Legal Update: January 2025

Mancini v. UBS AG: Valuation of Collateral Pursuant to an Event of Default

This article discusses the recent case of Mancini v. UBS AG, a case where UBS liquidated Plaintiff’s collateral following an event of default. The issue before the court was whether UBS AG acted arbitrarily when it liquidated Plaintiff’s account based on an earlier valuation date, rather than based on a higher and more recent account value.

“Timing is everything” may be a cliché, but when it comes to valuation, it is certainly true. In Mancini v. UBS AG, 2024 U.S. Dist. LEXIS 213279 (S.D. N.Y. November 21, 2024), the Plaintiff learned this the hard way.

Background

Robert Mancini (“Plaintiff”) was, until June 6, 2018, a managing director of the Carlyle Group (“Carlyle”). At that point, he transitioned to a “senior advisor” and fully withdrew from Carlyle in December 2018.

Carlyle is a global investment management company with a particular emphasis on private equity investments. For example, Carlyle’s private equity investment portfolio was valued at more than $100 million at the end of 2023.[1] Carlyle offered certain employees, including Plaintiff, opportunities to participate in private equity investments that it calls “Carlyle Co-investment Entities” or “CCEs.” To facilitate employee participation in the CCEs, Carlyle obtained a credit facility with UBS AG, a Swiss bank. Plaintiff took advantage of the UBS financing to invest in multiple CCEs. In January 2013, Plaintiff executed a loan agreement with UBS under its master agreement with Carlyle. Under the terms of the UBS financing, UBS retained custody of Plaintiff’s CCE investments as collateral for the debt, and Plaintiff was required to continue as a Carlyle employee.

Plaintiff’s December 2018 departure from Carlyle was an event of default under his UBS loan. On February 5, 2019, UBS notified Plaintiff that his withdrawal from Carlyle constituted a “final event” under the terms of his loan and demanded payment of the March 15, 2019 maturity date. Plaintiff and UBS negotiated an extension of the due date to March 1, 2020. By that time, Plaintiff was to repay the loan; he did not.

Under the terms of the credit agreement and New York law, Plaintiff’s failure to pay the amount due allowed UBS, in its “sole and absolute discretion,” to liquidate some or all the collateral (Plaintiff’s CCE investments) in a commercially reasonable manner. On August 26, 2020, UBS notified Plaintiff that it would sell the collateral sometime after September 10, 2020, satisfying a 10-day liquidation notice contained in the credit agreement.

In early September 2020, before the September 10 anticipated transaction date, Plaintiff phoned UBS to propose purchasing the debt and redeeming the collateral himself. UBS advised Plaintiff that since the liquidation proceedings had already begun, it was too late for him to intercede. While a specific closing date is not part of the record, UBS completed a sale of the collateral in October 2020.

The Plaintiff claimed that at the end of 2019, his CCE portfolio was worth more than $4 million. UBS liquidated the CCE investments for gross proceeds of $2,895,229, against which it incurred $358,652 in transaction costs. The net proceeds ($2,536,577) were applied to Plaintiff’s loan balance ($2,017,124) and the surplus ($519,453) was paid to Plaintiff. UBS used the March 31, 2020 market values provided by Carlyle in the October sale despite, according to Plaintiff, June 30, 2020 values being available.

Court Findings

Procedural Posture

Plaintiff initiated his lawsuit on November 6, 2023, and filed an amended complaint on February 9, 2024. The Plaintiff asserted claims for breach of the implied covenant of good faith and fair dealing, and breach of the duty to exercise commercial reasonableness. On March 15, 2024, UBS answered the amended complaint and filed a motion for judgment on the pleadings under Federal Rule of Civil Procedure (FRCP) 12(c).

To survive a 12(c) motion, the Plaintiff’s complaint must contain sufficient facts, accepted as true, to state a claim that is plausible on its face. The court’s inquiry is focused on the pleadings (complaint and answer), but it may also consider documents attached to those pleadings or incorporated by reference in the pleadings, provided that there is no dispute as to the authenticity, accuracy or relevance of such documents. In this case, the court could reasonably consider the UBS loan documents. As in a motion to dismiss under FRCP 12(b)(6), the court is required to accept factual assertions[2] of the complaint as true. Conclusory assertions[3] are not to be considered.

