In Good Hill Master Fund L.P. v. Deutsche Bank AG, No. 600858/10-2188B, 2017 BL 19363 (App. Div. 1st Dep’t Jan. 24, 2017), the Appellate Division, First Department, unanimously affirmed a judgment entered in the Commercial Division of over $90 million, a large portion of which included prejudgment interest at 21 percent. The judgment followed a nonjury trial before Justice O. Peter Sherwood of the New York County Commercial Division. The case was brought by two hedge funds against Deutsche Bank in connection with credit default swap (CDS) agreements. The First Department rejected the bank’s arguments that the hedge funds acted in bad faith by renegotiating the terms of the underlying securitized notes to the detriment of their CDS counterparty, Deutsche Bank.

Background

In 2007, two hedge funds, Good Hill Master Fund L.P. and Good Hill Master Fund, H.L.P. (collectively, Good Hill) purchased several tranches of notes from Bank of America in a securitization that was backed by $10.3 billion of residential mortgage-backed securities. Of the notes that Good Hill purchased, only one tranche was investment grade, tranche B6. Good Hill, 2017 BL 19363, at *1. In early 2008, Good Hill executed CDS agreements for the B6 tranche with Deutsche Bank under which Good Hill was obliged to pay Deutsche Bank if a “floating amount event” occurred. The CDS agreements consisted of a 2002 International Swaps and Derivatives Association (ISDA) Master Agreement and 2003 ISDA Credit Derivatives Definitions. A “floating amount event” could occur, among other things, upon the writedown of the B6 notes—i.e., if the noteholders forgave any part of the principal due. Id. at *1-*2.To purchase the CDS, Deutsche Bank paid Good Hill $12.8 million up front, and $1.5 million in total monthly payments. Good Hill posted collateral up front to secure its obligation under the CDS.