D. Ill. March 31, 1993) .................................................................................... 20 Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879 (10th Cir. 1985) ............................................................................................... 30, 31 Kennedy v. Hart, 187 Okla. 169, 101 P.2d 808 (1940) ................................. 20, 23, 26 Kraft v. Toxikon Corp., 1998 WL 1284187 (Mass. Super. April 17, 1998) ............. 20 L.N. Jackson & Co. v. Royal Norwegian Gov’t, 177 F.2d 694 (2d Cir. 1949) ........................................................................................................ 33 Levy v. Isaacs, 285 A.D. 1170 (2d Dep’t 1955) ........................................................ 15 Louis Schlesinger Co. v. Rice, 4 N.J. 169, 72 A.2d 197 (1950) ............................... 20 Mawhinney v. Millbrook Woolen Mills, Inc., 231 N.Y. 290 (1921) ........................ 33 McClave v. Paine, 49 N.Y. 561 (1872) ............................................................... 16, 17 McPike v. Siver, 168 Iowa 149, 150 N.W. 52 (1914) ......................................... 20, 23 Morgenthau v. Avion Res. Ltd., 11 N.Y.3d 383 (2008) ...................................... 34, 35 Moses v. Bierling, 31 N.Y. 462 (1865) ..................................................................... 16 Myers v. Batcheller, 177 A.D. 47 (3d Dep’t 1917) ................................................... 20 N. German Lloyd v. Guaranty Trust Co., 244 U.S. 12 (1917) .................................. 33 Navy Gas & Supply Co. v. Schoech, 105 Colo. 374, 98 P.2d 860 (1940) ................ 20 NFL Enters. LLC v. Echostar Satellite L.L.C., 2008 WL 2157888 (Sup. Ct. N.Y. Cnty. Apr. 30, 2008) ..................................................................... 33 Peeler Ins. & Realty, Inc. v. Harmon, 20 N.C. App. 39, 200 S.E.2d 443 (1973) .................................................................................................................... 20 Prime City Real Estate Co. v. Hardy, 256 A.D.2d 80 (1st Dep’t 1998) .................... 21 Rusciano Realty Servs., Ltd. v. Griffler, 62 N.Y.2d 696 (1984) ............................... 21 Schwob v. Int’l Water Corp., 136 F. Supp. 310 (D. Del. 1955) ................................ 20 NEWYORK 8993010 v2 viii Sibbald v. Bethlehem Iron Co., 83 N.Y. 378 (1881) ................................................. 22 Siegel v. Rosenzweig, 129 A.D. 547 (2d Dep’t 1908) .............................................. 22 Slattery v. Cothran, 210 A.D. 581 (4th Dep’t 1924) ................................................. 15 Solid Waste Inst., Inc. v. Sanitary Disposal, Inc., 120 A.D.2d 915 (3d Dep’t 1986) ......................................................................................... 15, 16, 29 Sussdorff v. Schmidt, 55 N.Y. 319 (1873) ................................................................ 20 Wachovia Corp. v. Citigroup, Inc., 634 F. Supp. 2d 445 (S.D.N.Y. 2009) ........ 10, 11 Werner v. Eurich, 263 A.D. 744 (2d Dep’t 1941) ..................................................... 15 Westhill Exports, Ltd. v. Pope, 12 N.Y.2d 491 (1963) ....................................... 21, 29 White v. Farrell, 20 N.Y.3d 487 (2013) ..................................................................... 29 Wood v. Hutchinson Coal Co., 85 F. Supp. 1010 (N.D. W. Va.) ............................. 20 Wylie v. Marine Nat’l Bank, 61 N.Y. 415 (1875) ..................................... 4, 19, 22, 29 STATUTES AND RULES CPLR § 5602(b)(1) ...................................................................................................... 7 MISCELLANEOUS 11 N.Y. Jur. 2d, Brokers § 169, at 594 (2006) ........................................................... 22 ANNUAL REPORT ON THE NEW YORK REAL ESTATE MARKET 2012, at 3-4, available at www.nysar.com/docs/memberspdfs/ ................................................ 28 Barbara Taylor, “In Defense of Business Brokers,” NEW YORK TIMES, Apr. 12, 2012, available at http://boss.blogs.nytimes.com/2012/04/12/in-defense-of- business-brokers/ .................................................................................................. 28 N.Y. C.P.L.R. 3211 .................................................................................................... 12 National Aircraft Resale Association, available at www.nara-dealers.com .............. 28 NEW YORK CITY TAXI AND LIMOUSINE COMMISSION 2012 ANNUAL REPORT, at 10, available at www.nyc.gov/html/tlc/downloads/pdf/annual_report_2012.pdf ...... 28 NEWYORK 8993010 v2 ix U.S. CENSUS BUREAU, STATISTICAL ABSTRACT OF THE UNITED STATES: 2012, CONSTRUCTION AND HOUSING (Tables 977 & 979), available at www.census.gov/compendia/statab/2012/tables/12s0979.pdf; www.census.gov/compendia/statab/2012/tables/ 12s0977.pdf ............................ 28 Williston on Contracts § 62:20, at 392 (4th ed. 2002) ............................................... 22 NEWYORK 8993010 v2 Defendant-Appellant, UBS Real Estate Securities, Inc. (“UBSRE”), appeals from an order of the Appellate Division, First Department, modifying an order of Supreme Court, New York County, which granted UBSRE’s motion to dismiss the Complaint for failure to state a cause of action. PRELIMINARY STATEMENT This is a breach of contract action by Morpheus Capital Advisors LLC (“Morpheus”) to recover a broker’s commission for the sale of certain assets by UBSRE, a subsidiary of UBS AG, a bank organized under the laws of Switzerland. The sale, however, made in October 2008, at the depth of the worldwide financial crisis, was no ordinary commercial transaction. It was, rather, “arranged by the Swiss central bank” as part of what was, “in common parlance, a ‘bailout[,]’” Appendix (“A”) 34 (quoting Appellate Division dissent) (parentheses omitted), and was made to an entity owned and controlled by the Swiss central bank itself. For the reasons set forth below, Morpheus has no cause of action. Morpheus bargained for a retainer and monthly fees (all of which were paid) and for an “exclusive right to solicit counterparties for any potential Transaction[.]” Morpheus, however, never procured a buyer for the assets at issue, and UBSRE simply exercised its right to sell its own property, without using any broker, to the first party who offered an acceptable price. As the dissent in the Appellate Division concluded, succinctly and incisively, “[T]his [is a] desperate attempt by NEWYORK 8993010 v2 2 MCA [Morpheus] to insinuate itself into the financial rescue of UBS AG by the [Swiss central bank], entirely at the central bank’s expense, to seek payment of a success fee the broker could not possibly hope to have earned.” Id. * * * * In September 2008, in the midst of the financial crisis, UBSRE engaged Morpheus, an investment bank, to find a buyer for certain of UBSRE’s illiquid student loan assets (the “Student Loan Assets”). Around that time, in response to the financial crisis, governments in Washington and around the globe took unprecedented actions -- nationalizing financial institutions, guaranteeing private debts and pumping cash into the private sector. In Switzerland, the Swiss National Bank (the “SNB”) -- Switzerland’s central bank -- took action pursuant to its Swiss statutory mandate to stabilize the Swiss financial system. Thus, in October, the SNB announced that it would establish a special purpose vehicle, the SNB StabFund (the “Stabilization Fund”), through which the SNB would purchase certain illiquid -- so-called “toxic” -- assets from UBS AG, in order to improve UBS AG’s liquidity by removing such assets from UBS AG’s consolidated balance sheet. Morpheus alleges that UBSRE thereby sold a portion of the Student