It is undisputed that a writedown of the B6 notes had occurred when BofA wrote down or forgave all notes in the securitization as part of its unwinding. In response to the writedown, DB, in its role as calculation agent under the CDS contracts, was required by the terms of the CDS contracts to calculate the Floating Amount – the amount to be paid by the credit protection seller, Good Hill, to the protection buyer, DB itself, as a result of the writedown, which was a credit event under the CDS contracts.

This calculation was to be based solely on the servicer report, also as required by the terms of the CDS contracts. DB had refused to make this calculation, however, because it believed that the obligation to rely on the servicer report only extended to the degree that DB could trust that the prices and allocations in the servicer report were arrived at in good faith and in a commercially reasonable manner.

DB counterclaimed that Good Hill had breached its obligation to act in good faith and in a commercially reasonable manner when arriving at the 86% allocation for the B6 notes. Further, DB alleged that Good Hill and BofA colluded on the B6 notes allocation to specifically reduce Good Hill's liability to DB under the CDS contracts. DB argued that such an allocation was "grossly out of line" with the marked price on Good Hill's books. Therefore, DB argued the allocation was unreasonable and DB was unable to rely on the servicer report to complete its calculation.

However, Good Hill argued, and the court agreed, that calculating the Floating Amount had nothing to do with market valuations, allocations, or the good faith negotiations (discussed below) represented in the final price and allocation among the different classes of notes in the servicer report for the purposes of DB acting as the calculation agent. By the express terms of the CDS contracts, DB had the obligation to calculate the Floating Amount based only on the servicer report. The court found that the failure of DB to complete this task represented a breach of the terms of the CDS contracts.

The court found DB's argument that its good faith obligation under the CDS contracts precluded it from performing its tasks as the calculation agent unconvincing. Through expert testimony, the court established that price allocations by class is standard practice, and that both Good Hill and BofA had engaged in good faith, arm's-length negotiations in which each party pursued its own interests in a reasonable manner. In explaining the disparity between the book value of the securitization and the final price paid, the court found that the B6 notes had a higher perceived value to BofA due to its intent to unwind and extinguish the debt from its books.

Further, Good Hill was expressly permitted under the CDS contracts to negotiate the sale of the notes without regard to the existence of the CDS contracts or any adverse effects the negotiations might have had on DB's positions under the CDS contracts, so long as the negotiations were not carried out in bad faith (which the court did not find). The court noted that Section 9.1(b)(iii) of the 2003 ISDA Credit Derivatives Definitions, which governed the CDS contracts, expressly provided for each party's authority to deal in its own self-interest.

The implied duty of good faith and fair dealing in every contract under New York law (and thus in the CDS contracts in this case) imposed no obligations beyond the terms of the CDS contracts, and parties were free to engage in negotiations and deal making so long as they complied with contract terms.

DB also counterclaimed that Good Hill's actions manipulated the price of the B6 notes in violation of Section 10(b) of the Exchange Act. The court found that DB, as proponent of the claim, was unable to meet its burden of proof to establish that Good Hill had violated Section 10(b) of the Exchange Act.

Section 10(b) and SEC Rule 10b-5 under the Exchange Act prohibit fraud or manipulation in connection with the purchase and sale of securities. Manipulation refers to the practice of rigging prices and artificially affecting market activity in an effort to mislead investors. To establish liability under Section 10(b) and Rule 10b-5, the party asserting the claim must show:

The securities law covered the CDS because it was a security-based swap (SBS) under the definition adopted by the SEC under Title VII of the Dodd-Frank Act. Hence, securities laws, including Section 10(b) and SEC Rule 10(b)-5, now apply to SBS such as the CDS in this case. For details, see Practice Note, US Derivatives Regulation: Application of Securities Laws to Security-Based Swaps.

For more information on liability under Section 10(b) of the Exchange Act and SEC Rule 10b-5, see Practice Note, Liability Provisions: Securities Offerings: Section 10(b) of the Exchange Act and SEC Rule 10b-5.

The court was unconvinced by this argument because it had already established that Good Hill and BofA had negotiated the price and allocation of the B6 notes at arm's-length and in good faith. Further, the court noted that there was no market in which to manipulate the price of the B6 notes. Good Hill was the only investor in the B6 notes, and the only transaction that occurred with respect to those notes, subsequent to issuance, was when BofA repurchased them.

Good Hill has posted $27,114,476 in collateral with DB under the CDS contracts to secure any potential payment obligations, including a Floating Amount Event, which occurred when the Good Hill notes were written down. Upon the writedown and termination of the B6 notes, Good Hill was entitled to a return of its collateral, minus the Floating Amount, as calculated by a formula set out in the CDS contracts. These calculations under the CDS contract formula yielded a Floating Amount owed to DB of $4,972,254.87. By netting the amounts owed by both Good Hill and DB, the court found that Good Hill was due $22,142,221.43, plus interest accrued, from DB under the CDS contracts.