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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
ae x
STONEBRIDGE CAPITAL, LLC, : Index No, 08-602081
Plaintiff, : IAS Part 60
v. : Justice Fried
NOMURA INTERNATIONAL PLC, et al.,
Defendants.
MEMORANDUM OF LAW OF DEFENDANT/COUNTERCLAIM PLAINTIFF
NOMURA INTERNATIONAL PLC IN SUPPORT OF
ITS MOTION TO DISMISS PLAINTIFF’S AMENDED VERIFIED COMPLAINT
Brian H. Polovoy
Daniel C. Lewis
SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, NY 10022-6069
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
Attorneys for Defendant/Counterclaim Plaintiff
Nomura International pleTABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .....csscsscsssssssescsssessneesssseessneessuessuseessseesuseeessesssecsssssssscesneessancesseessseesaneees ii
PRELIMINARY STATEMENT .....cssesssssssssssssssesesssessseensetessusessueessusessnesssvessuecssscessasessseeesvessneccsseees 1
STATEMENT OF FACTS.......sesscssessssssessseesssessssecessnessavessueecsneesareessnsessusssusssscessuscsssesssueesseessneessses 4
A. Stonebridge’s Clients Create “Investor LLCs” And Buy Underlying Bonds.............00 4
B. The Investor LLCs Issue Notes To The “Pass-Through Trusts”
Collateralized By The Underlying Bonds... 4
C. The Pass-Through Trusts Issue Notes To NOMULA...........:s:cssesseesseeseessessessssecsesssesseeesesaees 5
D. The Parties Negotiate The “Event of Default” And “Downgrade Yield Trigger”
PLOVISIONS..0.....s.ssseessseessscseeceesersseteceeeseessneeesecneenseensees 6
E. Stonebridge Proposes Changing the Deal After It Is Signed ..........ssessssessstessseecsnessneeess 7
F, The Dispute Over The Agreement .........scsssssssssecssssseessssesssvessnscessesesseessseessneessneesnneesneeess 8
STANDARD OF REVIEW.....cccssessesssessecesssssessecssecnssucsscsussucsusssesecsseasesessessesuesucsessessscseeansaceneentenee 10
ARGUMENT.......ccssssssssessssessssesesssecessecsssecssnecssssessseresnusessuecssuccsasersensessuessusecsuseearessneesaneesaneenneeestee 11
I. THE “MUTUAL MISTAKE” AND “SCRIVENER’S ERROR” CLAIMS
SHOULD BE DISMISSED BECAUSE STONEBRIDGE FAILS TO ALLEGE
THAT IT AND NOMURA SHARED THE SAME ERRONEOUS BELIEF ........s::000+ 11
I. THE DECLARATORY JUDGMENT CAUSE OF ACTION SHOULD BE
DISMISSED.......sccssssesssscesseesssescsseesescessnecssssesanvesnerecsuscssnsecsavecanessuessarecanessneessuecsuseesesees 14
Ill. THE TRADE LIBEL CLAIM FAILS AS A MATTER OF LAW......ccsecssssscssessseeeseteente 17
IV. THE EQUITABLE ESTOPPEL CLAIM FAILS AS A MATTER OF LAW... .18
V. THE BREACH OF CONTRACT CLAIM FAILS AS A MATTER OF LAW .....ee 20TABLE OF AUTHORITIES
150 Broadway N.Y. Assocs., L.P. v. Bodner, 784 N.Y.S.2d 63 (1st Dep’t 2004)... 10, 14, 16
Arnav Indus., Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner,
96 N.Y.2d 300 (2001).....sccseecssseccseeesseessneecssvecssecssscesueesarsessuressusesneceanecssseessnseesneeenecessesess 10
Aventine Investment Management, Inc. v. Canadian Imperial Bank of Commerce,
695 N.Y.S.2d 128 (2d Dep’t 1999) .......eccceeseecssesseesseessessessssccseccnesssesstssesstesseseuessessseesasene 13
Bailey v. Fish & Neave, 8 N.Y.3d 523 (2007)....-cssscssssssssossseessessscessnscnsssnecscssecneesseseeeenesaneessesneens 14
Biondi v. Beekman Hill House, Apt. Corp., 257 A.D.2d 76, 692 N.Y.S.2d 304
(Ast Dep't 1999)... .cceccescssesssessecseesesessnessnesssessvessnesuesssssasssnsssueenessevecucsunenaesaresaneenecnasenncessess 10
Brauner v. Metro-North Commuter Railroad Co., 642 N.Y.S.2d 677 (1st Dep’t 1996) ... 19
Cambridge Assocs. v. Inland Vale Farm Co., 497 N.Y.S.2d 751 (2d Dep’t 1986) ........-0--+ 17, 18
Chimart Assocs. v. Paul, 66 N.Y.2d 570 (1986) .....sssesseceesecscseesesseecesesseesccsecsesesseenueeucseenteareneenses 11
D&L Holdings LLC v. RCG Goldman Co., LLC, 734 N.Y.S.2d 25 (1st Dep’t 2001) «0... 20
Drug Research Corp. v. Curtis Publishing Co., 7 N.Y.2d 435 (1960) -.eessessesssessssseeeeeseeeeees 17, 18
Farr v. Newman, 14 N.Y.2d 183 (1964) w.ccesesecsessesceeesssesecenseesssesesecsnsnsasssacsnsesaceesssanensasseaecetsneace 12
Griffin v. Anslow, 17 A.D.3d 889, 793 N.Y.S.2d 615 (3d Dep’t 2005) ........sssessseesssstessteeneeesnenes 10
Guardian Life Ins. Co. of Amer., Inc. v. Schaefer, 70 N.Y.2d 888 (1987)....:.s:ssecsessessseteeeeeesteeses 16
Gucci America, Inc. v. Duty Free Apparel, Ltd., 277 F. Supp. 2d 269 (S.D.N.Y. 2003)........0+ 18
Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) ....ssccescsssssssseseceesseeeseeseceseeentereeers 13
Holm v. C.M.P. Sheet Metal, Inc., 455 N.Y.S.2d 429 (4th Dep’t 1982) .......sesesseseesseeeeteeeeneeeeeee 19
Kalmanash v. Smith, 291 N.Y. 142 (1943) ..seccsssccsssecssessssecesvecsueecssnsesneessseeeavessneecsnsesseceeneesss 12, 13
Kennedy v. Leibowitz, 757 N.Y.S.2d 50 (2d Dep’t 2003) .......sesessecssesesseesssteseeeessenteseesteneeneeneeseene 19
Kirby v. Wildenstein, 784 F. Supp. 1112 (S.D.N-Y. 1992) .eccssssecseesesseesecsesnseeeseeneeereseentseteaeeneene 17
Leon v. Martinez, 84 N.Y.2d 83 (1994).....ccecseecsecsscsesrseesesensseeseesseneeaeesessssuseeeaeesteseententeeeeneeneeee 10
