United States District Court, S.D. New York
August 20, 2004.
KOREA LIFE INSURANCE CO., LTD. and MORNING GLORY INVESTMENT (L) LIMITED, Plaintiffs,
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Defendant.
The opinion of the court was delivered by: ALVIN HELLERSTEIN, District Judge
OPINION AND ORDER DENYING RECONSIDERATION, AND ON DAMAGES
In my Opinion and Order dated July 1, 2003 ("Opinion"), I
granted summary judgment to defendant Morgan Guaranty Trust
Company of New York ("Morgan") dismissing counts one, two, three,
five, and six of plaintiffs' Second Amended Complaint. I granted
summary judgment to plaintiffs Korea Life Insurance Co., Ltd.
("KLI") and Morning Glory Investment (L) Limited ("Morning
Glory") on count four, alleging breach of contract against
Morgan. Korea Life Ins. Co. v. Morgan Guar. Trust Co. of N.Y.,
269 F. Supp. 2d 424, 447 (S.D.N.Y. 2003). I deferred ruling on
damages, pending further submissions from the parties and further
proceedings. Id. at 447-48.
Both parties filed motions regarding damages, and Morgan also
filed a motion for reconsideration. I held oral argument on
February 4, 2004, and the parties filed supplemental briefs on
damages subsequent to the argument. I now rule on all outstanding
issues, denying Morgan's motion for reconsideration, denying
Morgan's defense regarding mitigation, and finding Morgan liable
for damages pursuant to its breach of contract in the amounts
stated below. I also deny as moot plaintiffs' motion to strike the expert
reports of Michael R. Darby and Robert Pickel.
The complex factual background is treated extensively in my
prior opinion. See Opinion at 1-16; 269 F. Supp. 2d at 426-35.
I assume familiarity with that opinion and restate the facts here
only to the extent germane to this discussion.
Morgan moved for reconsideration in response to my invitation.
My original decision granted relief to both sides, even though
only Morgan had moved for summary judgment. I granted summary
judgment to plaintiffs for breach of contract on the ground that
the district judge should search the record in deciding a motion
for summary judgment and give judgment as appropriate, even
though the party who turns out to win may not have made the
motion itself. See Opinion at 37; 269 F. Supp. 2d at 446.
However, I was concerned that the record was so extensive that I
may have overlooked facts, or that a party may not have felt the
need to present all relevant facts and arguments. I therefore
invited further submissions to correct any overlooked or
unpresented facts or arguments, as well as on the issues of
damages. See Tr. Feb. 4, 2004, at 2-3.
In moving for reconsideration, Morgan makes two primary
arguments. The first is that there is no admissible evidence that
written notice was ever provided to Morgan, rather than to Korea
Exchange Bank ("KEB"), and that written notice to Morgan was
contractually required. The second is that several contemporary
documents written by KLI's Bo-Chan Kim in September and October
1997 do not mention KLI's demand to unwind, and Kim's
contemporary silence suggests that his October 16, 1997 demand was not really
intended. I consider and reject both of Morgan's arguments.
A. Written Notice to Morgan
As I held in my opinion, see Opinion at 9;
269 F. Supp. 2d at 431, the Total Return Swap Agreements between Morning
Glory and KEB, and between KEB and Morgan, incorporated the ISDA Master
Agreement, requiring all notices to be in writing. Accordingly,
it was the October 16, 1997 written unwind request, rather than
the prior oral communications, which constituted legally
effective demand on Morgan, obligating it to unwind the
transactions. Morgan's refusal to act constituted a breach of its
contract obligations. Opinion at 37;
269 F. Supp. 2d at 446.*fn1
Morgan asserts that I should grant reconsideration because it,
and not only KEB, should have been given written notice of KLI's
instruction to unwind the transactions. According to Morgan, the
testimony of KLI's Bo-Chan Kim, who sent the October 16, 1997
demand to unwind and then telephoned KEB and Morgan to confirm
its receipt, is hearsay and inadmissible, and that is the only
evidence that Morgan was informed of the written notice.
To elaborate on what I described in my earlier opinion, see
Opinion at 15, 31; 269 F. Supp. 2d at 434, 443, the record shows
that KLI first demanded an unwind as early as June 1997,
directing its requests both to Morgan and to KEB as intermediary.
KEB and Morgan both declined to act. At a meeting at KLI's office
in August 1997, Dr. Chang Hyun Chi, the head of Morgan's Korea
team, acknowledged to Kim, a manager in KLI's Fixed Income
Department, that Morgan had received, but had not executed, KLI's
demand to unwind. Kim reiterated to Chi KLI's demand to unwind, but Morgan still did not comply.
Ultimately, on Morgan's specific instructions, KLI sent its
written demand to KEB on October 16, 1997, in the form of a
telefax from Kim to Joongseok Ahn, a General Manager of KEB.
After sending the telefax, Kim called KEB to confirm its receipt
of KLI's telefax, in accordance with the regular business
practice in Korea, and KEB acknowledged to Kim that it had
received KLI's demand notice. A week later, Kim called both KEB
and Morgan to inquire why the unwind had not yet been executed.
Both KEB and Morgan told Kim that they would not unwind the
transaction, each stating that it could not act without the
assent of the other, but neither giving the other its assent.
The record that establishes these facts is drawn primarily from
testimony by Kim, and confirmed in testimony by other KLI and
Morgan employees having personal knowledge, including Chae Wook
Noh, the General Manager of KLI's Stock Department who had
principally brokered the deal. Taped telephone conversations
among Morgan employees confirm that Morgan knew of, and that it
intentionally ignored, KLI's attempts to make further contact.
