New York’s highest court dismissed claims brought by a noteholder alleging that actions taken by the collateral managers of the noteholder’s structured investment vehicles breached their fiduciary duties. Oddo Asset Mgmt. v. Barclays Bank PLC, 2012 WL 2399815 (N.Y. 2012). Even though the vehicles collapsed shortly after allegedly purchasing impaired sub-prime mortgage-backed securities at inflated prices, the court found that the claims failed because the defendants did not owe a fiduciary duty to the plaintiff as a noteholder.

The Parties

In July 2008, the plaintiff Oddo Asset Management (“plaintiff”), a French asset management company, brought claims against Barclays Bank PLC, Barclays Capital Inc. (together, “Barclays”), The McGraw-Hill Companies, Inc. and Solent Capital Partners, LLP after the collapse of two structured investment vehicles (“SIV-Lites”) in which plaintiff had invested. Defendant Solent Capital (Jersey) Limited (“Solent”) and nonparty Avendis Financial Services Limited (“Avendis”) acted as the collateral managers, which Barclays allegedly had elected. Standard and Poor’s (“S & P”), owned by defendant McGraw- Hill Companies, Inc., evaluated the risk of default of notes issued by the SIV-Lites and provided ratings of the notes.

Structure of the SIV-Lites

Generally, a structured investment vehicle, or “SIV,” borrowed money and raised equity to purchase a variety of asset-backed securities, with no set termination date. The term “SIV-Lite” refers to a vehicle with a limited duration that typically invested in residential mortgage-backed securities and had defined reinvestment strategies. Barclays first created the SIV-Lites at issue by incorporating Golden Key Ltd. and Mainsail II as limited liability entities in the Cayman Islands. Barclays allegedly structured the SIV-Lites to issue three types of notes: (i) commercial paper, which provided a fixed rate of return with a 90-day maturity, at which point the principal was to be repaid to the holders and fresh funds raised by the SIV-Lites; (ii) mezzanine notes, which paid a fixed rate of return with a four- or five-year maturity date, at which point the principal was to be repaid; and (iii) capital notes, which had a later date of maturity than mezzanine notes and paid part of the profits of the SIV-Lites. The commercial paper was senior to all of the notes for distributions, while the capital notes would absorb losses first in the event of a decline in asset value.

Before the SIV-Lites issued notes, they did not have the necessary capital to purchase investments. Thus they entered into credit agreements with Barclays whereby Barclays purchased asset-backed securities and held them for eventual transfer or sale to the SIV-Lites at the purchase price, an arrangement called a “warehousing transaction.” “The SIV-Lite business model was to generate a higher rate of return from its asset-backed securities, which were comprised primarily of residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”), than the interest the SIV-Lites had to pay the holders of the commercial paper, mezzanine notes, and capital notes.”

In addition, Barclays allegedly chose the collateral managers of the SIV-Lites. Golden Key’s collateral manager was non-party Avendis and Mainsail’s collateral manager was defendant Solent. The collateral managers’ responsibilities included investing and managing the proceeds raised from the notes, ensuring that the investment portfolio satisfied “Specific Investment Eligibility Criteria” and maintained a certain credit quality, making trades, reinvesting principal proceeds, maximizing recovery rates in the event of defaults on the asset pools and sending weekly reports to ratings agencies.

Plaintiff’s Investment and Allegations

In 2005-2006, plaintiff allegedly purchased $30 million of AAA-rated and AA-rated mezzanine notes in Golden Key and $20 million of AAA-rated mezzanine notes in Mainsail from Barclays. In 2007, Golden Key purchased $574 million in warehoused sub-prime mortgage-backed securities from Barclays at the price Barclays paid for them. Mainsail purchased $400 million and then later $637 million in warehoused mortgagebacked securities from Barclays at the purchase price as well. Directly after purchasing the securities, Golden Key allegedly suffered a loss of $123 million and Mainsail allegedly suffered a loss of $505 million. Plaintiff asserted that “Barclays offloaded the sub-prime asset-backed securities onto the balance sheets of Golden Key and Mainsail in order to shift losses from Barclays to the SIV-Lites, knowing that the securities would plummet in value.” Furthermore, plaintiff alleged that the collateral managers conspired with Barclays to transfer the securities to gain favor for future Barclaysarranged investment vehicles.