Lewis v. Welch, 510 N.Y.S. 640 (2d Dep’t 1987) ...e.ssessessesssssssesseccesseesecnesueenseeeseeeeeeneenseteeeeneeneeee 13
iiMurphy v. American Home Prods. Corp., 58 N.Y.2d 293 (1983) seccsssssscssssscessssssssssvesecsseessssssvess 20
Nau v. Vulcan Rail & Constr. Co., 286 N.Y. 188 (1941) sisssesssssssssesssseessescsseccsseesseessssessseeessee 14, 16
Oppman v. IRMC Holdings, Inc.,2007 NY Slip Op. 50093U (Sup. Ct. 2007) ...cessssssssseeeesees 20, 21
School of Visual Arts v. Kuprewicz, 771 N.Y.S.2d 804 (Sup. Ct. 2003)...c..sssssssesssrecssseesseesseeseeee 17
Sheth y. New York Life Ins. Co., 709 N.Y.S.2d 74 (Ist Dep’t 2000).....:essssscssssscsssenescesneeceeneeees 21
South Fork Broadcasting Corp. v. Fenton, 528 N.Y.S.2d 837 (Ist Dep’t 1988)......s:sscssssecessseees 12
Spirig v. Evans, 809 N.Y.S. 2d 212 (2d Dep’t 2006) .....sesecssssssssnseescesssescsssecessssscssssnteccesneseesnsee 20
Two Guys From Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 63 N.Y.2d 396 (1984) ......s1esees0 16
Velasquez v. GAB Robins North America, Inc., 2007 NY Slip Op. 52255U
(Sup. Ct. 2007).......-sccscsesssessesssesscsssessessuessssesessesssececesneeneessessesneceacseassaessnsesneecseeaneentensees 20
Warner Theater Associates Limited Partnership v. Metropolitan Life Ins. Co.,
No. 97 Civ. 4914, 1997 U.S. Dist. LEXIS 17217 (S.D.N.Y. Oct. 31, 1997) cesses 14
Waste Distillation Tech., Inc. v. Blasland & Bouck Engineers, 523 N.Y.S.2d 875
(2d Dep't 1988) ...essseessssecssseessssessseessssesssseessevecsseessssesssenssnsesseressueecssesssrecsutesraressuseeseeetsnenss 17
William P. Pahl Equipment Corp. v. Kassis, 588 N.Y.S.2d 8 (1st Dep’t 1992) ......eeeeeeeees 11, 13
iiiDefendant/Counterclaim Plaintiff Nomura International ple (“Nomura”)
respectfully submits this memorandum of law in support of its motion to dismiss the Amended
Verified Complaint (the “Amended Complaint”) of Plaintiff/Counterclaim Defendant
Stonebridge Capital LLC (“Stonebridge”) pursuant to Sections 321 1(a)(1) and (7) of the New
York Civil Practice Law and Rules.
PRELIMINARY STATEMENT
This lawsuit is Stonebridge’s attempt to change a deal it no longer likes.
Stonebridge, a sophisticated business entity, negotiated the terms of certain indentures and
several related transaction documents with Nomura, a major investment bank. One of the
provisions the parties negotiated was the definition of the terms “Event of Default” and
“Downgrade Yield Trigger.” After the principals initially could not reach agreement on the
definitions, Stonebridge’s lawyers inserted revised language into the transaction documents.
Nomura agreed to this revised language and the parties executed the documents with that revised
language. Now, one year after the deal was signed — and after an Event of Default with respect
to one of the notes has occurred — Stonebridge wants to rewrite it.
Casting about for a viable theory to do so, Stonebridge’s Amended Complaint
asserts six causes of action. Five of them ask that the Court actually or effectively rewrite the
signed transaction documents. The sixth seeks millions of dollars in damages based on the claim
that Nomura committed “trade libel” when it provided notice to the indenture trustee that an
Event of Default had occurred — a notice Nomura was contractually entitled to send. All six
causes of action should be dismissed with prejudice for the following reasons.
First, Stonebridge’s first two causes of action for “scrivener’s error” or a “mutual
mistake” should be dismissed because Stonebridge does not plead any facts that could rebut the
“heavy presumption” against “mutual mistake” claims imposed under New York law. There isno factual allegation in the Amended Complaint that Nomura and Stonebridge reached any
agreement other the one memorialized in the signed transaction documents. Indeed, while
Stonebridge amended its complaint to add a conclusory allegation to the contrary, that
conclusory allegation is contradicted by the specific allegations in the Amended Complaint.
Second, Stonebridge’s request for a declaration that an Event of Default has not
occurred and an injunction preventing Nomura from ever declaring one fails as a matter of law
and is barred under CPLR 3211(a)(1). Such relief would be inconsistent with the unambiguous
language of the transaction documents. It also would, as Stonebridge concedes, render the Event
of Default and Downgrade Yield Trigger provisions meaningless, depriving Nomura of its
bargained-for rights and violating the “cardinal rule of contract construction that a court should
avoid an interpretation that would leave contractual clauses meaningless.”
Third, Stonebridge’s claim that Nomura committed trade libel by sending a notice
of default to the indenture trustee fails because Stonebridge does not come close to pleading any
of the elements of a trade libel claim: there are no factual allegations that the notice of default
was derogatory to Stonebridge’s business; that the notice was sent with the malicious intent of
preventing Stonebridge from entering into transactions with other parties; or that any losses
Stonebridge claims were the natural and immediate consequence of sending the notice.
