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CDO Plus Master Fund Ltd. v. Wachovia Bank

August 16, 2010



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 action pursuant to 28 U.S.C. § 1332.

In response to Wachovia's earlier motion for judgment on the pleadings, the Court dismissed all of CDO's claims except one: the aspect of CDO's breach of contract claim that was premised upon Wachovia's alleged breach of the implied covenant of good faith and fair dealing "in its performance of its function as Valuation Agent under the dispute resolution provision [of the parties' agreement]" survived the motion. (Docket entry no. 47.) Wachovia has moved for summary judgment pursuant to Federal Rule of Civil Procedure 56(c), seeking dismissal of CDO's remaining claim and judgment in Wachovia's favor on its counterclaim. The Court has reviewed thoroughly the parties' submissions. For the following reasons, Wachovia's motion is granted insofar as it seeks dismissal of CDO's remaining claim and granted as to liability with respect to Wachovia's counterclaim.


The following facts are undisputed, except as otherwise indicated.*fn2 Wachovia is a national banking association and a wholly owned subsidiary of Wachovia Corporation. (Def.'s 56.1 St. ¶ 1.) CDO, at all relevant times, was a hedge fund incorporated in the Isle of Jersey. (Def.'s 56.1 St. ¶ 4.) In May 2007, the parties entered into a credit default swap transaction (the "Trade"). (Def.'s 56.1 St. ¶ 8.) The underlying reference obligation of the Trade was a collateralized debt obligation, the Forge ABS High Grade CDO Ltd., 2007-1A ("Reference Obligation"), with a principal underlying debt obligation ("Notional Amount") of $10,000,000. (Def.'s 56.1 St. ¶¶ 6, 10.) 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 experienced a Credit Event (defined as a failure to pay principal, a writedown, a failure to pay interest, or a distressed rating downgrade), CDO would have been obligated to pay Wachovia up to the full Notional Amount.

(Def.'s 56.1 St. ¶ 11.) 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.

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 ("ISDA Master Agreement"); (2) the Schedule to the ISDA Master Agreement, dated May 4, 2007 ("ISDA Schedule"); (3) the 1994 ISDA Credit Support Annex, dated May 4, 2007 ("Credit Support Annex"); and (4) the Confirmation Letter, dated May 30, 2007 ("Confirmation Letter"). (Def.'s 56.1 St. ¶ 11.) The CDO Contract is governed by New York law. (ISDA Schedule ¶ 4(h).) The CDO Contract provides Wachovia with two separate rights to collateral security: CDO was required to pledge as collateral an "Independent Amount" of $750,000 at the outset of the Trade (Def.'s 56.1 St. ¶¶ 11, 12), and the parties were also obligated to transfer to each other additional collateral depending on the fluctuating value of the parties' "Exposure," which is defined as the mark-to-market replacement cost of the Trade. For Wachovia, Exposure represented the amount it would have had to pay another market participant at any given time to step into CDO's shoes which, depending on the perceived likelihood of a Credit Event, could be as much as the Notional Amount ($10,000,000). (Def.'s 56.1 St. ¶ 13.) The total amount of collateral that Wachovia could hold at any time during the life of the Trade (defined as the "Credit Support Amount") was thus the sum of the Independent Amount ($750,000) and the Exposure (up to $10,000,000). (Def.'s 56.1 St. ¶ 15.)

As the credit market deteriorated throughout the course of 2007, Wachovia made fourteen separate demands for additional collateral between June 18, 2007, and November 1, 2007. (Def.'s 56.1 St. ¶ 17.) CDO acceded to these demands. By November 20, 2007, Wachovia held a Credit Support Amount of $8,920,000, which included the $750,000 Independent Amount and $8,170,000 based on its Exposure. (Def.'s 56.1 St. ¶¶ 20, 21.) On November 21, 2007, Wachovia demanded an additional $550,000 of collateral. (Def.'s 56.1 St. ¶ 22.) CDO challenged the demand and invoked the CDO Contract's Dispute Resolution Provision.

