Highland CDO Opportunity Master Fund, L.P. v. Citibank, N.A. et al

Filing 28

MEMORANDUM AND ORDER: For the foregoing reasons, the motion (docket no. 22 ) is granted in part and denied in part. The parties are directed to confer and submit to the Court a proposed schedule for discovery on the remaining claims asserting breach of contract and violation of Article 9 of the U.C.C. re: Motions terminated: 22 MOTION to Dismiss filed by Citigroup Global Markets Limited, Citibank, N.A., Citigroup Global Markets Inc., Citigroup Financial Products, Inc. (Signed by Judge Naomi Reice Buchwald on 3/21/2013) Copies Mailed By Chambers. (sac)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
HIGHLAND CDO OPPORTUNITY MASTER FUND,
L.P.,
Plaintiff,
MEMORANDUM AND ORDER

- against -

12 Civ. 2827 (NRB)

CITIBANK, N.A., CITIGROUP GLOBAL MARKETS
INC., CITIGROUP GLOBAL MARKETS LIMITED,
and CITIGROUP FINANCIAL PRODUCTS INC.,
Defendants.
----------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

Plaintiff Highland CDO Opportunity Master Fund, L.P. (“CDO
Fund”)

brings

this

action

asserting

claims

for

breach

of

contract; breach of the implied covenant of good faith and fair
dealing;

violation

of

Article

9

of

the

New

York

Uniform

Commercial Code (the “U.C.C.”); and unjust enrichment, with an
accompanying request for imposition of a constructive trust.

In

the motion before the Court, defendants Citibank, N.A. (“CBNA”),
Citigroup Global Markets Inc. (“CGMI”), Citigroup Global Markets
Limited (“CGML”), and Citigroup Financial Products Inc. (“CFPI”)
(together,

the

“Citi

Parties”)

seek

dismissal

of

CDO

Fund’s

complaint pursuant to Rule 12(b)(6) of the Federal Rules of

Civil Procedure.1

For the reasons set forth below, the Citi

Parties’ motion is granted in part and denied in part.
BACKGROUND2
I.

Introduction
This

action

arises

from

a

series

of

complex

financing

transactions that met their early demise in the credit crisis.
In 2007 and 2008, CDO Fund and one or more of the Citi Parties
(collectively, the “Parties”) executed a number of lending and
financing agreements.

Compl. ¶ 1.

Under one set of contracts,

CDO Fund sold credit protection to CBNA as part of a secured
credit default swap transaction (the “CDS Transaction”).3
¶ 20.

Id.

Under a second set of contracts, CBNA and CFPI provided a

secured

financing

“Facility”).

(or

Id. ¶ 21.

lending)

facility

to

CDO

Fund

(the

In connection with these transactions,

CDO Fund pledged collateral comprised primarily of interests in
collateralized

loan

obligations

(“CLOs”),

collateralized

obligations (“CDOs”), and other such investments.
21.

debt

Id. ¶¶ 1, 20-

In addition, CDO Fund agreed to post additional collateral

1

We heard oral argument on this motion on March 18, 2013.
References
preceded by “Tr.” refer to the transcript of oral argument.
2
This background is derived from (i) the complaint (“Compl.”), filed in
the Supreme Court of the State of New York, County of New York, on April 5,
2012 and removed to this District on April 10, 2012 and (ii) the Declaration
of LeRoy Haynes in Support of Defendants’ Motion to Dismiss (“Haynes Decl.”),
filed June 26, 2012, and the exhibits annexed thereto.
To the extent the
allegations in the complaint are well-pleaded, we take them as true for the
purposes of this motion.
See S.E.C. v. Apuzzo, 689 F.3d 204, 207 (2d Cir.
2012).
3
CDO Fund entered into parallel transactions with CBNA and CGML. Compl.
¶ 20. For ease of reference, we discuss the CDS Transaction with CBNA only.

2

(or “margin”) if the value of the existing collateral decreased
relative to the Citi Parties’ exposure.
The
their

CDS

Transaction

inception.

and

However,

the
the

Id. ¶¶ 20-21.

Facility
Parties

were
later

unrelated
linked

at

these

transactions through the Restated Credit Support Administrative
Agreement (the “CSAA”), dated October 10, 2008.

Id. ¶ 22.

The

CSAA served as a “master netting product” that governed the
administration

of

credit

cross-collateralized

their

support

under

underlying

the

transactions

contracts.

Id.

and
As

relevant here, the CSAA authorized the Citi Parties to value the
collateral underlying the transactions and to issue margin calls
to the extent there were shortfalls.

Id. ¶ 23.

The crux of CDO Fund’s complaint is that the Citi Parties
abused this authority to generate “quick cash” at CDO Fund’s
expense.

Id. ¶ 5.

According to the complaint, the Citi Parties

“inexplicably and unreasonably” marked down the value of the
collateral and employed “coercion and economic duress” to force
CDO Fund to satisfy inflated margin calls.

Id. ¶¶ 24, 27.

After CDO Fund defaulted on the margin calls, the Citi Parties
allegedly

seized

the

collateral

at

“rock

bottom

engaged in “disingenuous efforts” to sell it.

prices”

Id. ¶¶ 5-6.

and
CDO

Fund maintains that the Citi Parties intended to, and did, keep
most of the collateral they seized.

Id. ¶ 7.

As the collateral

steadily regained its value, the Citi Parties allegedly reaped

3

an “undeserved windfall” of approximately $200 million -- all at
CDO Fund’s expense.
II.

Id.

The Transactions and Their Underlying Contracts
A.

The CDS Transaction

CDO Fund and CBNA entered into the CDS Transaction in 2007.
Haynes Decl. Ex. A.

The terms of the transaction were set forth

in the following contracts (collectively, the “CDS Contracts”):


the ISDA Master Agreement (together with
Schedule, the “CBNA ISDA”), dated January
2007, between CBNA and CDO Fund;



the ISDA Credit Support Annex (the “Credit
Support Annex”), dated January 12, 2007, between
CBNA and CDO Fund; and



the Amended Confirmation, dated
2008, between CBNA and CDO Fund.