Stonebridge’s trade libel claim also fails because the Amended Complaint does not allege special
damages with the requisite particularity.
Fourth, Stonebridge’s claim that Nomura should be equitably estopped from
enforcing the Event of Default and Downgrade Yield Trigger provisions as written fails. This
claim is based on Nomura’s supposed expression of willingness to sign supplemental indentures
revising the transaction documents in the event that it and Stonebridge entered into a secondtransaction similar to the one at issue in this case. It should be dismissed because the Amended.
Complaint does not allege that Nomura made false statements designed to mislead Stonebridge
or that Stonebridge detrimentally relied on Nomura’s alleged statements. It also fails because
equitable estoppel cannot be invoked to rewrite agreements.
Fifth, and finally, Stonebridge’s claim for breach of the implied obligation of
good faith and fair dealing fails for the same reason that the declaratory judgment and equitable
estoppel claims fail: the implied obligation of good faith and fair dealing cannot be used to
rewrite transaction documents.
PROCEDURAL HISTORY
Stonebridge filed its original complaint on July 16, 2008 (the “Original
Complaint”). The Original Complaint contained three causes of action: for scrivener’s error,
mutual mistake, and declaratory judgment. After Stonebridge filed the Original Complaint,
Nomura sent a letter identifying certain deficiencies of Stonebridge’s claims and asking
Stonebridge to withdraw its complaint. Stonebridge did not substantively respond to Nomura’s
letter or withdraw the Original Complaint. (Affirmation of Brian H. Polovoy, dated October 16,
2008 (“Polovoy Aff.”), Ex. 1.) Asa result, Nomura filed a motion to dismiss the claims for
scrivener’s error and mutual mistake based on the same deficiencies set forth in its earlier letter
to Stonebridge. In response to Nomura’s motion, Stonebridge submitted the Amended
Complaint (1) attempting to cure the deficiencies identified by Nomura through the addition of
conclusory allegations that are contrary to the Amended Complaint’s specific allegations, and (2)
adding new causes of action that could have been raised in the Original Complaint. Nomura now
moves to dismiss the Amended Complaint with prejudice.STATEMENT OF FACTS
A. Stonebridge’s Clients Create “Investor LLCs” And Buy Underlying Bonds
Plaintiff Stonebridge acted as the “Sponsor” of securitized, “back-to-back” loan
transactions involving eight of its individual clients. Stonebridge’s clients wanted to sell shares
of their respective businesses to employee stock ownership plans for their respective employees
(ESOPs) and obtain favorable tax treatment for the proceeds of the sales. (Amended Complaint
{11 2, 13, attached as Ex. 2 to Polovoy Aff.) In connection with the transactions, each of
Stonebridge’s clients set up his own limited liability company (together, the “Investor LLCs”).
(d. {§ 20, 22.) The Investor LLCs, which Stonebridge named as defendants in its Amended
Complaint, purchased from Nomura certain bonds that were issued by six different public
utilities, such as the Jersey Central Power & Light Co. (the “Underlying Bonds”). (Id. {§ 22, 25-
27; see Polovoy Aff., Ex. 2C, Investor Indenture (defined below), Whereas Clause, 1.) Each
Underlying Bond was insured against default by one of various financial guaranty insurers, such
as MBIA Insurance Corp., Ambac Financial Group, or XL Capital. (Polovoy Aff., Ex. 2 {{] 25-
26.) For example, the bonds issued by Jersey Central Power & Light Co. were insured by XL
Capital. (Jd. 4 132.) When a bond is insured against default by a financial guaranty insurer, it is
referred to as a “wrapped” bond. (/d. § 28.)
B. The Investor LLCs Issue Notes To The “Pass-Through Trusts”
Collateralized By The Underlying Bonds
Each Underlying Bond was used to collateralize one of six different classes of
notes issued by the Investor LLCs (together, the “Investor Notes”). For example, the Class A
Notes were collateralized by Jersey Central Power & Light, New Jersey, Senior Notes dated May
21, 2007, while the Class B Notes were collateralized by PPL Electric Utilities First Mortgage
Bonds, dated August 13, 2007. (See Polovoy Aff., Ex. 2C, Investor Indenture, Whereas Clause,1.) Each Investor LLC issued certain amounts of each of the six classes of Investor Notes
pursuant to eight indentures dated September 26, 2007, by and among Stonebridge (as sponsor),
defendant U.S. Bank National Association (as Indenture Trustee, Paying Agent, Collateral
Agent, and Account Intermediary), and each Investor LLC (as Issuer) (together, the “Investor
Indentures”). (Id. J 2.)
Each of the six classes of Investor Notes was issued to a corresponding Series of
Stonebridge Pass-Through Trusts. (Polovoy Aff., Ex. 2 ] 6.) For example, the Class A Notes
were issued to the Stonebridge Pass-Through Trust, Series A. (See Polovoy Aff., Ex. 2A,
Stonebridge Indenture (defined below), Whereas Clause, 1.)
Cc. The Pass-Through Trusts Issue Notes To Nomura
Each Pass-Through Trust in turn issued notes (collectively, the “Stonebridge
Notes”) under an indenture dated September 26, 2007, among Stonebridge (as sponsor),
Stonebridge Pass-Through Trust (as Stonebridge Trust), the various Series of Pass-Through
Trusts (as Issuers), and U.S. Bank National Association (as Stonebridge Trustee, each Series
Indenture Trustee, Paying Agent, Collateral Agent, and Account Intermediary) (the “Stonebridge
Indenture”). (See Polovoy Aff, Ex. 2A, Stonebridge Indenture § 2.) Each class of Stonebridge
Note corresponds to a similarly named class of Investor Note. For example, the Class A
Stonebridge Notes issued by Stonebridge Pass-Through Trust, Series A relate to the Class A
Notes that were issued by each Investor LLC and collateralized by the Jersey Central Power &
Light Co. Bonds, and the Class B Stonebridge Notes issued by Stonebridge Pass-Through Trust,
Series B relate to the Class B Notes that were issued by each Investor LLC and collateralized by
the PPL Electric Utilities First Mortgage Bonds. (Jd., Whereas Clause, 2.)