Loan Assets to the Stabilization Fund. Morpheus commenced this action seeking a commission (called here, contractually, a “Success Fee”) for that sale, even though NEWYORK 8993010 v2 3 the sale was part of the “bailout,” and even though Morpheus played no part whatsoever in procuring the buyer or arranging the sale. Supreme Court dismissed the Complaint, but the Appellate Division reversed. The Appellate Division held -- unanimously and correctly -- that the contract between the parties gave Morpheus an “exclusive agency,” not an “exclusive right to sell” the Student Loan Assets. The Appellate Division also held -- unanimously and correctly -- that UBSRE sold assets to the Stabilization Fund without using any broker. The Appellate Division, however, divided three Justices to one on the question whether the cause of action for breach of contract, seeking payment of a Success Fee, should be dismissed. The dissent, consistent with 140 years of case law, would have affirmed the dismissal of the Complaint. Under an exclusive agency contract, the owner of the property has the right to sell the property, without liability to the broker, where the owner arranges the sale without using any broker. Here, UBSRE sold assets to the Stabilization Fund without using any broker. Therefore, UBSRE can have no liability to Morpheus. The majority, however, sustained the cause of action for breach of contract. The majority held that UBSRE can have liability to Morpheus, even though UBSRE sold assets to the Stabilization Fund without using any broker, because NEWYORK 8993010 v2 4 UBSRE failed to give Morpheus “the opportunity” to find a buyer before UBSRE made the sale. The Appellate Division’s holding was erroneous and should be reversed. It cannot be squared with this Court’s long-standing precedent, under which the property owner may sell to the first party who offers an acceptable price. Where, as here, the broker fails to procure a buyer, but the owner finds a buyer without using any broker, the owner is “under no obligation to wait any longer, [so] that [the broker] might make further efforts.” Wylie v. Marine Nat’l Bank, 61 N.Y. 415, 419 (1875). Put differently, an exclusive agency creates a competition between the property owner and the broker, and the law declares the winner of that competition by applying a first-in-time rule. Thus, if the broker procures a buyer who is ready, willing and able to purchase at the terms set by the owner, then the broker has won the competition and has earned a commission. If, on the other hand, the owner finds a buyer without using any broker -- and does so first -- then the owner has won the competition and may sell without liability for a commission. The law does not require the victorious owner to wait, so as to give the broker a further opportunity to find a buyer. The Appellate Division overlooked this first-in-time rule. Morpheus did not procure a buyer for the Student Loan Assets. UBSRE, however, was presented NEWYORK 8993010 v2 5 with a buyer by the Swiss banking authorities, thereby finding a buyer without using any broker. UBSRE therefore won the competition and was free to sell without giving Morpheus any further opportunity to find another buyer. Accordingly, as a matter of law, UBSRE has no liability to Morpheus. This Court should reverse the Appellate Division and should dismiss the Complaint. The decision of the Appellate Division, furthermore, complicates and unsettles an area of law in which simple, bright-line rules have historically applied. The Appellate Division created a previously unknown hybrid -- a contract for an exclusive agency under which the owner who sells its property without using any broker can nevertheless have liability for a commission. Thus, a property owner must now wait some unspecified period of time before selling his or her own property, so as to give the broker the “opportunity” to find a buyer. The Court should reject these unnecessary legal and factual complications, which will alter the balance between property owners and brokers, thereby affecting anyone in New York who uses a broker to sell property (including, in particular, homeowners and business owners). The Court should adhere to the traditional, bright-line rules -- urged by the dissent in the Appellate Division -- which make a binary choice between an exclusive agency and an exclusive right to sell, a choice from which clear, established legal consequences flow. NEWYORK 8993010 v2 6 Finally, the Appellate Division’s “duty to wait” threatens to impede bank regulation. At a time of emergency, UBSRE and UBS AG cooperated with the national regulator, the SNB, by transferring illiquid assets pursuant to the SNB’s regulatory program. The Appellate Division, however, imposed a waiting period, which gives the broker time to find a buyer, but which threatens to stall the bank’s response to the emergency. And, if the Appellate Division is correct, then cooperation with the regulator may now have a price tag -- money damages for a commission. This is not sound public policy. The next bank, in the next emergency, may wait or think twice before cooperating, thereby impeding the regulatory program. QUESTIONS PRESENTED New York law recognizes two types of exclusive brokerage contracts -- an “exclusive right to sell,” and an “exclusive agency.” Under an “exclusive right to sell,” the broker is entitled to a commission upon the sale of the property at issue, including a sale arranged by the owner of the property without the use of any broker. Under an “exclusive agency,” by contrast, the owner of the property may sell the property, without liability to the broker for a commission, as long as the owner does not use any broker when arranging the sale. In this case, the Appellate Division held -- unanimously and correctly -- that the contract between the parties gave the broker an exclusive agency, not an NEWYORK 8993010 v2 7 exclusive right to sell. The Appellate Division nevertheless held -- erroneously, and over a dissent -- that the owner who sells its property without using any broker may have liability where, as alleged here, the owner failed to give the broker the opportunity to find a buyer. Therefore, this appeal presents the following questions with respect to a contract for an exclusive agency: 1. Does the owner have the right to sell its property to the first buyer who offers an acceptable price, without liability to the broker, where the owner arranges that sale without using any broker (as the Appellate Division dissent would have held)? Or: 2. In these circumstances, may the owner nevertheless have liability to the broker because the owner did not wait some unspecified period of time before selling its property, so as to give the broker a further opportunity to find a buyer (as the Appellate Division majority held)? STATEMENT SHOWING JURISDICTION AND PRESERVATION On March 12, 2013, the Appellate Division entered the order from which UBSRE appeals. A3. On April 17, 2013, Morpheus served UBSRE with a copy of that order with notice of entry. On May 16, 2013, UBSRE made a timely motion, pursuant to CPLR § 5602(b)(1), for permission to appeal to the Court of Appeals. On August 13, 2013, the Appellate Division granted UBSRE’s motion. A2. NEWYORK 8993010 v2 8 The questions raised for this Court’s review were preserved in the Appellate Division (see UBSRE’s Brief at pages 30-37) and in Supreme Court (see A76-82, 94-95, 105-07). STATEMENT OF FACTS A. UBSRE And Morpheus Enter Into The Agreement Morpheus is an investment bank. On September 19, 2008, UBSRE and Morpheus entered into an agreement (the “Agreement”) pursuant to which UBSRE engaged Morpheus “as its financial advisor and investment banker in the proposed sale of certain of [UBSRE’s] student loan warehouse loan facilities (the ‘Transaction’).” A60. These included the Student Loan Assets, which had a value estimated at $510 million. Id. 