19 N.Y.3d 584 (2012)

In an arm’s length transaction between a debtor and a note-holding creditor, no fiduciary duty exists absent a special relationship of confidence and trust demonstrating a higher level of reliance.

Summary

Oddo Asset Management sued Barclays and Standard & Poor’s (S&P) for aiding and abetting breach of fiduciary duty and tortious interference related to the collapse of two structured investment vehicles (SIV-Lites). Oddo, a mezzanine noteholder, claimed the collateral managers of the SIV-Lites breached their fiduciary duty by acquiring impaired sub-prime mortgage-backed securities at inflated prices, and that Barclays and S&P aided this breach. The court held that the collateral managers did not owe a fiduciary duty to Oddo, as the relationship was an arm’s length transaction, and Oddo failed to demonstrate an underlying breach of contract for its tortious interference claim. Thus, the claims were dismissed.

Facts

Barclays created Golden Key and Mainsail, two SIV-Lites, and selected Avendis and Solent as collateral managers, respectively. The collateral managers were responsible for investing the proceeds raised from issued notes. Oddo purchased mezzanine notes in Golden Key and Mainsail. Barclays sold warehoused mortgage-backed securities to the SIV-Lites. S&P rated the mezzanine notes AAA. Oddo alleged the warehoused securities were toxic, and their acquisition caused significant losses to the SIV-Lites. The SIV-Lites ultimately collapsed, causing Oddo to lose its investment. Oddo claimed that Avendis and Solent breached their fiduciary duty to the investors of Mainsail and Golden Key, and that Barclays and S&P aided and abetted these breaches.

Procedural History

Oddo sued Barclays, S&P, and Solent in New York Supreme Court. The Supreme Court dismissed the claims against Solent for lack of personal jurisdiction and all claims against Barclays and S&P for failure to state a cause of action. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

Issue(s)

1. Whether the collateral managers of the SIV-Lites owed a fiduciary duty to Oddo, a mezzanine noteholder.

2. Whether Barclays tortiously interfered with Oddo’s contracts with Golden Key and Mainsail.

Holding

1. No, because there was no special relationship of confidence and trust between the collateral managers and Oddo to establish a fiduciary duty.

2. No, because there was no actual breach of contract by Golden Key and Mainsail.

Court’s Reasoning

The court reasoned that a fiduciary relationship arises when one party is under a duty to act for the benefit of another. Such a relationship is fact-specific and grounded in a higher level of trust than is normally present in arm’s length business transactions. Generally, there is no fiduciary obligation in a contractual arm’s length relationship between a debtor and a note-holding creditor because there is no special relationship of confidence and trust. Even though the mezzanine notes had some equity-like features, there was no factual basis to elevate Oddo’s rights to those of a shareholder. The court noted that “if [the parties] do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them” (quoting Northeast Gen. Corp. v Wellington Adv., 82 NY2d 158, 162 [1993]).

The court further stated that Oddo had no contractual relationship with Avendis and Solent and no direct dealings with them, precluding a finding of higher trust. Because no fiduciary duty was owed, Barclays and S&P could not be liable for aiding and abetting a breach of fiduciary duty.

Regarding the tortious interference claim, the court stated that a valid contract, the defendant’s knowledge of the contract, intentional procurement of a breach, an actual breach, and resulting damages must be shown. Here, Golden Key and Mainsail never breached their contractual obligations to Oddo by expanding their investment portfolios and acquiring the additional securities. The court emphasized that “the Warehousing Party [Barclays] has agreed to acquire specified Investments for the Issuer [Golden Key and Mainsail] … and hold them for purchase by, or transfer to, the Issuer. The Issuer will . . . purchase . . . the Warehousing Investments; provided, that the Issuer will not purchase or take delivery of any Warehousing Investment that at the time of purchase or delivery by it is not an Eligible Investment.” The warehousing provision required the SIV-Lites to pay Barclays’ purchase price, regardless of market fluctuations. Because there was no underlying breach of contract, the tortious interference claim failed.