Defendant Nomura purchased all of the Stonebridge Notes pursuant to a Note
Purchase Agreement dated September 26, 2007 (the “Note Purchase Agreement”). (Id. 4; seealso Polovoy Aff., Ex. 2B, Note Purchase Agreement.) Nomura continues to hold certain of the
Stonebridge Notes.
D. The Parties Negotiate The “Event of Default”
And “Downgrade Yield Trigger” Provisions
Although Nomura is not a party to either the Investor or Stonebridge Indentures, it
was involved in negotiating their terms. (Polovoy Aff., Ex. 2 J 14.) One of the issues during
these negotiations was what measures would be used to determine whether or not an “Event of
Default” or “Downgrade Yield Trigger Event” had occurred. (Id. 34.) The provisions related
to these two events were important to the parties, When an Event of Default with respect to any
particular class of notes occurs, those notes can be declared immediately due and payable. (See
Polovoy Aff., Ex. 2A, Stonebridge Indenture § 6.2.) When a Downgrade Yield Trigger event
with respect to any particular class of notes occurs, the noteholders are entitled to additional
distributions. (See id. § 3.3(a).)
The original drafts of the Investor Indenture provided that an Event of Default
occurred with respect to an affected Investor Note if the rating “with respect to any Underlying
Bond...falls below ‘B2’ by Moody’s of ‘B’ by S&P.” (Polovoy Aff., Ex. 2 | 52.) Similarly, the
original drafts of the Stonebridge Indenture provided that a “Downgrade Yield Trigger” occurred
with respect to each Stonebridge Note if the rating “with respect to any Underlying Bond... falls
to or below ‘Baa3’ by Moody’s or ‘BBB-’ by S&P.” (Jd. $50.) The definition of the provision
in an Annex to the Indentures was the same. (Id. 54.)
On September 18, 2007, Nomura requested that the draft documents be changed
so that the triggering events defined in those provisions would be tied to the rating of the
uninsured utility bond purchased by the Individual Investors. (/d. | 37.) Stonebridge did not
accept this proposal. (Jd. 38.) After Nomura’s proposal was rejected, Stonebridge and itsagent sent three emails to Nomura in which it expressed its views regarding the two provisions
and solicited Nomura’s agreement. (Id. {| 40-42.) Nomura did not confirm that it shared
Stonebridge’s views with respect to the provisions. (/d. § 43.)
The next day, on September 19, 2007, Stonebridge’s attorneys — who the
Amended Complaint now alleges acted without their client’s authorization — amended the
language of these provisions and circulated revised drafts with the proposed new language. (Id.
{1 46-57.) Specifically, Stonebridge’s lawyers inserted language into the Investor Indenture
such that an Event of Default occurs if “the rating with respect to any financial guaranty
insurance policy related to any Underlying Bond falls to or below ‘B2’ by Moody’s or ‘B’ by
S&P.” (Id. J 56-57.) Stonebridge’s lawyers also inserted language into the Stonebridge
Indenture and the accompanying definitions such that a Downgrade Yield Trigger occurs “with
respect to any financial guaranty insurance policy on any Underlying Bond, [if] the...Trustee
determines that the rating of such financial guaranty insurance policy has fallen below ‘Baa3’ by
Moody’s or ‘BBB-’ by S&P.” (/d. (51, 54.) Nomura accepted these suggested changes, and
the revised “financial guaranty insurance policy” language was contained in the executed
transaction documents. (Jd. [§ 58.)
E. Stonebridge Proposes Changing the Deal After It Is Signed
Stonebridge contacted Nomura in January 2008 — months after the deal closed —
to propose revisions to the Event of Default and Downgrade Yield Trigger provisions. (Id. 1]
68-69.) Even though both parties are sophisticated business entities that were represented by
well-known law firms, Stonebridge claimed that it did not “believe anyone had focused” on the
language contained in the executed transaction documents.’ (Jd. ] 70.) It therefore asked
' There is no allegation in the Amended Complaint — because there cannot be — that Nomura ever agreed with
Stonebridge’s assessment that the parties or their lawyers had not focused on the language of the transactionNomura to execute Supplemental Indentures that would have the effect of returning the Event of
Default and Downgrade Yield Trigger provisions to the pre-September 19 language. (Jd. §] 71-
72.) At the time Stonebridge asked, Nomura and Stonebridge were negotiating a second
transaction similar to the one at issue in this lawsuit. (Jd. § 74.) In the context of negotiating that
second transaction, Stonebridge alleges that Nomura said that it would execute the Supplemental
Indentures “at the same time” the parties agreed to a second transaction. (Jd. 74.) Regardless
of whether Nomura actually said what it would do at the same time the parties agreed to a second
transaction, the Amended Complaint acknowledges that Nomura did not participate in a second
transaction and did not execute the proposed Supplemental Indentures. (Jd. 78.)
F. The Dispute Over The Agreement
Nomura believes that the two provisions in the executed agreements mean what
they say, namely that an Event of Default or Downgrade Yield Trigger occurs when the rating of
one of the financial guaranty insurers insuring an Underlying Bond is downgraded. (Jd. {J 63-
64.) On June 20, 2008, the rating on XL Capital, which issued the financial guaranty policy on
the Jersey Central Power & Light Co. bonds, was downgraded to “B2.” (Jd. { 132.) Nomura
therefore believes that an Event of Default occurred with respect to the Class A Notes. (/d.
84-88.)
Stonebridge preemptively filed this lawsuit to prevent an Event of Default from
being declared. Stonebridge claims that the language contained in the executed transaction
documents does not reflect the parties’ agreement. (Jd. 59.) According to Stonebridge, the
revisions by its own lawyers were a mistake: the language of the provisions should have tied the
Event of Default and Downgrade Yield Trigger provisions to “the higher of the credit rating of
documents or that the language of the Event of Default and Downgrade Yield Trigger provisions constituted a
scrivener’s error or mutual mistake.the utility that issued the bond or of the insurance company that guarantees payment on the
bond.” (/d. { 60 (emphasis supplied).) Stonebridge’s First and Second Causes of Action
therefore seek to reform the agreements. (Id. {| 89-125, Wherefore Clauses A and B.)