Court’s Analysis

Plaintiff’s claims for breach of the implied covenant of good faith and fair dealing, and breach of the duty to exercise commercial reasonableness, while separate legal issues, rested on the same three operative concepts:

• That UBS used “stale” March 31, 2020 values to market Plaintiff’s CCE investments rather than the more recent June 30 or September 30 values;
• That UBS failed to defer closing on the sale from early October to later in October or November when September 30 values for the CCE investments would be available; and
• That, in a September 2020 telephone call, UBS foreclosed Plaintiff from redeeming the CCE investments making the notice provided meaningless.[4]

Failure to Use Updated Value Information

Plaintiff contended that UBS breached its duties by continuing to use March 31, 2020 values in marketing and, ultimately, selling Plaintiff’s CCE holdings in October 2020 when more current values were available from Carlyle. As a result, according to Plaintiff, he did not receive the “fruits of his contract.” In other words, if UBS had used June 30, 2020 values, the CCE investments would have sold for a higher price and, therefore, Plaintiff would have received a greater surplus at the closing.[5]

The court, however, concluded that it was not UBS’s obligation to maximize Plaintiff’s recovery from the sale of the collateral. The legal standard for evaluating the actions of a creditor in liquidating collateral following a default is whether the creditor acted intentionally or irrationally to deprive the debtor of his benefits under the financing agreement. The financing agreement did not impose any specific process on UBS for selling the collateral. In fact, the agreement specifically granted UBS “sole and absolute” discretion to liquidate the collateral. Further, the Uniform Commercial Code “provides that secured parties like UBS are under no obligation to defer disposition of collateral after a debtor’s default. In other words, there is no contractual or extra-contractual basis under which [Plaintiff] can claim that UBS unlawfully failed to defer the sale. Therefore, UBS did not breach the implied covenant through its timing of the sale.”[6]

The court reached the same conclusion regarding the marketing process for the collateral. Plaintiff did not provide any reasonable basis to conclude that UBS acted in an arbitrary or irrational manner. As nothing in the loan documents required UBS to maximize Plaintiff’s recovery in a forfeiture of the collateral, UBS cannot be held liable for not doing so … so long as its actions were commercially reasonable. If, for example, it sold the CCE investments for less than the balance of the loan when alternative sales opportunities would have fully satisfied the debt, UBS’s actions might have been considered unreasonable.

Adequacy of Notice

Plaintiff also alleged that UBS failed to provide him sufficient notice of the asset sale when he called UBS after receiving UBS’s August 26, 2020 letter advising him of an impending liquidation of the collateral and was told that he was too late to intervene. While the court focused on the specific terms of both the loan agreement and New York law stating that 10 days’ notice is sufficient, it is also worth noting that Plaintiff had months of warning that the debt was due, and his collateral was in jeopardy. Plaintiff knew, or should have known, that his departure from Carlyle in December 2018 triggered his obligation to satisfy the debt, and the failure to do so would risk losing his collateral. Plaintiff negotiated an extension of his loan maturity from March 15, 2019 to March 1, 2020, by which time he was required to pay off the loan or risk losing his collateral. From March 1, 2020 on, Plaintiff knew, or should have known, that his continuing failure to pay the loan put him at risk of losing his collateral.

Conclusion

In Mancini v. UBS AG, the court makes clear that, absent some factual allegation of a defendant’s arbitrary or unreasonable behavior, it will not conclude that the liquidation of collateral was an unlawful act. A creditor is not obligated to maximize a debtor’s recovery in the sale of collateral so long as the creditor’s actions are reasonable at the time.

[1] The Carlyle Group Form 10-K for the year ended December 31, 2023, at p. 9.

[2] Such as the dates on which events occurred, or the identities of individuals involved in meetings.

[3] Such as the subjective intentions of the parties that are not stated in underlying documents.

[4] While UBS disputes that the alleged phone call occurred or what was supposed to have been discussed, the court is required to accept Plaintiff’s factual assertion as true for purposes of the motion.

[5] UBS, on the other hand, contended that the investments reflected significant volatility on a day-to-day basis. Thus, according to UBS, any specific quarterly report from Carlyle would have been dated and not necessarily reflected the value of the assets by the time the quarterly report was issued.

[6] 2024 U.S. Dist. LEXIS 213279 at *14 (internal citation omitted).

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Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.

Mr. Molder has served as a valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.

Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.

Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”

Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.