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,” which would expire on December 31, 2008. A60, 62. The Agreement obligated UBSRE to pay Morpheus a retainer of $150,000 and a monthly fee of $50,000, and to reimburse Morpheus’s expenses. A61. (It is undisputed that UBSRE paid these amounts, and made reimbursement, to Morpheus.) The Agreement also obligated UBSRE to pay Morpheus a “Success Fee” in limited circumstances. Thus, as relevant here, the Agreement provided that “MCA NEWYORK 8993010 v2 9 [Morpheus] shall receive a Success Fee payable upon the closing of the Transaction . . . .” A61. “Transaction,” in turn, was defined as “the proposed sale of [the Student Loan Assets].” A60. B. The Worldwide Financial Crisis In 2008 “Like many other financial services companies, at the beginning of 2008, UBS AG owned many billions of dollars in assets whose value declined daily, thereby impairing UBS AG’s capital base.” A51 (Complaint ¶ 10). UBS AG was by no means alone in holding illiquid assets. Indeed, as the Complaint admits, a “financial crisis developed during 2008[.]” Id. (Complaint ¶ 10). In September and October 2008, the world experienced “a cataclysmic financial market crash . . . which . . . left a residual lack of liquidity in the banking system not only in the United States, but throughout the world.” Destiny USA Holdings, LLC v. Citigroup Global Mkts. Realty Corp., 24 Misc. 3d 1222(A), 2009 WL 2163483, at *16 (Sup. Ct. Onondaga Cnty. July 17, 2009), aff’d in part, modified in part, 69 A.D.3d 212 (4th Dep’t 2009). As one court recounted: In [September], Lehman Brothers had been forced into bankruptcy, Merrill Lynch was sold to Bank of America, Fannie Mae and Freddie Mac were seized and subsequently controlled by the Treasury Department, and AIG received a bailout from the federal government. At the end of September 2008, Washington Mutual’s bank subsidiary was put into FDIC receivership and involuntarily sold to J.P. Morgan Chase. NEWYORK 8993010 v2 10 There is no dispute that the nation was confronted by an alarming banking crisis. Wachovia Corp. v. Citigroup, Inc., 634 F. Supp. 2d 445, 456 (S.D.N.Y. 2009). Elsewhere, Germany and France committed $1.37 trillion to bailout their banks. A109. Great Britain launched a multi-billion pound rescue program to “restore confidence and trust in the financial system and, more than that, to put the British banking system on a sounder footing.” A111. Japan approved a $277 billion stimulus plan, announcing, “The world is on the verge of a once-in-a-century recession. Abnormal economic circumstances demand exceptional responses.” A113. South Korea provided its banks with a $130 billion bailout. A117-18. C. The Swiss National Bank Takes Action On October 16, 2008, Switzerland’s central bank, the SNB, announced its own measures “to strengthen the Swiss financial system.” A119. The SNB stated that “[t]he major Swiss banks UBS and [Credit Suisse] Group” would in turn “announc[e] measures to strengthen their capital base.” Id. The SNB continued: The step taken by the SNB is part of measures of the Swiss Federal Government to strengthen the Swiss financial system. It is based on the SNB’s statutory mandate to contribute to the stability of the financial system. The SNB is convinced that it will result in a sustainable reduction of strains in the Swiss financial system. The stabilization thus reached will be favorable for the development of the Swiss economy as a whole and is in the interest of the country. NEWYORK 8993010 v2 11 Id. As part of the stabilization effort, the SNB stated that it would “finance[ ]” the “transfer [of] illiquid assets [of UBS] to a special purpose vehicle,” which the SNB would “control.” Id. “UBS can thus be relieved from all relevant remaining risks stemming from problem-ridden segments of credit markets.” Id. UBS AG, in turn, announced that it had “reached an agreement to transfer up to USD 60 billion of currently illiquid securities and other assets from UBS’s balance sheet to a separate fund entity.” A121. UBS AG continued, “The transfer of . . . assets will take place over the coming months, during fourth quarter 2008 or first quarter 2009 . . . .” A122. D. UBS Transfers Assets To The Stabilization Fund In November, 2008, the SNB established the Stabilization Fund. A134. UBS ultimately made three transfers to the Stabilization Fund, which totaled $38.7 billion (not the $60 billion announced in October 2008). A54 (Complaint ¶¶ 21- 22); A126-28 (Scolaro Aff. ¶¶ 3-8). E. Morpheus Commences This Action Meanwhile, UBSRE paid Morpheus the retainer and the monthly fee. On December 31, 2008, the Agreement expired by its own terms. A53. Morpheus later demanded a Success Fee, in the amount of $2,887,500, for the transfers to the Stabilization Fund. UBSRE refused to pay because those transfers did not trigger NEWYORK 8993010 v2 12 Morpheus’s right to a Success Fee under the terms of the Agreement. Morpheus then commenced this breach of contract action against UBSRE, seeking payment of a Success Fee (and other relief not relevant to this appeal).1 F. The Proceedings Below 1. The Proceedings In Supreme Court UBSRE moved to dismiss the Complaint, pursuant to CPLR Rule 3211(a)(1) and (a)(7), making two alternative arguments: First, the SNB’s intervention, creating the Stabilization Fund as part of the bailout of October 2008, frustrated the purpose of the Agreement, thereby dissolving the Agreement, and excusing any duty to pay a Success Fee. Second, if the Agreement was not dissolved, it was not breached; under the terms of the Agreement, Morpheus was not entitled to a Success Fee for the transfers to the Stabilization Fund. Supreme Court granted UBSRE’s motion, holding that the SNB’s intervention frustrated the purpose of the Agreement. A37-43. Given that disposition, Supreme Court did not reach the alternative argument that UBSRE did not breach the Agreement. 1 Morpheus also asserted a cause of action for breach of contract against UBS AG, on a theory of piercing the corporate veil. Supreme Court dismissed this cause of action, and the Appellate Division affirmed that dismissal without prejudice. A15-17. Those rulings are not at issue on this appeal. NEWYORK 8993010 v2 13 2. The Proceedings In The Appellate Division Morpheus appealed to the Appellate Division, First Department, which reversed the dismissal as against UBSRE. The Appellate Division first held that UBSRE had “fail[ed] to establish [the] frustration of purpose defense as a matter of law.” A8. That holding is not at issue on this appeal. The Appellate Division next held -- unanimously and correctly -- that the Agreement gave Morpheus an “exclusive agency,” not an “exclusive right to sell” the Student Loan Assets. A9-10. The Appellate Division also held -- unanimously and correctly -- that UBSRE sold assets to the Stabilization Fund without using any broker.2 The Appellate Division, however, divided three Justices to one on the question whether the cause of action for breach of contract, seeking payment of a Success Fee, should be dismissed. Justice Tom, in a dissenting opinion (the “Dissent”), would have affirmed the dismissal of the Complaint. “Under an exclusive agency contract, no liability to pay a commission is incurred where the property is transferred to a purchaser located by the client [the owner], without the participation of either the contracting broker or any other[.]” A19. Here, UBSRE sold assets to the Stabilization Fund, a 2 Morpheus contended that the SNB introduced UBS AG to the