Barclays found liable in $300 million dispute with Black Diamond

By Joseph Ax

NEW YORK, Oct 24 (Reuters) - Barclays Plc breacheda derivative agreement with a Black Diamond Capital Managementunit and must return an estimated $297 million in collateral tothe hedge fund, a divided New York state appeals court ruled onThursday.

The Connecticut-based fund's BDC Finance LLC filed a lawsuitagainst the bank in 2008, claiming Barclays had defaulted on a$40 million collateral call made at the height of the financialcrisis.

Barclays disagreed with that amount, asserting that it owedonly $5 million, which it remitted to Black Diamond two daysafter the call was made. Black Diamond then declared Barclays indefault.

Last year, Justice Eileen Bransten in state Supreme Court inManhattan dismissed Black Diamond's breach of contract claim.However, the Appellate Division of the Supreme Court, a midlevelappeals court, reversed that ruling in a 3-2 decision onThursday.

The court found Barclays breached the contract both by notmaking the $5 million payment on time and by failing to followthe contract's procedures for disputing a collateral call, whichrequired the bank to pay the full $40 million amount beforedisputing it.

"The evidence in the record undeniably shows that Barclaysfailed to pay the undisputed amount by the deadline, andestablishes as a matter of law that Barclays did not comply withthe (contract's) dispute resolution process," the three-judgemajority wrote.

With Barclays in default, Black Diamond had the right toterminate the agreement and demand a return of its entirecollateral, which the fund has estimated at $297 million, thecourt said.

Two judges, however, dissented from the court's opinion,arguing that there are questions of fact over whether Barclaysdisputed the $40 million call in a timely fashion.

Barclays did not immediately respond to a request seekingcomment outside of regular U.S. business hours. The bank canseek to appeal the decision to the Court of Appeals, New York'shighest court.

Craig Newman, a lawyer for Black Diamond, declined tocomment.

The deal at issue was signed in 2005. The total return swaptransferred the benefits and risks of an investment in aBarclays-held portfolio of corporate debt instruments to BlackDiamond in exchange for financing fees paid to the bank.

The contract allowed each side to make collateral demands onthe other based on changes to the value of the underlying loans.

The case is BDC Finance v. Barclays Bank, New York StateSupreme Court, Appellate Division, First Department, No. 9906.