Eternity Global Master Fund Limited v. Morgan Guaranty Trust

Eternity Global Master Fund Limited (Eternity) (plaintiff) purchased credit-default swaps (CDSs) from Morgan Guaranty Trust Company of New York and JPMorgan Chase Bank (collectively, Morgan) (defendants). The CDSs were made against Argentine bonds. The terms of the CDS contracts were based on a standardized master agreement published by the International Swaps and Derivatives Association (ISDA). The ISDA master agreement in turn incorporated official ISDA definitions. The CDS contracts provided that Morgan’s obligation to settle—that is, pay on the contracts—would be triggered by one of four default events: (1) failure to pay; (2) obligation acceleration, i.e., mandatory transfer; (3) repudiation or moratorium; or (4) restructuring. The ISDA definition of restructuring included (1) a reduction in the rate of payable interest or the principal, (2) a postponement of payment, and (3) a subordination of the obligation that did not exist prior to the event. Argentina experienced an economic crisis. In November 2001, the Argentine government initiated a voluntary debt exchange under which bondholders could exchange their bonds for loans secured by tax revenues but with less favorable terms. The voluntary debt exchange included an extension of the bonds’ maturity and a suspension of payment while the bonds were placed in trust. In response to this event, Eternity unsuccessfully sought payment on the CDSs from Morgan. In December 2001, the newly elected Argentine president announced a public-debt moratorium. Although the moratorium was a triggering event under the CDSs, Eternity argued that the voluntary debt exchange had itself been a triggering event, and that Morgan’s failure to settle in November caused Eternity to lose $3 million. Eternity brought a breach-of-contract claim in federal district court. The court took no submissions on industry custom and usage for credit derivatives. The court ruled in favor of Morgan, concluding that the voluntary debt exchange was unambiguously not among the triggering default events for the CDSs. Eternity appealed. The United States Court of Appeals for the Second Circuit granted certiorari.