(CN) - The 2nd Circuit reversed a District Court's ruling that cleared Aladdin Capital Management LLC of charges brought by Germany's Bayerische Landesbank after losing $60 million in a mortgage-backed securities derivative investment.
Bayerische claimed Aladdin, a U.S.-based hedge fund, was grossly negligent and reckless in its management of the Collateralized Debt Obligation investment and Bayerische was one of several banks that filed suit over the CDO's, which tanked when several underpinning entities, such as Lehman Brothers Holding, Inc. and Washington Mutual Inc. suffered "credit events."
U.S. District Judge Denise Cote granted Aladdin a dismissal in July 2011, holding that plaintiffs could not bring a "third-party beneficiary" breach of contract claim due to a contract provision "limiting intended third-party beneficiaries to those 'specifically provided herein.'"
The District Court also held that Bayerische could not "recast" their failed contract claim in tort.
However, U.S. District Judge Jed Rakoff, sitting by designation from New York's Southern District, found that the bank has properly alleged both a breach of contract and a tort claim.
"It is more than plausible that the parties intended the PMA (Portfolio Management Agreement) to inure to the benefit of the noteholders," Rakoff said. "Otherwise, to read the ambiguous language of 'specifically herein" as not encompassing these express obligations undertaken by Aladdin would leave these obligations enforceable only by the shell issuer and the swap counterparty, GSCM (Goldman Sachs Capital Markets), that, as the counterparty, had interests that were directly opposed to those of the noteholders."
The 2nd Circuit panel also supported Bayerische's tort claim, saying that, "Bayerische has plausibly alleged that Aladdin's gross negligence exposed Bayerische to greater risk that it would lose its entire investment than would have otherwise been the case."