Litigation Department Obtains Victory In Credit Default Swap Case, Making New Law In A Developing Area of Litigation

April 16, 2010

New York state court grants Willkie’s motion to dismiss with prejudice.

On April 12, a New York state court judge granted Willkie’s motion to dismiss with prejudice a complaint bought against its clients Merrill Lynch International (Merrill International) and Merrill Lynch & Co., Inc. (collectively, Merrill Lynch) by DKR Soundshore Oasis Holding Fund, Ltd. (Oasis). Oasis sought to enforce the parties’ credit default swap (CDS) transaction, under which Merrill International was the seller and Oasis the buyer of credit protection against certain defined "Credit Events" relating to a debt obligation issued by the "Reference Entity." As is standard with CDS transactions, Oasis and Merrill International were parties to an International Swaps and Derivatives Association (ISDA) Master Agreement, which incorporated by reference the 2003 ISDA Credit Derivatives Definitions, and a related Confirmation Agreement (collectively, the Agreement). The Agreement provided that for the swap to be triggered, Oasis had to deliver to Merrill International a Credit Event Notice and accompanying Notice of Publicly Available Information (together, the Notice) meeting certain requirements. Notwithstanding plaintiff’s claim that only reasonable notice need be (and was in fact) given, Willkie successfully argued that to be valid, a Credit Event Notice must set forth facts confirming that the specific contractual requirements for a Credit Event have occurred. The court agreed with Willkie that the Notice delivered by Oasis had a number of deficiencies and was, at best, ambiguous.

Oasis vigorously opposed defendants’ motion, arguing that the Notice provided was sufficient because Merrill Lynch had the ability to investigate the occurrence of a Credit Event prior to paying on the swap.  In response, the court adopted Willkie’s argument that the ISDA Definitions require that the Buyer provide notice that specifies the factual elements necessary to show that a Credit Event has occurred and that the Seller has an obligation to pay, ruling that "the ISDA Definitions place the burden of providing notice that complies with specific contractual requirements squarely upon the Buyer."

The case, DKR Soundshore Oasis Holding Fund Ltd. v. Merrill Lynch International and Merrill Lynch & Co., Inc., No. 650327/09, was argued before Judge Barbara R. Kapnick of the Supreme Court of the State of New York, New York County Commercial Division.  Willkie’s victory is profiled in the Am Law Litigation Daily in a feature article entitled "Willkie Wins for Merrill Lynch in Credit Default Swap Dispute with Hedge Fund" (4/15/2010). The case was handled by partners Richard Bernstein and Mary Eaton, and associates David Gise, Emma Deacon, and Melissa Yang.