VCG Special Opportunities Master Fund Ltd. v. Citibank, N.A.

VCG Special Opportunities Master Fund Limited (VCG) (plaintiff) and Citibank, N.A. (defendant) entered into a credit-default swap involving notes issued by Millstone III CDO Limited III-A (Millstone). VCG was the protection seller, meaning it undertook the risk associated with the notes, and Citibank was the protection buyer. VCG agreed to make floating payments to Citibank if certain credit events occurred, including write-downs or implied write-downs. The swap was governed by an indenture that specifically mentioned write-downs of assets owned by Millstone but did not address write-downs of the notes. As the calculation agent under the indenture, Citibank was allowed to calculate implied write-downs that occurred outside of the specifics of the indenture. VCG deposited collateral with Citibank to ensure that VCG would be able to make the floating payments. In exchange, Citibank made fixed payments to VCG according to the value of the notes. The agreement between VCG and Citibank also allowed Citibank to demand additional collateral from VCG if the risk associated with the notes increased. In 2007 Citibank determined that the risk associated with the notes had increased. Citibank requested additional collateral from VCG four times, which VCG supplied. In 2008 Citibank informed VCG that a floating payment was due because an implied write-down had occurred. The implied write-down that Citibank referenced related to the decreased value of the notes, rather than a decrease in the value of assets owned by Millstone. Because the indenture did not address write-downs of the notes, Citibank was entitled to calculate the write-down amount and determine that a floating payment had been triggered. VCG filed a lawsuit in federal district court against Citibank, arguing that no write-down that triggered a floating payment had occurred. Alternately, VCG argued that it was entitled to rescind its contract with Citibank and that Citibank had breached the implied covenant of good faith and fair dealing by making unjustified demands for additional collateral. Citibank moved to dismiss the case, arguing that VCG had failed to state valid claims.