September

the
12,

18,

Id. ¶ 19(a); Haynes Decl. Exs. A, B, C.4
Under the CDS Contracts, CDO Fund sold credit protection to
CBNA in relation to certain “Reference Obligation[s]” consisting
of complex securities.5

Haynes Decl. Ex. C § 1.

As the credit

protection seller, CDO Fund was required to make floating-rate

4

These agreements were governed by New York law. See Haynes Decl. Ex. A
§ 13(a), Pt. 4(h).
5
As the Court of Appeals has explained, “[a] credit default swap (‘CDS’)
is a financial derivative that allows counterparties to buy and sell
financial protection for the creditworthiness” of reference obligations.
Bayerische Landesbank, N.Y. Branch v. Aladdin Capital Mgmt., LLC, 692 F.3d
42, 46 (2d Cir. 2012).
“A counterparty taking the position that the
[reference obligations] would not experience a ‘Credit Event’ -- such as
bankruptcy, default, restructuring, or failure to pay a defined obligation -is said to be the ‘protection seller,’ similar to an insurance underwriter.”
Id.
Conversely, “[a] counterparty taking the position that the [reference
obligations] would experience a Credit Event is the ‘protection buyer,’
similar to an individual purchasing insurance.” Id.

4

payments to CBNA whenever necessary to compensate for a decrease
in the market value of any Reference Obligation.

Id. § 3.

In

exchange, CDO Fund received periodic fixed-rate payments from
Id. § 2.

CBNA during the life of the contract.
In

connection

with

the

CDS

Contracts,

CDO

Fund

pledged

collateral amounting to $59 million in aggregate notional value.
Compl.

¶

providing

20;

see

“a

first

also

Haynes

priority

Decl.

Ex.

continuing

B

¶

2

(each

security

Party

interest

in,

lien on and right of Set-off against all Posted Collateral”).
Furthermore, CDO Fund agreed to post margin if the value of the
existing collateral, as calculated by CBNA, decreased relative
to CBNA’s exposure.
arrangement,

CBNA

Haynes Decl. Ex. B ¶ 3.
regularly

calculated

Pursuant to this

an

“excess/deficit

amount” for the CDS Transaction using “the market value of the
collateral

offset

posted cash.”

by

agreed-upon

margins,

asset

marks,

and

Compl. ¶ 20; see also Haynes Decl. Ex. B ¶¶ 3-4.

Under the terms of the CDS Contracts, CBNA undertook to perform
these

calculations

reasonable manner.”

“in

good

faith

and

in

Haynes Decl. Ex. B ¶ 11(d).

a

commercially
To the extent

that CDO Fund disagreed with the Citi Parties’ calculations, the
Credit Support Annex provided for dispute resolution.
Ex. B ¶ 5.

5

See id.

B.

The Facility

Independently of the CDS Transaction, CBNA and CFPI agreed
to provide a financing facility (i.e., the Facility) to CDO
Fund.

Compl. ¶ 21.

contracts

The Facility was governed by the following

(together

with

their

amendments,

the

“Facility

Contracts,” and, together with the CDS Contracts and the ISDA
Master Agreement, dated January 12, 2007, between CGML and CDO
Fund, the “Underlying Contracts”):




the Third Amended and Restated Master Financing
Agreement, dated August 27, 2007, between CBNA
and CDO Fund;



the Second Amended and Restated Master Financing
Agreement, dated August 27, 2007, between CFPI
and CDO Fund; and



Id.

the Third Amended and Restated Facility Letter,
dated August 27, 2007, between CBNA and CFPI, on
the one hand, and CDO Fund, on the other;

the Master Repurchase Agreement, dated July 24,
2007, between CGMI and CDO Fund.

¶

19(c)-(f);

Haynes

Decl.

Exs.

D,

E,

F,

G,

H,

I,

J.6

Under the Facility Contracts, CBNA and CFPI permitted CDO
Fund to draw cash loans up to a predetermined maximum amount.
Compl. ¶ 21.
interest

In exchange, CDO Fund agreed to make monthly

payments

on

outstanding

6

loans

and

to

repay

the

New York law governed each of these agreements. See Haynes Decl. Ex. D
¶ 26; Ex. E § 5; Ex. F § 16.4; Ex. G § 5; Ex. H § 16.4; Ex. I § 5; Ex. J
¶ 16.

6

principal in full on the scheduled maturity date.

Haynes Decl.

Ex. D ¶ 5; Ex. F ¶ 3.6; Ex. H ¶ 3.6.
CDO Fund pledged certain assets, notionally valued at $213
million, as collateral against the Facility.

Compl. ¶ 21.

As

with the CDS Transaction, CDO Fund undertook to post margin when
the value of existing collateral, as calculated by CBNA and
CFPI, fell below specified levels in relation to outstanding
loans.

Haynes Decl. Ex. F ¶ 3.5; Ex. H ¶ 3.5.

Therefore, CBNA

and CFPI regularly calculated an “excess/deficit amount” using
“the market value of the pledged collateral offset by an agreedupon 50% haircut and loan and cash amounts.”

Compl. ¶ 21.

Once

again, CBNA and CFPI undertook to perform these calculations in
“good faith.”

Haynes Decl. Ex. F, at 5; Ex. H, at 5.

C.

The CSAA

Due

to

the

complexity

of

the

CDS

Transaction

and

the

Facility, the Parties executed a master agreement (i.e., the
CSAA) that unified the administration of credit support with
respect to the Underlying Contracts.
K.

Id. ¶ 22; Haynes Decl. Ex.

The CSAA designated one or more of the Citi Parties as

“Credit Support Administrator,”7 see Haynes Decl. Ex. K, at 4
(defining

“Credit

Support

Administrator”),

7

to

perform

margin

The CSAA defined “Credit Support Administrator” as “the Citigroup
Entity,” id. Ex. K, at 4, which the CSAA defined to include CBNA, CGMI, CFPI,
or CGML, see id. at 1.
The CSAA authorized “the Citigroup Entity that is
then the Credit Support Administrator” to “designate another Citigroup Entity
to become the Credit Support Administrator, such designation to take effect
immediately.” Id. at 4.

