On August 6, 2012, the Second Circuit considered “whether an investor in a special investment vehicle—a synthetic collateralized debt obligation (‘CDO’) that sold interests in a credit default swap—[could] bring an action against the manager of the investment portfolio for the loss of its investment where the investor was not a party to the contract that defined the manager’s roles and duties.” Bayerische Landesbank, New York Branch v. Aladdin Capital Mgmt. LLC, 2012 WL 3156441, at *1 (2d Cir. Aug. 6, 2012) (Rakoff, J.).2 Based on the allegations in the complaint, the Second Circuit found it “more than plausible” that “the parties intended the [portfolio management agreement] to inure to the benefit of” investors in the CDO and therefore permitted the investors to proceed with their breach of contract claims against the portfolio manager. Id. at *11.  


In December 2006, Bayerische Landesbank and Bayerische Landesbank New York Branch (collectively, “Bayerische”) invested $60 million in a CDO “structured and marketed by” Aladdin Capital Management LLC, Goldman Sachs & Co. and Goldman Sachs International. Id. at *1. Aladdin “manag[ed] the CDO as an independent investment manager on behalf of” purchasers of interests in the CDO (the “Noteholders”). Id. at *3. In a marketing book provided to Bayerische, Aladdin allegedly “represented that its 7 interests were aligned with investors’ interests in the CDO and that it would manage the [CDO’s] Reference Portfolio in ‘a conservative and defensive manner’ to avoid losses to the Noteholders[.]” Id. at *12. “Aladdin’s formal responsibilities, however, were spelled out in the Portfolio Management Agreement (‘PMA’), an agreement between Aladdin and [the shell entity that issued the CDO notes] that was not signed by the Noteholders.” Id. at *3. Bayerische “did not enter into any direct contract with Aladdin.” Id.  

“[F]ollowing the issuance of the Aladdin CDO on December 19, 2006, Aladdin [allegedly] managed the portfolio in a grossly negligent fashion, … thereby causing [Bayerische’s] Notes to default.” Id. “As a result, [Bayerische] lost [its] entire $60 million principal investment and any future interest from the remaining four years of the CDO term.” Id. Bayerische subsequently brought suit against Aladdin “assert[ing] two claims: (1) a claim in contract alleging that Aladdin [had] breached its obligations under the PMA; and (2) a claim in tort alleging that Aladdin’s conduct was grossly negligent, resulting in harm to the Noteholders.” Id. at *4. Bayerische did not name Goldman Sachs & Co. or Goldman Sachs International as defendants in the suit.  

On July 8, 2011, the Southern District of New York granted Aladdin’s motion to dismiss the complaint. “The district court held that because of a provision of the [PMA] limiting intended third-party beneficiaries to those ‘specifically provided herein,’ [the] plaintiffs could not bring a third-party beneficiary breach of contract claim, and held also that [the] plaintiffs could not ‘recast’ their failed contract claim in tort.” Id. at *1. Bayerische appealed.  

The Allegations Plausibly Indicate that the Parties Intended the PMA to Benefit the Noteholders

The Second Circuit noted that “[t]he PMA is governed by New York law.” Id. at *8. “Under New York law, a third party may enforce a contract when ‘recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and … the circumstances indicate that the promise intends to give the beneficiary the benefit of the promised performance.’” Id. (quoting Levin v. Tiber Holding Corp., 277 F.3d 243, 248 (2d Cir. 2002) (Jacobs, J.)). “In determining whether the parties intended to benefit the third party, a court ‘should consider the circumstances surrounding the transaction as well as the actual language of the contract.’” Id. (quoting Subaru Distribs. Corp. v. Subaru of Am., Inc., 425 F.3d 119, 124 (2d Cir. 2005) (Gibson, J.)).  

Aladdin contended that “section 29 of the PMA expressly rules out any intent to benefit the Noteholders.” Id. Section 29 provides in relevant part as follows:  

Beneficiaries[:] This Agreement is made solely for the benefit of the Issuers and the Portfolio Manager, their successors and assigns, and no other person shall have any right, benefit or interest under or because of this Agreement, except as otherwise specifically provided herein.

Id. (quoting PMA § 29) (emphasis added by the court). The Second Circuit found that “[o]n its face,” it was not clear that “section 29 precludes an intent by the parties to benefit the Noteholders.” Id. at *9. “The ‘herein’ in ‘except as otherwise specifically provided herein’ is not defined.” Id. “While it might be read to refer, as Aladdin argues, to only section 29, it could just as reasonably be read to refer, as Bayerische argues, to the PMA as a whole.” Id. The Second Circuit found that “the latter interpretation seems more likely.” Id.  

