Richards Kibbe & Orbe LLP, New York (Craig A. Newman of counsel), for appellant-respondent.
Sullivan & Cromwell LLP, New York (Robinson B. Lacy of counsel), for respondent-appellant.
Andrias, J.P., Saxe, DeGrasse, Richter, Gische, JJ.
Order, Supreme Court, New York County (Eileen Bransten, J.), entered August 15, 2012, which, to the extent appealed from as limited by the briefs, denied plaintiff's motion for summary judgment on liability on its breach of contract claim, granted in part defendant's motion for summary judgment dismissing that claim, and denied defendant's motion as to its breach of contract counterclaims, modified, on the law, to grant plaintiff's motion, to deny defendant's motion, and otherwise affirmed, without costs.
On May 5, 2005, plaintiff BDC Finance LLC and defendant Barclays Bank PLC entered into a total return swap, a derivative transaction whereby BDC would obtain the benefits, and assume the risk, of an investment in a portfolio of corporate debt instruments in exchange for paying financing fees to Barclays, which owned the loans. The agreement was memorialized in a series of documents, including a standard form Master Agreement, a standard form Credit Support Annex (CSA), and a negotiated Master Confirmation that modified certain provisions of the standard forms.
Under the agreements, each party had the right to demand collateral from the other party based on changes in the value of the underlying debt instruments. If more collateral was needed, Barclays could make a collateral call for BDC to transfer an amount known as the "Delivery Amount." Conversely, if collateral needed to be returned, BDC could make a collateral call for Barclays to transfer an amount called the "Return Amount." Thus, if BDC determined that Barclays was over-collateralized, then BDC could demand the return of any excess collateral.
At issue in this case is Barclays' alleged failure to meet a $40 million collateral call made by BDC. Barclays maintains that the agreements permitted it to dispute BDC's collateral call by notifying BDC and making a partial payment of what Barclays considered to be the undisputed amount. In support, Barclays points to Paragraph 3(b) of the CSA, which provides that "[s]ubject to Paragraphs 4 and 5, upon a demand made by [BDC]... [Barclays] will Transfer to [BDC] [the amount of collateral] specified by [BDC] in that demand" (i.e ., the Return Amount). Paragraph 4(b) provides that if the demand is made by 1:00 p.m., the transfer of collateral must be made by the end of the following business day, but if the demand is made after 1:00 p.m, the transfer must be made by the end of the second business day.
According to Barclays, Paragraph 5 of the CSA sets forth a mechanism for resolving disputes over the proper amount of the collateral calls. Under that provision, the disputing party is required to both notify the other party of the dispute and transfer the undisputed amount by the end of the business day following the date of the demand. The parties are then required to consult with each other in an attempt to resolve the dispute, and if that fails, they must utilize the CSA's formal dispute resolution process.
BDC maintains that the dispute procedures contained in Paragraph 5 of the standard form CSA were expressly modified by the Master Confirmation that was negotiated by the parties. The Master Confirmation contains a "Delivery of Collateral" clause that provides that "[n]otwithstanding anything in the [CSA] to the contrary... [Barclays] shall Transfer any Return Amounts... not later than the Business Day following the Business Day on which [BDC] requests the Transfer of such Return Amount." Unlike the form CSA, this clause requires that any transfer take place by the business day following the demand, regardless of whether the demand was made before or after 1:00 p.m. According to BDC, the Delivery of Collateral clause also nullifies the CSA's dispute resolution procedures and requires transfer of the entire Return Amount pending resolution of a dispute, and not just the undisputed amount. In other words, BDC maintains that if Barclays disagreed with the Return Amount demanded, it was required to pay first, and dispute later. Barclays, on the other hand, contends that the Delivery of Collateral clause modified only the timing of the transfer and left intact the dispute resolution process.
As relevant here, an Event of Default occurs when a party fails to perform any obligation required under the CSA if such failure is continuing after any applicable grace period has elapsed (Master Agreement § 5[a][iii]). The CSA states that an Event of Default exists if a party fails to transfer required collateral and such failure continues for two business days after notice of that failure is given (CSA ¶ 7[i]). If an Event of Default occurs, the non-defaulting party may, upon proper notice to the defaulting party, designate a Early Termination Date for all outstanding transactions (Master Agreement § 6[a]).
On October 6, 2008, BDC determined that Barclays was over- collateralized, and demanded, pursuant to Paragraph 3(b) of the CSA, that Barclays transfer a $40, 140, 405.78 Return Amount. Barclays made no payment that day, believing that it owed BDC only $5, 080, 000 in excess collateral (the undisputed amount). The next day, October 7, 2008, having received no payment by mid-afternoon, BDC again wrote to Barclays asking that it remit the $40 million Return Amount. Barclays, however, did not transfer the $40 million Return Amount by the deadline. Nor did Barclays transfer the $5, 080, 000 undisputed amount. In fact, Barclays made no payment on October 7, 2008.
The following day, October 8, 2008, Barclays sent BDC a flat $5 million payment, which was a day late and $80, 000 less than the undisputed amount. That same day, BDC sent Barclays a "Notice of Failure to Transfer Return Amount" (the default notice). In the default notice, BDC informed Barclays that it had been required, by October 7, 2008, to either pay the $40 million Return Amount or the undisputed amount. The notice declared a Potential Event of Default against Barclays, and advised Barclays that if it failed to cure within two business days, it would be in default under Section 5(a)(iii)(1) of the Master Agreement and Paragraph 7(i) of the CSA. Despite this notice, Barclays did not cure by remitting the balance of the $40 million Return Amount.
On October 13, 2008, BDC sent Barclays a notice declaring Barclays in default for having failed to transfer the $40 million Return Amount within the cure period (the termination notice). The termination notice advised Barclays that the default was continuing, and designated the following day as the Early Termination Date ending all transactions pursuant to Section 6(a) of the Master Agreement. The termination of the agreements obligated Barclays to return BDC's collateral that it was holding, which, according to BDC, amounted to approximately $297 million. On October 17, 2008, BDC requested Barclays to remit this amount, but Barclays never did. This litigation ensued.
BDC's default notice stated that in order to have properly disputed the collateral call, Barclays was required to have both notified BDC of the dispute and transferred the undisputed amount of $5, 080, 000 by October 7, 2008. The evidence in the record establishes as a matter of law that Barclays did not do this. Barclays' payment of $5 million on October 8, 2008 was a day late. Accordingly, BDC notified Barclays that it had two business days to pay the Return Amount. Still, Barclays did not remit the $40 million, placing it in default. Barclays' default, in turn, entitled BDC to terminate the transactions and demand return of its ...