UPDATE 1-Barclays found liable in $300 mln Black Diamond dispute

Reuters

(Corrects fifth paragraph to show that the lower courtdismissed only a portion of Black Diamond's breach of contractclaim)

By Joseph Ax

NEW YORK/LONDON, Oct 25 (Reuters) - British bank BarclaysPlc breached a derivative agreement with a BlackDiamond Capital Management unit and must return an estimated$297 million in collateral to the hedge fund, a divided New Yorkstate appeals court ruled on Thursday.

Barclays said on Friday it disagreed with the decision andwas considering an appeal against it.

The Connecticut-based fund's BDC Finance LLC filed a lawsuitagainst Barclays in 2008, claiming it had defaulted on a $40million collateral call made at the height of the financialcrisis.

Barclays disagreed with that amount, asserting it owed only$5 million, which it remitted to Black Diamond two days afterthe call was made. Black Diamond then declared Barclays indefault.

Last year, Justice Eileen Bransten in state Supreme Court inManhattan dismissed a portion of Black Diamond's breach ofcontract claim while allowing the rest of the lawsuit toproceed. However, the Appellate Division of the Supreme Court, amid-level appeals court, reversed that ruling in a 3-2 decisionon Thursday.

The court found Barclays breached the contract both by notmaking the $5 million payment on time and by failing to followthe contract's procedures for disputing a collateral call, whichrequired the bank to pay the full $40 million amount beforedisputing it.

"The evidence in the record undeniably shows that Barclaysfailed to pay the undisputed amount by the deadline, andestablishes as a matter of law that Barclays did not comply withthe (contract's) dispute resolution process," the three-judgemajority wrote.

With Barclays in default, Black Diamond had the right toterminate the agreement and demand a return of its entirecollateral, which the fund has estimated at $297 million, thecourt said.

Two judges, however, dissented from the court's opinion,arguing that there were questions of fact over whether Barclaysdisputed the $40 million call in a timely fashion.

"We are disappointed with and disagree with the court'sdecision. We are evaluating our options with respect to anappeal," a spokesman for Barclays said.

An appeal would be to New York's highest court, the Court ofAppeals.

Craig Newman, a lawyer for Black Diamond, declined tocomment.

Barclays Chief Executive Antony Jenkins is trying to repairthe bank's image after a string of scandals, but is being doggedby legacy issues as his bank remains embroiled in several legaldisputes or regulatory investigations.

It was the first bank to be fined for attempted manipulationof Libor interest rates, and Britain's financial regulator andfraud office are investigating the circumstances around acontroversial fundraising from Qatari investors in 2008.

The bank is also fighting a $453 million fine imposed byU.S. energy regulator FERC in July, relating to power trading inthe western United States from 2006 to 2008.

The Black Diamond deal was signed in 2005. The total returnswap transferred the benefits and risks of an investment in aBarclays-held portfolio of corporate debt instruments to BlackDiamond in exchange for financing fees paid to the bank.

The contract allowed each side to make collateral demands onthe other based on changes to the value of the underlying loans.

The case is BDC Finance v. Barclays Bank, New York StateSupreme Court, Appellate Division, First Department, No. 9906. (Reporting by Joseph Ax; Additional reporting by Steve Slaterin London; Editing by Richard Chang and Mark Potter)

View Comments (1)