Bankruptcy Court's Block Of $1B Lehman Clawback Upheld
March 14, 2018
A New York federal judge on Wednesday affirmed a bankruptcy court’s dismissal of a Lehman Brothers unit's bid to claw back $1 billion in swaps transactions, saying it correctly determined the safe harbor provision for swap agreements protects the distributions of the collateral.
U.S. District Judge Lorna G. Schofield rejected Lehman Brothers Special Financing's argument — that the word “liquidation” as it’s used in a section of the bankruptcy code was misapplied by the bankruptcy court and therefore those protections should be revoked — as out of context.
“LBSF’s interpretation is rejected because it is based on an interpretation of the term ‘liquidation’ in the context of an ‘unliquidated’ — i.e., uncalculated — claim or amount, or in terms of converting an illiquid asset to cash, and not in the context of the liquidation of an agreement, specifically a swap agreement,” she said. “But the [section's] safe harbor is not concerned with unliquidated or unascertained amounts and the need to ascertain them.”
In October 2015 Lehman filed an adversary proceeding against Bank of America Corp., Goldman Sachs Group Inc., Wells Fargo and more than 200 other investors, seeking to claw back $1 billion in payments Lehman made when the credit default swap agreements were terminated.
Under the agreements, Lehman purchased credit protection from certain special-purpose entities that, in turn, funded the collateral securing the swap agreements by issuing notes to investors. The swap deals could be terminated early if Lehman or the issuer defaulted, with the noteholders having priority for payment from the collateral if the default was on the Lehman side.
Lehman has argued that the default provisions in question are unenforceable, “ipso facto” provisions that impermissibly altered Lehman’s rights under the contracts after Lehman followed parent company Lehman Brothers Holdings Inc. into bankruptcy in 2008.
U.S. Bankruptcy Judge Shelley C. Chapman tossed the case last year, ruling the transactions were structured in such a way that the provisions did not act as “ipso facto” clauses and were therefore valid and enforceable. Lehman appealed that decision to a New York federal court.
In a letter to Judge Schofield earlier this month, Lehman said the U.S. Supreme Court’s February decision in Merit Management Group v. FTI Consulting, which established a narrow reading of the Bankruptcy Code’s “safe harbor” provision, should prevail, rather than the broad reading used by the bankruptcy court and argued for by the noteholders.
Judge Schofield cited the decision when rejecting Lehman’s “liquidation” argument.
The Lehman unit is represented by Paul R. DeFilippo of Wollmuth Maher & Deutsch LLP.
The noteholders are represented by Ballard Spahr LLP, Chaffetz Lindsey LLP, Chapman and Cutler LLP, Cleary Gottlieb Steen & Hamilton LLP, Cravath Swaine & Moore LLP, Gray Plant Mooty Mooty & Bennett PA, Hogan Lovells, Hunton & Williams LLP, Jackson Walker LLP, K&L Gates LLP, Kleinberg Kaplan Wolff & Cohen PC, Locke Lord LLP, McCarter & English LLP, McGuire Woods LLP, Morgan Lewis & Bockius LLP, Munger Tolles & Olson LLP, Nixon Peabody LLP, Olshan Frome Wolosky LLP, Reed Smith LLP, Seward & Kissel LLP, Sidley Austin LLP and Wuersch & Gering LLP.
The case is Lehman Brothers Special Financing Inc. v. Bank of America NA et al., case number 1:17-cv-01224, in the U.S. District Court for the Southern District of New York.
--Additional reporting by Rick Archer. Editing by Alanna Weissman.
Bankruptcy Court's Block Of $1B Lehman Clawback Upheld - Law360