The Dispute Resolution Provision provides that the "Valuation Agent" must recalculate the Exposure "by seeking four actual quotations at mid-market from Reference Market-makers . . . and taking the arithmetic average of those obtained." (Def.'s 56.1 St. ¶¶ 25-26.) The Dispute Resolution Provision also provides that "if four quotations are not available . . . then fewer than four quotations may be used." (Def.'s 56.1 St. ¶ 26.) The CDO Contract designates Wachovia as the Valuation Agent. (Confirmation Letter p. 1, Credit Support Annex ¶ 13(c)(i).) On November 26, 2007, Wachovia, in its capacity as Valuation Agent, solicited "a mid-market valuation, in points upfront" from ten Reference Market-makers. (Def.'s 56.1 St. ¶¶ 27-28.) "Points" represent the percentage of the Notional Amount that a party would require to step into CDO's shoes in the Trade. A quotation close to 100 indicates a perception that a Credit Event is likely to occur, requiring the protection seller to pay Wachovia the full Notional Amount.

The trader who responded to Wachovia's inquiry on behalf of Goldman Sachs wrote, "[I] took a quick look at your cds contract and it is worth between 97 and 99 [points upfront]." (Def.'s 56.1 St. ¶ 31.) The trader who responded on behalf of RBS Greenwich Capital ("RBS")queried, "bid or mark[?]", and when Wachovia replied "mid-market mark," RBS provided a quotation of 100. (Def.'s 56.1 St. ¶ 31.) In total, four Reference Market-makers responded to Wachovia's query and provided the following quotations: RBS (100); Goldman Sachs (97-99); Merrill Lynch (95); and Deutsche Bank (95).*fn3 (Def.'s 56.1 St. ¶ 31.) In light of these four quotations, Wachovia calculated the Exposure at $9,650,000, based on an average of 96.5 points,*fn4 warranting an $1,490,000 increase in collateral.*fn5 (Def.'s 56.1 St. ¶ 32.) Wachovia accordingly demanded an additional $1,490,000 in collateral, which was significantly greater than the $550,000 Wachovia had demanded based on its own calculation of Exposure prior to its calculation as Valuation Agent pursuant to the Dispute Resolution Provision. (Def.'s 56.1 St. ¶ 17.)

CDO did not accede to the demand in the manner required by the CDO Contract but, rather, initiated this action. (Def.'s 56.1 St. ¶¶ 35-36, 39.) Although CDO wrote to Wachovia that it was "still in the process of securing our own market levels," it never provided Wachovia with market levels (mid-market quotations) of its own. (Def.'s 56.1 St. ¶¶ 36-38.) Nor has CDO proffered any evidence, in the course of this litigation, to support a finding in favor of any valuation other than that determined by the Valuation Agent.

In response to CDO's refusal to transfer the requested collateral, Wachovia exercised its remedies under the CDO Contract: it delivered to CDO a Notice of Failure to Transfer requested collateral, terminated the Trade, liquidated CDO's posted collateral, and requested that CDO pay it $1,030,861.12, which is the balance it believes it is due (the "Unpaid Settlement Amount"). (Def.'s 56.1 St. ¶ 41.) Wachovia also requested that CDO pay interest, legal fees and costs pursuant to ISDA Master Agreement § 11. That section provides:

A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees . . . incurred by such other party by reason of the enforcement and protections of its rights under this Agreement. (Def.'s 56.1 St. ¶ 41.)


Summary judgment is to be granted in favor of a moving party where the "pleadings, the discovery and disclosure material on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c)(2). The moving party bears the burden of establishing that there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). A fact is considered material "if it 'might affect the outcome of the suit under the governing law,'" and an issue of fact is a genuine one where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Holtz v. Rockefeller & Co. Inc., 258 F.3d 62, 69 (2d Cir. 2001) (quoting Anderson, 477 U.S. at 248). The Second Circuit has explained, however, that "[t]he party against whom summary judgment is sought . . . 'must do more than simply show that there is some metaphysical doubt as to the material facts. . . . ...

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