The relevant testimony by Kim, aside from deposition testimony,
was at an evidentiary hearing which I conducted on September 4-5,
2002. Kim testified that he sent the fax on the instructions of
the Morgan representative whom he spoke with, either Dr. Chang
Hyun Chi or General Manager Sung Woo Park. Tr. Sept. 5, 2002, at
174-75. "Before we sent out this particular instruction, we made
several calls in order to unwind in order to request unwinding
of a thai baht, but that was not done. . . . Dr. Chi said that we
have to send out instruction to KEB . . . What he said was that
if we sent this instruction to KEB, KEB will relay this document
to J.P. Morgan and then J.P. Morgan will quote the price and if
we accept the price, then deal can be settled." Id. at 175-77;
see also id. at 169 ("We sent this document because J.P.
Morgan asked us to send."). Kim authenticated a translation and the
original of the telefax which he had sent, which were received as
Plaintiffs' Exhibits 15 and 16, respectively.
Morgan did not object to the admission of the original
document, Exhibit 16, on grounds of authenticity, but objected on
grounds of late production and on the grounds that a foundation
was not laid for its receipt by KEB. Id. at 164-65. I inquired
of Kim as to the regular business practice in Korea, and he
explained that the legend which in the United States customarily
appears at the top of a faxed document to confirm its receipt is
not printed in Korea. Instead, the sender customarily telephones
the recipient to confirm the document's receipt. Kim testified
that he followed the customary practice in this case, speaking to
either KEB General Manager Joongseok Ahn or his deputy, Yong Il
Keum. Id. at 165-66. Morgan did not raise any objections during
the course of my questioning, id., and on the basis of this
testimony, I overruled Morgan's objection and admitted the
document into evidence. Id. at 167.
Kim testified that he called KEB to confirm its receipt of his
telefax, see id. at 166, and that he called Morgan the
following week to inquire why the unwind had not occurred. His
most detailed explanation followed at the end of his redirect
examination, when I questioned him directly:
THE COURT: What happened after you sent Exhibit 16?
THE WITNESS: After we sent out this document, we
still did not receive any response from J.P. Morgan.
So after one week we called J.P. Morgan once again.
I'm not sure whether the person who answered my call
was Dr. Chi or Mr. Sung Woo Park.
When I asked why the order was not implemented, why
they didn't give us the price quote, J.P. Morgan
answered that they did not receive this document from
KEB. So after I hung up the phone, I called Mr. Keum
When I asked Mr. [Keum] why this instructional
document was not released to J.P. Morgan, Mr. Keum
answered that he did relay this document to J.P.
Morgan but he said that . . . he was under the
impression that J.P. Morgan was not interested in
implementing the order.
I was very nervous about what happened, so I called
J.P. Morgan once again. THE COURT: Before you do that, you testified that Mr.
[Keum] at KEB said that it was his impression that
Morgan wasn't interested. Did he say why he had that
MR. HUMMEL [counsel for Morgan]: Your Honor, may I
object to the hearsay?
THE COURT: Overruled.
MR. HUMMEL: And I move to strike the hearsay.
THE WITNESS: Mr. Keum said that J.P. Morgan was
trying to make excuses, but I didn't really ask why
Mr. Keum formulated such an impression about J.P.
Morgan because I was really angry and I just wanted
to speak to J.P. Morgan once again to find out why.
So I called.
THE COURT: See if you can give me a date for this
next call to Morgan.
THE WITNESS: I made all these calls one week after we
sent out this document and several calls were made on
the same day after sending out this document. And
when I spoke to J.P. Morgan, they told me something
opposite to what KEB told me, had told me earlier,
saying that J.P. Morgan said that it is KEB who
seemed to be not interested in unwinding the thai
. . .
I was very much angry at the time and . . . I really
was under the impression that KEB and J.P. Morgan
[were] playing with KLI.
Id. at 177-79. The only hearsay objection that Morgan made to
any of Kim's testimony was the objection, quoted above, to Kim's
testimony regarding the basis for Keum's "impression that J.P.
Morgan was not interested in implementing the order." Id. at
178. Morgan now objects to Kim's entire testimony on the grounds
that it was hearsay. I note first that Morgan's objection was not
timely made, and Morgan in no way indicated that its objection
applied to any previous part of Kim's testimony. Morgan did not
object during Kim's direct examination, for instance, when he
testified that he called KEB to confirm receipt of the telefax.
Id. at 165-67. Nor did Morgan object earlier in Kim's redirect
examination, when he testified that he informed Morgan that he
had sent the unwind demand to KEB. Id. at 173. As applied to
these aspects of Kim's testimony, Morgan's objection was not
timely made and therefore is waived. See Fed.R. Evid.
103(a)(1) (admission of evidence is not error unless "a timely
objection or motion to strike appears of record"); United States
v. Frustaci, 96 Cr. 430, 1997 U.S. Dist. Lexis 14111 (S.D.N.Y.
Sept. 16, 1997) (objection sustained where not timely made). Even if Morgan's objection is understood broadly to refer to
the entirety of Kim's testimony, and even if it were deemed
timely, it could not properly be sustained as applied to other
aspects of Kim's testimony beyond his testimony regarding Keum's
impression that J.P. Morgan was not interested in implementing
the order. Fed.R. Evid. 801(c) defines hearsay as "a statement,
other than one made by the declarant while testifying at the
trial or hearing, offered in evidence to prove the truth of the
matter asserted." Kim's testimony that he called KEB and Morgan
to check that the unwind demand was received and would be acted
upon was not hearsay, since Kim made the statements himself,
regarding his own previous activities. See Fed.R. Evid. 801(c)
(defining hearsay as a statement "other than one made by the
declarant while testifying at the . . . hearing"); cf. United
States v. Yousef, 327 F.3d 56
, 153 (2d Cir. 2003) (defendant's
prior written statement is hearsay but his testimony is
admissible under Fed.R. Evid. 801(c)). Kim's testimony regarding
the course of phone calls following a telefax was also not
hearsay, for this testimony was offered not "to prove the truth
of the matter asserted," but to establish the regular business
practice in Korea. The testimony was not offered in the context
of direct questioning, but in the context of investigating the
reliability of Plaintiffs' Exhibit 16.
