Opinion
96 Civ. 7874 (RWS)
September 20, 2002
FRIEDMAN KAPLAN SEILER ADELMAN New York, NY, By: ERIC SEILER, ESQ., ROBERT J. LACK, ESQ., LEE D. SEILER, ESQ., Of Counsel, BROWN RUDNICK BERLACK ISRAELS, New York, NY, By: STEVEN E. GREENBAUM, ESQ., Of Counsel. Attorneys for Plaintiffs.
SIDLEY AUSTIN BROWN WOOD New York, NY, By: JONATHAN J. BRENNAN, ESQ., Of Counsel. Attorney for Defendants.
OPINION
Plaintiffs Granite Partners, L.P., Granite Corporation and Quartz Hedge Funds (the "Funds") have moved pursuant to Rule 50(b) of the Federal Rules of Civil Procedure for judgment in their favor on liability as a matter of law on Count I for wrongful margin calls against Merrill Lynch, Pierce, Fenner Smith, Inc. ("Merrill") and for a new trial on damages on that count, or, in the alternative, pursuant to Fed.R.Civ.P. 50(b), 59(a)(1), 60(b)(1), 60(b)(3), and 60(b)(6) for a new trial on the entirety of Count I.
For the following reasons, the Funds' motion for judgment as a matter of law and for a new trial on damages on Count I is granted.
Facts
The facts underlying this dispute are stated in greater detail in Primavera Familienstifung v. Askin, 130 F. Supp.2d 450 (S.D.N.Y. 2001), familiarity with which is presumed.
Pretrial Statements and Rulings
In June 2000, the Funds sought summary judgment on Count I, which alleged that Merrill breached its repurchase contracts with the Funds by issuing margin calls on March 30, 1994. The Funds argued that the contracts governing the parties' relationships prohibited Merrill from making margin calls when the Funds' collateral exceeded 102% of the outstanding purchase price. The Funds based this argument on two provisions of the confirmations:
If on a business day the market value of the securities for a transaction is less than the agreed upon percentage of the outstanding purchase price, the purchaser may demand a mark to market. If notice is given prior to 10 A.M. New York time, the seller shall, on such day, eliminate such deficiency by delivering additional securities or prepaying a portion of the purchase price (with accrued interest on each portion). If on a business day the market value of the securities exceeds such percentage, the seller may demand a mark to market. ("Clause One").
Margin percentage shall at all times be equal to 102% of the purchase principal plus accrued repurchase interest to date unless otherwise agreed ("Clause Two").
Merrill retorted that the parties had "otherwise agreed" on a percentage equal to the "haircut" applicable to a given transaction. The applicable haircut for the Funds was 20%, which according to Merrill meant that the Funds were required to maintain the accounts at a 125% level of collateral. To support its argument, Merrill pointed to deposition testimony of certain Merrill employees and evidence that industry practice permitted it to set the margin percentage equal to the haircut level. After considering these arguments and the supporting evidence, it was held that:
As described in Primavera:
The repo buyer (the broker) always paid (loaned) an amount less than the actual value of the security sold (transferred as security for the loan) by the repo seller (the Fund) as protection against default on the obligation to repurchase the security (pay back the loan). The difference between the amount loaned and the security's value is the "haircut." Thus, if a broker took a 20 percent haircut on a security valued at $100,000, then the repo amount (the amount loaned) to the Fund was $80,000 for that $100,000 security. If the value of the securities in a repo account fell below an amount agreed upon by the parties, the "margin amount," then there was a "margin deficit" and the broker had the right to make a "margin call," i.e., to demand money or additional securities as collateral for the loan. If a proper margin call was not met, the broker had the right to liquidate the securities in the repo account.130 F. Supp.2d at 461-62.
The figure is derived from the formula 1/(100%- y), where y is the haircut.
There is no dispute as to the governing contractual provision. Nor is there any dispute that Merrill made its margin calls based on the 20% "haircut" amount, rather than based on the 102% figure referred to in the repo trade confirmations, and that at that time the value of the securities in the Funds' accounts was at least 102% of their outstanding obligations. However, Merrill contends that the parties "otherwise agreed," as permitted by the repo trade confirmation agreements, that the required maintenance level would be identical to the "haircut" established by the parties when they entered into each repo transaction. Repo Trade Confirmation at 2.