7

calculations under each Underlying Contract, Compl. ¶ 23; see
also Haynes Decl. Ex. K § 2(a) (requiring the Credit Support
Administrator to “determine the Exposure Mark-to-Market Amount
and

the

Independent

Contract”).

Amount,

if

any,

for

each

Underlying

The CSAA required the Credit Support Administrator

to perform margin calculations in accordance with the relevant
provisions, if any, of each Underlying Contract.

Compl. ¶ 23;

see also Haynes Decl. Ex. K, at 4-5 (defining “Exposure Mark-toMarket Amount”).
authorized

the

Where no such provisions existed, the CSAA
Credit

Support

Administrator

to

discretion in determining the appropriate margin.

exercise

Id.

To reduce the number of margin transfers required under the
Underlying

Contracts,

the

CSAA

permitted

the

Credit

Support

Administrator to net any margin calls arising on the same date.
Compl. ¶ 23; see also Haynes Decl. Ex. K § 2(g) (“In the event
that on any one day, [CDO Fund] and any Citigroup Entity would
otherwise

be

required

pursuant

to

one

or

more

Contracts

to

Transfer Credit Support or payments to or among one another in
the same currency or in the same type of non-cash asset, the
Credit Support Administrator may, at its option, calculate the
netting of any or all such Transfers so that fewer Transfers
need be made.”).

If CDO Fund became “generally unable to pay

its debts when due,” the Citi Parties were entitled to declare a
“Close-out Event,” which permitted the Citi Parties to terminate

8

the CSAA and/or any of the Underlying Contracts and net the
termination amounts.

See Haynes Decl. Ex. K §§ 1, 6(a), 6(b).

III. The Allegations Underlying the Instant Dispute
As alleged in the complaint, “[d]uring the credit crisis of
2008, there was substantial panic by investors in assets of the
type that comprised the collateral” securing the CDS Transaction
and the Facility.
October

15,

2008,

Compl. ¶ 2.
the

Citi

Between September 30, 2008 and

Parties

securing the Facility by $47 million.8

marked

down

Id. ¶ 24.

the

assets

On or about

October 17, 2008, the Citi Parties issued a margin call of $19
million, which CDO Fund initially failed to satisfy.

Id. ¶ 24.

Accordingly, on or about October 20, 2008, the Citi Parties
notified CDO Fund that they were entitled to declare a “Closeout Event” under the CSAA.

Id.

CDO Fund maintains that the Citi Parties’ mark-downs were
“unreasonabl[e],” because “nothing had changed in the economics
of the underlying assets.”

CDO Fund claims that it sought

Id.

“justification” for the Citi Parties’ actions -- “specifically
requesting back-up or support for [the] dramatic mark-downs and
corresponding margin call” –- but received none.

Id. ¶ 25.

Nevertheless, on or about October 23, 2008, CDO Fund posted

8

Specifically, CDO Fund alleges that the Citi Parties marked down the
assets “from $85 million, on September 30, 2008, to $38 million, on October
15, 2008.” Compl. ¶ 24.

9

“additional ‘free collateral’ with a market value of just over
$20 million.”

Id. ¶ 26.

CDO Fund alleges that, over the course of the following
month,

the

Citi

Parties

continued

to

issue

“unreasonabl[e]”

margin calls without justifying their mark-downs.

Id. ¶ 28.

Once again, CDO Fund satisfied the Citi Parties’ requests:

on

November 25, 2008, CDO Fund agreed by written contract to pay
off

the

Facility

by

December

1,

2008

(the

“November

2008

Agreement”), at which time the Facility would terminate, and the
collateral

securing

the

surviving CDS Transaction.
L.

Facility

would

collateralize

the

Id. ¶ 29; see also Haynes Decl. Ex.

On December 2, 2008, the collateral thus shifted.
However, the margin calls did not cease.

Id. ¶ 31.

In early December

2008, the Citi Parties allegedly “mark[ed] down the original
Facility

collateral

to

approximately

$18

million

(from

$85

million just weeks earlier) and effectively mark[ed] down the
CDS collateral to $0 (from $59 million weeks earlier).”
¶ 32.
million

Id.

As a result, the Citi Parties issued margin calls of $5.2
on

December

11,

2008,

every business day thereafter.9

and

approximately

$20

million

Id. ¶¶ 32, 34-35.

CDO Fund alleges that, “during that time period, there was
absolutely no reason for [the Citi Parties] to keep marking down
9

The Citi Parties allegedly issued the $20 million margin calls between
December 12, 2008 and December 31, 2008. Id. ¶¶ 34-35. As before, the Citi
Parties purportedly refused to provide “back-up or support” for their
calculations. Id. ¶ 35.

10

assets,”

because

“there

was

little

trading”

on

the

relevant

asset types and “very little, if any, downward market movement.”
Id. ¶ 35.

CDO Fund claims:

[O]ther third-party marks for the specific assets
comprising the free collateral, during the same time
period, came back higher (in some cases substantially
higher) than [the Citi Parties’] marks. The same held
true, almost without exception, with respect to the
original Facility collateral.
Id.

Accordingly, CDO Fund refused to satisfy the additional

margin calls.

Id. ¶ 33.10

In response, the Citi Parties declared an event of default
on December 24, 2008.11

Id. ¶ 36.

Thereafter, the Citi Parties

exercised their contractual right to foreclose and liquidate the
collateral and to offset the proceeds against payments owed by
CDO

Fund.

¶ 8(a)(iv).

Id.

¶¶

36,

38-39;

see

also

Haynes

Decl.

Ex.

B

As alleged in the complaint, the Citi Parties held

a total of three auctions in late December 2008 and February
2009,

but

sold

only

two

of

the

assets.12

Compl.

¶¶

38-39.

