A lawsuit alleging breach of contract brought by a U.S. hedge fund against JPMorgan regarding a credit derivative contract on Argentine sovereign debt will be heard in the U.S. District Court for the southern district of New York after a judge threw out the bank's attempt to dismiss the case. In a memorandum and order District Judge Lawrence McKenna dismissed all Eternity Global Master Fund's other claims expect breach of contract. The notional size of the credit derivatives position and the damages Eternity is seeking could not be determined by press time. Officials at JPMorgan did not respond to messages and officials at Eternity in New York could not be reached for comment.
Lawyers said the outcome of this case could have a huge impact on what constitutes a restructuring, adding that although the case is being heard in the U.S., it would also affect contracts written in English law.
The case concerns credit default protection Eternity purchased from JPMorgan. The hedge fund alleges that a debt exchange Argentina entered last November constitutes a credit event and therefore JPMorgan should have paid out on credit protection it sold to the fund. The U.S. heavyweight argues that because it was a voluntary exchange it does not count as an Obligation Exchange and therefore there was no credit event. In the memorandum and order, Judge McKenna wrote, "It is not necessary to even examine the definition of the term "Obligation Exchange" to find that a restructuring took place."
What makes the case particularly contentious is Eternity's credit protection matured between Nov. 1, when Argentina announced a voluntary exchange of debt, and Dec. 24, when the sovereign suspended payment on its debt. JPMorgan accepts that the December decision to suspend payment on the debt constitutes a credit event.
"The court effectively stripped away extraneous claims and forced the parties to focus on the contract," said Patrick Clancy, derivatives counsel at Shearman & Sterling in London.
However, Clancy said, "The judgment is only really on the motions to dismiss, so comments on the parts not dismissed are the equivalent of saying that there is an arguable case."
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