January 6, 2011 / 10:15 PM / 7 years ago

UPDATE 1-US court revives suit against BofA on credit swap

* Ruling favoring Bank of America’s Merrill unit reversed

* Notice need not be overly precise, appeals court says

* Bank of America reviewing decision (Adds Bank of America comment, details)

By Jonathan Stempel

NEW YORK, Jan 6 (Reuters) - A New York State appeals court revived a lawsuit seeking to force Bank of America Corp’s (BAC.N) Merrill Lynch unit to pay out on a 1.5 billion Japanese yen ($18 million) credit default swap.

Thursday’s ruling by the Manhattan court may help other buyers of credit protection in the multi-trillion-dollar credit default swap market when the subjects of the swaps fail to pay their debts as expected.

A buyer of a credit default swap makes payments to a seller in exchange for protection in case a third party cannot pay its debts. Tens of trillions of dollars in swaps were written and the swaps helped trigger the 2008 financial crisis and near collapse of insurer American International Group Inc (AIG.N).

In the Merrill case, Merrill sold and the plaintiff DKR Soundshore Oasis Holding Fund Ltd bought credit protection relating to an entity called Urban Corp.

When Urban decided in June 2008 to restructure some debt, Oasis notified Merrill of the “credit event” and demanded payment under its swap agreement.

Merrill argued the notice was inadequate and a lower court judge agreed. But a five-judge panel of the New York State Supreme Court, Appellate Division reversed, saying the notice needed be only “reasonably” precise in detail.

“Even an inaccuracy would not necessarily invalidate a credit event notice as long as it could subsequently be shown that a credit event had in fact occurred,” the panel said.

David Eiseman, a partner at Golenbock Eiseman Assor Bell & Peskoe LLP representing the Oasis fund, was pleased with the ruling.

“It’s a very good decision for buyers,” he said. “It puts the focus on the substance of a credit default swap agreement: whether a credit event has actually occurred. That helps ensure sellers don’t avoid their obligations to buyers based on hypertechnical arguments addressed to credit event notices.”

Bank of America spokesman Bill Halldin said the Charlotte, North Carolina-based lender is reviewing the decision. The largest U.S. bank bought Merrill on Jan. 1, 2009.

The case is DKR Soundshore Oasis Holding Fund Ltd v. Merrill Lynch International et al, New York State Supreme Court, Appellate Division (1st Dep‘t), No. 3818. (US$1 = 83.3 Japanese yen) (Reporting by Jonathan Stempel in New York; editing by Bernard Orr and Andre Grenon)

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