Claims held by employees of a Chapter 11 debtor based on “restricted stock units (‘RSUs’) … must be subordinated [under Bankruptcy Code § 510(b)] to the claims of general creditors because … (i) RSUs are securities, (ii) the claimants acquired them in a purchase, and (iii) the claims for damages arise from those purchases or the asserted rescissions thereof,” held the U.S. Court of Appeals for the Second Circuit on May 4, 2017. In re Lehman Brothers Holdings, Inc., 2017 U.S. App. LEXIS 7920, *6 (2d Cir. May 4, 2017).

As a result of the recent turmoil in the financial markets, a number of clients have asked us questions about counterparty risk. The following is a summary of some of the key issues in dealing with financial counterparties. The U.S. Bankruptcy Code (“Bankruptcy Code”) and the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa et seq. (“SIPA”) each seek to protect “customer property” in the event of the failure, insolvency or liquidation of a broker-dealer.1 Neither affords customers the certainty of a 100% recovery, however.

“Claims arising from securities of a debtor’s affiliate should be subordinated” to all other “senior or equal” claims in the debtor’s bankruptcy case, held the U.S. Court of Appeals for the Second Circuit on Dec. 14, 2015. In re Lehman Brothers Inc., 2015 WL 8593604, at *3 (2d Cir. Dec. 14, 2015).

U.S. District Judge Jed S. Rakoff of the Southern District of New York held on July 6, 2014 that the Madoff Securities SIPA trustee could not recover customer funds subsequently transferred abroad by “foreign feeder funds” to their foreign “customers, managers, and the like.” Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), 2014 WL 2998557, *1 (S.D.N.Y. July 6, 2014).

The United States Court of Appeals for the Seventh Circuit, on March 19, 2014, held that a corrupt debtor’s pre-bankruptcy cash transfer to a commodity broker was a “settlement payment” made “in connection with a securities contract,” thus falling “within [Bankruptcy Code] §546(e)’s safe harbor” and insulating the transfer from the trustee’s preference claim. Grede v. FCStone, LLC (In re Sentinel Management Group, Inc.), 2014 WL 1041736, *7 (7th Cir. Mar. 19, 2014).

The U.S. Court of Appeals for the Seventh Circuit held on Aug. 26, 2013 that an investment manager’s “failure to keep client funds properly segregated” and subsequent pledge of those funds “to secure an overnight loan” to stay in business may have constituted: (a) a fraudulent transfer to the lender; and (b) grounds for equitably subordinating the lender’s $312 million secured claim. In re Sentinel Management Group, Inc., 2013 WL 4505152, *1 (7th Cir. Aug. 26, 2013) (“Sentinel II”).

Appellate courts continue to agree on the vitality and breadth of the safe harbor defense contained in Bankruptcy Code ("Code") § 546(e) (insulating from the trustee's fraudulent transfer or preference attack "settlement payment" or "margin payment" on a "securities contract," "commodity contract" or "forward contract" except when the debtor's payment is made with "actual intent to hinder, delay, or defraud" creditors). In re Quebecor World (USA) Inc., 2013 WL2460726, *1 (2d Cir.

A settlement has been announced in the Tronox Securities Litigation,^[1] making it one of the first cases where the failure to publicly disclose environmental liabilities has resulted in a substantial settlement.

In a decision likely to affect thousands of Madoff investors, the Second Circuit Court of Appeals on Aug. 16, 2011 unanimously upheld the method used by the liquidating trustee for Bernard L.

The United States Bankruptcy Court for the Southern District of New York, overseeing the bankruptcy cases of Lehman Brothers Holdings Inc. (“LBHI”) and its affiliated debtors (collectively, the “Debtors”), entered an order on Aug.