The United States District Court for the District of Delaware recently affirmed a Bankruptcy Court decision that invalidated the use by creditors of so-called “triangular”, or non-mutual, setoffs in which obligations are offset among not only the parties to a bilateral contract but also their affiliates. In re SemCrude, L.P., 2010 U.S. Dist. LEXIS 42477 (D. Del.

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.

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.

Today, the U.K. Treasury and Northern Rock plc separatelyannounced that the restructuring of Northern Rock will take place on January 1, 2010 (Transfer Date).