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Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs. (In re Lehman Bros. Holdings Inc.)

United States Bankruptcy Court for the Southern District of New York

January 25, 2010, Decided

Chapter 11, Case No. 08-13555 (JMP), Adversary Proceeding No.: 09-01242 (JMP)

Opinion

 [*410]  MEMORANDUM DECISION GRANTING MOTION FOR SUMMARY JUDGMENT AND DECLARING APPLICABLE PAYMENT PRIORITIES

JAMES M. PECK

United States Bankruptcy Judge

Introduction

This is a matter arising out of a complex financial structure that includes an added layer of complexity due to the pendency of parallel and potentially conflicting legal proceedings in this Court and the United Kingdom. The litigation in England (the "English Litigation") was first commenced in the High Court of Justice, Chancery Division (the "High Court") followed by an appeal to the Court of Appeal, Civil Division  [**2] (the "Court of Appeal" and, together with the High Court, the "English Courts"). At issue both here and in the English Courts is the priority of payment to beneficiaries (one a noteholder and the other a swap counterparty) that hold competing interests in collateral securing certain credit-linked synthetic portfolio notes. The swap counterparty is Lehman Brothers Special Financing Inc. ("LBSF"), one of the Lehman entities whose chapter 11 case is before this Court.

The English Litigation was filed in the High Court by Perpetual Trustee Company Limited ("Perpetual"), as holder of various credit-linked synthetic portfolio notes, against BNY Corporate Trustee Services Limited ("BNY") seeking priority payment pursuant to so-called "Noteholder Priority" (as defined below) under the terms of certain swap agreements (each a "Swap  [*411]  Agreement") 1 among LBSF and Dante Finance Public Limited Company ("Dante").

LBSF intervened in the English Litigation and has participated both in the English Litigation and in this adversary proceeding. 2 After a trial, the High Court issued a judgment in which  [**3] it held, inter alia, that LBSF's interest in the collateral securing the Swap Agreements (the "Collateral") was "always limited and conditional," and, therefore, payment pursuant to Noteholder Priority did not violate the so-called "anti-deprivation principle" under English law. (Venditto Aff. Ex. 7 at PP 45, 49-55). The High Court also noted that Noteholder Priority became effective on September 15, 2008, the date on which Lehman Brothers Holdings Inc. ("LBHI"), credit support provider for LBSF's payment obligations under each Swap Agreement, filed its petition in this Court for protection under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). (Venditto Aff. Ex. 7 at PP 24, 49).

During the pendency of the English Litigation in the High Court, on May 20, 2009, LBSF (collectively with LBHI and its affiliated debtors, the "Debtors") commenced this action by filing a two-count complaint (the "Complaint") against BNY. Count I of the Complaint seeks a declaratory judgment that the provisions in the Swap Agreements that modify LBSF's  [**4] payment priority upon an event of default constitute unenforceable ipso facto clauses that violate Bankruptcy Code sections 365(e)(1) and 541(c)(1)(B), thereby enabling LBSF to retain its right to receive a priority payment under the Swap Agreements ("Swap Counterparty Priority"). Count II seeks a declaratory judgment from this Court that any action to enforce the provisions purportedly modifying LBSF's right to priority of payments as a result of its bankruptcy filing violates the automatic stay under Bankruptcy Code section 362(a).

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422 B.R. 407 *; 2010 Bankr. LEXIS 141 **; 63 Collier Bankr. Cas. 2d (MB) 586; 52 Bankr. Ct. Dec. 191

In re: LEHMAN BROTHERS HOLDINGS INC., et al., Debtors. LEHMAN BROTHERS SPECIAL FINANCING INC., Plaintiff, -against- BNY CORPORATE TRUSTEE SERVICES LIMITED, Defendant.

Subsequent History: Appeal granted by Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs. (Lehman Bros. Holdings Inc.), 2010 U.S. Dist. LEXIS 146031 (S.D.N.Y., Sept. 20, 2010)

Disposition:  The debtor's motion for summary judgment was granted.

CORE TERMS

Swap, provisions, Noteholder, Documents, ipso facto, Courts, commencement, Collateral, bankruptcy case, termination, parties, subordinated, bankruptcy filing, unenforceable, executory contract, modify, counterparty, protections, clauses, obligations, rights, subordination agreement, automatic stay, relevant provision, event of default, affiliates, effective, purposes, argues, summary judgment motion

Civil Procedure, Judgments, Summary Judgment, Evidentiary Considerations, Entitlement as Matter of Law, General Overview, Bankruptcy Law, Administrative Powers, Executory Contracts & Unexpired Leases, Termination Clauses, Bankruptcy, Estate Property, Contents of Estate, Preclusion of Judgments, International Law, Comity Doctrine, Comity Doctrine Procedures, Discretion Regarding Procedures, Dispute Resolution, Automatic Stay, Scope of Stay, Claims Against Estate Property, Contractual Rights, Types of Claims, Unsecured Priority Claims, Subordination