Therefore, the Citi Parties’ retained most of the collateral

10

However, it appears that CDO Fund ultimately offered to post additional
collateral. See id. ¶ 36 (alleging that “CDO Fund had even offered to post
more collateral”).
11
The Citi Parties allegedly declared the event of default under section
4(b) of the CSAA.
Id. ¶ 36.
That section provides:
“By the Transfer
Deadline on each Business Day, Counterparty shall make all Transfers required
to be made by Counterparty pursuant to the notice given under Section 3
hereof.
Neither party shall be excused from making any Transfer by the
Transfer Deadline as required herein for any reason whatsoever.”
Haynes
Decl. Ex. K § 4(b).
12
Specifically, CDO Fund claims that Morgan Stanley held two auctions on
December 29, 2008, and that third-party broker SMH held an auction for the
remaining assets in late February 2009. Compl. ¶¶ 38-39.

11

they seized.

Id.

CDO Fund alleges that the auctions were an “elaborate sham”
designed to make it look like the Citi Parties were marketing
the assets when, in reality, they had no intention of selling
them.13

Id. ¶ 40.

CDO Fund claims that, as the assets regained

their value, the Citi Parties “reaped an undeserved benefit of
approximately
improperly

$200

seized

million,
collateral

seizure to current values.”
IV.

measured
from

the

by

the

time

of

value

of

the

the

wrongful

Id. ¶ 44.

The Instant Action
On April 5, 2012, CDO Fund commenced this action asserting

claims for breach of contract; breach of the implied covenant of
good

faith

and

fair

dealing;

violation

of

Article

9

of

the

U.C.C.; and unjust enrichment, with an accompanying request for
imposition of a constructive trust.

The Citi Parties now move

to dismiss CDO Fund’s claims.
DISCUSSION
I.

Legal Standards
To survive a motion to dismiss, the pleadings must include

“enough facts to state a claim for relief that is plausible on
its

face.”

(2007).

Bell

Atl.

Corp.

v.

Twombly,

550

U.S.

544,

570

Where a plaintiff has not “nudged [its] claims across

13

In particular, CDO Fund maintains that the Citi Parties sold the assets
when the market was illiquid, id. ¶ 38, and that they “failed to market or
offer the assets to typical industry players,” id. ¶ 40.

12

the

line

from

appropriate.
true

all

conceivable

Id.

factual

to

plausible,”

dismissal

is

In applying these standards, we accept as
allegations

in

the

pleadings

and

reasonable inferences in the non-moving party’s favor.

draw

all

Anderson

News, L.L.C. v. Am. Media, Inc., 680 F.3d 162, 185 (2d Cir.
2012).
legal

However, “we give no effect to assertions of law or to
conclusions

(internal
Ashcroft

couched

quotation
v.

Iqbal,

as

marks

and

556

factual

allegations.”

Id.

alterations

omitted);

also

U.S.

662,

678

(2009)

see

(“Threadbare

recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice.”).
In undertaking our analysis, we may consider “the complaint
and

any

documents

reference.”
York,

678

attached

thereto

or

incorporated

by

Bldg. Indus. Elec. Contractors Ass’n v. City of New
F.3d

184,

187

(2d

Cir.

2012).

“Because

the

interpretation of contracts generally is a question of law to be
determined by the Court, it may dismiss the complaint where
contracts are unambiguous and do not support the plaintiff’s
claim.”
LLC,

842

Soroof Trading Dev. Co., Ltd. v. GE Fuel Cell Sys.,
F.

Supp.

2d

502,

509-10

(S.D.N.Y.

2012)

(internal

quotation marks omitted); see also DynCorp v. GTE Corp., 215 F.
Supp. 2d 308, 315 (S.D.N.Y. 2002) (noting that dismissal is
appropriate

where

“the

contract

unambiguously

shows

plaintiff is not entitled to the requested relief”).

13

that

the

II.

Breach of Contract
CDO Fund alleges that the Citi Parties breached the CSAA

and the Underlying Contracts (collectively, the “Contracts”) by:


failing to use good faith in
value of underlying securities;



engaging
in
acts
constituting
coercion
and
economic duress to force CDO Fund to meet
improperly
calculated
margin
calls,
post
additional collateral, and agree to certain
contractual amendments;



failing to specify the nature of the potential
termination event or provide relevant information
reasonably requested by CDO Fund;



failing to provide any statement or other
information to CDO Fund detailing any deficiency
in any of the financing transactions;



failing to identify termination or settlement
amounts due or giving CDO Fund notice of the
results of any set off or netting pursuant to the
CSAA;



improperly seizing assets; and



failing to provide an accounting detailing the
results of the Citi Parties’ efforts to sell the
seized collateral.

determining

the

See Compl. ¶ 49.
In support of their motion to dismiss these claims, the
Citi Parties contend that CDO Fund waived any alleged breach
concerning

collateral

valuations

and

margin

calls

by

(i)

continuing to perform and accept benefits under the Contracts
with contemporaneous knowledge of the purported breach and (ii)

14

failing to invoke the dispute resolution provisions set forth in
the

Credit

Support

Annex.

In

addition,

the

Citi

Parties

maintain that CDO Fund’s allegations fail to state a claim.

We

address these arguments in turn.
A.

On the Facts Alleged,
Alleged Breaches

CDO

Fund

Did

Not

Waive

the

Waiver is the “voluntary and intentional” abandonment of a
known contractual right.

Amerex Grp., Inc. v. Lexington Ins.

Co., 678 F.3d 193, 201 (2d Cir. 2012) (internal quotation marks
omitted).

Waiver may be express or implied.

Hadden v. Consol.

Edison Co., 382 N.E.2d 1136, 1138 (N.Y. 1978) (noting that a
waiver “may be accomplished by express agreement or by such
conduct or failure to act as to evince an intent not to claim
the purported advantage”).
‘essentially

a

matter

In either case, however, waiver “is
of

intention.’”

Ring

v.

