When Barry Sher won an appellate ruling Tuesday dismissing fraud claims against UBS, it wasn’t the first time the Paul Hastings partner had gotten fraud allegations dropped against the bank in a case filed over the mortgage meltdown.

But Tuesday’s ruling–in which the New York Appellate Division, First Department dismissed HSH Nordbank’s $500 million lawsuit–may be the most significant yet. Reversing a lower court, the five-judge panel set a tough standard for sophisticated investors to prevail in a fraud case. The court determined that German commercial bank HSH was too sophisticated to claim it had been deceived by UBS when it bought a synthetic collateralized debt obligation. It could not rely on alleged representations made by UBS outside the contracts, and had a duty to uncover any misrepresentations about the CDO, the court said.

Written by Justice David Friedman, the decision may raise the bar for sophisticated investors like hedge funds and financial institutions to sue for fraud in New York state court when a transaction goes bad. “It certainly will have applicability in the structured product world,” said Sher. “But it’s likely far broader, impacting complex contracts in many other areas as well.”

Lawyers for HSH at Quinn Emanuel Urquhart & Sullivan first sued UBS in February 2008 to recoup the $500 million the German bank lost on the synthetic CDO investment it made with UBS six years earlier. HSH claimed UBS had misrepresented the risks of investing in the transaction. Justice Richard Lowe III allowed HSH to proceed on its fraud and breach of contract claims, but dismissed its negligent misrepresentation claims.

In reversing, Justice Friedman said that to allow HSH to sue for fraud would mean having to “close our eyes to HSH’s sophistication,” as well as to disclaimers and disclosures in the contract and to the bank’s ability to scrutinize the transaction. “By no means do we suggest that UBS, if it engaged in the sharp dealing alleged by HSH, is to be commended; such practices are indeed troubling,” Justice Friedman wrote. But the judge said there was no reason to infer that the bank relied on UBS’s representations.

The lawsuit isn’t over, as HSH’s breach of contract claim survives. That claim is now before Justice Eileen Bransten following Justice Lowe’s promotion to the appellate court. A motion for summary judgment on those claims is pending. UBS is also represented in the lower court by Paul, Weiss, Rifkind, Wharton & Garrison. HSH counsel Philippe Selendey of Quinn Emanuel declined comment.

Even with the contract claim alive, the case is now much simpler. Don’t be surprised to see citations to the opinion popping up in defense briefs in other cases in the months to come. Said Sher: “It is a really strong and comprehensive statement by an influential court that should provide some predictability in contracts between sophisticated parties.”