Sutherland Alert: U.S. District Court Affirms Lehman Ruling Raising Concern on Cross-Affiliate Netting

by Paul Turner and Mark Sherrill

A recent opinion by the U.S. District Court for the Southern District of New York affirms a 2010 ruling by the Lehman Brothers bankruptcy court, which rendered certain netting and setoff provisions unenforceable in bankruptcy. The core holding - that a counterparty cannot offset pre-petition and post-petition amounts - should come as no surprise to market participants. In reaching that result, however, both courts opined that parties seeking to exercise setoff rights under the Bankruptcy Code's safe harbor statutes remain subject to the more restrictive mutuality requirements of section 553 of the Bankruptcy Code. That ruling likely will continue to cause some significant changes in the risk management practices of traders.

Swedbank was one of Lehman's depository banks. As such, Lehman deposited money with Swedbank, both before and after filing its bankruptcy petition. In the latter category, Lehman deposited approximately $11.7 million after September 15, 2008, when Lehman Brothers Holdings Inc. (LBHI) filed its voluntary petition. After the bankruptcy filing, Swedbank notified Lehman that it was placing

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