by Paul Turner and Mark
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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