I provided Morgan with ample opportunity to supplement the
record with its own evidence, through testimony or otherwise,
that it and KEB had not received notice of KLI's October 16, 1997
telefax. Both on and off the record, at conferences, during the
evidentiary hearings on Morgan's summary judgment motion, and
during this motion for reconsideration, I pressed the parties to
submit any other relevant evidence which would provide a more
complete record. See, e.g., Tr. Sept. 4, 2002, at 3, 107-08,
117-18; Tr. Sept. 5, 2002, at 183; Tr. July 17, 2003, at 13-14;
Tr. Feb. 4, 2004, at 2-3. Morgan did not produce any evidence
contradicting Kim's testimony; instead, Morgan rests on its
denials. Morgan "must do more than simply show that there is some metaphysical doubt as to the material facts"
in order to raise a triable issue of fact. Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Morgan's simple denial is even less persuasive in the context of
a motion for reconsideration. See Kotlicky v. United States
Fidelity Guar. Co., 817 F.2d 6, 9 (2d Cir. 1987) (heightened
standards for motion to reconsider); Nemaizer v. Baker,
793 F.2d 58, 61-62 (2d Cir. 1986) (same).
Aside from disputing the evidence showing that KEB and Morgan
were made aware of KLI's October 16, 1997 unwind demand, Morgan
also contends that the unwind demand was legally defective
because the requirement of written notice included a requirement
that the written notice be sent, not to KEB, but to Morgan
directly. As I held before, Morgan "knew, by reason of both KLI's
written and oral notices, that KLI wanted its baht position
unwound, and that it was Morgan's decision not to comply with the
demand Clearly, Morgan had actual knowledge, and therefore is
deemed to have notice that KLI made demand pursuant to the unwind
provision." Opinion at 32; 269 F. Supp. 2d at 443 (citing
Leasing Serv. Corp. v. Diamond Timber, Inc., 559 F. Supp. 972,
978 (S.D.N.Y. 1983)). Morgan thus had actual knowledge of the
written notice. "A person is deemed to have notice when he has
actual knowledge or when `from all the facts and circumstances
known to him at the time in question he has reason to know that
it exists.'" Pavia v. 1120 Ave. of the Americas Assocs.,
901 F. Supp. 620, 625 (S.D.N.Y. 1995) (quoting Diamond Timber,
559 F. Supp. at 978).
More significantly, it was Morgan which had "instructed KLI to
send any request to unwind to KEB." Opinion at 15;
269 F. Supp. 2d at 431. Indeed, Morgan maintained that position that any
notice was to be sent to KEB right up through its motion for
summary judgment. See Memorandum in Support of Defendant's
Motion for Summary Judgment at 35-36 (April 12, 2002) ("Morning
Glory did have an express contractual right under the Morning Glory-KEB Swap to `terminate' that contract upon two days written
notice to KEB." (emphasis original; citing clause establishing
privity between Morning Glory and KEB)); Tr. June 20, 2002, at
62-63 ("The contracts provide that there should be a demand, that
it should be to KEB . . ."); Tr. Sept. 5, 2002, at 171 ("The
unwind request should have been to KEB . . ."). After
consistently maintaining the position that KLI and Morning Glory
were required to give written notice to KEB, Morgan is now
estopped from arguing that the written notice should have been to
Morgan instead. See, e.g., Club Haven Investment Co. v.
Capital Co. of America, 160 F. Supp. 2d 590 (S.D.N.Y. 2001)
(equitable estoppel doctrine binds a party to its word in breach
of contract case).
Morgan held out KEB as its agent for receiving notice. It
rejected KLI's initial attempts to communicate directly to Morgan
its desire to unwind, instructing KLI that an unwind demand would
be considered effective only if it was sent, in writing, to KEB.
It maintained that position throughout this lawsuit. Morgan's
actions now are governed by the rule that a party which gives
instructions as to the recipient to whom notice must be provided
may not later contend that notice given to that recipient was
ineffective. "[K]knowledge acquired by an agent acting within the
scope of his agency is imputed to his principal and the latter is
bound by such knowledge although the information is never
actually communicated to it." Center v. Hampton Affiliates,
Inc., 488 N.E.2d 828, 829 (N.Y. 1985) (citing Farr v. Newman,
199 N.E.2d 369, 371 (N.Y. 1964); see also Wight v.
BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) (following
Nor does KEB's agency fall within the "adverse interests"
exception to this doctrine. Wight, 291 F.3d at 87. That
exception can be invoked only when the agent has "totally
abandoned his principal's interests and [is] acting entirely for
his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or
because he is not acting primarily for his principal." Center,
488 N.E.2d at 830. KEB's role in this set of transactions was
purely as an intermediary. It had no interests adverse to
Morgan's, and, by telling KLI that it could not effect the unwind
that is, by taking the same position towards KLI that Morgan
took it was in no way acting adversely to Morgan's interests,
let alone "totally abandon[ing]" them. Id. The adverse
interests exception is "narrow," Wight, 219 F.3d at 87, and it
does not apply here. The written notice which KLI provided to KEB
on October 16, 1997 was sufficient and legally effective to
compel instructed action from Morgan.
