Barclays found liable in $300 million Black Diamond dispute
British bank Barclays breached a derivative agreement with 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 crisis.
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 default.
Last year, Justice Eileen Bransten in state Supreme Court in Manhattan dismissed Black Diamond's breach of contract claim. However, the Appellate Division of the Supreme Court, a midlevel appeals court, reversed that ruling in a 3-2 decision on Thursday.
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 disputing it.
"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 majority wrote.
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 court said.
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 Appeals.
Craig Newman, a lawyer for Black Diamond, declined to comment.
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.