As Seen on Jury Verdict Review & Analysis

Attorney(s) for Plaintiff:
Alan D. Zuckerbrod
Wilk, Auslander, LLP
www.wilkauslander.com

$22,114,472 VERDICT – BREACH OF CONTRACT – DEFENDANT BANK BREACHED CREDIT DEFAULT SWAP CONTRACT BY FAILING TO RETURN COLLATERAL TO PLAINTIFF HEDGE FUNDS.

New York County, NY

The plaintiffs are two related hedge funds, both who purchased certain residential mortgage-backed securities and entered into a series of credit default swap (CDS) contracts with defendant, Deutsche Bank, which was taking a “short” position on the future value of the securities. Upon the re-purchase and termination of the securities by the issuer (Bank of America) at a higher price than Deutsche Bank believed to be the market value, the credit default swap contract was closed out, resulting in less of a payment obligation by plaintiffs to Deutsche Bank than it expected. Since the bank was holding approximately $27,000,000 in collateral, but was only entitled to a payment of $5,000,000, the court ruled that it was obligated to return to the plaintiffs the difference of approximately $22,000,000.

Deutsche Bank contended, at trial, that the plaintiffs did not act in good faith or in a commercially reasonable manner when they sold the mortgage-backed securities to Bank of America at a price higher than Deutsche Bank had valued them. However, the court found that Bank of America had strong, independent reasons for re-purchasing the securities and that the plaintiffs acted in good faith and in a commercially reasonable manner when they sold the securities at a price greater than where they had been “marked” at the time during the turbulent financial crisis.

The plaintiffs contended, and the court found, that nothing in the swap contract (comprising the ISDA standard forms used by most in the derivatives marketplace), nor under New York law’s covenant to act in good faith, prohibited the hedge funds from negotiating with and selling the bonds to Bank of America at a favorable price in an arms-length transaction, even though the result might have had an adverse effect of Deutsche Bank’s swap position. The court found for the plaintiff and awarded $22,114,142.

Reference

Good Hill Master Fund LP, et al. vs. Deutche Bank, AG. Index no. 6000858/10; Judge O. Peter Sherwood, 02-00-16.

Attorney for plaintiff: Alan D. Zuckerbrod of Wilk, Auslander, LLP in New York, NY.

Commentary

The court expanded upon and confirmed a long line of authority, establishing that the implied covenant of good faith and fair dealing cannot override specific contractual provisions of the parties. The court also cited the critical provision in the ISDA CDS contract, granting each party the right to deal in its economic self-interest, in the same manner as each of them could as if such CDS trade did not exist, regardless of whether any such action might adversely affect the position of the other party.

In post-trial motions, the Court also ruled that plaintiff is entitled to pre-judgment interest at the rate of 21% per year based on a specific provision in the swap contract, which trumps the 9% New York statutory rate of interest. According to plaintiff’s counsel, since the breach of contract by Deutsche Bank occurred in 2009, the amount of interest to be awarded in the final judgment is expected to be significantly more than the initial trial award.

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