Bankruptcy Court Grants Defendants’ Motion to Dismiss in Lehman Brothers v. Bank of America, et al

Yesterday, June 28th, the United States Bankruptcy Court, Southern District New York (“the Court”), issued its decision in Lehman Brothers Special Financing Inc. v. Bank of America, et al, granting the defendants’ motion to dismiss. While all of Lehman’s claims were dismissed, two points are of particular note to the defendants and the structured finance community.

First, the Court rejected the so-called “singular event” theory. One of the earlier decisions in this case held that the bankruptcy of Lehman Brothers Holding Inc., the parent, was sufficient to trigger ipso facto protection for contracts with other Lehman entities, even when those entities did not themselves file for bankruptcy protection. At the time, this theory was heavily criticized, particularly given the instability it injected into the market for structured products. The Court rejected this argument, holding that the ipso facto provisions of the Bankruptcy Code apply only once an entity files for bankruptcy protections, notwithstanding that its affiliates may have sought bankruptcy protections earlier. 

The second key aspect of the decision is its broad reading of the Bankruptcy Code safe harbors of Section 560, which protects the ability of a party to a swap agreement to exercise its contractual rights to “terminate, accelerate, and liquidate” a swap agreement. Relying on the broad reading of the safe harbors of Section 546, which protects certain transfers received by a debtor’s counterparty prior to bankruptcy from avoidance, the Court held that the safe harbor of Section 560 should be interpreted broadly. In particular, the right to “liquidate” the collateral underlying the safe harbor includes within it the right for the proceeds of that collateral to be distributed. Importantly, this decision was based partly on the fact that the swap schedules in question either contained the priority of payment provision, or incorporated it expressly.

This decision will likely be appealed by Lehman to the District Court and SFIG will keep you apprised.

In December 2015, SFIG submitted an amicus brief to the Court regarding this proceeding. In January 2016, SFIG also filed a reply in support of filing its amicus brief, following Lehman’s objection to SFIG’s motion for leave to file the brief, and successfully argued the motion for leave before the Bankruptcy Court. Freshfields Bruckhaus Deringer US LLP filed the briefs and appeared for the argument on behalf of SFIG. If you are interested in joining SFIG’s Legal Counsel Committee, please contact Alyssa.Acevedo@sfindustry.org.

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