Stabilization Fund, thereby seeking to cast the SNB in the role of a broker. The Appellate Division, however, unanimously and correctly rejected that contention. The dissent explicitly rejected it, A24-26, 29-30, and the majority implicitly rejected it, stating, “We have considered the parties’ remaining arguments and find them unavailing.” A17. NEWYORK 8993010 v2 14 purchaser located by UBS AG and UBSRE without the participation of any broker. Therefore, under the law of exclusive agency, UBSRE can have no liability to Morpheus. The majority, with then-Justice Román writing for the Court (the “Majority”), agreed with the Dissent that “generally under an exclusive agency agreement no liability to pay commissions arises absent the participation of the party to whom the exclusive agency is granted.” A9. The Majority nevertheless sustained the cause of action for breach of contract. “[S]ince 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.” A11. The Appellate Division later granted UBSRE’s motion for permission to appeal to this Court, certifying the following question for review: “Was the order of this Court [the Appellate Division], which modified the order of the Supreme Court, properly made?” A2. ARGUMENT MORPHEUS HAS NO CAUSE OF ACTION FOR A SUCCESS FEE A. Exclusive Brokerage Contracts -- The Applicable Law The law -- set forth in a long line of Appellate Division cases -- recognizes two types of exclusive brokerage contracts. Thus, an exclusive brokerage contract NEWYORK 8993010 v2 15 can give the broker an “exclusive right to sell.” Under such a contract, the broker is entitled to a commission upon the sale of the property, even a sale made by the owner of the property without the use of any broker. Or, an exclusive brokerage contract can give the broker an “exclusive agency.” Under such a contract, the owner of the property may sell the property, without liability to the broker for a commission, as long as the owner does not use any broker when arranging the sale. The first appellate case to state the law in these now familiar, modern terms appears to be Slattery v. Cothran, 210 A.D. 581 (4th Dep’t 1924): The general rule is that where an exclusive right of sale is given a broker, the principal cannot make a sale himself without becoming liable for the commissions. . . . But where the contract is merely to make the broker the sole agent, the principal may make a sale himself without the broker’s aid, if such sale is made in good faith and to some purchaser not procured by the broker. Id. at 583 (citations omitted). Since 1924, a long and unbroken line of Appellate Division cases states and applies these rules.3 Perhaps the clearest statement 3 See, e.g., Gaillard Realty Co. v. Rogers Wire Works, Inc., 215 A.D. 326, 332-33 (1st Dep’t 1926); Werner v. Eurich, 263 A.D. 744, 744 (2d Dep’t 1941); Levy v. Isaacs, 285 A.D. 1170, 1170-71 (2d Dep’t 1955); Barnet v. Cannizzaro, 3 A.D.2d 745, 746 (2d Dep’t 1957); Ackman v. Toren, Inc., 6 A.D.2d 427 (1st Dep’t 1958), aff’d, 6 N.Y.2d 720 (1959); Hammond, Kennedy & Co. v. Servinational, Inc., 48 A.D.2d 394, 397 (1st Dep’t 1975); Solid Waste Inst., Inc. v. Sanitary Disposal, Inc., 120 A.D.2d 915, 916 (3d Dep’t 1986); Audrey Balog Realty Corp. v. E. Coast Real Estate Dev., Inc. 202 A.D.2d 529, 530 (2d Dep’t 1994); Harvard Assocs., Ltd. v. Hayt, Hayt & Landau, 264 A.D.2d 814, 815 (2d Dep’t 1999); Carnes Commc’ns, Inc. v. Russo, 305 A.D.2d 332, 332 (1st Dep’t 2003); Far Realty Assocs. Inc. v. RKO Del. Corp., 34 A.D.3d 261, 262 (1st Dep’t 2006). NEWYORK 8993010 v2 16 comes in Hammond, Kennedy & Co. v. Servinational, Inc., 48 A.D.2d 394 (1st Dep’t 1975): The issue is whether the agreement granted plaintiff [broker] an exclusive agency or an exclusive right to sell. If it was an exclusive agency, defendant [owner] could not employ another broker, but would not be precluded from itself making the sale without becoming liable to plaintiff for a commission. On the other hand, if the agreement were considered an exclusive right to sell, then plaintiff would be entitled to a commission even if the defendant alone were responsible for the sale. Id. at 397 (Stevens, P.J.). See also Solid Waste Inst., Inc. v. Sanitary Disposal, Inc., 120 A.D. 915, 916 (3d Dep’t 1986) (“[A] contract giving a broker the exclusive right to sell, in contrast to an exclusive agency (which merely excludes the employment of another broker by the owner making a sale), establishes the right to a commission even upon sale by the owner[.]”); Far Realty Assoc., Inc. v. RKO Del. Corp., 34 A.D.3d 261, 262 (1st Dep’t 2006) (“A broker is entitled to a commission upon the sale of the property by the owner only where the broker has been given the exclusive right to sell; an exclusive agency merely precludes the owner from retaining another broker in the making of the sale[.]”).4 4 This Court established some basic propositions in two early cases. In Moses v. Bierling, 31 N.Y. 462 (1865), the contract gave the plaintiff the right to sell the defendants’ “Prussian muskets” and to do so “to the exclusion of all other brokers.” Id. at 462. Thus, the contract gave the plaintiff an exclusive agency. The Court held the defendants liable for commissions where the defendants sold the muskets “through the agency of another broker.” Id. In McClave v. Paine, 49 N.Y. 561 (1872), the defendant employed a broker to sell the defendant’s real estate. The defendant then found a buyer on his own and sold the property to that buyer without using any broker. The Court affirmed a judgment in favor of the defendant, NEWYORK 8993010 v2 17 B. Under The Applicable Law, Morpheus Is Not Entitled To A Success Fee And The Complaint Should Be Dismissed In this case, the Appellate Division held -- unanimously and correctly -- that the Agreement gave Morpheus an “exclusive agency,” not an “exclusive right to sell” the Student Loan Assets. It follows that UBSRE had the right to sell Student Loan Assets, without liability to Morpheus for a Success Fee, as long as UBSRE did not use any broker when arranging the sale. The Appellate Division also held -- unanimously and correctly -- that UBSRE did not use any broker when arranging the sale to the Stabilization Fund. It follows that Morpheus is not entitled to a Success Fee and that the Complaint should be dismissed. C. The Appellate Division Erred When It Sustained The Complaint The Appellate Division failed to apply the legal principles set forth above. The Appellate Division held that the Agreement gave Morpheus an exclusive agency, rather than an exclusive right to sell. The court nevertheless held that the Complaint states a cause of action for breach of the Agreement. For the following reasons, that holding was erroneous. stating: “A party having employed a broker to sell real estate, may, notwithstanding, negotiate a sale himself; and if he does so without any agency of the broker, is not liable to him for commission.” 49 N.Y. at 561. After McClave, however, it has been the Departments of the Appellate Division that have established the now-longstanding dichotomy between an exclusive right to sell and an exclusive agency. The only Court of Appeals case touching this issue was Ackman v. Toren, Inc., 6 N.Y.2d 720 (1959), where this Court, without opinion, affirmed a decision of the First Department. 