Last week the Court of Appeal of England and Wales handed down its decision in four appeals which raise a number of questions of construction in relation to derivatives in the form of interest rate swaps and forward freight agreements documented under the International Swaps and Derivatives Association Inc. Master Agreement (the “ISDA Master Agreement”).¹ In particular, the decision focuses on the interpretation of section 2(a)(iii) of the ISDA Master Agreement.

Key Points

On October 4, 2011, the United States Bankruptcy Court for the Southern District of New York ruled that a contractual right of a triangular (non-mutual) setoff was unenforceable in bankruptcy, even though the contract was safe harbored. In re Lehman Brothers, Inc., No. 08-01420 (JMP), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct. 4, 2011).

In two recent decisions, the United States Bankruptcy Court for the Southern District of New York has interpreted narrowly certain of the Bankruptcy Code’s safe harbor provisions.  

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.

In the current economic climate, there are a number of key issues facing borrowers in the event of lender insolvency or default.

Committed facilities/term loans

Provided they are fully drawn and the borrower is not in breach itself, the impact in the short term may not be too severe.

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”).

The United States Bankruptcy Court for the Southern District of New York entered an order on Sept. 17, 2009, granting a motion filed by Lehman Brothers Special Financing Inc. (“LBSF”) to compel Metavante Corporation (“Metavante”) to continue to make payments to LBSF under an ISDA Master Agreement.

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.

Funds' assets in the U.S. has been denied by the United States Bankruptcy Court for the Southern District of New York. See 2007 Bankr. LEXIS 2949, *26 (Bankr. S.D.N.Y. Aug. 30 , 2007). The Funds were being liquidated in the Cayman Islands, but the bankruptcy court held that they were not eligible for Chapter 15 relief under the U.S. Bankruptcy Code (the "Code") because the liquidations were not pending in a country where the Funds had their "center of main interests" or an "establishment" for the conduct of business.

TheLehman Brothers bankruptcy court has determined that the contractually specified methodology for conducting the liquidation of a swap agreement is protected by the safe harbor provisions of the bankruptcy, even if the selected methodology would be more favorable to the non-defaulting counterparty than the liquidation methodology that would apply absent the bankruptcy.See Michigan State Housing Dev. Auth. v. Lehman Bros. Deriv. Prods. Inc. (In re Lehman Bros. Holdings Inc.), No. 08-13555, ---B.R.