B. Contemporary Extrinsic Evidence
Morgan argues that internal KLI memoranda, one of September 30,
1997 and another of October 30, 1997, derogate from KLI's written
demand to unwind the Morning Glory transactions. Morgan contends
that since Bo-Chan Kim, who signed the October 16 demand notice
on behalf of KLI, did not mention anything about an unwind
request in the two internal memoranda, an issue of fact arises as
to what really was KLI's intent. Morgan notes that it and KLI had
been discussing a restructuring of their deal, as reflected in
Morgan's letter of October 3, 1997, and that KLI may have
preferred a restructuring to an unwind.
KLI's internal memoranda do not change the legal effect of the
October 16 written demand Clause 12 of the ISDA Master
Agreement, specifically incorporated into the KLI/Morgan/KEB
agreements, required that notice be given in writing, and where
written notice is required, anything that derogates from that
written notice must be in writing as well. See N.Y. Gen. Oblig.
Law § 15-301 (contractual requirement of written notice is
enforceable and cannot be waived except in writing); see,
e.g., Jaffe v. Paramount Communications, 644 N.Y.S.2d 43, 47 (N.Y.App. Div., 1st Dep't 1996) (where contract required
written notice, presence or absence of a writing is dispositive;
extrinsic evidence is immaterial under N.Y. Gen. Oblig. Law §
15-301); Bank of N.Y. v. Kranis, 592 N.Y.S.2d 67 (N.Y.App.
Div., 1st Dep't 1993) (same: contract "with a
no-oral-modification clause is not amenable to oral termination.
Parol evidence cannot be used to vary or contradict the express
terms of the writing, and no triable issues of fact are
created. . . ."). Morgan cannot produce a writing that
constitutes a revocation or modification of KLI's written demand
Morgan's motion for reconsideration raises no triable issue of
fact. KLI's October 16, 1997 written demand was neither modified
nor revoked. I affirm my finding that KLI's written demand on
October 16, 1997 was effective, and that Morgan's failure to
comply with it constituted a breach of Morgan's contractual duty.
Accordingly, I deny Morgan's motion for reconsideration.
I calculated in my opinion that Morgan was responsible for
paying $26,456,946 in damages. I explained that this calculation
was preliminary and did not constitute a ruling, and I invited
the parties to submit supplemental briefings on the question of
damages. Opinion at 38; 269 F. Supp 2d at 446. Morgan argues that
plaintiffs failed to mitigate damages and that, under the
mitigation doctrine, the maximum KLI can recover is $6.35
million. Morgan argues that KLI could have mitigated its damage
by making offsetting three-month forward contracts, purchasing
and selling short baht forward positions and long dollar forward
positions, in appropriate amounts. Alternatively, Morgan argues,
KLI could have purchased put options on the baht. Morgan presents an expert to show that either of these types of
transactions would have protected KLI against subsequent
depreciation of the baht against the dollar.
The doctrine of mitigation generally applies to a breach of
contract action. "New York's courts adhere to the universally
accepted principle that a harmed plaintiff must mitigate
damages." Air Et Chaleur, S.A. v. Janeway, 757 F.2d 489, 494
(2d Cir. 1985). "[T]he party seeking damages is under the duty to
make a `reasonable effort' to avoid consequences of the act
complained of. It is, indeed, a rule of broad acceptance that `No
recovery may be had for losses which the person injured might
have prevented by reasonable efforts and expenditures.'" Wilmot
v. State, 297 N.E.2d 90, 92 (N.Y. 1973) (internal citations
However, a plaintiff is not required to take economically
unreasonable steps, or to engage in particular transactions
identified by the breaching defendant. In Carlisle Ventures,
Inc. v. Banco Espanol de Credito, S.A., 176 F.3d 601 (2d Cir.
1999), Carlisle bought shares of common stock in the defendant
bank, known as Banesto. Soon afterwards, Spanish regulators
uncovered financial instabilities in Banesto, leading to the
devaluation of its shares. Carlisle sued, and Banesto was found
liable for breach of contract. On appeal, Banesto argued that its
damages should be reduced because Carlisle failed to participate
in a below-market sale of shares, which would have offset the
losses it incurred through its previous transaction. The Court of
Appeals rejected this argument, holding that in evaluating a
it is appropriate for courts to focus "not on the
failure of the plaintiff to pursue the . . .
alternative courses of action suggested by [the]
defendant but upon the reasonableness of the action
which [the] plaintiff did in fact take. The fact that
in retrospect a reasonable alternative course of
action is shown to have been feasible is not proof of
the fact that the course actually pursued by the
plaintiff was unreasonable."
Id. at 609 (citing Zanker Dev. Co. v. Cogito Sys. Inc.,
264 Cal. Rptr. 76, 79 (1989) (brackets and ellipses in original). The
Court of Appeals thus held that "a breach victim is rarely
required to accept a new offer in order to mitigate damages." Id. (citing
caselaw and Dan B. Dobbs, Law of Remedies, at 135 (2d ed. 1993));
see also III E. Allan Farnsworth, Farnsworth on Contracts §
12.12, at 232 (3d ed. 2004) ("What steps the injured party is
expected to take depends on the circumstances. . . . The injured
party is not . . . expected . . . to take steps that involve
undue burden, risk, or humiliation.").
A plaintiff is also not required to take steps in mitigation
that should have been taken by the breaching defendant. In
Travelers Indemnity Co. v. Maho Machine Tool Corp., 952 F.2d 26
(2d Cir. 1991), defendant Maho, a German company, sold a machine
to a purchaser in Singapore. It arrived damaged, and was
rejected. Maho offered the purchaser a choice: incur the expense
of approximately $10,000 to fly Maho's engineer from Germany to
Singapore to inspect the machine, or fly the machine to Germany
for repairs. The purchaser declined to return the machine to
Germany, and its insurer, Travelers, as subrogee, sold the
machine for salvage, and sued Maho for breach of contract. Maho
relied on the defense of mitigation, arguing that the purchaser
could have reduced its damages by spending $10,000 to fly Maho's
engineer from Germany to Singapore. The Court of Appeals rejected
the argument, ruling, in part, that "even if it were thought
reasonable for Travelers to have incurred the $10,000 expense for
Maho's engineer to inspect the machine in Singapore, it was at
least as reasonable for Maho to incur the same expense." Id. at
31. "[T]he victim of a breach of contract need not make
expenditures to mitigate damages where the breaching party had
the same opportunity to prevent damages." Id.
