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Swap Counter-Parties Squabble Over Alleged Default: BDC Finance, LLC vs. Barclays Bank, PLC
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Under New York law, where the parties have set forth in a contract the rights and duties by which they will conduct themselves, a court should strive to give a fair and reasonable meaning to the language used.

BDC Finance, LLC vs. Barclays Bank, PLC, No. 5 (N.Y. Ct. of App., 2/19/15).

A Swap Transaction Heads to Court

BDC Finance and Barclays Bank, both sophisticated institutional investors, entered into a swap transaction involving millions of dollars in securities in May 2005. The arrangement worked for several years, but, after the financial credit crisis occurred, the transaction began to fray. By October 2008, BDC, a Connecticut-based hedge fund and Barclays, a major global UK bank, were in New York State court. Perhaps, they chose state court, because of the Commercial Part, which promises swift action by knowledgeable judges; perhaps, the New York courts are seen as the appropriate arbiters of the standard form contracts issued by the International Swap & Derivatives Association. Whatever the reason, three state courts have ruled on this dispute in the past seven years, variously deciding on dueling summary judgment motions that BDC breached the contract (NY Supreme), that Barclays breached the contract (NY App. Div.) and, by this Court, that questions of fact require that the summary judgment motions be denied.

The Issues

The facts are involved, but the contractual issues are not complex: did Barclays breach the contract by delaying an additional business day the return of collateral under the ISDA provisions; was the amount returned adequate to satisfy the demand; and, did the failure to return the agreed amount trigger a requirement to pay the original demand amount? The resolution of these issues lies, the Court explains, in the dispute resolution mechanisms established by the parties to deal with (1) demands for “Delivery of Collateral” by Barclays (required to be made within one business day) as the party obliged to make payments based on the return of certain underlying referenced assets, and (2) demands to transfer a “Return Amount” to BDC (similar one business day requirement) as the party obliged to make payments to Barclays based on a financing rate.

Summary Judgment Fails

As the reference assets fluctuate in value and trade in specialized markets, the need to adjust collateral arises from time to time and, in volatile markets, can gyrate dramatically from day to day. Thus, on one day, October 6, 2008, the two parties found themselves making competing collateral calls upon one another, with Barclays claiming the referenced assets were under-collateralized by $11,750,000 and BDC claiming an over-collateralization status of $40 million. An informal dispute resolution mechanism under the ISDA agreements provided that Barclays, which disagreed with the BDC call, had to notify BDC of a dispute, transfer the undisputed amount by the next business day, whereupon the parties could attempt to negotiate a resolution of the disputed amount.
Barclays claimed that it substantially complied with that procedure, but BDC, claiming a failure to notify BDC properly of a dispute or to timely repay the full Return Amount, sought early termination of the swap arrangement and followed three days later with this lawsuit. Under New York law, the Court observes, where the parties have set forth in a contract the “rights and duties” by which they will conduct themselves, “a court should strive to give a fair and reasonable meaning to the language used.” In the Court’s view, questions of fact exist about whether Barclays defaulted and, also, “as to whether BDC received the full benefit of the amount it was owed when Barclays paid the $5 million and reduced the amount of its collateral call to BDC by the additional $80,000.” As Barclays’ counterclaim rely upon the lack of a default, summary judgment on both the claims and counterclaims cannot be decided.

(ed: *The case has, by now, been remanded to the lower court for trial. No indication appeared in the Court’s Opinion as to whether the swap arrangement was unwound, pursuant to the notice of default BDC issued. While the amounts exchanged or demanded by the parties were in the tens of millions, we have no idea what the ultimate damage claims were, once the transaction was unwound. **A dispute of this nature cries for arbitration. Thus, we were heartened to find that, in 2011, the ISDA issued two memoranda, regarding the use of arbitration under the ISDA forms, which led to the publication of the “2013 ISDA Arbitration Guide.” The Guide discusses the use of arbitration, provides model pre-dispute arbitration clauses, and contains appendices of the rules of seven international arbitration forums, including the AAA’s ICDR Rules.)

(SLC Ref. No. 2015-35-09)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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