Barclays (NYSE:BCS) is following in the footsteps of Deutsche Bank (NYSE:DB) and delaying a hearing on its culpability for the effects of LIBOR manipulation. Earlier this year, Deutsche Bank won an appeal against having LIBOR rigging claims included in trial involving Indian based Unitech, which claimed that the bank knew LIBOR was being rigged at the time the disputed transactions took place. 

That claim was dismissed in March, and now Barclays wants a chance to appeal the inclusion of the LIBOR manipulation in its trial. Both Barclays and Deutsche Bank were being sued for misselling products that relied on LIBOR to set rates. The original claim in the cases rests on the products being sold to unsophisticated investors, but the cases could also bring in the LIBOR manipulation as another component.

Missold interest rate swaps
At the heart of the case, Barclays is being taken to court for misselling a product. Guardian Care Homes, a U.K. retirement home operator, says it was sold an interest rate hedging tool that was overly sophisticated. The products have come under scrutiny in the U.K. recently, and many banks are now repaying customers that bought the swaps, which have been available since at least 2001. 

The swaps were supposed to help customers by limiting the amount they would have to pay if interest rates went up. Basically, the bank would sell a borrower a swap, which meant that if the LIBOR was between x% and y%, the customer paid normal interest -- LIBOR plus one percent, for instance. If the rate rose above y%, then the customer's rate was capped at that level. This meant that rising rates had less effect on borrowers.

However, if LIBOR fell below x%, the customer had to paid x% plus the difference between x% and LIBOR. Once rates crashed, many borrowers found themselves paying huge penalties. Lead by the Financial Services Authority in the U.K., many banks have now admitted that these swaps were sold to people who didn't really understand the risks they were taking on. Some of those customers are being repaid now.

The Libor tie-in
What's being challenged in the Barclays case is the idea that the swap was even sellable to a sophisticated investor. Guardian Care Homes is claiming that Barclays sold it the swap, based on LIBOR, at a time when it both knew that LIBOR was rigged and that it was involved in that rigging. The company is asking for damages of 70 million pounds. 

Deutsche Bank was in the same boat, as the bank is being investigated by the German authorities for LIBOR rigging. Unitech claimed that it wouldn't have purchased the swap if it knew what Deutsche Bank knew, namely that the LIBOR wasn't all it was cracked up to be.

Judge Jeremy Cooke dismissed Unitech's claim on the basis that Deutsche Bank didn't imply that LIBOR was going to be set a certain way -- or even that it would be set fairly. The dismissal isn't an endorsement of Deutsche Bank's actions -- instead it was about what a person could reasonably assume when buying a rate swap.

The delay in the Barclays case is designed to give the bank time to hear if its appeal on those grounds also succeeds. As a benefit for Guardian Care Homes, it gives the company time to trawl through the huge set of documents it received from Barclays, hopefully giving it a chance to bolster its case.

Even if the LIBOR portion of the case is dismissed, Barclays may still have to shell out something to resolve the case. The precedent set by the FSA and by other lenders implies that even if all the facts were revealed, the selling of the swaps may not have been entirely legitimate. The case is set to resume in August 2014, and a lot can happen between now and then.