Saboundjian v. Bank Audi (USA), 556 N.Y.S.2d 258 (N.Y.App.
Div., 1st Dep't 1990), which Morgan cites as contrary authority,
involves very different facts. Plaintiff in Saboundjian was an
experienced and active foreign currency trader, who maintained "a
number of different foreign currency positions open with the bank
at various times." 556 N.Y.S.2d at 260. Plaintiff had ordered the bank to sell his deutsche marks
when they reached a certain price per dollar, and the bank failed
to do so. When the bank informed him, the morning after the
deutsche marks hit the sell price, that the sale had not been
executed as requested, the bank also informed him that they could
execute it at that time at a price "only somewhat less." Id.
Plaintiff declined, stating, "Don't worry, I am bullish." Id.
Plaintiff then waited another month until he finally asked the
bank to close out his position. Id. The First Department held
that since plaintiff had "fail[ed] to cover within a reasonable
time," his damages should be reduced by the amount of loss that
he could have avoided had he mitigated through an offsetting
transaction. Id. at 261. Plaintiff could not, the First
Department held, "refuse to cover a transaction previously
requested and thereby speculate on the market entirely at the
risk of the broker." Id. at 261 (quoting Brown v. Pressner
Trading Corp., 475 N.Y.S.2d 405 (N.Y.App. Div., 1st Dep't
KLI did no such thing. The unwind provision, clause 2(e) of the
Morning Glory/KEB Total Return Swap Agreement, was inserted
specifically to protect KLI against an open-ended currency
devaluation. KLI had far less experience with international
currency markets than did Morgan, and the parties specifically
provided by the unwind demand provision to place on Morgan the
obligation to mitigate the effects of devaluation. The parties to
a contract may rearrange such rights and obligations as part of
their negotiations. See, e.g., Charles J. Goetz & Robert E.
Scott, The Mitigation Principle: Toward a General Theory of
Contractual Obligation, 69 Va. L. Rev. 967, 971-72 (1983)
(mitigation doctrine, like most contract rules, is "permissive,
applying only if the parties do not otherwise agree," and can and
should be contractually modified when appropriate); cf. Duncan
v. TheraTx, Inc., 775 A.2d 1019, 1021 (Del. 2001) (damage rules
should reflect what the parties bargained for or would have
bargained for (quoting Goetz & Scott)). The Total Return Swap Agreement
thus assigned to Morgan the duty to mitigate damages, and Morgan
had the obligation, upon written demand by KLI pursuant to clause
2(e), to mitigate loss by unwinding the baht portion of the deal.
As in Maho Machine, KLI should not bear the responsibility and
the expense of undertaking this unwind by entering into an
offsetting transaction when Morgan had an equal opportunity,
greater market experience, and the contractual obligation to do
Furthermore, the mitigation transactions suggested by Morgan
would not have been financially reasonable for KLI. According to
Morgan, the cost of a put option on the baht would have been
$6.35 million. As I observed in my opinion, KLI's income was
approximately $7 million for the year ending March 31, 1996.
Opinion at 11; 269 F. Supp. 2d at 432. Given the financially
precarious situation that KLI found itself in after the baht
began to fall including both its mounting debt to Morgan and
the potential credit ramifications of operating in a deficit
the high deployment of capital required to exercise a put option
would have raised the transaction costs of a $6.35 million offset
beyond KLI's means, not to speak of the magnitude of
transactional risk that KLI would have had to incur in trying to
effect a perfect hedge with a volatile currency and an unstable
(at the time) Thai government. Thus, just like the plaintiff in
Carlisle, KLI was not required to enter into the specific
transaction identified by the defendant; while a party has an
obligation to take "reasonable" steps to mitigate damages, it
does not have an obligation to go beyond those. Carlisle,
176 F.3d at 609; Wilmot, 297 N.E.2d at 92.
Accordingly, I hold that the doctrine of mitigation of damages
did not require KLI or Morning Glory to enter into the put and
call transactions suggested by Morgan. KLI had the contract right
under clause 2(e) to require Morgan to unwind, and thus to stop
the running of loss. III. Calculation of Damages
In my opinion, I performed a preliminary calculation of the
damages caused by Morgan's breach. "Using published exchange
values of the baht to the dollar as of October 20, 1997, two
business days after KLI's demand, I calculate[d] that an unwind
of the baht forward contract executed on that date would have
yielded $39,847,800." Opinion at 38; 269 F. Supp 2d at 446. I
then compared that value with the yield obtained when Morgan
performed its unwind, on January 7, 1998. The actual unwind
yielded $66,304,746. Subtracting one from the other, I posited
the difference, or $26,456,946, as the amount of damage caused by
Morgan's breach. Since KLI is suing to be repaid the much larger
amount that it had paid Morgan, I held that that difference,
$26,456,946, is the amount which Morgan should be obligated to
credit, or repay, to plaintiffs. Id.
I observed, however, that "liquidation values of forward
currency contracts for deteriorating currencies are not so easily
derived," requiring expert proofs more appropriately than
arithmetical calculations from published currency tables. Opinion
at 38; 269 F. Supp 2d at 447. I held that the correct amounts of
damages still had to be ascertained, and I called for submissions
and held a hearing. Id. The parties, in their additional
briefing, now dispute a number of elements of damages. I address
each of these points in turn.