6 A.D.2d 427 (1st Dep’t 1958). NEWYORK 8993010 v2 18 1. The Appellate Division Imposed A Duty To Wait Before Selling The Appellate Division held: A review of the agreement establishes that while plaintiff was only granted an exclusive agency, the agreement nevertheless gave plaintiff “the exclusive right to solicit counterparties for any potential Transaction involving the Student Loan Assets during the term of this Agreement.” Read broadly, the allegations in the complaint . . . state a cause of action for breach of contract. Specifically, the complaint alleges “[t]he Agreement provided Morpheus with the exclusive right to solicit counterparties’ for any potential transaction,” and premises the breach of contract claim on, inter alia, UBSRE’s failure to give plaintiff the right to solicit counterparties before transferring its assets to the Fund . . . . 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. A10-11. This holding -- “requir[ing] UBSRE to give [Morpheus] the opportunity to solicit a counterparty prior to transferring its assets into the Fund” -- effectively imposed on UBSRE a duty to wait before selling Student Loan Assets to the Stabilization Fund. Notwithstanding the Appellate Division’s unanimous holdings that the Agreement created an exclusive agency, and that UBSRE sold its assets without using any broker, UBSRE can have liability to Morpheus where, as alleged NEWYORK 8993010 v2 19 here, UBSRE sold before Morpheus had “the opportunity” to find a buyer. This holding was erroneous. 2. The Imposition Of A Duty To Wait Was Erroneous The Appellate Division’s holding cannot be squared with Wylie v. Marine Nat’l Bank, 61 N.Y. 415 (1875). In that case, a bank sought to sell a building for $80,000, and engaged the plaintiff as a broker. The plaintiff found a buyer, who offered $75,000 for the building, but the bank rejected that offer. The buyer thereafter contacted the bank through the buyer’s own intermediary, offering $80,000, which the bank accepted. The plaintiff sued for a commission. The lower courts rejected the plaintiff’s claim and this Court affirmed, holding: [T]he bank violated none of [the plaintiff’s] rights by selling to the first party who would offer their [the bank’s] price; and it matters not that they sold to the very party with whom plaintiff had been negotiating. He failed to find or produce a purchaser upon the terms prescribed in his employment, and the bank was under no obligation to wait any longer, that he might make further efforts. Id. at 419. So, too, in this case, UBSRE “violated none of [Morpheus’] rights by selling to the first party who would offer [UBSRE’s] price[.]” Id. Morpheus failed to find or produce a purchaser, and UBSRE “was under no obligation to wait any longer, that [Morpheus] might make further efforts.” Id. UBSRE simply had no duty to NEWYORK 8993010 v2 20 wait, or to give Morpheus -- in the words of the Appellate Division in this case -- “the opportunity” to find a different buyer. This Court should reverse in light of Wylie.5 Put differently, an exclusive agency agreement establishes a competition between the owner and the broker.6 The reason for this competition is clear. The owner has agreed to protect the broker from competition by additional brokers who might find a buyer for the property at issue. In these circumstances, “the only stimulus available to the principal [the owner] to quicken the diligence of the exclusive agent [is] the possibility that the principal himself might find the buyer first.” McPike v. Siver, 168 Iowa 149, 152, 150 N.W. 52, 53 (1914). 5 Wylie involved a non-exclusive agency, rather than an exclusive agency. This difference, however, does not diminish Wylie’s precedential force here. Under an exclusive agency, the owner enjoys the right to sell on his or her own, without using any broker. Under a non- exclusive agency, the owner enjoys that same right -- to sell on his or her own, without using any broker -- plus the right to sell using a broker other than the plaintiff-broker. See, e.g., Sussdorff v. Schmidt, 55 N.Y. 319, 321-22 (1873); Myers v. Batcheller, 177 A.D. 47, 50-51 (3d Dep’t 1917). Wylie analyzes the owner’s right to sell on his or her own without using any broker. That right is the same, whether the agency is exclusive or non-exclusive. Thus, Wylie applies with full force where, as here, the owner (UBSRE) exercised its right to sell without using any broker. 6 See, e.g., Navy Gas & Supply Co. v. Schoech, 105 Colo. 374, 378, 98 P.2d 860, 861 (1940); Kennedy v. Hart, 187 Okla. 169, 171, 101 P.2d 808, 810 (1940); Wood v. Hutchinson Coal Co., 85 F. Supp. 1010, 1015-16 (N.D. W. Va.) (West Virginia law), aff’d, 176 F.2d 682, 684-86 (4th Cir. 1949); Louis Schlesinger Co. v. Rice, 4 N.J. 169, 177-78, 72 A.2d 197, 201 (1950); Conway v. Matthews, 37 Ala. App. 513, 515, 70 So. 2d 827, 829 (1954); Ballard v. Tingue Mills, Inc., 128 F. Supp. 683, 689 (D. Conn. 1954); Schwob v. Int’l Water Corp., 136 F. Supp. 310, 312 (D. Del. 1955); Peeler Ins. & Realty, Inc. v. Harmon, 20 N.C. App. 39, 41-42, 200 S.E.2d 443, 444- 45 (1973); IFA Inc. v. Ellco Leasing Corp., 1993 U.S. Dist. LEXIS 4376 *44-46, *57-58 (N.D. Ill. March 31, 1993) (Illinois law); Kraft v. Toxikon Corp., 1998 WL 1284187 *2 (Mass. Super. April 17, 1998); Dubuc, Lucke & Co. v. DiFlora, 1999 Ohio App. LEXIS 3736 *18-22 (Aug. 4, 1999). NEWYORK 8993010 v2 21 A duty to wait is inconsistent with the fundamental premise of competition between owner and broker. The law, having established a competition, rewards and protects the winner of the competition. And -- assuming a level playing field; that is, assuming no fraud or bad faith by either competitor -- the law declares the winner by applying a first-in-time rule, as follows: If, on the one hand, the broker procures a buyer who is ready, willing and able to purchase at the terms set by the owner, then the broker has won the competition. At that point, the law rewards and protects the broker. The broker has earned a commission, for which the owner is liable. See, e.g., Rusciano Realty Servs., Ltd. v. Griffler, 62 N.Y.2d 696, 697 (1984); Hecht v. Meller, 23 N.Y.2d 301, 305 (1968). The law does not require the victorious broker to give the owner “the opportunity” -- or more accurately, a further opportunity -- to win the competition by finding a buyer without using any broker, to whom the owner can sell without liability for a commission. See, e.g., Westhill Exports, Ltd. v. Pope, 12 N.Y.2d 491, 497-97 (1963); Prime City Real Estate Co. v. Hardy, 256 A.D.2d 80, 81 (1st Dep’t 1998). If, on the other hand, the owner finds a buyer without using any broker -- and does so before the broker has procured a buyer -- then the owner has won the competition. At that point, the law rewards and protects the owner by allowing him or her to sell without liability for a commission. The law does not require the NEWYORK 8993010 v2 22 victorious owner to wait, so as to give the broker “the opportunity” -- or more accurately, a further opportunity -- to win the competition by finding a buyer. See, e.g., Wylie, 61 N.Y. at 419; Sibbald v. Bethlehem Iron Co., 83 N.Y. 378, 383 (1881) (“[T]he principal violates no right of the broker by selling to the first party who offers the price asked[.]. . . The failure [to find a buyer] and its consequences were the risk of the broker only.”); Ettinghoff v. Horowitz, 115 A.D. 571, 571-72 (2d Dep’t 1906) (“[A] broker must produce his customer while the premises are in the market; . . . the owner does not contract to hold them for the customer to be produced by the broker, but . . . acting in good faith, he may sell the premises at any time and to any customer who is willing to buy upon his terms . . . .”); Siegel v. Rosenzweig, 129 A.D. 547, 549 (2d Dep’t 1908) (“[N]o one will assert that the broker has a right of action against the owner for selling to the first party who offers the price asked . . . even though the broker has not been accorded what might be deemed a reasonable time in which to find a purchaser.”). 