The securities case accusing Merrill Lynch International alleging breach of contract related to the $18 million credit default swap purchased by DKR Soundshore Oasis Holding Fund Ltd has been reinstated. The Appellate Division (First Department) of the New York Supreme Court rejected the financial firm’s efforts to get the case tossed on the grounds that DKR did not give enough notice of a credit event. The judges were in unanimous agreement that notifying Merrill the event happened was enough and it didn’t matter that the date hadn’t been specified.
DKR bought for ¥1.5 billion (that’s $18 million) the swap from Merrill for insurance against a certain debt obligation of Urban Corp. Per the contract, a credit event would constitute a restructuring of at least ¥1 billion of Urban’s subordinate debt.
In June 2008, DKR told Merrill that Urban had restructured its debt, but the credit default seller said the notice was not valid and refused to issue payment. DKR filed a lawsuit against Merrill claiming breach of contract and other claims. The defendant filed a motion to dismiss on the grounds that DKR did not give the exact date of when the restructuring happened. The lower court agreed.
Now the appellate court, in reversing the ruling, has determined that CDS buys are entitled to “the benefit of every possible favorable inference” and that the contract under dispute did not ask that the notice have the same precision as how a credit event was defined.
CDS buyers are required to make periodic payments to sellers in return for credit protection against a third party. If that party defaults on its obligation, the buyer tells the seller there has been a credit event and this is supposed to result in payment of the credit protection.
Related Web Resources:
DKR Soundshore Oasis Holding Fund Ltd. v. Merrill Lynch International, Justia
N.Y. Appeals Court Says Merrill Must Pay Offshore Buyer of CDS Protection, BNA Securities Law Daily, January 10, 2011
More Blog Posts:
France and Germany Press EU to Ban Naked Short Selling of Stocks and Limit Credit Default Swaps, Stockbroker Fraud Blog, July 8, 2010
The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps, Stockbroker Fraud Blog, November 24, 2008
Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008