A. Calculating the Unwind Date and Price
I held in my opinion that the effective date of KLI's unwind
demand was October 16, 1997, and that the unwind should be
calculated, in accordance with clause 2(e) of the Morning Glory/KEB Total Return Swap Agreement, as of two business
days following that demand, or October 20, 1997. See Opinion at
38; F. Supp. 2d at 446.
Plaintiffs now contend that the proper valuation date should be
October 16, 1997, rather than two business days later. According
to plaintiffs, a distinction exists between the "valuation date"
and the "termination date." Because the entire process of
unwinding the transaction from agreeing on a price to arranging
for settlement of the transaction could not be entirely
completed in one day, according to plaintiffs, the unwind was to
be priced as of the day of demand, and effected two days later.
Thus, plaintiffs argue, the "valuation date" was the date of
demand, October 16, and the baht should be priced as of that
date, rather than as of the "termination date," October 20.
Morgan contends that under the plain language of clause 2(e),
the date of unwind should have been October 20, and that should
therefore be considered the date of valuation.
Clause 2(e) of the Morning Glory/KEB Total Return Swap
Agreement reads as follows:
The Counterparty [Morning Glory] has the right as of
any Business Day on a full two-way payments basis to
terminate the Transaction at the prevailing market
value, as determined by the Calculation Agent
[Morgan] in a reasonable and fair commercial manner,
on at least two (2) Business Days prior notice.
Under this provision, Morning Glory had a right to terminate
the transaction "at the prevailing market value," a right which
arose "as of any Business Day" which followed "two (2) Business
Days prior notice." The prevailing market value was thus to be
determined as of the day when the right to terminate arose, that
is, two business days following the date notice was given.
Effective notice was given first on October 16, 1997;
accordingly, plaintiffs' right to terminate arose not on that
date, but rather two business days later, October 20, and section
2(e) directed the unwind to occur "at the prevailing market
value" as of that day. The plain text and logic of the clause suggests that there is no difference between
the "valuation date" and the "termination date"; the baht is to
be priced as of the date of termination, October 20, 1997.
The next issue is to fix the exact amount of actual damages
caused by Morgan's failure to perform the unwind as of October
20, 1997. Since KLI paid Morgan an amount based on Morgan's
unwind occurring on January 7, 1998, the amount KLI would have
owed Morgan had the unwind been effected on October 20, 1997 must
be subtracted by the amount KLI actually paid based on the
January 7, 1998 unwind. The parties are in agreement that KLI
paid Morgan $66,304,746 with respect to Morgan's January 7, 1998
unwind. See Opinion at 38; 269 F. Supp 2d at 446. They also
agree that the formula by which to determine what KLI would have
owed Morgan had the unwind occurred as of October 20, 1997 was
the formula provided by the Morning Glory/KEB Total Return Swap
Agreement, see Opinion at 6 n. 5; 269 F. Supp. 2d at 429 n. 5:
Baht Payment Amount = Notional Amount × 5 ×
"Notional Amount" = $25,000,000;
"ThbSpot" = 25.624;
"ThbMat" = the value of the baht at maturity.
As I held above, ThbMat should be determined as of October 20,
1997, the date the unwind should have occurred. The parties
dispute the value of ThbMat on that date.
In calculating the value of the baht on October 20, 1997, the
parties agree that a three-month forward rate is appropriate, and
I accept the methodology adopted by William Arnold, in his
Supplemental Declaration dated November 12, 2003, for determining
this rate. The result is a rate of 38.71 baht per dollar. Using
this rate and the formula cited earlier,
Baht Payment Amount = $25,000,000 × 5 × (25.624
38.71)/38.71 = -42,256,522.75, or a $42,256,522.75 payment from
Morning Glory (or KLI as guarantor and as the real party in
interest) to KEB. See Opinion at 6 n. 5; 269 F. Supp. 2d at 429
n. 5. Assuming that the unwind should have occurred at the 38.71 baht/dollar exchange rate, the
amount of overpayment, adjusted by Morgan's breach of contract,
was $66,304,746 $42,256,522.75 = $24,048,223.25.
Accordingly, Morgan must pay to plaintiffs $24,048,223.25 in
damages, with interest at nine percent from October 20, 1997.
See N.Y.C.P.L.R. § 5001(a) ("Interest shall be recovered upon a
sum awarded because of a breach of performance of a contract
. . ."); id. § 5004 ("Interest shall be at the rate of nine per
centum per annum, except where otherwise provided by statute.");
Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 90 (2d Cir. 1998)
(simple interest at statutory rate of nine percent in breach of
contract actions); Adams v. Lindblad Travel, Inc., 730 F.2d 89,
93 (2d Cir. 1984) (prejudgment interest recoverable as of right
in an action at law for breach of contract).
B. Financing Costs
Plaintiffs also claim incidental damages of $14,448,075 to
repay them for the financing costs they incurred when they paid
Morgan $90,492,246 following the termination of the Total Return
Swap Agreements. Plaintiffs argue that the financing costs they
incurred were the consequence of Morgan's breach of contract. KLI
lacked sufficient funds to pay Morgan's demand, made January 27,
1998 for full payment of $90,492,246, and entered into a Loan
Facility Agreement with Morgan to finance such payment. KLI
argues that if Morgan had unwound its baht position on October
20, 1997, as it was contractually required to do, much of this
financing would have been unnecessary. Accordingly, KLI argues
that the financing costs it thus could have avoided should be
recoverable. Morgan argues that financing costs constitute
consequential damages and are not recoverable under New York law
because they were not within the contemplation of the parties at
the time they signed the contract. KLI relies on several New York cases which hold that financing
costs may be awarded in certain circumstances, alongside
prejudgment interest. See Bulk Oil (U.S.A.), Inc. v. Sun Oil
Trading Co., 697 F.2d 481 (2d Cir. 1983); Intermeat, Inc. v.