Mpath

Interactive, Inc., 302 F. Supp. 2d 301, 304 (S.D.N.Y. 2004)
(quoting Alsens Am. Portland Cement Works v. Degnon Contracting
Co., 118 N.E. 210, 210 (N.Y. 1917)).
A
rights

party’s
must

be

intention
“clear,

to

relinquish

unmistakable,

its

and

known

contractual

without

ambiguity,”

Faiveley Transp. USA, Inc. v. Wabtec Corp., 758 F. Supp. 2d 211,
217 (S.D.N.Y. 2010) (internal quotation marks omitted), and “is
not to be inferred from a doubtful or equivocal act.”

Echostar

Satellite L.L.C. v. ESPN, Inc., 914 N.Y.S.2d 35, 39 (N.Y. App.

15

Div. 2010) (internal quotation marks omitted); see also Amerex
Grp., 678 F.3d at 201 (noting that waiver does not arise from
“negligence, oversight, or silence”) (internal quotation marks
omitted);

Alsens,

118

N.E.

at

210

(stating

that

a

party’s

“undisputed acts or language” must be “so inconsistent with his
purpose to stand upon his rights” that there is “no opportunity
for a reasonable inference to the contrary”).
Where, as here, an alleged waiver is implied, the defense
“is ‘rarely established as a matter of law rather than as a
matter of fact.’”

Wyeth v. King Pharm., Inc., 396 F. Supp. 2d

280, 290 (E.D.N.Y. 2005) (quoting Alsens, 118 N.E. at 210); see
also Great Am. Ins. Co. v. M/V Handy Laker, Nos. 96 Civ. 8737
(BSJ), 97 Civ. 7400 (BSJ), 2002 WL 32191640, at *7 (S.D.N.Y.
Dec. 20, 2002) (“[C]ourts generally hold that whether waiver has
been

established

by

the

conduct

of

the

parties

during

the

performance of the contract is a question of fact.”), aff’d, 348
F.3d 352 (2d Cir. 2003).

Therefore, unless “waiver is clear on

the face of the complaint,” it is inappropriate for resolution
on a motion to dismiss.

Eastman Chem. Co. v. Nestle Waters

Mgmt. & Tech., No. 11 Civ. 2589 (JPO)(HBP), 2012 WL 4474587, at
*3 (S.D.N.Y. Sept. 28, 2012).
In this case, although a finding of waiver finds support in
relevant case law, see VCG Special Opportunities Master Fund
Ltd. V. Citibank, N.A., 594 F. Supp. 2d 334 (S.D.N.Y. 2008); CDO

16

Plus Master Fund Ltd. v. Wachovia Bank, N.A., No. 07 Civ. 11078
(LTS)(AJP), 2009 WL 2033048 (S.D.N.Y. July 13, 2009), we believe
this outcome would be premature given the complexity of the
facts and the absence of discovery.

Even assuming, arguendo,

that an implied waiver could be found under the Contracts,14 it
is

not

“clear

intentionally

on

the

face

relinquished

of
its

14

the

complaint”

contractual

that

rights.

CDO
As

Fund
an

This question arises because the CSAA contains a no-waiver clause.
Specifically, the CSAA provides that no “waiver in respect of any Contract
will be effective unless in writing,” see Haynes Decl. Ex. K § 18(a), and
that no “course of dealing [shall] be deemed to preclude any subsequent
exercise of any right, power or privilege” in respect of any Contract, see
id. Ex. K § 18(c); see also id. Ex. A § 9(f).
Under New York law, courts
“uniformly enforce” such provisions to preclude an implied waiver.
Rosenzweig v. Givens, 879 N.Y.S.2d 387, 390 (N.Y. App. Div. 2009), aff’d, 915
N.E.2d 1140 (N.Y. 2009); see also MBIA Ins. Corp. v. Patriarch Partners VIII,
LCC, 842 F. Supp. 2d 682, 709 (S.D.N.Y. 2012) (declining to find an implied
waiver where the contract at issue contained a no-waiver clause); Maxim Grp.
LLC v. Life Partners Holdings, Inc., 690 F. Supp. 2d 293, 310 (S.D.N.Y. 2010)
(same).
But see Kenyon & Kenyon v. Logany, LLC, 823 N.Y.S.2d 72, 74 (N.Y.
App. Div. 2006) (“[T]he existence of a nonwaiver clause does not in itself
preclude waiver of a contract clause.”) (internal quotation marks omitted).
Nothing in the November 2008 Agreement purports to waive CDO Fund’s rights
under the Contracts.
See Haynes Decl. Ex. L.
In light of the foregoing
authorities, the absence of an express waiver may result in an insurmountable
hurdle for the Citi Parties.
On the other hand, we note that some of the Underlying Contracts
require a party to provide notification of a counterparty’s alleged failure
to perform its obligations under the Contracts, see, e.g., id. Ex. A
§ 5(a)(ii), id. Ex. B ¶ 5, and that CDO Fund does not explicitly allege to
have provided such formal notification here. Some courts have suggested that
a party’s “failure to provide notice pursuant to a contractual provision
effectively abrogate[s] that contract’s non-waiver provision.”
In re
Arbitration Between Atherton & Online Video Network, Inc., 274 F. Supp. 2d
592, 595-96 (S.D.N.Y. 2003) (collecting cases). However, even if the notice
requirements trump the no-waiver provisions here, factual questions would
nonetheless remain. See Compl. ¶ 32 (alleging that CDO Fund “disputed” the
Citi Parties’ mark-downs and “requested specific details justifying” their
calculations); see also Medinol Ltd. v. Boston Scientific Corp., 346 F. Supp.
2d 575, 620 (S.D.N.Y. 2004) (noting, in the context of the election of
remedies doctrine, that the question of what constitutes adequate notice is
often a factual issue, particularly when “notice has not been given in an
unequivocal form such as a lawyer’s letter”). Given these contradictions in
the legal landscape -- and our obligation to read the complaint in the light
most favorable to CDO Fund -- we are in no position to resolve the question
of whether an implied waiver could be found.
The parties would be well
advised to brief this issue in the future, as they have not done so now.