“[L]ook[ing] beyond section 29 to the contract as a whole[,]” the Second Circuit found that “other portions of the PMA evince an intent to benefit the Noteholders by defining Aladdin’s obligations and delineating the scope of its liability to the Noteholders.” Id. at *10. “For example, section 6 of the PMA states that ‘the Portfolio Manager shall use all reasonable efforts to ensure that [it takes no action that would] … adversely affect the interest of the holders of the Notes in any material respect (other than as permitted under the Transaction Documents).’” Id. “Even more tellingly, section 8 of the PMA, entitled ‘Benefit of this Agreement; Limit on Liability,’ states in relevant part:  

The Portfolio Manager shall perform its obligations hereunder in accordance with the terms of this Agreement and the terms of the Transaction Documents applicable to it. The Portfolio Manager agrees that such obligations shall be enforceable at the insistence of each Issuer, the Trustee on behalf of the holders of the relevant Notes, or the requisite percentage of holders of the relevant Notes on behalf of themselves, as provided in the relevant Indenture.  

Id. (quoting PMA § 8). The Second Circuit found that “[t]ogether, these sections plausibly demonstrate an intent to benefit the Noteholders.” Id.  

“Drawing all inferences in favor of the plaintiff[s],” the Second Circuit determined that “a plausible reading of the parties’ [a]greement is that the PMA expressly requires the Portfolio Manager to perform various obligations—including managing the Reference Portfolio—on behalf of the Noteholders.”Id. “The limitations on liability that discuss the Noteholders suggest that the parties intended that the Noteholders be able to sue Aladdin directly, albeit only for acts of gross negligence.” Id. Moreover, the Second Circuit noted that other “allegations set forth in the [complaint] regarding Bayerische’s decision to invest in the CDO” also reflected the parties’ intent that the PMA benefit Noteholders such as Bayerische. Id. at *12.  

“In short,” the court found it “more than plausible that the parties intended the PMA to inure to the benefit of the Noteholders.” Id. at *11. The Second Circuit “therefore conclude[d] that the district court [had] erred in dismissing [the plaintiff’s] contract claim.” Id. at *14.  

The Complaint Adequately Alleges That Aladdin Owed a Duty of Care to the Noteholders

The Second Circuit “turn[ed] then to Bayerische’s second, alternative claim: that Aladdin [had] breached a duty of care, in tort, to the Noteholders, by engaging in acts that amounted to gross negligence in its management of the [CDO’s] Reference Portfolio.” Id. at *14. “Under New York law, a breach of contract will not give rise to a tort claim unless a legal duty independent of the contract itself has been violated.” Id. “Such a ‘legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent on the contract.” Id. (quoting Clark-Fitzpatrick v. Long Island R.R. Co., 70 N.Y.2d 382, 389 (1987) (Alexander, J.)).  

The Second Circuit found that “in light of Bayerische’s allegations that it [had] detrimentally relied on Aladdin’s representations of how it would select the Reference Portfolio and manage the Portfolio for the life of the CDO, Bayerische ha[d] sufficiently established that ‘[a] legal duty independent of contractual obligations may be imposed by law as an incident to the parties’ relationship’ in this case.” Id. at *15 (quoting Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 551 (1992) (Kaye, J.)). “This legal duty, though assessed largely on the standard of care and the other obligations set forth in the contract, would arise out of the independent characteristics of the relationship between Bayerische and Aladdin, and the circumstances under which Bayerische purchased the Notes linked to the [CDO’s] Reference Portfolio that Aladdin, under the PMA, was to manage.” Id.

“This conclusion is not the end of our inquiry,” the Second Circuit explained. Id. “Under New York law, in the absence of privity, the scope of the ‘orbit of duty’ to third parties must be carefully examined[.]” Id. The Second Circuit “consider[ed], in particular, the requirements for recognizing liability of professionals to third parties that New York courts have developed in the analogous context of negligent misrepresentation claims.” Id. Under the test set forth in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985) (Jasen, J.), “a plaintiff must establish that (1) the defendant had awareness that the work was to be used for a particular purpose; (2) there was reliance by a third party known to the defendant in furtherance of that purpose; and (3) there existed some conduct by the defendant linking it to that known third party evincing the defendants’ understanding of the third party’s reliance.” Id. The Second Circuit determined that “a plaintiff that can satisfy these requirements will … also be within the limits established under New York law for tort claims sounding in negligence that are brought by non-privy third parties.” Id.  

“Here,” the Second Circuit found that “Bayerische ha[d] plausibly alleged facts sufficient to meet the test of Credit Alliance and its precursors.” Id. at *16. “Bayerische ha[d] properly alleged that (1) Aladdin was aware that the PMA had the particular purpose of installing Aladdin as the Portfolio Manager to manage the [CDO’s] Reference Portfolio on behalf of the Noteholders; (2) Bayerische was known to Aladdin and relied on Aladdin to perform its obligations pursuant to the PMA; and (3) Aladdin’s conduct in soliciting Bayerische’s investment and its representation that it would manage the CDO in Bayerische’s favor evinced an understanding by Aladdin that Bayerische would rely on its performance.” Id. “Thus,” the Second Circuit held that “Bayerische ha[d] properly alleged a relationship between Aladdin and the Noteholders sufficiently close that recognizing a duty running from Aladdin to Bayerische would not offend the limitations imposed by New York law on tort liability to non-privy third parties.” Id.  

The Second Circuit reversed the district court’s dismissal of Bayerische’s complaint and remanded for further proceedings consistent with its opinion.