The English High Court in Lehman Brothers International (Europe) (In Administration) [2016] EWHC 2417 (Ch), in one of a series of cases arising from the Lehman insolvency, has had to consider (among other issues) the meaning of “Default Rate” under the ISDA Master Agreement.

Editor’s Note: Our good London colleague Ed Marlow recently published this as a Bryan Cave client advisory.

Including an unsecured creditor  in an agreed payments waterfall does not by itself confer on that unsecured creditor  the benefit of a mortgagee’s usual duties on enforcement of security, or a direct claim against the sale proceeds.

The English High Court in Fondazione Enasarco v Lehman Brothers Finance S.A. and Anthracite Rated Investments (Cayman) Limited [2015] EWHC 1307 (Ch) applied a common sense approach in the circumstances to the determination of Loss under the 1992 ISDA Master Agreement. The judgment of the judge (Mr Justice David Richards) is useful reading for those involved in structured products and derivatives.

Background

Section 552(b)(2) of the Bankruptcy Code provides that if a creditor prior to bankruptcy obtained a security interest in rents paid to the debtor, that security interest extends to postpetition rents to the extent provided in the security agreement. Courts have disagreed, however, on the question of whether the debtor must provide adequate protection with respect to such postpetition rents. The resolution of this issue typically determines whether the debtor may use a portion of the postpetition rents that it receives to fund the administrative costs of its bankruptcy.