Stonebridge alleges that it and its individual clients (who are not named in the lawsuit) otherwise
“stand[] to lose millions of dollars.” (Jd. § 65.)
Alternatively, in its Third Cause of Action, Stonebridge claims that the language
of the Event of Default and Downgrade Yield Trigger provisions are unenforceable as written.
This is because, even though financial guaranty insurance companies are rated by S&P and
Moody’s, their policies are not. (Jd. JJ 126-139.) Stonebridge therefore seeks a declaration that
an Event of Default has not occurred with respect to the Series A Notes even though XL Capital
has been downgraded. (Jd. § 136, Wherefore Clause C.) It also seeks to enjoin Nomura and U.S.
Bank — the Trustee — from ever declaring an Event of Default or a Downgrade Yield Trigger
based on the provisions contained in the executed transaction documents. (Id. J 139, Wherefore
Clause C.)
In its Fourth Cause of Action, Stonebridge claims that Nomura committed “trade
libel” when it sent a notice to the Trustee declaring an “Event of Default,” an “Issuer Event of
Default,” and a “Downward Yield Trigger.” (/d. JJ 140-149; Polovoy Aff. Ex. 2J.) According
to Stonebridge, these notices somehow caused an unnamed institutional investor to back out of a
second round Stonebridge financing allegedly similar to the transaction at issue in this case. (/d.
4] 148.) Stonebridge therefore seeks special damages “in an amount, to be determined at trial, but
no less than $3 million.” (/d. { 149, Wherefore Clause D.)
Stonebridge’s Fifth Cause of Action seeks a judgment declaring that Nomura is
equitably estopped from declaring an Event of Default, an Issuer Event of Default, or aDowngrade Yield Trigger because Nomura supposedly induced Stonebridge to believe that
Nomura would agree to revise the transaction documents through Supplemental Indentures. (Id.
{| 150-157, Wherefore Clause E.)
Finally, Stonebridge’s Sixth Cause of Action asserts a breach of contract claim
against Nomura because Nomura supposedly breached its obligation of good faith and fair
dealing by declaring an Event of Default and a Downgrade Yield Trigger and by failing to sign
the Supplemental Indentures. (/d. {| 158-164.) For this cause of action, Stonebridge seeks
damages in an amount to be determined at trial. (Jd. { 164, Wherefore Clause F.)
STANDARD OF REVIEW
“[O]n a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a
liberal construction. [Courts] accept the facts as alleged in the complaint as true [and] accord
plaintiffs the benefit of every possible favorable inference.” Griffin v. Anslow, 17 A.D.3d 889,
891, 793 N.Y.S.2d 615, 617 (3d Dep’t 2005) (citing Arnav Indus., Inc. Retirement Trust v.
Brown, Raysman, Millstein, Felder & Steiner, 96 N.Y.2d 300, 303 (2001)) (internal quotations
omitted). However, “allegations consisting of bare legal conclusions, as well as factual claims
either inherently incredible or flatly contradicted by documentary evidence, are not presumed to
be true and accorded every favorable inference.” Biondi v. Beekman Hill House, Apt. Corp., 257
A.D.2d 76, 81, 692 N.Y.S.2d 304, 308 (1st Dep’t 1999) (internal quotations omitted). CPLR §
3211(a)(1) permits a court to dismiss an action based on documentary evidence. Dismissal
pursuant to that section is warranted “where ‘the documentary evidence submitted conclusively
establishes a defense to the asserted claims as a matter of law.’” See 150 Broadway N.Y. Assocs.,
LP. v. Bodner, 784 N.Y.S.2d 63, 66 (1st Dep’t 2004) (quoting Leon v. Martinez, 84 N.Y.2d 83,
88 (1994).
10ARGUMENT
L THE “MUTUAL MISTAKE” AND “SCRIVENER’S ERROR” CLAIMS
SHOULD BE DISMISSED BECAUSE STONEBRIDGE FAILS TO ALLEGE
THAT IT AND NOMURA SHARED THE SAME ERRONEOUS BELIEF
To state a claim for mutual mistake or “scrivener’s error,” a plaintiff must allege
that the parties reached an oral agreement and, unknown to either, the writing does not express
that agreement. Chimart Assocs. v. Paul, 66 N.Y.2d 570, 573 (1986); see also William P. Pahl
Equipment Corp. v. Kassis, 588 N.Y.S.2d 8, 12 (1st Dep’t 1992) (claims for “scrivener’s error”
and “mutual mistake” are treated as the same claim). Because the freedom to contract would not
“long survive” if courts were to remake contracts readily, there is a “heavy presumption that a
deliberately prepared and executed written instrument manifests the true intention of the parties.”
Chimart Assocs., 66 N.Y.2d at 574. This is particularly true when, as here, the parties are
“sophisticated businessmen represented by counsel throughout the negotiation.” Jd.
Accordingly, in order to state a claim for mutual mistake, Stonebridge must plead “exactly what
was really agreed upon between the parties.” Jd. (emphasis added). Stonebridge can not and
does not do so.
Instead, the Amended Complaint alleges that Nomura, on September 18, 2007,
raised the issue of whether the Event of Default and Downgrade Yield Trigger provisions should
be changed so that they would be tied to the rating on the utility bonds themselves rather than to
the ratings on the wrapped utility bonds. (Am. Compl. { 34.) Stonebridge rejected this proposal
and then sent emails to Nomura directly questioning whether the parties had an agreement over
the two provisions. (/d. J] 35-39.) For example, within hours of Nomura’s proposed change,
one of Stonebridge’s agents in the transaction sent an email that began: “Want to make sure we
are all on the same page...” (Id. | 37 (emphasis supplied).) In another email, the same agent,
after positing that the provisions would be based on the ratings of the “wrapped” utility bonds,
llasked: “Does anyone think otherwise?” (Id. {39 (emphasis supplied).) Nomura, having
opened a negotiation over these provisions, never offered that it was on the “same page” or that
its thinking was the same as Stonebridge’s. (Jd. § 40.)