7 The Appellate Division’s holding cannot be reconciled with the foregoing cases. As one sister-state court summarized, in language applicable here: 7 A leading national treatise states the first-in-time rule as follows: “Under the exclusive agency agreement, listing real property for sale does not permit an owner to list the property with other brokers during the contractual term, but it does not preclude the owner from selling to a buyer procured by the owner unless the broker has procured a purchaser able and willing to buy prior to that time.” 23 Richard A. Lord, Williston on Contracts § 62:20, at 392 (4th ed. 2002) (emphasis added). A New York treatise is similar: “New York is in accordance with the general rule that where an exclusive agency is given to the broker, the owner may still sell the property without liability to the broker unless the broker has procured a purchaser able and willing to buy prior to such time.” 11 N.Y. Jur. 2d, Brokers § 169, at 594 (2006) (emphasis added). NEWYORK 8993010 v2 23 Of course it may be said that any time a principal makes a sale himself, he thus deprives his agent of the opportunity of thereafter making a sale of the same property, but this he has a perfect right to do without subjecting himself to any liability for the payment of a commission. By merely listing his property for sale with a real estate agent or broker, the owner thereof does not thereby agree that he will not compete with the agent in making a sale of the property himself and generally, he may sell it without the assistance of the broker and without becoming liable to him for a commission, unless the broker has procured a purchaser who is ready, willing and able to buy it. Kennedy v. Hart, 187 Okla. 169, 171, 101 P.2d 808, 810 (1940).8 Applying these principles, the Court should reverse the Appellate Division in this case and should dismiss the Complaint because UBSRE arranged a sale, without the use of any broker, before Morpheus procured any purchaser. On September 19, 2008, the parties entered into the Agreement, which gave Morpheus an exclusive agency to find a buyer for the Student Loan Assets. A52-53. On October 16, 2008, the SNB and UBS AG announced the transaction that -- 8 Sister states also apply a first-in-time rule. See, e.g., McPike, 168 Iowa at 152, 150 N.W. at 52-53 (owner not liable for commission where owner found buyer first; “the agent takes his chances on the owner himself making a sale.”); Kennedy, 187 Okla. at 172, 101 P.2d at 811 (owner not liable for commission because owner “had procured a buyer of his own . . . before the plaintiff [broker] had ever procured such a purchaser” (emphasis added)); Conway, 37 Ala. App. at 515, 70 So. 2d at 828-29 (“Even where an exclusive agency is given a broker, the owner may still sell the property without liability for commission unless the broker has procured a purchaser ready and able to buy. . . . [Owner] had every right to sell to the party who had made the equal offer to [owner] prior to the communication by the [broker] of the offer [that the broker] had procured.” (emphasis added)); Foltz v. Begnoche, 222 Kan. 383, 385-86, 565 P.2d 592, 595 (1977) (“An ‘exclusive agency’ agreement . . . does not permit an owner to list his property with other brokers . . . but this does not prevent the owner from selling to a buyer procured on his own, unless the broker has procured a purchaser able and willing to buy prior to such time.” (emphasis added)). NEWYORK 8993010 v2 24 according to Morpheus -- amounted to the sale of the Student Loan Assets. A53- 54. That transaction did not involve any broker. Between September 19 and October 16, Morpheus did not procure a buyer who was ready, willing and able to purchase the Student Loan Assets. Accordingly, on October 16, UBSRE was free to sell without liability to Morpheus. UBSRE had no duty to wait, so as to allow Morpheus the “opportunity” -- or more accurately, a further “opportunity” -- to find a buyer. The 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. In this case, however, the Agreement contains no additional terms that might alter the rights that flow as a matter of law from an exclusive agency. The Agreement provides only 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. That is the very language that gives Morpheus an exclusive agency. That language cannot do double duty; it cannot give Morpheus an exclusive agency (under which, as a matter of law, UBSRE enjoyed the right to sell its own property without using any broker) plus a right that postpones or precludes the exercise of UBSRE’s right to sell (as under an exclusive right to sell). NEWYORK 8993010 v2 25 3. A Duty To Wait Would Complicate And Unsettle The Law, Thereby Affecting A Multiplicity Of Commercial Transactions a. A Duty To Wait Would Complicate And Unsettle The Law The applicable law, as shown above, establishes simple, bright-line rules. New York courts recognize that an exclusive brokerage contract presents a binary choice between an exclusive right to sell or an exclusive agency. If the contract creates an exclusive right to sell, then the owner has liability to the broker for a commission, even on a sale arranged by the owner without using any broker. If, on the other hand, the contract creates an exclusive agency, then the owner has no such liability where the owner arranges the sale without using any broker. These rules, urged by the Dissent in the Appellate Division, and supported by 140 years of case law, have the virtues of clarity, simplicity and stability -- important virtues in rules that govern commercial transactions. These rules have also avoided the need for fact-intensive, case-by-case adjudication. The decision of the Appellate Division, by contrast, complicates and unsettles this otherwise clear and simple area of law. The Appellate Division created a hybrid previously unknown to New York law -- a contract for an exclusive agency under which the owner who sells its property without using any broker can nevertheless have liability for a commission (as under an exclusive right to sell). If the Appellate Division is correct, New York law now imposes on a property owner who enters into an exclusive agency agreement a duty to wait some NEWYORK 8993010 v2 26 unspecified amount of time before selling his or her own property, so as to give the broker the “opportunity” to find a buyer, who, though still unidentified and hypothetical, would have some sort of “preemptive right to acquire the . . . assets ahead of the purchaser located by [the owner].” A32 (quoting Appellate Division Dissent). As the Dissent in the Appellate Division recognized, this creates a new right “akin” to a right of first refusal “in favor of a counterparty [a buyer] yet to be located by [the broker].” Id. No exclusive-agency case, however, has ever given a broker this kind of “power to control and restrict the other party’s right to sell to a third party.” A13 (internal quotation marks and citation omitted). No prior case has ever seen the need, or provided any reason, to complicate the law of exclusive agency by engrafting upon it the law of rights of first refusal. The Appellate Division’s response to the Dissent on this issue actually provides further reason for reversal. The Appellate Division stated, “Hence, if the parties have bargained for notification of an impending sale to the party who holds the right of first refusal, the failure to provide such notice, as is alleged here, constitutes sufficient grounds for a breach of contract claim.” Id. (emphasis added). The Agreement, however, says nothing about a right of first refusal or any such “notice” from UBSRE to Morpheus. The Complaint does not allege a failure NEWYORK 8993010 v2 27 to give “notice,” nor could it. Morpheus knew all about the Swiss government bailout, which both