Merrill alleges that before entering into each repo transaction, its salesperson discussed the terms with a representative of ACM on behalf of the Funds, and that at the time the parties agreed to a haircut for a repo transaction they also agreed — orally — to designate the same percentage as the margin maintenance level for that transaction.130 F. Supp.2d at 550-51. The Court further determined that the "agreement" did not have to be in writing pursuant to the statute of frauds because it did not involve quantity or price. Id. at 551. The Court concluded that the evidence presented a genuine dispute of fact as to what the parties and denied summary judgment to the Funds on Count I. Id. at 551-52.
Prior to trial, the Funds moved in limine to clarify how the parties would try the case on the purported oral agreements. The Court held that "[t]here is no question that the written confirmations represent an agreement between the parties" and that the Funds did not carry a burden "to prove that the oral agreements did not take place." Granite Partners, L.P. v. Merrill Lynch, slip op. at 4-5 (April 30, 2002) (the "April 30, 2002 Opinion") Further, "the only competent evidence on the question of whether there was an oral offer and acceptance is the parties' objective manifestation of their intent," and "Merrill is limited to presenting evidence of oral conversations showing the objective manifestation of the parties' intent." Id. at 2-3.
Evidence Presented At Trial
Testimony of George Ellison
George Ellison, the Merrill Lynch representative who principally handled the repo transactions with the Funds, discussed practices in the industry generally. He testified that billions of dollars of such trades were "done over the phone." Trial Tr. at 1192. He stated that he usually negotiated the repo transactions with David Askin and that the most "critical" piece of the negotiation was the haircut. Id. at 1196. Ellison further stated that a margin call would be made when the haircut, or cushion, started to deteriorate and that the purpose of the margin call process was to "reestablish the collateral and how much you are lending against it." Id. at 1198. The amount asked for in a margin call, he testified, would be that necessary to "get back to the original amount," by which Merrill contends he means the haircut. Id. at 1199. Merrill contends that the above testimony is also applicable to the Funds' accounts.
Ellison testified that once a haircut level had been established with Askin, there was never a separate discussion about Merrill's right to make a margin call. Id. at 1200. When asked why separate requirements for haircuts and margin maintenance were never discussed, Ellison testified:
The convention in our business is let's decide up front how much money you will lend me against said collateral. And that was agreed upon up front. And that the only — as you were touching on earlier, the only time that you would — or that I ever discussed with him his haircut level, again, was actually when the market was in a fair amount of turmoil and we were actually looking for more money.
Id. at 1201-02.
Ellison was asked on cross-examination whether in negotiating with Askin he spoke the "exact words" that "margin maintenance is the haircut." Id. at 1267. He responded that he did not, because "margin maintenance is the haircut." Id. at 1266.
There was no evidence that Ellison ever communicated this belief to the Funds. When queried on this point, Ellison stated that David Askin was a sophisticated investor who "knows what I know in the business as a professional, that the margin maintenance is the haircut." Id. at 1267. That testimony was stricken by the Court. Id.
Ellison also testified as to the meaning of Clause One and Clause Two:
Q: . . . [T]he outstanding purchase price, so we're clear, is the amount of principal outstanding and the amount of interest accrued at the point in time that you do that. Right?
A: Right.
* * *
Q: So just look down to my next box. The outstanding purchase price in the first box is mathematically the same as the repurchase principal plus accrued repurchase interest to date, right?
A: Right.
Q: O.K. So those two concepts are the same in the two boxes, that is, what are we applying the percentage to. And the first box tells us we are going to apply the agreed upon percentage, right?
A: Right.
Q: And the second box tells us margin percentage shall at all times be equal to 102 percent of the repurchase principal plus accrued repurchase interest to date unless otherwise agreed. So the second box is telling us that the number is 102 percent of that same thing, the principal plus the interest; that is what those words mean, right?
A: Unless otherwise agreed.
Id. at 1259-60.
