## Facts

- A hedge fund entered into credit default swaps (CDSs) with bank counterparties referencing Argentine sovereign bonds, documented under an ISDA Master Agreement and the ISDA 1999 Credit Derivatives Definitions.
- The CDSs required the protection sellers to pay upon a defined “credit event,” including “restructuring,” and permitted settlement through delivery of qualifying bonds at par.
- During Argentina’s 2001 financial crisis, Argentina announced a “voluntary” debt exchange offering new instruments with altered terms, including extended maturities and disrupted payment expectations.
- The fund treated the exchange as a “restructuring” credit event and demanded settlement; the banks refused, asserting no qualifying credit event had occurred.
- Argentina later declared a moratorium on external debt payments, which the parties agreed was a credit event under the CDSs.
- The fund alleged it suffered losses from the earlier refusal to recognize the exchange as a restructuring and separately alleged that the banks made misleading statements or omissions about how “restructuring” would be interpreted and about market practice.
- The district court ultimately dismissed the entire amended complaint with prejudice, holding the exchange unambiguously did not constitute a restructuring and that the fraud-based claims still failed Rule 9(b).

## Issues

1. Whether the CDS “restructuring” definition was unambiguous such that the breach-of-contract claim could be dismissed on the pleadings based on the characterization of the exchange as “voluntary.”
2. Whether the amended complaint pleaded fraud and negligent misrepresentation with particularity under Rule 9(b), including actionable misstatements or omissions, scienter, and reasonable reliance, and (for negligent misrepresentation) a duty arising from a special relationship.

## Decision

- The court affirmed dismissal of the fraud and negligent misrepresentation claims.
- The court reversed dismissal of the breach-of-contract claim and remanded for further proceedings.
- The court held the CDS language, as applied to the debt exchange, was reasonably susceptible to more than one interpretation, making dismissal at the Rule 12(b)(6) stage improper.
- The court held the fraud-based allegations did not identify specific actionable statements with sufficient detail and largely amounted to non-actionable opinions or legal interpretations, without adequately pleaded scienter or reasonable reliance.
- The court held the negligent misrepresentation claim also failed because the parties’ arm’s-length relationship did not plausibly establish a special relationship creating a duty of care.

## Legal Principles

- A contract claim may be dismissed on the pleadings only when the contractual language is unambiguous and the plaintiff’s interpretation is unreasonable; where language supports multiple reasonable readings, interpretation generally cannot be resolved on a motion to dismiss.
- In technical, market-defined contracts, evidence of trade usage and custom may be relevant to meaning; courts should be cautious about declaring specialized terms unambiguous without a factual record.
- Rule 9(b) requires fraud-based claims to plead the particulars of the alleged misrepresentations (who, what, when, where, and how) and facts supporting a strong inference of fraudulent intent.
- Under New York law, generalized assurances, predictions, and a counterparty’s views about legal meaning or future application of contract terms are typically not actionable misstatements of fact, especially in transactions between sophisticated parties.
- Negligent misrepresentation requires, among other elements, a duty of care arising from a special relationship; arm’s-length dealing between sophisticated financial actors ordinarily does not establish such a duty without additional facts.

## Conclusion

The Second Circuit held that whether a “voluntary” sovereign debt exchange constitutes an ISDA “restructuring” could not be decided as a matter of law on the pleadings because the CDS terms were ambiguous in application and potentially informed by market usage, but it upheld dismissal of fraud and negligent misrepresentation claims for failure to plead actionable statements, scienter, reasonable reliance, and a qualifying duty.


Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co. of N.Y., 375 F.3d 168 (2d Cir. 2004)