Court of Appeals Affirms Commercial Division Ruling Stating Creditors of SIV-Lites Have No Cause of Action for Breach of Fiduciary Duty and Tortious Interference Without a Contract


[authors: Sean Cornely and Rena Andoh]

In Oddo Asset Management v. Barclays Bank PLC, et al., No. 126 (Jul. 27, 2012), Chief Judge Lippman, in a unanimous decision, affirmed the holdings of the Commercial Division of Supreme Court (Kapnick, J.), as upheld by the Appellate Division, 1st Department, by dismissing a lawsuit where a creditor alleged both a breach of fiduciary duty by the collateral managers of the debtor and a claim of tortious interference with contract against the seller of the debt.

The case arose from the sale of $50 million of mezzanine notes by Defendant Barclays to Plaintiff Oddo which were issued by two “SIV-Lites,” Golden Key and Mainsail — SIV-Lites are a type of structured investment vehicle that borrow money by issuing various levels of notes in order to buy certain asset-backed securities. Barclays created the SIV-Lites, and appointed Avendis Financial Services Limited as manager of Golden Key and Solent Capital Limited as manager of Mainsail (collectively, the “SIV-Lite Managers”).

The SIV-Lites issued commercial paper, mezzanine notes, and capital notes, while using the funds generated by the paper and notes to purchase asset-backed securities (“MBS”) primarily comprised of mortgage-backed securities. Barclays then warehoused the MBS for the SIV-Lites. After obtaining the required consent of certain note holders, the SIV-Lites purchased from Barclays a total of $974 million of these warehoused sub-prime MBS. Immediately upon acquisition, the SIV-Lites suffered losses of $628 million and a downgrade in S&P rating from “AAA” to “CCC.” Since the SIV-Lites’s liabilities exceeded their assets, the investment vehicles quickly collapsed — causing Oddo to lose its $50 million investment. In July 2008 Oddo filed this suit, claiming that the SIV-Lite Managers breached their fiduciary duties to the investors of the notes issued by the SIV-Lites and further that Barclays tortiously interfered with Oddo’s contracts with the SIV-Lites.

The Court, in affirming the dismissal on issue of breach of a fiduciary duty, focused on the lack of a fiduciary relationship between Oddo and the SIV-Lite Managers. The Court found that the facts, as pled by Oddo, did not present a relationship whereby the SIV-Lite Managers were under a duty to advise Oddo as to matters within the scope of that relationship. The Court further observed that such fiduciary relationships are “necessarily fact-specific” and therefore courts will not impose a fiduciary relationship when the parties have not created one. Further, Oddo, as per its own admission, was a holder of debt - typically, creditors have “no special relationship of confidence and trust [with debtors], and the relationship is generally controlled by the contract.” It is clear from the facts that Oddo held a mezzanine note which entitled it to a fixed rate of return and payment of principal on a certain date. Oddo’s right to vote to remove the SIV-Lite Managers along with other note holders did not “elevate Oddo’s rights to that of a shareholder.” Finally, the Court found persuasive the fact that Oddo never dealt directly with the SIV-Lite Managers — all monthly investment reports were issued by a third-party and the “complaint never alleged any direct communications between the plaintiff and collateral managers….”

Turning to Oddo’s claim against Barclays for tortious interference of contract, the Court, citing to Lama Holding Co. v. Smith Barney Inc., 88 N.Y. 2d 413 (1996), for the proposition that a breach of contract is a necessary element of the claim, highlighted the fact that in the instant case, no such breach occurred. Prior to the purchase of the MBS, the SIV-Lites obtained the required note-holder consent. Additionally, the price paid for the MBS was fixed by contract irrespective of the market price at time of sale. And most importantly, the information about the transaction was made available to Oddo prior to Oddo’s purchase of the mezzanine notes.

The Court concluded by noting:

“In hindsight, it is apparent that a greater degree of vigilance was necessary from all concerned before soliciting funds for, committing funds to, and rating esoteric entities with little understood risks, such as the SIV-Lites -- whose fate was dependent almost exclusively on sub-prime residential and commercial mortgage-backed securities. That being said, Oddo has nevertheless failed to state a claim for aiding and abetting breach of fiduciary duty and tortious interference with contract, although remedies may be available to the receivers for the SIV-Lites.”


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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