On September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for bankruptcy protection, commencing the largest bankruptcy case in U.S. history. Initially, it appeared that many of the operating subsidiaries would remain outside of bankruptcy, but during the past several days, many of them have filed bankruptcy petitions as well. As of this writing, a complete list of the bankrupt Lehman entities (collectively, “Lehman”) is as follows:
In the current economic climate, businesses are likely to take a keen interest in the ability of their suppliers and customers to meet their obligations. This can extend beyond purely financial obligations to include the protection of critical links in the supply chain. A manufacturer may, for instance, be very dependent on one of its suppliers for a specialist part that cannot readily be obtained elsewhere, or a supplier may rely heavily on an intermediary to reach ultimate consumers.
In the wake of recent bankruptcy filings by several prominent financial institutions, there’s a growing interest in changing standard credit documentation to address the risks of defaulting lenders and nonperforming administrative agents. Here are credit agreement provisions that financial institutions, acting as swingline lenders and letter of credit issuers, can require to protect themselves against the risk of a defaulting lender.
The United States Bankruptcy Court for the District of Massachusetts recently denied a mortgage purchaser’s Motion for Relief from Automatic Stay of Chapter 13 proceedings on the ground that the purchaser lacked standing where it could not provide documentary evidence showing each transfer of the mortgage. In re Robin Hayes, Case No. 07-13967-JNF (August 19, 2008).
In November 2004, the Debtor, Robin Hayes, obtained a $324,000 mortgage from Argent Mortgage Company LLC (“Argent Mortgage”). The mortgage subsequently was sold and ultimately ended up with Deutsche Bank.
A creditor’s ability in a bankruptcy case to exercise rights that it has under applicable law to set off an obligation it owes to the debtor against amounts owed by the debtor to it, thereby converting its unsecured claim to a secured claim to the extent of the setoff, is an important entitlement.
This alert describes issues to consider when a derivatives dealer counterparty becomes insolvent.We address below issues involving termination of a master agreement, close-out netting of underlying trades and collateral. Even though this alert focuses on the bankruptcy of a dealer, many of the issues would also arise in connection with the bankruptcy of most non-dealer counterparties.
1. Existence of an Event of Default and Termination
a. Existence of an Event of Default
October 17, 2008 marked the third anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). This sweeping bankruptcy reform was designed to eliminate bankruptcy as an option for many would-be filers. While there is no doubt BAPCPA impacted bankruptcy filings both nationally and in West Virginia, recent trends suggest filings are on the rise and could reach pre-BAPCPA levels in the foreseeable future.
The 2005 Boom
The recent downturn in the financial sector and related bankruptcy filings have shed light on issues involving executive compensation, particularly in chapter 11 cases. Specifically, bankrupt companies often have paid substantial bonuses to executives prior to filing for bankruptcy protection and desire to retain those executives throughout the bankruptcy process through additional bonus payments and similar schemes. These types of payments have been criticized as giveaways to management.