The Trustee's Report
The Trustee in his Report discussed the CMO repo market as it existed in 1994 and concluded that the "haircut" requirement and the margin maintenance requirement were one and the same. He stated:
If, however, the overall value of the security positions repoed to particular brokers declines prior to a repo roll, a "margin deficit" may exist. The broker/dealer is then entitled to require the customer to put up additional cash or collateral to bring the account "up to margin," i.e., to the point where the value of the account will again exceed the repo loan amount by the amount of the "haircut." The broker/dealer then exercises this right by making a "margin call."
Final Report of Harrison J. Goldin, Trustee, at 57 ("Trustee's Report"). The Trustee also stated that it was common in the industry for dealers to have some form of "automated internal system" designed to monitor the firm's credit exposure and send up a "red flag." Id. at 58. When a margin call was made, he stated, it was "industry custom . . . to request an amount calculated to bring the account fully up to margin (as opposed to some lesser amount, such as the amount that would bring the account simply up to its minimum margin tolerance)." Id. This section does not specifically refer to the agreement between Merrill and the Funds.
The Trustee also specifically discussed the agreements between Merrill and the Funds. He described the 102% figure as an "internal margin tolerance" level. Trustee's Report at 113, 149. He found that pursuant to industry custom, a margin call was made "to request an amount to bring the account fully up to margin (as opposed to some lesser amount, such as the amount that would bring the account simply up to its minimum margin tolerance)." Id. at 58.
The First and Second Amended Complaints
Merrill also presented what it deemed admissions and what the Funds deemed inaccurate statements that were included in the First Amended Complaint, dated August 4, 1997, and the Second Amended Complaint, dated October 16, 1998. In these pleadings, the Funds stated as follows:
The Funds stated during its opening statement that the plaintiffs never read the repo confirmations until they received Merrill's Answer to the Second Amended Complaint, which referred to the repo confirmations. At that time, the confirmations had been in their possession for years.
59. Under the PSA Agreements, if the overall market value of the securities repoed to a particular broker-dealer declines before a repo buy-back such that the value of the collateral no longer exceeds the repo loan amount by the amount of the agreed upon haircut, a "margin deficit" exists. The broker-dealer may then be entitled to make a margin call to require the delivery of additional collateral to bring the account "up to margin." The PSA Agreement provides that in making margin calculations, the market value of the securities must be the price obtained from a "generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source," plus accrued income not included therein.
60. Similarly, Merrill Lynch's trade confirmations specified that, respecting margin maintenance, the Funds were to furnish additional collateral "should the market value of the securities decrease below the minimum standards agreed to at the time of the transaction."
2d Am. Comp. ¶¶ 59-60. The only time in the Second Amended Complaint that the 102% figure is referred to is when it is described as Merrill's "tolerance level" as the Trustee had described. Id. at ¶ 199.
Testimony of Dr. Marcia Stigum
Dr. Marcia Stigum, an expert on repos ("Stigum"), stated that as to the 102% percent figure, it was "not credible that anybody" would have loaned money against collateral with a haircut of only 2%. Compendium 1 at 14. She further stated that "anyone familiar with the market" would know that 102% was "a standard haircut on Treasury securities" and that because this case involved volatile CMOs, "there must have been an oral agreement on the phone." Id. at 14-15. Stigum also testified that if a dealer had asked for an initial margin of 115%, it would have made no sense for a dealer not to "make a margin call until the margin drops down to 102 percent, there is no basis for it. Absolutely none." Id. at 15.
Merrill's Arguments
The Funds contend that Merrill's opening and closing arguments focused almost entirely on Merrill's subjective beliefs as to what was "otherwise agreed." Merrill's counsel emphasized Ellison's opinions about Merrill's rights. Trial Tr. at 72 (Ellison "said he made no such agreement."); id. at 1400 (Ellison "told you about what that percentage was. That percentage was the haircut amount."); id. at 1412 (Ellison testified that the "agreed upon percentage" was the haircut). Counsel argued that it "would make no sense, absolutely no sense from our point of view" to use a 102% threshold. Id. at 66. He also argued that Merrill's internal credit policy showed that Merrill intended for the margin maintenance level to be set at the original haircut, and that Ellison "wouldn't have the authority" to disregard such a policy. Id. at 67-68.
