(Corrects fifth paragraph to show that the lower court
dismissed only a portion of Black Diamond's breach of contract
By Joseph Ax
NEW YORK/LONDON Oct 25 British bank Barclays
Plc breached a derivative agreement with a Black
Diamond Capital Management unit and must return an estimated
$297 million in collateral to the hedge fund, a divided New York
state appeals court ruled on Thursday.
Barclays said on Friday it disagreed with the decision and
was considering an appeal against it.
The Connecticut-based fund's BDC Finance LLC filed a lawsuit
against Barclays in 2008, claiming it had defaulted on a $40
million collateral call made at the height of the financial
Barclays disagreed with that amount, asserting it owed only
$5 million, which it remitted to Black Diamond two days after
the call was made. Black Diamond then declared Barclays in
Last year, Justice Eileen Bransten in state Supreme Court in
Manhattan dismissed a portion of Black Diamond's breach of
contract claim while allowing the rest of the lawsuit to
proceed. However, the Appellate Division of the Supreme Court, a
mid-level appeals court, reversed that ruling in a 3-2 decision
The court found Barclays breached the contract both by not
making the $5 million payment on time and by failing to follow
the contract's procedures for disputing a collateral call, which
required the bank to pay the full $40 million amount before
"The evidence in the record undeniably shows that Barclays
failed to pay the undisputed amount by the deadline, and
establishes as a matter of law that Barclays did not comply with
the (contract's) dispute resolution process," the three-judge
With Barclays in default, Black Diamond had the right to
terminate the agreement and demand a return of its entire
collateral, which the fund has estimated at $297 million, the
Two judges, however, dissented from the court's opinion,
arguing that there were questions of fact over whether Barclays
disputed the $40 million call in a timely fashion.
"We are disappointed with and disagree with the court's
decision. We are evaluating our options with respect to an
appeal," a spokesman for Barclays said.
An appeal would be to New York's highest court, the Court of
Craig Newman, a lawyer for Black Diamond, declined to
Barclays Chief Executive Antony Jenkins is trying to repair
the bank's image after a string of scandals, but is being dogged
by legacy issues as his bank remains embroiled in several legal
disputes or regulatory investigations.
It was the first bank to be fined for attempted manipulation
of Libor interest rates, and Britain's financial regulator and
fraud office are investigating the circumstances around a
controversial fundraising from Qatari investors in 2008.
The bank is also fighting a $453 million fine imposed by
U.S. energy regulator FERC in July, relating to power trading in
the western United States from 2006 to 2008.
The Black Diamond deal was signed in 2005. The total return
swap transferred the benefits and risks of an investment in a
Barclays-held portfolio of corporate debt instruments to Black
Diamond in exchange for financing fees paid to the bank.
The contract allowed each side to make collateral demands on
the other based on changes to the value of the underlying loans.
The case is BDC Finance v. Barclays Bank, New York State
Supreme Court, Appellate Division, First Department, No. 9906.
(Reporting by Joseph Ax; Additional reporting by Steve Slater
in London; Editing by Richard Chang and Mark Potter)