the SNB and UBS AG publicly announced. See A119. The Appellate Division’s new “duty to wait,” furthermore, raises obvious questions: How long must the owner wait? How much time does the broker get to find this hypothetical buyer? See A32-33 (Appellate Division Dissent) (“The obvious difficulty that arises in connection with a right of first refusal bestowed in futuro is the amount of time to be allotted to the broker to locate a suitable counterparty . . . .”). Perhaps the answer to this question is that the owner must wait the entire length of the contractually-specified exclusivity period. If so, then the Appellate Division has obliterated the historic difference between an exclusive agency and an exclusive right to sell. The broker would be entitled to a commission on a sale made by the owner at any time during the life of the contract -- an arrangement indistinguishable from an exclusive right to sell. Perhaps, on the other hand, the answer to this question is that the owner must wait “a reasonable time.” If so, then questions of fact will complicate nearly every case, making it impossible to dispose of cases on motions to dismiss, and adding to already overwhelmed judicial caseloads and already robust litigation costs for parties and witnesses. NEWYORK 8993010 v2 28 b. A Duty To Wait Will Affect A Multiplicity Of Commercial Transactions These changes and complications, described above, will alter the balance between property owners and brokers. The Appellate Division expanded the right of a broker to claim, and the corresponding duty of a property owner to pay, a commission. The Appellate Division decision will thereby affect the timing and terms of innumerable commercial transactions in myriad fields around the State. For example, the Appellate Division decision in this case will affect homeowners, who routinely engage real estate brokers when seeking to sell.9 It will also affect owners of businesses -- large, medium and mom-and-pop; a thriving industry exists for “business brokers,” who act in connection with the sale of ongoing businesses in a wide range of fields.10 9 According to the National Association of Realtors, some 88% of sellers nationwide were assisted by a real estate agent. See HIGHLIGHTS FROM THE 2012 PROFILE OF HOME BUYERS AND SELLERS, available at /www.realtor.org/ reports/ highlights-from-the-2012-profile-of-home- buyers-and-sellers. According to the New York State Association of Realtors, residential real estate was a $20 billion industry in New York in 2012. See ANNUAL REPORT ON THE NEW YORK REAL ESTATE MARKET 2012, at 3-4, available at www.nysar.com/docs/memberspdfs/ nysar_ann_2012_ public-version_revised.pdf?sfvrsn=0 (93,582 closed sales at a median sales price of $215,000). Statistics from the U. S. Census Bureau peg it even higher. See U.S. CENSUS BUREAU, STATISTICAL ABSTRACT OF THE UNITED STATES: 2012, CONSTRUCTION AND HOUSING, at 613-14 (Tables 977 & 979), available at www.census.gov/compendia/statab/2012/tables/12s0979.pdf; www.census.gov/compendia/statab/2012/tables/ 12s0977.pdf (242,000 sales in 2010 at a median sales price in the “Northeast” of $243,900). 10 See, e.g., Barbara Taylor, “In Defense of Business Brokers,” NEW YORK TIMES, Apr. 12, 2012, available at http://boss.blogs.nytimes.com/2012/04/12/in-defense-of-business-brokers/; National Aircraft Resale Association, www.nara-dealers.com (“We’re the premier organization of turbine aircraft brokers, dealers and support service providers.”); NEW YORK CITY TAXI AND LIMOUSINE COMMISSION 2012 ANNUAL REPORT, at 10, available at NEWYORK 8993010 v2 29 In short, the Appellate Division’s new, amorphous “duty to wait,” if allowed to stand, will have a high impact around this State. It will affect anyone in New York who uses a broker to sell property. c. The Court Should Reject These Changes And Complications The Court should reject the unnecessary legal and factual complications introduced by the Appellate Division here. New York law does not recognize the novel contract created by the Appellate Division. Rather, as held 140 years ago, an owner is free to sell on his or her own, without using any broker, to the first buyer who offers a price acceptable to the owner. See Wylie, 61 N.Y. at 419. This Court recently reminded, “Adherence to tradition is particularly apt in cases involving the legal effect of contractual relations. In fact, when contractual rights are at issue, where it can reasonably be assumed that settled rules are necessary and necessarily relied upon, stability and adherence to precedent are generally more important than a better or even a ‘correct’ rule of law.” White v. Farrell, 20 N.Y.3d 487, 500 (2013) (internal quotation marks and citations omitted). In this case, the Court should adhere to the traditional, bright-line rules -- urged by the Dissent in the Appellate Division -- which make a binary choice www.nyc.gov/html/tlc/downloads/pdf/annual_report_2012.pdf (New York City Taxi and Limousine Commission (“TLC”) “licenses and regulates . . . brokers that assist buyers and sellers of taxicab medallions[;]” TLC has issued 13,237 medallions; “the highest corporate medallion sale of $1,125,000 was recorded in September, 2012”); Westhill Exports, 12 N.Y.2d 491 (supply of newsprint); Hammond, 48 A.D.2d 394 (sale of a business); Solid Waste Inst., 120 A.D.2d 915 (sale of a business); Carnes Commc’ns, 305 A.D.2d 332 (placement of advertising). NEWYORK 8993010 v2 30 between an exclusive agency and an exclusive right to sell. Such adherence is especially appropriate where, as here, the traditional rules are the “better,” the “correct,” and the more workable rules. 4. A Duty To Wait Threatens To Impede Bank Regulation The Appellate Division decision has ominous public policy implications for bank regulation in this State, the largest and most important banking center in the country, and perhaps the world. Specifically, the decision threatens to delay and increase the costs of cooperation with regulators, thereby interfering with or diluting measures taken by regulators in the public interest. The banking industry is heavily regulated by both the state and federal governments, and by foreign-country governments. Regulators, acting in the public interest, wield extensive powers to assist financial institutions in managing their assets and to ensure that financial institutions have adequate capital and liquidity to meet the needs and demands of customers and counterparties. The law should encourage banks to cooperate with their regulators, especially in times of emergency. See Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 887 (10th Cir. 1985) (“[A]s a matter of policy, individuals and corporations who cooperate with local regulatory agencies and comply with the letter and spirit of legally proper regulations . . . are to be encouraged.”). NEWYORK 8993010 v2 31 Here, it is undisputed that UBS AG’s consolidated balance sheet was burdened with certain illiquid, “toxic” assets, at a time of emergency -- when financial institutions around the world were short of money and unable to find ready markets for their assets (such as the Student Loan Assets). The Swiss banking authorities therefore established a program that allowed UBS AG to transfer assets to a “special purpose vehicle,” owned and controlled by the banking authorities, at prices unattainable in the marketplace and paid entirely by the banking authorities.11 And the authorities announced their program publicly, so that market participants and the general public would know that Swiss institutions were sound and liquid. This was quintessential regulatory activity, well outside the realm of ordinary commercial affairs. As the Dissent in the Appellate Division