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By Louis M. Solomon
Park Investments PTY Limited (Respondent) v. BNY Corporate Trustee Services
Limited and Lehman Brothers Special Financing Inc (Appellant), 2011 UKSC 38 (Trinity Term July 2011), is a decision by
the UK's Supreme Court of England and Wales that involves two important
principles of international litigation practice. The decision dismisses
an appeal in the case of Perpetual Trustee Company Ltd v. BNY Corporate
Trustee Services and provides an exhaustive analysis of the
"anti-deprivation" rule. The decision is comprised of several decisions,
long, detailed, erudite, lucid, and well-written opinions that, in the end,
appear unanimously to agree on a result.
The anti-deprivation rule is aimed
at attempts to withdraw an asset on bankruptcy or liquidation or
administration, thereby reducing the value of the insolvent estate to the
detriment of creditors. Its application is one of a number of instances
we have discussed in this blog concerning the limits of freedom of contract in the face of overarching public
policy constraints (also see the same struggle in the state law context).
As explained by the Court, the
appeal concerned the effect of the security arrangements in a complex series of
credit swap transactions under which, in effect, investors gave credit
protection to Lehman by reference to the performance of a basket of underlying
obligations. A Lehman entity was a counterparty to a number of swap
agreements made with a series of special purpose vehicles. These
SPVs in turn issued notes to investors and used the funds to buy
securities. There were priority provisions in the various instruments,
the priority altered in the event of a default including insolvency, and the
Court said that the "central issue" in the proceedings and the appeal is the
validity of those provisions for alteration of priority.
Lehman's creditors argued that they were being deprived of assets
otherwise available in the event of insolvency. Both the High Court and the
Court of Appeal found that no deprivation had occurred.
The two principles of international
practice reflected in the decision are:
First, procedurally, there is an
interesting use of international communication, cooperation, and comity
exhibited in the decision. Litigation involving these issues was pending
in many different forums, including in the UK and in the Bankruptcy Court in
the Southern District of New York. As the Court explains here:
"Following communications between
the High Court in England and the Bankruptcy Court in New York, it was agreed
that, in order to limit potential conflict between decisions in the two
jurisdictions, relief would be limited to declaratory relief: Perpetual Trustee
Co Ltd v BNY Corporate Trustee Services Ltd  EWHC 2953 (Ch),  2
BCLC 237; Re Lehman Brothers Holdings Inc, 422 BR 407 (US Bankruptcy Court,
SDNY, 2010) [enhanced version available to lexis.com subscribers] ."
Interestingly as well on the
procedural front, the UK decision observes that
"In January 2010 Judge Peck, sitting
in the US Bankruptcy Court for the Southern District of New York, granted
summary judgment in favour of LBSF on its application for a declaration that
the provisions in the Perpetual documentation were ineffective because they
were in breach of the US Bankruptcy Code: Re Lehman Brothers Holdings Inc, 422
BR 407 (US Bankruptcy Court, SDNY, 2010) [enhanced version available to lexis.com subscribers]."
Second, substantively, the holding
by the US court did not prevent the UK Court from essentially coming out the
opposite way. The Court explained initially that:
"the law is too clearly settled to
admit of a shadow of doubt that no person possessed of property can reserve
that property to himself until he shall become bankrupt, and then provide that,
in the event of his becoming bankrupt, it shall pass to another and not to his
Yet despite 200 years of
applicability finding anti-deprivation provisions unenforceable, the Court here
determines that the rule should not be applied invariably and unbendingly to
complex and bona fide commercial transactions but rather should be applied
with "common sense". The Court determined that the intent to single out
the case of bankruptcy was not evident in the standard form contracts.
Said the Court:
"As has been seen, commercial sense
and absence of intention to evade insolvency laws have been highly relevant
factors in the application of the antideprivation rule. Despite statutory
inroads, party autonomy is at the heart of English commercial law. Plainly
there are limits to party autonomy in the field with which this appeal is
concerned, not least because the interests of third party creditors will be
involved. But, as Lord Neuberger stressed  Ch 347, para 58, it is
desirable that, so far as possible, the courts give effect to contractual terms
which parties have agreed. And there is a particularly strong case for autonomy
in cases of complex financial instruments such as those involved in this
International Practice Law Blog for more analysis of international
and foreign law issues.
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