(New York, NY) – The New York Appellate Division, First Department recently affirmed the grant of summary judgment for breach of contract to three Deephaven hedge funds based only on signed trade confirmations. (Deephaven Distressed Opportunities Tradings, Ltd. v 3v Capital Master Fund) Even though the confirmations were subject to final documentation, the Court agreed that they “contained all the material terms of the trade,” and defendants’ attempt to flip a bankruptcy claim to another investor was proof “that the Trade Confirmations were binding.”
The case marks the first time an appellate court in New York has examined the binding effect of signed trade confirmations, customarily used to quickly document trade terms for the purchase and sale of unsecured claims in bankruptcy cases, an increasingly popular form of investment by distressed debt desks of hedge funds and brokerage firms.
“This is an important decision for our clients that trade in the bankruptcy claims space,” said Dickstein Shapiro partner Jeffrey Mitchell, lead counsel for the plaintiff. “Because formal documentation is ultimately required to transfer a claim on the bankruptcy docket, there is often a lag of several months or more between trade and closing. Knowing that short form trade confirmations are enforceable in New York protects buyers and sellers alike from the risk of market movement after a trade is made.”
Several cases around the country have previously addressed different aspects of bankruptcy claims trading, but none had considered the effect of a fully executed trade confirmation. “We are extremely pleased that an appellate court has finally addressed this important issue, and provided guidance to distressed debt investors.”
The case may also have a broader impact on flip sales generally. Mr. Mitchell explained, “If any purchaser tries to resell an asset before closing itself, that act alone may demonstrate an intent to be bound by less than formal documentation, leaving the flip seller exposed until its purchaser closes.”
In October 2006, Sea Containers, Ltd. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Deephaven acquired an unsecured claim against Sea Containers from an upstream seller, and thought it had sold that claim for a profit in February 2007 to 3V Capital, both parties using Los Angeles based Imperial Capital as the broker.
After trade confirmations were signed, but before an assignment agreement was executed, 3V Capital, brokered by Imperial, resold the Sea Containers claim to a group of hedge funds managed by Post Advisory Group in Los Angeles. 3V Capital asked Deephaven to close with Post, but negotiations over closing documents eventually broke down. When Deephaven then turned back to 3V Capital, it refused to close claiming the trade confirmations were not binding.
In December 2011, the trial court granted the Deephaven’s motion for summary judgment against 3V Capital and its successors, and denied a motion to dismiss claims by brought against the fund’s manager, Scott Stagg, individually. In its decision, the Appellate Division also affirmed the denial of summary judgment to Stagg, finding his “self-serving affidavit” was “insufficient to demonstrate defendants’ entitlement to judgment as a matter of law.”
The Dickstein Shapiro team representing Deephaven is led by Partner Jeffrey Mitchell and includes Counsel Don Abraham.
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Jeffrey A. Mitchell,