O’Melveny Secures Victory for Client in Litigation Concerning the Distress Trading MarketFebruary 02, 2012
Piper Hall Andrea Rodeschini
O’Melveny & Myers LLP O’Melveny & Myers LLP
202.220.5022 (office) 212.326.2251 (office)
NEW YORK, NY ─ FEBRUARY 2, 2012 ─ O’Melveny & Myers LLP secured a victory for several funds named as third party defendants in the hotly-contested litigation case, Deephaven Distressed Opportunities Tradings, Ltd. v 3V Capital Master Fund Ltd., concerning trading practices in the market for distressed bankruptcy claims. Yesterday, Justice Melvin Schweitzer of the Supreme Court, New York County, issued a decision and order granting the motion brought by Post Distressed Master Fund and two sister funds for summary judgment on third-party breach-of-contract, contribution and indemnification claims brought by the counter-party to an aborted trade-claim trade. This ruling is significant because it is one of a handful of rulings addressing the application of contract-law principles to trading practices in the distressed trade-claim market.
“The decision should serve as a guidepost to traders and others active in the distressed trading market who have struggled to determine what trading practices are most likely to give rise to legally enforceable trades,” said O’Melveny partner Tancred Schiavoni, who represented the Post third party defendants in this matter.
This litigation arose from a series of failed transactions involving the purchase and sale of distressed claims in the Sea Container, Inc. bankruptcy. In February 2007, Deephaven and 3V Capital executed trade confirmations, which describe the Sea Container Claims as an “Allowed Unsecured Nonpriority” claim after traders from both firms spoke separately with representatives of the broker, Imperial. The trade confirmation was a single-page document that set out some of the terms in term-sheet fashion; including a statement that any transaction was subject to the negotiation of an assignment agreement. In June 2007, before the assignment agreement between Deephaven and 3V Capital had been finalized, 3V Capital attempted to “flip” or re-sell the Sea Container Claims to another party, Post. Post expressed to the broker an interest in the Sea Container Claims to the broker and signed a trade confirmation for their purchase. But 3V Capital never co-signed the draft trade confirmations with Post.
In June 2007, 3V Capital asked Deephaven to assign the Sea Container Claims directly to Post. Negotiations between Post and Deephaven followed but later broke down due to a fundamental disagreement over who was to bear the risk of disallowance if the Sea Container Claims were not allowed by the bankruptcy court. The draft trade confirmations indicated that the Claims were “allowed,” but in actuality, the Claims were merely allowable. This is a material distinction because a claim that may be allowed —but has not yet been allowed by the bankruptcy court —will be worth nothing if it is later disallowed. After 3V Capital refused to close the original transaction with Deephaven, Deephaven sued 3V Capital. 3V Capital in turn asserted contract-based third-party claims against Post.
After discovery and motion practice, all parties filed summary judgment motions. Deephaven sought summary judgment that 3V Capital breached by not closing. 3V Capital sought summary judgment that there was no agreement with Deephaven. O’Melveny moved for summary judgment against 3V Capital, arguing that there was no contract between 3V Capital and Post because (i) there was no meeting of the minds; (ii) there was no final, executed written agreement; (iii) there was no evidence of an oral agreement; and (iv) there was no preliminary agreement. The court agreed, finding that “[a] thorough review of the parties’ submissions to the court provides no evidence that Post ever agreed to purchase the Claims from 3V.”
In an earlier decision, Judge Schweitzer granted summary judgment to Deephaven against 3V Capital finding that the two had an enforceable agreement and that 3V Capital had breached it by not closing on the sale.
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