17

initial matter, CDO Fund alleges that it continued performing
under the Contracts solely as a consequence of the Citi Parties’
coercion and economic duress.
these

allegations

cannot

See, e.g., Compl. ¶ 27.

form

the

basis

of

an

Although

independent

breach, infra Section II(B), they nonetheless raise issues as to
whether
rights.
476

CDO

Fund

and

intentionally

abandoned

its

Cf. Milgrim v. Backroads, Inc., 142 F. Supp. 2d 471,

(S.D.N.Y.

party’s

voluntarily

2001)

intentions

(noting
with

that

respect

duress

may

to

contract)

a

“contradict”

a

(internal

quotation marks omitted).
Moreover, CDO Fund alleges that, during the course of its
performance, it repeatedly “disputed” the Citi Parties’ markdowns, “requested specific details justifying” the valuations,
and “insisted” that the Citi Parties “revise” their calculations
to conform with other third-party marks.
also id. ¶¶ 25, 28, 30.

Compl. ¶¶ 32, 35; see

As the Citi Parties contend, these

allegations demonstrate CDO Fund’s contemporaneous knowledge of
the breaches it now claims.

Nevertheless, waiver is ultimately

a matter of intent, and “a party’s reluctance to terminate a
contract” and “its attempts to encourage the breaching party to
adhere to its obligations” do not demonstrate the unmistakable
intention to abandon contractual rights.
Solomon,

67

F.

Supp.

2d

312,

18

318

AM Cosmetics, Inc. v.

(S.D.N.Y.

1999)

(internal

quotation marks omitted); see also S.D. Hicks & Son Co. v. J.T.
Baker Chem. Co., 307 F.2d 750, 751 (2d Cir. 1962).
As
Support

to

CDO

Annex’s

Fund’s

alleged

dispute

failure

resolution

to

invoke

mechanism,

the

the

Credit

governing

provisions simply required CDO Fund to “notify” CBNA of the
dispute.15

Haynes Decl. Ex. B ¶ 5.

The provisions do not

require that the notice adhere to a particular form or means
(e.g., a written demand), nor that the notice formally reference
the dispute resolution process.
has

plausibly

den[ied]”

the

alleged
Citi

that

Parties’

As noted supra, CDO Fund

Id.
it

“disputed”

marks.

and

Compl.

“vehemently
¶¶

30,

32.

Interpreting the complaint in the light most favorable to the
non-movant,

we

communications
provisions.

cannot
did

conclude

not

at

trigger

this
the

stage
dispute

Cf. Medinol, 346 F. Supp. 2d at 620.

that

these

resolution
Additionally,

the CBNA ISDA explicitly provided that “[a] failure or delay in
exercising any right, power or privilege in respect of this
Agreement will not be presumed to operate as a waiver.”16
Decl. Ex. A § 9(f).

Haynes

As noted supra, the parties have yet to

address the impact of this provision.
15

See n.14.

Because these provisions were a species of the Credit Support Annex, an
argument could be made that the dispute resolution mechanism was only
available to CDO Fund to the extent it challenged the Citi Parties’ valuation
of the collateral underlying the CDS Transaction.
The allegations make
clear, however, that CDO Fund also contested the Citi Parties’ valuation of
the Facility collateral. See Compl. ¶¶ 24, 28.
16
By its terms, the Credit Support Annex “is subject to” the CBNA ISDA.
See Haynes Decl. Ex. B, at 1.

19

For

the

foregoing

reasons,

we

cannot

conclude

at

this

juncture in the proceedings that an implied waiver has occurred.
In reaching this conclusion, we are mindful that waiver “should
not be lightly presumed.”

Globecon Grp., LLC v. Hartford Fire

Ins. Co., 434 F.3d 165, 176 (2d Cir. 2006) (internal quotation
marks omitted).

However, we share the Citi Parties’ concern

that

continued

CDO

Fund’s

together

with

its

performance

three-year

delay

under

in

the

filing

Contracts,

the

instant

action,17 has essentially permitted CDO Fund to challenge the
Citi

Parties’

hindsight.

To

valuations
the

risk

extent

free

that

and

with

discovery

the

benefit

confirms

the

of

Citi

Parties’ position that real-time valuations of the collateral
cannot be recreated, any failure to unequivocally invoke the
dispute resolution provisions might well undermine CDO Fund’s
claims.
B.

CDO Fund Has Sufficiently Alleged a Breach of Contract
with
Respect
to
the
Citi
Parties’
Collateral
Valuations, Declaration of an Event of Default, and
Seizure of the Assets

To state a claim for breach of contract under New York law,
“the complaint must allege:

(i) the formation of a contract

between the parties; (ii) performance by the plaintiff; (iii)

17

During oral argument, counsel for CDO Fund explained that the reason
for the three-year delay was that CDO Fund was trying to maintain its
existing relationship with the Citi Parties. See Tr. 17, 23. To the extent
this is true, it may demonstrate that CDO Fund intended to (and did)
relinquish its contractual rights in an effort to protect its broader
business interests.

20

failure of defendant to perform; and (iv) damages.”

Johnson v.

Nextel Commc’ns, Inc., 660 F.3d 131, 142 (2d Cir. 2011); accord
Mee Direct, LLC v. Automatic Data Processing, Inc., 958 N.Y.S.2d
385, 386 (N.Y. App. Div. 2013).
specify

the

provisions

allegedly breached.

of

In addition, the complaint must

the

contract

that

the

defendant

See, e.g., Fink v. Time Warner Cable, 810

F. Supp. 2d 633, 644-45 (S.D.N.Y. 2011) (noting that “a breach
of contract claim will be dismissed where a plaintiff fails to
allege . . . the specific provisions of the contract upon which
liability is predicated”) (internal quotation marks omitted);
accord Barker v. Time Warner Cable, Inc., 923 N.Y.S.2d 118, 120
(N.Y. App. Div. 2011).
Here, CDO Fund has adequately alleged that the Citi Parties
failed

to

use

collateral.18
no

good

faith

in

determining

the

value

of

In its complaint, CDO Fund alleges that “there was

reasonable

or

good

faith

basis

for

continuously

reducing

asset marks,” because there was “little trading” on such assets
and “very little, if any, downward market movement.”
¶

35.

