In Bethlehem Steel Corp. v. Moran Towing Corp. (In re Bethlehem Steel Corp.),1 the United States Bankruptcy Court for the Southern District of New York held that preferential transfer claims were not arbitrable. The Court reasoned that because the avoidance powers did not belong to the debtor, but rather were creditor claims that could only be brought by a trustee or debtor-in-possession, they were not subject to the arbitration clauses in contracts to which the creditors were not parties.
The Dispute and the Arbitration Clauses
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”.
Section 510(b) of the Bankruptcy Code provides that claims for “damages arising from the purchase or sale of . . . a security” of the debtor or an affiliate of the debtor are subordinated to any claims not based on stock. 11 U.S.C. § 510(b). Because there is rarely enough value in a bankrupt company to satisfy all claims, a determination that a particular claim is subject to mandatory subordination under section 510(b) means that, as a practical matter, the claim is unlikely to receive any distribution from the estate.
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.
In the summer of 2007, we reported on Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.),1 decided by the United States Bankruptcy Court for the Southern District of New York.
Congress enacted amendments to the United States Bankruptcy Code in 2005 designed to increase certainty in the marketplace for mortgage loan repurchase agreements and other financial contracts.1 The contours – and limits – of these amendments were recently explored by the Delaware bankruptcy court in Calyon New York Branch v. American Home Mortgage Corp.
January 8, 2008 A Delaware bankruptcy court decided on Friday that mortgage servicing rights could be severed from a mortgage loan repurchase agreement that fell within applicable safe harbors of the Bankruptcy Code, at least where the loans were transferred “servicing retained.” The decision isCalyon New York Branch v. American Home Mortgage Corp., et al. (In re American Home Mortgage Corp.), Bankr. Case No. 07-51704 (CSS) (Bankr. D. Del. Jan. 4, 2008).
In re Lehman Bros. Holdings Inc., 513 B.R. 624 (Bankr. S.D.N.Y. 2014)
A purchaser of residential mortgage-backed securities filed proofs of claim based on alleged misrepresentations by the debtors in offering materials distributed in connection with sale of the securities. The debtors objected and sought to subordinate the claims as claims arising from securities “of” the debtors.
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 6 edition of the Bloomberg Law Reports—Asia Pacific Law. Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.