## Facts

- VCG Special Opportunities Master Fund Ltd. (VCG) and Citibank, N.A. (Citibank) entered a credit default swap (CDS) in which VCG sold credit protection to Citibank on a tranche of Millstone III CDO notes (Class B-2 Notes).
- The transaction was documented through ISDA-form agreements, including a 2002 ISDA Master Agreement, a Schedule, a 1994 ISDA Credit Support Annex (CSA), and a confirmation incorporating ISDA credit derivatives definitions and CDO standard terms.
- Citibank served as both protection buyer and the contractually designated Calculation Agent.
- Under the CSA’s margining framework, Citibank made multiple collateral demands as it valued the reference obligation; VCG disputed the methodology but posted the requested collateral and did not pursue the contracts’ dispute procedures to finality.
- A central dispute arose when Citibank determined an “Implied Writedown” had occurred with respect to the reference obligation, constituting a “Floating Amount Event” that required VCG to make a “Floating Payment.”
- VCG refused to make the Floating Payment, asserting the CDO indenture’s “Written Down Amount” provisions meant the indenture already expressly addressed writedowns, so the contract’s implied writedown conditions were not satisfied.
- VCG sued for, among other claims, breach of contract, rescission, and breach of the implied covenant of good faith and fair dealing; Citibank counterclaimed for breach based on VCG’s nonpayment.
- Citibank moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c).

## Issues

1. Whether Citibank’s collateral calls under the CSA were authorized by the contract or constituted actionable misconduct.
2. Whether the transaction documents permitted Citibank to find an “Implied Writedown,” triggering a “Floating Amount Event” and obligating VCG to make a Floating Payment.
3. Whether Citibank, as Calculation Agent and counterparty, breached the contract or the implied covenant of good faith and fair dealing in making valuations, calling collateral, or determining an Implied Writedown.
4. Whether VCG could obtain rescission or similar relief based on alleged misrepresentations or non-disclosure in a complex derivatives transaction between sophisticated parties.
5. Whether VCG’s refusal to make the Floating Payment constituted a breach entitling Citibank to judgment on its counterclaim.

## Decision

- The court granted Citibank’s Rule 12(c) motion.
- The court dismissed VCG’s complaint in full.
- The court held Citibank’s collateral demands were permitted under the CSA’s terms and VCG’s performance under the collateral regime undermined its contrary breach theory.
- The court held the documents allowed an Implied Writedown determination because the CDO indenture did not expressly provide for writedown of the referenced notes in the manner required to preclude an implied writedown.
- The court rejected VCG’s claims for breach of contract, breach of the implied covenant, and rescission, finding no adequately pleaded basis to treat Citibank’s determinations as bad faith or otherwise outside the contract.
- The court entered judgment for Citibank on its counterclaim, concluding VCG breached the CDS by failing to make the Floating Payment.

## Legal Principles

- Courts enforce the plain language of ISDA-based derivatives documentation, including confirmations and supplements that control over inconsistent master-agreement terms.
- Where a contract designates a counterparty as calculation agent and grants valuation/event-determination discretion, that structure is enforceable; a challenge requires well-pleaded facts showing the determinations violated contractual standards (e.g., bad faith or lack of commercially reasonable conduct).
- A CDS may treat losses as an “Implied Writedown” when the underlying indenture does not expressly provide for writedown of the referenced obligations, even if the indenture uses “written down” terminology addressing other components (such as assets rather than the issued notes).
- Rescission in sophisticated, heavily documented derivatives transactions requires extraordinary, well-pleaded grounds; generalized allegations of unfairness or non-disclosure are insufficient where the contracts allocate risk and provide dispute mechanisms.
- Once a covered event is validly determined under the contract, the protection seller’s refusal to pay constitutes a breach supporting judgment for the amount due.

## Conclusion

The court enforced the CDS and CSA as written, upheld Citibank’s calculation-agent determination that an Implied Writedown triggered a Floating Amount Event, dismissed VCG’s contract and equitable claims, and awarded Citibank judgment for VCG’s nonpayment under the swap.


VCG Special Opportunities Master Fund Ltd. v. Citibank, N.A., 594 F. Supp. 2d 334 (S.D.N.Y. 2008)