To

substantiate

these

claims,

CDO

Fund

Compl.

alleges

that

“other third-party marks for the specific assets comprising the
free collateral, during the same period, came back higher (in

18

As the Citi Parties point out, CDO Fund did not specify the contractual
provisions forming the basis of the alleged breach.
Nevertheless, we are
satisfied that the allegations placed the Citi Parties “on notice of the
grounds for which plaintiff seeks relief.”
Greenspan v. Allstate Ins.
Co.¸937 F. Supp. 288, 291 (S.D.N.Y. 1996) (internal quotation marks omitted).

21

some cases substantially higher)” that the Citi Parties’ marks.19
Id.

Construing the facts in the light most favorable to CDO

Fund,

we

find

sufficient

to

these

“draw

allegations

the

“facially

reasonable

plausible”

inference”

Parties engaged in wrongful conduct.

that

the

and
Citi

Iqbal, 556 U.S. at 678.

Therefore, the first alleged breach claim survives.
Nevertheless, many of the remaining breach allegations are
deficient
alleges

as

a

that

matter
the

of

Citi

law.
Parties

In

its

complaint,

breached

the

CDO

Contracts

Fund
by

“engaging in acts constituting coercion and economic duress.”
Compl.

¶

49.

Economic

duress

is

a

theory

of

recovery

for

rescission, cf. Bank Leumi Trust Co. v. D’Evori Int’l, Inc., 558
N.Y.S.2d 909, 914 (N.Y. App. Div. 1990) (“[W]e do not believe
that the doctrine of economic duress, which is traditionally
used as a defense to an action, has any place in a cause of
action seeking monetary damages.”), and thus has no application
here.

However, even if this were not the case, we note that CDO

Fund has not claimed duress with the alacrity the law demands.
See, e.g., In re Toscano, 799 F. Supp. 2d 230, 244 (E.D.N.Y.
2011) (“A party seeking to cancel a contract on the basis of
duress

must

do

so

promptly

or

they

will

be

deemed

to

have

ratified the contract.”) (internal quotation marks omitted); see

19

CDO Fund makes the
collateral. Compl. ¶ 35.

same

allegations

22

with

respect

to

the

Facility

also Bank Leumi Trust, 558 N.Y.S.2d at 914 (finding a right to
assert duress forfeited after a six-month delay).
CDO Fund next alleges that the Citi Parties breached the
Contracts by failing to (i) “specify the nature of the potential
termination

event

or

provide

relevant

information

reasonably

requested by CDO Fund,” (ii) “provide any statement or other
information to CDO Fund detailing any deficiency in any of the
financing

transactions,”

(iii)

“identify

termination

or

settlement amounts due or giving CDO Fund notice of the results
of

any

“provide

set

off

an

or

netting

accounting

pursuant

detailing

to

the

the

CSAA,”

results

of

Parties’] efforts to sell the seized collateral.”

and

(iv)

[the

Citi

Compl. ¶ 49.

These allegations are insufficient, because CDO Fund has failed
to set forth the contractual provisions that the Citi Parties
allegedly breached.
and

CDO

Fund

Indeed, as the Citi Parties point out –-

does

not

contest

--

the

permitted much of the conduct alleged.

Contracts

explicitly

For instance, the CDS

Contracts provided that CDO Fund “[was] not entitled to prior
notice of any sale of [the] Posted Collateral by [CBNA], except
any notice that is required under applicable law and cannot be
waived.”

Id. Haynes Decl. Ex. B ¶ 8(a).

Therefore, these

claims fail as a matter of law.
Finally, CDO Fund alleges that the Citi Parties breached
the

Contracts

by

improperly

declaring

23

an

Event

of

Default,

Compl.

¶

8,

and

wrongfully

seizing

the

assets,

id.

¶

49.

Because CDO Fund has sufficiently alleged that the Citi Parties
failed

to

use

good

faith

in

determining

the

value

of

the

collateral, it has stated an entitlement to relief with respect
to the resultant declaration of an Event of Default and seizure
of the assets, as any such actions were the by-product of the
Citi Parties’ allegedly improper marks and margin calls.

Cf.

MHR Capital Partners LP v. Presstek, Inc., 912 N.E.2d 43, 48
(N.Y. 2009) (“[A] party to a contract cannot rely on the failure
of

another

frustrated

to
or

perform

a

prevented

condition

the

precedent

occurrence

of

where

the

he

has

condition.”)

(internal quotation marks omitted); Morris v. Lee, No. 08 Civ.
6673 (LAP), 2011 WL 2947009, at *1 (S.D.N.Y. July 18, 2011)
(“[U]nder

New

York

law,

when

a

breaching

party’s

actions

contribute materially to the nonoccurrence of the other party’s
duties,

the

non-occurrence

is

excused.”).

Therefore,

we

conclude that CDO Fund has stated a plausible breach of contract
claim on the basis of the Citi Parties’ collateral valuations,
declaration of an Event of Default, and seizure of the assets.
III. Implied Covenant of Good Faith and Fair Dealing
In its second cause of action, CDO Fund alleges that the
Citi Parties breached the implied duty of good faith and fair
dealing by, inter alia, failing to use good faith in determining
the value of collateral and improperly seizing the underlying

24

assets.

See Compl. ¶ 55.

This claim fails as duplicative.

“‘New York law does not recognize a separate cause of action for
breach of the implied covenant of good faith and fair dealing
when a breach of contract claim, based upon the same facts, is
also pled.’”

Fleisher v. Phoenix Life Ins. Co., 858 F. Supp. 2d

290, 299 (S.D.N.Y. 2012) (alteration omitted) (quoting Harris v.
Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir.
2002)).

Here, the allegations supporting the purported breach

of the duty of good faith and fair dealing are the predicate for
the alleged breach of contract and, indeed, are “intrinsically
tied to the damages” purportedly arising therefrom.20

Sawabeh

Info. Servs. Co. v. Brody, 832 F. Supp. 2d 280, 301 (S.D.N.Y.
2011) (internal quotation marks omitted).

