Aon Financial Products, Inc. v. Société Générale

Bear Stearns Investment Limited (BSIL) made a loan to Escobel Land, Inc. (Escobel) for the construction of condominiums in the Philippines. At BSIL’s request, Escobel procured a surety bond from the Government Service Insurance System (GSIS), a Philippine government agency, to guarantee repayment in the event of a default. Seeking additional protection, BSIL entered into a credit-default swap (CDS) with Aon Corporation (plaintiff). The BSIL/Aon contract named GSIS as the reference entity—i.e., the entity whose obligation was the subject of the contract. The contract further provided that a failure by GSIS to pay under the surety bond would constitute a credit event—that is, the event that would trigger Aon’s obligation to pay. Aon sought protection of its own and entered into a separate CDS with Société Générale (SG) (defendant). The Aon/SG contract named the Philippines itself as the reference entity without incorporating Philippine government agencies. The Aon/SG contract defined a credit event as a sovereign event, which in turn entailed a condition created by a failure to act on the part of the reference entity (i.e., the Philippines). BSIL assigned its rights in the Escobel loan to Bankers Trustee Company, Ltd. Escobel defaulted. GSIS informed Bankers Trustee that it did not intend to pay on the bond, which GSIS alleged had been inappropriately authorized. Bankers Trustee brought suit against Aon. The court granted summary judgment in favor of Bankers Trustee, holding that GSIS’s failure to pay was a credit event under the terms of the BSIL/Aon contract. Aon and its subsidiary, Aon Financial Products, Inc. (plaintiff), brought a separate federal action against SG, alleging that the finding of a credit event in the Bankers Trustee/Aon litigation necessarily meant that a credit event had also occurred in the Aon/SG contract. Aon also argued that GSIS’s failure to honor an obligation relating to the Philippine government constituted a sovereign event under the Aon/SG contract. The court granted summary judgment in favor of Aon. SG appealed. The United States Court of Appeals for the Second Circuit granted certiorari.