In the face of this silence, the now disputed language was inserted by
Stonebridge’s own lawyers the very next day. (Jd. | 44.) This language did not just slip
accidentally into one of the transaction documents, which might suggest a drafting mistake.
Rather, the language was inserted deliberately and throughout all of the transaction documents.
(See id. {| 46-53.) It was inserted into the Investor Indenture, it was inserted into the
Stonebridge Indenture, and it was inserted into the Standard Definitions. (See Polovoy Aff., Ex.
1C, Investor Indenture § 6.1; Jd. Ex. 1A, Stonebridge Indenture § 3.3(b); Jd., Annex A.) Most
importantly, the language was included in the executed transaction documents. Stonebridge, a
sophisticated business entity, is bound by its lawyers’ changes, which Nomura accepted. Farr v.
Newman, 14.N.Y.2d 183, 189 (1964) (acts of attorney in negotiations bind principal); cf South
Fork Broadcasting Corp. v. Fenton, 528 N.Y.S.2d 837, 839 (1st Dep’t 1988) (plaintiff failed to
prove mutual mistake claim because, among other things, “the final version was drafted by
plaintiff's attorney....”).
Stonebridge attempted to get around this by amending its Original Complaint to
add the wholly-conclusory allegation that the parties had reached an understanding other than the
one contained in the executed transaction documents. See, e.g., Compl. 459. This attempt fails
as a matter of law because the conclusion is not supported by the more specific allegations in the
Amended Complaint; indeed, it is contradicted by them. Kalmanash v. Smith, 291 N.Y. 142, 154
(1943) (conclusory allegations “unsupported...by facts from which the plaintiff drew those
conclusions” are “legally ineffective”); Lewis v. Welch, 510 N.Y.S. 640, 521 (2d Dep’t 1987)
12(same); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995) (“General,
conclusory allegations need not be credited, however, when they are belied by more specific
allegations of the complaint.”).
On this issue, the specific allegations of the Amended Complaint could not be
clearer: the parties did not reach any agreement on the language of the Event of Default and
Downgrade Yield Trigger provisions other than that memorialized in the executed transaction
documents. Stonebridge rejected Nomura’s opening proposal; Nomura never accepted
Stonebridge’s. Following these disagreements, Stonebridge’s own lawyers revised the language
for Nomura’s consideration. Nomura accepted the revision. And Nomura subsequently signed
transaction documents that contained it. So did Stonebridge. Because Stonebridge’s conclusion
that there was an understanding other than the one reflected in the transaction documents is
“ansupported” by the “facts from which [Stonebridge] drew those conclusions,” it should be
disregarded as “legally ineffective.” Kalmanash, 291 N.Y. at 154.
Accordingly, the Amended Complaint fails to allege that the parties reached an
agreement that is not reflected in the transaction documents, much less “exactly” what that
agreement was, and it fails to meet the high burden and presumption against “mutual mistake”
claims. The First and Second Causes of Action should therefore be dismissed. William P. Pahl
Equipment Corp., 588 N.Y.S.2d at 12 (dismissing claims for mutual mistake and scrivener’s
error because complaint failed to allege agreement between parties); Aventine Investment
Management, Inc. v. Canadian Imperial Bank of Commerce, 695 N.Y.S.2d 128, 129 (2d Dep’t
1999) (same); see also Warner Theater Associates Limited Partnership v. Metropolitan Life Ins.
Co., No. 97 Civ. 4914, 1997 U.S. Dist. LEXIS 17217, *20 (S.D.N.Y. Oct. 31, 1997) (same).
13IL THE DECLARATORY JUDGMENT CAUSE OF ACTION
SHOULD BE DISMISSED
The transaction documents “unambiguously contradict[]” Stonebridge’s claim
that the Event of Default and Downgrade Yield Trigger provisions are meaningless as written
because S&P and Moody’s technically rate financial guaranty insurance companies and not each
of the individual policies of the financial guaranty insurance companies. 150 Broadway N.Y.
Assocs., L.P. v. Bodner, 784 N.Y.S.2d 63, 66 (1st Dep’t 2004). As such, the transaction
documents constitute “documentary evidence warranting the dismissal” of Stonebridge’s Third
Cause of Action for declaratory and injunctive relief “regardless of any extrinsic evidence or
self-serving allegations.” /d.; CPLR { 3211(a)(1).
Whether particular contract language is ambiguous is a question of law. Bailey v.
Fish & Neave, 8 N.Y.3d 523, 528 (2007). Agreements should be “read as a whole to ensure that
undue emphasis is not placed upon particular words and phrases,” Bailey, 8 N.Y.3d at 529, and
transaction documents executed at the same time that relate to the same subject matter are
“contemporaneous writings [that] must be read together as one,” Nau v. Vulcan Rail & Constr.
Co., 286 N.Y. 188, 197 (1941).
Here, the language of the provisions is not ambiguous: an Event of Default and a
Downgrade Yield Trigger occur when the rating of one of the financial guaranty insurers
insuring an Underlying Bond is downgraded. The lack of ambiguity is perhaps best
demonstrated in one of the key transaction documents drafted by Stonebridge’s lawyers, a tax
opinion letter dated September 26, 2007 (the “Stonebridge Tax Opinion”). In the Stonebridge
Tax Opinion, Stonebridge’s own lawyers explain that the two provisions protect against the risk
of default by the issuer of the financial guaranty policy, i.e., by the insurer:
14With the two downgrade triggers (Baa3/BBB- and B2/B), the
Stonebridge financing provides risk protections for the Issuer and
the Securityholders that are anticipated to be triggered prior to any
potential, subsequent default of the issuer of the financial
guaranty insurance policy on the Underlying Bond. A corporate
obligor’s financial condition generally begins to deteriorate before
it defaults on an obligation, with its financial strength gradually
worsening over time. The Baa3/BBB- trigger serves as a stop-
Joss prior to default by the issuer of the financial guaranty
insurance policy on the Underlying Bond.