After the opening, the Funds objected that Merrill's argument had been based on subjective intent. Id. at 99. The Court reaffirmed its holding that "a contract has nothing to do with the personal or individual intent of the parties." Id. at 108. It instructed the jury that "on the question of whether the contract existed," it should consider "the parties' objective manifestation of intent." Id. at 110.
The Funds further object to two other specific portions of Merrill's argument. First:
Mr. Ellison came and testified as a defense witness and they didn't call anybody from ACM, Mr. Askin or someone to say, no, he got it wrong, it didn't happen that way, you didn't hear that testimony.
If Mr. Ellison had not been telling the truth, don't [you] think they would have done that, they would have put somebody on to say that you had it wrong?
Id. at 1395-96. The Funds also object to the following:
Now, Mr. Ellison testified that the margin maintenance is the haircut, that was his testimony. Mr. Seiler [Funds' counsel] asked Mr. Ellison, did you ever say the words to Mr. Askin margin percentage is the haircut, did you ever say those exact words to him in a conversation. He says no, I didn't say those words.
But if Mr. Askin didn't understand the concept, then why didn't they bring him in and have him say so? This is a man who borrowed hundreds of millions of dollars from broker-dealers. He was the investment manager for these funds. If he had any confusion in his mind about haircuts and margin maintenance and what the two of them mean, then you would have heard some testimony, it seems to me, on that subject.
Id. at 1401. Defense counsel also pointed to Paragraphs 59 and 60 in the Second Amended Complaint, stating that "everyone was on the same wavelength." Id. at 1402-05; see also id. at 70-71, 75-76. He also told the jury: "They said to you that 102 percent is the same agreed upon percentage that is referred to up here. That is the connection that they made. But no one testified to that. You didn't hear anybody say that that was the understanding that the parties mutually agreed upon." Id. at 1413.
The Funds' Motion for Directed Verdict
At the conclusion of the evidence, the Funds moved for judgment as a matter of law on Count I. They argued that Merrill had not shown any evidence of oral agreements. Further, they stated that it was the province of the Court, not the jury, to construe contractual language. That motion was denied as the Funds would have the opportunity to so move after the verdict if necessary.
The Court's Instructions
Over the Funds' objections, the Court instructed the jury that "[w]hen interpreting the terms of a contract, all the terms should be read in a way so as to avoid an absurd or an unreasonable result." Id. at 1546. The Court further instructed the jury that it should determine whether or not the contracts were ambiguous, and that any ambiguity could be resolved through, inter alia, trade usage. Id. at 1546-47.
The jury returned a verdict for Merrill and judgment was entered by the Court on June 4, 2002. The Funds filed this motion on June 16, 2002, and it was considered fully submitted on July 26, 2002.
Discussion
I. Standard for a Rule 50 Motion for Judgment as a Matter of Law
The Federal Rules provide for entry of judgment as a matter of law where "there is no legally sufficient evidentiary basis for a reasonable jury to find for" a party. Fed.R.Civ.P. 50(a)(1); Merrill Lynch Interfunding v. Argenti, 155 F.3d 113, 120 (2d Cir. 1998). Such motions face a "high bar." Lavin McEleney v. Marist Coll., 239 F.3d 476, 479 (2d Cir. 2001). A Rule 50 motion should be denied,
unless the evidence, viewed in the light most favorable to the opposing party, is insufficient to permit a reasonable juror to find in her favor. In deciding such a motion, the court must given deference to all credibility determinations and reasonable inferences of the jury, and it may not itself weigh the credibility of witnesses or consider the weight of the evidence. Thus, judgment as a matter of law should not be granted unless (1) there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or (2) there is such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded [persons] could not arrive at a verdict against [it].