observed, “[C]entral banks have [no] desire to see [toxic] assets come to market. Permitting 11 See A33-34 (Appellate Division Dissent) (“[T]here is simply no possibility that [Morpheus] could locate a prospective counterparty willing to acquire the assets on the terms offered by the SNB. . . . The whole point behind the acquisition of such ‘toxic assets’ by the SNB and other central banks was to avoid their depreciation to market levels by substituting an artificial valuation. What has escaped discussion is that neither UBSRE nor any other financial institution in possession of such poor quality investments would have been willing or able to dispose of them in the open market due to the devastating impact on their capital reserves, including the possibility that the reduction of the required capital would render the institution insolvent.”). According to SEC filings, the Stabilization Fund was established “as a Swiss limited partnership.” A132. It “is owned by a general partner and a limited partner, both of which are wholly owned by the SNB. The general partner has a board of directors with five members, of which three are designated by the SNB and two by UBS.” Id. The Stabilization Fund is therefore “owned and controlled by the SNB.” Id. The SNB loaned 90% of the purchase price and made an equity contribution for the other 10%. Id. NEWYORK 8993010 v2 32 the market to establish a highly discounted value for toxic assets held by major banks would have a highly negative effect on the amount of the banks’ required capital reserves, if not their very solvency, and this explains the need for central bank purchases of such assets. . . . [T]he reality is that the SNB, as the party providing 100% of the funds to effectuate the StabFund’s asset acquisition . . . is the effective purchaser[,] . . . [with the Stabilization Fund] as the central bank’s agent.” A31. Plainly, the SNB functioned “in its official capacity as a regulator charged with overseeing the financial health of the Swiss banking system.” A25- 26. The Appellate Division, however, would impose on a bank a “duty to wait” before transferring assets under a regulatory program, to give a broker time to find a buyer -- precisely when there is reason to doubt the very existence of a willing buyer with access to cash. That duty to wait, and the accompanying risk of money damages for failing to wait, create a Hobbesian choice: The bank can wait, even in times of emergency, explaining to the regulator that the bank must give a private broker the opportunity to find a buyer for the assets in question, even the most “toxic” assets. Or, the bank can promptly cooperate with the regulatory program -- and run the risk of a later judgment ordering the bank to pay money damages to the broker. NEWYORK 8993010 v2 33 This is not sound public policy. It threatens to stall a bank’s response to an emergency. And, the costs of cooperation with a regulator should not include money damages for breach of a private contract. Cf. L.N. Jackson & Co. v. Royal Norwegian Gov’t, 177 F.2d 694, 702 (2d Cir. 1949) (“person[s] co-operating with the war effort should not be held liable for civil damages because of their acts”). As the Dissent in the Appellate Division stated, “[I]t is naïve to attempt to apply a commercial brokerage agreement to regulatory action undertaken to ward off a threat to the financial stability of a sovereign nation’s banking system. . . . [The Complaint] provides no reason why a contract entered into in a commercial context for a commercial purpose should be applied to regulatory action undertaken by a central bank in its supervisory capacity.” A25-26. UBSRE and UBS AG promptly cooperated with the national regulator, the SNB, by transferring illiquid assets to the Stabilization Fund.12 If the Appellate 12 UBSRE need not demonstrate government compulsion, or even that UBS AG or UBSRE resisted a request from the SNB. See Mawhinney v. Millbrook Woolen Mills, Inc., 231 N.Y. 290, 300 (1921) (“The one who gave his service with alacrity under such [war] conditions should at least be considered with as much favor as he who held back until threatened or his property commandeered. The laggard who feared the financial results under his civilian contracts merits no encouragement.”); N. German Lloyd v. Guaranty Trust Co., 244 U.S. 12, 23-24 (1917) (defendant not liable for failure to deliver cargo where defendant “anticipated” government order to return to port). On the contrary, “the government possesses the ability to gain compliance through informal means.” NFL Enters. LLC v. Echostar Satellite L.L.C., 2008 WL 2157888 (Sup. Ct. N.Y. Cnty. Apr. 30, 2008) (“government intervention,” within meaning of force majeure clause, includes letters from Members of Congress that merely requested that NFL televise certain football game, allegedly in breach of NFL’s contract with the defendant). NEWYORK 8993010 v2 34 Division in this case is correct, then that cooperation may now have a price tag -- money damages for a Success Fee. The next bank, in the next emergency, may wait or think twice before cooperating, thereby delaying, diluting or interfering with the regulatory program. This Court should reverse because the decision of the Appellate Division threatens to impede bank regulation. 5. Considerations Of International Comity Support Reversal In this particular case, the bank regulatory and policy concerns, outlined above, also raise considerations of international comity. “The doctrine of comity refers to the spirit of cooperation in which a domestic tribunal approaches the resolution of cases touching the laws and interests of other sovereign states.” Morgenthau v. Avion Res. Ltd., 11 N.Y.3d 383, 389 (2008) (internal quotation marks and citation omitted). This case certainly touches the laws and interests of another sovereign state. Here, the SNB -- the central bank of Switzerland -- created the Stabilization Fund. The SNB did so, according to its own pronouncement, pursuant to its Swiss “statutory mandate to contribute to the stability of the financial system,” A119, seeking “stabilization . . . in the interest of the country.” Id. UBSRE and UBS AG cooperated with the SNB by transferring illiquid assets to the Stabilization Fund. NEWYORK 8993010 v2 35 The requisite spirit of cooperation, and respect for a friendly foreign sovereign, suggest that the State of New York, acting through its courts, should hesitate to impose money damages on account of such transfers. As the Dissent in the Appellate Division put it, “[T]here is no conceivable way that the parties’ brokerage contract can be stretched to cover the transaction arranged by the Swiss central bank (in common parlance, a ‘bailout’).” A34. The Appellate Division, however, did precisely that, potentially allowing Morpheus to profit from the Swiss government bailout of Swiss banks in Switzerland. To quote the Dissent again, “[T]his [is a] desperate attempt by MCA [Morpheus] to insinuate itself into the financial rescue of UBS AG by the SNB, entirely at the central bank’s expense, to seek payment of a success fee the broker could not possibly hope to have earned.” Id. CONCLUSION For the foregoing reasons, the order of the Appellate Division should be reversed, the Complaint should be dismissed and the certified question should be answered in the negative. Dated: October 11, 2013 New York, New York NBWYORK 8993010 v2 Of Counsel: Kenneth A. Caruso Patrick M. Wilson Jeffrey I. Wasserman 36 Respectfully submitted, WHITE & CASE LLP By~· ~~=------------- Kenneth A. Caruso 1155 Avenue of the Americas New York, NY 10036-2787 (212) 819-8200 HERRICK, FEINSTEIN LLP 2 Park A venue New York, NY 10016 (212) 592-1400 Attorneys for Defendant- Appellant UBSRE