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Good Hill Master Fund L.P. v. Deutsche Bank AG

Supreme Court of New York, First Department

January 24, 2017

Good Hill Master Fund L.P., et al., Plaintiffs-Respondents,
Deutsche Bank AG, Defendant-Appellant.

          Cahill Gordon & Reindel LLP, New York (Charles A. Gilman of counsel), for appellant.

          Wilk Auslander LLP, New York (Alan D. Zuckerbrod of counsel), for respondents.

          Renwick, J.P., Moskowitz, Kapnick, Kahn, Gesmer, JJ.

         Judgment, Supreme Court, New York County (O. Peter Sherwood, J.), entered July 21, 2016, awarding plaintiffs, after a nonjury trial, the sum of $22, 142, 221.13, with prejudgment interest at the rate of 21% from August 18, 2009 through date of entry of judgment in the sum of $68, 061, 305.71, and awarding plaintiffs attorneys' fees and litigation expenses in the sum of $3, 750, 000.00, for a total sum of $93, 953, 526.84, and awarding plaintiffs postjudgment interest at the statutory rate on the counsel fees and litigation expenses, and at the rate of 21% on the remainder of the judgment ($90, 203, 526.84) until the date payment of the judgment is complete, and bringing up for review an order, same court and Justice, entered November 27, 2015, which, among other things, precluded, in limine, one of defendant's experts from testifying, and orders, same court and Justice, entered February 3, 2016, and, as amended, March 30, 2016, unanimously affirmed, with costs. Appeals from the foregoing orders, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

         This action arises out of a dispute between defendant Deutsche Bank, AG and plaintiffs Good Hill Master Fund L.P. and Good Hill Master Fund, H.L.P. (collectively, Good Hill), two hedge funds. In October 2007, nonparty Bank of America Securities, LLC issued notes to fund a securitization backed by $10.3 billion worth of residential mortgage-backed securities; the notes relevant to this action were classified in tranches designated A1 through B13. That same month, Good Hill bought, at par, all of the notes designated B6 through B12 for a total of approximately $54 million. Only the B6 notes were investment grade. No other entity invested in the securitization, and Bank of America retained the rest of the notes.

         In early 2008, Good Hill and Deutsche Bank executed credit default swap agreements that referred to the B6 notes. In those agreements, Deutsche Bank bought protection again one of three risks: a writedown or forgiveness of the principal, a failure to pay principal, and an interest shortfall. If any of these three events occurred, Good Hill would be obliged to pay Deutsche Bank. The relevant swap agreements included, among other things, a 2002 International Swaps and Derivatives Association, Inc. (ISDA) Master Agreement (ISDA Master Agreement) and 2003 ISDA Credit Derivatives Definitions.

         Under the terms of the swap agreements, Deutsche Bank paid Good Hill $12.8 million up front and $1.5 million in total monthly payments. In exchange, "[i]f a Floating Amount Event occurs, then... Seller [Good Hill] will pay the relevant Floating Amount to Buyer [Deutsche Bank]." A "floating amount event" included a "writedown" of the B6 notes, defined as "the forgiveness of any amount of principal by the holders of the [B6 Notes] pursuant to an amendment to the Underlying Instruments [the Indenture underlying the securitization] resulting in a reduction in the Outstanding Principal Amount." Because Good Hill might have been required to pay the floating amount if certain events occurred, it posted collateral up front. If the market value of the B6 notes fell, Deutsche Bank could demand more collateral, and if it rose, Good Hill could demand the return of some collateral.

         Further, Section 9.1(b)(iii) of the 2003 ISDA Credit Derivatives Definitions provided, in relevant part, that the parties "may act with respect to such business in the same manner as each of them would if such Credit Derivative Transaction did not exist, regardless of whether any such action might have an adverse effect on... the position of the other party to such Credit Derivative Transaction or otherwise."

         By April 2009, the market had declined dramatically, and the B6-B12 notes were downgraded to well below investment grade. In an effort to mitigate its own risks in the declining market, Bank of America decided to unwind and terminate the securitization. It thus offered to buy back Good Hill's notes, because they were the only tranches that Bank of America did not own. Bank of America rejected Good Hill's initial asking price of $.70 on the dollar; the parties ultimately negotiated a price of $.29 on the dollar for the entire "stack" of B6 through B12 notes.

         In July 2009, before finalization of the repurchase of the notes, Good Hill tried to persuade Bank of America to treat the cancellation as a redemption, which would not have constituted a floating amount event, and would not have triggered any obligation to pay Deutsche Bank under the swap agreements. Bank of America, however, refused to treat the cancellation of the notes as a redemption.

         Good Hill then asked Bank of America to allocate the total purchase price for the stack of B6 through B12 notes so that the B6 notes would be paid at 100% of par, and the remaining tranches little to nothing. This action would result in no floating amount due to Deutsche Bank, as the principal forgiven would be zero. After further negotiation, Good Hill and Bank of America ultimately agreed to an 83% allocation to the B6 notes, meaning that only 17% of the principal of the B6 notes would be forgiven.

         Good Hill and Bank of America completed the repurchase on August 14, 2009. On August 17, 2009, Bank of America cancelled the B6 through B12 notes along with terminating the securitization, and forgave total principal of 71% of the notes based on the 29% tender price.

         On August 24, 2009, Deutsche Bank advised Good Hill that a floating amount event - namely, a writedown - had occurred. Under the swap agreements, Deutsche Bank was required to calculate the floating amount based solely on the basis of reports prepared by the entity that serviced the loans. However, Deutsche Bank stated that it could not rely on the servicer report because the principal paid on the B6 notes was "allocated in a manner that appears to be potentially arbitrary and inconsistent with our understanding of the market valuation of the certificates prior to such allocation."

         On September 14, 2009, Good Hill sent Deutsche Bank two "Collateral Return Amount Demand" notices in which it calculated that Good Hill owed Deutsche Bank a payment of approximately $5 million. Therefore, Good Hill stated, it was entitled to return ...

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