In Credit Suisse First Boston v. Utrecht-America Fin. Co., 914 N.Y.S.2d 600 (N.Y. Co. 2010), a New York trial court rejected the argument of investment bank Utrecht-America Finance Co. (“Utrecht-America”) that its liability for terminating an agreement to sell distressed debt should be limited to the difference between the contract price and market value of the debt on the date of termination. In so doing, the court declined to apply the general rule that damages are determined “by the loss sustained or gain prevented at the time and place of the breach,” without regard to events subsequent to the breach. The court concluded that determining the proper measure of damages in the emerging legal area of distressed debt required a more comprehensive understanding, to be developed at trial, of the type of transaction at issue.

Agreement to Purchase Distressed Debt  

The dispute between plaintiff Credit Suisse First Boston (“Credit Suisse”) and defendant Utrecht-America, a Delaware subsidiary of Dutch investment bank Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A., also a defendant, arose from an alleged breach of an agreement to sell distressed debt. According to the complaint, on October 28, 2003, the parties entered into an oral agreement pursuant to which Utrecht-America agreed to sell to Credit Suisse a portion of the $45 million interest it held in a $485 million syndicated loan to Choctaw Investors, B.V. (“Choctaw”), which had been a financing vehicle for Enron Corporation.  

As is customary in the distressed debt market, the deal structured payment as a percentage of the face value of the claim. Under the terms of that agreement, which was memorialized in a November 5, 2003 confirmation, Credit Suisse was to purchase $15 million of the face amount of Utrecht-America’s claim against Choctaw for 62.5% of its face value. By January 13, 2004, just a few months after reaching this agreement, the market value of the Choctaw debt had risen to 75% of its face value, at which time Utrecht-America notified Credit Suisse that it planned to terminate their agreement. Utrecht-America memorialized its termination by a written confirmation the next day. The market value of the Choctaw debt continued to rise and, on February 24, 2004—over a month after Utrecht-America terminated—Credit Suisse purchased a comparable amount of Choctaw debt from a third party but was forced to pay a higher price than the amount it had agreed to pay Utrecht-America. Credit Suisse brought suit for breach of contract.  

Questioning the Measure of Damages

In their motion for partial summary judgment, defendants sought an order limiting Credit Suisse’s damages to the difference between the agreed-upon purchase price and the price Credit Suisse paid to the third-party in February. Credit Suisse opposed defendants’ motion, arguing that it was premature to determine the measure of damages prior to trial because New York courts apply different measures of damages to different situations and, to properly determine the measure of damages, the court required a more complete factual record.

Defendants argued that New York law assesses damages at the time and place of the breach and that Credit Suisse had failed to demonstrate that some other measure of damages should apply. The court disagreed.  

As a preliminary matter, the court acknowledged the general rule that damages are measured as of the time and place of the breach without regard to “fluctuations in value that occur subsequent to the breach.” More specifically, as a general matter, “[w]here the breach involves the failure to deliver an asset, damages are determined by the difference between the contract price for the asset and the fair market value of the asset at the time of the breach.” Nevertheless, the court agreed with Credit Suisse’s position that the appropriate measure of damages depends on the circumstances of the particular case, and the full circumstances of the case had not yet been fully presented.

The court analyzed other potential measures of damages that might apply. The court observed that, as one possible exception to the general rule discussed above, a non-breaching party can recover lost profits that might have been realized after the date of the breach, provided that parties had contemplated such a measure of damages at the time they entered into the contract and provided that the lost profits claimed can be accurately measured. Additionally, the court referenced Article 2 of the Uniform Commercial Code (“U.C.C.”), which provides for cover damages as a remedy where the breached contract is for the sale of goods. Under N.Y. U.C.C. Section 2-712, a buyer may, in good faith and without unreasonable delay, repurchase goods in substitution of those promised for sale under the contract and later recover from the seller the difference between the cost of the cover and the contract price. Despite acknowledging that Article 2 explicitly excludes “investment securities” from the definition of “goods,” the court noted that New York courts have applied the U.C.C. to security transactions by analogy and cited several examples of the same. In one such case, G.A. Thomson & Co., Inc. v. Wendell J. Miller Mortg. Co., Inc., 457 F. Supp. 996, 999 (S.D.N.Y. 1998), a federal court applying New York law awarded plaintiff cover damages where defendant failed to deliver securities under a contract and forced the plaintiff to purchase the same securities from another source.  

Unresolved Factual Concerns

The court observed that the overall approach to damages under New York law is to restore the non-breaching party to the position it would have been in but for the breach of contract. In this case, the court was unable to determine without a more complete record to be developed at trial if this goal could be accomplished under the customary measure of damages. Specifically, the structure and liquidity of the market for Choctaw debt and Credit Suisse’s involvement in that market, as well as the nature of the debt itself, remained unclear to the court at the summary judgment stage.

In particular, the court focused on the open question of whether the Choctaw debt might qualify as an investment security or a good so as to extend the remedies of the U.C.C. The court observed that additional evidence could reveal that the debt was properly characterized as an investment contract. Such a determination would mean that the debt would constitute a security under the Supreme Court decision S.E.C. v. W.J. Howey Co., 328 U.S. 293, 301 (1946), which defined an “investment scheme” as one that “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” Alternatively, a complete record might establish that the court should treat the Choctaw debt as a good similar to foreign currency, as the New York Appellate Division did in Saboundjian v. Bank Audi (USA), 157 A.D.2d 278, 284 (1st Dep’t 1990). When dealing with foreign currency, the Saboundjian court had measured damages as “the difference between the price at which the plaintiff could have executed the trade at issue, were it not for the failure to carry it out, and the price at which he could have executed the transaction within a reasonable time after he learned that it had not been effected earlier.” Moreover, if the court ultimately concludes that the Choctaw debt is analogous to a good, thereby subjecting defendants to the value of cover damages under the U.C.C., the court observed it would need additional facts to determine whether Credit Suisse’s delay of over one month in purchasing replacement debt following termination was reasonable. The court reasoned that the incomplete record on summary judgment made that inquiry, and the others, impossible.

Conclusion

As the court itself recognized, one of the difficulties in resolving the status of the Choctaw debt for the purposes of measuring damages was the court’s own unfamiliarity with the distressed debt market and the dearth of applicable precedent. The court cited the need to obtain “a fuller understanding of Choctaw distressed debt and also trading of distressed debt, generally—a subject about which, owing to the relative newness of distressed debt trading, there is a surprising dearth of relevant case law.” As more courts have the opportunity to grapple with these issues, and a more unified legal characterization of distressed debt materializes, perhaps the question of damages similar to those presented in Credit Suisse can be resolved at the summary judgment stage. Meanwhile, the court concluded that defendants had failed to make out a prima facie showing of entitlement to judgment as a matter of law, and summary judgment was denied.