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New York Court of Appeals Reverses $300M Summary Judgment in Contract Dispute

New York Court of Appeals Reverses $300M Summary Judgment in Contract Dispute

Breach of contract cases often turn on the interpretation of precise language contained in the original agreement between the parties. Each party may believe they are following the contract to the letter, even when that results in conflicting interpretations. A recent decision by the New York Court of Appeals illustrates how millions of dollars can turn on such interpretations.

BDC Finance L.L.C. v. Barclays Bank PLC

This case involves a series of contracts between a U.S.-based hedge fund and a bank in the United Kingdom. Hedge funds and banks frequently engage in what are known as “total return swaps.” Basically, the hedge fund makes periodic payments to the bank, and, in exchange, the bank makes payments to the hedge fund based on the performance of some underlying “reference asset,” such as bonds, loans or even equity indexes. The idea is that the hedge fund can receive the potential benefits of the underlying asset without actually purchasing it, while the bank gets a guaranteed return on the asset.

Here, the bank and the hedge fund executed a total return swap by signing several standard contracts. These agreements contained dispute resolution procedures. These procedures came into play when the parties disagreed over how much additional collateral each owed the other. In these type of swaps, either party has the right to demand additional collateral based on fluctuations in the price of the underlying reference assets. The other party must therefore honor a collateral demand unless it avails itself of the dispute resolution procedures contained in the contract.

Of importance here was a $40 million collateral call the hedge fund made to the bank on October 6, 2008. Under the terms of the contract, the bank then had until the close of business the next day—October 7—to either meet the call, invoke the dispute resolution process, or default. The bank disputed the amount of the hedge fund's collateral demand. It claimed it only owed $5.08 million. Accordingly, the bank made a partial payment of $5 million—$80,000 less than the undisputed amount—to the hedge fund on October 8, two days after the initial call.

The hedge fund argued this constituted default. The hedge fund informed the bank it was terminating the entire agreement and demanded the return of nearly $300 million in collateral held by the bank. The bank refused and the hedge fund sued.

Both sides moved for summary judgment. The Appellate Division ruled for the hedge fund, agreeing the bank “failed to properly dispute the October 6 collateral call” because it neither provided the required notice to the hedge fund or made the full $5.08 million payment of the undisputed amount by the October 7.

The Court of Appeals did not see it that way, however. It unanimously held neither party was entitled to summary judgment. The bank, in fact, immediately notified the hedge fund it was disputing the $40 million call. And, the parties have differing accounts of what happened with respect to the $5 million payment. The bank maintains the additional $80,000 was then credited to the hedge fund at the next collateral call. The hedge fund continues to dispute this. As a result, the Court of Appeals said summary judgment was not warranted, and it returned the case to Supreme Court for trial.

Protecting Your Interests

As complicated as all this may sound, the basic principle is quite simple: parties to a contract must be aware of how every term affects the business relationship. Even a seemingly insignificant clause can have great importance if litigation arises. That is why if you are involved with or contemplating any sort of civil litigation, you need an experienced New York business attorney who can ensure your interests are protected. Contact our office today if you need speak with an attorney right away.

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