American Poultry Inc., 575 F.2d 1017 (2d Cir. 1978); Niagara
Mohawk Power Corp. v. Stone & Webster Engineering Corp., 88 Civ.
819, 1992 U.S. Dist. Lexis 7721 (N.D.N.Y. May 23, 1992). These
cases hold that "[a] party to a contract may recover financing
costs as incidental damages, apart from prejudgment interest
allowable under New York State law." Niagara Mohawk, 1992 U.S.
Dist. Lexis 7721, at *106.
However, as Niagara Mohawk itself acknowledges, id. at
*107, Bulk Oil and Intermeat are both inapposite because
those cases were decided under Article 2 of New York's Uniform
Commercial Code. See N.Y.U.C.C. § 2-710 ("Incidental damages to
an aggrieved seller include any commercially reasonable charges,
expenses or commissions incurred in stopping delivery, in the
transportation, care and custody of goods after the buyer's
breach, in connection with return or resale of the goods or
otherwise resulting from the breach."). The financing costs in
those cases were deemed "commercially reasonable"; they had been
incurred previously and were owed to third parties. Bulk Oil,
697 F.2d at 482; Intermeat, 575 F.2d at 1024-25.
By contrast, the instant case is not a U.C.C. case, and the
rights afforded under § 2-710 are not present. Further, KLI
incurred the financing costs after Morgan's breach had already
occurred. KLI, already having cause for complaint against Morgan,
made a conscious decision not only to continue paying Morgan the
sums owed to it, but to return to Morgan for financing. The
financing charges were thus caused not by Morgan's breach, but by
KLI's business decision. KLI cannot now complain that it should
not have paid those charges. More significantly, the breach of contract damages which I
award here must be distinguished from the damages which
plaintiffs originally sought when they brought suit. Plaintiffs
sought a rescission of their contracts under grounds including
fraud, negligent misrepresentation, illegality, and commercial
frustration. Plaintiffs sought the return of all sums they paid
to Morgan, $90,492,246 in total. This sum included the financing
costs that KLI now seeks. See Opinion at 15-16;
269 F. Supp. 2d at 434-35. I granted summary judgment to Morgan
dismissing those causes of action, holding that the parties were
in pari delicto. Opinion at 29-30; 269 F. Supp. 2d at 442. I allowed
plaintiffs to recover not the entirety of their expenditures, but
only the amount of the overpayments which were the direct consequence
of Morgan's breach of contract. Opinion at 38; 269 F. Supp. 2d at 446.
I denied in my opinion, and I deny again now, plaintiffs' attempt to
recover more of their losses than they are entitled to by virtue of
Morgan's breach of contract.
Finally, I observe, as does Morgan, that under New York law,
"[in] order to impose on the defaulting party a further liability
than for damages [which] naturally and directly [flow from the
breach], i.e., in the ordinary course of things, arising from a
breach of contract, such unusual or extraordinary damages must
have been brought within the contemplation of the parties as the
probable result of a breach at the time of or prior to
contracting." Kenford Co. v. County of Erie, et al.,
537 N.E.2d 176, 178 (N.Y. 1989) (Kenford II) (citations omitted) (brackets
in original). There is no evidence that the parties contemplated
when they entered into the Total Return Swap Agreements that they
would need a financing agreement to settle their accounts, or, if
they had considered this unlikely eventuality, that they would
have agreed upon the result plaintiffs now seek. See Kenford
Co. v. County of Erie, et al., 493 N.E.2d 234, 236 (N.Y. 1986)
(Kenford I) (in the absence of a governing contractual
provision, "the commonsense rule to apply is to consider what the parties would have
concluded had they considered the subject"). Plaintiffs' claim
for financing costs is denied.
C. Collateral Held by Morgan
Plaintiffs allege that Morgan currently holds an account
containing a credit balance remaining from U.S. Treasury
securities pledged by KLI to secure KLI's payment obligations
under the Loan Facility Agreement. As explained by plaintiffs,
collateral was sold from this account to make payments as they
came due under that Agreement. After KLI paid the entire debt
claimed by Morgan on January 31, 2000, a cash balance of
$574,132.55 remained in the account controlled by Morgan. KLI
seeks return of that balance, as well as prejudgment interest.
Morgan concedes that it is currently holding cash collateral
belonging to KLI, and that such a sum should be included in a
final award of damages. Morgan argues, however, that it should
not be required to pay prejudgment interest on this money, given
that plaintiffs have never before asserted a claim regarding that
collateral or even referenced it in the course of this lawsuit.
The record shows that plaintiffs properly demanded return of
their collateral on February 28, 2000, exactly one month after
they made payment to Morgan of $90,492,246 and shortly after they
filed this lawsuit. Morgan was thus on notice that failure to
repay the collateral would result in an interest obligation.
Cf. Doyle v. Levy, 162 N.Y.S.2d 714 (N.Y.App. Div., 1st
Dep't 1957), aff'd 152 N.E.2d 541 (N.Y. 1958). Morgan's objection
that the complaint did not specifically mention the collateral is
without merit, because this aspect of the claim is fairly
subsumed within the balance of KLI's claims. Accordingly, Morgan
is liable to plaintiffs in the amount of the excess collateral, $574,132.55, plus prejudgment
interest at the statutory rate of nine percent, running from
February 28, 2000. Morgan may keep whatever interest actually
accrued in the ordinary course, and accordingly, no further
accounting is required.