Prior to purchasing the securities from Barclays, the SIVLites allegedly obtained required noteholder consents and ratings confirmations from S&P. S&P confirmed the AAA ratings for the mezzanine notes of the SIV-Lites, but was not asked to analyze the assets to be purchased by the vehicles. About a month after confirming the AAA ratings in July 2007, S&P downgraded the ratings to CCC. The plaintiff alleged that S&P purposefully confirmed the AAA ratings even though it knew the portfolios were at risk of a downgrade because Barclays was an important repeat customer. Both Golden Key and Mainsail ultimately collapsed once mandatory acceleration events occurred due to the SIV-Lites holding assets worth substantially less than their liabilities. Accordingly, investors lost nearly all of their investments.

Procedural History

Plaintiff commenced its action in July 2008 alleging that the collateral managers breached their fiduciary duties to the investors, and thereby Barclays and S&P aided and abetted the breaches. In addition, plaintiff claimed that Barclays tortiously interfered with Plaintiff’s contract. The defendants moved to dismiss the complaint for lack of personal jurisdiction as to Solent and for failure to state a cause of action because the collateral managers did not owe a fiduciary duty to plaintiff. Barclays also argued against the tortious interference claim because it did not allege a breach of the mezzanine notes. The trial court dismissed the claims against Solent for lack of personal jurisdiction and the plaintiff did not appeal that issue. The trial court and appellate division both agreed that plaintiff failed to state a claim and dismissed all claims against Barclays and S&P.

The Court’s Findings

On appeal to New York’s highest court, the New York Court of Appeals, the court began by elaborating the standard of fiduciary duty and stated that a fiduciary relationship is “grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions.” The court held that the collateral managers did not owe a fiduciary duty to the plaintiff for several reasons. First, the plaintiff did not have a contractual relationship with the collateral managers. Indeed, the plaintiff never had any direct dealings or communications with the collateral managers. Further, “a debtor and creditor have no special relationship of confidence and trust,” and here, the plaintiff admitted that the mezzanine notes were a form of debt. Even though the mezzanine notes had equity-like features, there was “no factual basis to elevate Oddo’s rights to that of a shareholder.”

Ultimately, the court concluded that while the collateral managers may have owed duties to the SIV-Lites, there was no evidence that similar duties flowed to its investors. Thus, plaintiff failed to state a claim of aiding and abetting breach of fiduciary duty against Barclays and S&P because it failed to sufficiently allege a fiduciary duty owed to plaintiff by the collateral managers.

Next, the court disposed of the tortious interference claim against Barclays. To plead a claim of tortious interference, the plaintiff needed to allege: (i) existence of a valid contract between plaintiff and SIV-Lites; (ii) Barclays’ knowledge of the contract; (iii) Barclays’ intentional procurement of the SIV-Lites’ breach of contract without justification; (iv) actual breach of the contract; and (v) plaintiff’s damages resulting from the breach. The court found that the SIV-Lites did not actually breach the contract by acquiring the warehoused securities because they obtained the proper noteholder consents, confirmed S&P’s ratings, and purchased at the contractually agreed upon purchase price by Barclays. Moreover, the risk of a potential shift in market price of the warehoused securities was included in information memoranda describing the SIV-Lites and known to plaintiff when it purchased the mezzanine notes. Finally, the court noted that plaintiff also failed to allege inducement of breach of the implied duty of good faith and fair dealing because plaintiff had no contract with Barclays and the collateral managers, who were the parties that allegedly perpetrated the scheme.

Conclusion

The court concluded its analysis by observing that “[i]n 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.” Unfortunately for the investors, the court’s acknowledgement of this fact does not support claims for breach of fiduciary duties or tortious interference. Notably, however, the court pointed out that the receivers for the SIV-Lites may be the appropriate parties to bring such claims.