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CDO Plus Master Fund Ltd. v. Wachovia Bank

July 13, 2009



Plaintiff CDO Plus Master Fund Ltd. ("CDO" or "Plaintiff"), an Isle of Jersey exempted corporation,*fn1 has brought the above-captioned action against defendant Wachovia Bank, N.A. ("Wachovia" or "Defendant"), a North Carolina corporation, asserting claims for fraud, mistake, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, specific performance and conversion. Wachovia has asserted a counterclaim for breach of contract. The Court has subject matter jurisdiction of the instant claims based upon the complete diversity of the parties' citizenship. 28 U.S.C. § 1332.

Wachovia has moved for judgment on the pleadings, pursuant to Federal Rule of Civil Procedure 12(c), seeking dismissal of CDO's amended complaint and judgment in Wachovia's favor on its counterclaim. The Court has reviewed thoroughly the parties' pleadings and submissions. For the following reasons, Wachovia's motion is granted in part and denied in part.


The following facts, alleged in Plaintiff's Amended Complaint ("Am. Compl."), are taken as true for the purposes of this motion practice. See Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004). Provisions of documents incorporated by reference or relied on in the amended complaint are described insofar as they relevant. CDO, at the time it filed the amended complaint, was a hedge fund with approximately $50,000,000 of assets under management. (Am. Compl. ¶ 8.) CDO and Wachovia, a national banking association, entered into a credit default swap transaction (the "Trade") on or about May 21, 2007. (Am. Compl. ¶¶ 5-9.) The underlying reference obligation of the Trade was a collateralized debt obligation, the Forge ABS High Grade CDO Ltd., 2007-1A, with a principal underlying debt obligation ("notional amount") of $10,000,000. (Am. Compl. ¶¶ 10-11.) Wachovia was the protection buyer in the Trade and CDO the protection seller: Wachovia paid regular premiums to CDO in exchange for CDO's assumption of the reference obligation's credit risk. If the reference obligation had defaulted or experienced any other defined credit event, CDO would have been obligated to pay Wachovia up to the full notional amount. As long as the reference obligation did not experience a credit event, CDO would profit from receiving a steady payment stream throughout the life of the Trade.*fn2

The primary contract documents (collectively, the "CDO Contract") governing the parties' rights and obligations in the Trade are: (1) the 1992 version of the Master Agreement of the International Swap Dealers Association ("ISDA"), dated May 4, 2007 (McCormick Decl., Ex. 2 ("ISDA Master Agreement")); (2) the Schedule to the ISDA Master Agreement, dated May 4, 2007 (McCormick Decl., Ex. 3 ("ISDA Schedule"); (3) the 1994 ISDA Credit Support Annex, dated May 4, 2007 (McCormick Decl., Ex. 4 ("Credit Support Annex")); and (4) the Confirmation Letter, dated May 30, 2007 (McCormick Decl., Ex. 1 ("Confirmation Letter")). The Confirmation Letter "supplements, forms a part of, and is subject to, the ISDA Master Agreement" (Confirmation Letter p. 1), and provides that "in the event of any inconsistency between the provisions of any Confirmation and [the ISDA Master Agreement and ISDA Schedule], such Confirmation will prevail." (ISDA Master Agreement 1(b).) The CDO Contract provides that it is to be governed by and construed in accordance with New York law. (ISDA Schedule ¶ 4(h).)

Wachovia, as the protection buyer, committed to make fixed payments to CDO of 2.75% per annum of the $10,000,000 notional amount.*fn3 (Am. Compl. ¶ 11.) CDO, as the protection seller, committed to pay Wachovia "Floating Payments" if at any time during the life of the Trade the "Calculation Agent" determined that a "Credit Event" related to the reference obligation had occurred.*fn4 (Id.) CDO deposited $750,000 (the "Independent Amount") with Wachovia as collateral to secure Wachovia against the risk that CDO might be unable to meet a "Floating Payment" obligation. (Confirmation Letter § 7.) The CDO Contract also allowed either party to demand "Credit Support" collateral whenever the party's "Exposure," defined as the cost to that party to replace the Trade in the market, exceeded by more than $250,000 the value of the collateral held by the party. (Credit Support Annex ¶¶ 3, 12.) The CDO Contract's dispute resolution provision ("Dispute Resolution Provision") required that, in the event that a party disputed a Credit Support demand, the "Valuation Agent" was required to recalculate the Exposure based upon four independent quotations from "Reference Market-Makers." (Credit Support Annex ¶ 5.) The CDO Contract designated Wachovia as both the Calculation Agent and the Valuation Agent. (Confirmation Letter p. 1, Credit Support Annex ¶ 13(c)(i).)

