On September 21, 2010, the United States District Court for the Southern District of New York granted BNY Corporate Trustee Services Limited leave to appeal a decision of the Bankruptcy Court in the Lehman Brothers bankruptcy case.1 The Bankruptcy Court held that a key provision of certain transaction documents constituted an unenforceable ipso facto clause. The District Court granted leave to appeal the Bankruptcy Court decision even though it was interlocutory.

On May 5, 2009, Judge James Peck, the Bankruptcy Judge in the Lehman Brothers bankruptcy cases, held that the safe harbor provisions of the Bankruptcy Code do not override the mutuality requirements for setoff under section 553(a) of the Bankruptcy Code. As a consequence, the Bankruptcy Court prohibited Swedbank, a non-debtor counter party to a swap agreement, from setting off pre-petition claims against Lehman against funds collected for Lehman’s account postpetition. See In re Lehman Bros. Holdings Inc., Bankr. Case No. 08-13555 (JMP) (Bankr. S.D.N.Y.

On January 25, 2010, Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York ruled that provisions in a CDO indenture subordinating payments due to Lehman Brothers Special Financing Inc., as swap provider, constituted unenforceable ipso facto clauses under the facts and circumstances of this case. The Court also held that, because the payment priority provisions were not contained in the four corners of a swap agreement, the Bankruptcy Code’s safe harbor protections, which generally permit the operation of ipso facto clauses, did not apply.

In a recent ruling from the bench, Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York held that Metavante Corporation’s suspension of payments under an outstanding swap agreement with Lehman Brothers Special Financing Inc.

Introduction

The High Court1 in England has confirmed the validity under English law of contractual provisions common in structured finance transactions which subordinate payments to a swap counterparty in circumstances where the swap counterparty has defaulted on its obligations under the terms of the relevant swap agreement.

The Judgment

Parties

In a recently filed motion in the United States Bankruptcy Court Southern District of New York (the “Motion”), Lehman Brothers Holdings Inc. (“LBHI”) is seeking to compel Metavante Corporation (“Metavante”) to perform its obligations under a swap agreement between Metavante and Lehman Brothers Special Financing Inc.

Historically, the United Kingdom has not had a specialised bankruptcy regime for dealing with the failures of financial institutions. Rather, these were handled under the same rules that applied to ordinary corporations.

September 21, 2008 Following a week of unprecedented market upheaval, players in financial contracts got some reassurance from the bankruptcy judge presiding over the liquidation of broker/dealer Lehman Brothers Inc. (“LBI”) and the sale of a portion of its assets to Barclays Capital Inc. (“BCI”).

On May 23, 2008, in American Home Mortgage Investment Corp. v. Lehman Bros. Inc.(In re American Home Mortgage Corp.),1 the United States Bankruptcy Court for the District of Delaware ruled that BBB-rated mortgagebacked notes are eligible for the Bankruptcy Code’s repurchase agreement safe harbor as “interests in mortgage loans”.

In a May 23, 2008 decision, the United States Bankruptcy Court for the District of Delaware ruled that BBB-rated mortgage-backed notes are eligible for the Bankruptcy Code's repurchase agreement safe harbor as “interests in mortgage loans”. The court also held that a repurchase agreement constituted a sale, as opposed to a financing governed by UCC Article 9 -- the first decision on this topic since the financial contract safe harbors were expanded under the 2005 amendments to the Bankruptcy Code.