Therefore, dismissal

of the second cause of action is appropriate.
IV.

Article 9 of the U.C.C.
In its third cause of action, CDO Fund alleges that the

Citi Parties violated Article 9 of the U.C.C. by (i) neglecting
to provide “reasonable authenticated notic[e]” of any sale of
collateral,

(ii)

failing

to

dispose

20

of

the

assets

in

a

To the extent CDO Fund is attempting to plead a breach of the duty of
good faith and fair dealing in connection with the Citi Parties’ alleged
failure to provide certain notices and accounting details, then CDO Fund was
required to adequately plead a breach of a particular term of the Contracts.
In re Worldcom, Inc. Sec. Litig., 456 F. Supp. 2d 508, 519 (S.D.N.Y. 2006);
see also Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Grp., Inc.,
No. 11 Civ. 5832 (AJN), 2012 WL 3542196, at *7 (S.D.N.Y. Aug. 15, 2012)
(noting that the implied covenant “does not impose obligations beyond those
intended and stated in the language of the contract”). Because CDO Fund has
not satisfied this requirement, supra Section II(B), any corresponding
implied covenant claims necessarily fail.

25

commercially reasonable manner, and (iii) failing to provide a
post-sale accounting.

Compl.

¶¶ 38-41, 61.

All but the first

allegation survive.
The statutory notice requirement does not apply where the
collateral “threatens to decline speedily in value or is of a
type customarily sold on a recognized market,” see N.Y. U.C.C. §
9-611(d), and the Contracts explicitly provide that this is the
case here, see Haynes Decl. Ex. B ¶ 8(a) (acknowledging and
agreeing that “Posted Collateral in the form of securities may
decline speedily in value and is of the type customarily sold on
a recognized market”).21

Therefore, CDO Fund’s first alleged

violation of the U.C.C. fails.
Nonetheless,
Citi

Parties

CDO

violated

Fund
the

has

sufficiently

U.C.C.

by

alleged

failing

to

that

the

sell

the

collateral in a commercially reasonable manner and neglecting to
provide a post-sale accounting.

See Compl. ¶ 38 (claiming that

the Citi Parties held two auctions scheduled to conclude on New
Year’s Eve, “when the market is highly illiquid”); id. ¶ 40
(alleging that the Citi Parties “failed to market or offer the
assets to typical industry players, essentially failing to even
attempt to engage third parties”); id. ¶ 41 (claiming that the
Citi Parties “never indicated which, if any, assets were sold

21

As a result, we need not reach the Citi Parties’ contention that the
notice claim is time-barred.

26

(and

at

what
the

Although
Fund’s

price)
Citi

claims,22

or

which,

if

any

assets

Parties

may

dispute

questions

of

commercial

necessarily fact intensive.

the

it

retained”).

viability

of

CDO

reasonableness

are

See, e.g., In re Excello Press,

Inc., 890 F.2d 896, 905 (7th Cir. 1989) (applying New York law
and noting that “[w]hether a sale was commercially unreasonable
is,

like

intensive

other

questions

inquiry”);

see

about

also

‘reasonableness,’

Seomi

v.

Sotheby’s,

a

fact-

Inc.,

910

N.Y.S.2d 765, at *3 n.3 (N.Y. Sup. Ct. 2010) (Table) (noting
that the question of commercial reasonableness raises “issues of
fact more appropriate for determination on a motion for summary
judgment than on a motion to dismiss”).

Therefore, dismissal of

CDO Fund’s third cause of action is unwarranted at this stage in
the proceedings.
V.

Unjust Enrichment and Constructive Trust
Finally, CDO Fund asserts a claim for unjust enrichment and

seeks the imposition of a constructive trust.
as a matter of law.
of

a

valid

and

Such claims fail

It is well-established that the existence
enforceable

contract

enrichment and constructive trust claims.

“precludes”

unjust

In re First Cent.

Fin. Corp., 377 F.3d 209, 213 (2d Cir. 2004); see also Soroof,
22

Such skepticism might well be justified. At oral argument, counsel for
CDO Fund was unable to name a single “typical industry player” whom the Citi
Parties allegedly excluded from the sales process.
See Tr. 21-22.
When
pressed on this point, counsel indicated that he could obtain this
information “quite quickly” from his client. Id. 22. In that circumstance,
it is curious that the players were not named in the complaint.

27

842 F. Supp. 2d at 514

fendant/s motion

(granting

judgment

on the pleadings with respect to plaintiff IS unj ust enrichment
and constructive trust
was

I

claims where

at all relevant times

I

the parties

I

ationship

"

governed by a contract

ll

Because

)

it is undisputed that the Contracts govern the parties
and obligations here
quasi-contractual

l

l

rights

there is simply no basis for relief under

remedies.

We

therefore

smiss

CDO

Fund/s

no.

22)

fourth and fifth causes of action.
CONCLUSION

For the

rYrQrfning reasons

motion

I

granted in part and denied in part.

(docket

parties are directed to

confer and submit to the Court a proposed schedule
on

the

violation

Dated:

remaining

claims

asserting

is

breach

of

discovery
contract

and

Article 9 of the U.C.C.

New York New
March 211 2013
l

BUCHWALD
UNITED STATES DISTRICT JUDGE

28

Copies of the foregoing Order have been mailed on this date to
the following:
Attorneys for Plaintiff

Kieran M. Corcoran, Esq.

Lackey Hershman, L.L.P.

1325 Avenue of the Americas
New York, New York 10019

I

28th Floor

Ross A. Mortillaro, Esq.

Paul B. Lackey, Esq.

Michael P
, Esq.

Lackey Hershman, L.L.P.

3102 Oak Lawn Avenue, Suite 777

Dallas, Texas 75219

Attorneys for Defendants

Marshall H.
shman, Esq.

Patrick D. Oh, Esq.

Becca Everhardt, Esq.

Freshfields Bruckhaus Deringer LLP

601 Lexington Avenue

New York, New York 10022

29