(Polovoy Aff. Ex. 3, § (A)(3).)
Not only does the Stonebridge Tax Opinion demonstrate that the language is
unambiguous on its face and when read in the context of the entire transaction, but it also
constitutes a contemporaneous writing that must be read in pari materia with the other
transaction documents, including the indentures. The Stonebridge Tax Opinion was dated
September 26, 2007, the same date as the other transaction documents. (/d.) It was addressed to
all of the parties to the indentures and to Nomura and was signed by Stonebridge’s attorneys.
(/d.) It relates to the same Notes involved in the transaction. Indeed, the Stonebridge Tax
Opinion was so integral to the transaction that Stonebridge and the 1042 Investors signed Letter
Agreements also dated September 26, 2007 specifically acknowledging that the 1042 Investors
“read, understood and relied on the tax opinion delivered by [Stonebridge’s counsel] in
connection with the Transaction.” (Polovoy Aff. Ex. 4,7.) Moreover, each 1042 Investor and
each Investor LLC certified having read the Stonebridge Tax Opinion, among others, and that
“the facts set forth or assumed in each of the opinions...are true accurate, complete and do not
omit any material fact related to the subject matter hereof.” (Polovoy Ex. 5.) The only way to
read the indentures, the Stonebridge Tax Opinion, and the Letter Agreements “as one,” as they
must be read, is if the Event of Default and Downgrade Yield Trigger provisions are read as
15being tied to the ratings of the insurers that issue the financial guaranty policies. See, e.g., Nau,
286 N.Y. at 197 (selecting interpretation consistent with all transaction documents).
Stonebridge concedes that its best alternative interpretation of the provisions —
that the Event of Default and Downgrade Yield Trigger provisions are tied strictly to the ratings
on individual insurance policies themselves rather than to the ratings of the insurers issuing the
policies — would mean that an Event of Default or Downgrade Yield Trigger “can never occur.”
(Am. Compl. § 62.) This is because rating agencies do not issue ratings on the “financial
guaranty insurance policies” themselves. (/d.)
As discussed above, this reading cannot be squared with the other transaction
documents. Moreover, Stonebridge’s reading that an Event of Default or Downgrade Yield
Trigger can never occur would deprive Nomura of the benefit of those provisions, in
contravention of “a cardinal rule of contract construction that a court should ‘avoid an
interpretation that would leave contractual clauses meaningless.” 150 Broadway N.Y. Assocs.,
784 N.Y.S.2d at 66 (quoting Two Guys From Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 63
N.Y.2d 396, 403 (1984)). Stonebridge’s reading would also violate the rule that “[c]ourts may
not by construction add or excise terms, nor distort the meaning of those used and thereby make
anew contract for the parties under the guise of interpreting the writing.” Bailey, 8 N.Y.3d at
528. In the context of the transaction documents as a whole, the two provisions have meaning
only if read as tied to changes in the ratings of the insurers themselves, and they must be read as
such.
For the foregoing reasons, Stonebridge is, as a matter of law, not entitled to the
declaratory and injunctive relief it seeks in its Third Cause of Action.
? Even assuming that the language were ambiguous, it would be construed against Stonebridge because it was
drafted by Stonebridge’s lawyers. Guardian Life Ins. Co. of Amer., Inc. v. Schaefer, 70 N.Y.2d 888, 890 (1987).
16I. THE TRADE LIBEL CLAIM FAILS AS A MATTER OF LAW
Stonebridge’s claim that Nomura committed trade libel by notifying the Trustee
of the occurrences of an Event of Default, an Issuer Event of Default, and a Downgrade Yield
Trigger is frivolous. Trade libel (or injurious falsehood) “consists of the knowing publication of
false matter derogatory to the plaintiffs business of a kind calculated to prevent others from
dealing with the business or otherwise interfering with its relations with others, to its detriment.”
Waste Distillation Tech., Inc. v. Blasland & Bouck Engineers, 523 N.Y.S.2d 875, 877 (2d Dep’t
1988). In order to state a claim, Stonebridge must also plead and prove special damages, Drug
Research Corp. v. Curtis Publishing Co., 7 N.Y.2d 435, 440 (1960), that are “related causally to
the alleged tortious act,” Cambridge Assocs. v. Inland Vale Farm Co., 497 N.Y.S.2d 751, 753
(2d Dep’t 1986).
Stonebridge’s trade libel claim fails as a matter of law for at least two independent
reasons.
First, the Amended Complaint fails to make out even the basic elements of a trade
libel claim. Stonebridge does not and cannot make a factual allegation that the notice of default,
attached as Exhibit J to the Amended Complaint (see Polovoy Aff. Ex. 2J), were derogatory to
Stonebridge’s business. School of Visual Arts v. Kuprewicz, 771 N.Y.S.2d 804, 810 (Sup. Ct.
2003) (dismissing claim because allegedly false statements were not derogatory of plaintiffs
business). Nor is there a factual allegation that Nomura sent the notice related to the defaults
with the malicious intent of preventing Stonebridge from entering into transactions with other
parties. Instead, Stonebridge alleges only that Nomura “published” the notice to the Trustee,
who is not a potential Stonebridge customer. Kirby v. Wildenstein, 784 F. Supp. 1112, 1118
(S.D.N.Y. 1992) (“While the latter three disclosures are technically adequate to constitute
publication, none of those parties were potential purchasers of the Painting, and there is no
17evidence they circulated the statements to outside parties.”). Finally, there is no factual
allegation that any losses Stonebridge suffered by the supposedly lost transaction were the
“natural and immediate consequence” of Nomura exercising its right under the transaction
documents to send default notices to the Trustee. Gucci America, Inc. v. Duty Free Apparel,
Ltd., 277 F. Supp. 2d 269, 277 (S.D.N.Y. 2003).