DiSanto v. McGraw-Hill, Inc./Platt's Div., 220 F.3d 61, 64 (2d Cir. 2000) (per curiam) (citation and quotation omitted) (alterations in original)
II. The Funds' Motion for Judgment as a Matter of Law Is Granted
In opposition to the Funds' motion, Merrill relies on two different theories. First, it argues that it did not have to prove that the parties "otherwise agreed" on a percentage other than 102% because the margin was set by Clause One, not Clause Two. In the alternative, it argues that if Clause Two governs the margin maintenance level, the jury could conclude based on the evidence presented that the parties had "otherwise agreed" on a percentage based on the haircut, rather than 102%.
A. The Jury Could Not Have Determined That the "Agreed Upon Percentage" in Clause One Was the "Haircut"
Merrill first argues in opposition to the Funds' motion that the jury could have concluded that the "agreed upon percentage" in Clause One was the "haircut" and separate from the figure cited in Clause Two. It was not the province of the jury to make such a determination. In any case, the evidence did not support this argument, which is contrary to the law of the case.
Merrill's argument admittedly relies on the notion that the term "agreed upon percentage of the outstanding purchase price" in Clause One was ambiguous. Def.'s Mem. at 4. The determination of whether a contract term is ambiguous is one for the Court to make. Sayers v. Rochester Tel. Corp., 7 F.3d 1091, 1094 (2d Cir. 1993); Wallace v. 600 Partners Corp., 86 N.Y.2d 543, 548, 634 N.Y.S.2d 669, 673 (1995). It is now held that neither Clause One nor Clause Two is ambiguous. Further, the construction of an unambiguous clause is a matter of law reserved to the Court. Revson v. Cinque Cinque, 221 F.3d 59, 66 (2d Cir. 2000).
It is now held that Clause One, while referring to an "agreed upon percentage of the outstanding purchase price," does not set what that percentage is. That percentage is found in Clause Two, which fixes a default percentage of 102%. Accordingly, absent any other agreement between the parties on a different margin maintenance percentage, Merrill's right was triggered only if the market value of the securities for the transaction fell below 102%. The issue of whether the jury could correctly have concluded that the parties otherwise agreed is addressed in the next section.
Even if the jury were empowered to make this determination, the evidence did not support Merrill's argument. First, George Ellison admitted on cross examination that the two percentages referred to in Clauses One and Two were the same, "unless otherwise agreed." Further, Dr. Stigum also recognized that Clause Two provided the agreed upon percentage for Clause One, although she stated that she believed there must have been an oral agreement on the phone to modify the 102% figure. In addition, in deciding the summary judgment motion, the Court concluded that the resolution of Count I turned on whether the parties "otherwise agreed" that a percentage other than 102 percent would apply. Primavera, 130 F. Supp.2d at 551.
Merrill finally argues that the Funds' version of the contract would produce an absurd or unreasonable result. E.g., Natwest USA Credit Corp. v. Alco Standard Corp., 858 F. Supp. 401, 413 (S.D.N.Y. 1994) ("A contract must be construed, if possible, to avoid an interpretation that will result in an absurdity, an injustice or have inequitable or unusual result.") (citing Silinsky v. State-Wide Ins. Co., 30 A.D.2d 1, 289 N.Y.S.2d 541, 549 (N.Y.App.Div. 1968)). This rule is a rule of construction that assists the court in resolving the meaning of contract terms, rather than providing a justification for departing from those terms. E.g., Uribe v. Merchants Bank of New York, 91 N.Y.2d 336, 341, 670 N.Y.S.2d 393, 396 (1998) ("[W]hen the meaning of [a] . . . contract is plain and clear . . . [it is] entitled to [be] enforced according to its terms . . . [and] not to be subverted by straining to find an ambiguity which otherwise might not be thought to exist.") (alterations in original).
While this argument presumably applies to both of Merrill's arguments in support of the judgment, it is only addressed in this section.
In any case, as the Funds point out, the 102% was not "absurd" or "unreasonable" as it allowed Merrill to make a margin call before it was exposed to any loss. Further, any deterioration in the collateral cushion that did not result in a margin call could be remedied at the end of the 30-day period, when the repo terminated, and Merrill would have an opportunity to request additional collateral. The fact that the 102 percent was not as beneficial to Merrill as a figure of 120 percent would have been does not by itself render the provision "absurd" or "unreasonable." E.g., Wallace v. 600 Partners Co., 86 N.Y.2d 543, 545-46 (1995) (enforcing lease provision that rent would be retrospectively determined 32 years into lease term).
