Bloomberg News

Commerzbank Unit, Eurohypo, Must Face QVT Fund U.S. Lawsuit

July 08, 2011

(Updates with judge’s comments in third paragraph.)

July 8 (Bloomberg) -- Eurohypo AG, a unit of Commerzbank AG, must face a U.S. lawsuit by QVT Fund LP over purported payments the bank owes QVT and other investors in Delaware-based trusts owned by Eurohypo.

Delaware State Judge Donald F. Parsons denied the bank’s request to dismiss the complaint and ruled that the issues in the case must be determined under Delaware law, according to a court filing today in Delaware Chancery Court.

“I conclude that the central questions before this court require the application of Delaware law,” and Eurohypo’s argument that the Delaware lawsuit will cause “inconvenience and expense” because of a similar German proceeding “are also unavailing,” Parsons said in the ruling.

The lawsuit stems from a dispute over 2010 dividend payments that weren’t made to QVT and other holders of trust preferred securities which they claim they were entitled to receive, according to court documents.

Maximilian Bicker, a spokesman for Frankfurt-based Commerzbank, wasn’t immediately able to respond to an e-mail seeking comment.

Eurohypo created the Delaware trusts in 2003 and 2005, and raised $1.2 billion of “profit-dependent securities,” court papers and company statements show. QVT, managed by New York- based hedge fund QVT Financial LP, owns about $226 million of the trust securities. QVT seeks about $68 million for the Trust investors, about $14.1 million for itself, and “further damages” to be determined at trial.

‘Reaped the Benefits’

“Having reaped the benefits associated with raising capital from investors using Delaware entities, the defendants now are unwilling to live up to their obligations,” QVT said in the complaint.

The bank argues it wasn’t obligated to make dividend payments to the Trust holders in 2010 because it wasn’t profitable in 2009, and the payments are based on making a profit in the previous year.

QVT challenges Eurohypo’s assertion claiming it’s forcibly being made unprofitable by Commerzbank, the second-biggest bank in Germany, under a so-called German law domination agreement, which requires it to transfer all profits, if any, to its controlling company. QVT alleges that the bank made scheduled payments in 2008 and 2009 even though it was unprofitable.

“One plausible inference is that the Bank did not make sufficient profits in 2009 to trigger the profit prong because its controlling company took certain actions to limit or eliminate its profitability,” as a direct consequence of the domination agreement, Parsons said in the decision.

Mandatory Obligations

QVT also contends the dividend payments become mandatory obligations when a security equal or subordinate to its own in the capital structure receives payments or is redeemed, according to court documents. QVT says the 2010 mandatory dividend payments were triggered by payments and redemption Eurohypo made to so-called participation-certificates holders in June, July, September and November 2009.

The bank claims that the participation-certificates are debt securities and therefore not on par with the trust preferred securities and not mandatory. Eurohypo also argues that it can’t make any discretionary payments, which it considers the trust dividend payments to be, due to Commerzbank’s recapitalization.

The key issue that must be resolved is “whether distributions made on the participation certificates in 2010 despite the bank’s unprofitability in 2009, still obligated the bank’s subsidiaries to make dividend payments to the trust preferred security holders in 2010,” Parsons said in his decision.

The case is QVT Fund LP v. Eurohypo Capital Funding, CA5881 Delaware Chancery Court (Wilmington).

--Editors: Glenn Holdcraft, Fred Strasser

To contact the reporter on this story: Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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