Deutsche Bank AG v. Ambac Credit Prods., LLC

Deutsche Bank AG (DB) (plaintiff) and Ambac Credit Products, LLC (Ambac) (defendant) entered into a credit-default swap (CDS) in which DB was the buyer and Ambac was the seller. The CDS encompassed a portfolio of 60 reference obligations, including bonds issued by Solutia Inc. The CDSs included a master agreement, which used standard language and definitions from the International Swaps and Derivatives Association (ISDA), and a separate confirmation document. Under the ISDA definitions, the seller’s obligation to pay on the contract in exchange for delivery of the underlying obligation—a process known as physical settlement—was triggered by a credit event, after which the buyer had 30 days to provide notice. This notice period was followed by a relatively brief period whose length was specified by confirmation or by standard industry practice, ending in the physical settlement date, after which a five-day window existed to complete delivery. The DB/Ambac confirmation provided that the termination date would be either the physical settlement date or the scheduled termination date of May 2, 2005, whichever was later. Solutia filed for bankruptcy in December 2003—a credit event triggering Ambac’s duty to pay DB upon DB’s delivery of the bonds. DB gave proper notice to Ambac within 30 days, and the parties agreed on a delivery date of February 4, 2004. However, DB delivered the bonds in a gradual manner that was not complete until March 4, by which point Ambac had removed the order to its bank to accept delivery. Ambac’s parent company, Ambac Assurance Association (defendant), also refused to pay. DB brought a breach-of-contract suit in federal district court. DB argued that late delivery was supported by CDS industry custom, though its expert witnesses were unable to substantiate this claim. DB also argued that it had until May 2, 2005—the termination date listed in the confirmation—to make final delivery.