Therefore, this argument does not support the jury's verdict, and it is necessary to determine whether the evidence was sufficient to support a finding that the parties had "otherwise agreed" to a margin other than 102%.
III. The Jury Could Not Have Concluded with Respect to Clause Two that the Parties Had "Otherwise Agreed"
In deciding the summary judgment motion, this Court set up what Merrill needed to prove:
There is no dispute as to the governing contractual provision. Nor is there any dispute that Merrill made its margin calls based on the 20% "haircut" amount, rather than based on the 102% figure referred to in the repo trade confirmations, and that at that time the value of the securities in the Funds' accounts was at least 102% of their outstanding obligations. However, Merrill contends that the parties "otherwise agreed," as permitted by the repo trade confirmation agreements, that the required maintenance level would be identical to the "haircut" established by the parties when they entered into each repo transaction. Repo Trade Confirmation at 2.130 F. Supp.2d at 550-51.
Merrill survived summary judgment on liability for Count One by stating that it could prove that "before entering into each repo transaction, its salesperson discussed the terms with a representative of ACM on behalf of the Funds, and that at the time the parties agreed to a haircut for a repo transaction they also agreed — orally — to designate the same percentage as the margin maintenance level for that transaction." Id.
There is no question that the parties agreed on March 24, when the repos were rolled over, to new haircuts requiring an additional $14 million in collateral. Trial Tr. at 1212. The Funds argue that Merrill presented no evidence by which the jury could conclude that the parties had "otherwise agreed" that the "haircut" agreed to on March 24 would establish Merrill's right to make a margin call rather than the 102 percent figure. In opposition, Merrill points to four pieces of evidence by which it argues that the jury could have concluded that the parties had so agreed.
First, Merrill points to the testimony of Ellison, who is the only Merrill representative who spoke with and thus could have "otherwise agreed" with the Funds' representatives to a different margin than 102% on March 24. Yet he testified that he never expressly told Askin that "the margin maintenance is the haircut" and that he did not say those words because it was so generally understood to be the "convention in our business" that he did not have to say it. Trial Tr. at 1201-02.
Merrill argues that Ellison also never spoke with Askin about the 102% figure or "any contractual limitations Merrill Lynch's right to make a margin call." Def.'s Mem. at 7. It was not necessary that he do so, however, as the confirmations had already set that figure. Merrill's argument places a burden on the Funds that it did not face at trial.
Second, Merrill points to Stigum's testimony. She stated that it was "not credible that anybody" would have loaned money against collateral with a haircut of only 2% and that "anyone familiar with the market" would know that 102% was "a standard haircut on Treasury securities." Compendium 1 at 14. When asked about industry practice, Stigum responded that, "It's totally inconsistent with the market practice to make the . . . inference that you just did, that 102 percent had something to do with margin maintenance." Id.
Stigum also testified that "there must have been an oral agreement on the phone" to vary the 102% margin maintenance provision. This statement should not have been admitted at trial. E.g., RB Ventures v. Shane, 91 Civ. 5678, 2000 U.S. Dist. LEXIS 5631, at *9-11 (S.D.N.Y. April 28, 2000) ("It is clear that [a party's] expert could not express an opinion that, given the industry practice that they describe, [the parties] actually entered into the oral agreements" which one party avers and the other denies). In any case, the statement merely reveals Stigum's subjective belief that an oral agreement must have taken place, rather than any evidence by which the jury could have properly concluded that an agreement took place.
Third, the Trustee's Report identified the 102% figure as the "internal margin tolerance" level, the level at which a "red flag" would go up, as opposed to the level at which Merrill had the right to make a margin call.
Finally, Merrill points to the First and Second Amended Complaints, in which the Funds misquote the confirmations and look to the PSA Agreements (as opposed to the confirmations) and conclude that a margin deficit exists whenever the value of the collateral no longer exceeds the repo loan amount by the amount of the agreed-upon haircut. Second Am. Compl. ¶¶ 59, 60.