Wachovia made more than fourteen demands for Credit Support from CDO. (Am. Compl. ¶ 22.) CDO acceded to the first seven Credit Support demands without protest. (Id. ¶¶ 22, 27.) CDO believed it was not obligated to pay Wachovia's demands but it did so out of fear that Wachovia would otherwise declare a technical default and seize CDO's collateral. (Id. ¶ 28.) After complying with the seventh Credit Support demand, CDO wrote to Wachovia and expressed concern about Wachovia's Credit Support demands, which at that point had required CDO to post collateral in a sum exceeding 40% of the notional amount. (Id. ¶ 27.) Wachovia responded that it was entitled to require Credit Support pursuant to the Credit Support Annex and that its requests were necessitated by the deterioration in the mark-to-market value of the reference obligation. (Id. ¶ 29.) CDO thereafter acceded to seven more of Wachovia's Credit Support demands. (Id. ¶ 22.)

On November 21, 2007, CDO invoked the Dispute Resolution Provision to challenge Wachovia's latest demand for Credit Support. (Id. ¶¶ 22, 38, 39.) On November 27, 2007, Wachovia, as the Valuation Agent, provided CDO with four quotations that purported to establish that Wachovia's demands for Credit Support were legitimate. Wachovia also demanded additional Credit Support of $1,490,000 (the "Final Demand"). (Am. Compl. ¶¶ 48-49.) Had CDO complied with the Final Demand, Wachovia's total collateral would have exceeded the $10,000,000 notional amount of the Trade. CDO refused the Final Demand and initiated this lawsuit. (Am. Compl. ¶ 56.)

The Dispute Resolution Provision required CDO to "make the appropriate Transfer" of demanded Credit Support following "notice [] of the Valuation Agent." (Credit Support Annex ¶ 5.) CDO did not pay any further sums to Wachovia. (Am. Compl. ¶ 58.) Wachovia sent CDO a Notice of Failure to Transfer, followed by a Notice of an Event of Default, and thereafter declared an Early Termination of the CDO Contract, liquidated the posted collateral, and notified CDO that it owed Wachovia $1,030,861, together with interest and other amounts, including collection costs and legal fees. (Id. ¶¶ 57-61.)


A motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) is determined under the same standard as a motion to dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Shaw v. Rolex Watch U.S.A., Inc., 745 F. Supp. 982, 984 (S.D.N.Y. 1990). Accordingly, the Court accepts as true the factual allegations set forth in the amended complaint, and will draw all reasonable inferences in CDO's favor. See, e.g., W. Mohegan Tribe & Nation v. Orange County, 395 F.3d 18, 20 (2d Cir. 2004). The Court may consider the contract documents submitted by the parties as exhibits to their motion papers because they were in both parties' possession and were relied upon by the parties in their pleadings. Prentice v. Apfel, 11 F. Supp. 2d 420, 424 (S.D.N.Y. 1998) (citing Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993)). "Judgment on the pleadings is appropriate if, from the pleadings, the moving party is entitled to a judgment as a matter of law." Burns Int'l Sec. Servs., Inc. v. Int'l Union, Union Plant Workers of Am., 47 F.3d 14, 16 (2d Cir. 1994).

Wachovia also seeks dismissal of Plaintiff's fraud claims for failure to comply with Rule 9(b) of the Federal Rules of Civil Procedure, which provides that, "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). The plaintiff must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (internal quotation marks and citation omitted).

I. Plaintiff's First and Third Causes of Action: "Rescission - Fraud" and "Damages from Wachovia's Fraud"

To state a cognizable fraud claim under New York law, a plaintiff must allege (i) a misrepresentation or omission of a material fact, which was (ii) false and was known by the defendant to be false and (iii) made for the purpose of inducing plaintiff to rely on it. See Stewart v. World Wrestling Fed'n Entm't, Inc., No. 03 Civ. 2468, 2005 WL 66890, at *6 (S.D.N.Y. Jan. 11, 2005) (citing Lana Holding Co. v. Smith Barney, Inc., 646 N.Y.S.2d 76, 80 (N.Y. 1996)). A plaintiff must also ...

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