For participants in the over-the-counter ("OTC") derivatives markets, perhaps the most significant recent US legal decision interpreting counterparty rights upon a bankruptcy event of default was the September 15, 2009 bench ruling in the US Lehman Brothers chapter 11 bankruptcy cases, In re Lehman Brothers Holdings, Inc., Case No. 08-13555 et seq. (JMP)(jointly administered) ("Bankruptcy Case").
Introduction
CIT Group Inc.
Not necessarily so, according to the recent rulings of Southern District of New York Bankruptcy Judge Allan Gropper in the US$27 billion General Growth Properties Chapter 11 bankruptcy—at least with respect to the issue of substantive consolidation.
In a matter of first impression arising in the largest corporate bankruptcy in history, In re Lehman Brothers Holdings Inc., the Bankruptcy Court for the Southern District of New York invalidated a common contractual provision shifting payment priority upon the default of a swap counterparty (“Flip Clause”) in a credit-linked debt structure.1
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.
On Jan. 25, 2010, the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) held that a trust deed provision reversing a priority of payment waterfall upon the bankruptcy of a credit support provider under a swap agreement is unenforceable under the U.S. Bankruptcy Code (the “Bankruptcy Code”).
PETER J. SOLOMON COMPANY, L.P., v. ONEIDA, LTD., CASE NO. 09-CIV-2229, 2010 WL 234827 (S.D.N.Y. JAN. 22, 2010)
In a significant ruling with potentially wide-reaching implications, Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York dismissed the Securities Act of 1933 causes of action (Sections 11, 12, and 15) against McGraw Hill and Moody's (the "Rating Agencies") in In re: Lehman Brother Mortgage Backed Securities Litigation.
Introduction
The United States Bankruptcy Court for the Southern District of New York ruled recently on the validity of “gift plans” – plans of reorganization under which a senior creditor “gifts” assets to a junior creditor or equity holder.1 In In re Journal Register Co.,2 Bankruptcy Judge Alan L. Gropper approved a plan in which secured lenders gifted a portion of their recovery to certain trade creditors, and detailed some of the important limitations on gift plans.
Evolution of the Gift Plan Doctrine