The first three pieces of evidence go to industry custom rather than to any direct agreement between the parties. "While industry custom and usage or a prior course of dealing between the parties is relevant to determining the meaning of a contract, it `cannot create a contract where there has been no agreement by the parties . . . .'" Cherry River Music Co. v. Simitar Entertainment, Inc., 38 F. Supp.2d 310, 319 n. 56 (S.D.N.Y. 1999) (quoting Stulsaft v. Mercer Tube Mfg. Co., 288 N.Y. 255, 260, 43 N.E.2d 31 (1942)). See also Tilley v. Cook Co., 103 U.S. 155, 160 (1880) ("unless some contract is shown, evidence of usage or custom is immaterial"); Fasolino Foods Co. v. Banca Nazionale del Lavoro, 761 F. Supp. 1010, 1021 (S.D.N.Y. 1991) ("A prior course of dealings between the parties is a tool for interpreting existing contracts and may not be used to establish contract formation."); Grombach Prods. v. Waring, 293 N.Y. 609, 616, 59 N.E.2d 425 (1944) ("Such a custom . . . cannot create a contract where there has been no agreement by the parties and none is implied by law . . . .").
Even though the Trustee's Report refers to specifics of the relationship between the parties, these beliefs are based, presumably, on conclusions drawn from the industry custom rather than any agreement between the parties.
This rule makes particular sense in this situation. There was no question that the parties had entered into a contract that set the levels of margin maintenance at 102%. To imply that the words "otherwise agreed" permitted a silent agreement based on convention or trade usage would render Clause Two superfluous and defeat the evident purpose of the clause to specify a default margin maintenance percentage.
Merrill argues that the fact that there was no evidence of an express agreement should not result in a judgment as a matter of law. Relying on § 220 of the Restatement (Second) of Contracts, § 220, Merrill states that an agreement need not be stated in words if assent was manifested by other conduct, as dictated by custom. § 220, cmt. c. Presumably, Merrill means that by agreeing to a haircut, the parties also agreed to a margin based on that haircut. This argument would only make sense if there were not an express term of the confirmations that contradicted the custom. Here, the parties agreed to a 102% margin. Evidence of mere industry custom alone is insufficient to supplant that express agreement.
The final piece of evidence also is unhelpful. First, Paragraph 59 of the Second Amended Complaint describes the PSA Agreement and thus, contrary to Merrill's argument (Def.'s Mem. at 12), is irrelevant to the confirms. Granite Corp. and Granite Partners had no PSA Agreement with Merrill. Further, although Quartz signed a PSA Agreement with Merrill, it provided that the parties could set a margin call threshold other than the one based on the haircut. The confirmations provided that other threshold. To the extent that Paragraph 59 describes customary practices, it is inutile for the reasons discussed above.
As for Paragraph 60, which specifically mentions the Merrill confirmations, the language cited in that paragraph does not actually appear in the confirmations. Because the Funds moved under Fed.R.Civ.P. 15(b) to amend their pleading to conform to the evidence presented at trial, Paragraph 60 is so amended. In any case, Paragraph 60 refers to "the minimum standards agreed to at the time of the transaction," rather than the "agreed upon haircut" referred to in Paragraph 59, suggesting that the two figures were not the same.
As discussed in the Order dated April 30, 2002, "[t]he Funds do not carry the burden to `prove a negative' — to prove that the oral agreements did not take place." Granite Partners, L.P. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 2002 WL 826956, at *2 (S.D.N.Y. May 1, 2002). Therefore, the burden was entirely on Merrill to show that the parties had otherwise agreed. The evidence, viewed in the light most favorable to Merrill, was insufficient to permit a reasonable juror to find in its favor. There was, in fact, such a complete lack of evidence supporting the verdict that the jury's verdict could only have been the result of "sheer surmise or conjecture."
IV. The Funds' Motion for a New Trial
Because of the above determination, there is no need to address the Funds' contentions with regard to a new trial on liability.
Conclusion
For the foregoing reasons, the Funds' motion for a judgment as a matter of law on Count I and for a trial on damages is granted. The parties shall attend a pretrial conference on October 21, 2002.
It is so ordered.