D. Currency Exchange Loss
The final element of KLI's requested damages is currency
exchange loss in the amount of $1,346,360.25. Plaintiffs are
Korean entities and claim that they will ultimately need to
convert any damages into Korean won. The overpayments they made
to Morgan were in U.S. dollars, however, as will be the judgment
that they recover. Plaintiffs argue that the dollar/won exchange
rate is less favorable to them today than it was at the time it
made its overpayments that is, KLI used more won to pay Morgan
in dollars in 1998 through 2000 than it would recover now if it
were awarded the same dollar sum. Plaintiffs therefore argue that
in order to make them whole, the award of damages should include
compensation for losses in the exchange rate. Plaintiffs
calculate that the sum of currency exchange losses, assuming a
comparison between the exchange rates in place during each
payment and the exchange rate in place on October 9, 2003,
shortly before plaintiffs submitted their motion, equals
Stated in other terms, KLI is asking to be compensated for the
difference between what the award would be in dollars, as of the
date of judgment, and what the award would have been in won, had
it been granted on the date of loss. In practical effect, KLI is
seeking a judgment that would change its damages from an award
calculated in dollars, as of the date of judgment, to an award
calculated in won, as of the date of loss. This request
contradicts two basic principles of judgments: that damages are
rendered in dollars, and that any conversion of currencies in an
award of damages is calculated as of the date of judgment. "Almost forty-five years ago, in Shaw, Savill, Albion & Co. v.
The Fredericksburg, the Court of Appeals for the Second Circuit
stated that `it is well settled that a money judgment by an
American court must be in American currency.'" Mitsui & Co. v.
Oceantrawl Corp., 906 F. Supp. 202, 203 (S.D.N.Y. 1995) (quoting
Shaw, 189 F.2d 952, 954 (2d Cir. 1951)). KLI, by seeking a
judgment in the won equivalent of dollars as of an earlier set of
dates, is circumventing the rule of Shaw, Savill by seeking
practical compensation in won, rather than in dollars.
The proper course is to calculate the loss in dollars, and to
do so as of the date of judgment. For instance, in Sae Sadelmi
S.p.A. v. Papua New Guinea Elec. Comm'n, 94 Civ. 2959, 1994 U.S.
Dist. Lexis 16978 (S.D.N.Y. Nov. 29, 1994), then-District Judge
Sotomayor confirmed an arbitration award which was in part
expressed in foreign currencies. She held that "[a]n American
court . . . can only enter a money judgment in U.S. dollars.
Therefore, I will enter judgment directing the parties to convert
the foreign currencies into U.S. dollars as of the date judgment
is entered by the Clerk of the Court." Id. at *4 (citation
Even if a judgment in won were appropriate, the date of
conversion to dollars would be that of judgment, rather than that
of injury. "[I]n a diversity action such as this one, the date on
which to convert a foreign currency judgment into United States
dollars is governed by New York law." Dynamic Cassette Int'l v.
Mike Lopez & Assocs., 923 F. Supp. 8, 11 (E.D.N.Y. 1996). Under
New York law, a judgment may be rendered in a foreign currency
where the cause of action was based upon an obligation expressed
in that currency. N.Y. Jud. Law § 27(b); see Dynamic Casette,
923 F. Supp at 12. In such a case, however, the "judgment or
decree shall be converted into currency of the United States at
the rate of exchange prevailing on the date of entry of the
judgment or decree." N.Y. Jud. Law § 27(b); see Dynamic
Casette, 923 F. Supp. at 12 ("Section 27(b) now explicitly provides that a judgment
entered in a foreign currency be converted into United States
dollars at the exchange rate prevailing on the date of
Accordingly, judgment should be expressed in dollars, without
regard to the currency markets for dollars and won. Section 27(b)
of the Judiciary Law does not apply, since the dealings of the
parties were done, not in a foreign currency, but in
dollars.*fn3 Cf. In re Oil Spill by The Amoco Cadiz,
954 F.2d 1279, 1328 (7th Cir. 1992) (when commercial activity took
place in a foreign currency, court should enter judgment in such
currency, for "the parties themselves selected for their
dealings, the currency in which the loss is felt"); see also
Sea-Roy Corp. v. Parts R Parts, Inc., 1999 U.S. App. Lexis
3383, at *12-*13 (4th Cir. 1999) (quoting Amoco Cadiz). Here,
as stated, the required payment was to be made in dollars, and
KLI's loss was therefore expressed in dollars. A judgment
converted into Korean won as of the date of loss, which KLI is in
substance requesting, would be inappropriate.
IV. Plaintiffs' Motion to Strike
By letter dated June 4, 2004, plaintiffs inquired about the
status of their motion to strike the expert reports of Michael R.
Darby and Robert Pickel, filed on November 18, 2002. The reports
were filed as part of Morgan's Offer of Proof in response to my
invitation, concerning the possible international financing and
investment effects were I to find that the transaction between
the parties was ultra vires and illegal under Korean law.
Morgan's experts expressed their opinions that the potential effects were
significant and could undermine financial markets and possibly
cause capital flight.
My ruling on the merits of the case made the experts' opinions
moot and academic. See Opinion at 26-27, 34-35;
269 F.Supp. 2d at 440-41, 444-45. Plaintiffs' motion to strike no
longer has any practical import. It is denied as moot.
For the reasons stated, I deny Morgan's motion for
reconsideration and its argument relating to mitigation of
damages. I deny plaintiffs' argument that KLI's damages should
include financing costs and currency exchange losses. I deny as
moot KLI's motion to strike the expert reports of Michael R.
Darby and Robert Pickel. I find Morgan liable to plaintiffs in
the following amounts:
1. Loss of $24,048,223.25 for Morgan's breach of
contract, with interest of nine percent from October
2. Cash collateral of $574,132.55, with interest of
nine percent from February 28, 2000.
The Clerk shall enter judgment accordingly and mark this case as