Oddo Asset Management v. Barclays Bank PLC: N.Y. Court of Appeals Affirms Lack of Fiduciary Duty to Debt Holders
In Oddo Asset Management v. Barclays Bank PLC, the Court of Appeals of New York ruled that the defendants did not owe Oddo Asset Management (“Oddo”) a fiduciary duty and that Oddo failed to state a cognizable claim for tortious interference with contract. Therefore, the court affirmed the dismissal of Oddo’s claims. 2012 WL 2399815 (N.Y. Jun. 27, 2012).
According to the allegations in the Complaint, Oddo purchased $50 million in promissory notes issued by Golden Key and Mainsail. Golden Key and Mainsail were SIV-Lites, a type of structured investment vehicle that borrowed money by issuing promissory notes in order to purchase asset-backed securities, which in this case were mortgage-backed securities. The defendants, Barclays Bank PLC and Barclays Capital Inc. (“Barclays”) created the Golden Key and Mainsail investment vehicles, determined their size and leverage, and selected Avendis Financial Services Limited ("Avendis") and Solent Capital (Jersey) Limited ("Solent") to act as collateral managers. Barclays also agreed to warehouse (i.e., hold) mortgage-backed securities for eventual transfer to Golden Key and Mainsail.
Through a series of transactions in 2007, Golden Key and Mainsail acquired $1.6 billion in mortgage-backed securities, which Barclays warehoused. Per the terms of the warehousing agreement, Golden Key and Mainsail purchased the mortgage-backed securities at the price that Barclays had paid for them, despite the fact that at least some of the securities had declined in value significantly. Shortly after the transfers, Standard & Poor’s (“S&P”) downgraded the ratings of both Golden Key and Mainsail from AAA to CCC, and both investment vehicles ultimately collapsed.
Oddo then sued Barclays and The McGraw-Hill Companies, Inc. (“McGraw-Hill”), the parent company of S&P, for aiding and abetting Golden Key and Mainsail’s breaches of fiduciary duty. According to the allegations made by Oddo, Barclays and the collateral managers conspired to transfer mortgage-backed securities at inflated prices to shift losses from Barclays to the investment vehicles. Oddo alleged that S&P was complicit in the collateral management companies’ breaches of fiduciary duty by knowingly issuing inflated ratings for the notes issued by Golden Key and Mainsail.
A fiduciary relationship exists between two parties when one is “under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation”; on the other hand, there is no fiduciary relationship “between a debtor and a note-holding creditor." The court ruled that because Oddo was “essentially a lender” and not a shareholder of Golden Key and Mainsail, the investment vehicles did not owe Oddo a fiduciary duty. Therefore, the court affirmed the dismissal of Oddo’s breach of fiduciary claims.
Oddo also sued Barclays for tortiously interfering with Oddo's contract with Golden Key and Mainsail. A claim of tortious interference requires an “underlying breach of contract.” The court ruled that Golden Key and Mainsail had not breached their contract with Oddo when the investment vehicles purchased the warehoused securities above market price because that risk was “included in the information memoranda and known by Oddo” at the time it purchased the promissory notes. Because there was no underlying breach, the court affirmed the dismissal of Oddo’s tortious interference claim against Barclays.
The primary materials for this case may be found on the DU Corporate Governance website.