On November 17th, Lehman Brothers Special Financing Inc. (“LBSF”) and its official unsecured creditors’ committee filed a joint motion to stay BNY Corporate Trustee Services Limited’s (“BNY”) appeal for 90 days in the “Dante” matter, pending final settlement of the dispute between LBSF and Perpetual Trustee Company Limited (“Perpetual”).
The reason for the motion was LBSF’s settlement in principal with noteholder Perpetual, an Australian trustee with noteholders of its own. On September 20th, the United States District Court for the Southern District of New York granted to BNY leave to appeal the bankruptcy court’s January decision. This decision had voided certain document provisions related to the Dante credit-linked note program providing for the subordination of LBSF’s rights as swap counterparty to an early termination payment when the swap counterparty or one of its close affiliates went into bankruptcy. In effect, the bankruptcy court had held that these subordination provisions—which effectively flip LBSF’s right to get paid from above that of the noteholders to below that of the noteholders—constitute unenforceable ipso facto clauses under the U.S. Bankruptcy Code (the “Bankruptcy Code”) and that any action to enforce the subordination provisions would violate the automatic stay provisions of the Bankruptcy Code. BNY holds the collateral subject to this dispute and had brought the appeal in its capacity as trustee.[1]
The motion for the stay was granted and, on November 24th, LBSF filed another motion seeking the court’s approval of a settlement with Perpetual. If the final settlement between LBSF and Perpetual is approved by the court, it is expected that LBSF will then request that the BNY appeal be dismissed. Such a dismissal will leave uncertainty as to the enforceability of similar flip clauses.
[1] For a detailed summary of the Dante matter, please see DMIR October 2010 and DMIR January 2010.