Second, Stonebridge’s trade libel claim fails because the Amended Complaint
fails to allege special damages with “sufficient particularity.” Cambridge Assocs. v. Inland Vale
Farm Co., 497 N.Y.S.2d 751, 753 (2d Dep’t 1986). In order to meet this stringent standard,
Stonebridge needed to but failed to plead by name the financial institution that allegedly refused.
to enter into a transaction with it. Stonebridge also needed to but failed to itemize its supposed
losses in the Amended Complaint, instead alleging only a round number loss of “no less than” $3
million. See, e.g., Drug Research, 7 N.Y.2d at 440-1 (reversing failure to dismiss complaint that
failed to identify customers by name and that presented only “round” damage figures); Gucci
America, 277 F. Supp. 2d at 278 (S.D.N.Y. 2003) (noting that pleading requirements for special
damages are applied “strictly” and that courts “routinely” dismiss claims for failing to satisfy
them).
IV. THE EQUITABLE ESTOPPEL CLAIM FAILS AS A MATTER OF LAW
The Court should also dismiss Stonebridge’s claim that Nomura should be
equitably estopped from declaring an Event of Default, an Issuer Event of Default, or a
Downgrade Yield Trigger because Nomura supposedly induced Stonebridge to believe that
Nomura would agree to revise the transaction documents by executing Supplemental Indentures.
New York’s “rather restrictive view of estoppel” requires: (1) conduct calculated to convey an
impression that facts are inconsistent with those the party subsequently asserts; (2) intent that
such conduct will be relied upon; and (3) actual or constructive knowledge of the true facts.
18Holm v. C.M.P. Sheet Metal, Inc., 455 N.Y.S.2d 429, 433 (4th Dep’t 1982). It also requires
detrimental reliance. Jd. Stonebridge’s equitable estoppel claim fails for three independent
reasons.
First, the Amended Complaint does not allege that Nomura made false
representations with an intent to mislead Stonebridge. In this regard, Stonebridge alleges that
Nomura “stated it could and would execute the Supplemental Indentures fixing the Transaction
Documents, at the same time that it entered into the second transaction.” (Am. Compl. 74.)
Even assuming that Stonebridge’s allegation is accurate — which it is not — Nomura’s supposed
statement was neither false nor intended to mislead Stonebridge. Indeed, Stonebridge’s
disappointment stems from the fact that the alleged statement was true. When Nomura decided
not to participate in a second transaction, Stonebridge’s own allegation is that Nomura was “no
longer” willing to “discuss execution of the Supplemental Indentures.” (Jd. 78.) Because these
alleged statements were in no way misleading, Stonebridge’s claim for equitable estoppel should
be dismissed. Kennedy v. Leibowitz, 757 N.Y.S.2d 50, 51 (2d Dep’t 2003) (affirming dismissal
of equitable estoppel claim because plaintiff failed to allege that defendant’s conduct “amounted
to false representation”); Brauner v. Metro-North Commuter Railroad Co., 642 N.Y.S.2d 677,
677 (1st Dep’t 1996) (same).
Second, the Amended Complaint does not contain any allegation that Stonebridge
detrimentally relied on Nomura’s representations. Even accepting Stonebridge’s allegations for
purposes of this motion, the Amended Complaint at most claims that Nomura’s alleged
statements that it would sign Supplemental Indentures at the same time the parties entered into a
second transaction put the parties’ dispute over the Event of Default and Downgrade Yield
Trigger provisions on hold. But there is no allegation that Stonebridge was in any way
19prejudiced thereby. Spirig v. Evans, 809 N.Y.S. 2d 212, 213 (2d Dep’t 2006) (estoppel claim
dismissed for failure to allege detrimental reliance).
Finally, Stonebridge’s equitable estoppel claim fails for the same reason its
declaratory judgment and breach of contract claims fail: “[t]he doctrine of equitable estoppel
cannot be invoked to create a right that does not already exist.” Velasquez v. GAB Robins North
America, Inc., 2007 NY Slip Op. 52255U, *3 (Sup. Ct. 2007). As discussed above, the meaning
of the executed transaction documents is clear. Stonebridge cannot create the transaction
documents it now wishes it had executed based on Nomura’s earlier willingness to consider
agreeing to amend the transaction documents if a new deal were reached. That would
impermissibly create contractual rights for Stonebridge that do not now exist.
Vv. THE BREACH OF CONTRACT CLAIM FAILS AS A MATTER OF LAW
Stonebridge’s claim that Nomura breached its obligation of good faith and fair
dealing should be dismissed for the simple reason that the implied duty of good faith and fair
dealing “cannot be used to add a new term to a contract, especially to a Commercial contract
between two sophisticated commercial parties represented by counsel.” D&L Holdings LLC v.
RCG Goldman Co., LLC, 734 N.Y.S.2d 25, 31 (1st Dep’t 2001); see also Murphy v. American
Home Prods. Corp., 58 N.Y.2d 293, 304 (1983) (implied obligation of good faith is “in aid and
furtherance of other terms of the agreement of the parties” and obligation not be implied when it
would be “inconsistent with other terms of the contractual relationship”); Oppman v. IRMC
Holdings, Inc., 2007 NY Slip Op. 50093U, *6 (Sup. Ct. 2007) (Fried, J.) (dismissing complaint
where obligation of good faith did not permit plaintiff to imply terms not contained in written
contract).
The parties entered into multiple, written transaction documents. Stonebridge
cannot insert into these written agreements what it alleges was a prior understanding between the
20parties supposedly now not reflected in the transaction documents through the back-door of an
implied obligation of good faith and fair dealing. Oppman, 2007 NY Slip Op. 50093U, at *6-7.
Because a claim for breach of the implied covenant of good faith and fair dealing “may not be
used as a substitute for a nonviable claim of breach of contract,” Stonebridge’s Sixth Cause of
Action should be dismissed. Sheth v. New York Life Ins. Co., 709 N.Y.S.2d 74, 75 (1st Dep’t
2000).
CONCLUSION
For the foregoing reasons, the Amended Complaint should be dismissed
with prejudice.
Dated: New York, New York
October 16, 2008
Respectfully submitted,
- a oe a +
SHEARMAN 9p STERLOYE*
- vo
y lo
By peed
ie H. Polovoy
Daniel C. Lewis
599 Lexington Avenue
New York, NY 10022-6069
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
Attorneys for Defendant/Counterclaim Plaintiff
Nomura International ple
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