An important decision by Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware recently focused the distressed debt market (and financial creditors in general) on the proper legal characterization of a common financing provision — the “make-whole premium.”¹ Judge Carey allowed a lender’s claim in bankruptcy for the full amount of a large make-whole premium, after denying a motion by the Unsecured Creditors’ Committee to disallow the claim.

 WHY DOES THIS DECISION MATTER?

The U.S. bankruptcy claims trading market has grown in recent years, from one with a few specialized firms investing in small vendor trade claims into a multibillion dollar industry. Major investment banks and hedge funds now regularly buy and sell claims arising from a variety of transactions, including swap terminations, litigation judgments, debt issuances and rejected real estate and equipment leases. With individual claim amounts frequently in the millions (and sometimes billions) of dollars, the volume of claims bought and sold has increased significantly.

The ISDA Master Agreement¹ serves as the basis for the vast majority of overthe- counter derivatives transactions. Two fundamental principles of the ISDA Master Agreement are: (1) upon the default of one party to a swap, the nondefaulting counterparty may terminate the swap, calculate its loss and claim damages; and (2) the obligation of each party to a swap to make payments to the other is subject to the satisfaction of the conditions precedent that no default has occurred with respect to the other party.

According to a recent Delaware bankruptcy court decision, avoidance and disallowance risk travel with a distressed claim. This decision highlights the importance of diligence and the benefits provided by purchasing distressed debt on “distressed” documents.

The debt of a troubled company is trading in the secondary market at a significant discount because the company is highly levered and is at risk of default.

T he LBIE Client Money Judgment on the appeal from the Court of Appeal has been eagerly awaited by creditors and secondary claims trading market participants in order to give clarity to the funds available for the client money pool and to determine which clients will have the benefit of those funds.

The decision has implications for creditors of MF Global UK Limited and all clients of UK financial firms.

BACKGROUND

Greece is proceeding with the largest sovereign debt restructuring in history after its bondholders accepted a significant debt reduction in the face of mounting evidence that a Greek default was inevitable without such relief. In a related market development garnering only slightly less attention than the debt restructuring itself, the International Swaps and Derivatives Association, Inc.

T he recent—and unexpected—rejection by a U.S. Bankruptcy Court of the modified plan of reorganization of Washington Mutual, Inc. (“WaMu”)² on the ground of a “colorable claim” of insider trading has raised questions about the standards of conduct for members of ad hoc creditors committees during corporate reorganizations.³ In WaMu, Judge Mary F.

On January 25, 2010, United States Bankruptcy Court Judge James M. Peck issued a decision that limited the ability of parties to swap transactions to enforce certain of their contractual rights against a counterparty that has filed for bankruptcy. See Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Ltd.1 (the “BNY Decision”).

On April 27, 2011, the United States Supreme Court approved certain amendments to Bankruptcy Rule 2019 requiring disclosures by certain creditors and equity holders in Chapter 11 cases. We expect that amended Rule 20191 (“Amended Rule 2019”) will take effect as a matter of law on December 1, 2011 unless in the interim Congress enacts legislation to reject, modify, or defer the rules, which we view as unlikely.

On April 25, 2011, as widely expected, a group of Lehman creditors holding claims arising from terminated derivatives transactions filed a competing plan of reorganization and related disclosure statement in the Debtors' chapter 11 cases. As a result of the new filing, there are now three competing plans – (1) the Debtors’ Plan, (2) the Ad Hoc Group’s Plan (filed by a group of bondholder creditors) and (3) the Non-Consolidation Plan (filed by the derivative claimants) - in the Lehman bankruptcy proceedings.