Barclays Ordered to Return $297 Million to Hedge Fund

, The Litigation Daily

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A New York Supreme Court appellate panel has determined that Barclays Bank PLC defaulted on a derivative agreement with a unit of Black Diamond Capital Management and must return $297 million to the hedge fund. The 3-2 ruling issued Thursday brings a likely end to a five-year contract dispute between the two companies that has sparked plenty of disagreement among New York judges.

In 2005 the Black Diamond unit called BDC Finance put down collateral for a portfolio of corporate debt instruments controlled by Barclays. Under the terms of an agreement between the companies, BDC could demand the return of that money if it determined that Barclays had overcollateralized the underlying debt instruments. The parties anticipated that there might be disagreement over whether the securities were in fact overcollateralized, so they agreed to a dispute resolution protocol. They also agreed that a failure by Barclays to comply with that dispute resolution protocol would constitute a breach of contract, allowing BDC to terminate the investment agreement and reclaim all of its collateral.

On Oct. 6, 2008, during the height of the financial crisis, BDC determined that Barclays was overcollateralized by $40 million and demanded the remittance of the money. Barclays acknowledged that it had overcollateralized by about $5 million, and transferred BDC that amount on Oct. 8. Five days later, BDC declared Barclays in default, terminated their agreements, and demanded the return of its entire collateral, then valued at approximately $297 million. Barclays didn't return the money, prompting BDC to sue for breach of contract in New York Supreme Court on Oct. 17, 2008.

The central issue in the case was whether Barclays followed the correct protocol for challenging BDC's collateralization figure. The parties interpreted Barclays' duties very differently. Under BDC's interpretation of the contract, Barclays was supposed to return the full $40 million while the dispute was pending or, alternatively, return the undisputed amount of roughly $5 million by the end of Oct. 7. By sending the $5 million one day late, on Oct. 8, and also refusing to transfer the $40 million, Barclays breached its obligations, BDC argued.

In August 2012, Judge Eileen Bransten rejected what she called BDC's "pay first, dispute later" theory, siding with Barclays' lawyers at Sullivan & Cromwell. "The court interprets the agreement as providing that, in the event of a dispute, the parties need only pay the undisputed amount of a collateral call prior to the resolution of the dispute," she wrote.

In Thursday's decision, the New York Supreme Court Appellate Division, First Department, overruled Bransten and sided with BDC's interpretation. "Barclays' payment of $5 million on Oct. 8, 2008, was a day late," the majority wrote. Once Barclays missed that deadline, its only option was to hand over the full $40 million, the court wrote. "Because Barclays did not return BDC’s collateral, it breached the agreements, and summary judgment on liability should have been granted to BDC," the court wrote, ordering Barclays to hand over to full $297 million.

Craig Newman of Richards Kibbe & Orbe represented BDC. Robinson Lacy of Sullivan & Cromwell represented Barclays. Neither was immediately available for comment.

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